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EX-21.1 - SUBSIDIARIES OF DENNY'S - DENNYS CORPex21_1.htm
EX-23.1 - CONSENT OF KPMG LLP - DENNYS CORPex23_1.htm
EX-10.30 - DENNY'S CORPORATE INCENTIVE PLAN - DENNYS CORPex10_30.htm
EX-31.1 - NELSON J. MARCHIOLI CERTIFICATION - DENNYS CORPnjmcertification_ex311.htm
EX-31.2 - F. MARK WOLFINGER CERTIFICATION - DENNYS CORPfmwcertification_ex312.htm
EX-32.1 - NJM AND FMW SECTION 906 CERTIFICATION - DENNYS CORPsection906certification.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 30, 2009
 
Commission file number 0-18051
 
DENNY'S CORPORATE LOGO
 
DENNY'S CORPORATION
(Exact name of registrant as specified in its charter)
   
Delaware
13-3487402
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
identification number)
   
203 East Main Street
Spartanburg, South Carolina 29319-9966
(Address of principal executive offices)
(Zip Code)
 
(864) 597-8000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
           Title of each class         
Name of each exchange on which registered
$.01 Par Value, Common Stock
The Nasdaq Stock Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes  ¨    No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes  ¨    No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  þ    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,"  "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
       Large accelerated filer ¨   Accelerated filer þ   Non-accelerated filer ¨   Smaller reporting company ¨
                                                                                                                                                        (Do not check if a smaller reporting company)                                                        
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  ¨    No  þ
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $214.2 million as of July 1, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of registrant’s common stock on that date of $2.26 per share and, for purposes of this computation only, the assumption that all of the registrant’s directors, executive officers and beneficial owners of 10% or more of the registrant’s common stock are affiliates.
 
As of March 1, 2010, 96,826,746 shares of the registrant’s common stock, $.01 par value per share, were outstanding.
 
Documents incorporated by reference: 
Portions of the registrant’s definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
 

 
TABLE OF CONTENTS
   
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F-1
   
 
 
FORWARD-LOOKING STATEMENTS
 
The forward-looking statements included in the “Business,” “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk” sections and elsewhere herein, which reflect our best judgment based on factors currently known, involve risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,”  “hopes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements contained in “Risk Factors.” The forward-looking information we have provided in this Form 10-K pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
 

 
 
Description of Business
 
Denny’s Corporation, or Denny’s, is one of America’s largest family-style restaurant chains. Denny’s, through its wholly owned subsidiaries, Denny’s Holdings, Inc. and Denny’s, Inc., owns and operates the Denny’s restaurant brand. At December 30, 2009, the Denny’s brand consisted of 1,551 restaurants, 1,318 (85%) of which were franchised/licensed restaurants and 233 (15%) of which were company-owned and operated. Denny’s restaurants are operated in 49 states, the District of Columbia, two U.S. territories and five foreign countries with concentrations in California (26% of total restaurants), Florida (10%) and Texas (10%).
 
Our restaurants generally are open 24 hours a day, 7 days a week. We provide high quality menu offerings and generous portions at reasonable prices with friendly and efficient service in a pleasant atmosphere. Denny’s expansive menu offers traditional American-style food such as breakfast items, appetizers, sandwiches, dinner entrees and desserts. Denny's restaurants are best known for breakfast items, such as our Grand Slam®. Sales are broadly distributed across each of the dayparts (i.e., breakfast, lunch, dinner and late-night).
 
References to "Denny's," the "Company," "we," "us," and "our" in this Form 10-K are references to Denny's Corporation and its subsidiaries.
 
Restaurant Operations
 
We believe that the superior execution of basic restaurant operations in each Denny’s restaurant, whether it is company-owned or franchised, is critical to our success. To meet and exceed our guests’ expectations, we require both our company-owned and our franchised restaurants to maintain the same strict brand standards. These standards relate to the preparation and efficient serving of quality food and the maintenance, repair and cleanliness of restaurants.
 
We devote significant effort to ensuring all restaurants offer quality food served by friendly, knowledgeable and attentive employees in a clean and well-maintained restaurant. We seek to ensure that our company-owned restaurants meet our high standards through a network of Regional Directors of Company Operations, Company Business Leaders and restaurant level managers, all of whom spend the majority of their time in the restaurants. A network of Regional Directors of Franchise Operations and Franchise Business Leaders oversee our franchised restaurants to ensure compliance with brand standards, promote operational excellence, and provide general support to our franchisees. 
 
A principal feature of Denny’s restaurant operations is the consistent focus on improving operations at the unit level. Unit managers are hands-on and versatile in their supervisory activities. Many of our restaurant management personnel began as hourly associates in the restaurants and, therefore, know how to perform restaurant functions and are able to train by example.
 
Denny’s maintains training programs for associates and restaurant managers including Denny's University. Denny's University is a training program conducted at our Corporate Support Center for our company and franchise managers and general managers. The mission of Denny's University is to teach managers the skills needed to become business leaders with an owner/operator mentality, operating successful Denny's restaurants.
 
Franchising and Development
 
Our criteria to become a Denny’s franchisee include minimum liquidity and net worth requirements and appropriate operational experience. We believe that Denny’s is an attractive financial proposition for current and potential franchisees and that our fee structure is competitive with other full service brands. The initial fee for a single twenty-year Denny’s franchise agreement is $40,000 and the royalty payment is 4% of gross sales. Additionally, our franchisees are required to contribute up to 4% of gross sales for advertising and, depending on their market location, may make additional advertising contributions as part of a local marketing co-operative.
 
During 2009, we continued our Franchise Growth Initiative ("FGI") to increase franchise restaurant development through the sale of certain geographic clusters of company restaurants to both current and new franchisees. As a result, we sold 81 restaurant operations and certain related real estate to 18 franchisees for net proceeds of $30.3 million.  As of December 30, 2009, the total number of company restaurants sold since our FGI program began in early 2007 is 290. The Denny’s system is approximately 85% franchised and 15% company-operated. Our targeted portfolio mix is 90% franchised and 10% company-operated. We anticipate achieving this goal through a combination of new franchise unit growth and the sale of restaurants to franchisees over the next couple of years. We expect that the future growth of the brand will come primarily from the development of franchise restaurants.
 
Fulfilling the unit growth expectations of this program, certain franchisees that purchased company restaurants during the year also signed development agreements to build additional new franchise restaurants. In addition to franchise development agreements signed under our FGI, we have been negotiating development agreements outside of our FGI program under our Market Growth Incentive Plan ("MGIP"). Over the last 30 months we have signed development agreements for 185 new restaurants under our FGI and MGIP programs, 58 of which have opened. The majority of the units in the pipeline are expected to open over the next five years. While the majority of the units developing under FGI and MGIP agreements are on track, from time to time some of our franchisees' ability to grow and meet their development commitments is hampered by the economy, access to capital and the difficult lending environment.
 
The table below sets forth information regarding the distribution of single-store and multi-store franchisees as of December 30, 2009:
 
   
Franchisees
   
Percentage of Franchisees
   
Restaurants
   
Percentage of Restaurants
 
One
   
94
     
35.5
%
   
94
     
7.1
%
Two to five
   
115
     
43.4
%
   
329
     
25.0
%
Six to ten
   
30
     
11.3
%
   
221
     
16.8
%
Eleven to fifteen
   
7
     
2.6
%
   
90
     
6.8
%
Sixteen to thirty
   
11
     
4.2
%
   
251
     
19.0
%
Thirty-one and over
   
8
     
3.0
%
   
333
     
25.3
%
Total
   
265
     
100.0
%
   
1,318
     
100.0
%
 
1

Site Selection
 
The success of any restaurant is influenced significantly by its location. Our development team works closely with franchisees and real estate brokers to identify sites which meet specific standards. Sites are evaluated on the basis of a variety of factors, including but not limited to:
 
demographics;
traffic patterns;
visibility;
building constraints;
competition;
environmental restrictions; and
proximity to high-traffic consumer activities.
 
Competition
 
The restaurant industry is highly competitive. Competition among major companies that own or operate restaurant chains is especially intense. Restaurants compete on the basis of name recognition and advertising; the price, quality, variety, and perceived value of their food offerings; the quality and speed of their guest service; and the convenience and attractiveness of their facilities.
 
Denny’s direct competition in the family-style category includes a collection of national and regional chains, as well as thousands of independent operators. Denny’s also competes with quick service restaurants as they attempt to upgrade their menus with premium sandwiches, entree salads, new breakfast offerings and extended hours.
 
We believe that Denny’s has a number of competitive strengths, including strong brand name recognition, well-located restaurants and market penetration. We benefit from economies of scale in a variety of areas, including advertising, purchasing and distribution. Additionally, we believe that Denny’s has competitive strengths in the value, variety, and quality of our food products, and in the quality and training of our employees. See “Risk Factors” for certain additional factors relating to our competition in the restaurant industry.
 
Research and Innovation
 
We continue our emphasis on being a consumer driven organization with particular focus on our service, menu, marketing, and overall guest experience. We rely on consumer insights obtained through secondary and primary qualitative and quantitative studies. These insights form the strategic foundation for menu architecture, pricing, promotion and advertising. The added-value of these insights and strategic understandings also assist our Restaurant Operations and Information Technology personnel in the evaluation and development of new restaurant processes and upgraded restaurant equipment that may improve our speed of service, food quality and order accuracy.

Through this consumer focused effort, we are successfully innovating our brand and concept, striving for continued relevance and brand differentiation. This allows us the opportunity to protect margins, gain market share and efficiently maximize our research investment.
 
Marketing and Advertising
 
Our marketing department manages contributions from both company-owned and franchised units and provides integrated marketing and advertising to promote our brand. The department focuses include brand and communications strategy, media, advertising, menu management, product innovation and development, consumer insights, public relations, field marketing and national promotions.
 
Our marketing campaigns, including broadcast advertising, focus on amplifying Denny's brand strengths with the consumer -- made-to-order variety with an emphasis on breakfast at an affordable value offered all day, every day. On a national level and through recently formed local co-operatives, the campaigns reach their consumer targets through network, cable and local television, radio, online, digital, social, outdoor and print.
 
Denny's reaches out to all consumers through integrated marketing programs, including community outreach. These programs are designed to enhance our brand image, support our brand message and, in some cases, augment our diversity efforts.
 
Product Sources and Availability
 
Our purchasing department administers programs for the procurement of food and non-food products. Our franchisees also purchase food and non-food products directly from the vendors under these programs. Our centralized purchasing program is designed to ensure uniform product quality as well as to minimize food, beverage and supply costs. Our size provides significant purchasing power which often enables us to obtain products at favorable prices from nationally recognized manufacturers.
 
While nearly all products are contracted for by our purchasing department, the majority are purchased and distributed through Meadowbrook Meat Company, or MBM, under a long-term distribution contract. MBM distributes restaurant products and supplies to the Denny’s system from nearly 250 vendors, representing approximately 88% of our restaurant product and supply purchases. We believe that satisfactory sources of supply are generally available for all the items regularly used by our restaurants. We have not experienced any material shortages of food, equipment, or other products which are necessary to our restaurant operations.
 
Seasonality
 
Our business is moderately seasonal. Restaurant sales are generally greater in the second and third calendar quarters (April through September) than in the first and fourth calendar quarters (October through March). Additionally, severe weather, storms and similar conditions may impact sales volumes seasonally in some operating regions. Occupancy and other operating costs, which remain relatively constant, have a disproportionately greater negative effect on operating results during quarters with lower restaurant sales.
 
2

Trademarks and Service Marks
 
Through our wholly owned subsidiaries, we have certain trademarks and service marks registered with the United States Patent and Trademark Office and in international jurisdictions, including "Denny's" and "Grand Slam Breakfast".  We consider our trademarks and service marks important to the identification of our restaurants and believe they are of material importance to the conduct of our business. Domestic trademark and service mark registrations are renewable at various intervals from 10 to 20 years. International trademark and service mark registrations have various durations from 5 to 20 years. We generally intend to renew trademarks and service marks which come up for renewal. We own or have rights to all trademarks we believe are material to our restaurant operations. In addition, we have registered various domain names on the internet that incorporate certain of our trademarks and service marks, and believe these domain name registrations are an integral part of our identity. From time to time, we may resort to legal measures to defend and protect the use of our intellectual property.
 
Economic, Market and Other Conditions
 
The restaurant industry is affected by many factors, including changes in national, regional and local economic conditions affecting consumer spending, the political environment (including acts of war and terrorism), changes in customer travel patterns, changes in socio-demographic characteristics of areas where restaurants are located, changes in consumer tastes and preferences, increases in the number of restaurants, unfavorable trends affecting restaurant operations, such as rising wage rates, healthcare costs and utilities expenses, and unfavorable weather. See "Risk Factors" for additional information.
 
Government Regulations
 
We and our franchisees are subject to local, state and federal laws and regulations governing various aspects of the restaurant business, including, but not limited to:
 
health;
sanitation;
land use, sign restrictions and environmental matters;
safety;
disabled persons’ access to facilities;
the sale of alcoholic beverages; and
hiring and employment practices.
 
The operation of our franchise system is also subject to regulations enacted by a number of states and rules promulgated by the Federal Trade Commission. We believe we are in material compliance with applicable laws and regulations, but we cannot predict the effect on operations of the enactment of additional regulations in the future.
 
We are also subject to federal and state laws, including the Fair Labor Standards Act, governing matters such as minimum wage, tip reporting, overtime, exempt status classification and other working conditions. At December 30, 2009, a substantial number of our employees were paid the minimum wage. Accordingly, increases in the minimum wage or decreases in the allowable tip credit (which reduces wages deemed to be paid to tipped employees in certain states) increase our labor costs. This is especially true for our operations in California, where there is no tip credit. Employers must pay the higher of the federal or state minimum wage. We have attempted to offset increases in the minimum wage through pricing and various cost control efforts; however, there can be no assurance that we will be successful in these efforts in the future.
 
Environmental Matters
 
Federal, state and local environmental laws and regulations have not historically had a material impact on our operations; however, we cannot predict the effect of possible future environmental legislation or regulations on our operations.
 
Executive Officers of the Registrant
 
The following table sets forth information with respect to each executive officer of Denny’s:
 
 Name
 
Age
 
Current Principal Occupation or Employment and Five-Year Employment History
Nelson J. Marchioli
    60  
Chief Executive Officer and President of Denny’s (2001-present).
           
F. Mark Wolfinger
    54  
Executive Vice President and Chief Administrative Officer of Denny’s (April, 2008-present); Executive Vice President, Growth Initiatives of Denny's (October, 2006-April, 2008); Chief Financial Officer of Denny’s (2005-present); Senior Vice President of Denny's (2005-October, 2006); Executive Vice President and Chief Financial Officer of Danka Business Systems (a document imaging company) (1998-2005).
 
In addition to the executive officer positions noted above, our executive officer positions also include a Chief Operating Officer and a Chief Marketing Officer.  These positions are currently vacant. We are in the process of identifying appropriate talent for both positions and expect to complete this process during 2010. 
 
Employees
 
At December 30, 2009, we had approximately 11,000 employees, none of whom are subject to collective bargaining agreements. Many of our restaurant employees work part-time, and many are paid at or slightly above minimum wage levels. As is characteristic of the restaurant industry, we experience a high level of turnover among our restaurant employees. We have experienced no significant work stoppages, and we consider relations with our employees to be satisfactory.
 
The staff for a typical restaurant consists of one general manager, two or three restaurant managers and approximately 50 hourly employees. All managers of company-owned restaurants receive a salary and may receive a performance bonus based on financial measures. In addition, we employ Divisional Vice Presidents, Company and Franchise Regional Directors of Operations and Company and Franchise Business Leaders. The Directors of Operations' and Business Leaders’ duties include regular restaurant visits and inspections, which ensure the ongoing maintenance of our standards of quality, service, cleanliness, value, and courtesy.
 
3

 
Available Information
 
We make available free of charge through our website at www.dennys.com (in the Investor Relations—SEC Filings section) copies of materials that we file with, or furnish to, the Securities and Exchange Commission ("SEC"), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.
 
 
We caution you that our business and operations are subject to a number of risks and uncertainties. The factors listed below are important factors that could cause actual results to differ materially from our historical results and from those anticipated in forward-looking statements contained in this Form 10-K, in our other filings with the SEC, in our news releases and in public statements made orally by our representatives. However, other factors that we do not anticipate or that we do not consider significant based on currently available information may also have an adverse effect on our results.

Risks Related to Our Business
 
Our financial condition depends on our ability and the ability of our franchisees to operate restaurants profitably, to generate positive cash flows and to generate acceptable returns on invested capital.  The returns and profitability of our restaurants may be negatively impacted by a number of factors, including those described below.
 
Food service businesses are often adversely affected by changes in:
 
consumer tastes;
consumer spending habits;
global, national, regional and local economic conditions; and
demographic trends.
 
The performance of our individual restaurants may be adversely affected by factors such as:
 
traffic patterns;
demographic considerations; and
the type, number and location of competing restaurants.
 
Multi-unit food service chains such as ours can also be adversely affected by publicity resulting from:
 
poor food quality;
food-related illness;
injury; and
other health concerns or operating issues.
 
Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. In addition, the food service industry in general, and our results of operations and financial condition in particular, may also be adversely affected by unfavorable trends or developments such as:
 
inflation;
increased food costs;
increased energy costs;
labor and employee benefits costs (including increases in minimum hourly wage and employment tax rates and health care and workers' compensation cost);
regional weather conditions; and
the availability of experienced management and hourly employees.
 
A decline in general economic conditions could adversely affect our financial results.

Consumer spending habits, including discretionary spending on dining out at restaurants such as ours, are affected by many factors, including:
 
prevailing economic conditions, such as the housing and credit markets;
energy costs, especially gasoline prices;
levels of employment;
salaries and wage rates;
consumer confidence; and
consumer perception of economic conditions.
 
Continued weakness or uncertainty of the United States economy as a result of reactions to consumer credit availability, increasing energy prices, inflation, increasing interest rates, unemployment, war, terrorist activity or other unforeseen events could adversely affect consumer spending habits, which may result in lower restaurant sales.
 
The locations where we have restaurants may cease to be attractive as demographic patterns change.
 
The success of our owned and franchised restaurants is significantly influenced by location. Current locations may not continue to be attractive as demographic patterns change. It is possible that the neighborhood or economic conditions where our restaurants are located could decline in the future, potentially resulting in reduced sales in those locations.
 
4

Our growth strategy depends on our ability and that of our franchisees to open new restaurants.  Delays or failures in opening new restaurants could adversely affect our planned growth.

The development of new restaurants may be adversely affected by risks such as:
 
costs and availability of capital for the Company and/or franchisees;
competition for restaurant sites;
negotiation of favorable purchase or lease terms for restaurant sites;
inability to obtain all required governmental approvals and permits;
developed restaurants not achieving the expected revenue or cash flow; and
general economic conditions.
 
A majority of Denny's restaurants are owned and operated by independent franchisees, and as a result the financial performance of franchisees can negatively impact our business.
 
As we become more heavily franchised, our financial results are increasingly contingent upon the operational and financial success of our franchisees. We receive royalties and contributions to advertising and, in some cases, lease payments from our franchisees. We set forth operational standards, guidelines and strategic plans; however, we have limited control over how our franchisees’ businesses are run. While we are responsible for ensuring the success of our entire chain of restaurants and for taking a longer term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might sometimes conflict with our interests. Our franchisees may not be able to secure adequate financing to open or continue operating their Denny’s restaurants.  If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay debt existing debt, it could result in financial distress or even bankruptcy.  If a significant number of franchisees become financially distressed, it could harm our operating results through reduced royalties and lease income.
 
For 2009, our ten largest franchisees accounted for approximately 33% of our franchise revenue. The balance of our franchise revenue is derived from the remaining 255 franchisees. Although the loss of revenues from the closure of any one franchise restaurant may not be material, such revenues generate margins that may exceed those generated by other restaurants or offset fixed costs which we continue to incur.
 
The restaurant business is highly competitive, and if we are unable to compete effectively, our business will be adversely affected.
 
We expect competition to continue to increase. The following are important aspects of competition:
 
restaurant location;
number and location of competing restaurants;
food quality and value;
quality and speed of service;
attractiveness and repair and maintenance of facilities; and
the effectiveness of marketing and advertising programs.
 
Each of our restaurants competes with a wide variety of restaurants ranging from national and regional restaurant chains to locally owned restaurants. There is also active competition for advantageous commercial real estate sites suitable for restaurants.

Many factors, including those over which we have no control, affect the trading price of our stock.

Factors such as reports on the economy or the price of commodities, as well as negative or positive announcements by competitors, regardless of whether the report relates directly to our business, could have an impact of the trading price of our stock. In addition to investor expectations about our prospects, trading activity in our stock can reflect the portfolio strategies and investment allocation changes of institutional holders, as well as non-operating initiatives that we may institute from time to time. Any failure to meet market expectations whether for sales growth rates, refranchising goals, earnings per share or other metrics could cause our share price to decline.

Numerous government regulations impact our business, and our failure to comply with them could adversely affect our business.
 
We and our franchisees are subject to federal, state and local laws and regulations governing, among other things:
 
health;
sanitation;
environmental matters;
safety;
the sale of alcoholic beverages; and
hiring and employment practices, including minimum wage laws and fair labor standards.
 
Our restaurant operations are also subject to federal and state laws that prohibit discrimination and laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. The operation of our franchisee system is also subject to regulations enacted by a number of states and rules promulgated by the Federal Trade Commission. If we or our franchisees fail to comply with these laws and regulations, we or our franchisees could be subjected to restaurant closure, fines, penalties, and litigation, which may be costly and could adversely affect our results of operations and financial condition. In addition, the future enactment of additional legislation regulating the franchise relationship could adversely affect our operations, particularly our relationship with franchisees.
 
Negative publicity generated by incidents at a few restaurants can adversely affect the operating results of our entire chain and the Denny’s brand.
 
Food safety concerns, criminal activity, alleged discrimination or other operating issues stemming from one restaurant or a limited number of restaurants do not just impact that particular restaurant or a limited number of restaurants. Rather, our entire chain of restaurants may be at risk from negative publicity generated by an incident at a single restaurant. This negative publicity can adversely affect the operating results of our entire chain and the Denny’s brand.
 
5

If we lose the services of any of our key management personnel, our business could suffer.
 
Our future success significantly depends on the continued services and performance of our key management personnel. Our future performance will depend on our ability to motivate and retain these and other key officers and key team members, particularly regional and area managers and restaurant general managers. Competition for these employees is intense. The loss of the services of members of our senior management or key team members or the inability to attract additional qualified personnel as needed could harm our business.
 
The positions of Chief Operating Officer and Chief Marketing Officer are currently vacant. We are in the process of identifying appropriate talent for both positions and expect to complete this process during 2010.  We do not expect our business to suffer as a result of these temporary vacancies.
 
If our internal controls are ineffective, we may not be able to accurately report our financial results or prevent fraud.

We maintain a documented system of internal controls which is reviewed and tested by the Company’s full time Internal Audit Department. The Internal Audit Department reports to the Audit Committee of the Board of Directors. We believe we have a well-designed system to maintain adequate internal controls on the business; however, we cannot be certain that our controls will be adequate in the future or that adequate controls will be effective in preventing errors or fraud. Any failures in the effectiveness of our internal controls could have an adverse effect on our operating results or cause us to fail to meet reporting obligations.
 
Risks Related to our Indebtedness
 
Our indebtedness could have an adverse effect on our financial condition and operations.
 
We have a significant amount of indebtedness. As of December 30, 2009, we had total indebtedness of approximately $278.7 million.
 
Our level of indebtedness could:
 
make it more difficult for us to satisfy our obligations with respect to our indebtedness;
require us to continue to dedicate a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which would reduce the availability of our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate purposes;
increase our vulnerability to general adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from making strategic acquisitions or pursuing business opportunities;
place us at a competitive disadvantage compared to our competitors that may have less indebtedness; and
limit our ability to borrow additional funds.
 
We may need to access the capital markets in the future to raise the funds to repay our indebtedness. We have no assurance that we will be able to complete a refinancing or that we will be able to raise any additional financing, particularly in view of our anticipated high levels of indebtedness and the restrictions contained in the credit agreements and indenture that govern our indebtedness. If we are unable to satisfy or refinance our current debt as it comes due, we may default on our debt obligations. If we default on payments under our debt obligations, virtually all of our other debt would become immediately due and payable.
 
Despite our current level of indebtedness, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our leverage.
 
Despite our current and anticipated debt levels, we may be able to incur substantial additional indebtedness in the future. Our credit agreement and the indenture governing our indebtedness limit, but do not fully prohibit, us from incurring additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify.
 
At December 30, 2009, we had an outstanding term loan of $80.0 million and outstanding letters of credit of $28.2 million under our letter of credit facility. There were no outstanding letters of credit under our revolver facility and no revolving loans outstanding at December 30, 2009. These balances result in availability of $1.8 million under our letter of credit facility and $50.0 million under the revolving facility. As of March 8, 2010, we had availability of $5.0 million under our letter of credit facility and $50.0 million under the revolving facility. There were no outstanding letters of credit under our revolving facility and no revolving loans outstanding at March 8, 2010. In addition, we have Denny's Holdings Inc. 10% Senior Notes due in 2012 (the "10% Notes") with an aggregate principal amount of $175 million.
 
We continue to monitor our cash flow and liquidity needs. Although we believe that our existing cash balances, funds from operations and amounts available under our credit facility will be adequate to cover those needs, we may seek additional sources of funds including additional financing sources and continued selected asset sales, to maintain sufficient cash flow to fund our ongoing operating needs, pay interest and scheduled debt amortization and fund anticipated capital expenditures over the next twelve months. There are no material debt maturities until March 2012.

Our ability to generate cash depends on many factors beyond our control, and we may not be able to generate the cash required to service or repay our indebtedness.
 
Our ability to make scheduled payments on our indebtedness will depend upon our subsidiaries’ operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our historical financial results have been, and our future financial results are expected to be, subject to substantial fluctuations. We cannot be sure that our subsidiaries will generate sufficient cash flow from operations to enable us to service or reduce our indebtedness or to fund our other liquidity needs. Our subsidiaries’ ability to maintain or increase operating cash flow will depend upon:
 
consumer tastes and spending habits;
the success of our marketing initiatives and other efforts by us to increase guest traffic in our restaurants; and
prevailing economic conditions and other matters discussed throughout "Risk Factors" in this Form 10-K, many of which are beyond our control.
 
If we are unable to meet our debt service obligations or fund other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before maturity or seek additional equity capital. We cannot be sure that we will be able to pay or refinance our indebtedness or obtain additional equity capital on commercially reasonable terms, or at all, especially in a difficult economic environment.
 
6

Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.
 
The credit agreement and the indenture governing our indebtedness contain various covenants that limit, among other things, our ability to:
 
incur additional indebtedness;
pay dividends or make distributions or certain other restricted payments;
make certain investments;
create dividend or other payment restrictions affecting restricted subsidiaries;
issue or sell capital stock of restricted subsidiaries;
guarantee indebtedness;
enter into transactions with stockholders or affiliates;
create liens;
sell assets and use the proceeds thereof;
engage in sale-leaseback transactions; and
enter into certain mergers and consolidations.
 
Our credit agreement contains additional restrictive covenants, including financial maintenance requirements. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger, acquisition or other corporate opportunities and to fund our operations.
 
A breach of a covenant in our debt instruments could cause acceleration of a significant portion of our outstanding indebtedness.
 
A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. In addition, our credit agreement requires us to maintain certain financial ratios. Our ability to comply with these covenants may be affected by events beyond our control (such as uncertainties related to the current economy), and we cannot be sure that we will be able to comply with these covenants. Upon the occurrence of an event of default under any of our debt instruments, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them, if any, to secure the indebtedness. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot be sure that our assets would be sufficient to repay in full our outstanding indebtedness.
 
We may not be able to repurchase the 10% Senior Notes due 2012 upon a change of control.
 
Upon the occurrence of specific kinds of change of control events, we would be required to offer to repurchase all outstanding 10% Notes at 101% of their principal amount, together with any accrued and unpaid interest and liquidated damages, if any, from the issue date. We may not be able to repurchase the notes upon a change of control because we may not have sufficient funds. Further, our credit agreement restricts our ability to repurchase the notes, and also provides that certain change of control events will constitute a default under our credit agreement that permits our lenders thereunder to accelerate the maturity of related borrowings, and, if such debt is not paid, to enforce security interests in the collateral securing such debt, thereby limiting our ability to raise cash to purchase the notes. Any future credit agreements or other agreements relating to indebtedness to which we become a party may contain similar restrictions and provisions. In the event a change of control occurs at a time when we are prohibited by any other indebtedness from purchasing the notes, we could seek consent of the lenders of such indebtedness to the purchase of the notes or could attempt to refinance the borrowings that contain such prohibition. If we do not obtain such consent or repay or refinance such borrowings, we will remain prohibited from purchasing the notes. In such case, our failure to purchase tendered notes would constitute an event of default under the indenture governing the notes which would, in turn, constitute a default under our credit agreement.
 
As holding companies, Denny’s Corporation and Denny’s Holdings depend on upstream payments from their operating subsidiaries. Our ability to repay our indebtedness depends on the performance of those subsidiaries and their ability to make distributions to us.
 
A substantial portion of our assets are owned, and a substantial percentage of our total operating revenues are earned, by our subsidiaries. Accordingly, Denny’s Corporation and Denny’s Holdings depend upon dividends, loans and other intercompany transfers from these subsidiaries to meet their debt service and other obligations. These transfers are subject to contractual restrictions.
 
The subsidiaries are separate and distinct legal entities and they have no obligation to Denny's Corporation or Denny's Holdings, contingent or otherwise, to make any funds available to meet our debt service and other obligations, whether by dividend, distribution, loan or other payments. If the subsidiaries do not pay dividends or other distributions, Denny’s Corporation and Denny’s Holdings may not have sufficient cash to fulfill their obligations.
 
Item 1B.     Unresolved Staff Comments
 
None.
 
7

 
Most Denny’s restaurants are free-standing facilities, with property sizes averaging approximately one acre. The restaurant buildings average 4,500 square feet, allowing them to accommodate an average of 140 guests. The number and location of our restaurants as of December 30, 2009 and December 31, 2008 are presented below:
 
   
2009
 
2008
State/Country
 
Company Owned
 
Franchised/Licensed
 
Company Owned
 
Franchised/Licensed
Alabama
   
 
3
   
2
 
1
Alaska 
   
 
3
   
 
3
Arizona 
   
18
 
58
   
18
 
57
Arkansas 
   
 
9
   
 
9
California 
   
80
 
328
   
102
 
304
Colorado 
   
7
 
19
   
7
 
19
Connecticut 
   
 
8
   
 
8
District of Columbia 
   
 
1
   
 
1
Delaware 
   
1
 
   
2
 
Florida 
   
22
 
132
   
22
 
137
Georgia 
   
 
14
   
 
13
Hawaii 
   
5
 
3
   
4
 
3
Idaho 
   
 
7
   
 
7
Illinois 
   
17
 
35
   
20
 
32
Indiana 
   
1
 
32
   
1
 
31
Iowa 
   
 
1
   
 
1
Kansas 
   
 
8
   
 
8
Kentucky 
   
6
 
6
   
6
 
6
Louisiana 
   
1
 
1
   
1
 
1
Maine 
   
 
6
   
 
6
Maryland 
   
3
 
20
   
3
 
20
Massachusetts 
   
 
6
   
 
6
Michigan 
   
9
 
13
   
10
 
12
Minnesota 
   
 
14
   
 
15
Mississippi 
   
 
1
   
 
1
Missouri 
   
4
 
30
   
4
 
28
Montana 
   
 
4
   
 
4
Nebraska 
   
 
1
   
 
1
Nevada 
   
8
 
22
   
8
 
20
New Hampshire 
   
 
3
   
 
3
New Jersey 
   
2
 
8
   
3
 
8
New Mexico 
   
 
24
   
 
23
New York 
   
1
 
42
   
33
 
9
North Carolina 
   
 
19
   
 
18
North Dakota 
   
 
4
   
 
4
Ohio 
   
4
 
28
   
9
 
23
Oklahoma 
   
 
13
   
 
12
Oregon 
   
 
24
   
 
23
Pennsylvania 
   
17
 
19
   
30
 
6
Rhode Island 
   
 
2
   
 
2
South Carolina 
   
 
14
   
 
13
South Dakota 
   
 
2
   
 
2
Tennessee 
   
1
 
3
   
3
 
1
Texas 
   
20
 
140
   
21
 
137
Utah 
   
 
21
   
 
21
Vermont 
   
 
2
   
 
2
Virginia 
   
6
 
19
   
6
 
18
Washington 
   
 
50
   
 
51
West Virginia 
   
 
2
   
 
2
Wisconsin 
   
 
17
   
 
17
Guam 
   
 
2
   
 
2
Puerto Rico 
   
 
11
   
 
10
Canada 
   
 
49
   
 
50
Other International 
   
 
15
   
 
15
Total 
   
233
 
1,318
   
315
 
1,226

8

 
Of the total 1,551 company-owned and franchised units, our interest in restaurant properties consists of the following:
 
   
Company-Owned Units
   
Franchised Units
   
Total
 
Own land and building 
   
60
     
40
     
100
 
Lease land and own building 
   
17
     
     
17
 
Lease both land and building 
   
156
     
384
     
540
 
     
233
     
424
     
657
 
 
In addition to the restaurants, we own an 18-story, 187,000 square foot office building in Spartanburg, South Carolina, which serves as our corporate headquarters. Our corporate offices currently occupy approximately 16 floors of the building, with a portion of the building leased to others.
 
See Note 10 to our Consolidated Financial Statements for information concerning encumbrances on substantially all of our properties.
 
 
There are various claims and pending legal actions against or indirectly involving us, including actions concerned with civil rights of 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 liabilities reflecting our best estimate of loss, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty.
 
 
 
 
Our common stock is listed under the symbol “DENN” and trades on the NASDAQ Capital Market. As of March 1, 2010, 96,826,746 shares of common stock were outstanding, and there were approximately 10,250 record and beneficial holders of common stock. We have never paid dividends on our common equity securities. Furthermore, restrictions contained in the instruments governing our outstanding indebtedness prohibit us from paying dividends on our common stock in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 10 to our Consolidated Financial Statements.
 
The following tables list the high and low sales prices of the common stock for each quarter of fiscal years 2009 and 2008, according to NASDAQ. Our common stock began trading on the NASDAQ Capital Market on May 10, 2005.
 
   
High
   
Low
 
2009
           
First quarter 
 
$
2.23
   
$
1.15
 
Second quarter 
   
3.10
     
1.60
 
Third quarter 
   
2.87
     
2.07
 
Fourth quarter 
   
3.02
     
2.14
 
                 
2008
               
First quarter 
 
$
4.22
   
$
2.50
 
Second quarter 
   
4.10
     
2.90
 
Third quarter 
   
3.20
     
1.98
 
Fourth quarter 
   
2.83
     
1.18
 
 
9

 
Stockholder Return Performance Graph
 
The following graph compares the cumulative total stockholders’ return on our Common Stock for the five fiscal years ended December 30, 2009 (December 29, 2004 to December 30, 2009) against the cumulative total return of the Russell 2000® Index and a peer group.  The graph and table assume that $100 was invested on December 29, 2004 (the last day of fiscal year 2004) in each of the Company’s Common Stock, the Russell 2000® Index and the peer group and that all dividends were reinvested.
 
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
DENNY’S CORPORATION, RUSSELL 2000® INDEX AND PEER GROUP
 
STOCKHOLDER RETURN PERFORMANCE GRAPH
 
ASSUMES $100 INVESTED ON DECEMBER 29, 2004
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDED DECEMBER 30, 2009
 
   
Russell 2000® Index (1)
   
Peer Group (2)
   
Denny's Corporation
 
December 29, 2004
 
$
100.00
   
$
100.00
   
$
100.00
 
December 28, 2005
 
$
104.56
   
$
114.48
   
$
89.55
 
December 27, 2006
 
$
123.75
   
$
130.15
   
$
104.67
 
December 26, 2007
 
$
121.83
   
$
100.67
   
$
83.33
 
December 31, 2008
 
$
80.66
   
$
78.01
   
$
44.22
 
December 30, 2009
 
$
102.59
   
$
93.16
   
$
48.66
 
 

(1)
The Russell 2000 Index is a broad equity market index of 2,000 companies that measures the performance of the small-cap segment of the U.S. equity universe. As of December 31, 2009, the average market capitalization of companies within the index was approximately $1.0 billion with the median market capitalization being approximately $0.4 billion.
(2)
The peer group consists of 20 public companies that operate in the restaurant industry. The peer group includes the following companies: Burger King Holdings, Inc. (BKC), Bob Evans Farms, Inc. (BOBE), Buffalo Wild Wings, Inc. (BWLD), Cracker Barrel Old Country Store, Inc. (CBRL), O’Charleys Inc. (CHUX), CKE Restaurants, Inc. (CKR), California Pizza Kitchen, Inc. (CPKI), Domino’s Pizza, Inc. (DPZ), Darden Restaurants, Inc. (DRI), Brinker International, Inc. (EAT), DineEquity, Inc. (DIN), Jack In The Box Inc. (JACK), Panera Bread Company (PNRA), Papa John’s International, Inc. (PZZA), Red Robin Gourmet Burgers, Inc. (RRGB), Ruby Tuesday, Inc. (RT), Steak 'n Shake Company (SNS), Sonic Corp. (SONC), Texas Roadhouse, Inc. (TXRH) and Wendy’s/Arby’s Group, Inc. (WEN).
 

10

 
 
The following table summarizes the consolidated financial and operating data of Denny’s Corporation as of and for the years ended December 30, 2009, December 31, 2008, December 26, 2007, December 27, 2006 and December 28, 2005. The consolidated statements of operations for the years ended December 30, 2009, December 31, 2008 and December 26, 2007 and the balance sheet data as of December 30, 2009 and December 31, 2008 are derived from our audited Consolidated Financial Statements included in this Form 10-K. The consolidated statements of operations for the years ended December 27, 2006 and December 28, 2005 and balance sheet data as of December 26, 2007, December 27, 2006 and December 28, 2005 are derived from our Audited Consolidated Financial Statements not included in this Form 10-K. The selected consolidated financial and operating data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes.
 
   
Fiscal Year Ended
 
   
December 30,
2009
   
December 31,
2008 (a)
   
December 26,
2007
   
December 27,
2006
   
December 28,
2005
 
   
(In millions, except ratios and per share amounts)
 
Statement of Operations Data:
                             
Operating revenue 
 
$
608.1
   
$
760.3
   
$
939.4
   
$
994.0
   
$
978.7
 
Operating income
   
72.4
     
60.9
     
79.8
     
110.5
     
48.5
 
Income (loss) from continuing operations before cumulative effect of
change in accounting principle (b)
   
41.6
     
12.7
     
29.5
     
28.5
     
(7.3
)
Cumulative effect of change in accounting principle, net of tax
   
     
     
     
0.2
     
 
Income (loss) from continuing operations (b)
   
41.6
     
12.7
     
29.5
     
28.7
     
(7.3
)
                                         
Basic net income (loss) per share:
                                       
Basic net income (loss) before cumulative effect of change in accounting
principle, net of tax (b)
 
$
0.43
   
$
0.13
   
$
0.31
   
$
0.31
   
$
(0.08
)
Cumulative effect of change in accounting principle, net of tax
   
     
     
     
0.00
     
 
Basic net income (loss) per share from continuing operations (b)
 
$
0.43
   
$
0.13
   
$
0.31
   
$
0.31
   
$
(0.08
)
                                         
Diluted net income (loss) per share:
                                       
Diluted net income (loss) before cumulative effect of change in
accounting principle, net of tax (b)
 
$
0.42
   
$
0.13
   
$
0.30
   
$
0.29
   
$
(0.08
)
Cumulative of effect of change in accounting principle, net of tax
   
     
     
     
0.00
     
 
Diluted net income (loss) per share from continuing operations (b)
 
$
0.42
   
$
0.13
   
$
0.30
   
$
0.30
   
$
(0.08
)
                                         
Cash dividends per common share (c)
   
     
     
     
     
 
                                         
Balance Sheet Data (at end of period):
                                       
Current assets
 
$
58.3
   
$
53.5
   
$
57.9
   
$
63.2
   
$
62.1
 
Working capital deficit (d)
   
(33.8
)
   
(53.7
)
   
(73.6
)
   
(72.6
)
   
(86.3
)
Net property and equipment 
   
131.5
     
160.0
     
184.6
     
236.3
     
288.1
 
Total assets 
   
312.6
     
341.8
     
373.9
     
442.7
     
511.7
 
Long-term debt, excluding current portion 
   
274.0
     
322.7
     
346.8
     
440.7
     
545.7
 


(a)
The fiscal year ended December 31, 2008 includes 53 weeks of operations as compared with 52 weeks for all other years presented. We estimate that the additional, or 53rd, week added approximately $14.3 million of operating revenue in 2008.
   
(b)
Fiscal years 2006 through 2008 have been adjusted from amounts previously reported to reflect certain adjustments as discussed in "Adjustments to Previously Issued Financial Statements" in Note 2 to our Consolidated Financial Statements.
   
(c)
Our bank facilities have prohibited, and our previous and current public debt indentures have significantly limited, distributions and dividends on Denny’s Corporation’s common equity securities.
   
(d)
A negative working capital position is not unusual for a restaurant operating company. The decrease in working capital deficit from December 26, 2007 to December 30, 2009 is primarily due to the sale of company-owned restaurants to franchisees during 2007, 2008 and 2009.
 
11

 
 
The following discussion should be read in conjunction with “Selected Financial Data,” and our Consolidated Financial Statements and the notes thereto.
 
 Overview
 
At December 30, 2009, the Denny’s brand consisted of 1,551 restaurants, 1,318 (85%) of which were franchised/licensed restaurants and 233 (15%) of which were company-owned and operated.  Prior to the implementation of our Franchise Growth Initiative in 2007, the Denny’s brand consisted of 1,545 restaurants, 1,024 (66%) of which were franchised/licensed restaurants and 521 (34%) of which were company-owned and operated.

Revenues

Our revenues are derived primarily from two sources: the sale of food and beverages at our company-owned restaurants and the collection of royalties and fees from restaurants operated by our franchisees under the Denny’s name.

During 2009, we continued our Franchise Growth Initiative (“FGI”), a strategic initiative to increase franchise restaurant development through the sale of certain geographic clusters of company restaurants to both current and new franchisees. In 2009, as a result of our FGI, we sold 81 restaurant operations and certain related real estate to 18 franchisees for net proceeds of $30.3 million. As of December 30, 2009, the total number of company restaurants sold since our FGI program began in early 2007 is 290.

The sale of company restaurants to franchisees has a significant impact on company restaurant sales and the collection of royalties and fees from restaurants operated by our franchisees. Specifically, revenues are impacted as follows:
 
Company restaurant sales have decreased significantly as a result of the sale of restaurants to franchisees. In general, we have sold restaurants with below-average sales volumes, which in turn should raise the average sales volume and average operating margin of our remaining company restaurant portfolio.
   
 •
The decline in company restaurant revenues is partially offset by increased royalty income derived from the growing franchise restaurant base. This royalty income is included as a component of franchise and license revenue. The resulting net reduction in total revenue related to our FGI is generally recovered by a decrease in depreciation and amortization from the sale of restaurant related assets to franchisees and a reduction in interest expense resulting from the use of our FGI proceeds to reduce debt.
   
 •
Additionally, initial franchise fees, included as a component of franchise and license revenue, are generally recorded in the period in which a restaurant is sold to a franchisee. These initial fees are completely dependent on the number of restaurants sold during a particular period.
 
Certain franchisees purchasing company restaurants under our FGI have also signed development agreements to build additional new franchise restaurants. In addition to franchise development agreements signed under our FGI, we have negotiated development agreements outside of our FGI program under our Market Growth Incentive Plan ("MGIP"). The positive impact of these development programs is evident in the 39 new franchise restaurant openings in 2009.

As a result of our FGI and MGIP programs, we expect that the majority of new Denny’s restaurants will be developed by our franchisees. Development of company-owned restaurants will focus on core markets, strategic locations and nontraditional opportunities. As a result of continued franchisee demand for Denny’s restaurants and our desire to expand our base of franchise locations, we expect to continue to sell company restaurants to franchisees during 2010. Our targeted portfolio mix is appropriately 90% franchised and 10% company-operated. We anticipate achieving this goal through a combination of new franchise unit growth and the sale of restaurants to franchisees over the next couple of years. However, the current economic environment and availability of credit to franchisees will impact the number of restaurants we are able to sell to franchisees and the number of restaurants our franchisees are able to develop.

Sales and customer traffic at both company-operated and franchised restaurants are affected by the success of our marketing campaigns, new product introductions and customer service, as well as external factors including competition, economic conditions affecting consumer spending, and changes in guest tastes and preferences. As with many other restaurant companies, the economy has had a significant impact on sales during 2008 and 2009.

Cost of Company Restaurant Sales

Our costs of company restaurant sales are exposed to volatility in two main areas: product costs and payroll and benefit costs.

Many of the products sold in our restaurants are affected by commodity pricing and are, therefore, subject to price volatility. This volatility is caused by factors that are fundamentally outside of our control and are often unpredictable. In general, we purchase food products based on market prices or we set firm prices in purchase agreements with our vendors. During 2008 and 2009, our ability to lock in prices on several key commodities added to our favorable product costs in an environment in which many commodity prices were on the rise.

In addition, our continued success with menu management helped to further reduce product costs. Our promotional activities focused on menu items with lower food costs that still provided a compelling value to our customers, such as our Build Your Own Grand Slam® promotion. Increased incident rates of menu items such as our signature Grand Slam® breakfast, Everyday Value Slam® and Weekday Slam® contributed to favorable product costs as a percentage of sales.

The volatility of payroll and benefit costs results primarily from changes in wage rates and increases in labor related expenses such as medical benefit costs and workers’ compensation costs. A number of our employees are paid the minimum wage. Accordingly, substantial increases in the minimum wage increase our labor costs. Additionally, declines in guest counts and investments in store-level labor can cause payroll and benefit costs to increase as a percentage of sales. During 2009, payroll and benefit costs especially benefited from the favorable development of workers' compensation claims. This benefit is the result of multiple years of increased focus on safety at the unit level in addition to the benefit derived from selling company-owned restaurants to franchisees.

Many of our costs vary based on sales and unit count. Certain costs such as occupancy and other operating expenses have fixed components that may not react as directly to changes in sales and unit count. However, as noted above, many of our below-average sales volume units have been sold through our FGI. As a result, cost of company restaurant sales as a percentage of sales have generally improved during 2009.

12

Costs of Franchise and License Revenue

Our costs of franchise and license revenue include occupancy costs related to restaurants leased or subleased to franchisees and direct costs consisting primarily of payroll and benefit costs of franchise operations personnel. These costs are significantly affected by our FGI. As units are sold to franchisees, Denny’s generally leases or subleases the land and building to the franchisee. As a result, the occupancy costs related to these restaurants moves from costs of company restaurant sales to costs of franchise and license revenue to match the related occupancy income from franchisee lease payments.

Debt and Interest

Interest expense has a significant impact on our net income as a result of our indebtedness. However, during 2008 and 2009, we continued to reduce interest expense through a series of debt repayments using the proceeds generated from our FGI transactions, sales of real estate and cash flow from operations. These repayments resulted in an overall debt reduction of approximately $49 million during 2009 and $25 million in 2008.

We continue to take a conservative approach to our cash management. While we paid down approximately $49 million in debt during 2009, we chose to maintain more than $26 million in cash at year end given the uncertain outlook for the economy and the capital markets. We will continue to balance our debt reduction goals and our commitment to maintain an ample liquidity cushion.

We are subject to the effects of interest rate volatility since approximately $80.0 million, or 31%, of our debt has variable interest rates. To minimize the interest rate volatility we participated in an interest rate swap on the first $100 million of floating rate debt. The interest rate swap, which was scheduled to end on March 30, 2010, was terminated on December 17, 2009. 
 
13

Statements of Operations
 
 
Fiscal Year Ended
 
 
December 30, 2009
   
December 31, 2008
   
December 26, 2007
 
 
(Dollars in thousands)
 
Revenue: 
                               
Company restaurant sales (a)
$
488,948
 
80.4
%
 
$
648,264
     
85.3
%
 
$
844,621
     
89.9
%
Franchise and license revenue (b)
 
119,155
 
19.6
%
   
112,007
     
14.7
%
   
94,747
     
10.1
%
Total operating revenue 
 
608,103
 
100.0
%
   
760,271
     
100.0
%
   
939,368
     
100.0
%
                                           
Costs of company restaurant sales (c): 
                                         
Product costs 
 
114,861
 
23.5
%
   
157,545
     
24.3
%
   
215,943
     
25.6
%
Payroll and benefits 
 
197,612
 
40.4
%
   
271,933
     
41.9
%
   
355,710
     
42.1
%
Occupancy 
 
31,937
 
6.5
%
   
40,415
     
6.2
%
   
50,977
     
6.0
%
Other operating expenses 
 
73,496
 
15.0
%
   
100,182
     
15.5
%
   
123,310
     
14.6
%
Total costs of company restaurant sales
 
417,906
 
85.5
%
   
570,075
     
87.9
%
   
745,940
     
88.3
%
                                           
Costs of franchise and license revenue (c) 
 
42,626
 
35.8
%
   
34,933
     
31.2
%
   
28,005
     
29.6
%
                                           
General and administrative expenses 
 
57,282
 
9.4
%
   
60,970
     
8.0
%
   
67,374
     
7.2
%
Depreciation and amortization 
 
32,343
 
5.3
%
   
39,766
     
5.2
%
   
49,347
     
5.3
%
Operating (gains), losses and other charges, net
 
(14,483
)
(2.4
%)
   
(6,384
)
   
(0.8
%)
   
(31,082
)
   
(3.3
%)
Total operating costs and expenses
 
535,674
 
88.1
%
   
699,360
     
92.0
%
   
859,584
     
91.5
%
Operating income 
 
72,429
 
11.9
%
   
60,911
     
8.0
%
   
79,784
     
8.5
%
Other expenses: 
                                         
Interest expense, net 
 
32,600
 
5.4
%
   
35,457
     
4.7
%
   
42,957
     
4.6
%
Other nonoperating (income) expense, net
 
(3,125
)
(0.5
%)
 
 
9,190
     
1.2
%
   
668
     
0.1
%
Total other expenses, net 
 
29,475
 
4.8
%
   
44,647
     
5.9
%
   
43,625
     
4.6
%
Net income before income taxes
 
42,954
 
7.1
%
   
16,264
     
2.1
%
   
36,159
     
3.8
%
Provision for income taxes (d)
 
1,400
 
0.2
%
   
3,522
     
0.5
%
   
6,675
     
0.7
%
Net income (d)
$
41,554
 
6.8
%
  $
12,742
     
1.7
%
  $
29,484
     
3.1
%
                                           
Other Data:
                                         
Company-owned average unit sales
$
1,810
       
$
1,813
           
$
1,716
         
Franchise average unit sales
$
1,396
       
$
1,490
           
$
1,523
         
Company-owned equivalent units (e)
 
270
         
357
             
492
         
Franchise equivalent units (e)
 
1,274
         
1,186
             
1,049
         
Same-store sales increase (decrease) (company-owned) (f)(g)
 
(3.7
%)
       
(1.4
%)
           
0.3
%
       
Guest check average increase (g) 
 
1.0
%
       
5.9
%
           
4.6
%
       
Guest count decrease (g)
 
(4.6
%)
       
(6.9
%)
           
(4.1
%)
       
Same-store sales increase (decrease) (franchised and licensed units) (f)(g)
 
(5.2
%)
       
(4.6
%)
           
1.7
%
       
 

(a) We estimate that the additional, or 53rd, week added approximately $12.1 million of company restaurant sales in 2008.
   
(b) We estimate that the additional, or 53rd, week added approximately $2.2 million of franchise and license revenue in 2008, consisting of $1.5 million of royalties and $0.7 million of occupancy revenue.
   
(c)
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.
   
(d)
Fiscal years 2007 and 2008 have been adjusted from amounts previously reported to reflect certain adjustments as discussed in “Adjustments to Previously Issued Financial Statements” in Note 2 to our Consolidated Financial Statements.
   
(e)
Equivalent units are calculated as the weighted-average number of units outstanding during the defined time period.
   
(f)
Same-store sales include sales from restaurants that were open the same period in the prior year. For purposes of calculating same-store sales, the 53rd week of 2008 was compared to the 1st week of 2008.
   
(g)
Prior year amounts have not been restated for 2009 comparable units.
 
14

2009 Compared with 2008
 
Unit Activity
 
   
2009
   
2008
 
Company-owned restaurants, beginning of period
   
315
     
394
 
Units opened
   
1
     
3
 
Units sold to franchisees
   
 (81
)
   
 (79
)
Units closed
   
(2
)
   
(3
)
End of period
   
233
     
315
 
                 
Franchised and licensed restaurants, beginning of period
   
1,226
     
1,152
 
Units opened
   
39
     
31
 
Units purchased from Company
   
 81
     
 79
 
Units closed
   
(28
)
   
(36
)
End of period
   
1,318
     
1,226
 
Total company-owned, franchised and licensed restaurants, end of period
   
1,551
     
1,541
 
 
Company Restaurant Operations
 
During the year ended December 30, 2009, we incurred a 3.7% decrease in same-store sales, comprised of a 1.0% increase in guest check average and a 4.6% decrease in guest counts. Company restaurant sales decreased $159.3 million, or 24.6%, primarily resulting from an 87 equivalent unit decrease in company-owned restaurants and the 53rd week in 2008. The decrease in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees as part of our FGI program.
 
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 85.5% from 87.9%. Product costs decreased to 23.5% from 24.3% due to price increases taken to help offset commodity inflation. Payroll and benefits costs decreased to 40.4% from 41.9% primarily as a result of $5.2 million in favorable workers’ compensation claims development over the prior year (1.2%). Payroll and benefit costs also benefited from improved scheduling of restaurant staff (0.7%), partially offset by higher incentive compensation (0.4%). Occupancy costs increased to 6.5% from 6.2% as a result of changes in the portfolio of company-owned restaurants and the decrease in same-store sales. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:
 
   
Fiscal Year Ended
 
   
December 30, 2009
   
December 31, 2008
 
   
(Dollars in thousands)
 
Utilities 
 
$
23,083
     
4.7
%
 
$
33,160
     
5.1
%
Repairs and maintenance 
   
9,909
     
2.0
%
   
14,592
     
2.3
%
Marketing 
   
20,082
     
4.1
%
   
23,243
     
3.6
%
Legal settlement costs
   
412
     
0.1
%
   
2,283
     
0.4
%
Other direct costs
   
20,010
     
4.1
%
   
26,904
     
4.2
%
Other operating expenses 
 
$
73,496
     
15.0
%
 
$
100,182
     
15.5
%
 
Utilities decreased by 0.4 percentage points primarily due to lower natural gas and electricity costs.  Marketing increased by 0.5 percentage points primarily as a result of the establishment of local advertising cooperatives during 2008 and 2009. The overall decrease in other operating expenses primarily results from the sale of company-owned restaurants to franchisees.
 
Franchise Operations
 
Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:
 
   
Fiscal Year Ended
 
   
December 30, 2009
   
December 31, 2008
 
   
(Dollars in thousands)
 
Royalties  
 
$
70,743
     
59.4
%
 
$
70,081
     
62.6
%
Initial and other fees
   
4,910
     
 4.1
%
   
4,949
     
 4.4
%
Occupancy revenue 
   
43,502
     
36.5
%
   
36,977
     
33.0
%
Franchise and license revenue 
   
119,155
     
100.0
%
   
112,007
     
100.0
%
                                 
Occupancy costs 
   
33,658
     
28.3
%
   
28,451
     
25.4
%
Other direct costs 
   
8,968
     
7.5
%
   
6,482
     
5.8
%
Costs of franchise and license revenue 
 
$
42,626
     
35.8
%
 
$
34,933
     
31.2
%
 
15

Royalties increased by $0.7 million, or 0.9%, primarily resulting from an 88 equivalent unit increase in franchised and licensed units. This increase was partially offset by the decrease from the 53rd week in 2008 and the effects of a 5.2% decrease in same-store sales. The increase in equivalent units resulted from the sale of company-owned restaurants to franchisees. During 2009 we opened 39 franchise restaurants and sold 81 restaurants to franchisees as compared to the opening of 31 franchise restaurants and the sale of 79 restaurants to franchisees during 2008. Although we opened more franchise units during 2009, initial fees remained essentially flat as a result of incentives included in certain franchise development agreements. The increase in occupancy revenue of $6.5 million, or 17.6%, is primarily the result of the sale of company-owned restaurants to franchisees, offset by the decrease from the 53rd week in 2008.

Costs of franchise and license revenue increased by $7.7 million, or 22.0%. The increase in occupancy costs of $5.2 million, or 18.3%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs increased by $2.5 million, or 38.4%, due primarily to $1.1 million of franchise-related costs associated with our 2009 Super Bowl promotion and $1.0 million increase in field management labor and incentive compensation. Occupancy costs as a percentage of occupancy revenue are generally higher than other direct costs as a percentage of royalties and fees. Therefore, as occupancy revenue increases as a percentage of total franchise and license revenue, the cost of franchise and license revenue as a percentage of franchise and license revenue will increase. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue increased to 35.8% for the year ended December 30, 2009 from 31.2% for the year ended December 31, 2008.
 
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:
 
   
Fiscal Year Ended
 
   
December 30, 2009
   
December 31, 2008
 
   
(In thousands)
 
Share-based compensation 
 
$
4,671
   
$
4,117
 
General and administrative expenses 
   
52,611
     
56,853
 
Total general and administrative expenses 
 
$
57,282
   
$
60,970
 
 
The increase in share-based compensation expense is primarily due to the adjustment of the liability classified restricted stock units to fair value as of December 30, 2009. The $4.2 million decrease in other general and administrative expenses is primarily the result of decreased staffing attributable to organizational structure changes implemented during the second quarter of 2008. This decrease is partially offset by a $2.8 million increase in expense related to our deferred compensation plan resulting from gains on the underlying assets of the plan and a $0.7 million increase in incentive compensation.
 
Depreciation and amortization was comprised of the following:
 
   
Fiscal Year Ended
 
   
December 30, 2009
   
December 31,  2008
 
   
(In thousands)
 
Depreciation of property and equipment 
 
$
24,240
   
$
30,609
 
Amortization of capital lease assets 
   
2,723
     
3,420
 
Amortization of intangible assets 
   
5,380
     
5,737
 
Total depreciation and amortization 
 
$
32,343
   
$
39,766
 

The overall decrease in depreciation and amortization expense was due to the sale of company-owned restaurants to franchisees during 2008 and 2009. 

Operating gains, losses and other charges, net were comprised of the following:
 
   
Fiscal Year Ended
 
   
December 30, 2009
   
December 31, 2008
 
   
(In thousands)
 
Gains on sales of assets and other, net
 
$
(19,429
)
 
$
(18,701
)
Restructuring charges and exit costs
   
3,960
     
9,022
 
Impairment charges
   
986
     
3,295
 
Operating (gains), losses and other charges, net
 
$
(14,483
)
 
$
(6,384
)
 
During the year ended December 30, 2009, we recognized $12.5 million of gains on the sale of 81 restaurant operations to 18 franchisees for net proceeds of $30.3 million, which included notes receivable of $3.5 million. During the year ended December 31, 2008, we recognized $15.2 million of gains on the sale of 79 restaurant operations to 22 franchisees for net proceeds of $35.5 million, which included notes receivable of $2.7 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.

16

Restructuring charges and exit costs were comprised of the following: 
 
   
Fiscal Year Ended
 
   
December 30, 2009
   
December 31, 2008
 
   
(In thousands)
 
Exit costs
 
$
698
   
$
3,435
 
Severance and other restructuring charges 
   
3,262
     
5,587
 
Total restructuring and exist costs
 
$
3,960
   
$
9,022
 
 
Exit costs for the year ended December 30, 2009 decreased by $2.7 million, resulting primarily from the favorable termination of certain leases related to closed restaurants. Severance and other restructuring charges decreased by $2.3 million. The $3.3 million of severance and other restructuring charges for the year ended December 30, 2009 primarily resulted from the departure of our Chief Operating Officer and Chief Marketing Officer during the fourth quarter. The $5.6 million of severance and other restructuring charges for the year ended December 31, 2008 resulted primarily from a reorganization to support our ongoing transition to a franchise-focused business model. The reorganization led to the elimination of approximately 70 positions in 2008.

Impairment charges for the years ended December 30, 2009 and December 31, 2008 related to underperforming restaurants, as well as restaurants and real estate held for sale.
  
Operating income was $72.4 million during 2009 compared with $60.9 million during 2008.
 
Interest expense, net was comprised of the following:
 
   
Fiscal Year Ended