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 25, 2008
 
DENNY'S CORPORATE LOGO

 
  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 [X]                                                                                       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 ¨                                                                                                                      Accelerated filer þ      
                 Non-accelerated filer   ¨ (Do not check if a smaller reporting company)                                 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 [X]

As of July 25, 2008 , 95,267,020 shares of the registrant’s common stock, par value $.01 per share, were outstanding.  



TABLE OF CONTENTS
 
 
Page
 
   
 
 
   
 
   
 
 
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 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands, except per share amounts)
 
Revenue:
                       
Company restaurant sales
 
$
163,233
   
$
218,316
   
$
332,826
   
$
434,117
 
Franchise and license revenue
   
27,039
     
22,626
     
53,442
     
43,576
 
Total operating revenue
   
190,272
     
240,942
     
386,268
     
477,693
 
Costs of company restaurant sales:
                               
Product costs
   
39,032
     
56,323
     
80,979
     
111,449
 
Payroll and benefits
   
69,021
     
91,932
     
142,749
     
184,800
 
Occupancy
   
9,976
     
13,024
     
20,528
     
26,152
 
Other operating expenses
   
24,730
     
31,782
     
49,938
     
62,095
 
Total costs of company restaurant sales
   
142,759
     
193,061
     
294,194
     
384,496
 
Costs of franchise and license revenue
   
8,520
     
6,933
     
16,691
     
13,408
 
General and administrative expenses
   
15,537
     
17,167
     
31,152
     
33,093
 
Depreciation and amortization
   
9,892
     
12,480
     
20,133
     
25,358
 
Operating gains, losses and other charges, net
   
3,027
     
(12,025
)
   
(5,686
)
   
(14,574
)
Total operating costs and expenses
   
179,735
     
217,616
     
356,484
     
441,781
 
Operating income
   
10,537
     
23,326
     
29,784
     
35,912
 
Other expenses:
                               
Interest expense, net
   
8,883
     
10,953
     
18,084
     
22,294
 
Other nonoperating expense (income), net
   
(1,617
)
   
(228
)
   
3,759
     
(425
)
Total other expenses, net
   
7,266
     
10,725
     
21,843
     
21,869
 
Net income before income taxes
   
3,271
     
12,601
     
7,941
     
14,043
 
Provision for income taxes
   
120
     
2,018
     
666
     
2,373
 
Net income
 
$
3,151
   
$
10,583
   
$
7,275
   
$
11,670
 
                                 
Net income per share:
                               
Basic net income per share
 
$
0.03
   
$
0.11
   
$
0.08
   
$
0.12
 
Diluted net income per share
 
$
0.03
   
$
0.11
   
$
0.07
   
$
0.12
 
                                 
Weighted average shares outstanding:
                               
Basic
   
95,017
     
93,692
     
94,922
     
93,554
 
Diluted
   
98,911
     
98,967
     
98,659
     
98,796
 
 
 
See accompanying notes to unaudited condensed consolidated financial statements.

3


Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
   
June 25, 2008
   
December 26, 2007
 
   
(In thousands)
 
Assets
           
Current Assets:
           
Cash and cash equivalents
 
$
12,046
   
$
21,565
 
Receivables, net
   
11,862
     
13,585
 
Receivable from sale of restaurants
     3,223          
Inventories
   
5,810
     
6,485
 
Assets held for sale
   
1,920
     
6,712
 
Prepaid and other current assets
   
7,253
     
9,526
 
Total Current Assets
   
42,114
     
57,873
 
                 
Property, net of accumulated depreciation of $307,133 and $307,047, respectively
   
176,799
     
184,610
 
                 
Other Assets:
               
Goodwill
   
41,064
     
42,439
 
Intangible assets, net
   
60,693
     
62,657
 
Deferred financing costs, net
   
4,461
     
5,078
 
Other assets
   
29,635
     
24,699
 
Total Assets
 
$
354,766
   
$
377,356
 
                 
Liabilities and Shareholders' Deficit
               
Current Liabilities:
               
Current maturities of notes and debentures
 
$
1,526
   
$
2,085
 
Current maturities of capital lease obligations
   
3,757
     
4,051
 
Accounts payable
   
31,213
     
43,262
 
Other
   
79,045
     
82,069
 
Total Current Liabilities
   
115,541
     
131,467
 
                 
Long-Term Liabilities:
               
Notes and debentures, less current maturities
   
310,913
     
325,971
 
Capital lease obligations, less current maturities
   
21,330
     
20,845
 
Liability for insurance claims, less current portion
   
25,874
     
27,148
 
Deferred income taxes
   
11,753
     
11,579
 
Other noncurrent liabilities and deferred credits
   
41,327
     
42,578
 
Total Long-Term Liabilities
   
411,197
     
428,121
 
Total Liabilities
   
526,738
     
559,588
 
                 
Commitments and contingencies
               
                 
Total Shareholders’ Deficit
   
(171,972
)
   
(182,232
)
Total Liabilities and Shareholders’ Deficit
 
$
354,766
   
$
377,356
 

 
See accompanying notes to unaudited condensed consolidated financial statements.
 
4

 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss
(Unaudited)

 
   
Common Stock
               
Accumulated Other Comprehensive
   
Total Shareholders'
 
   
Shares
   
Amount
   
Paid-in Capital
   
Deficit
   
Loss, Net
   
Deficit
 
   
(In thousands)
 
Balance, December 26, 2007
   
94,626
   
$
946
   
$
533,612
   
$
(700,284
)
 
$
(13,144
)
 
$
(178,870
)
Goodwill adjustment (Note 3)
   
     
     
     
(3,362
)
   
     
(3,362
)
Balance, December 26, 2007
   
94,626
   
$
946
   
$
533,612
   
$
(703,646
)
 
$
(13,144
)
 
$
(182,232
)
Comprehensive income:
                                               
Net income
   
     
     
     
7,275
     
     
7,275
 
Recognition of unrealized loss on hedge
transactions, net of tax
     
       
       
       
       559        559  
Comprehensive income
   
     
     
     
7,275
     
559
     
7,834
 
Share-based compensation on equity classified
awards
   
     
     
1,623
     
     
     
1,623
 
Issuance of common stock for share-based
compensation
   
210
     
2
     
289
     
     
     
291
 
Exercise of common stock options
   
253
     
3
     
509
     
     
     
512
 
Balance, June 25, 2008
   
95,089
   
$
951
   
$
536,033
   
$
(696,371
)
 
$
(12,585
)
 
$
(171,972
)


See accompanying notes to unaudited condensed consolidated financial statements.
 
5

 
Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Cash Flows from Operating Activities:
           
Net income
 
$
7,275
   
$
11,670
 
Adjustments to reconcile net income to cash flows provided by operating activities:
               
Depreciation and amortization
   
20,133
     
25,358
 
Operating gains, losses and other charges, net
   
(5,686
)
   
(14,574
)
Amortization of deferred financing costs
   
553
     
585
 
Loss (gain) on early extinguishment of debt
   
(30
)
   
67
 
Loss on change in the fair value of interest rate swap
   
3,048
     
 
Deferred income tax expense
   
295
     
2,047
 
Share-based compensation
   
1,662
     
2,319
 
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
               
Decrease (increase) in assets:
               
Receivables
   
2,072
     
938
 
Inventories
   
675
     
134
 
Other current assets
   
2,273
     
2,333
 
Other assets
   
(3,045
)
   
(1,728
)
Increase (decrease) in liabilities:
               
Accounts payable
   
(6,827
)
   
(826
)
Accrued salaries and vacations
   
(3,756
)
   
(469
)
Accrued taxes
   
(1,207
)
   
(731
)
Other accrued liabilities
   
(4,080
)
   
6,231
 
Other noncurrent liabilities and deferred credits
   
(6,224
)
   
(4,504
)
Net cash flows provided by operating activities
   
7,131
     
28,850
 
                 
Cash Flows from Investing Activities:
               
Purchase of property
   
(14,829
)
   
(10,992
)
Proceeds from disposition of property
   
18,008
     
26,888
 
Acquisition of restaurant units
   
     
(2,208
)
Net cash flows provided by investing activities
   
3,179
     
13,688
 
                 
Cash Flows from Financing Activities:
               
Long-term debt payments
   
(17,837
)
   
(18,996
)
Deferred financing costs paid
   
     
(321
)
Proceeds from exercise of stock options
   
512
     
807
 
Net bank overdrafts
   
(2,504
)
   
(2,991
)
Net cash flows used in financing activities
   
(19,829
)
   
(21,501
)
                 
Increase (decrease) in cash and cash equivalents
   
(9,519
)
   
21,037
 
                 
Cash and Cash Equivalents at:
               
Beginning of period
   
21,565
     
26,226
 
End of period
 
$
12,046
   
$
47,263
 
 
See accompanying notes to unaudited condensed consolidated financial statements.

6



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

Note 1.   Introduction and Basis of Presentation

Denny’s Corporation, through its wholly owned subsidiaries, Denny’s Holdings, Inc. and Denny’s, Inc., owns and operates the Denny’s restaurant brand, or Denny’s.

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 conditions; 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 26, 2007 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 26, 2007. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 31, 2008.

Note 2.   Summary of Significant Accounting Policies
 
Effective December 27, 2007, the first day of fiscal 2008, we adopted Statement of Financial Accounting Standards No. 159 ("SFAS 159"), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value reporting option for any assets and liabilities not previously recorded at fair value.

Effective December 27, 2007, the first day of fiscal 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157 ("SFAS 157"), “Fair Value Measurements” for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the Financial Accounting Standards Board ("FASB") having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. We applied the provisions of FSP FAS 157-2, "Effective Date of FASB Statement 157," which defers the provisions of SFAS 157 for nonfinancial assets and liabilities to the first fiscal period beginning after November 15, 2008. The deferred nonfinancial assets and liabilities include items such as goodwill and other nonamortizable intangibles. We are required to adopt SFAS 157 for nonfinancial assets and liabilities in the first quarter of fiscal 2009 and are still evaluating the impact on our Condensed Consolidated Financial Statements.
 
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
   
Fair Value Measurements as of June 25, 2008
   
June 25, 2008
   
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 
 
$
6,713
   
$
6,713
   
$
   
$
 
market approach 
Interest rate swap liability
   
(2,850
)
   
     
(2,850
   
 
income approach
Total
 
$
3,863
   
$
6,713
   
$
(2,850
)
 
$
   
 
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 26, 2007, except as noted in Note 3.
 
Note 3.   Adjustments Related to Goodwill
 
In March 2008, we recorded adjustments to correct an error in accounting for goodwill in relation to the sale of restaurant operations during the quarters ending March 28, 2007, June 27 2007, September 26, 2007 and December 26, 2007. Historically, we did not write-off goodwill when we sold restaurant units to franchisees. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" requires that a portion of the entity level goodwill should be written off based on the relative fair values of the restaurant unit being sold and the remaining value of the entity, in our case , Denny's. The adjustments had no impact on previously reported cash flows.
 
The following line items on the Consolidated Statements of Operations for the quarter and two quarters ended June 27, 2007 and the fiscal year ended December 26, 2007 were impacted by the adjustments:
 
   
Quarter Ended June 27, 2007
   
Two Quarters Ended June 27, 2007
   
Fiscal Year Ended December 26, 2007
 
   
Unadjusted
   
Adjustment
   
Adjusted
   
Unadjusted
   
Adjustment
   
Adjusted
   
Unadjusted
   
Adjustment
   
Adjusted
 
   
(In thousands, except per share amounts)
 
Operating gains, losses and other charges, net
  $ (13,047 )   $ 1,022     $ (12,025 )   $ (15,680 )   $ 1,106     $ (14,574 )   $ (34,828 )     3,746       (31,082 )
Total operating costs and expenses
    216,594       1,022       217,616       440,675       1,106       441,781       855,838       3,746       859,584  
Operating income
    24,348       (1,022 )     23,326       37,018       (1,106 )     35,912       83,530       (3,746 )     79,784  
Net income before taxes
    13,623       (1,022 )     12,601       15,149       (1,106 )     14,043       39,905       (3,746 )     36,159  
Provision for income taxes
    2,123       (105 )     2,018       2,486       (113 )     2,373       5,192       (384 )     4,808  
Net income
    11,500       (917 )     10,583       12,663       (993 )     11,670       34,713       (3,362 )     31,351  
                                                                         
Basic net income per share
  $ 0.12     $ (0.01 )   $ 0.11     $ 0.14     $ (0.02 )   $ 0.12     $ 0.37     $ (0.04 )   $ 0.33  
Diluted net income per share
  $ 0.12     $ (0.01 )   $ 0.11     $ 0.13     $ (0.01 )   $ 0.12     $ 0.35     $ (0.03 )   $ 0.32  
 

7

The following line items on the Consolidated Balance Sheet as of December 26, 2007 were impacted by the adjustments:
 
   
December 26, 2007
   
Adjustment
   
Adjusted
December 26, 2007
 
   
(In thousands)
 
Goodwill
 
$
46,185
   
$
(3,746
)
 
$
42,439
 
Total assets
   
381,102
     
(3,746
)
   
377,356
 
Deferred income taxes
   
11,963
     
(384
)
   
11,579
 
Total long-term liabilities
   
428,505
     
(384
)
   
428,121
 
Total liabilities
   
559,972
     
(384
)
   
559,588
 
Total shareholders' deficit
   
(178,870
)
   
(3,362
)
   
(182,232
)
Total liabilities and shareholders' deficit
   
381,102
     
(3,746
)
   
377,356
 
 
The following reflects the adjusted quarterly data for fiscal 2007:
 
   
Fiscal Year Ended December 26, 2007
 
   
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
 
   
(In thousands, except per share data)
 
Company restaurant sales
 
$
215,801
   
$
218,316
   
$
216,792
   
$
193,712
 
Franchise and licensing revenue
   
20,950
     
22,626
     
24,617
     
26,554
 
Total operating revenue
   
236,751
     
240,942
     
241,409
     
220,266
 
Total operating costs and expenses
   
224,165
     
217,616
     
225,529
     
192,274
 
Operating income
 
$
12,586
   
$
23,326
   
$
15,880
   
$
27,992
 
                                 
Net income
 
$
1,087
   
$
10,583
   
$
4,950
   
$
14,731
 
                                 
Basic net income per share (a)
 
$
0.01
   
$
0.11
   
$
0.05
   
$
0.16
 
Diluted net income per share (a)
 
$
0.01
   
$
0.11
   
$
0.05
   
$
0.15
 
 
 (a)
Per share amounts do not necessarily sum to the total year amounts due to changes in shares outstanding and rounding.
 
Note 4.   Assets Held for Sale

Assets held for sale of $1.9 million and $6.7 million, as of June 25, 2008 and December 26, 2007, respectively, include  restaurants to be sold to franchisees and certain real estate properties . We expect to sell each of these assets within 12 months. Our Credit Facility (defined in Note 7) requires us to make mandatory prepayments to reduce outstanding indebtedness with the net cash proceeds from the sale of  specified real estate properties . As a result, we classified a corresponding $0.4 million of our long-term debt as a current liability in our Consolidated Balance Sheet as of December 26, 2007. This amount represents the net book value of the specified properties as of the balance sheet date. As of June 25, 2008, there were no properties included in assets held for sale for which mandatory prepayment was required.
 
Note 5.   Goodwill and Other Intangible Assets
 
The changes in carrying amounts of goodwill for the two quarters ended June 25, 2008 are as follows:
 
   
(In thousands)
 
Balance at December 26, 2007
 
$
42,439
 
Write-offs associated with sale of restaurants
   
(1,253
)
Reversal of valuation allowance related to deferred tax assets (Note 11)
   
(122
)
Balance at June 25, 2008
 
$
41,064
 
 
The following table reflects goodwill and intangible assets as of June 25, 2008 and December 26, 2007:
 
   
June 25, 2008
   
December 26, 2007
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Gross Carrying Amount
   
Accumulated Amortization
 
   
(In thousands)
 
Goodwill
 
$
41,064
   
$
   
$
42,439
   
$
 
                                 
Intangible assets with indefinite lives:
                               
Trade names
 
$
42,414
   
$
   
$
42,395
   
$
 
Liquor licenses
   
262
     
     
279
     
 
Intangible assets with definite lives:
                               
Franchise and license agreements
   
55,727
     
37,819
     
61,903
     
42,036
 
Foreign license agreements
   
241
     
132
     
241
     
125
 
Intangible assets
 
$
98,644
   
$
 37,951
   
$
104,818
   
42,161
 
                                 
Other assets with definitive lives:
                               
Software development costs
 
$
31,675
   
$
25,515
   
$
30,853
   
$
24,560
 
 
8

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

Operating gains, losses and other charges, net are comprised of the following:
 
   
Quarter Ended
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Gains on sales of assets and other, net
 
$
(3,176
)
 
$
(13,457
)
 
$
(12,924
)
 
$
(16,644
)
Restructuring charges and exit costs
   
5,719
     
1,192
     
6,754
     
1,830
 
Impairment charges
   
484
     
240
     
484
     
 240
 
Operating gains, losses and other charges, net
 
$
3,027
   
$
(12,025
)
 
$
(5,686
)
 
$
(14,574
)
 
Gains on Sales of Assets
 
Proceeds and gains on sales of assets for the quarters ended June 25, 2008 and June 27, 2007 were comprised of the following:
 
   
Quarter Ended June 25, 2008
   
Quarter Ended June 27, 2007
 
   
Net Proceeds
   
Gains
   
Net Proceeds
   
Gains
 
   
(In thousands)
 
Sales of restaurant operations and related real estate to
franchisees
 
$
5,544
   
$
2,201
   
$
20,241
   
$
12,637
 
Sales of other real estate assets
   
1,647
     
944
     
911
     
305
 
Recognition of deferred gains
   
     
31
     
     
515
 
Total
 
$
7,191
   
$
3,176
   
$
21,152
   
$
13,457
 
 
Proceeds and gains on sales of assets for the two quarters ended June 25, 2008 and June 27, 2007 were comprised of the following:
 
   
Two Quarters Ended June 25, 2008
   
Two Quarters Ended June 27, 2007
 
   
Net Proceeds
   
Gains
   
Net Proceeds
   
Gains
 
   
(In thousands)
 
Sales of restaurant operations and related real estate to
franchisees
 
$
21,999
   
$
11,943
   
$
21,853
   
$
12,956
 
Sales of other real estate assets
   
1,622
     
919
     
5,035
     
3,142
 
Recognition of deferred gains
   
     
62
     
     
546
 
Total
 
$
23,621
   
$
12,924
   
$
26,888
   
$
16,644
 
 
Restructuring Charges and Exit Costs

Restructuring charges and exit costs were comprised of the following:
   
   
Quarter Ended
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Exit costs
 
$
815
   
$
588
   
$
1,655
   
$
735
 
Severance and other restructuring charges
   
4,904
     
604
     
5,099
     
1,095
 
Total restructuring and exit costs
 
$
5,719
   
$
1,192
   
$
6,754
   
$
1,830
 

Severance and other restructuring charges of $4.9 million for the quarter ended June 25, 2008 primarily resulted from severance costs of $4.3 million related to the reorganization to support our ongoing transition to a franchise-focused business model, which led to the elimination of approximately 50 positions.

The components of the change in accrued exit cost liabilities are as follows:
 
   
(In thousands)
 
Balance, beginning of year
 
$
8,339
 
Provisions for units closed during the year (1)
   
414
 
Changes in estimates of accrued exit costs, net (1) 
   
1,241
 
Payments, net
   
(1,831
)
Interest accretion
   
409
 
Balance, end of quarter
   
8,572
 
Less current portion included in other current liabilities
   
1,957
 
Long-term portion included in other noncurrent liabilities
 
$
6,615
 
 
 (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 2008
 
$
1,321
 
2009
   
2,182
 
2010
   
1,626
 
2011
   
1,401
 
2012
   
1,143
 
Thereafter
   
2,997
 
Total
   
10,670
 
Less imputed interest
   
2,098
 
Present value of exit cost liabilities
 
$
8,572
 

As of June 25, 2008 and December 26, 2007, we had accrued severance and other restructuring charges of $4.5 million and $1.3 million, respectively.  The balance as of June 25, 2008 is expected to be paid during the next 12 months.

9

Note 7.   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), a $137 million term loan and an additional $37 million letter of credit facility (together, the "Credit Facility"). At June 25, 2008, we had outstanding letters of credit of $35.3 million (comprised of $35.0 million under our letter of credit facility and less than $0.3 million under our revolving facility). There were no revolving loans outstanding at June 25, 2008. These balances result in availability of $2.0 million under our letter of credit facility and approximately $49.7 million under the revolving facility.
 
The revolving facility matures on December 15, 2011. The term loan and the $37 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 2008, combined with our capacity for additional borrowings under our Credit Facility, will enable us to meet our anticipated cash requirements and fund capital expenditures through the end of 2008.

The Credit Facility is guaranteed by Denny's Corporation 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 119 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 25, 2008.

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. Prior to considering the impact of the interest rate swap described below, the weighted-average interest rate under the term loan was 4.7% and 7.1% as of June 25, 2008 and June 27, 2007, respectively.

Interest Rate Swap

During the second quarter of fiscal 2007, we entered into an interest rate swap with a notional amount of $150 million to hedge a portion of the cash flows of our variable rate debt. We designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on the first $150 million of floating rate debt. Under the terms of the swap, we pay a fixed rate of 4.8925% on the $150 million notional amount and receive 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 $150 million notional amount at the inception of the swap. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.
 
Prior to December 26, 2007, to the extent the swap was effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap were not included in current earnings, but were reported as adjustments to other comprehensive income. At December 26, 2007, we determined that a portion of the underlying cash flows related to the swap (i.e., interest payments on $150 million of floating rate debt) were no longer probable of occurring over the term of the interest rate swap as a result of the probability of paying the debt down below $150 million through scheduled repayments and prepayments with cash from the sale of company-owned restaurant operations to franchisees. As a result, we discontinued hedge accounting treatment.  The losses related to the fair value of the swap included in accumulated other comprehensive income as of December 26, 2007 will be amortized to other nonoperating expense over the remaining term of the interest rate swap. Additionally, changes in the fair value of the swap are recorded in other nonoperating expense. 
 
The changes in accumulated other comprehensive income related to the swap for the quarter and two quarters ended June 25, 2008 are as follows:
 
   
Quarter Ended
June 25, 2008
   
Two Quarters Ended
June 25, 2008
 
   
(In thousands)
 
Accumulated Other Comprehensive Income, beginning of period
  $ (2,091   $ (2,353
Amortization of unrealized losses related to the interest rate swap (recorded in other
nonoperating expense)
    297       559  
Accumulated Other Comprehensive Income, end of period
  $ (1,794   $ (1,794
 
The changes in fair value of the interest rate swap for the quarter and two quarters ended June 25, 2008 are as follows:
 
     
Quarter Ended
J une 25, 2008 
     
Two Quarters Ended
June 25, 2008 
 
      (In thousands)   
Fair value of the interest rate swap, beginning of period
  $ (4,723 )   $ (2,753 )
Change in the fair value of the interest rate swap (recorded in other nonoperating expense)
    1,881       (2,489 )
Termination of swap
    (8 )     2,392  
Fair value of the interest rate swap, end of period
  $ (2,850 )   $ (2,850 )
 
On March 26, 2008, we terminated $50 million notional amount of the interest rate swap. The termination resulted in a $2.4 million cash payment, which was made during the quarter ended June 25, 2008.  
 
By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.

10

Note 8.   Defined Benefit Plans

The components of net pension cost of our pension plan and other defined benefit plans as determined under Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” as amended by Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans," are as follows:
 
   
Pension Plan
   
Other Defined Benefit Plans
 
   
Quarter Ended
   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Service cost
 
$
87
   
$
88
   
$
   
$
 
Interest cost
   
851
     
789
     
48
     
47
 
Expected return on plan assets
   
(966
)
   
(879
)
   
     
 
Amortization of net loss
   
150
     
224
     
5
     
6
 
Net periodic benefit cost
 
$
122
   
$
222
   
$
53
   
$
53
 
 
 
   
Pension Plan
   
Other Defined Benefit Plans
 
   
Two Quarters Ended
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Service cost
 
$
175
   
$
175
   
$
   
$
 
Interest cost
   
1,694
     
1,572
     
97
     
95
 
Expected return on plan assets
   
(1,939
)
   
(1,764
)
   
     
 
Amortization of net loss
   
300
     
441
     
10
     
12
 
Net periodic benefit cost
 
$
230
   
$
424
   
$
107
   
$
107
 
 
We made contributions of $0.9 million and $1.8 million to our qualified pension plan during the two quarters ended June 25, 2008 and June 27, 2007, respectively. We made contributions of $0.1 million and $0.2 million to our other defined benefit plans during the two quarters ended June 25, 2008 and June 27, 2007, respectively. We expect to contribute $0.5 million to our qualified pension plan and $0.5 million to our other defined benefit plans during the remainder of fiscal 2008.

Additional minimum pension liability of $10.8 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss as of June 25, 2008 and December 26, 2007.

Note 9.   Share-Based Compensation

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

   
Quarter Ended
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Share-based compensation related to liability classified
restricted stock units
 
$
168
   
$
209
   
$
39
   
$
682
 
Share based compensation related to equity classified awards:
                               
Stock options
 
$
686
   
421
   
$
925
   
619
 
Restricted stock units
   
111
     
426
     
575
     
858
 
Board deferred stock units
   
67
     
79
     
123
     
160
 
Total share-based compensation related to equity classified
awards
   
864
     
926
     
1,623
     
1,637
 
Total share-based compensation
 
$
1,032
   
$
1,135
   
$
1,662
   
$
2,319
 

Additionally, during the two quarters ended June 25, 2008, we issued approximately 97,000 shares of common stock in lieu of cash to pay approximately $0.3 million of incentive compensation.
 
Stock Options

During the two quarters ended June 25, 2008, we granted approximately 1.5 million stock options to certain employees and approximately 0.2 million stock options to the non-employee members of our Board of Directors. These stock options vest evenly over 3 years and have a 10-year contractual life.

The weighted average fair value per option of options granted during the two quarters ended June 25, 2008 was $1.18. The fair value of the stock options granted in the period ended June 25, 2008 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 Consolidated Statements of Operations.

We used the following weighted average assumptions for the stock option grants for the two quarters ended June 25, 2008:
 
Dividend yield
   
0.0
%
Expected volatility
   
50.1
%
Risk-free interest rate
   
2.7
%
Weighted-average expected term
 
4.6 years
 
 
11

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 25, 2008, there was approximately $2.8 million of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of 2.3 years.

Restricted Stock Units

During the two quarters ended June 25, 2008, we made payments of $0.4 million (before taxes) in cash and issued 0.1 million shares of common stock related to the restricted stock unit awards that vested as of December 26, 2007

Accrued compensation expense included as a component of the Condensed Consolidated Balance Sheet was as follows:
 
   
June 25, 2008
   
December 26, 2007
 
   
(In thousands)
 
Liability classified restricted stock units:
           
Other current liabilities                                                                                             
 
$
1,377
   
$
1,170
 
Other noncurrent liabilities
 
$
2,277
   
$
2,828
 
                 
Equity classified restricted stock units: 
               
Additional paid-in capital
 
$
4,166
   
$
3,925
 
 
As of June 25, 2008, we had approximately $3.1 million of unrecognized compensation cost (approximately $0.9 million for liability classified units and approximately $2.2 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 1.8 years.

Board Deferred Stock Units

During the two quarters ended June 25, 2008, we granted approximately 0.1 million deferred stock units (which are equity classified) with a weighted-average grant date fair value of $3.30 per unit to non-employee members of our Board of Directors. These awards are restricted in that they may not be converted to shares until the recipient has ceased serving as a member of the Board of Directors for Denny's Corporation at which time the awards automatically convert to shares. During the quarter ended June 25, 2008, one board member did not stand for reelection. As a result, the board member's  deferred stock units were converted into shares of common stock.
 
Note 10.   Accumulated Other Comprehensive Income (Loss)

Total comprehensive income was $7.8 million and $14.1 million for the two quarters ended June 25, 2008 and June 27, 2007, respectively

The components of Accumulated Other Comprehensive Income (Loss) in the Condensed Consolidated Statement of Shareholder’s Deficit are as follows:

   
June 25, 2008
   
December 26, 2007
 
   
(In thousands)
 
Additional minimum pension liability
 
$
(10,791
)
 
$
(10,791
)
Unrealized gain on hedged transaction
   
(1,794
)
   
(2,353
)
Accumulated other comprehensive income (loss)
 
$
(12,585
)
 
$
(13,144
)

Note 11.   Income Taxes

The provision for income taxes was $0.1 million and $0.7 million for the quarter and two quarters ended June 25, 2008, respectively, compared with $2.0 million and $2.4 million for the quarter and two quarters ended June 27, 2007, respectively. The provision for income taxes for the first two quarters of 2008 and 2007 was determined using our effective rate estimated for the entire fiscal year. The two quarters ended June 27, 2007 also included the recognition of $0.3 million of current tax benefits and a $0.6 million reduction to the valuation allowance. These items resulted from the enactment of certain federal and state laws that benefited us during the second quarter of 2007.
 
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. In addition, during 2008 and 2007, we utilized certain federal and state NOL carryforwards whose valuation allowance was established in connection with fresh start reporting on January 7, 1998. Accordingly, federal and state deferred tax expense was recorded in connection with fresh start reporting on January 7, 1998 with a corresponding reduction to the goodwill.  The amounts recognized were approximately $0.0 million and $0.1 million for the quarter and two quarters ended June 25, 2008, respectively, and $2.4 million and $2.5 million for the quarter and two quarters ended June 27, 2007, respectively.
 
The reduction in our effective tax rate for the two quarters ended June 25, 2008 was due primarily to the utilization of federal net operating loss carryforwards from periods prior to fresh start reporting on January 7, 1998. These federal net operating loss carryforwards were fully utilized during fiscal 2007. We still have certain state net operating loss carryforwards from periods prior to fresh start reporting that have been utilized in both fiscal 2007 and 2008.

12

Note 12.   Net Income Per Share

   
Quarter Ended
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands, except for per share amounts)
 
Numerator:
                       
Numerator for basic and diluted net income per share -
net income
 
$
3,151
   
$
10,583
   
$
7,275
   
$
11,670
 
                                 
Denominator:
                               
Denominator for basic net income per share – weighted
average shares
   
95,017
     
93,692
     
94,922
     
93,554
 
Effect of dilutive securities:
                               
Options
   
2,797
     
4,159
     
2,724
     
4,131
 
Restricted stock units and awards
   
1,097
     
1,116
     
1,013
     
1,111
 
Denominator for diluted net income per share - adjusted
weighted average shares and assumed conversions of
dilutive securities
   
98,911
     
98,967
     
98,659
     
98,796
 
                                 
Basic net income per share
 
$
0.03
   
$
0.11
   
$
0.08
   
$
0.12
 
Diluted net income per share
 
$
0.03
   
$
0.11
   
$
0.07
   
$
0.12
 
                                 
Stock options excluded (1)
   
3,814
     
1,853
     
3,182
     
1,799
 

(1)                  Excluded from diluted weighted-average shares outstanding as the impact would have been antidilutive.
 
Note 13.   Supplemental Cash Flow Information

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Income taxes paid, net
 
$
668
   
$
1,231
 
Interest paid
 
$
17,540
   
$
18,144
 
                 
Noncash investing activities:
               
Net proceeds receivable from disposition of property
 
$
3,223
   
$
 
Notes received in connection with disposition of property
 
$
2,390
   
$
 
Noncash financing activities:
               
Issuance of common stock, pursuant to share-based compensation plans
 
$
771
   
$
222
 
Execution of capital leases
 
$
2,613
   
$
597
 
 
Note 14.     Related Party Transactions
 
During the quarter and two quarters ended June 25, 2008, we sold company-owned restaurants to franchisees that are former employees. We received cash proceeds of $0.7 million and $1.9 million from the sale of restaurant operations to these related parties during the two periods, respectively. 

Note 15.   Implementation of New Accounting Standards
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 ("SFAS 162"), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Codification of Auditing Standards , AU Section 411, " The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." We do not currently believe that adopting SFAS 162 will have a material impact on our Condensed Consolidated Financial Statements.
 
In April 2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (“FSP FAS 142-3 ”) , “Determination of the Useful Life of Intangible Assets.”  FSP FAS 142-3  amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141, "Business Combinations."  We are required to adopt FSP FAS 142-3 in the first quarter of 2009 and will apply it prospectively to intangible assets acquired after the effective date.
 
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities,” which amends and expands Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 161 requires tabular disclosure of the fair value of derivative instruments and their gains and losses.  This Statement also requires disclosure regarding the credit-risk related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. We are required to adopt SFAS 161 in the first quarter of 2009.  We are currently evaluating the impact of adopting SFAS 161 on our Condensed Consolidated Financial Statements.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51." SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in our Consolidated Financial Statements. Among other requirements, this Statement requires that the consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. SFAS 160 is effective for the first fiscal period beginning on or after December 15, 2008.  We are required to adopt SFAS 160 in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our Condensed Consolidated Financial Statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree and the goodwill acquired. SFAS 141R applies to business combinations for which the acquisition date is on or after the first fiscal period beginning on or after December 15, 2008. SFAS 141R will also require that any additional reversal of deferred tax asset valuation allowance established in connection with fresh start reporting on January 7, 1998 be recorded as a component of income tax expense rather than as currently reflected as a reduction to the goodwill established in connection with the fresh start reporting. We are required to adopt SFAS 141R in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 141R on our Condensed Consolidated Financial Statements.
 
13

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. Effective December 27, 2007, the first day of fiscal 2008, we adopted the provisions of SFAS 157 for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. See Note 2 to the Condensed Consolidated Financial Statements . We applied the provisions of FSP FAS 157-2, "Effective Date of FASB Statement 157," which defers the provisions of SFAS 157 for nonfinancial assets and liabilities to the first fiscal period beginning after November 15, 2008. The deferred nonfinancial assets and liabilities include items such as goodwill and other nonamortizable intangibles. We are required to adopt SFAS 157 for nonfinancial assets and liabilities in the first quarter of fiscal 2009 and are still evaluating the impact on our Condensed Consolidated Financial Statements.
 
Other 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 the Condensed Consolidated Financial Statements upon adoption.

Note 16.   Commitments and Contingencies

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 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.

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

The following discussion is intended to highlight significant changes in our financial position as of June 25, 2008 and results of operations for the quarter and two quarters ended June 25, 2008 compared to the quarter and two quarters ended June 27, 2007. 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; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors 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 26, 2007.

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 25, 2008
   
June 27, 2007
   
June 25, 2008
   
June 27, 2007
 
   
(Dollars in thousands)
 
Revenue:
                                               
Company restaurant sales
 
$
163,233
 
85.8
%
 
$
218,316
 
90.6
%
 
$
332,826
 
86.2
%
 
$
434,117
 
90.9
%
Franchise and license revenue
   
27,039
 
14.2
%
   
22,626
 
9.4
%
   
53,442
 
13.8
%
   
43,576
 
9.1
%
Total operating revenue
   
190,272
 
100.0
%
   
240,942
 
100.0
%
   
386,268
 
100.0
%
   
477,693
 
100.0
%
                                                 
Costs of company restaurant sales (a):
                                               
Product costs
   
39,032
 
23.9
%
   
56,323
 
25.8
%
   
80,979
 
24.3
%
   
111,449
 
25.7
%
Payroll and benefits
   
69,021
 
42.3
%
   
91,932
 
42.1
%
   
142,749
 
42.9
%
   
184,800
 
42.6
%
Occupancy
   
9,976
 
6.1
%
   
13,024
 
6.0
%
   
20,528
 
6.2
%
   
26,152
 
6.0
%
Other operating expenses
   
24,730
 
15.1
%
   
31,782
 
14.6
%
   
49,938
 
15.0
%
   
62,095
 
14.3
%
Total costs of company restaurant sales
   
142,759
 
87.5
%
   
193,061
 
88.4
%
   
294,194
 
88.4
%
   
384,496
 
88.6
%
                                                 
Costs of franchise and license revenue (a)
   
8,520
 
31.5
%
   
6,933
 
30.6
%
   
16,691
 
31.2
%
   
13,408
 
30.8
%
                                                 
General and administrative expenses
   
15,537
 
8.2
%
   
17,167
 
7.1
%
   
31,152
 
8.1
%
   
33,093
 
6.9
%
Depreciation and amortization
   
9,892
 
5.2
%
   
12,480
 
5.2
%
   
20,133
 
5.2
%
   
25,358
 
5.3
%
Operating gains, losses and other charges
   
3,027
 
1.6
%
   
(12,025
)
(5.0
%)
   
(5,686
)
(1.5
%)
   
(14,574
)
(3.1
%)
Total operating costs and expenses
   
179,735
 
94.5
%
   
217,616
 
90.3
%
   
356,484
 
92.3
%
   
441,781
 
92.5
%
Operating income
   
10,537
 
5.5
%
   
23,326
 
9.7
%
   
29,784
 
7.7
%
   
35,912
 
7.5
%
Other expenses:
                                               
Interest expense, net
   
8,883
 
4.7
%
   
10,953
 
4.5
%
   
18,084
 
4.7
%
   
22,294
 
4.7
%
Other nonoperating expense (income), net
   
(1,617
)
(0.8
%)
   
(228
)
(0.1
%)
   
3,759
 
1.0
%
   
(425
)
(0.1
%)
Total other expenses, net
   
7,266
 
3.8
%
   
10,725
 
4.5
%
   
21,843
 
5.7
%
   
21,869
 
4.6
%
Net income before income taxes
   
3,271
 
1.7
%
   
12,601
 
5.2
%
   
7,941
 
2.1
%
   
14,043
 
2.9
%
Provision for income taxes
   
120
 
0.1
%
   
2,018
 
0.8
%
   
666
 
0.2
%
   
2,373
 
0.5
%
Net income
 
$
3,151
 
1.7
%
 
$
10,583
 
4.4
%
 
$
7,275
 
1.9
%
 
$
11,670
 
2.4
%
                                                 
Other Data:
                                               
Company-owned average unit sales
 
$
442
       
$
428
       
$
875
       
$
844
     
Franchise average unit sales
   
368
         
380
         
735
         
746
     
Company-owned equivalent units (b)
      369             510             380             514      
Franchise equivalent units (b)
    1,178           1,032           1,168           1,028      
Same-store sales increase (decrease) (company- owned) (c)(d)
   
(0.7
)%
       
2.8
%
       
0.0
%
       
0.5
%
   
Guest check average increase (d)
   
6.4
%
       
3.6
%
       
6.1
%
       
3.1
%
   
Guest count decrease (d)
   
(6.7
)%
       
(0.8
)%
       
(5.7
)%
       
(2.6
)%
   
Same-store sales increase (decrease) (franchised and licensed
units) (c) (d)
   
(3.7
)%
       
4.0
%
       
(2.3
)%
       
1.6
%
   
__________________
(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 days in both the current year and prior year.
   
(d)
Prior year amounts have not been adjusted for 2008 comparable units.
14

 
  Quarter Ended June 25, 2008 Compared with Quarter Ended June 27, 2007

   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
Company-owned restaurants, beginning of period
   
373
     
517
 
Units opened
   
2
     
 
Units acquired from franchisees
   
     
 
Units sold to franchisees
   
(20
)
   
(28
)
Units closed
   
(1
)
   
(1
)
End of period
   
354
     
488
 
                 
Franchised and licensed restaurants, beginning of period
   
1,177
     
1,028
 
Units opened 
   
2
     
2
 
Units acquired by Company
   
     
 
Units purchased from Company
   
20
     
28
 
Units closed
   
(8
)
   
(7
)
End of period
   
1,191
     
1,051
 
Total company-owned, franchised and licensed restaurants, end of period
   
1,545
     
1,539
 

  Company Restaurant Operations

During the quarter ended June 25, 2008, we incurred a 0.7% decrease in same-store sales, comprised of a 6.4% increase in guest check average and a 6.7% decrease in guest counts. Company restaurant sales decreased $55.1 million, or 25.2%, primarily resulting from a 141 equivalent-unit decrease in company-owned restaurants. The decrease in equivalent-units primarily resulted from the sale of company-owned restaurants to franchisees as part of our Franchise Growth Initiative.
 
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 87.5% from 88.4%. Product costs decreased to 23.9% from 25.8% due to favorable shifts in menu mix. Payroll and benefits costs increased to 42.3% from 42.1% primarily as a result of increased group insurance and management staffing costs , offset by a decrease in restaurant staffing related to improved scheduling. Occupancy costs increased slightly to 6.1% from 6.0%.  Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(Dollars in thousands)
 
Utilities
 
$
8,080
     
4.9
%
 
$
10,032
     
4.6
%
Repairs and maintenance
   
3,607
     
2.2
%
   
4,818
     
2.2
%
Marketing
   
5,592
     
3.4
%
   
7,315
     
3.4
%
Legal
   
487
     
0.3
%
   
985
     
0.4
%
Other direct costs
   
6,964
     
4.3
%
   
8,632
     
4.0
%
Other operating expenses
 
$
24,730
     
15.1
%
 
$
31,782
     
14.6
%

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:
 
   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(Dollars in thousands)
 
Royalties
 
$
17,156
     
63.5
%
 
$
15,521
     
68.6
%
Initial and other fees    
 1,056
     
 3.9
%    
 1,257
     
 5.6
%
Occupancy revenue
   
8,827
     
32.6
%
   
5,848
     
25.8
%
Franchise and license revenue
   
27,039
     
100.0
%
   
22,626
     
100.0
%
                                 
Occupancy costs
   
6,886
     
25.5
%
   
4,932
     
21.8
%
Other direct costs
   
1,634
     
6.0
%
   
2,001
     
8.8
%
Costs of franchise and license revenue
 
$
8,520
     
31.5
%
 
$
6,933
     
30.6
%

Royalties increased by $1.6 million, or 10.5%, primarily resulting from a 146 equivalent-unit increase in franchised and licensed units, as compared to the prior year quarter, offset by the effects of a 3.7% decrease in same-store sales. The increase in equivalent-units resulted from the sale of company-owned restaurants to franchisees. The increase in occupancy revenue of $3.0 million, or 50.9%, is also primarily the result of the sale of restaurants to franchisees. 
 
Costs of franchise and license revenue increased by $1.6 million, or 22.9%. The increase in occupancy costs of $2.0 million, or 39.6%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs benefited by $0.4 million, or 18.3%, primarily as a result of the reorganization of the field management structure that occurred in the third quarter of 2007. As a percentage of franchise and license revenue, costs of franchise and license revenue increased to 31.5% for the quarter ended June 25, 2008 from 30.6% for the quarter ended June 27, 2007.
 
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.

15

General and administrative expenses are comprised of the following:

   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Share-based compensation
 
$
1,032
   
$
1,135
 
General and administrative expenses
   
14,505
     
16,032
 
Total general and administrative expenses
 
$
15,537
   
$
17,167
 
 
Depreciation and amortization is comprised of the following:

   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Depreciation of property and equipment
 
$
7,669
   
$
9,632
 
Amortization of capital lease assets
   
827
     
1,216
 
Amortization of intangible assets
   
1,396
     
1,632
 
Total depreciation and amortization expense
 
$
9,892
   
$
12,480
 

The overall decrease in depreciation and amortization expense is due primarily to the sale of company-owned restaurants to franchisees during fiscal 2007 and 2008. 

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

   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Gains on sales of assets and other, net
 
$
(3,176
)
 
$
(13,457
)
Restructuring charges and exit costs
   
5,719
     
1,192
 
Impairment charges
   
484
     
240
 
Operating gains, losses and other charges, net
 
$
3,027
 
 
$
(12,025
)
 
During the quarter ended June 25, 2008, we recognized $2.2 million of gains on the sale of 20 restaurant operations to seven franchisees for net proceeds of $5.5 million compared to $12.6 million of gains on the sale of 28 restaurant operations to five franchisees for net proceeds of $20.2 million during the prior year quarter. The remaining gains for the two periods resulted from the sale of real estate related to closed restaurants and restaurants operated by franchisees and the recognition of deferred gains.
 
Restructuring charges and exit costs were comprised of the following:
 
   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Exit costs
 
$
815
   
$
588
 
Severance and other restructuring charges
   
4,904
     
604
 
Total restructuring and exit costs
 
$
5,719
   
$
1,192
 

During the quarter ended June 25, 2008, we recognized $4.3 million in severance and other restructuring charges related to a reorganization to support our ongoing transition to a franchise-focused business model. The reorganization led to the elimination of approximately 50 positions.

Operating income was $10.5 million for the quarter ended June 25, 2008 compared with $23.3 million for the quarter ended June 27, 2007.

Interest expense, net is comprised of the following:

   
Quarter Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Interest on senior notes
 
$
4,363
   
$
4,363
 
Interest on credit facilities
   
2,355
     
4,201
 
Interest on capital lease liabilities
   
915
     
995
 
Letters of credit and other fees
   
504
     
590
 
Interest income
   
(228
)
   
(321
)
Total cash interest
   
7,909
     
9,828
 
Amortization of deferred financing costs
   
277
     
297
 
Interest accretion on other liabilities
   
697
     
828
 
Total interest expense, net
 
$
8,883
   
$
10,953
 
 
The decrease in interest expense resulted primarily from the repayment of $100.3 million on the credit facilities during 2007.

16

The provision for income taxes was $0.1 million and $2.0 million for the quarter ended June 25, 2008 and June 27, 2007, respectively. The provision for income taxes for the quarters of 2008 and 2007 was determined using our effective rate estimated for the entire fiscal year. The quarter ended June 27, 2007 also included the recognition of $0.3 million of current tax benefits and a $0.6 million reduction to the valuation allowance. These items resulted from the enactment of certain federal and state laws that benefited us during the second quarter of 2007. 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. In addition, during 2008 and 2007, we utilized certain federal and state NOL carryforwards whose valuation allowance was established in connection with fresh start reporting on January 7, 1998. Accordingly, for the quarter ended June 25, 2008 and June 27, 2007, we recognized approximately $0.0 million and $2.4 million, respectively, of federal and state deferred tax expense with a corresponding reduction to the goodwill that was recorded in connection with fresh start reporting on January 7, 1998. The reduction in our effective tax rate for the quarter ended June 25, 2008 was due primarily to the utilization of federal net operating loss carryforwards from periods prior to fresh start reporting on January 7, 1998. These federal net operating loss carryforwards were fully utilized during fiscal 2007. We still have certain state net operating loss carryforwards from periods prior to fresh start reporting that have been utilized in both fiscal 2007 and 2008.

Net income was $3.2 million for the quarter ended June 25, 2008 compared with $10.6 million for the quarter ended June 27, 2007 due to the factors noted above.

Two Quarters Ended June 25, 2008 Compared with Two Quarters Ended June 27, 2007
  
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
Company-owned restaurants, beginning of period
   
394
     
521
 
Units opened
   
3
     
1
 
Units acquired from franchisees
   
     
1
 
Units sold to franchisees
   
(41
)
   
(34
)
Units closed
   
(2
)
   
(1
)
End of period
   
354
     
488
 
                 
Franchised and licensed restaurants, beginning of period
   
1,152
     
1,024
 
Units opened 
   
11
     
5
 
Units acquired by Company
   
     
(1
)
Units purchased from Company
   
41
     
34
 
Units closed
   
(13
)
   
(11
)
End of period
   
1,191
     
1,051
 
Total company-owned, franchised and licensed restaurants, end of period
   
1,545
     
1,539
 

Company Restaurant Operations

During the two quarters ended June 25, 2008, same-store sales remained unchanged, but were comprised of a 6.1% increase in guest check average and a 5.7% decrease in guest counts. Company restaurant sales decreased $101.3 million, or 23.3%, primarily resulting from a 134 equivalent-unit decrease in company-owned restaurants. The decrease in equivalent-units primarily resulted from the sale of company-owned restaurants to franchisees as part of our Franchise Growth Initiative.
 
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 88.4% from 88.6%. Product costs decreased to 24.3% from 25.7% due to favorable shifts in menu mix. Payroll and benefits increased to 42.9% from 42.6% primarily as a result of increased management staffing costs, offset by a decrease in restaurant staffing related to improved scheduling. Occupancy costs increased to 6.2% from 6.0%. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(Dollars in thousands)
 
Utilities
 
$
16,345
     
4.9
%
 
$
20,795
     
4.8
%
Repairs and maintenance
   
7,265
     
2.2
%
   
8,765
     
2.0
%
Marketing
   
11,229
     
3.4
%
   
14,468
     
3.3
%
Legal
   
872
     
0.3
%
   
1,530
     
0.4
%
Other direct costs
   
14,227
     
4.3
%
   
16,537
     
3.8
%
Other operating expenses
 
$
49,938
     
15.0
%
 
$
62,095
     
14.3
%

The overall decrease in other operating expenses primarily results from the sale of company-owned restaurants to franchisees. As a percentage of company restaurant sales, other direct costs in fiscal 2007 benefited from $0.6 million of insurance proceeds resulting from income lost due to hurricanes.
 
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 25, 2008
   
June 27, 2007
 
   
(Dollars in thousands)
 
Royalties
 
$
33,992
     
63.6
%
 
$
30,319
     
69.6
%
Initial fees
   
  2,262
     
  4.2
%    
1,776
     
4.1
%
Occupancy revenue
   
17,188
     
32.2
%
   
11,481
     
26.3
%
Franchise and license revenue
   
53,442
     
100.0
%
   
43,576
     
100.0
%
                                 
Occupancy costs
   
13,407
     
25.1
%
   
9,534
     
21.9
%
Other direct costs
   
3,284
     
6.1
%
   
3,874
     
8.9
%
Costs of franchise and license revenue
 
$
16,691
     
31.2
%
 
$
13,408
     
30.8
%

Royalties increased by $3.7 million, or 12.1%, primarily resulting from a 140 equivalent-unit increase in franchised and licensed units, as compared to the prior year period, offset by the effects of a 2.3% decrease in same-store sales. The increase in equivalent-units resulted from the sale of company-owned restaurants to franchisees. The increase in occupancy revenue of $5.7 million, or 49.7%, is also primarily the result of the sale of company-owned restaurants to franchisees. 

17

Costs of franchise and license revenue increased by $3.3 million, or 24.5%. The increase in occupancy costs of $3.9 million, or 40.6%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs benefited by $0.6 million, or 15.2%, primarily as a result of the reorganization of the field management structure that occurred in the third quarter of 2007. As a percentage of franchise and license revenue, costs of franchise and license revenue increased to 31.2% for the two quarters ended June 25, 2008, as compared to 30.8% for the two quarters ended June 27, 2007.
 
Other Operating Costs and Expenses

General and administrative expenses are comprised of the following:

   
Two Quarters Ended
 
  
 
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Share-based compensation
 
$
1,662
   
$
2,319
 
General and administrative expenses
   
29,490
     
30,774
 
Total general and administrative expenses
 
$
31,152
   
$
33,093
 

The 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 25, 2008.

Depreciation and amortization is comprised of the following:

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Depreciation of property and equipment
 
$
15,541
   
$
19,436
 
Amortization of capital lease assets
   
1,670
     
2,425
 
Amortization of intangible assets
   
2,922
     
3,497
 
Total depreciation and amortization expense
 
$
20,133
   
$
25,358
 
 
The overall decrease in depreciation and amortization expense is due primarily to the sale of company-owned restaurants to franchisees during fiscal 2007 and 2008. 

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

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Gains on sales of assets and other, net
 
$
(12,924
)
 
$
(16,644
)
Restructuring charges and exit costs
   
6,754
     
1,830
 
Impairment charges
   
484
     
240
 
Operating gains, losses and other charges, net
 
$
(5,686
)
 
$
(14,574
)
 
During the two quarters ended June 25, 2008, we recognized $11.9 million of gains on the sale of 41 restaurant operations to eleven franchisees for net proceeds of $22.0 million compared to $13.0 million of gains on the sale of 34 restaurant operations to six franchisees for net proceeds of $21.9 million during the prior year period. The remaining gains for the two periods resulted from the sale of real estate related to closed restaurants and restaurants operated by franchisees and the recognition of deferred gains.
 
Restructuring charges and exit costs were comprised of the following:
         
   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Exit costs 
 
$
1,655
   
$
735
 
Severance and other restructuring charges
   
5,099
     
1,095
 
Total restructuring and exit costs
 
$
6,754
   
$
1,830
 
 
During the two quarters ended June 25, 2008, we recognized $4.3 million in severance and other restructuring charges related to a reorganization to support our ongoing transition to a franchise-focused business model. The reorganization led to the elimination of approximately 50 positions.

Operating income was $29.8 million for the two quarters ended June 25, 2008 compared with $35.9 million for the two quarters ended June 27, 2007.

Interest expense, net is comprised of the following:

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Interest on senior notes
 
$
8,726
   
$
8,726
 
Interest on credit facilities
   
5,019
     
8,853
 
Interest on capital lease liabilities
   
1,858
     
1,999
 
Letters of credit and other fees
   
997
     
1,183
 
Interest income
   
(501
)
   
(672
)
Total cash interest
   
16,099
     
20,089
 
Amortization of deferred financing costs
   
554
     
585
 
Interest accretion on other liabilities
   
1,431
     
1,620
 
Total interest expense, net
 
$
18,084
   
$
22,294
 

The decrease in interest expense resulted primarily from the repayment of $100.3 million on the credit facilities during 2007.

18

The provision for income taxes was $0.7 million and $2.4 million for the two quarters ended June 25, 2008 and June 27, 2007, respectively. The provision for income taxes for the two quarters of 2008 and 2007 was determined using our effective rate estimated for the entire fiscal year. The two quarters ended June 27, 2007 also included the recognition of $0.3 million of current tax benefits and a $0.6 million reduction to the valuation allowance. These items resulted from the enactment of certain federal and state laws that benefited us during the second quarter of 2007. 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. In addition, during 2008 and 2007, we utilized certain federal and state NOL carryforwards whose valuation allowance was established in connection with fresh start reporting on January 7, 1998. Accordingly, for the two quarters ended June 25, 2008 and June 27, 2007, we recognized approximately $0.1 million and $2.5 million, respectively, of federal and state deferred tax expense with a corresponding reduction to the goodwill that was recorded in connection with fresh start reporting on January 7, 1998. The reduction in our effective tax rate for the two quarters ended June 25, 2008 was due primarily to the utilization of federal net operating loss carryforwards from periods prior to fresh start reporting on January 7, 1998. These federal net operating loss carryforwards were fully utilized during fiscal 2007. We still have certain state net operating loss carryforwards from periods prior to fresh start reporting that have been utilized in both fiscal 2007 and 2008.
 
Net income was $7.3 million for the two quarters ended June 25, 2008 compared with $11.7 million for the two quarters ended June 27, 2007 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 7) and, in recent years, cash proceeds from the sale of surplus properties and sales of restaurant operations to franchisees. 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 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Net cash provided by operating activities
 
$
7,131
   
$
28,850
 
Net cash provided by investing activities
   
3,179
     
13,688
 
Net cash used in financing activities
   
(19,829
)
   
(21,501
)
Net increase (decrease) in cash and cash equivalents
 
$
(9,519
)
 
$
21,037
 
 
The decrease in operating cash flows primarily resulted from the runoff of working capital deficit following the sale of restaurant operations to franchisees and the timing of certain operating expense payments. We believe that our estimated cash flows from operations for 2008, combined with our capacity for additional borrowings under our credit facility, will enable us to meet our anticipated cash requirements and fund capital expenditures through the end of 2008.
 
Net cash flows provided by investing activities were $3.2 million for the two quarters ended June 25, 2008. These cash flows primarily represent net proceeds of $18.0 million on sales of restaurant operations to franchisees, real estate related to restaurants operated by franchisees and other assets. The proceeds were offset by capital expenditures of $17.4 million for the two quarters ended June 25, 2008, of which $2.6 million was financed through capital leases. Our principal capital requirements have been largely associated with the maintenance of our existing company-owned restaurants and facilities, new construction, remodeling and our strategic initiatives, as follows:

   
Two Quarters Ended
 
   
June 25, 2008
   
June 27, 2007
 
   
(In thousands)
 
Facilities
 
$
4,994
   
$
5,419
 
New construction 
   
3,756
     
3,570
 
Remodeling
   
4,436
     
1,597
 
Strategic initiatives
   
1,557
     
 
Other
   
86
     
406
 
Capital expenditures
   
14,829
     
10,992
 
Acquisitions
   
 —
     
 2,208
 
Capital expenditures and acquisitions
 
$
 14,829
   
$
 13,200
 
 
Cash flows used in financing activities were $19.8 million for the two quarters ended June 25, 2008, which included $14.8 million of prepayments and $3.0 million of scheduled debt payments made through a combination of asset sale proceeds, as noted above, and surplus cash.
 
Our credit facility consists of a $50 million revolving credit facility (including up to $10 million for a revolving letter of credit facility), a $137 million term loan and an additional $37 million letter of credit facility. At June 25, 2008, we had outstanding letters of credit of $35.3 million (comprised of $35.0 million under our letter of credit facility and $0.3 million under our revolving facility). There were no revolving loans outstanding at June 25, 2008. These balances result in availability of $2.0 million under our letter of credit facility and $49.7 million under the revolving facility.
 
The revolving facility matures on December 15, 2011. The term loan and the $37 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.

The credit facility is guaranteed by Denny's Corporation 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 119 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 25, 2008.

As of June 25, 2008, 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. Prior to considering the impact of the interest rate swap, the weighted-average interest rate under the term loan was 4.7% as of June 25, 2008.

19

Our working capital deficit was $73.4 million at June 25, 2008 compared with $73.6 million at December 26, 2007. 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 cash from the related sales.
 
Implementation of New Accounting Standards

See Notes 2 and 15 to our Condensed Consolidated Financial Statements.

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.

During the second quarter of fiscal 2007, we entered into an interest rate swap with a notional amount of $150 million to hedge a portion of the cash flows of our variable rate debt. We designated the interest rate swap as a cash flow hedge of our exposure to variability in future cash flows attributable to interest payments on the first $150 million of floating rate debt. Under the terms of the swap, through March 26, 2008, we paid a fixed rate of 4.8925% on the $150 million 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 $150 million notional amount. On March 26, 2008, we terminated $50 million of the notional amount of the interest rate swap. As of June 25, 2008, the swap effectively increases our ratio of fixed rate debt from approximately 56% of total debt to approximately 88% of total debt.
 
Based on the levels of borrowings under the credit facility at June 25, 2008, if interest rates changed by 100 basis points our annual cash flow and income before income taxes would change by approximately $0.4 million. This computation is determined by considering the impact of hypothetical interest rates on the variable rate portion of the credit facility at June 25, 2008. 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 estimated fair value of our fixed rate long-term debt (excluding capital lease obligations and revolving credit facility advances) was approximately $170.2 million, compared with a book value of $175.4 million at June 25, 2008. This computation is based on market quotations for the same or similar debt issues or the estimated borrowing rates available to us. Specifically, the difference between the estimated fair value of long-term debt compared with its historical cost reported in our consolidated balance sheets at June 25, 2008 relates primarily to market quotations for our Denny's Holdings, Inc. 10% Senior Notes due 2012.
 
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 and other defined benefit plans by $1.7 million and $0.1 million, respectively, and impact our net periodic benefit cost related to our pension plan by $0.1 million. The impact of a 25 basis point increase or decrease in discount rate on periodic benefit costs related to our other defined benefit plans would be less than $0.1 million. 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 arrangements to control costs as an alternative to using financial instruments to hedge commodity prices. We have determined that our purchasing agreements do not qualify as derivative financial instruments or contain embedded derivative instruments. 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 enter into financial instruments for trading or speculative 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 President and Chief Executive Officer, Nelson J. Marchioli, and our Executive Vice President, Growth Initiatives, 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, Messrs. Marchioli and 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 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
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

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 our best estimate of legal and financial liabilities, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty.

20

Item 4.   Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders of Denny’s Corporation was held on Wednesday, May 21, 2008, and the following matters were voted on by the stockholders of Denny’s Corporation:
 
 (i)
Election of Directors
 
Name
 
 Votes For
 
Votes Against
 
 Votes Abstained
               
 
  Vera K. Farris
 
85,611,630
 
670,535
 
169,601 
 
 Brenda J. Lauderback
 
80,460,640
 
5,912,363  
 
78,763
 
 Nelson J. Marchioli
 
85,957,890
 
412,563
 
81,313
 
 Robert E. Marks
 
85,980,444
 
301,986
 
169,336 
 
 Michael Montelongo
 
85,668,795
 
700,837
 
82,134
 
 Louis P. Neeb
 
85,942,393
 
340,711
 
168,662 
 
 Donald C. Robinson
 
85,935,556
 
347,236
 
168,974 
 
 Donald R. Shepherd
 
85,654,585
 
630,430
 
166,751 
 
 Debra Smithart-Oglesby
 
85,737,996
 
636,451
 
77,319
 
 
  (ii)
Ratification of the Selection of KPMG LLP as the independent registered public accounting firm for the fiscal year ending December 31, 2008
 
Votes For
 
Votes Against
 
Votes Abstaining
           
 
85,663,819
 
672,445
 
115,502
 
 
  (iii)
Proposal to approve the Denny’s Corporation 2008 Omnibus Incentive Plan
 
Votes For
 
Votes Against
 
Votes Abstaining
 
Broker Non-Votes
               
 
67,991,863
 
8,699,059
 
63,005
 
9,697,839

Item 6.   Exhibits
 
a.   The following are included as exhibits to this report:
 
 Exhibit No.
 
Description 
     
10.1   Denny's Corporation 2008 Omnibus Incentive Plan (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Denny's Corporation filed with the Securities and Exchange Commission on May 27, 2008)
     
 10.2   Denny's Corporation Amended and Restated 2004 Omnibus Incentive Plan
     
31.1
 
Certification of Nelson J. Marchioli, President and 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, Growth Initiatives, 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 Nelson J. Marchioli, President and Chief Executive Officer of Denny’s Corporation and F. Mark Wolfinger, Executive Vice President, Growth Initiatives, 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.

 

21


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: July 29, 2008
By:
/s/  F. Mark Wolfinger
 
   
F. Mark Wolfinger
 
   
Executive Vice President,
Growth Initiatives,
Chief Administrative Officer and
Chief Financial Officer
 
       
       
Date: July 29, 2008
By:
/s/  Jay C. Gilmore
 
   
Jay C. Gilmore
 
   
Vice President,
Chief Accounting Officer and
Corporate Controller
 
       



22


Exhibit 10.2












DENNY’S CORPORATION
AMENDED AND RESTATED
2004 OMNIBUS INCENTIVE PLAN











DENNY’S CORPORATION
AMENDED AND RESTATED
2004 OMNIBUS INCENTIVE PLAN

Table of Contents
 
 
 
ARTICLE 1   PURPOSE...............................................................................................................................................................................................................
1  
       
  1.1 General................................................................................................................................................................................................................. 1
   
ARTICLE 2   DEFINITIONS.......................................................................................................................................................................................................
1
       
  2.1 Definitions........................................................................................................................................................................................................... 1
   
ARTICLE 3   EFFECTIVE TERM OF PLAN.............................................................................................................................................................................
8
       
 
3.1  
Effective Date.....................................................................................................................................................................................................
8
       
 
3.2  
Term of Plan........................................................................................................................................................................................................
8
   
ARTICLE 4   ADMINISTRATION............................................................................................................................................................................................
9
       
 
4.1
Committee............................................................................................................................................................................................................
9
       
 
4.2
Actions and Interpretations by the Committee.............................................................................................................................................
9
       
 
4.3
Authority of Committee....................................................................................................................................................................................
9
       
 
4.4
Award Certificates.............................................................................................................................................................................................
11
   
ARTICLE 5   SHARES SUBJECT TO THE PLAN...................................................................................................................................................................
11
       
 
5.1
Number of Shares...............................................................................................................................................................................................
11
       
 
5.2
Share Counting...................................................................................................................................................................................................
11
       
 
5.3
Stock Distributed...............................................................................................................................................................................................
12
       
 
5.4
Limitation on Awards........................................................................................................................................................................................
12
   
ARTICLE 6   ELIGIBILITY..........................................................................................................................................................................................................
12
       
 
6.1
General.................................................................................................................................................................................................................
12
   
ARTICLE 7   STOCK OPTIONS................................................................................................................................................................................................
12
       
  7.1 General................................................................................................................................................................................................................. 12
       
  7.2 Incentive Stock Options................................................................................................................................................................................... 13
   
ARTICLE 8   STOCK APPRECIATION RIGHTS....................................................................................................................................................................
15
       
  8.1 Grant of Stock Appreciation Rights................................................................................................................................................................ 15
   
ARTICLE 9   PERFORMANCE AWARDS..............................................................................................................................................................................
15
       
 
9.1  
Grant of Performance Awards.......................................................................................................................................................................... 15
       
  9.2 Performance Goals............................................................................................................................................................................................. 16
       
  9.3 Right to Payment................................................................................................................................................................................................ 16
       
  9.4 Other Terms........................................................................................................................................................................................................ 16
 

ARTICLE 10   RESTRICTED STOCK AND RESTRICTED STOCK UNIT AWARDS.....................................................................................................
17
       
 
10.1
Grant of Restricted Stock and Restricted Stock Units..................................................................................................................................
17
       
 
10.2
Issuance and Restrictions................................................................................................................................................................................
17
       
 
10.3
Forfeiture.............................................................................................................................................................................................................
17
       
 
10.4
Delivery of Restricted Stock.............................................................................................................................................................................
17
   
ARTICLE 11   DEFERRED STOCK UNITS.............................................................................................................................................................................. 18
       
 
11.1
Grant of Deferred Stock Units..........................................................................................................................................................................
18
   
ARTICLE 12   DIVIDEND EQUIVALENTS.............................................................................................................................................................................
18
       
 
12.1
Grant of Dividend Equivalents.........................................................................................................................................................................
18
   
ARTICLE 13   STOCK OR OTHER STOCK-BASED AWARDS..........................................................................................................................................
18
       
 
13.1
Grant of Stock or Other Stock-Based Awards...............................................................................................................................................
18
   
ARTICLE 14   PROVISIONS APPLICABLE TO AWARDS..................................................................................................................................................
19
       
 
14.1  
Stand-Alone and Tandem Awards.................................................................................................................................................................. 19
       
  14.2 Term of Awards.................................................................................................................................................................................................. 19
       
 
14.3
Form of Payment of Awards............................................................................................................................................................................. 19
       
 
14.4
Limits on Transfer.............................................................................................................................................................................................. 19
       
 
14.5
Beneficiaries........................................................................................................................................................................................................ 19
       
 
14.6
Stock Certificates............................................................................................................................................................................................... 20
       
 
14.7
Acceleration upon Death or Disability or Retirement.................................................................................................................................. 20
       
 
14.8
Acceleration upon a Change in Control......................................................................................................................................................... 20
       
 
14.9
Acceleration for Any Other Reason............................................................................................................................................................... 21
       
 
14.10  
Effect of Acceleration........................................................................................................................................................................................ 21
       
 
14.11
Qualified Performance-Based Awards............................................................................................................................................................ 21
       
 
14.12  
Annual Incentive Awards................................................................................................................................................................................ 23
       
  14.13 Termination of Employment............................................................................................................................................................................. 24
       
 
14.15  
Forfeiture Events................................................................................................................................................................................................ 25
 

ARTICLE 15   CHANGES IN CAPITAL STRUCTURE.......................................................................................................................................................... 25
       
 
15.1  
Mandatory Adjustments ..................................................................................................................................................................................
25
       
  15.2
Discretionary Adjustments..............................................................................................................................................................................
25
       
  15.3
General.................................................................................................................................................................................................................
26
   
ARTICLE 16   AMENDMENT, MODIFICATION AND TERMINATION......................................................................................................................... 26
       
  16.1
Amendment, Modification and Termination ..................................................................................................................................................
26
       
  16.2 Awards Previously Granted............................................................................................................................................................................. 26
   
ARTICLE 17   GENERAL PROVISIONS...................................................................................................................................................................................
27
       
  17.1 No Rights to Awards; Non-Uniform Determinations................................................................................................................................... 27
       
  17.2 No Stockholder Rights...................................................................................................................................................................................... 27
       
  17.3 Withholding........................................................................................................................................................................................................ 27
       
  17.4 No Right to Continued Service........................................................................................................................................................................ 28
       
  17.5 Unfunded Status of Awards............................................................................................................................................................................ 28
       
  17.6 Relationship to Other Benefits......................................................................................................................................................................... 28
       
  17.7 Expenses.............................................................................................................................................................................................................. 28
       
  17.8 Titles and Headings........................................................................................................................................................................................... 28
       
  17.9 Gender and Number........................................................................................................................................................................................... 28
       
  17.10 Fractional Shares................................................................................................................................................................................................ 28
       
  17.11 Government and Other Regulations................................................................................................................................................................ 28
       
  17.12 Governing Law................................................................................................................................................................................................... 29
       
  17.13 Additional Provisions....................................................................................................................................................................................... 29
       
  17.14 No Limitations on Rights of Company........................................................................................................................................................... 29
       
  17.15 Indemnification................................................................................................................................................................................................... 29
       
  17.16 Special Provisions Related to Section 409A of the Code............................................................................................................................ 30
 
 

 
DENNY’S CORPORATION
AMENDED AND RESTATED
2004 OMNIBUS INCENTIVE PLAN

ARTICLE 1
PURPOSE

1.1.            GENERAL .  The purpose of the Denny’s Corporation Amended and Restated 2004 Omnibus Incentive Plan (the "Plan") is to promote the success, and enhance the value, of Denny’s Corporation (the "Company"), by linking the personal interests of employees, officers, directors and consultants of the Company or any Affiliate (as defined below) to those of Company stockholders and by providing such persons with an incentive for performance.  The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees, officers, directors and consultants upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent.  Accordingly, the Plan permits the grant of incentive awards from time to time to selected employees, officers, directors and consultants of the Company and its Affiliates.

ARTICLE 2
DEFINITIONS

2.1.            DEFINITIONS .  When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Section 1.1 unless a clearly different meaning is required by the context.  The following words and phrases shall have the following meanings:

(a)           “Affiliate” means (i) any Subsidiary or Parent, or (ii) an entity that directly or through one or more intermediaries controls, is controlled by or is  under common control with, the Company, as determined by the Committee.

(b)           "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Deferred Stock Unit Award, Performance Award, Dividend Equivalent Award, or Other Stock-Based Award, Performance-Based Cash Awards, or any other right or interest relating to Stock or cash, granted to a Participant under the Plan.

(c)           “Award Certificate” means a written document, in such form as the Committee prescribes from time to time, setting forth the terms and conditions of an Award.  Award Certificates may be in the form of individual award agreements or certificates or a program document describing the terms and provisions of an Awards or series of Awards under the Plan.  The Committee may provide for the use of electronic, internet or other non-paper Award Certificates, and the use of electronic, internet or other non-paper means for the acceptance thereof and actions thereunder by a Participant.

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(d)           "Board" means the Board of Directors of the Company.

(e)           “Cause” as a reason for a Participant’s termination of employment shall have the meaning assigned such term in the employment agreement, if any, between such Participant and the Company or an Affiliate, provided, however that if there is no such employment agreement in which such term is defined, and unless otherwise defined in the applicable Award Certificate, “Cause” shall mean any of the following acts by the Participant, as determined by the Board: gross neglect of duty, prolonged absence from duty without the consent of the Company, intentionally engaging in any activity that is in conflict with or adverse to the business or other interests of the Company, willful misconduct, misfeasance or malfeasance of duty which is reasonably determined to be detrimental to the Company, conviction of, or plea of guilty or nolo contendere, to any crime involving the personal enrichment of the Participant at the expense of the Company or shareholders of the Company, or conviction of a felony.

(f)           “Change in Control” shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied:

(i)           any Person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates, other than in connection with the acquisition by the Company or its Affiliates of a business) representing 30% or more of either the then outstanding Shares of Stock or the combined voting power of the Company’s then outstanding securities; or

(ii)           The following individuals cease for any reason to constitute at least two-thirds (2/3) of the number of directors then serving on the Board:  individuals who, on the Effective Date hereof, constitute the Board  and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company (as such terms are used in Rule 14A-11 of the 1934 Act) whose appointment or election by the Board or nomination of election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the Company’s directors then still in office who either were directors on the Effective Date of the Plan, or whose appointment, election, or nomination for election was previously approved); or

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(iii)           the consummation of a merger or consolidation with any other entity, other than (i) a merger or consolidation which would result in (A) the voting securities of the Company then outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, greater than 65% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, and (B) individuals described in Section 2.1(f)(ii) above constitute more than one-half of the members of the board of directors of the surviving entity or ultimate parent thereof; or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates, other than in connection with the acquisition by the Company or its Affiliates of a business) representing 30% or more of either the then outstanding shares of the Company or the combined voting power of the Company’s then outstanding securities; or

(iv)           the consummation of (i) a plan of complete liquidation or dissolution of the Company; or (ii) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, greater than 65% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or

Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred unless the circumstances giving rise to such Change in Control qualify as a “change in control event” under Code Section 409A and applicable regulations.

Furthermore, notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the voting securities of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

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Furthermore, notwithstanding the foregoing, a Change in Control will not be deemed to have occurred by reason of a distribution of the voting securities of any of the Company's Subsidiaries to the stockholders of the Company, or by means of an initial public offering of such securities.

(g)           "Code" means the Internal Revenue Code of 1986, as amended from time to time, and includes a reference to the underlying final regulations.

(h)           "Committee" means the committee of the Board described in Article 4.

(i)           "Company" means Denny’s Corporation, a Delaware corporation or any successor corporation.

(j)           “Continuous Status as a Participant” means the absence of any interruption or termination of service as an employee, officer, consultant or director of the Company or any Affiliate, as applicable; provided, however, that for purposes of an Incentive Stock Option, or a Stock Appreciation Right issued in tandem with an Incentive Stock Option, “Continuous Status as a Participant” means the absence of any interruption or termination of service as an employee of the Company or any Parent or Subsidiary, as applicable.  Continuous Status as a Participant shall continue to the extent provided in a written severance or employment agreement during any period for which severance compensation payments are made to an employee, officer, consultant or director and shall not be considered interrupted in the case of any leave of absence authorized in writing by the Company prior to its commencement.

(k)           "Covered Employee" means a covered employee as defined in Code Section 162(m)(3).

(l)           “Disability” or “Disabled” shall mean any physical or mental condition which would qualify a Participant for a disability benefit under the long-term disability plan maintained by the Company and applicable to that particular Participant, and if no such disability plan exists, then at the discretion of the Committee. Notwithstanding the above, with respect to an Incentive Stock Option, Disability shall mean Permanent and Total Disability as defined in Section 22(e)(3) of the Code.

(m)           "Deferred Stock Unit" means a right granted to a Participant under Article 11.

(n)           "Dividend Equivalent" means a right granted to a Participant under Article 12.

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(o)           "Effective Date" has the meaning assigned such term in Section 3.1.

(p)           “Eligible Participant” means an employee, officer, consultant or director of the Company or any Affiliate.

(q)           “Exchange” means the Nasdaq National Market or any national securities exchange on which the Stock may from time to time be listed or traded.

(r)           "Fair Market Value", on any date, means (i) if the Stock is listed on a securities exchange, the closing sales price on such exchange on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the Stock is not listed on a securities exchange, the closing sales price as quoted on the OTC Bulletin Board for such trading date or, in the absence of quoted sales on such date, the closing sales price on the immediately preceding date on which sales were quoted, provided that if it is determined that the fair market value is not properly reflected by such OTC Bulletin Board quotations, Fair Market Value will be determined by such other method as the Committee determines in good faith to be reasonable.

(s)           “Full Value Award”   means an Award other than in the form of an Option or SAR, and which is settled by the issuance of Stock (or at the discretion of the Committee, settled in cash valued by reference to Stock value).

(t)           “Good Reason” has the meaning assigned such term in the employment agreement, if any, between a Participant and the Company or an Affiliate, provided, however that if there is no such employment agreement in which such term is defined, and unless otherwise defined in the applicable Award Certificate, “Good Reason” shall mean any of the following acts by the Company or an Affiliate, without the consent of the Participant: (i) the assignment to the Participant of duties materially inconsistent with, or a material diminution in, the Participant’s authority, duties or responsibilities, (ii) a material reduction by the Company or an Affiliate in the Participant’s base salary or target annual bonus (other than an overall reduction in salaries or target annual bonuses of 10% or less that affects substantially all of the Company’s full-time employees), (iii) a material change in the geographic location at which the Participant is required to perform (it being agreed that a required relocation of more than 50 miles shall be material), or (iv) the continuing material breach by the Company or an Affiliate of any employment agreement between the Participant and the Company or an Affiliate after the expiration of any applicable period for cure.

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A termination by the Participant shall not constitute termination for Good Reason unless the Participant shall first have delivered to the Company, not later than 90 days after the initial occurrence of an event deemed to give rise to a right to terminate for Good Reason, written notice setting forth with specificity the occurrence of such event, and there shall have passed a reasonable time (not less than 30 days) within which the Company may take action to correct, rescind or otherwise substantially reverse the occurrence supporting termination for Good Reason as identified by the Participant.

(u)           “Grant Date” means the date an Award is made by the Committee.

(v)           "Incentive Stock Option" means an Option that is intended to be an incentive stock option and meets the requirements of Section 422 of the Code or any successor provision thereto.

(w)           “Non-Employee Director” means a director of the Company who is not a common law employee of the Company or an Affiliate.

(x)           "Nonstatutory Stock Option" means an Option that is not an Incentive Stock Option.

(y)           "Option" means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods.  An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.

(z)           "Other Stock-Based Award" means a right, granted to a Participant under Article 13, that relates to or is valued by reference to Stock or other Awards relating to Stock.

(aa)           "Parent" means a corporation, limited liability company, partnership or other entity which owns or beneficially owns a majority of the outstanding voting stock or voting power of the Company. Notwithstanding the above, with respect to an Incentive Stock Option, Parent shall have the meaning set forth in Section 424(e) of the Code.

(bb)           "Participant" means a person who, as an employee, officer, director or consultant of the Company or any Affiliate, has been granted an Award under the Plan; provided that in the case of the death of a Participant, the term “Participant” refers to a beneficiary designated pursuant to Section 14.5 or the legal guardian or other legal representative acting in a fiduciary capacity on behalf of the Participant under applicable state law and court supervision.

(cc)           “Performance Award” means Performance Shares, Performance Units or Performance-Based Cash Awards granted pursuant to Article 9.

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(dd)           “Performance-Based Cash Award” means a right granted to a Participant under Article 9 to a cash award to be paid upon achievement of such performance goals as the Committee establishes with regard to such Award.

(ee)           “Performance Share” means any right granted to a Participant under Article 9 to a unit to be valued by reference to a designated number of Shares to be paid upon achievement of such performance goals as the Committee establishes with regard to such Performance Share.

(ff)           “Performance Unit” means a right granted to a Participant under Article 9 to a unit valued by reference to a designated amount of cash or property other than Shares, to be paid to the Participant upon achievement of such performance goals as the Committee establishes with regard to such Performance Unit.

(gg)           “Person” means any individual, entity or group, within the meaning of Section 3(a)(9) of the 1934 Act and as used in Section 13(d)(3) or 14(d)(2) of the 1934 Act.

(hh)           "Plan" means this Denny’s Corporation Amended and Restated 2004 Omnibus Incentive Plan, as amended from time to time.

(ii)           “Qualified Performance-Based Award” means an Award that is either (i) intended to qualify for the Section 162(m) Exemption and is made subject to performance goals based on Qualified Business Criteria as set forth in Section 14.11, or (ii) an Option or SAR having an exercise price equal to or greater than the Fair Market Value of the underlying Stock as of the Grant Date.

(jj)            “Qualified Business Criteria” means one or more of the Business Criteria listed in Section 14.11(b) upon which performance goals for certain Qualified Performance-Based Awards may be established by the Committee.

(kk)           "Restricted Stock Award" means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture.

(ll)           “Restricted Stock Unit Award” means the right granted to a Participant under Article 10 to receive shares of Stock (or the equivalent value in cash or other property if the Committee so provides) in the future, which right is subject to certain restrictions and to risk of forfeiture.

(mm)                      “Retirement” means the voluntary termination of employment from the Company or an Affiliate for any reason other than a leave of absence, death or Disability on or after attainment of the age of fifty-five.

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(nn)           “Section 162(m) Exemption” means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code or any successor provision thereto.

(oo)           “Shares” means shares of the Company’s Stock.  If there has been an adjustment or substitution pursuant to Section 15.1, the term “Shares” shall also include any shares of stock or other securities that are substituted for Shares or into which Shares are adjusted pursuant to Section 15.1.

(pp)           "Stock" means the $.01 par value common stock of the Company and such other securities of the Company as may be substituted for Stock pursuant to Article 15.

(qq)           "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a Share as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8.

(rr)           "Subsidiary" means any corporation, limited liability company, partnership or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. Notwithstanding the above, with respect to an Incentive Stock Option, Subsidiary shall have the meaning set forth in Section 424(f) of the Code.

(ss)           "1933 Act" means the Securities Act of 1933, as amended from time to time.

(tt)           "1934 Act" means the Securities Exchange Act of 1934, as amended from time to time.

ARTICLE 3
EFFECTIVE TERM OF PLAN

3.1.            EFFECTIVE DATE .  The Plan shall be effective as of the date it is approved by both the Board and the stockholders of the Company (the “Effective Date”).  The Plan was amended and restated by the Committee as of May 20, 2008.

3.2.            TERMINATION OF PLAN .  The Plan shall terminate on the tenth anniversary of the Effective Date.  The termination of the Plan on such date shall not affect the validity of any Award outstanding on the date of termination.

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ARTICLE 4
ADMINISTRATION

4.1.            COMMITTEE .  The Plan shall be administered by a Committee appointed by the Board (which Committee shall consist of at least two directors) or, at the discretion of the Board from time to time, the Plan may be administered by the Board.  It is intended that at least two of the directors appointed to serve on the Committee shall be “non-employee directors” (within the meaning of Rule 16b-3 promulgated under the 1934 Act) and “outside directors” (within the meaning of Code Section 162(m)) and that any such members of the Committee who do not so qualify shall abstain from participating in any decision to make or administer Awards that are made to Eligible Participants who at the time of consideration for such Award (i) are persons subject to the short-swing profit rules of Section 16 of the 1934 Act, or (ii) are reasonably anticipated to become Covered Employees during the term of the Award.  However, the mere fact that a Committee member shall fail to qualify under either of the foregoing requirements or shall fail to abstain from such action shall not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan.  The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board.  The Board may reserve to itself any or all of the authority and responsibility of the Committee under the Plan or may act as administrator of the Plan for any and all purposes.  To the extent the Board has reserved any authority and responsibility or during any time that the Board is acting as administrator of the Plan, it shall have all the powers of the Committee hereunder, and any reference herein to the Committee (other than in this Section 4.1) shall include the Board.  To the extent any action of the Board under the Plan conflicts with actions taken by the Committee, the actions of the Board shall control.

4.2.            ACTION AND INTERPRETATIONS BY THE COMMITTEE .  For purposes of administering the Plan, the Committee may from time to time adopt rules, regulations, guidelines and procedures for carrying out the provisions and purposes of the Plan and make such other determinations, not inconsistent with the Plan, as the Committee may deem appropriate.  The Committee’s interpretation of the Plan, any Awards granted under the Plan, any Award Certificate and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.  Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Affiliate, the Company’s or an Affiliate’s independent certified public accountants, Company counsel or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.

4.3.            AUTHORITY OF COMMITTEE .  Except as provided below, the Committee has the exclusive power, authority and discretion to:
 
(a)           Grant Awards;
 
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(b)           Designate Participants;
(c)           Determine the type or types of Awards to be granted to each Participant;

(d)           Determine the number of Awards to be granted and the number of Shares or dollar amount to which an Award will relate;

(e)           Determine the terms and conditions of any Award granted under the Plan, including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines;

(f)           Accelerate the vesting, exercisability or lapse of restrictions of any outstanding Award, in accordance with Article 14, based in each case on such considerations as the Committee in its sole discretion determines;

(g)           Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;

(h)           Prescribe the form of each Award Certificate, which need not be identical for each Participant;

(i)           Decide all other matters that must be determined in connection with an Award;

(j)           Establish, adopt or revise any rules, regulations, guidelines or procedures as it may deem necessary or advisable to administer the Plan;

(k)           Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan;

(l)           Amend the Plan or any Award Certificate as provided herein; and

(m)           Adopt such modifications, procedures, and subplans as may be necessary or desirable to comply with provisions of the laws of non-U.S. jurisdictions in which the Company or any Affiliate may operate, in order to assure the viability of the benefits of Awards granted to participants located in such other jurisdictions and to meet the objectives of the Plan.

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Notwithstanding the foregoing, grants of Awards to Non-Employee Directors hereunder shall be made only in accordance with the terms, conditions and parameters of a plan, program or policy for the compensation of Non-Employee Directors as in effect from time to time, and the Committee may not make discretionary grants hereunder to Non-Employee Directors.

Notwithstanding the above, the Board may expressly delegate to a special committee consisting of one or more officers of the Company some or all of the Committee’s authority under subsections (a) through (i) above, except that no delegation of its duties and responsibilities may be made to officers of the Company with respect to Awards to Eligible Participants who as of the Grant Date are persons subject to the short-swing profit rules of Section 16 of the 1934 Act, or who as of the Grant Date are reasonably anticipated to be become Covered Employees during the term of the Award.  The acts of such delegates shall be treated hereunder as acts of the Committee and such delegates shall report to the Committee regarding the delegated duties and responsibilities.

4.4.            AWARD CERTIFICATES .  Each Award shall be evidenced by an Award Certificate.  Each Award Certificate shall include such provisions, not inconsistent with the Plan, as may be specified by the Committee.

ARTICLE 5
SHARES SUBJECT TO THE PLAN

5.1.            NUMBER OF SHARES .  Subject to adjustment as provided in Section 15.1, the aggregate number of Shares reserved and available for issuance pursuant to Awards granted under the Plan shall be 10,000,000, plus a number of additional Shares (not to exceed 1,500,000) underlying awards outstanding as of the Effective Date under the Company’s Omnibus Incentive Compensation Plan for Executives, the Advantica Stock Option Plan, or the Advantica Restaurant Group Director Stock Option Plan that thereafter terminate or expire unexercised, or are cancelled, forfeited or lapse for any reason.

5.2.            SHARE COUNTING .

(a)           To the extent that an Award is canceled, terminates, expires, is forfeited or lapses for any reason, any unissued or forfeited Shares subject to the Award will again be available for issuance pursuant to Awards granted under the Plan.

(b)           Shares subject to Awards settled in cash will again be available for issuance pursuant to Awards granted under the Plan.

(c)           If the exercise price of an Option is satisfied by delivering Shares to the Company (by either actual delivery or attestation), only the number of Shares issued in excess of the Shares tendered (by delivery or attestation) shall be considered for purposes of determining the number of Shares remaining available for issuance pursuant to Awards granted under the Plan.

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(d)           To the extent that the full number of Shares subject to an Option or SAR is not issued upon exercise of the Option or SAR for any reason (other than Shares used to satisfy an applicable tax withholding obligation), only the number of Shares issued and delivered upon exercise of the Option or SAR shall be considered for purposes of determining the number of Shares remaining available for issuance pursuant to Awards granted under the Plan.

5.3.            STOCK DISTRIBUTED .  Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.

5.4.            LIMITATION ON AWARDS .  Notwithstanding any provision in the Plan to the contrary (but subject to adjustment as provided in Section 15.1), the maximum number of Shares with respect to one or more Options and/or SARs that may be granted during any one calendar year under the Plan to any one Participant shall be 3,000,000. The maximum aggregate grant with respect to Awards of Restricted Stock, Restricted Stock Units, Deferred Stock Units, Performance Shares or other Stock-Based Awards granted in any one calendar year to any one Participant shall be 3,000,000 Shares. The aggregate maximum fair market value (measured as of the Grant Date) of any other Awards that may be granted to any one Participant (less any consideration paid by the Participant for such Award) during any one calendar year under the Plan shall be $4,500,000.

ARTICLE 6
ELIGIBILITY

6.1.            GENERAL .  Awards may be granted only to Eligible Participants; except that Incentive Stock Options may be granted to only to Eligible Participants who are employees of the Company or a Parent or Subsidiary as defined in Section 424(e) and (f) of the Code.

ARTICLE 7
STOCK OPTIONS

7.1.            GENERAL .  The Committee is authorized to grant Options to Participants on the following terms and conditions:

(a)            EXERCISE PRICE .  The exercise price per Share under an Option shall be determined by the Committee, provided that the exercise price of an Option shall not be less than the Fair Market Value as of the Grant Date.

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(b)            TIME AND CONDITIONS OF EXERCISE .  The Committee shall determine the time or times at which an Option may be exercised in whole or in part, subject to Section 7.1(d).  The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised or vested.  The Committee may waive any exercise or vesting provisions at any time in whole or in part based upon factors as the Committee may determine in its sole discretion so that the Option becomes exercisable or vested at an earlier date.  No Option shall provide for any feature for the deferral of compensation other than the deferral of recognition of income until the exercise or disposition of the Option.

(c)            PAYMENT .  The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, Shares, or other property (including "cashless exercise" arrangements), and the methods by which Shares shall be delivered or deemed to be delivered to Participants.

(d)            EXERCISE TERM .  In no event may any Option be exercisable for more than ten years from the Grant Date.

(e)            PROHIBITION ON REPRICING .  Except as otherwise provided in Section 15.1, the exercise price of an Option may not be reduced, directly or indirectly by cancellation and regrant or by exchange for cash or other Awards or otherwise, without the prior approval of the shareholders of the Company

7.2.            INCENTIVE STOCK OPTIONS .  The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules:

(a)            EXERCISE PRICE .  The exercise price of an Incentive Stock Option shall not be less than the Fair Market Value as of the Grant Date.

(b)            LAPSE OF OPTION .  Subject to any earlier termination provision contained in the Award Certificate, an Incentive Stock Option shall lapse upon the earliest of the following circumstances; provided, however, that the Committee may, prior to the lapse of the Incentive Stock Option under the circumstances described in subsections (3), (4) or (5) below, provide in writing that the Option will extend until a later date, but if an Option is so extended and is exercised after the dates specified in subsections (3) and (4) below, it will automatically become a Nonstatutory Stock Option:

(1)           The expiration date set forth in the Award Certificate.

(2)           The tenth anniversary of the Grant Date.

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(3)           Three months after termination of the Participant’s Continuous Status as a Participant for any reason other than the Participant’s Disability or death.

(4)           One year after the Participant’s Continuous Status as a Participant by reason of the Participant’s Disability.

(5)           One year after the termination of the Participant’s death if the Participant dies while employed, or during the three-month period described in paragraph (3) or during the one-year period described in paragraph (4) and before the Option otherwise lapses.

Unless the exercisability of the Incentive Stock Option is accelerated as provided in Article 14, if a Participant exercises an Option after termination of employment, the Option may be exercised only with respect to the Shares that were otherwise vested on the Participant's termination of employment.  Upon the Participant's death, any exercisable Incentive Stock Options may be exercised by the Participant's beneficiary, determined in accordance with Section 14.5.

(c)            INDIVIDUAL DOLLAR LIMITATION .  The aggregate Fair Market Value (determined as of the Grant Date) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00.

(d)            TEN PERCENT OWNERS .  No Incentive Stock Option shall be granted to any individual who, at the Grant Date, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary unless the exercise price per share of such Option is at least 110% of the Fair Market Value per Share at the Grant Date and the Option expires no later than five years after the Grant Date.

(e)            EXPIRATION OF AUTHORITY TO GRANT INCENTIVE STOCK OPTIONS .  No Incentive Stock Option may be granted pursuant to the Plan after the day immediately prior to the tenth anniversary of the date the Plan was adopted by the Board, or the termination of the Plan, if earlier.

(f)            RIGHT TO EXERCISE .  During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant or, in the case of the Participant's Disability, by the Participant's guardian or legal representative.

(g)            ELIGIBLE GRANTEES .  The Committee may not grant an Incentive Stock Option to a person who is not at the Grant Date an employee of the Company or a Parent or Subsidiary.

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ARTICLE 8
STOCK APPRECIATION RIGHTS

8.1.            GRANT OF STOCK APPRECIATION RIGHTS .  The Committee is authorized to grant Stock Appreciation Rights to Participants on the following terms and conditions:

(a)            RIGHT TO PAYMENT .  Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of:

(1)             The Fair Market Value of one Share on the date of exercise; over

(2)             The grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of one Share on the Grant Date.

(b)            OTHER TERMS .  All awards of Stock Appreciation Rights shall be evidenced by an Award Certificate.  The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Certificate; provided, however, that in no event may any SAR be exercisable for more than ten years from the Grant Date.

(c)            PROHIBITION ON REPRICING .  Except as otherwise provided in Section 15.1, the base price of a SAR may not be reduced, directly or indirectly by cancellation and regrant or by exchange for cash or other Awards or otherwise, without the prior approval of the shareholders of the Company.

ARTICLE 9
PERFORMANCE AWARDS

9.1.            GRANT OF PERFORMANCE AWARDS .  The Committee is authorized to grant Performance Shares, Performance Units or Performance-Based Cash Awards to Participants on such terms and conditions as may be selected by the Committee.  The Committee shall have the complete discretion to determine the number of Performance Awards granted to each Participant, subject to Section 5.4, and to designate the provisions of such Performance Awards as provided in Section 4.3.  All Performance Awards shall be evidenced by an Award Certificate or a written program established by the Committee, pursuant to which Performance Awards are awarded under the Plan under uniform terms, conditions and restrictions set forth in such written program.

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9.2.            PERFORMANCE GOALS .   The Committee may establish performance goals for Performance Awards which may be based on any criteria selected by the Committee.  Such performance goals may be described in terms of Company-wide objectives or in terms of objectives that relate to the performance of the Participant, an Affiliate or a division, region, department or function within the Company or an Affiliate.  If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company or the manner in which the Company or an Affiliate conducts its business, or other events or circumstances render performance goals to be unsuitable, the Committee may modify such performance goals in whole or in part, as the Committee deems appropriate.  If a Participant is promoted, demoted or transferred to a different business unit or function during a performance period, the Committee may determine that the performance goals or performance period are no longer appropriate and may (i) adjust, change or eliminate the performance goals or the applicable performance period as it deems appropriate to make such goals and period comparable to the initial goals and period, or (ii) make a cash payment to the participant in amount determined by the Committee.  The foregoing two sentences shall not apply with respect to a Performance Award that is intended to be a Qualified Performance-Based Award.

9.3.            RIGHT TO PAYMENT .  The grant of a Performance Share to a Participant will entitle the Participant to receive at a specified later time a specified number of Shares, or the equivalent cash value, if the performance goals established by the Committee are achieved and the other terms and conditions thereof are satisfied.  The grant of a Performance Unit to a Participant will entitle the Participant to receive at a specified later time a specified dollar value in cash or other property, including Shares, variable under conditions specified in the Award, if the performance goals in the Award are achieved and the other terms and conditions thereof are satisfied.  The Committee shall set performance goals and other terms or conditions to payment of the Performance Awards in its discretion which, depending on the extent to which they are met, will determine the number and value of the Performance Awards that will be paid to the Participant.

9.4.            OTHER TERMS .  Performance Awards may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Committee and reflected in the Award Certificate.  For purposes of determining the number of Shares to be used in payment of a Performance Award denominated in cash but payable in whole or in part in Shares or Restricted Stock, the number of Shares to be so paid will be determined by dividing the cash value of the Award to be so paid by the Fair Market Value of a Share on the date of determination by the Committee of the amount of the payment under the Award, or, if the Committee so directs, the date immediately preceding the date the Award is paid.

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ARTICLE 10
RESTRICTED STOCK AND RESTRICTED STOCK UNIT AWARDS

10.1.            GRANT OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS .  The Committee is authorized to make Awards of Restricted Stock or Restricted Stock Units to Participants in such amounts and subject to such terms and conditions as may be selected by the Committee.  An Award of Restricted Stock or Restricted Stock Units shall be evidenced by an Award Certificate setting forth the terms, conditions, and restrictions applicable to the Award.

10.2.            ISSUANCE AND RESTRICTIONS .  Restricted Stock or Restricted Stock Units shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock).  These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, upon the satisfaction of performance goals or otherwise, as the Committee determines at the time of the grant of the Award or thereafter.  Except as otherwise provided in an Award Certificate, the Participant shall have all of the rights of a stockholder with respect to the Restricted Stock, and the Participant shall have none of the rights of a stockholder with respect to Restricted Stock Units until such time as Shares of Stock are paid in settlement of the Restricted Stock Units.

10.3.            FORFEITURE .  Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of Continuous Status as a Participant during the applicable restriction period or upon failure to satisfy a performance goal during the applicable restriction period, Restricted Stock or Restricted Stock Units that are at that time subject to restrictions shall be forfeited; provided, however, that the Committee may provide in any Award Certificate that restrictions or forfeiture conditions relating to Restricted Stock or Restricted Stock Units will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock or Restricted Stock Units.

10.4.            DELIVERY OF RESTRICTED STOCK .  Shares of Restricted Stock shall be delivered to the Participant at the time of grant either by book-entry registration or by delivering to the Participant, or a custodian or escrow agent (including, without limitation, the Company or one or more of its employees) designated by the Committee, a stock certificate or certificates registered in the name of the Participant.  If physical certificates representing shares of Restricted Stock are registered in the name of the Participant, such certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock.

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ARTICLE 11
DEFERRED STOCK UNITS

11.1.            GRANT OF DEFERRED STOCK UNITS .  The Committee is authorized to grant Deferred Stock Units to Participants subject to such terms and conditions as may be selected by the Committee.  Deferred Stock Units shall entitle the Participant to receive Shares of Stock (or the equivalent value in cash or other property if so determined by the Committee) at a future time as determined by the Committee, or as determined by the Participant within guidelines established by the Committee in the case of voluntary deferral elections.  An Award of Deferred Stock Units shall be evidenced by an Award Certificate setting forth the terms and conditions applicable to the Award.

ARTICLE 12
DIVIDEND EQUIVALENTS

12.1.            GRANT OF DIVIDEND EQUIVALENTS .  The Committee is authorized to grant Dividend Equivalents with respect to Full Value Awards granted hereunder, subject to such terms and conditions as may be selected by the Committee.  Dividend Equivalents shall entitle the Participant to receive payments equal to dividends with respect to all or a portion of the number of Shares subject to an Award, as determined by the Committee.  The Committee may provide that Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional Shares, or otherwise reinvested.  Unless otherwise provided in the applicable Award Certificate, Dividend Equivalents will be paid or distributed no later than the 15 th day of the 3 rd month following the later of (i) the calendar year in which the corresponding dividends were paid to shareholders, or (ii) the first calendar year in which the Participant’s right to such Dividends Equivalents is no longer subject to a substantial risk of forfeiture.

ARTICLE 13
STOCK OR OTHER STOCK-BASED AWARDS

13.1.            GRANT OF STOCK OR OTHER STOCK-BASED AWARDS .  The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to Shares, as deemed by the Committee to be consistent with the purposes of the Plan, including without limitation Shares awarded purely as a “bonus” and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into Shares, and Awards valued by reference to book value of Shares or the value of securities of or the performance of specified Parents or Subsidiaries.  The Committee shall determine the terms and conditions of such Awards.

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ARTICLE 14
PROVISIONS APPLICABLE TO AWARDS

14.1.            STAND-ALONE AND TANDEM AWARDS .  Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, any other Award granted under the Plan.  Subject to Section 16.2, awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.

14.2.            TERM OF AWARD .  The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from its Grant Date (or, if Section 7.2(c) applies, five years from its Grant Date).

14.3.            FORM OF PAYMENT FOR AWARDS .  Subject to the terms of the Plan and any applicable law or Award Certificate, payments or transfers to be made by the Company or an Affiliate on the grant or exercise of an Award may be made in such form as the Committee determines at or after the Grant Date, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee.

14.4.            LIMITS ON TRANSFER .  No right or interest of a Participant in any unexercised or restricted Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or an Affiliate.  No unexercised or restricted Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, except in the case of an Incentive Stock Option, pursuant to a domestic relations order that would satisfy Section 414(p)(1)(A) of the Code if such Section applied to an Award under the Plan; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any Option intended to be an Incentive Stock Option to fail to be described in Code Section 422(b), and (iii) is otherwise appropriate and desirable, taking into account any factors deemed relevant, including without limitation, state or federal tax or securities laws applicable to transferable Awards.

14.5.            BENEFICIARIES .  Notwithstanding Section 14.4, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death.  A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Certificate applicable to the Participant, except to the extent the Plan and Award Certificate otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee.  If no beneficiary has been designated or survives the Participant, payment shall be made to the Participant's estate.  Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.

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14.6.            STOCK CERTIFICATES .  All Stock issuable under the Plan is subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded.  The Committee may place legends on any Stock certificate or issue instructions to the transfer agent to reference restrictions applicable to the Stock.

14.7.            ACCELERATION UPON DEATH OR DISABILITY OR RETIREMENT .  Except as otherwise provided in the Award Certificate, upon the Participant's death or Disability during his or her Continuous Status as a Participant, or (with respect to Awards that are not intended to be Qualified Performance-Based Awards under Section 14.12(b)) upon the Participant’s Retirement, all of such Participant’s outstanding Options, SARs, and other Awards in the nature of rights that may be exercised shall become fully exercisable, all time-based vesting restrictions on the Participant’s outstanding Awards shall lapse, and any performance-based criteria shall be deemed to be satisfied at the greater of “target” or actual performance as of the date of such termination and there shall be a prorata payout to the Participant or his or her estate within sixty (60) days following the date of termination (unless a later date is required by Section 17.16 hereof).  Any Awards shall thereafter continue or lapse in accordance with the other provisions of the Plan and the Award Certificate.  To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(b), the excess Options shall be deemed to be Nonstatutory Stock Options.

14.8.            ACCELERATION UPON A CHANGE IN CONTROL .  Except as otherwise provided in the Award Certificate, if a Participant’s employment is terminated without Cause or the Participant resigns for Good Reason within two years after the effective date of a Change in Control, then (i) all of that Participant’s outstanding Options, SARs and other Awards in the nature of rights that may be exercised shall become fully exercisable and shall remain exercisable for a period of 60 months from such date or until the earlier expiration of the award, and (ii) all time-based vesting restrictions on his or her outstanding Awards shall lapse.  Except as otherwise provided in the Award Certificate, upon the occurrence of a Change in Control, the target payout opportunities attainable under all outstanding performance-based Awards shall be deemed to have been fully earned as of the effective date of the Change in Control and there shall be pro rata payout to Participants within thirty (30) days following the effective date of the Change in Control (unless a later date is required by Section 17.16 hereof) based upon an assumed achievement of all relevant targeted performance goals and upon the length of time within the performance period that has elapsed prior to the Change in Control.

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14.9.            ACCELERATION FOR ANY OTHER REASON .  Regardless of whether an event has occurred as described in Section 14.7 or 14.8 above, and subject to Section 14.11 as to Qualified Performance-Based Awards, the Committee may in its sole discretion at any time determine that all or a portion of a Participant's Options, SARs, and other Awards in the nature of rights that may be exercised shall become fully or partially exercisable, that all or a part of the restrictions on all or a portion of the outstanding Awards shall lapse, and/or that any performance-based criteria with respect to any Awards shall be deemed to be wholly or partially satisfied, in each case, as of such date as the Committee may, in its sole discretion, declare.  The Committee may discriminate among Participants and among Awards granted to a Participant in exercising its discretion pursuant to this Section 14.9.

14.10.            EFFECT OF ACCELERATION .  If an Award is accelerated under Section 14.7, 14.8 or Section 14.9, the Committee may, in its sole discretion, provide (i) that the Award will expire after a designated period of time after such acceleration to the extent not then exercised, (ii) that the Award will be settled in cash rather than Stock, (iii) that the Award will be assumed by another party to a transaction giving rise to the acceleration or otherwise be equitably converted or substituted in connection with such transaction, (iv) that the Award may be settled by payment in cash or cash equivalents equal to the excess of the Fair Market Value of the underlying Stock, as of a specified date associated with the transaction, over the exercise price of the Award, or (v) any combination of the foregoing.  The Committee's determination need not be uniform and may be different for different Participants whether or not such Participants are similarly situated.  To the extent that such acceleration causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(b), the excess Options shall be deemed to be Nonstatutory Stock Options.

14.11.            QUALIFIED PERFORMANCE-BASED AWARDS .

(a)           The provisions of the Plan are intended to ensure that all Options and Stock Appreciation Rights granted hereunder to any Covered Employee shall qualify for the Section 162(m) Exemption; provided that the exercise or base price of such Award is not less than the Fair Market Value of the Shares on the Grant Date.

(b)           When granting any other Award, the Committee may designate such Award as a Qualified Performance-Based Award, based upon a determination that the recipient is or may be a Covered Employee with respect to such Award, and the Committee wishes such Award to qualify for the Section 162(m) Exemption.  If an Award is so designated, the Committee shall establish performance goals for such Award within the time period prescribed by Section 162(m) of the Code based on one or more of the following Qualified Business Criteria, which may be expressed in terms of Company-wide objectives or in terms of objectives that relate to the performance of an Affiliate or a division, region, department or function within the Company or an Affiliate:
 
 
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·  
Net earnings;
·  
Earnings per share;
·  
Net sales growth;
·  
Net income (before or after taxes);
·  
Net operating profit;
·  
Return measures (including, but not limited to, return on assets, capital, equity, or sales, and cash flow return on assets, capital, equity, or sales);
·  
Cash flow (including, but not limited to, operating cash flow and free cash flow);
·  
Earnings before or after taxes, interest, depreciation and/or amortization;
·  
Internal rate of return or increase in net present value;
·  
Dividend payments to parent;
·  
Gross margins;
·  
Gross margins minus expenses;
·  
Operating margin;
·  
Share price (including, but not limited to, growth measures and total shareholder return);
·  
Expense targets;
·  
Working capital targets relating to inventory and/or accounts receivable;
·  
Planning accuracy (as measured by comparing planned results to actual results);
·  
Comparisons to various stock market indices;
·  
Comparisons to the performance of other companies;
·  
Same-store sales;
·  
Customer counts;
·  
Customer satisfaction; and
·  
EVA®.

For purposes of this Plan, EVA means the positive or negative value determined by net operating profits after taxes over a charge for capital, or any other financial measure, as determined by the Committee in its sole discretion. (EVA is a registered trademark of Stern Stewart & Co.).  In the event that applicable tax and/or securities laws change to permit Board or Committee discretion to alter the governing Qualified Business Criteria without obtaining stockholder approval of such changes, the Board or Committee shall have sole discretion to make such changes without obtaining stockholder approval.

(c)           Each Qualified Performance-Based Award (other than a market-priced Option or SAR) shall be earned, vested and payable (as applicable) only upon the achievement of performance goals established by the Committee based upon one or more of the Qualified Business Criteria, together with the satisfaction of any other conditions, such as continued employment, as the Committee may determine to be appropriate; provided, however, that the Committee may provide, either in connection with the grant thereof or by amendment thereafter, that achievement of such performance goals will be waived upon the death or Disability of the Participant, or in connection with a Change in Control.  Performance periods established by the Committee for any such Qualified Performance-Based Award may be as short as three months and may be any longer period.

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(d)           The Committee may provide in any Qualified Performance-Based Award that any evaluation of performance may include or exclude any of the following events that occurs during a performance period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results; (d) accruals for reorganization and restructuring programs; (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual report to stockholders for the applicable year; (f) acquisitions or divestitures; and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.

(e)           Any payment of a Qualified Performance-Based Award granted with performance goals pursuant to subsection (c) above shall be conditioned on the written certification of the Committee in each case that the performance goals and any other material conditions were satisfied.  Except as specifically provided in subsection (c), no Qualified Performance-Based Award may be amended, nor may the Committee exercise any discretionary authority it may otherwise have under the Plan with respect to a Qualified Performance-Based Award under the Plan, in any manner to waive the achievement of the applicable performance goal based on Qualified Business Criteria or to increase the amount payable pursuant thereto or the value thereof, or otherwise in a manner that would cause the Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption.

(f)           Section 5.4 sets forth the maximum number of Shares or dollar value that may be granted in any one-year period to a Participant in designated forms of Qualified Performance-Based Awards.

14.12.            ANNUAL INCENTIVE AWARDS .

(a)           The Committee may designate Company executive officers who are eligible to receive a monetary payment in any calendar year based on a percentage of an incentive pool equal to five percent (5%) of the company's consolidated operating earnings for the calendar year. If so, the Committee shall allocate an incentive pool percentage to each designated Participant for each calendar year. In no event may the incentive pool percentage for any one Participant exceed thirty percent (30%) of the total pool. Consolidated operating earnings shall mean the consolidated earnings after income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of Extraordinary Items.  For purposes of this Section 14.12, "Extraordinary Items" shall mean (i) extraordinary, unusual and/or nonrecurring items of gain or loss, (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition, all of which must be identified in the audited financial statements, including footnotes, or Management Discussion and Analysis section of the Company's annual report.

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(b)           As soon as possible after the determination of the incentive pool for a Plan year, the Board shall calculate the Participant's allocated portion of the incentive pool based upon the percentage established at the beginning of the calendar year. The Participant's incentive award then shall be determined by the Board based on the Participant's allocated portion of the incentive pool subject to adjustment in the sole discretion of the Board. In no event may the portion of the incentive pool allocated to a participant who is a Covered Employee be increased in any way, including as a result of the reduction of any other Participant's allocated portion.

(c)           Unless otherwise provided by the Committee at the time of grant, upon the occurrence of a Change in Control, annual incentive awards granted under this Section 14.12 shall be paid out based on the consolidated operating earnings of the immediately preceding year or such other method of payment as may be determined by the Committee at the time of the Award or thereafter but prior to the Change in Control.

14.13.            TERMINATION OF EMPLOYMENT .  Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive.  A Participant’s Continuous Status as a Participant shall not be deemed to terminate  (i) in a circumstance in which a Participant transfers from the Company to an Affiliate, transfers from an Affiliate to the Company, or transfers from one Affiliate to another Affiliate, or (ii) in the discretion of the Committee as specified at or prior to such occurrence, in the case of a spin-off, sale or disposition of the Participant’s employer from the Company or any Affiliate.  To the extent that this provision causes Incentive Stock Options to extend beyond three months from the date a Participant is deemed to be an employee of the Company, a Parent or Subsidiary for purposes of Sections 424(e) and 424(f) of the Code, the Options held by such Participant shall be deemed to be Nonstatutory Stock Options.

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14.15.            FORFEITURE EVENTS .  The Committee may specify in an Award Certificate that the Participant's rights, payments and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events shall include, but shall not be limited to, termination of employment for cause, violation of material Company or Affiliate policies, breach of noncompetition, confidentiality or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company or any Affiliate.

ARTICLE 15
CHANGES IN CAPITAL STRUCTURE

15.1.            MANDATORY ADJUSTMENTS .  In the event of a nonreciprocal transaction between the Company and its stockholders that causes the per-share value of the Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend), the authorization limits under Section 5.1 and 5.4 shall be adjusted proportionately, and the Committee shall make such adjustments to the Plan and Awards as it deems necessary, in its sole discretion, to prevent dilution or enlargement of rights immediately resulting from such transaction.  Action by the Committee may include: (i) adjustment of the number and kind of shares that may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the exercise price of outstanding Awards or the measure to be used to determine the amount of the benefit payable on an Award; and (iv) any other adjustments that the Committee determines to be equitable.  Without limiting the foregoing, in the event of a subdivision of the outstanding Stock (stock-split), a declaration of a dividend payable in Shares, or a combination or consolidation of the outstanding Stock into a lesser number of Shares, the authorization limits under Section 5.1 and 5.4 shall automatically be adjusted proportionately, and the Shares then subject to each Award shall automatically, without the necessity for any additional action by the Committee, be adjusted proportionately without any change in the aggregate purchase price therefor.

15.2            DISCRETIONARY ADJUSTMENTS .  Upon the occurrence or in anticipation of any corporate event or transaction involving the Company (including, without limitation, any merger, reorganization, recapitalization, combination or exchange of shares, or any transaction described in Section 15.1), the Committee may, in its sole discretion, provide (i) that Awards will be settled in cash rather than Stock, (ii) that Awards will become immediately vested and exercisable and will expire after a designated period of time to the extent not then exercised, (iii) that Awards will be assumed by another party to a transaction or otherwise be equitably converted or substituted in connection with such transaction, (iv) that outstanding Awards may be settled by payment in cash or cash equivalents equal to the excess of the Fair Market Value of the underlying Stock, as of a specified date associated with the transaction, over the exercise price of the Award, (v) that performance targets and performance periods for Performance Awards will be modified, consistent with Code Section 162(m) where applicable, or (vi) any combination of the foregoing.  The Committee’s determination need not be uniform and may be different for different Participants whether or not such Participants are similarly situated.

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15.3            GENERAL .  Any discretionary adjustments made pursuant to this Article 15 shall be subject to the provisions of Section 16.2.  To the extent that any adjustments made pursuant to this Article 15 cause Incentive Stock Options to cease to qualify as Incentive Stock Options, such Options shall be deemed to be Nonstatutory Stock Options.

ARTICLE 16
AMENDMENT, MODIFICATION AND TERMINATION

16.1.            AMENDMENT, MODIFICATION AND TERMINATION .  The Board or the Committee may, at any time and from time to time, amend, modify or terminate the Plan without stockholder approval; provided, however, that if an amendment to the Plan would, in the reasonable opinion of the Board or the Committee, either (i) materially increase the benefits accruing to Participants, (ii) materially increase the number of Shares available under the Plan, (iii) expand the types of awards under the Plan, (iv) materially expand the class of participants eligible to participate in the Plan, (v) materially extend the term of the Plan, or (vi) otherwise constitute a material change requiring stockholder approval under applicable laws, policies or regulations or the applicable listing or other requirements of an Exchange, then such amendment shall be subject to stockholder approval; and provided, further, that the Board or Committee may condition any other amendment or modification on the approval of stockholders of the Company for any reason, including by reason of such approval being necessary or deemed advisable to (i) permit Awards made hereunder to be exempt from liability under Section 16(b) of the 1934 Act, (ii) to comply with the listing or other requirements of an Exchange, or (iii) to satisfy any other tax, securities or other applicable laws, policies or regulations.

16.2.            AWARDS PREVIOUSLY GRANTED .  At any time and from time to time, the Committee may amend, modify or terminate any outstanding Award without approval of the Participant; provided, however:

(a)           Subject to the terms of the applicable Award Certificate, such amendment, modification or termination shall not, without the Participant’s consent, reduce or diminish the value of such Award determined as if the Award had been exercised, vested, cashed in or otherwise settled on the date of such amendment or termination (with the per-share value of an Option or Stock Appreciation Right for this purpose being calculated as the excess, if any, of the Fair Market Value as of the date of such amendment or termination over the exercise or base price of such Award);

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(b)           The original term of an Option may not be extended without the prior approval of the stockholders of the Company;

(c)           Except as otherwise provided in Article 15, the exercise price of an Option may not be reduced, directly or indirectly, without the prior approval of the stockholders of the Company; and

(d)           No termination, amendment, or modification of the Plan shall adversely affect any Award previously granted under the Plan, without the written consent of the Participant affected thereby.  An outstanding Award shall not be deemed to be “adversely affected” by a Plan amendment if such amendment would not reduce or diminish the value of such Award determined as if the Award had been exercised, vested, cashed in or otherwise settled on the date of such amendment (with the per-share value of an Option or Stock Appreciation Right for this purpose being calculated as the excess, if any, of the Fair Market Value as of the date of such amendment over the exercise or base price of such Award).

ARTICLE 17
GENERAL PROVISIONS

17.1.            NO RIGHTS TO AWARDS; NON-UNIFORM DETERMINATIONS .  No Participant or any Eligible Participant shall have any claim to be granted any Award under the Plan.  Neither the Company, its Affiliates nor the Committee is obligated to treat Participants or Eligible Participants uniformly, and determinations made under the Plan may be made by the Committee selectively among Eligible Participants who receive, or are eligible to receive, Awards (whether or not such Eligible Participants are similarly situated).

17.2.            NO STOCKHOLDER RIGHTS .  No Award gives a Participant any of the rights of a stockholder of the Company unless and until Shares are in fact issued to such person in connection with such Award.

17.3.            WITHHOLDING .  The Company or any Affiliate shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising as a result of the Plan.  With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the Award Shares having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes.

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17.4.            NO RIGHT TO CONTINUED SERVICE .  Nothing in the Plan, any Award Certificate or any other document or statement made with respect to the Plan, shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant’s employment or status as an officer, director or consultant at any time, nor confer upon any Participant any right to continue as an employee, officer, director or consultant of the Company or any Affiliate, whether for the duration of a Participant’s Award or otherwise.

17.5.            UNFUNDED STATUS OF AWARDS .  The Plan is intended to be an “unfunded” plan for incentive and deferred compensation.  With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Certificate shall give the Participant any rights that are greater than those of a general creditor of the Company or any Affiliate.  This Plan is not intended to be subject to ERISA.

17.6.            RELATIONSHIP TO OTHER BENEFITS .  No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or benefit plan of the Company or any Affiliate unless provided otherwise in such other plan.

17.7.            EXPENSES .  The expenses of administering the Plan shall be borne by the Company and its Affiliates.

17.8.            TITLES AND HEADINGS .  The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

17. 9.            GENDER AND NUMBER .  Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

17.10.            FRACTIONAL SHARES .  No fractional Shares shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional Shares or whether such fractional Shares shall be eliminated by rounding up or down.

17.11.            GOVERNMENT AND OTHER REGULATIONS .

(a)           Notwithstanding any other provision of the Plan, no Participant who acquires Shares pursuant to the Plan may, during any period of time that such Participant is an affiliate of the Company (within the meaning of the rules and regulations of the Securities and Exchange Commission under the 1933 Act), sell such Shares, unless such offer and sale is made (i) pursuant to an effective registration statement under the 1933 Act, which is current and includes the Shares to be sold, or (ii) pursuant to an appropriate exemption from the registration requirement of the 1933 Act, such as that set forth in Rule 144 promulgated under the 1933 Act.

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(b)           Notwithstanding any other provision of the Plan, if at any time the Committee shall determine that the registration, listing or qualification of the Shares covered by an Award upon any Exchange or under any foreign, federal, state or local law or practice, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the purchase or receipt of Shares thereunder, no Shares may be purchased, delivered or received pursuant to such Award unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Committee.  Any Participant receiving or purchasing Shares pursuant to an Award shall make such representations and agreements and furnish such information as the Committee may request to assure compliance with the foregoing or any other applicable legal requirements.  The Company shall not be required to issue or deliver any certificate or certificates for Shares under the Plan prior to the Committee’s determination that all related requirements have been fulfilled.  The Company shall in no event be obligated to register any securities pursuant to the 1933 Act or applicable state or foreign law or to take any other action in order to cause the issuance and delivery of such certificates to comply with any such law, regulation or requirement.

17.12.            GOVERNING LAW .   To the extent not governed by federal law, the Plan and all Award Certificates shall be construed in accordance with and governed by the laws of the State of Delaware.

17.13            ADDITIONAL PROVISIONS .  Each Award Certificate may contain such other terms and conditions as the Committee may determine; provided that such other terms and conditions are not inconsistent with the provisions of the Plan.

17.14.            NO LIMITATIONS ON RIGHTS OF COMPANY .  The grant of any Award shall not in any way affect the right or power of the Company to make adjustments, reclassification or changes in its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.  The Plan shall not restrict the authority of the Company, for proper corporate purposes, to grant or assume awards, other than under the Plan, to or with respect to any person.  If the Committee so directs, the Company may issue or transfer Shares to an Affiliate, for such lawful consideration as the Committee may specify, upon the condition or understanding that the Affiliate will transfer such Shares to a Participant in accordance with the terms of an Award granted to such Participant and specified by the Committee pursuant to the provisions of the Plan.

17.15.            INDEMNIFICATION .  Each person who is or shall have been a member of the Committee, or of the Board, or an officer of the Company to whom authority was delegated in accordance with Article 4 shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability, or expense is a result of his or her own willful misconduct or except as expressly provided by statute.  The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

29

 
17.16.            SPECIAL PROVISIONS RELATED TO SECTION 409A OF THE CODE .

         (a)           Notwithstanding anything in the Plan or in any Award Certificate to the contrary, to the extent that any amount or benefit that would constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code would otherwise be payable or distributable under the Plan or any Award Certificate by reason of the occurrence of a Change in Control, or the Participant’s Disability or separation from service, such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless (i) the circumstances giving rise to such Change in Control, Disability or separation from service meet any description or definition of “change in control event”, “disability” or “separation from service”, as the case may be, in Section 409A of the Code and applicable regulations (without giving effect to any elective provisions that may be available under such definition), or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A of the Code by reason of the short-term deferral exemption or otherwise.  This provision does not prohibit the vesting of any Award upon a Change in Control, Disability or separation from service, however defined.  If this provision prevents the payment or distribution of any amount or benefit, such payment or distribution shall be made on the next earliest payment or distribution date or event specified in the Award Certificate that is permissible under Section 409A.

         (b)           If any one or more Awards granted under the Plan to a Participant could qualify for any separation pay exemption described in Treas. Reg. Section 1.409A-1(b)(9), but such Awards in the aggregate exceed the dollar limit permitted for the separation pay exemptions, the Company (acting through the Committee or the Head of Human Resources) shall determine which Awards or portions thereof will be subject to such exemptions.

30

 
         (c)           Notwithstanding anything in the Plan or in any Award Certificate to the contrary, if any amount or benefit that would constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code would otherwise be payable or distributable under this Plan or any Award Certificate by reason of a Participant’s separation from service during a period in which the Participant is a Specified Employee (as defined below), then, subject to any permissible acceleration of payment by the Committee under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes):

         (i) if the payment or distribution is payable in a lump sum, the Participant’s right to receive payment or distribution of such non-exempt deferred compensation will be delayed until the earlier of the Participant’s death or the first day of the seventh month following the Participant’s separation from service; and

         (ii) if the payment or distribution is payable over time, the amount of such non-exempt deferred compensation that would otherwise be payable during the six-month period immediately following the Participant’s separation from service will be accumulated and the Participant’s right to receive payment or distribution of such accumulated amount will be delayed until the earlier of the Participant’s death or the first day of the seventh month following the Participant’s separation from service, whereupon the accumulated amount will be paid or distributed to the Participant and the normal payment or distribution schedule for any remaining payments or distributions will resume.

For purposes of this Plan, the term “Specified Employee” has the meaning given such term in Code Section 409A and the final regulations thereunder.

         (d)           Eligible Participants who are service providers to an Affiliate may be granted Options or SARs under this Plan only if the Affiliate qualifies as an “eligible issuer of service recipient stock” within the meaning of §1.409A-1(b)(5)(iii)(E) of the final regulations under Code Section 409A.

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The foregoing is hereby acknowledged as being the Denny’s Corporation Amended and Restated 2004 Omnibus Incentive Plan as originally adopted by the Compensation Committee of the Board on July 19, 2004 and approved by the Company’s stockholders on August 25, 2004, and as adopted in amended and restated form by the Compensation Committee of the Board on May 20, 2008.

DENNY’S CORPORATION


By:                                           

Its:                                           

 
 
 
 
 
32

 
 
Exhibit 31.1
 
CERTIFICATION
 
I, Nelson J. Marchioli, President and Chief Executive Officer of Denny’s Corporation, certify that:
 
     1. I have reviewed this report on Form 10-Q of Denny’s Corporation;
 
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
     the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
     operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
     and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
           a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
           information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
           this report is being prepared;
 
           b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
           reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
           accounting principles;
 
           c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
           controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
           d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
           registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
           financial reporting; and
 
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
     the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
           a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
           the registrant’s ability to record, process, summarize and report financial information; and
 
           b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
 
 
 
 
     
       
Date: July 29, 2008
By:
/s/  Nelson J. Marchioli
 
   
Nelson J. Marchioli
 
   
President and Chief Executive Officer
 
       
 

 
 
Exhibit 31.2
 
CERTIFICATION
 
I, F. Mark Wolfinger, Executive Vice President, Growth Initiatives, Chief Administrative Officer and Chief Financial Officer of Denny’s Corporation, certify that:
 
     1. I have reviewed this report on Form 10-Q of Denny’s Corporation;
 
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
     the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
     operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
     and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
           a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
           information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
           this report is being prepared;
 
           b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
           reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
           accounting principles;
 
           c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
           controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
           d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
           registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
           financial reporting; and
 
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
     the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
            a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
           the registrant’s ability to record, process, summarize and report financial information; and
 
           b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
 
 
 
     
       
Date: July 29, 2008
By:
/s/  F. Mark Wolfinger
 
   
F. Mark Wolfinger
 
   
Executive Vice President, Growth Initiatives
 
   
Chief Administrative Officer and
 
   
Chief Financial Officer
 
 

 

 
Exhibit 32.1
 
CERTIFICATION
 
Nelson J. Marchioli
President and Chief Executive Officer of Denny’s Corporation
 
and
 
F. Mark Wolfinger
Executive Vice President, Growth Initiatives, Chief Administrative Officer and Chief Financial Officer
 
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of Denny’s Corporation (the “Company”) on Form 10-Q for the period ended June 25, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nelson J. Marchioli, President and Chief Executive Officer of the Company, and I, F. Mark Wolfinger, Executive Vice President, Growth Initiatives, Chief Administrative Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
     1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
     2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
     
       
Date: July 29, 2008
By:
/s/  Nelson J. Marchioli
 
   
Nelson J. Marchioli
 
   
President and Chief Executive Officer
 
       
 

 
     
       
Date: July 29, 2008
By:
/s/  F. Mark Wolfinger
 
   
F. Mark Wolfinger
 
   
Executive Vice President, Growth Initiatives
 
   
Chief Administrative Officer, and
 
   
Chief Financial Officer
 
 
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Denny’s Corporation and will be retained by Denny’s Corporation and furnished to the Securities and Exchange Commission or its staff upon request.