Denny's - 10-Q quarterly report FY

 

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 April 1, 2009

 

Commission File Number 0-18051 

DENNY’S CORPORATION

(Exact name of registrant as specified in its charter)

203 East Main Street

Spartanburg, South Carolina 29319-0001

(Address of principal executive offices)

(Zip Code)

(864) 597-8000

(Registrant’s telephone number, including area code)

 

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

Yes  þ    No  ¨ 

 

 

Indicate by check mark whether the registrant 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  þ 

As of May 1, 2009, 96,089,922 shares of the registrant’s common stock, par value $.01 per share, were outstanding.

 

TABLE OF CONTENTS

 

 

 

Denny’s Corporation and Subsidiaries

(Unaudited)

 

See accompanying unaudited notes to condensed consolidated financial statements

 

Denny’s Corporation and Subsidiaries

(Unaudited)

 

 

See accompanying unaudited notes to condensed consolidated financial statements

 

Denny’s Corporation and Subsidiaries

 (Unaudited)

 

See accompanying unaudited notes to condensed consolidated financial statements

 

Denny’s Corporation and Subsidiaries

(Unaudited)

 

 

See accompanying unaudited notes to condensed consolidated financial statements

 

Denny’s Corporation and Subsidiaries

(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 31, 2008 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 31, 2008. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 30, 2009.

Note 2.     Summary of Significant Accounting Policies

  

Effective January 1, 2009, the first day of fiscal 2009, we adopted Financial Accounting Standards Board (“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.” We will apply FSP FAS 142-3 prospectively to intangible assets acquired subsequent to the adoption date.  The adoption of FSP FAS 142-3 had no impact on our Condensed Consolidated Financial Statements as of April 1, 2009. 

Effective January 1, 2009, we adopted, 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. The adoption of SFAS 161 did not have a material impact on our Condensed Consolidated Financial Statements.  See Note 8.

 

During 2008, we adopted FASB Staff Position No. 157-2 ("FSP FAS 157-2"), "Effective Date of FASB Statement 157,"which deferred the provisions of SFAS 157 for nonfinancial assets and liabilities to the first fiscal period beginning after November 15, 2008. Deferred nonfinancial assets and liabilities include items such as goodwill and other nonamortizable intangibles. Effective January 1, 2009, we adopted the provisions of SFAS 157 for nonfinancial assets and liabilities. The adoption of FSP FAS 157-2 did not have a material impact on our Condensed Consolidated Financial Statements. See Note 6.

  

Effective January 1, 2009, we adopted 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. The adoption of SFAS 160 did not have a material impact on our Condensed Consolidated Financial Statements.

Effective January 1, 2009, we adopted 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. We will apply SFAS 141R to any business combinations subsequent to adoption. In addition, this Statement requires that any additional reversal of deferred tax asset valuation allowance established in connection with our fresh start reporting on January 7, 1998 be recorded as a component of income tax expense rather than as a reduction to the goodwill established in connection with the fresh start reporting. See Note 12.

 

In April 2009, the FASB issued FASB Staff Position Financial Accounting Standard 141R-1 ("FSP FAS 141R-1"), "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." FSP FAS 141R-1 amends SFAS 141R to require that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of SFAS 5, "Accounting for Contingencies", to determine whether the contingency should be recognized at the acquisition date or after such date. FSP FAS 141R-1 is effective for business combinations whose acquisition date is on or after the first reporting period beginning after December 15, 2008. Accordingly, we adopted this FSP during the first quarter of 2009. The adoption of FSP FAS 141R-1 did not have a material impact on our Condensed Consolidated Financial Statements.

 

There have been no other material changes to our significant accounting policies and estimates from the information provided in Note 2 of our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2008.

 

Note 3.     Assets Held for Sale

Assets held for sale of $4.2 million and $2.3 million as of April 1, 2009 and December 31, 2008, respectively, include restaurants to be sold to franchisees. 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 and restaurant operations to franchisees, net of a voluntary $10.0 million annual exclusion related to proceeds from the sale of restaurant operations to franchisees. As of April 1, 2009, as a result of the mandatory prepayment requirements, we classified $0.4 million of our long-term debt as a current liability in our Condensed Consolidated Balance Sheet. This amount represents the required prepayment based on the net book value of the specified properties as of the balance sheet date less the remaining balance of the annual exclusion. As of December 31, 2008, no reclassification of long-term debt to current liabilities required. As a result of classifying certain assets as held for sale, we recognized impairment charges of $0.3 million for the quarter ended April 1, 2009. This expense is included as a component of operating gains, losses and other charges, net in our Condensed Consolidated Statements of Operations. There were no impairment charges recognized related to assets held for sale for the quarter ended March 26, 2008.

 

Note 4.    Goodwill and Other Intangible Assets

 

The changes in carrying amounts of goodwill for the quarter ended April 1, 2009 are as follows:

 

 

The following table reflects goodwill and intangible assets as of April 1, 2009 and December 31, 2008:

 

 

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

 

 

Gains on Sales of Assets

 

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

 

 

Restructuring charges and exit costs were comprised of the following: 

 

 

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

 

 

 

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

 

 

As of April 1, 2009 and December 31, 2008, we had accrued severance and other restructuring charges of $0.8 million and $1.2 million, respectively.  The balance as of April 1, 2009 is expected to be paid during the next 12 months.

Note 6.     Fair Value of Financial Instruments

Effective December 27, 2007, the first day of fiscal 2008, we adopted the provisions of 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. Effective January 1, 2009, the first day of fiscal 2009, we applied the provisions of FSP FAS 157-2, "Effective Date of FASB Statement 157," which deferred the adoption of SFAS 157 for nonfinancial assets and liabilities.

 

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

 

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

 

 

Fair Value of Long-Term Debt

 

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

 

 

The difference between the estimated fair value of long-term debt compared with its historical cost reported in our Condensed Consolidated Balance Sheets at April 1, 2009 and December 31, 2008 relates primarily to market quotations for our Denny's Holdings, Inc. 10% Senior Notes due 2012 (the "10% Notes").

 

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 $126.3 million term loan and an additional $37 million letter of credit facility (together, the "Credit Facility"). At April 1, 2009, we had outstanding letters of credit of $31.3 million under our letter of credit facility. There were no outstanding letters of credit under our revolving facility and no revolving loans outstanding at April 1, 2009. These balances result in availability of $5.7 million under our letter of credit facility and $50.0 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 2009, combined with our capacity for additional borrowings under our Credit Facility, will enable us to meet our anticipated cash requirements and fund capital expenditures over the next twelve months.

The Credit Facility is guaranteed by Denny's and its other subsidiaries and is secured by substantially all of the assets of Denny's and its subsidiaries. In addition, the Credit Facility is secured by first-priority mortgages on 117 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 April 1, 2009.

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 our interest rate swap described below, the weighted-average interest rate under the term loan was 4.0% and 6.8% as of April 1, 2009 and March 26, 2008, respectively. Taking into consideration our interest rate swap, described below, the weighted-average interest rate under the term loan was 6.3% and 6.9% as of April 1, 2009 and March 26, 2008, respectively.

 

Note 8.     Derivative Financial Instruments

 

Interest Rate Swap

 

 

 

 

 

 

We enter into natural gas hedge contracts in order to limit our exposure to price increases for natural gas. These pay fixed/receive floating agreements are based on NYMEX prices. As of April 1, 2009, the outstanding contracts represent approximately 85% of our anticipated natural gas purchases through October 2009. Realized gains (losses) on the contracts are recorded as utility cost which is a component of other operating expenses. The contracts are not accounted for under hedge accounting, therefore, changes in the contracts' fair value are recorded in other nonoperating expense. Under the terms of the natural gas hedge contracts, both parties may be required to provide collateral related to any liability positions held.  As of April 1, 2009, collateral of $1.7 million was held in an interest-bearing cash account.

 

 

Both the interest rate swap and the natural gas hedge contracts are currently in liability positions, therefore there is no significant risk of loss related to counterparty credit risk.

 

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

 

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

 

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:

 

We made contributions of $0.3 million and $0.1 million to our qualified pension plan in the quarters ended April 1, 2009 and March 26, 2008, respectively. We made contributions of $0.1 million and $0.1 million to our other defined benefit plans during the quarters ended April 1, 2009 and March 26, 2008, respectively. We expect to contribute an additional $1.1 million to our qualified pension plan and an additional $0.1 million to our other defined benefit plans over the remainder of fiscal 2009.

Additional minimum pension liability of $23.7 million is reported as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Shareholders’ Deficit and Comprehensive Income (Loss) as of April 1, 2009 and December 31, 2008.

 

Note 10.     Share-Based Compensation

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

 

 

Stock Options

During the quarter ended April 1, 2009, we granted approximately 1.4 million stock options to certain employees. These stock options vest evenly over 3 years and have a 10-year contractual life.

 

The weighted average fair value per option for options granted during the quarter ended April 1, 2009 was $0.81. The fair value of these stock options was estimated at the date of grant using the Black-Scholes option pricing model. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Condensed Consolidated Statements of Operations.

We used the following weighted average assumptions for the stock option grants for the quarter ended April 1, 2009:

 

 

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 April 1, 2009, we had approximately $2.6 million of unrecognized compensation cost related to unvested stock option awards outstanding, which is expected to be recognized over a weighted average of 2.5 years.

Restricted Stock Units

 

During the quarter ended April 1, 2009, we made payments of $1.6 million (before taxes) in cash and issued 0.4 million shares of common stock related to the restricted stock unit awards that vested as of December 31, 2008.

 

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

 

 

As of April 1, 2009, we had approximately $3.9 million of unrecognized compensation cost (approximately $0.7 million for liability classified units and approximately $3.2 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 2.2 years.

Board Deferred Stock Units

During the quarter ended April 1, 2009, we granted less than 0.1 million deferred stock units (which are equity classified) with a weighted-average grant date fair value of $1.67 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 of our common stock.

Note 11.     Comprehensive Income and Accumulated Other Comprehensive Loss 

 

Total comprehensive income was $4.5 million and $4.4 million for the quarters ended April 1, 2009 and March 26, 2008, respectively.

 

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

 

Note 12.     Income Taxes

The benefit from income taxes was $0.4 million for the quarter ended April 1, 2009 compared to a provision for income taxes of $0.5 million for the quarter ended March 26, 2008. The benefit from and provision for income taxes for the first quarters of 2009 and 2008 were determined using our effective rate estimated for the entire fiscal year. The quarter ended April 1, 2009 included the recognition of $0.7 million of current tax benefits resulting from the enactment of certain federal laws that benefited us during the first quarter of 2009.

 

We have provided valuation allowances related to any benefits from income taxes resulting from the application of a statutory tax rate to our net operating losses (“NOL”) generated in previous periods. In addition, during 2008, we utilized certain state NOL carryforwards whose valuation allowance was established in connection with fresh start reporting on January 7, 1998. For the quarter ended March 26, 2008, we recognized approximately $0.1 million of state deferred tax expense with a corresponding reduction to goodwill in connection with fresh start reporting. The adoption of SFAS 141R during the quarter ended April 1, 2009 requires that any additional reversal of deferred tax asset valuation allowance established in connection with fresh start reporting be recorded as a component of income tax expense rather than as a reduction to the goodwill established in connection with the fresh start reporting.

 

The reduction in our effective tax rate for the quarter ended April 1, 2009 results primarily from the recognition of $0.7 million of current tax benefits related to the enactment of certain federal laws during the first quarter of 2009.

 

Note 13.     Net Income (Loss) Per Share

 

 

Note 14.     Supplemental Cash Flow Information

 

 

 

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 ("FSP FAS 107-1 and APB 28-1"), "Interim Disclosures about Fair Value of Financial Instruments." The FSP amends SFAS 107, "Disclosure about Fair Value of Financial Instruments," and Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. We are required to adopt FSP FAS 107-1 and APB 28-1 in the second quarter of 2009. We do not currently believe that adopting the FSP will have a material impact on our Condensed Consolidated Financial Statements.

 

In April 2009, the FASB issued FASB Staff Position No. FSP FAS 115-2 and FAS 124-2 ("FSP FAS 115-2 and FAS 124-2"), "Recognition and Presentation of Other-Than-Temporary Impairments." The FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. We are required to adopt FSP FAS 115-2 and FAS 124-2 in the second quarter of 2009.  We do not currently believe that adopting the FSP will have a material impact on our Condensed Consolidated Financial Statements.

 

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 ("FSP FAS 157-4"), "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." The FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, "Fair Value Measurements", when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. We are required to adopt FSP FAS 157-4 in the second quarter of 2009.  We do not currently believe that adopting the FSP will have a material 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 our 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 involving employees and guests, other employment related matters, taxes, sales of franchise rights and businesses and other matters. Based on our examination of these matters and our experience to date, we have recorded reserves reflecting our best estimate of liability, if any, with respect to these matters. However, the ultimate disposition of these matters cannot be determined with certainty. We record legal expenses and other litigation costs as those costs are incurred.

 

The following discussion is intended to highlight significant changes in our financial position as of April 1, 2009 and results of operations for the quarter ended April 1, 2009 compared to the quarter ended March 26, 2008. 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 31, 2008.

 

 

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.

 

__________________

 

Unit Activity

 

Company Restaurant Operations

 

During the quarter ended April 1, 2009, we realized a 0.3% increase in same-store sales, comprised of a 0.5% increase in guest check average and a 0.2% decrease in guest counts. Company restaurant sales decreased $34.0 million, or 20.1%, resulting from a 93 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 88.3% from 89.3%. Product costs decreased to 23.8% from 24.7% due to favorable shifts in menu mix. Payroll and benefits decreased to 42.6% from 43.5% primarily as a result of a decrease in management labor and improved scheduling of restaurant staff. Occupancy costs increased to 6.7% from 6.2% as a result of the negative development of certain general liability claims and margin decline resulting from the change in the portfolio of company-owned restaurants. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales: 

 

Utilities increased by 0.2% primarily due to the recognition of $0.6 million in losses on natural gas contracts during the quarter ended April 1, 2009. Marketing increased by 0.2% primarily as a result of the establishment of local advertising cooperatives during the fourth quarter of 2008 and the first quarter of 2009.

 

Franchise Operations

 

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

 

Royalties increased by $1.1 million, or 6.3%, primarily resulting from an 82 equivalent unit increase in franchised and licensed units, as compared to the prior year, offset by the effects of a 1.4% decrease in same-store sales. The increase in equivalent units resulted from the sale of company-owned restaurants to franchisees. The increase in initial fees of $0.4 million, or 34.2%, primarily results from the sale of 30 restaurants to franchisees during the first quarter of 2009 as compared to 21 restaurants sold to franchisees during the first quarter on 2008. The increase in occupancy revenue of $2.3 million, or 27.6%, is also primarily the result of the sale of restaurants to franchisees.

Costs of franchise and license revenue increased by $3.1 million, or 38.3%. The increase in occupancy costs of $1.5 million, or 23.0%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs increased by $1.6 million, or 98.5%, due to $1.1 million of franchise-related costs associated with our Super Bowl promotion. Additionally, we recorded $0.3 million of bad debt expense related to a note receivable on units sold to a franchisee in 1999. As a percentage of franchise and license revenue, costs of franchise and license revenue increased to 37.4% for the quarter ended April 1, 2009 from 30.9% for the quarter ended March 26, 2008.

Other Operating Costs and Expenses

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

General and administrativeexpenses are comprised of the following:

 

The $2.0 million decrease in other general and administrative expenses is primarily due to the 2008 reorganization to support our ongoing transition to a franchise-focused business model.

Depreciation and amortizationis comprised of the following:

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

Operating gains, losses and other charges, net represent gains or losses on the sales of assets, restructuring charges, exit costs and impairment charges and were comprised of the following:

 

During the quarter ended April 1, 2009, we recognized $0.5 million of gains on the sale of 30 restaurant operations to three franchisees for net proceeds of $4.8 million (which includes notes receivable of $1.4 million) compared to $9.7 million of gains on the sale of 21 restaurant operations to four franchisees for net proceeds of $16.5 million during the prior year quarter. The remaining gains for the two periods resulted from the recognition of deferred gains.

 

Restructuring charges and exit costs were comprised of the following:

 

 

Impairment charges of $0.4 million for the quarter ended April 1, 2009 relate to an underperforming restaurant as well as restaurants identified as held for sale.

Operating income was $11.9 million for the quarter ended April 1, 2009 compared with $19.2 million for the quarter ended March 26, 2008.

Interest expense, net is comprised of the following: