IHOP 2008 Annual Report Download

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Who we are
is how we win.
2008 Annual Report

Table of contents

  • Page 1
    Who we are is how we win. 2008 Annual Report

  • Page 2

  • Page 3
    ... of our two great brands, the formation of a shared services operating structure, new faces at the management level and, of course, a new Company name - DineEquity - to better represent the combined power of the Applebee's and IHOP businesses going forward. 2008 also brought the unexpected...

  • Page 4
    ... consumer environment. These strategies include value-oriented, limited-time offers supported by enhanced advertising to drive brand awareness, a singleminded focus on delivering "Service as Good as Our Pancakes," and continued franchise restaurant development. Additionally, non-traditional...

  • Page 5
    ... amount of maintenance capital required to service our remaining Applebee's company-operated restaurants. Due to the strength of the Applebee's and IHOP franchise systems, DineEquity generates a significant amount of cash each year to meet our obligations and comfortably run our business. Through...

  • Page 6
    ... more than just being the largest. To differentiate and distinguish Applebee's, we will become the sales and traffic performance leader. We will deliver the best guest experience among Applebee's competitive set. And, we will ensure that franchise restaurant profitability is healthy and growing. To...

  • Page 7
    ... St. George Bev Elving Angela Hornsby Jay Johns President Marketing Operations Franchise Development International Finance Human Resources Strategic Implementation products will form the basis of Applebee's marketing and advertising efforts, supported by engineered value programs that are designed...

  • Page 8
    ... and Canada. IHOP is now the leader in family dining with our system generating total sales higher than any other competitor, a multi-year record of sustainable same-store sales growth, annual franchise restaurant openings that significantly outpace the competition, and consumer brand awareness...

  • Page 9
    ... labor and food management tools. These efforts will be complimented by a refined and optimized field organization to support improved operational and sales performance throughout 2009. Maximize Franchise Development system-wide menu innovation with new breakfast, lunch and dinner items aimed...

  • Page 10
    DineEquity. Great teams growing great brands. DineEquity's vision is to become the number one franchising company with strong brands that deliver category leading same-store sales, profitable franchise restaurant performance, and a tireless commitment to providing exceptional guest service.

  • Page 11
    ... maintain independent approaches to the marketing and operational elements of their business that make the brands special and impact guests the most. The acquisition of Applebee's in 2007 provided DineEquity with a unique opportunity to implement a robust shared services structure to support other...

  • Page 12
    DineEquity is managing its business for the long term, optimizing our resilient franchise model, driving brand momentum and maximizing our financial flexibility for the future.

  • Page 13
    ... Restaurant Support Officer Howard M. Berk Partner, MSD Capital, L.P. Michael Archer President, Applebee's International H. Frederick Christie Independent Consultant; Former President and Chief Executive Officer, The Mission Group Jim Peros Acting President, IHOP Restaurants John Jakubek Senior...

  • Page 14
    Each year, Applebee's and IHOP's newly formed purchasing co-operative will procure approximately 100 million pounds of poultry, 70 million pounds of beef, 55 million pounds of pork, 30 million pounds of cheese, 5.6 million gallons of soft drinks, 78 million pounds of soy oil, and so much more.

  • Page 15
    ..., California 91203-2306 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 240-6055 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 Par Value New...

  • Page 16
    ... Director Independence ...Item 14-Principal Accounting Fees and Services ...PART IV. Item 15-Exhibits and Financial Statement Schedules ...Signatures ...134 141 ...and ...133 133 133 133 133 ...31 34 35 69 71 130 130 132 1-Business ...1A-Risk Factors ...1B-Unresolved Staff Comments ...2-Properties...

  • Page 17
    ...International House of Pancakes (''IHOP'') restaurant opened in 1958 in Toluca Lake, California. Since that time, the Company or its predecessors have engaged in the development, operation and franchising of IHOP restaurants. In November 2007, we completed the acquisition of Applebee's International...

  • Page 18
    ...of franchise fees not allocated to IHOP intellectual property, sales of equipment, as well as interest income from the financing of franchise fees and equipment leases. Financing expenses are primarily the cost of restaurant equipment. Restaurant Concepts Applebee's We develop, franchise and operate...

  • Page 19
    ... from our current 80% franchised system to an approximately 98% franchised system. In order to accomplish this strategy we plan to franchise substantially all of the company-operated Applebee's restaurants while retaining one company market in Kansas City. This heavily franchised business model is...

  • Page 20
    ... two-year terms. The Franchise Business Council is also responsible for the appointment of members to advisory committees related to marketing, supply chain, information technology and product development. Company-Operated Restaurants Historically, company-operated Applebee's restaurants have...

  • Page 21
    ... for development in each market. In 2009, we expect franchisees to open a total of 33 to 42 new Applebee's restaurants including 15 to 19 domestic franchise restaurants and 18 to 23 international franchise restaurants. We do not currently plan to open any domestic company-operated restaurants. The...

  • Page 22
    ...Under the new agreement, Applebee's and participating franchisees pay Weight Watchers a royalty equal to 2.5% of the proceeds from the sale of Weight Watchers branded items on the Applebee's menu. The initial term of the agreement is one year and Applebee's has the option to extend the agreement for...

  • Page 23
    .... IHOP We develop, franchise and operate restaurants in the family dining category of the restaurant industry under the names ''IHOP'' and ''International House of Pancakes.'' As of December 31, 2008, there were a total of 1,396 IHOP restaurants of which 1,225 were subject to franchise agreements...

  • Page 24
    ... fee. The revenues received by the Company from a typical franchise development arrangement under the Current Business Model include (a) (i) a location fee equal to $15,000 upon execution of a single store development agreement or (ii) a development fee equal to $20,000 for each IHOP restaurant...

  • Page 25
    ...to discuss operational issues, marketing matters, development and construction issues, information technology and many other topics. IHOP management also works closely with the IHOP Franchise Procurement Committee, a group formed to negotiate joint purchase arrangements for food and supplies to take...

  • Page 26
    ... maintain the company-operated restaurants in Cincinnati to facilitate the testing of new building types and remodel designs, new products and equipment, new operational procedures, and new marketing, brand and design elements. Restaurant Development The Current Business Model relies on franchisees...

  • Page 27
    ... as well as for developing new items. Marketing and Advertising IHOP franchisees and company-operated restaurants contribute a percentage of their sales to local advertising cooperatives and a national advertising fund. The franchise agreements provide for advertising fees comprised of (i) a local...

  • Page 28
    ...Family dining restaurants offer full table service, typically do not have bars or serve liquor, and usually offer breakfast in addition to lunch and dinner items. IHOP is one of the largest family dining brands in the world, in terms of number of restaurants and market share. The restaurant business...

  • Page 29
    ... Applebee's system in the United States and in various foreign countries. In addition, we own trademarks and service marks used in the IHOP system, including ''International House of Pancakes,'' ''IHOP'' and variations of each, as well as ''The Never Empty Coffee Pot,'' ''Rooty Tooty Fresh 'N Fruity...

  • Page 30
    ... At December 31, 2008, we employed approximately 25,248 employees, of whom 766 were full-time, non-restaurant, corporate personnel. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good. 16

  • Page 31
    ... the Company's financial performance, as reduced revenues result in downward pressure on margins. These factors could reduce Applebee's or IHOP company-operated restaurant gross sales and profitability. These factors could also reduce gross sales of franchise restaurants, resulting in lower royalty...

  • Page 32
    ... locations for new restaurants. Applebee's and IHOP restaurants also face competition from the introduction of new products and menu items by competitors, as well as substantial price discounting, and may continue to do so in the future. Although we may implement a number of business strategies...

  • Page 33
    ...expect to continue to apply a new business strategy that includes, among other things, (i) the refranchising of more than 90% of the Applebee's company-operated restaurants, (ii) specific changes in the manner in which our Applebee's and IHOP businesses are managed and serviced, such as the February...

  • Page 34
    ...-related expenses and credit card processing fees; • the inability to open new restaurants that achieve and sustain acceptable sales volumes; • the inability to increase menu pricing to offset increased operating expenses; • failure to effectively manage further penetration into mature markets...

  • Page 35
    ... customers) at a single Applebee's or IHOP location can have a substantial negative impact on the operations of all restaurants within the Applebee's or IHOP system. Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any type...

  • Page 36
    ... and in the foreign countries in which we operate from time to time, governing such matters as minimum-wage requirements, overtime and other working conditions and citizenship requirements. A significant number of the food-service employees in our restaurants are paid at rates related to the United...

  • Page 37
    ... of the related franchise agreements and development Agreements. Any franchisee that is experiencing financial difficulties may also be unable to participate in implementing changes to our business strategy. Any franchisee that owns and operates a significant number of Applebee's restaurants who...

  • Page 38
    ...to acquire company-operated restaurants. The concentration of the franchised Applebee's restaurants in a limited number of franchisees may also reduce our negotiating power with respect to the terms of sale of the company-operated Applebee's restaurants. Development rights for Applebee's restaurants...

  • Page 39
    ...be magnified by the limited number of existing franchisees. The inability of franchisees to fund capital expenditures may adversely impact future growth. Our business strategy includes revitalizing Applebee's store locations through a new remodel program and other operational changes. The success of...

  • Page 40
    ... the public's acceptance of Applebee's or IHOP restaurants, thereby reducing restaurant revenues and corresponding franchise payments to us. We are heavily dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business. We...

  • Page 41
    ... Beginning in the Form 10-K for the year ended December 31, 2008, consider expanding the critical accounting policy for goodwill to include the annual assessment date and a description of when an interim test is required, as well as a description of how the estimated fair value of reporting units is...

  • Page 42
    ... of the 2,004 Applebee's restaurants as of December 31, 2008: Location United States Alabama ...Alaska ...Arizona ...Arkansas ...California ...Colorado ...Connecticut ...Delaware ...Florida ...Georgia ...Idaho ...Illinois ...Indiana ...Iowa ...Kansas ...Kentucky ...Louisiana ...Maine ...Maryland...

  • Page 43
    ... ...Mexico ...Puerto Rico ...Qatar ...Saudi Arabia ...United Arab Emirates ... Franchise 6 2 1 5 1 54 1 2 10 1 128 1,598 CompanyOperated 1 406 Total 6 2 1 5 1 54 1 2 10 1 129 2,004 Total International ...Totals ... The table below shows the location and status of the 1,396 IHOP restaurants as of...

  • Page 44
    ... or other terms of the sublease. We currently lease our principal corporate offices and IHOP restaurant support center in Glendale, California, under a lease expiring in June 2010. The Applebee's restaurant support center is located in the Kansas City metropolitan area under a lease expiring in July...

  • Page 45
    ...'s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is traded on the New York Stock Exchange (''NYSE'') under the symbol ''DIN''. The following table sets forth the high and low closing prices of our common stock on the NYSE...

  • Page 46
    ... Purchases of Equity Securities In January 2003, our Board of Directors authorized a program to repurchase shares of our common stock. The Board approved the repurchase of up to 7.2 million shares of common stock from time to time, depending on market conditions and other factors. The total number...

  • Page 47
    ... Composite Index and the Value-Line Restaurants Index (''Restaurant Index'') over the five-year period ended December 31, 2008. The graph and table assume $100 invested at the close of trading on the last day of trading in 2003 in our common stock and in each of the market indices, with reinvestment...

  • Page 48
    ... Report on Form 10-K. The consolidated statement of operations and the consolidated balance sheet data for the years ended and as of December 31, 2008, 2007, 2006, 2005 and 2004 are derived from our audited consolidated financial statements. 2008 Revenues Franchise revenues ...Company restaurant...

  • Page 49
    ... Applebee's Key Strategies Franchise Company-Operated Restaurants and Sell Owned Real Estate We have made significant progress in implementing our strategy to franchise our companyoperated restaurants and sell our owned real estate resulting in a less capital-intensive development model. During 2008...

  • Page 50
    ...profitability at Applebee's restaurants system-wide were introduced in 2008: • we implemented initiatives in our company-operated restaurants to increase restaurant profitability including improved labor scheduling and labor rate controls, food cost improvement initiatives, and stricter management...

  • Page 51
    ...to capture and report a broad range of sales and product mix data. This information is used by management to, among other things, gauge guest acceptance of menu items and the success of promotions and limited time offers. Maximize Franchise Development Under the Current Business Model, IHOP seeks to...

  • Page 52
    ...purchasing behavior and choose lower-cost dining options or alternatives to dining out. These economic developments may affect our business and operations in a number of ways, including but not limited to: • lower profitability and cash flows from company-operated restaurants; • reduced payments...

  • Page 53
    ... Franchise operations revenue consists primarily of franchise royalty revenues and the portion of the franchise fees allocated to Applebee's intellectual property. Franchise operations expenses include pre-opening training expenses and other franchise-related costs. The company restaurant operations...

  • Page 54
    ...IHOP intellectual property, sales of equipment, as well as interest income from the financing of franchise fees and equipment leases. Financing expenses are primarily the cost of restaurant equipment. Captive Insurance Subsidiary In connection with the acquisition of Applebee's, the Company acquired...

  • Page 55
    ... percentage of their sales. Management also uses this information to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations. Pro forma information on Applebee's restaurant data and restaurant development and franchising activity is...

  • Page 56
    ...IHOP restaurant development and franchising activity: 2008 Year Ended December 31, 2007 2006 2005 2004 IHOP Restaurant Development Activity Beginning of year ...New openings Company-developed ...Franchisee-developed ...International franchisee-developed . Area license ...Total new openings Closings...

  • Page 57
    ... information derived from our consolidated statements of operations expressed as a percentage of total operating revenues, except where otherwise noted. Percentages may not add due to rounding. Year Ended December 31, 2008 2007 2006 Revenues Franchise operations revenues Company restaurant sales...

  • Page 58
    Franchise Operations 2008 2007 (In thousands) Variance Franchise Revenues Applebee's ...IHOP ...Total franchise revenues ...Cost of franchise revenues Applebee's ...IHOP ...Total cost of franchise revenues ...Franchise Segment Profit Applebee's ...IHOP ...Total franchise segment profit ... $148,391...

  • Page 59
    ...'s acquisition. IHOP franchise operations profit as a percentage of revenue increased from 54.1% to 55.1%, or $9.1 million, in 2008 compared to 2007. Company Restaurant Operations 2008 2007 (In thousands) Variance Company Restaurant Sales Applebee's ...IHOP ...Total company restaurant sales ...Cost...

  • Page 60
    ... reduction in franchise fee note balances. These decreases were partially offset by an increase in net profit margin on the sale of franchises and equipment associated with company-developed and rehabilitated and refranchised restaurants. In 2008, the Company had a net profit margin of $0.6 million...

  • Page 61
    ... remaining company-operated restaurants are located; (ii) while Applebee's year-to-date September 30, 2008 same-store sales for company-operated stores had decreased slightly compared with the same period of the prior year, the Company was in the process of implementing several initiatives designed...

  • Page 62
    ... completed its annual test for impairment of goodwill. We utilized a discounted cash flows model of the income approach to assess the fair value of our three reporting units, the IHOP franchised restaurants unit (''IHOP unit''), Applebee's company-operated restaurants unit (''Applebee's company unit...

  • Page 63
    ... operations profit for IHOP restaurants in 2007 increased by $7.4 million or 7.7% due to higher revenues associated with franchise restaurant retail sales; • general and administrative expenses for IHOP increased by $5.8 million or 9.1% primarily due to costs related to the Applebee's acquisition...

  • Page 64
    ... system than in previous periods. Company Restaurant Operations 2007 2006 Increase Revenues Applebee's ...IHOP ...Total Company Restaurant Sales ... $108,784 17,121 $125,905 $ - 13,585 $13,585 $108,784 3,536 $112,320 Total company restaurant sales in 2007 increased by $112.3 million as compared...

  • Page 65
    ... reduction in franchise fee note balances. These decreases were partially offset by an increase in net profit margin on the sale of franchises and equipment associated with company-developed and rehabilitated and refranchised restaurants. In 2007, the Company had a net profit margin of $0.1 million...

  • Page 66
    ... years ended December 31, 2008, 2007 and 2006-Applebee's The following section illustrates certain financial results of Applebee's on a stand-alone basis comparing 2008 as consolidated into the Company with 2007 information comprised of the 11-month data from Applebee's prior to the acquisition date...

  • Page 67
    ...sales of Applebee's restaurants operated by franchisees and Applebee's as reported to the Company. The Company acquired Applebee's International, Inc. on November 29, 2007. Applebee's system-wide sales information includes the full year. Domestic franchise restaurant sales for Applebee's restaurants...

  • Page 68
    ... year ...New openings Company-developed ...Franchisee-developed ...Total new openings ...Closings Company ...Franchise ...End of year ...Summary-end of year Franchise ...Company ...Total ...Applebee's Restaurant Franchising Activity Domestic franchisee-developed ...International franchisee-developed...

  • Page 69
    ... restaurants in 2008 and $1.7 million of revenue on temporary liquor agreements on company-operated restaurants in the Texas market that were franchised in October 2008. The increase in effective restaurants was mainly due to the company stores franchised during 2008 and new store openings in 2008...

  • Page 70
    ... currently plan to open any domestic company-operated restaurants in the foreseeable future. Rental Operations As the result of several transactions related to the franchising of Applebee's company-operated restaurants, Applebee's now has rental income. The amount of Applebee's rental income in 2008...

  • Page 71
    ... food costs related to Applebee's menu promotions which was partially offset by menu price increases of approximately 2.7% Total labor costs increased by 1.3% in 2007 as compared to 2006. The increase in 2007 was due primarily to higher restaurant management salaries and hourly wage rates including...

  • Page 72
    ... to IHOP's 99% franchised system. In order to accomplish this strategy, we plan to franchise substantially all of the company-operated Applebee's restaurants while retaining one company market in Kansas City. This heavily franchised business model is expected to require less capital investment...

  • Page 73
    ... (iii) the product of the current monthly operating lease expense and 96, that sum divided by the sum of: (i) the Company's EBITDA (as defined) for the preceding 12 months and (ii) annualized operating lease expense. Maximum ratios for this test are as follows: Applebee's Notes IHOP Notes Through...

  • Page 74
    ... fees, and sales of proprietary products for IHOP which fluctuate with increases or decreases in franchise retail sales. Franchise retail sales are impacted by the development of IHOP and Applebee's restaurants by our franchisees and by fluctuations in same-store sales. Company-operated operating...

  • Page 75
    ... related to Applebee's, consisting of $11.0 million related to company-operated restaurants and $14.4 million related to corporate activities, primarily Applebee's restaurant support center in Lenexa, Kansas. Capital expenditures are expected to decline in 2009 as we do not currently plan to develop...

  • Page 76
    ...on the common shares may be made at the discretion of the Board of Directors after consideration of the Company's earnings, financial condition, cash requirements, future prospects and other factors. Off-Balance Sheet Arrangements As of December 31, 2008, we had no off-balance sheet arrangements, as...

  • Page 77
    ... Applebee's assets acquired and liabilities assumed are based on reasonable assumptions. However, the fair value estimates for the purchase price allocation may change during the allowable allocation period under SFAS 141, which is up to one year from the acquisition date, if additional information...

  • Page 78
    ..., and changes in working capital along with an appropriate discount rate. Additional assumptions are made as to proceeds to be received from future franchising of company-operated restaurants. Step one of the impairment test compares the fair value of each of our reporting units to its carrying...

  • Page 79
    ... 123(R), the fair value of each employee stock option and restricted stock award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based compensation. The...

  • Page 80
    ... that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. For more information on the financial instruments the Company measures at fair value, see Note 13, Fair Value Measurements. Income Taxes...

  • Page 81
    ... effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS 141(R) in the first quarter of fiscal 2009 and apply the provisions of this statement for any acquisition after the adoption date. We are currently evaluating the...

  • Page 82
    ...141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the potential...

  • Page 83
    ...-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (''EITF 06-11''). EITF 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock units which are expected to vest be recorded as an increase to additional paid-in capital. The impact...

  • Page 84
    ...None of these food product contracts or agreements is a derivative instrument. Extreme changes in commodity prices and/or long-term changes could affect our franchisees, area licensees and company-operated restaurants adversely. We expect that, in most cases, the IHOP and Applebee's systems would be...

  • Page 85
    ... Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Page Reference Consolidated Balance Sheets as of December 31, 2008 and 2007 ...Consolidated Statements of Operations for each of the three years in the period ended December 31, 2008 ...Consolidated Statements...

  • Page 86
    ... Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) December 31, 2008 2007 Assets Current assets Cash and cash equivalents ...Restricted cash ...Short-term investments, at market value ...Receivables, net ...Inventories ...Prepaid income taxes ...Prepaid expenses...

  • Page 87
    DineEquity, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2008 2007 2006 Revenues Franchise revenues ...Company restaurant sales Rental income ...Financing revenues ... ... ... ... ... ... ... ... ... ... ... ... ... ......

  • Page 88
    ... ...Net income ...Interest rate swap, net of tax . . Comprehensive income ...Repurchase of treasury shares . Issuance of shares pursuant to stock plans ...Stock option expense ...Amortization of restricted stock grants ...Tax benefit from stock options exercised ...Dividends-common stock ...Balance...

  • Page 89
    ... ...Principal payments on capital lease obligations Dividends paid ...(Payment of costs) issuance of preferred stock Reissuance (purchase) of treasury stock, net . . Repurchase of restricted stock ...Proceeds from stock options exercised ...Excess tax benefit from stock options exercised Payment of...

  • Page 90
    ...to franchise agreements, 160 were subject to area license agreements and 11 were company-operated restaurants. IHOP restaurants are located in 49 states in the United States, and internationally in Canada and Mexico. In November 2007, the Company completed the acquisition of Applebee's International...

  • Page 91
    ... and Summary of Significant Accounting Policies (Continued) Statement of Operations. These reclassifications had no effect on the net income or financial position previously reported. With respect to (ii), the following amounts were reclassified in the balance sheet: Amount (in thousands) 2007...

  • Page 92
    ...and auction rate securities that are included in restricted assets related to the captive insurance subsidiary in its consolidated balance sheets. The Company has classified all investments as available-for-sale with any unrealized gain or loss included in Other Comprehensive Income. The contractual...

  • Page 93
    ... to the estimated fair value. The fair value is determined by discounting the future cash flows based on our cost of capital. A loss resulting from impairment is recognized by a charge against operations. The Company may decide to close certain company-operated restaurants. Typically such decisions...

  • Page 94
    ..., and changes in working capital, along with an appropriate discount rate. Additional assumptions are made as to proceeds to be received from future franchising of company-operated restaurants. Step one of the impairment test compares the fair value of each of our reporting units to their carrying...

  • Page 95
    ...all initial services required by the franchise agreement. Fees from development agreements are deferred and recorded into income when a restaurant under the development agreement is opened. Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant...

  • Page 96
    ... non-current liabilities on the consolidated balance sheets and amortizes the deferred rent over the term of the lease as a reduction to company restaurant expenses in the consolidated statements of earnings. Preopening Expenses Expenditures related to the opening of new or relocated restaurants are...

  • Page 97
    ... statements of operations includes local marketing advertising costs incurred by company-operated restaurants, contributions to the national advertising fund made by Applebee's company-operated restaurants and certain advertising costs incurred by the Company to benefit future franchise operations...

  • Page 98
    ... are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, management formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge...

  • Page 99
    ...of the Board of Directors. The Company accounts for all stockbased payments to employees, including grants of employee stock options and restricted stock units to be recognized in the financial statements based on their respective grant date fair values. The Company also accounts for the benefits of...

  • Page 100
    ... outside the United States. Franchise operations revenue consists primarily of franchise royalty revenues and the portion of the franchise fees allocated to Applebee's intellectual property. Franchise operations expenses include pre-opening training expenses and other franchise-related costs. 86

  • Page 101
    ... franchise fees allocated to IHOP intellectual property. Franchise operations expenses include advertising expense, the cost of proprietary products and pre-opening training expenses and other franchise-related costs. The company restaurant operations segment consists of company-operated restaurants...

  • Page 102
    ...141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the potential...

  • Page 103
    ...in capital. The impact of adopting EITF 06-11 in 2008 did not have a material impact on the consolidated financial statements. 3. Business Acquisition On November 29, 2007, the Company completed the acquisition of Applebee's, a global dining company that develops, franchises and operates restaurants...

  • Page 104
    ... of the Applebee's purchase price: (In thousands) Cash consideration ...Direct transaction costs ...Total purchase price ... $1,948,093 16,444 $1,964,537 The Company has accounted for the Applebee's acquisition using the purchase method and, accordingly, the results of operations related to this...

  • Page 105
    ... Financial Statements (Continued) 3. Business Acquisition (Continued) A significant portion of the fair value assigned to property and equipment in the preliminary purchase price allocation was related to 510 Applebee's company-operated restaurants. In the preliminary purchase price allocation...

  • Page 106
    ... Statements (Continued) 3. Business Acquisition (Continued) indicative of the results of future operations of the Company or of the results that would have actually been attained had the acquisition taken place at the beginning of 2007. 2007 Pro Forma (In thousands, except per share amounts) Total...

  • Page 107
    ...reacquired franchises and equipment held for sale at December 31, 2007 and none at December 31, 2008. Property and equipment In May 2007, Predecessor Applebee's signed a contract to sell its then-current corporate headquarters for $9.0 million, net of commissions. The Company closed this transaction...

  • Page 108
    ... in California and Nevada. The marketing of these restaurants was part of the Company's plan to ultimately refranchise approximately 100 Applebee's restaurants in 2008. The assets for these restaurants, totaling $47.8 million, were presented as assets held for sale in the consolidated balance sheet...

  • Page 109
    ... In 2007, Applebee's Services, Inc. (ASI), a subsidiary of Applebee's International, Inc. entered into a transaction with the City of Lenexa, Kansas, to lease the land, building and equipment for its new corporate headquarters. In conjunction with the Applebee's acquisition, the Company assumed this...

  • Page 110
    ... remaining company-operated restaurants are located; (ii) while Applebee's year-to-date September 30, 2008 same-store sales for company-operated stores had decreased slightly compared with the same period of the prior year, the Company was in the process of implementing several initiatives designed...

  • Page 111
    ...quarter of 2008 the Company completed its annual test for impairment of goodwill. We utilized a discounted cash flows model of the income approach to assess the fair value of our three reporting units, the IHOP franchised restaurants unit (''IHOP unit''), Applebee's company-operated restaurants unit...

  • Page 112
    ... in the carrying value of goodwill: IHOP Franchising Reporting Unit Applebee's Applebee's Franchising Company-operated (In thousands) Total Balance, December 31, 2006 ...Acquisition of business ...Balance, December 31, 2007 . Purchase price adjustments . Annual impairment test ...Refranchising...

  • Page 113
    ... Liquor Tradename Licenses Subject to Amortization Franchising Recipes and Rights Menus Leaseholds Total Balance, December 31, 2006 ...Acquisition of business ...Amortization expense ...Balance, December 31, 2007 . Additions ...Purchase price adjustments . . Amortization expense ...Impairment...

  • Page 114
    ...and Subsidiaries Notes to the Consolidated Financial Statements (Continued) 9. Captive Insurance Subsidiary (Continued) sheet includes the following balances related to the captive insurance subsidiary as of December 31, 2008: • Franchise premium receivables of approximately $0.7 million included...

  • Page 115
    ... Funding Notes, final maturity date March 2037, at a rate of 2.1% and 5.6% as of December 31, 2008 and 2007, respectively ...Series 2007-3 Fixed Rate Term Notes due December 2037, at a fixed rate of 7.0588% ...Discount on Fixed Rate Notes ...Total debt ...Less current maturities ...Long-term debt...

  • Page 116
    ...Settlement Rates for deposits in dollars for the applicable period. It is expected that amounts will be drawn under the Series 2007-2 VFN from time to time as needed by the IHOP Co-Issuers in connection with the operation of the IHOP franchising business. As of December 31, 2008 and 2007, a total of...

  • Page 117
    ... the closing of the securitization transaction, these three subsidiaries (the ''Real Estate Subsidiaries'') own the real property assets related to the IHOP restaurant franchising business, including the fee and leasehold interests on the real property on which many IHOP restaurants are located and...

  • Page 118
    ...party property lessors. The Company used the remaining proceeds primarily to pay the costs of the transaction and for share repurchases. As of December 31, 2008, a total of $15.0 million was drawn on the Series 2007-2 VFN which was used as part of the payment for the Applebee's acquisition. November...

  • Page 119
    ...$675 million of Series 2007-1 Class A-2-II-A Fixed Rate Term Senior Notes that have the benefit of a financial guaranty insurance policy covering payment of interest when due and payment of principal at the applicable legal final maturity date. These notes have an expected life of approximately five...

  • Page 120
    ..., Inc. and Standard & Poor's Ratings Services, respectively. Timely payment of interest (other than contingent interest) and the outstanding principal of the Series 2007-1 Class A-2-II-A Fixed Rate Term Senior Notes are insured under a financial guaranty insurance policy issued by Assured Guaranty...

  • Page 121
    ...the purchase price for the Applebee's acquisition. The IHOP Co-Issuer applied a portion of the net proceeds from the sale of the IHOP notes to deposit $4.3 million into the Series 2007-3 interest reserve account. The remaining $238.2 million was used to pay a portion of the purchase price related to...

  • Page 122
    ... are reported as Other Assets in the consolidated balance sheet. Interest Rate Swap On July 16, 2007, the Company entered into an interest rate swap (the ''Swap''), which was intended to hedge the interest payments on the securitized notes that were issued in November 2007 to finance the Applebee...

  • Page 123
    ... Statements (Continued) 11. Financing Obligations On May 19, 2008, the Company entered into a Purchase and Sale Agreement relating to the sale and leaseback of 181 parcels of real property (the ''Sale-Leaseback Transaction''), each of which is improved with a restaurant operating as an Applebee...

  • Page 124
    ... Subsidiaries Notes to the Consolidated Financial Statements (Continued) 11. Financing Obligations (Continued) As of December 31, 2008, future minimum lease payments under financing obligations during the initial terms of the leases related to the sale-leaseback transactions are as follows: Fiscal...

  • Page 125
    ... Total minimum lease payments ...Less interest ...Capital lease obligations ...Less current portion(1) ...Long-term capital lease obligations ... $1,660,343 (1) Included in other accrued expenses on the consolidated balance sheet. The asset cost and carrying amount on company-owned property leased...

  • Page 126
    ... market participants at the measurement date (an exit price). The Company has one financial instrument we must measure under FAS No. 157, investments held by Applebee's captive insurance subsidiary. None of the current non-financial assets or non-financial liabilities must be measured at fair value...

  • Page 127
    ...ensure quality throughout the system. Most of these agreements are fixed price purchase commitments. At December 31, 2008, the outstanding purchase commitments were $205.0 million, the majority of which related to Applebee's. The Company has developed processes to facilitate the liquidation of these...

  • Page 128
    ... costs over the expected service period. As of December 31, 2008 and 2007, the Company has accrued $0.8 million and $10.9 million, respectively, in its consolidated balance sheet. 16. Preferred Stock and Stockholders' Equity Preferred Stock As part of the financing for the Applebee's acquisition...

  • Page 129
    ... to affiliates of Chilton Investment Company, LLC (collectively, ''Chilton'') pursuant to a purchase agreement dated as of July 15, 2007. The shares of Series B Convertible Preferred Stock rank (i) senior to the common stock, and any series of preferred stock specifically designated as junior to the...

  • Page 130
    ...the Consolidated Financial Statements (Continued) 16. Preferred Stock and Stockholders' Equity (Continued) anniversary of the issue date, at a redemption price equal to the accreted value as of the applicable redemption date, subject to the terms set forth in the Certificate of Designations for the...

  • Page 131
    ... up to 400,000 shares of common stock pursuant to options to non-employee members of the Company's Board of Directors. Options are to be granted at an option price equal to 100% of the fair market value of the stock on the date of grant. Options granted pursuant to the Directors Plan vest and become...

  • Page 132
    ... be granted at an option price not less than 100% of the fair market value of the stock on the date of grant. The 2005 Plan provides for an initial grant of Restricted Stock (''Initial Grant''). At the end of a specified performance period, the number of shares in the Initial Grant will be increased...

  • Page 133
    ...$11.65-$62.00 ... The following table summarizes the Company's nonvested options as of December 31, 2008, 2007 and 2006 and changes during the years ended December 31, 2008 and 2007: Number of Shares Weighted Average Grant-Date Fair Value Per Share Nonvested Options Nonvested at December 31, 2006...

  • Page 134
    ... stock options and restricted stock to officers, directors and employees of the Company under the 2001 Plan and the 2005 Plan. The stock options generally vest over a three-year period and have a maturity of ten years from the issuance date. Option exercise prices equal the closing price on the New...

  • Page 135
    ... at December 31, 2008 ...19. Employee Benefit Plans 401(K) Savings and Investment Plan In 2001, the Company adopted a defined contribution plan authorized under Section 401(K) of the Internal Revenue Code. The plan covers Company employees who meet the minimum credited service requirements of the...

  • Page 136
    DineEquity, Inc. and Subsidiaries Notes to the Consolidated Financial Statements (Continued) 19. Employee Benefit Plans (Continued) Nonqualified Deferred Compensation Plan In 2002, Predecessor Applebee's entered into a rabbi trust agreement to protect the assets of the nonqualified deferred ...

  • Page 137
    ..., Inc. and Subsidiaries Notes to the Consolidated Financial Statements (Continued) 20. Income Taxes (Continued) The (benefit) provision for income taxes differs from the expected federal income tax rates as follows: 2008 2007 2006 Statutory federal income tax rate ...State and other taxes, net of...

  • Page 138
    ...and amortization of reacquired franchises and equipment ...Differences in acquisition financing costs ...Employee compensation ...Other comprehensive income primarily interest rate swap loss ...Differences in capitalization, amortization and depreciation(1) ...Deferred gain on sale of assets ...Book...

  • Page 139
    ... and related income tax benefits. The increase of $4.8 million is primarily related to adjustments to Applebee's reserves as a result of ongoing state audits. The entire $18.6 million will be included in the effective tax rate if recognized. The Company estimates the unrecognized tax benefits may...

  • Page 140
    ... (10.09) $ (0.13) $ For the years ended December 31, 2008 and 2007, diluted loss per common share is computed using the weighted average number of common shares outstanding during the period, as the 756,000 and 627,000 shares, respectively, from common stock equivalents would have been antidilutive...

  • Page 141
    ...has been restated to conform to the current year presentation. Information on segments and a reconciliation to income before income taxes are as follows: 2008 Applebee's Revenues Franchise operations Company restaurants Rental operations . . Financing operations Total ...$ 148,391 $ . 1,088,101 . 58...

  • Page 142
    ... per share were significantly impacted by the loss on derivative financial instruments and increased interest expense resulted from the securitization notes. 24. Subsequent Event (Unaudited) On February 24, 2009 the Company completed the franchising of five restaurants in the New Mexico market and...

  • Page 143
    Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of DineEquity, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of DineEquity, Inc. and Subsidiaries (the ''Company'') as of December 31, 2008 and 2007, and the related ...

  • Page 144
    ... reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing...

  • Page 145
    ... the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of DineEquity, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years...

  • Page 146
    ... in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item...

  • Page 147
    ... end of our fiscal year ended December 31, 2008. (a) Identification of Directors. The information under the section entitled ''Information Concerning Nominees and Members of the Board of Directors.'' (b) Identification of Executive Officers and Certain Employees. entitled ''Executive Officers of the...

  • Page 148
    ... and Financial Statement Schedules. Consolidated Financial Statements The following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K: Consolidated Balance Sheets as of December 31, 2008 and 2007. Consolidated Statements of Operations for each of the three years in...

  • Page 149
    ... March 8, 2004, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.11 to Registrant's 2003 Form 10-K is incorporated herein by reference). Second Amendment to Senior Note Purchase Agreement, dated as of February 24...

  • Page 150
    ... by and between International House of Pancakes, Inc. and Wells Fargo Bank, National Association (Exhibit 10.1 to Registrant's Form 8-K for September 29, 2006, is incorporated herein by reference). Base Indenture, dated as of March 16, 2007, by and among IHOP Franchising, LLC, IHOP IP, LLC and Wells...

  • Page 151
    ... A. Stewart dated November 1, 2008. Area Franchise Agreement, effective as of May 5, 1988, by and between IHOP, Inc. and FMS Management Systems, Inc. (Exhibit 10.8 to Registrant's 2002 Form 10-K is incorporated herein by reference). IHOP Corp. 1994 Stock Option Plan for Non-Employee Directors as...

  • Page 152
    ... and Change in Control Policy, dated October 13, 2008. Servicing Agreement, dated as of March 16, 2007, by and among IHOP Franchising, LLC, IHOP IP, LLC, IHOP Property Leasing, LLC, IHOP Properties, LLC, IHOP Real Estate, LLC, International House of Pancakes, Inc., IHOP Corp. and Wells Fargo...

  • Page 153
    ...2007-3 Fixed Rate Term Notes Purchase Agreement, dated as of November 29, 2007, by and among IHOP Franchising, LLC, IHOP IP, LLC, International House of Pancakes, Inc., IHOP Corp. and Lehman Brothers Inc., as Initial Purchaser (Exhibit 10.28 to Registrant's 2008 Form 10-K for the year ended December...

  • Page 154
    ... 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * †Filed herewith. A contract, compensatory plan or arrangement in which directors or executive officers are eligible to participate. 140

  • Page 155
    ... this report to be signed on its...Name Title /s/ JULIA A. STEWART Julia A. Stewart /s/ GREGGORY KALVIN Greggory Kalvin /s/ LARRY ALAN KAY Larry Alan Kay Chairman and Chief Executive Officer (Principal Executive Officer) Vice President, Corporate Controller (Principal Financial Officer) Director...

  • Page 156
    ...International House of Pancakes, LLC ...III Industries of Canada, LTD ...IHOP of Canada ULC ...Blue Roof Advertising, Inc...IHOP Holdings, LLC ...IHOP Franchising, LLC ...IHOP Property Leasing, LLC ...IHOP Property Leasing II, LLC ...IHOP Properties, LLC ...IHOP Realty, LLC ...IHOP Real Estate, LLC...

  • Page 157
    ...Gourmetwest Nevada, Limited Liability Company ...Innovative Restaurant Concepts, Inc...IRC Kansas, Inc...Neighborhood Insurance, Inc...RB International, Inc...Rio Bravo Restaurant, Inc...Rio Bravo Services, Inc...Shanghai Applebee's Restaurant Management Co. LTD...Summit Restaurants, Inc...The Heidi...

  • Page 158
    ... consolidated financial statements of DineEquity, Inc. and Subsidiaries and the effectiveness of internal control over financial reporting of DineEquity, Inc. and Subsidiaries, included in this Annual Report (Form 10-K) for the year ended December 31, 2008. ERNST & YOUNG LLP Los Angeles, California...

  • Page 159
    ...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 control over financial reporting. Date: February 26, 2009 /s/ JULIA A. STEWART Julia A. Stewart Chairman and Chief Executive Officer...

  • Page 160
    ... and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (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...

  • Page 161
    ... The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 26, 2009 /s/ JULIA A. STEWART Julia A. Stewart Chairman and Chief Executive Officer This certification accompanies the Report pursuant...

  • Page 162
    ... (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 26, 2009 /s/ GREGGORY KALVIN Greggory Kalvin Vice President, Corporate Controller (Principal Financial Officer) This certification...