IHOP 2008 Annual Report Download - page 127

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DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Fair Value of Financial Instruments (Continued)
The fair values of non-current financial liabilities are shown in the following table.
December 31, 2008 December 31, 2007
Carrying Carrying
Amount Fair Value Amount Fair Value
(In thousands)
Long-term debt, less current maturities . . . $1,853,367 $1,177,200 $2,263,887 $2,263,887
Series A Preferred Stock ............. $ 187,050 $ 131,200 $ 187,050 $ 187,050
At December 31, 2008, the fair value of the non-current financial liabilities was determined based
on Level 3 inputs using a risk-adjusted discounted cash flow model under the income approach. At
December 31, 2007, the fair value approximated the carrying value due to the fact the debt and
Preferred Stock had been priced and issued one month earlier.
15. Commitments and Contingencies
Purchase Commitments
In some instances, the Company enters into commitments to purchase food and other items on
behalf of the IHOP and Applebee’s systems, to achieve volume discounts and to 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
commitments to minimize financial exposure.
Lease Guarantees and Contingencies
In connection with the sale of Applebee’s restaurants to franchisees and other parties, the
Company has, in certain cases, remained contingently liable for the remaining lease payments. As of
December 31, 2008 and 2007, the Company has outstanding lease guarantees of approximately
$89.2 million and $13.4 million, respectively. In addition, the Company or its subsidiaries are
contingently liable for various leases that the Company has assigned in connection with the sale of
restaurants to franchisees and other parties in the potential amount of $71.7 million and $10.7 million
as of December 31, 2008 and 2007, respectively. These leases expire at various times with the final
lease agreement expiring in 2048. FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (‘‘FIN 45’’)
specifically exempts lease guarantees from recognition and therefore, the Company did not record a
liability related to these contingent lease liabilities as of December 31, 2008 or 2007.
In 2004, the Company arranged for a third-party financing company to provide up to
$250.0 million to qualified franchisees for loans to fund development of new restaurants, subject to its
approval. The Company provided a limited guarantee of 10% of certain loans advanced under this
program. The Company will be released from its guarantee if certain operating results are met after the
restaurant has been open for at least two years. As of December 31, 2008, there were loans outstanding
to five franchisees for approximately $33.6 million, net of any guarantees in which the Company was
released, under this program. The fair value of the Company’s guarantees under this financing program
were approximately $70,000 and $100,000 as of December 31, 2008 and 2007, respectively, and are
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