IHOP 2008 Annual Report Download - page 32

certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. If our business does not generate sufficient cash flow from
operations, if the refranchising of company-operated restaurants generates less proceeds than
anticipated or does not take place at all, if currently anticipated cost savings and operating
improvements are not realized on schedule, in the amounts anticipated or at all, or if future borrowings
are not available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other
liquidity needs, our financial condition and results of operations may be adversely affected. If we
cannot generate sufficient cash flow from operations and from the refranchising of company-operated
restaurants to make scheduled interest and principal payments on our debt obligations in the future, we
may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, defer
payment of Series A Preferred Stock dividends and by so doing incur a higher dividend rate, delay
capital expenditures or seek additional equity. If we are unable to refinance any of our indebtedness on
commercially reasonable terms or at all, or to effect any other action relating to our indebtedness on
satisfactory terms or at all, our business may be harmed.
Declines in our financial performance could result in additional impairment charges in future periods.
U.S. generally accepted accounting principles require annual (or more frequently if events or changes
in circumstances warrant) impairment tests of goodwill, certain intangible assets and other long-lived
assets. Generally speaking, if the carrying value of the asset is in excess of the estimated fair value of
the asset, the carrying value will be adjusted to fair value through an impairment charge. Fair value
estimates are primarily discounted cash flows based on five-year forecasts of financial results that
incorporate assumptions as to same-store sales trends, future development plans and brand-enhancing
initiatives, among other things. Significant underachievement of forecasted results could reduce the
estimated fair value of these assets below the carrying value, requiring non-cash impairment charges to
reduce the carrying value of the asset. As of December 31, 2008 our total stockholders’ equity is
$42.8 million. A significant writedown of goodwill, intangible assets or long-lived assets in the future
could result in a deficit balance in stockholders’ equity. While such a deficit balance would not create
an incident of default in any of our contractual agreements, the negative perception of such a deficit
could have an adverse affect on our stock price and could impair our ability to obtain new financing, or
refinance existing indebtedness on commercially reasonable terms or at all.
The restaurant industry is highly competitive, and that competition could lower our revenues, margins
and market share. The performance of individual restaurants may be adversely affected by factors such
as traffic patterns, demographics and the type, number and location of competing restaurants. The
restaurant industry is highly competitive with respect to price, service, location, personnel and the type
and quality of food. Each Applebee’s and IHOP restaurant competes directly and indirectly with a
large number of national and regional restaurant chains, as well as with locally-owned quick service
restaurants, fast-casual restaurants, sandwich shops and similar types of businesses. The trend toward
convergence in grocery, deli, and restaurant services may increase the number and variety of
Applebee’s and IHOP restaurants’ competitors. In addition to the prevailing baseline level of
competition, major market players in non-competing industries may choose to enter the food services
market. Such increased competition could have a material adverse effect on the financial condition and
results of operations of Applebee’s or IHOP restaurants in affected markets. Applebee’s and IHOP
restaurants also compete with other restaurant chains for qualified management and staff, and we
compete with other restaurant chains for available 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, the future success of new products, initiatives and
overall strategies is highly difficult to predict and will be influenced by competitive product offerings,
pricing and promotions offered by competitors. Our ability to differentiate the Applebee’s and IHOP
brands from their competitors, which is in part limited by the advertising monies available to us and by
consumer perception, cannot be assured. These factors could reduce the gross sales or profitability at
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