IHOP 2008 Annual Report Download - page 52

Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons of
Reported or Future Results
Global Economic Contraction
In 2008, economic conditions in both the U.S. and worldwide have experienced a downturn due to
the compounded effects of the subprime lending crisis, the credit market liquidity crisis, and the
collateral effects of each on the finance and banking industries. In addition, volatile energy costs,
concerns about inflation and deflation, slower economic activity, softness in both the commercial and
residential real estate markets, decreased consumer confidence, reduced corporate profits and capital
spending and rising unemployment have combined to create generally adverse business conditions for
all industries and sectors. These conditions make it extremely difficult for us to accurately forecast and
plan future business activities as the reduction in disposable income for discretionary spending could
cause our customers to change historic 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 from franchisees due to both a lower sales base on which royalties and other
payments are calculated and possible impairment to the ability of franchisees to make payments
when due as the result of the economic effects cited above on their businesses;
• limited availability of financing for franchisees to fulfill their new restaurant development
commitments;
• limited credit availability for potential purchasers of Applebee’s company-operated restaurants;
• lower proceeds from refranchising transactions due to both lower sales and profitability or
inability to consummate transactions at all; and
• lower estimated fair values for goodwill, intangible assets and long-lived assets resulting in future
non-cash impairment charges.
We cannot predict the effect or duration of this economic slowdown or the timing or strength of a
subsequent recovery in the economy in general or the restaurant industry in particular. If our business
significantly deteriorates due to these macroeconomic effects, our financial condition and results of
operations will likely be materially and adversely affected.
Securitized Debt and Related Interest Expense
We incurred a substantial amount of indebtedness to finance the Applebee’s acquisition. As a
result, our interest expense has increased significantly from that reported in prior years and is expected
to remain as one of the largest components of costs and expenses in the future until such time that
debt balances are repaid or otherwise retired.
Significant Gains and Charges
There were several significant gains and charges affecting the comparisons with previously reported
results. In 2008, we recognized impairment and closure charges of $240.6 million and a gain on
extinguishment of debt of $15.2 million. In 2007, we recognized a loss on a derivative financial
instrument of $62.1 million, impairment and closure charges of $4.4 million and a loss on
extinguishment of debt of $2.2 million. Each transaction is discussed in further detail under paragraphs
captioned with those descriptions elsewhere in Item 7. Given the uncertainty as to the length of the
current economic contraction and the timing and degree of recovery, it is reasonably possible that
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