IHOP 2008 Annual Report Download - page 60

rent resulting from terminated subleases on restaurants reacquired in 2008. Deferred rent on operating
subleases is the difference between straight-line rent and the actual amount received. Straight-line rent
is the amount of rent over the full lease term spread over equal monthly amounts.
Prior to 2008, rental operations were exclusively related to IHOP. 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 was $58,000 offset by $28,000 of
expense. The activity relates only to the franchising of the restaurants; Applebee’s is not entering into
rental operations similar to those of IHOP.
Financing Operations
2008 2007 Variance
(In thousands)
Financing income .................................. $25,722 $20,475 $ 5,247
Financing expenses ................................. 7,314 1,215 (6,099)
Financing segment profit ............................. $18,408 $19,260 $ (852)
Financing operations profit, which is financing revenues less financing expenses, is exclusively
attributable to the IHOP business unit. In 2008, financing operations profit decreased by $0.9 million
compared to 2007. This decrease was primarily attributable to the decrease in franchise and equipment
note interest due to the expected 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 associated with 14 refranchised restaurants, compared to a margin of
$0.1 million associated with four refranchised restaurants in 2007.
General and Administrative Expenses
General and administrative expenses increased by $100.6 million or 123.3% in 2008 compared to
the prior year, primarily due to the inclusion of twelve months of Applebee’s expenses in 2008 as
opposed to one month in 2007. The full year of Applebee’s expenses represented $89.6 million of the
increase. The remainder of the increase was primarily due to litigation settlements of $4.7 million, and
increased professional and consulting services of $5.3 million, primarily related to the ongoing
integration of Applebee’s. The Company expects that general and administrative expenses will decrease
in 2009 due to (i) the planned refranchising of approximately 200 Applebee’s company-operated
restaurants and (ii) cost-cutting measures implemented in February 2009.
Interest Expense
Interest expense increased by $174.5 million in 2008 compared to 2007, primarily attributable to a
full year of interest expense associated with the debt incurred for the acquisition as compared to one
month in 2007. Interest expense in 2008 comprised primarily: interest on acquisition-related debt of
$147.6 million; interest on Applebee’s financing obligations related to sales-leaseback transactions of
$14.4 million; non-cash amortization of deferred financing costs of $26.1 million; and non-cash
amortization of the loss on the effective portion of an interest rate swap of $12.8 million.
Impairment and Closure Charges
Impairment and closure charges increased significantly to $240.6 million in 2008 compared to
$4.4 million in 2007, with closure charges representing $0.3 million and $1.1 million for the years ended
December 31, 2008 and 2007, respectively.
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