IHOP 2008 Annual Report Download - page 63

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(Gain) Loss on Extinguishment of Debt
In August 2008, the Company retired certain Series 2007-1 Class A-2-II-A Fixed Rate Term Senior
Notes due December 2037 with a face amount of $23.5 million for a cash payment of $20.0 million.
The transaction resulted in a gain of $2.4 million after the write-off of the discount and deferred
financing costs related to the debt retired.
In October 2008, the Company retired certain Series 2007-1 Class A-2-II-X Fixed Rate Term
Senior Notes due December 2037 with a face amount of $35.2 million for a cash payment of
$20.0 million. The Company recognized a gain on extinguishment of debt of approximately
$12.8 million after the write-off of the discount and deferred financing costs related to the debt retired.
The loss on extinguishment of debt of $2.2 million in 2007 resulted from early debt retirement with
funds generated by the securitization transactions for IHOP. These costs include the write-off of
deferred financing costs in the amount of $1.0 million, and $1.2 million for prepayment penalties as a
result of paying off IHOP’s pre-existing debt.
Loss on Derivative Financial Instrument
As further described under ‘‘Liquidity and Capital Resources,’’ we entered into a swap
arrangement in July 2007. We terminated the swap arrangement upon the consummation of the
Applebee’s acquisition on November 29, 2007. Settlement of the swap resulted in a loss related to the
decline in fair value of the undesignated portion of the hedge of $62.1 million for 2007. No such
transaction occurred in 2008.
Provision for Income Taxes
We recognized a tax benefit of $33.7 million in 2008 as compared to a tax benefit of $2.2 million
in 2007. The change was primarily due to the decrease in our pretax book income, partially offset by
impairment of non-deductible goodwill.
Comparison of the fiscal years ended December 31, 2007 and 2006
Overview
Our 2007 financial results were significantly impacted by one month of Applebee’s operations since
the date of acquisition, a loss on derivative financial instrument and increased interest expense on
$2.3 billion worth of funded debt. In comparing the Company’s financial results for 2007 to those in
2006, we note that:
• net loss of $0.5 million in 2007 was comprised of IHOP net income of $0.8 million offset by
Applebee’s net loss of $1.3 million;
• IHOP net income decreased in 2007 to $0.8 million from $44.6 million in 2006 primarily due to
the loss on derivative financial instrument of $62.1 million ($37.8 million net of tax) in 2007;
• franchise 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; and
• diluted weighted average shares outstanding decreased by 5.8% in 2007.
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