IHOP 2008 Annual Report Download - page 72

As described in Note 10 of Notes to the Consolidated Financial Statements, the Fixed Rate Notes
issued as part of the Applebee’s securitization transaction have a legal maturity of December 2037;
however, the Indenture under which the Notes were issued includes provisions which may accelerate
certain of the payment dates which, if not met, would require the Company to use operating funds to
begin to pay down the outstanding debt. The accelerated payment dates for the Applebee’s
securitization are as follows:
Class A-2-II-A Fixed Rate Term Senior Notes ...................... December 2012
Class A-2-II-X Fixed Rate Term Senior Notes ...................... December 2012
Class M-1 Fixed Rate Term Subordinated Notes ..................... December 2012
As of December 31, 2008, there was no acceleration of payment dates.
Another impact of the Applebee’s acquisition on our liquidity is the planned monetization of
certain Applebee’s assets. We are continuing to pursue a strategy which contemplates transitioning from
our current 80% franchised Applebee’s system to an approximately 98% franchised Applebee’s system,
similar to IHOP’s 99% franchised system. In order to accomplish this strategy, we plan to franchise
substantially all of the company-operated Applebee’s restaurants while retaining one company market
in Kansas City. This heavily franchised business model is expected to require less capital investment,
improve margins and reduce the volatility of cash flow performance over time, while also providing
cash proceeds from the franchising of the restaurants. If our strategy to transition to a 98% franchised
system is delayed or sales proceeds from franchising restaurants are less than anticipated, we believe
that the company-operated Applebee’s restaurants will continue to generate sufficient cash from
operations to meet our obligations, such that we will not be compelled to enter into refranchising
transactions at prices lower than we deem appropriate. Under the terms of the securitized debt
agreements, all of the proceeds of asset dispositions must be used to retire long-term debt.
During 2008, we completed the following asset dispositions: a sale-leaseback transaction for the
real property on which 181 of the 199 fee-owned, company-operated Applebee’s restaurants are
situated, the sale of one additional fee-owned real estate parcel and a sale-leaseback transaction with
respect to Applebee’s corporate headquarters in Lenexa, Kansas. We received approximately
$378 million in proceeds from these transactions. During 2008, we also completed the franchising of
103 company-operated Applebee’s restaurants in the California, Nevada, Delaware and Texas markets.
We received after-tax proceeds of approximately $55.1 million from these transactions.
The proceeds from these transactions were used primarily to repay $350 million of Series 2007-1
Class A-2-I-X Fixed Rate Term Senior Notes, to repay portions of other long-term debt, to pay
transaction expenses (payment of which had been deferred) related to the acquisition of Applebee’s
and for general corporate purposes.
On February 24, 2009 we completed the franchising of five restaurants in the New Mexico market
and expect to recognize a gain of approximately $5.5 million on this transaction.
Applebee’s has a $100 million revolving credit facility, the Series 2007-1 Class A-1 Variable
Funding Senior Notes, committed to by Lehman Brothers Holdings Inc. (‘‘LBHI’’) (the ‘‘Lehman
Facility’’). LBHI filed for Chapter 11 bankruptcy protection on September 15, 2008. This bankruptcy
filing created uncertainty as to our ability to continue to access funds under the Lehman Facility. As a
result, in September 2008, the Company borrowed an additional $35 million under the Lehman Facility,
bringing our total borrowings to the maximum of $100 million, which amount was outstanding at
December 31, 2008. The $35 million has been used to purchase money market funds that are invested
in U.S. government securities. The money market funds are considered cash equivalents.
IHOP has a $25 million revolving credit facility, the Series 2007-2 Variable Funding Note,
committed to by Calyon Americas (the ‘‘Calyon Facility’’). At December 31, 2008, borrowings under the
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