IHOP 2009 Annual Report Download

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2009 annual report
The DineEquity difference.
DineEquity, Inc.

Table of contents

  • Page 1
    2009 annual report The DineEquity difference.

  • Page 2

  • Page 3
    ... of the largest full-service restaurant company in the world with the agility to connect with guests on a local level. We are working harder than ever to energize the brands, optimize operations, expand our market share and create value for our shareholders. Look closely at our businesses, and you...

  • Page 4
    In challenging times, the best brands 02

  • Page 5
    ... 2009, IHOP was the market share leader in family dining for the third consecutive year. IHOP also reported the highest annual system-wide sales in the category, solid same-store sales results and new franchise restaurant development among the strongest Julia A. Stewart Chairman and Chief Executive...

  • Page 6
    ... franchise operations revenue increases of 5% for 2009 compared to 2008. This was primarily due to increases in the number of effective franchise restaurants as the result of IHOP's robust franchise restaurant development efforts, as well as the successful franchising of 110 Applebee's company...

  • Page 7
    ... an even more highly franchised restaurant system over time. Since our acquisition of Applebee's in late 2007, we have successfully sold 110 company-operated Applebee's restaurants. We have been selective in the process, ensuring the prospective buyers are financially qualified and that they share...

  • Page 8
    The confidence to be irresistible.

  • Page 9
    Now that's delicious.

  • Page 10
    ... a grocery store near you. We create synergy to benefit our franchisees. In February 2009, one of our biggest opportunities to create synergies between Applebee's and IHOP went from an idea to a reality with the formation of a purchasing co-operative, Centralized Supply Chain Services (CSCS). When...

  • Page 11
    ...guests at IHOP the benefits of delicious meal choices with our IHOP For Me Sm menu, which includes a number of breakfast, lunch and dinner options that meet our guests' nutritional and dietary needs. We expect to evolve IHOP's nutritional menu over time as we look to connect with guest needs in even...

  • Page 12
    We deliver differentiation 010

  • Page 13
    one guest experience at a time. 011

  • Page 14
    .... We are optimizing our operations to both enhance the guest experience and run more profitable franchise and company restaurants. We are bringing the neighborhood new favorites in food and beverages, and helping connect friends and families in ways that will make our guests say, "There's no place...

  • Page 15
    ... a new design aimed at improving guest perceptions of food and value, while driving the trial of new breakfast, lunch and dinner items. We share success with the neighborhood. When an Applebee's franchisee opened our 2,000th restaurant in Harlem on New York's famed 125th Street in December 2009, we...

  • Page 16
    Dynamic and deter 014

  • Page 17
    mined. It's why we win. 015

  • Page 18
    We balance stability with agility. The resources and financial discipline of the world's leading restaurant company. The personal connections of a local business. At DineEquity, our unique business model gives team members, franchisees and guests the best of both worlds. It gives us the stability to...

  • Page 19
    10-k form

  • Page 20
    ..., California (Address of principal executive offices) 91203-2306 (Zip Code) Registrant's telephone number, including area code: (818) 240-6055 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 Par Value New...

  • Page 21
    ... Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2009 Table of Contents Page PART I. Item Item Item Item Item Item PART II. Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...Item 6-Selected Financial Data ...Item...

  • Page 22
    ... House of Pancakes↧ (''IHOP'') restaurant opened in 1958 in Toluca Lake, California. Since that time, the Company or its predecessors have engaged in the development, operation and franchising of IHOP restaurants. In November 2007, we completed the acquisition of Applebee's International...

  • Page 23
    ...of restaurant equipment. Financial information for our four operating segments for the last three fiscal years is set forth in Note 22, Segment Reporting, of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. Revenue derived from all foreign countries, in...

  • Page 24
    .... In order to accomplish this strategy we plan to franchise substantially all of the company-operated Applebee's restaurants while retaining restaurants in one company market in Kansas City. This heavily franchised business model is expected to require less capital investment, improve margins, and...

  • Page 25
    ... terms. The Franchise Business Council is also responsible for the appointment of members to advisory committees related to marketing, restaurant operations, information technology and product development. Company-Operated Restaurants Historically, company-operated Applebee's restaurants have been...

  • Page 26
    ... development agreements with the new franchisees setting forth requirements for additional development in each market. In 2010, we expect franchisees to open a total of approximately 30 new Applebee's franchise restaurants. We currently do not plan to open any domestic company-operated restaurants...

  • Page 27
    ... agreement, Applebee's and participating franchisees pay Weight Watchers a royalty equal to 2.5% of the proceeds from the sale of Weight Watchers endorsed items on the Applebee's menu. The initial term of the agreement was for one year and has been extended through at least December 2010. Marketing...

  • Page 28
    ... requirements for restaurants opened outside of the United States. In February 2009, we announced the formation of Centralized Supply Chain Services, LLC (''CSCS'' or the ''Co-op''), an independent purchasing cooperative, to manage procurement activities for domestic Applebee's and IHOP restaurants...

  • Page 29
    ... IHOP restaurants subject to franchise and area license agreements as of December 31, 2009, a total of 347 operate under the Current Business Model. The revenues received by the Company from a typical franchise development arrangement under the Current Business Model include (a) (i) a location fee...

  • Page 30
    ... 31, 2009, a total of 1,096 operate under the Previous Business Model. The revenues received from a restaurant franchised under the Previous Business Model include: (a) the franchise fee, a portion of which (typically 20%) was paid upon execution of the franchise agreement; (b) interest income from...

  • Page 31
    ... restaurant. We currently do not intend to build additional traditional IHOP restaurants in the Cincinnati market. New IHOP restaurants are only developed after a stringent site selection process. All restaurant development is approved by the Franchise Review Committee comprised of senior management...

  • Page 32
    ...moderately priced products designed to appeal to a broad base of customers. These include a wide variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak, sandwiches, salads and lunch and dinner specialties. Most IHOP restaurants offer special items for children and seniors at...

  • Page 33
    ...The Applebee's and IHOP restaurant chains are among the numerous restaurant chains and independent restaurants competing in the $550 billion-plus consumer food service market in the United States. The restaurant business is generally categorized into segments by price point ranges, the types of food...

  • Page 34
    ... terms of number of restaurants and market share. IHOP competes in the family dining segment against national and multi-state operators such as Denny's, Cracker Barrel Old Country Store, Bob Evans Restaurants and Perkins Restaurant and Bakery. In addition, there are many independent restaurants and...

  • Page 35
    ...of Applebee's restaurants), health, sanitation, safety, fire, building and other agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining, or failure to obtain, the required licenses or approvals could delay or prevent the development of a new restaurant in...

  • Page 36
    ...value per transaction will negatively impact the financial performance of Applebee's or IHOP company-operated restaurants, as reduced gross sales result in downward pressure on margins and profitability. These factors could also reduce gross sales at franchise restaurants, resulting in lower royalty...

  • Page 37
    ...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 similar styles of businesses. The trend toward convergence...

  • Page 38
    ... market. Therefore, there can be no assurance that the business strategy we apply to the Applebee's business will be suitable or will achieve similar results to the application of such business strategy to the IHOP system. In particular, the franchising of Applebee's company-operated restaurants...

  • Page 39
    ... sales volumes; • the inability to increase menu pricing to offset increased operating expenses; • failure to effectively manage further penetration into mature markets; • negative trends in the availability of credit and in expenses such as interest rates and the cost of construction...

  • Page 40
    ... customers) at a single Applebee's or IHOP location can have a substantial negative impact on the operations of all restaurants within the Applebee's or IHOP system. Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any type...

  • Page 41
    ... and in the foreign countries in which we operate from time to time, governing such matters as minimum-wage requirements, overtime and other working conditions and citizenship requirements. A significant number of the food-service employees in our restaurants are paid at rates related to the United...

  • Page 42
    ... the related franchise agreements and development Agreements. Any franchisee that is experiencing financial difficulties may also be unable to participate in implementing changes to our business strategy. Any franchisee that owns and operates a significant number of Applebee's restaurants and fails...

  • Page 43
    ... them subject to business, credit, financial and other risks which may be unrelated to the operations of Applebee's or IHOP restaurants. These unrelated risks could materially and adversely affect a franchisee and its ability to make its franchise payments in full or on a timely basis. Any such...

  • Page 44
    ... lead to a decline in restaurant revenues and sales of other branded products and services (if any). If the intellectual property became subject to third-party infringement, misappropriation or other claims, and such claims were decided against us, then we could be required to develop or adopt non...

  • Page 45
    ... could impair our ability to efficiently operate our business. We rely heavily on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes...

  • Page 46
    ... shows the location and ownership of the combined 3,464 Applebee's and IHOP restaurants as of December 31, 2009: Applebee's CompanyFranchise Operated United States Alabama ...Alaska ...Arizona ...Arkansas ...California ...Colorado ...Connecticut ...Delaware ...District of Columbia Florida ...Georgia...

  • Page 47
    ...12 12 164 Total - - 14 7 1 - - - 1 23 1,456 Total International ...Totals ... As of December 31, 2009, we operated 399 Applebee's restaurants and 13 IHOP restaurants for a total of 412 company-operated restaurants. Of these restaurants, we leased the building for 55 sites, owned the building and...

  • Page 48
    ... class of servers and bartenders who have worked in company-operated Applebee's restaurants since June 19, 2004. Unlike a class action, a collective action requires potential class members to ''opt in'' rather than ''opt out.'' On February 12, 2008, 5,540 opt-in forms were filed with the court. In...

  • Page 49
    ... II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is traded on the New York Stock Exchange (''NYSE'') under the symbol ''DIN''. The following table sets forth the high and low sales prices of...

  • Page 50
    ...the program. During 2009, a total of 50,927 shares of restricted stock were surrendered to the Company at an average price of $11.87 per share to satisfy tax withholding obligations in connection with the vesting of restricted stock awards issued to employees under our 2001 Stock Incentive Plan. 31

  • Page 51
    ... Composite Index and the Value-Line Restaurants Index (''Restaurant Index'') over the five-year period ended December 31, 2009. The graph and table assume $100 invested at the close of trading on the last day of trading in 2004 in our common stock and in each of the market indices, with reinvestment...

  • Page 52
    ... thereto and ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' appearing elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations and the consolidated balance sheet data for the years ended and as of December 31, 2009, 2008, 2007...

  • Page 53
    ... ''Company,'' ''we'' or ''our''). The first International House of Pancakes (''IHOP'') restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter we began developing and franchising additional restaurants. In November 2007, we completed the acquisition of Applebee's International, Inc...

  • Page 54
    ... remains committed to our strategy to franchise a substantial majority of the 399 company-operated restaurants to buyers who are financially qualified, share our vision for revitalizing the Applebee's brand, are willing to invest in the business, and have well-qualified management teams. We have the...

  • Page 55
    ... menu items and the success of promotions and limited time offers. Maximize Franchise Development Under the Current Business Model, IHOP seeks to maximize franchise development by emphasizing the recruitment of franchise developers within and outside the current system in order to grow its revenues...

  • Page 56
    ... their new restaurant development commitments; • limited or lack of credit availability for potential purchasers of Applebee's company-operated restaurants; • lower proceeds from the franchising of Applebee's company-operated restaurants due to both lower restaurant sales and profitability and...

  • Page 57
    ... quarter of 2008 and are planning to franchise a significant majority of the remaining 399 company-operated Applebee's over the next several years. As the number of company-operated restaurants declines, the amount of Company restaurant revenues and Company restaurant expenses in future periods will...

  • Page 58
    make decisions about future plans for the development of additional restaurants as well as evaluation of current operations. Year Ended December 31, 2009 2008 2007 (Pro Forma) Applebee's Restaurant Data Effective restaurants(a) Franchise ...Company ...Total ...System-wide(b) Domestic sales ...

  • Page 59
    ... Applebee's franchise and company-operated restaurants is impacted by the franchising of 103 company-operated restaurants during 2008 and seven companyoperated restaurants in 2009. (h) IHOP area license restaurants are located in Florida and Georgia in the U.S and in British Columbia, Canada. Sales...

  • Page 60
    ...The increase in Applebee's franchise closings in 2009 was due primarily to the closing of seven restaurants after the franchise agreements were terminated due to nonpayment of royalties and advertising fees. One of the seven restaurants re-opened under new ownership in 2009, and the Company expects...

  • Page 61
    for the increase was that six of the restaurants closed in 2009 were originally planned to be closed in 2008. 2009 Year Ended December 31, 2008 2007 2006 2005 IHOP Restaurant Development Activity Total restaurants, beginning of year ...New openings Company-developed ...Franchise-developed ...Area ...

  • Page 62
    ... on the Company's variable rate lines of credit. Franchise Operations Favorable (Unfavorable) 2008 Variance (In millions) % Change 2009 Franchise revenues Applebee's ...IHOP ...Total franchise revenues ...Franchise expenses Applebee's ...IHOP ...Total franchise expenses ...Franchise segment profit...

  • Page 63
    ... of operations in 2009 and revenues from temporary liquor license agreements related to Applebee's company-operated restaurants in the Texas market that were franchised in October 2008, partially offset by a 4.4% decline in domestic same-store sales and a decline in franchise fees. The increase in...

  • Page 64
    ... due to 2008 purchase price allocation adjustments. The 53rd week contributed additional company restaurant segment profit of approximately $4.9 million for Applebee's in 2009. Rental Operations Favorable (Unfavorable) 2008 Variance (In millions) % Change 2009 Rental revenues ...Rental expenses...

  • Page 65
    ... as the result of savings related to franchising of Applebee's company-operated restaurants, integration of Applebee's and IHOP administrative functions, other cost reduction initiatives and lower stock-based compensation expense. Additionally, transition-related costs recorded in 2008 did not recur...

  • Page 66
    ..., or a significant decline in the market price of the Company's common stock. In the process of the annual impairment review, we primarily use the income approach method of valuation that uses a discounted cash flow model to estimate the fair value of reporting units. Significant assumptions used in...

  • Page 67
    ... timing and estimated proceeds to be received from the franchising of Applebee's company-operated restaurants. The first step of the impairment test compared the fair value of each of our reporting units to their carrying value. Based on this first step, we concluded that the fair value of the IHOP...

  • Page 68
    ...that had been closed in a prior period and included in assets held for sale as of December 31, 2008 and four parcels of Applebee's real estate. The Company had fee ownership of the properties on which four Applebee's company-operated restaurants were located. These restaurants were franchised in the...

  • Page 69
    ... value was assigned as part of the purchase price allocation as of that date. The Company evaluated events subsequent to November 29, 2007 and noted a deterioration in both the domestic real estate and credit markets between the date of the purchase price allocation and the June 2008 closing date...

  • Page 70
    ... of Assets The Company recognized a gain on disposition of assets of $6.9 million in 2009, primarily related to the franchising of seven Applebee's restaurants in the New Mexico market and sale of a parcel of land held by IHOP. Other Expense (Income) In 2009, other items of income and expense netted...

  • Page 71
    ... of Applebee's operations as compared with one month in fiscal 2007, an increase in the number of IHOP effective franchise restaurants and a 3.5% increase in same-store sales for IHOP franchise restaurants. • General and administrative expenses decreased as a percentage of total revenues from...

  • Page 72
    ...to the Applebee's acquisition. IHOP franchise operations profit as a percentage of revenue increased from 54.1% to 55.1%, or $9.1 million, in 2008 compared to 2007. Company Restaurant Operations Favorable (Unfavorable) 2007 Variance (In millions) 2008 Company restaurant sales ...Company restaurant...

  • Page 73
    ... 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...

  • Page 74
    ... value was assigned as part of the purchase price allocation as of that date. The Company evaluated events subsequent to November 29, 2007 and noted a deterioration in both the domestic real estate and credit markets between the date of the purchase price allocation and the June 2008 closing date...

  • Page 75
    ... completed its annual test for impairment of goodwill. We utilized a discounted cash flows model of the income approach to assess the fair value of our three reporting units, the IHOP franchised restaurants unit (''IHOP unit''), Applebee's company-operated restaurants unit (''Applebee's company unit...

  • Page 76
    ... assets with finite lives, primarily franchising rights, recorded as part the allocation of the Applebee's purchase price. (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...

  • Page 77
    ... million of revenue on temporary liquor agreements on company-operated restaurants in the Texas market that were franchised in October 2008. The increase in effective restaurants was mainly due to the company stores franchised during 2008 and new store openings in 2008. This increase was partially...

  • Page 78
    ... by price increases and food cost improvement initiatives. Total labor costs as a percent of company restaurant sales decreased by 0.1% in 2008 as compared to 2007. The decrease in 2008 was due primarily to reductions in hourly labor costs as a percentage of sales due to an increased guest check...

  • Page 79
    ...and 4.22 to our Form 10-K filed on February 28, 2008. The prepayment penalty does not apply to open-market repurchases of the debt. Debt Covenant Compliance As part of the financing for the Applebee's acquisition, certain subsidiaries of the Company completed two separate securitization transactions...

  • Page 80
    ... by (b) the sum of: (i) the Company's EBITDA (as defined) for the preceding 12 months; and (ii) annualized operating lease expense. Maximum ratios for this test were as follows: Applebee's Notes IHOP Notes Through November 2008 ...Through November 2009 ...Thereafter ... 8.0x 7.75x 7.25x 7.75x...

  • Page 81
    .... In order to accomplish this strategy, we plan to franchise substantially all of the company-operated Applebee's restaurants while retaining part of the Kansas City area as a company market. This heavily franchised business model is expected to require less capital investment, improve margins and...

  • Page 82
    During 2009, we completed the franchising of seven company-operated Applebee's restaurants in the New Mexico markets. Proceeds from asset dispositions, including the seven restaurants, totaled $15.8 million for the twelve months ended December 31, 2009. Of that amount, $11.8 million was used to ...

  • Page 83
    ... in working capital used was due primarily to the faster settlement of receivables from gift card sales and lower payments for retention bonuses, partially offset by an increase in prepayments related to the January 3, 2010 close of the 2009 fiscal year and the timing of payments for advertising...

  • Page 84
    ... order to maximize the financial flexibility of the Company. Future dividend payments on the common shares may be resumed at the discretion of the Board of Directors after consideration of the Company's earnings, financial condition, cash requirements, future prospects and other factors. Off-Balance...

  • Page 85
    ... date of the financial statements and the reported amounts of net revenues and expenses in the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form...

  • Page 86
    ... flows model include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures, and changes in working capital along with an appropriate discount rate. Additional assumptions are made as to proceeds to be received from future franchising of company-operated...

  • Page 87
    ... develop these inputs based on the best information available, including our own data. For more information on the financial instruments the Company measures at fair value, see Note 11, Fair Value Measurements, of Notes to the Consolidated Financial Statements. Purchase Price Allocation The purchase...

  • Page 88
    ... the employee's requisite service period using the straight-line method. The fair value of each employee stock option and restricted stock award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to...

  • Page 89
    ... course of business we utilize derivative instruments to manage our exposure to interest rate risks. We account for our derivative instruments under U.S. GAAP that requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and...

  • Page 90
    ...the applicability of the amended fair-value measurement requirements to certain nonfinancial assets and liabilities. The Company adopted the requirements that had been deferred on January 1, 2009. The adoption did not have a material impact on the Company's financial condition, results of operations...

  • Page 91
    ... available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. Adoption of these amendments in the fourth quarter of fiscal year 2009 did not have a material effect on the Company's financial statements. New Accounting...

  • Page 92
    ... in interest rates. Investments in fixed interest rate earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. We currently do not hold any fixed rate investments. As of December 31, 2009 our...

  • Page 93
    ...changes in menu pricing or other strategies would not be material to our financial condition, results of operations or cash flows. In February 2009, the Company and owners of Applebee's and IHOP franchise restaurants formed Centralized Supply Chain Services, LLC (''CSCS'' or the ''Co-op'') to manage...

  • Page 94
    ... Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Page Reference Consolidated Balance Sheets as of December 31, 2009 and 2008 ...Consolidated Statements of Operations for each of the three years in the period ended December 31, 2009 ...Consolidated Statements...

  • Page 95
    ... Balance Sheets (In thousands, except share amounts) December 31, 2009 2008 Assets Current assets Cash and cash equivalents ...Restricted cash ...Receivables, net ...Inventories ...Prepaid income taxes ...Prepaid gift cards ...Prepaid expenses ...Deferred income taxes ...Assets held for sale...

  • Page 96
    DineEquity, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2008 2007 2009 Revenues Franchise revenues ...Company restaurant sales Rental income ...Financing revenues ... ... ... ... ... ... ... ... ... ... ... ... ... ...

  • Page 97
    ... restricted shares . Net issuance of shares pursuant to stock plans ...Stock-based compensation ...Tax benefit from stock options exercised ...Dividends-common stock ...Dividends-preferred stock ...Accretion of Series B preferred stock ...Balance, December 31, 2008 . Net income ...Interest rate swap...

  • Page 98
    ...Principal payments on capital lease and financing Dividends paid ...(Payment of costs) issuance of preferred stock . . Reissuance (purchase) of treasury stock, net ...Repurchase of restricted stock ...Proceeds from stock options exercised ...Excess tax benefit from stock options exercised . Payment...

  • Page 99
    ...↧, or IHOP, in the family dining category of the restaurant industry. The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter the Company's predecessor began developing and franchising additional restaurants. As of December 31, 2009, there...

  • Page 100
    ...31, 2009, Applebee's franchisees operated 1,470 Applebee's restaurants in the United States (which comprised 79% of the total Applebee's restaurants in the United States). Of those restaurants, the nine largest Applebee's franchisees owned 786 restaurants, representing 53% of all franchised Applebee...

  • Page 101
    ..., money market funds and auction rate securities included in restricted assets related to the captive insurance subsidiary in the Consolidated balance sheets. The Company has classified all investments as available-for-sale with any unrealized gain or loss included in Other Comprehensive Income. The...

  • Page 102
    ...The primary method of estimating fair value is by discounting the future cash flows based on our cost of capital. A loss resulting from impairment is recognized by a charge against operations. The Company may decide to close certain company-operated restaurants. Typically such decisions are based on...

  • Page 103
    ... flows model include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working capital, along with an appropriate discount rate. Additional assumptions are made as to proceeds to be received from future franchising of company-operated...

  • Page 104
    ...all initial services required by the franchise agreement. Fees from development agreements are deferred and recorded into income when a restaurant under the development agreement is opened. Sales by company-operated restaurants are recognized when food and beverage items are sold. Company restaurant...

  • Page 105
    ... operations. Preopening Expenses Expenditures related to the opening of new or relocated restaurants are charged to expense when incurred. Advertising Franchise fees designated for IHOP's national advertising fund and local marketing and advertising cooperatives are recognized as revenue as the fees...

  • Page 106
    ... are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, management formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge...

  • Page 107
    ...grant date fair values. The Company also accounts for the benefits of tax deduction in excess of recognized compensation cost be reported as a financing cash flow. U.S. GAAP requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model...

  • Page 108
    ...of franchise royalty revenues and the portion of the franchise fees allocated to Applebee's intellectual property. Franchise operations expenses include pre-opening training expenses and other franchise-related costs. The company restaurant operations segment consists of company-operated restaurants...

  • Page 109
    ... primarily of franchise royalty revenues, sales of proprietary products, franchise advertising fees and the portion of the franchise fees allocated to IHOP intellectual property. Franchise operations expenses include advertising expense, the cost of proprietary products and pre-opening training...

  • Page 110
    ..., established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted these amendments effective April 1, 2009. The FASB modified its guidance in February 2010...

  • Page 111
    ... primarily of amounts due from credit card companies used by the Company to process customer transactions. Notes receivable include IHOP franchise fee notes in the amount of $10.4 million and $16.1 million at December 31, 2009 and 2008, respectively. IHOP franchise fee notes have a term of five to...

  • Page 112
    ... of the corresponding restaurant building lease. Equipment lease contracts are due in equal weekly installments, primarily bear interest averaging 10.15% and 10.11% per annum at December 31, 2009 and 2008, respectively, and are collateralized by the equipment. Where applicable, franchise fee notes...

  • Page 113
    ... Applebee's restaurants in the California and Nevada markets, Applebee's previous corporate headquarters building, Applebee's corporate aircraft and property and equipment from closed stores. As the preliminary purchase price allocation was finalized during 2008, certain purchase price fair values...

  • Page 114
    ...assets reported as held for sale are part of the company restaurant operations segment. 5. Property and Equipment Property and equipment by category is as follows: 2009 2008 (In thousands) Land ...Buildings and improvements ...Leaseholds and improvements ...Equipment and fixtures ...Construction in...

  • Page 115
    ... changes in the carrying value of goodwill: IHOP Franchise Reporting Unit Applebee's Applebee's Franchise Company (In millions) Total Balance, December 31, 2006 ...Acquisition of business ...Balance, December 31, 2007 Purchase price adjustments . Refranchising ...Annual impairment test ... $10...

  • Page 116
    ... within a month after the acquisition. The fair value of the franchise unit was determined using a discounted cash flow based on forecast royalty revenues from the franchise operations. These fair values, which reconciled to the overall purchase price paid to acquire Applebee's, were then used to...

  • Page 117
    ... Financial Statements (Continued) 7. Other Intangible Assets The Company did not have any intangible assets prior to the November 29, 2007 acquisition of Applebee's. As of December 31, 2009, intangible assets are as follows: Not Subject to Amortization Subject to Amortization Liquor Franchising...

  • Page 118
    ... A-2-II-A Fixed Rate Term Senior Notes at face values of $5.5 million and $6.3 million, respectively. In January 2009, the Company began making scheduled monthly payments on the Series 2007-1 Class M-1 Fixed Rate Term Subordinated Notes due December 2037. Scheduled payments totaled $15.0 million...

  • Page 119
    ... the first issuances under this program. While the Applebee's notes (discussed below) are outstanding, the IHOP Co-Issuers are not allowed to make additional borrowings through the sale of a new series of notes under this program. Series 2007-1 Fixed Rate Notes The Series 2007-1 FRN have a stated...

  • Page 120
    ...Settlement Rates for deposits in dollars for the applicable period. It is expected that amounts will be drawn under the Series 2007-2 VFN from time to time as needed by the IHOP Co-Issuers in connection with the operation of the IHOP franchising business. As of December 31, 2009 and 2008, a total of...

  • Page 121
    ...The Company used the remaining proceeds primarily to pay the costs of the transaction and for share repurchases. In November, 2007, a total of $15.0 million was drawn on the Series 2007-2 VFN which was used as part of the payment for the Applebee's acquisition. The remaining $10.0 million balance on...

  • Page 122
    ... Class A-2-II-A Fixed Rate Term Senior Notes that have the benefit of a financial guaranty insurance policy covering payment of interest when due and payment of principal at the applicable legal final maturity date. These notes have an expected life of approximately five years, with a legal maturity...

  • Page 123
    ...substantially all of the intellectual property, franchising assets and other restaurant assets of the Applebee's system and a certificate representing the right to receive a portion of the weekly residual cash flow from the IHOP securitization program. The servicing and repayment obligations related...

  • Page 124
    .... The Company does, however, guarantee the performance of International House of Pancakes, LLC, as servicer for the IHOP securitization program. All of the Series 2007-3 FRN issued in the IHOP securitization were issued under the IHOP Base Indenture, as amended and supplemented from time to time...

  • Page 125
    ... FRN. Prepayment Penalties In the event a significant portion of the securitization debt is repaid prior to December 2012, the Company may be liable for certain make-whole prepayment penalties with respect to the securitization debt and the applicable insurance policies. The amount of any prepayment...

  • Page 126
    ... Purchase and Sale Agreement relating to the sale and leaseback of 181 parcels of real property (the ''Sale-Leaseback Transaction''), each of which is improved with a restaurant operating as an Applebee's Neighborhood Grill and Bar (the ''Properties''). On June 13, 2008, the closing date of the Sale...

  • Page 127
    ...sale-leaseback transaction with respect to its support center in Lenexa, Kansas. In connection with this transaction, the Company received approximately $39 million in proceeds. The initial term of the leaseback agreement is 15 years. As the Company expects to have continuing involvement in the form...

  • Page 128
    ... all restaurants. The restaurants are subleased to IHOP franchisees or in a few instances operated by the Company. These noncancelable leases and subleases consist primarily of land, buildings and improvements. The following is the Company's net investment in direct financing lease receivables: 2009...

  • Page 129
    ..., Inc. and Subsidiaries Notes to the Consolidated Financial Statements (Continued) 10. Leases (Continued) The following are minimum future lease payments on the Company's noncancelable leases as lessee at December 31, 2009: Operating Capital Leases Leases (In millions) 2010 ...2011 ...2012...

  • Page 130
    .... The money market funds, the auction rate securities and the mutual funds invested in auction-rate securities are considered available for sale. Financial instruments measured at fair value on a recurring basis at December 31, 2009 and 2008 are as follows: Fair Value Fair Value Measured Using Level...

  • Page 131
    ...-adjusted discounted cash flow model under the income approach. 13. Commitments and Contingencies Purchase Commitments In some instances, the Company enters into commitments to purchase advertising and other items. Most of these agreements are fixed price purchase commitments. At December 31, 2009...

  • Page 132
    ... class of servers and bartenders who have worked in company-operated Applebee's restaurants since June 19, 2004. Unlike a class action, a collective action requires potential class members to ''opt in'' rather than ''opt out.'' On February 12, 2008, 5,540 opt-in forms were filed with the court. In...

  • Page 133
    ... the entity in its financial statements. In February 2009, the Company and owners of Applebee's and IHOP franchise restaurants formed Centralized Supply Chain Services, LLC (''CSCS'' or the ''Co-op'') to manage procurement activities for the Applebee's and IHOP restaurants choosing to join the...

  • Page 134
    ... (the ''Series A Perpetual Preferred Stock'') for an aggregate purchase price of $190.0 million in cash. Total issuance costs were approximately $3.0 million. All of the shares were sold to MSD SBI, L.P., an affiliate of MSD Capital, L.P., pursuant to a purchase agreement dated as of July 15, 2007...

  • Page 135
    ... cash. Total issuance costs were approximately $0.8 million. All of the shares were sold to affiliates of Chilton Investment Company, LLC (collectively, ''Chilton'') pursuant to a purchase agreement dated as of July 15, 2007. The shares of Series B Convertible Preferred Stock rank (i) senior to the...

  • Page 136
    ... to 7.2 million shares of common stock. The Company has repurchased 6.3 million shares of its common stock since the inception of the program at a total cost of $280.0 million. The Company did not repurchase shares in 2009 or 2008. In February 2009, the Board of Directors cancelled the authorization...

  • Page 137
    ... million for the years ended December 31, 2009, 2008 and 2007, respectively. The amount of income tax benefit allocated to the temporary decline in available-for-sale securities was $0.1 million for the year ended December 31, 2008. The loss related to an interest rate swap designated as a cash flow...

  • Page 138
    ... one Applebee's restaurant that had been closed in a prior period and was included in assets held for sale and four parcels of Applebee's real estate. The Company had fee ownership of the properties on which four Applebee's company-operated restaurants were located. These restaurants were franchised...

  • Page 139
    ... value was assigned as part of the purchase price allocation as of that date. The Company evaluated events subsequent to November 29, 2007 and noted a deterioration in both the domestic real estate and credit markets between the date of the purchase price allocation and the June 2008 closing date...

  • Page 140
    ... the Company's stock price declined. The Company revised the significant assumptions underlying the discounted cash flows model, primarily its 2009 revenue forecast and the discount rate, and updated its impairment analysis of the Applebee's franchise unit. The Company determined the fair value of...

  • Page 141
    ...up to 400,000 shares of common stock pursuant to options to non-employee members of the Company's Board of Directors. Options were to be granted at an option price equal to 100% of the fair market value of the stock on the date of grant. Options granted pursuant to the Directors Plan vest and became...

  • Page 142
    ...the Company grants stock options and restricted stock to officers, directors and employees of the Company under the 2001 Plan and the 2005 Plan. The stock options generally vest over a three-year period and have a maturity of ten years from the issuance date. Option exercise prices equal the closing...

  • Page 143
    ...) 18. Stock-Based Incentive Plans (Continued) Stock Options Stock option activity for the years ended December 31, 2009, 2008 and 2007 is summarized as follows: Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in Years) Shares Under Option Number of Shares...

  • Page 144
    ... to the Consolidated Financial Statements (Continued) 18. Stock-Based Incentive Plans (Continued) The following table summarizes information regarding outstanding and exercisable options at December 31, 2009: Number of Shares Outstanding as of 12/31/2009 Weighted Average Remaining Contractual Life...

  • Page 145
    ... Consolidated Financial Statements (Continued) 18. Stock-Based Incentive Plans (Continued) the model may not be indicative of the actual fair values of the Company's stock-based awards. The following table summarizes the assumptions used to value options granted in the respective periods: 2009 2008...

  • Page 146
    ...to the Consolidated Financial Statements (Continued) 19. Employee Benefit Plans (Continued) current year of their pre-tax covered compensation as determined by the limitations of the tax code. DineEquity common stock is not an investment option for employees in the 409(k) plan. Substantially all of...

  • Page 147
    ..., Inc. and Subsidiaries Notes to the Consolidated Financial Statements (Continued) 20. Income Taxes (Continued) The provision (benefit) for income taxes differs from the expected federal income tax rates as follows: 2009 2008 2007 Statutory federal income tax rate ...State and other taxes, net of...

  • Page 148
    ... of reacquired franchises and equipment ...Differences in acquisition financing costs ...Employee compensation ...Other comprehensive income primarily interest rate swap loss ...Deferred gain on sale of assets ...Book/tax difference in revenue recognition ...Michigan business tax ...Kansas High...

  • Page 149
    ... The net operating loss carryovers will expire, if unused, during the period from 2010 through 2028. In 2009, the Company completed the certification process for High Performance Incentive Program (''HPIP'') credits associated with the Applebee's Restaurant Support Center in Lenexa, Kansas. The HPIP...

  • Page 150
    ...legislation requiring unitary businesses to file combined reports and $1.6 million is related to the HPIP credits associated with the Applebee's Restaurant Support Center in Lenexa, Kansas. 21. Net Income (Loss) Per Share The computation of the Company's basic and diluted net income (loss) per share...

  • Page 151
    ... Financial Statements (Continued) 22. Segment Reporting Information on segments and a reconciliation to income before income taxes are as follows: Year Ended December 31, 2009 2008 2007 (In millions) Revenues Franchise operations Company restaurants Rental operations . . Financing operations...

  • Page 152
    ... to the Consolidated Financial Statements (Continued) 23. Selected Quarterly Financial Data (Unaudited) Net Income (Loss) Net Income Per Share- Operating Margin (Loss) Basic(b) (In thousands, except per share amounts) Net Income (Loss) Per Share- Diluted(b) Revenues(a) 2009 1st Quarter . . 2nd...

  • Page 153
    ... of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform...

  • Page 154
    ... and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing...

  • Page 155
    ... consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2009 of DineEquity, Inc. and Subsidiaries and our report dated March 3, 2010 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Los Angeles, California...

  • Page 156
    ... Financial Reporting There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. None. Other Information...

  • Page 157
    ... Chief Executive and Senior Financial Officers.'' (e) Audit Committee. The information under the sections entitled ''Board Committees and their Functions'' and ''Report of the Audit Committee.'' Item 11. Executive Compensation. The information required by this Item regarding executive compensation...

  • Page 158
    ...and Financial Statement Schedules. (a)(1) Consolidated Financial Statements The following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K: Consolidated Balance Sheets as of December 31, 2009 and 2008. Consolidated Statements of Operations for each of the three years in...

  • Page 159
    ... March 8, 2004, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.11 to Registrant's 2003 Form 10-K is incorporated herein by reference). Second Amendment to Senior Note Purchase Agreement, dated as of February 24...

  • Page 160
    ...). Series Supplement for the Series 2007-1 Fixed Rate Term Notes, dated as of March 16, 2007, by and among IHOP Franchising, LLC, IHOP IP, LLC, Wells Fargo Bank, National Association and Financial Guaranty Insurance Company (Exhibit 4.6 to Registrant's Form 10-Q for the quarterly period ended March...

  • Page 161
    ... Stock Incentive Plan Non-qualified Stock Option Agreement (Exhibit 10.15 to Registrant's 2003 Form 10-K is incorporated herein by reference). IHOP Corp. 2005 Stock Incentive Plan for Non-Employee Directors (the ''2005 Plan'') (Appendix ''A'' to Registrant's Proxy Statement for the Annual Meeting...

  • Page 162
    ... Corp. Deferred Compensation Plan effective January 1, 2003 Servicing Agreement, dated as of March 16, 2007, by and among IHOP Franchising, LLC, IHOP IP, LLC, IHOP Property Leasing, LLC, IHOP Properties, LLC, IHOP Real Estate, LLC, International House of Pancakes, Inc., IHOP Corp. and Wells Fargo...

  • Page 163
    ...2007-3 Fixed Rate Term Notes Purchase Agreement, dated as of November 29, 2007, by and among IHOP Franchising, LLC, IHOP IP, LLC, International House of Pancakes, Inc., IHOP Corp. and Lehman Brothers Inc., as Initial Purchaser (Exhibit 10.28 to Registrant's 2008 Form 10-K for the year ended December...

  • Page 164
    .... Certification of CFO pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. * †Filed herewith. A contract, compensatory plan or arrangement in which directors or executive officers are eligible to participate. 145

  • Page 165
    ... Stewart Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities indicated, on this 3rd day of March 2010. Name Title /s/ JULIA A. STEWART...

  • Page 166
    ...31, 2009 State or Other Jurisdiction of Incorporation or Organization Name of Entity DineEquity, Inc...International House of Pancakes, LLC...III Industries of Canada, LTD...IHOP of Canada ULC ...Blue Roof Advertising, Inc...IHOP Holdings, LLC ...IHOP Franchising, LLC ...IHOP Property Leasing, LLC...

  • Page 167
    ... Systems, Inc...Gourmetwest Nevada, Limited Liability Company ...Innovative Restaurant Concepts, Inc...IRC Kansas, Inc...Neighborhood Insurance, Inc...RB International, Inc...Rio Bravo Services, Inc...Shanghai Applebee's Restaurant Management Co. LTD...Summit Restaurants, Inc...The Heidi Fund, Inc...

  • Page 168
    ... financial statements of DineEquity, Inc. and Subsidiaries and the effectiveness of internal control over financial reporting of DineEquity, Inc. and Subsidiaries, included in this Annual Report (Form 10-K) for the year ended December 31, 2009. /s/ ERNST & YOUNG LLP Los Angeles, California...

  • Page 169
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 170
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 171
    ..., as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 3, 2010 /s/ JULIA A. STEWART Julia A. Stewart Chairman and Chief Executive Officer This certification accompanies the...

  • Page 172
    ... In connection with the Annual Report on Form 10-K of DineEquity, Inc. (the ''Company'') for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, John F. Tierney, as Chief Financial Officer of the Company, do hereby certify...

  • Page 173
    ...Chief Executive Officer and Managing Member, BSG Technologies, LLC www.bakerbrand.com management team Julia A. Stewart Chairman and Chief Executive Officer John F. Tierney Chief Financial Officer Richard C. Celio Chief Restaurant Support Officer Michael J. Archer President, Applebee's Services Jean...

  • Page 174