IHOP 2009 Annual Report Download - page 133

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Commitments and Contingencies (Continued)
made and, therefore, the Company has not accrued a loss contingency related to this matter. It is
reasonably possible that future events will occur in the near term that provide clarification as to an
estimate of the possible loss, if any, or the range of the loss related to this matter.
Letters of Credit
The Company provides letters of credit, primarily to various insurance carriers to collateralize
obligations for outstanding claims. As of December 31, 2009, The Company had approximately
$21.7 million of unused letters of credit outstanding. These letters expire at different points in 2010 and
are automatically renewed for an additional year if no cancellation notice is submitted.
Severance Agreements
Applebee’s had severance and employment agreements with certain officers which provided for
severance payments to be made in the event of a change in control. In connection with the Company’s
acquisition of Applebee’s, the change in control provisions of these agreements were triggered. Certain
officers were terminated at the acquisition date. The severance amounts for these individuals have been
accrued in the consolidated financial statements. In addition, certain officers will be terminated over
the next two years. The Company accrued these severance costs over the expected service period. As of
December 31, 2009 and 2008, the Company has accrued $1.9 million and $3.8 million, respectively, in
its consolidated balance sheet.
14. Consolidation of Variable Interest Entities
U.S. GAAP prescribes the accounting for certain entities, called variable interest entities (‘‘VIEs’’),
in which equity investors do not have the characteristics of a controlling interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support. Under U.S. GAAP, an enterprise that absorbs a majority of the VIE’s expected losses, receives
a majority of the VIE’s expected residual returns, or both, is considered to be the primary beneficiary
of the VIE and must consolidate 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 Co-op. CSCS meets the definition of a
VIE under U.S. GAAP. Under the terms of the Co-op agreements, each member restaurant belonging
to CSCS has equal and identical ownership rights and obligations. IHOP franchise restaurants to which
the Company has provided financial support in the form of loans to purchase franchises and equipment
are considered de facto agents of the Company for purposes of determining the primary beneficiary of
the VIE. Company-owned Applebee’s and IHOP restaurants, in addition to the IHOP franchise
restaurants deemed to be de facto agents, comprised only 33.6% of the CSCS membership as of the
date of determination of the primary beneficiary of the VIE. Accordingly, the Company is not
considered to be the primary beneficiary of the VIE and therefore does not consolidate the results of
CSCS.
Under the Co-op agreements, the Company was obligated to make a one-time payment to CSCS
for start-up costs of $6.3 million, $5.5 million of which has been paid as of December 31, 2009, with a
payment of $0.8 million due in January 2010. The Company is not obligated to provide any support to
the Co-op under any express or implied agreement beyond this $6.3 million.
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