IHOP 2009 Annual Report Download - page 36

Item 1A. Risk Factors.
General economic conditions that are largely out of our control could adversely affect the Company’s
business, results of operations, liquidity and capital resources. Our business is dependent to a significant
extent on national, regional and local economic conditions, and, to a lesser extent, on global economic
conditions, particularly those conditions affecting the demographics that frequently patronize
Applebee’s or IHOP restaurants. If our customers’ disposable income available for discretionary
spending is reduced (because of circumstances such as job losses, credit constraints and higher housing,
taxes, energy, interest or other costs) or where the perceived wealth of customers has decreased
(because of circumstances such as lower residential real estate values, increased foreclosure rates,
increased tax rates or other economic disruptions), our business could experience lower sales and
customer traffic as potential customers choose lower-cost alternatives (such as quick-service restaurants
or fast casual dining) or choose alternatives to dining out. Any resulting decreases in customer traffic
or average 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 payments from franchisees, and reduce profitability of franchise restaurants, potentially
impacting the ability of franchisees to make royalty payments as they become due. Reduction in cash
flows from either company-operated or franchised restaurants could have a material adverse effect on
the Company’s liquidity and capital resources.
We incurred substantial indebtedness to finance the Applebee’s acquisition which could adversely affect
our business and limit our ability to respond to changes in our business. As of December 31, 2009, we
had outstanding long-term debt of approximately $1.6 billion, almost all of which was incurred to
finance the 2007 acquisition of Applebee’s. In addition, we may incur additional debt to the extent
permitted under the terms of our debt covenants. Our substantial indebtedness and the fact that we are
contractually obligated to apply a large portion of our cash flow from operations to make payments of
interest and principal on our indebtedness has, among other ramifications:
• reduced funds available for capital expenditures, acquisitions and other purposes;
• increased our vulnerability to adverse economic and industry conditions;
• limited our ability to obtain additional financing; and
• limited our ability to apply proceeds from a securities offering or asset sale to purposes other
than the repayment of debt.
Our debt covenants associated with this indebtedness limit our ability to incur additional
indebtedness, make investments, pay dividends and engage in other transactions. In addition, our debt
covenants require that certain debt service coverage and consolidated leverage ratios be met. Our
failure to comply with these covenants could result in an event of default that, if not cured or waived,
could result, among other things, in the acceleration of all of our indebtedness and the imposition of a
third party to act as Servicer for our IHOP and Applebee’s franchise systems.
We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which
would adversely affect our financial condition and results of operations. The Applebee’s and IHOP
November 2007 securitization indebtedness has an accelerated payment date of December 2012, with
possible extensions available until June 2013. The IHOP March 2007 securitization indebtedness has an
accelerated payment date of March 2012, with possible extensions available until March 2014. Our
ability to make interest and principal payments on our indebtedness and to refinance our indebtedness
prior to the accelerated payment date will depend on our ability to generate cash from operations.
This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. If our business does not generate sufficient cash flow
from operations, if currently anticipated cost savings and operating improvements are not realized on
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