IHOP 2009 Annual Report Download - page 81

three-month DSCR was 2.0x and the IHOP three-month DSCR was 3.0x. The DSCR has never fallen
below 1.85x for either the Applebee’s Notes or the IHOP Notes in any period since the Notes were
issued.
A second covenant test based on DSCR becomes effective under the Applebee’s Notes beginning
with the fiscal quarter commencing January 2010 and ending with the fiscal quarter commencing
October 2012. This test is based on the same DSCR calculation described above but covering the
preceding 12-month period as opposed to the preceding three-month period. A 12-month DSCR below
minimum set forth in the following table can trigger a Partial Amortization Event. In a Partial
Amortization Event, the indenture trustee for the Applebee’s securitization is required to retain an
amount equal to the lesser of (i) the sum of $5,583,000 plus the shortfall, if any, in the retained
amount from a preceding period under a Partial Amortization Event and (ii) the outstanding principal
amount of the Applebee’s Notes plus the shortfall, if any, from a preceding period under a Partial
Amortization Event. All retained amounts are used to retire principal amounts of debt in order of
seniority. The initial minimum 12-month DSCR is 2.20x and that minimum increases by 5 basis points
each quarter, as follows:
Minimum
Twelve-Month
Fiscal Quarter Commencing in: DCSR
January 2010 ........................................... 2.20x
April 2010 ............................................. 2.25x
July 2010 .............................................. 2.30x
October 2010 ........................................... 2.35x
January 2011 ........................................... 2.40x
April 2011 ............................................. 2.45x
July 2011 .............................................. 2.50x
October 2011 ........................................... 2.55x
January 2012 ........................................... 2.60x
April 2012 ............................................. 2.65x
July 2012 .............................................. 2.70x
October 2012 ........................................... 2.75x
The test of Applebee’s 12-month DSCR set forth above is not required until the payment date
occurring in January 2010 and will end with the payment date occurring in December 2012. The
Applebee’s 12-month DSCR as of December 31, 2009 was 3.07x.
Franchising of Applebee’s Company-Operated Restaurants
Another effect 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 transitions 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 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 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 at par.
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