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2010 Annual Report
2010 Annual Report
momentum!
DINE EQUITY 2010
ANNUAL REPORT
16 PAGES + COVER
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DineEquity, Inc. 2010 Annual Report

Table of contents

  • Page 1
    2010 Annual Report momentum!

  • Page 2
    Results Growth Connection Innovation Excellence

  • Page 3
    ...to brand management. We strive for excellence every day and it shows - through our exceptional franchise operators, Shared Services support structure, and the experience that guests enjoy in our restaurants. We deliver innovation at every level from menus to operations and in doing so build a strong...

  • Page 4
    ... forward with nearly 150 locations sold in the last six months. We delivered Applebee's most profitable company-operated restaurant performance in more than five years. IHOP opened its 1,500th location while optimizing marketing, menu, operations and remodel strategies to build upon its lead in...

  • Page 5
    ...talents of not only Shared Services, but also Applebee's and IHOP management and team members, to ensure our brands remain number one in their respective categories. I express my sincere thanks to our team members, franchisees, purchasing co-operative, vendor partners, Board of Directors, and to you...

  • Page 6
    ... challenge. This is how we have maintained leadership positions for our brands, year after year. Our commitment to excellence is built upon the franchise operator rating system that we employ within our Applebee's and IHOP businesses. This system, first implemented at IHOP in 2003 and carried on to...

  • Page 7
    ... DineEquity senior executives have coalesced into a leadership team focused on setting the standard for excellence in all aspects of the business. From fostering our brand strategies, to optimizing our Shared Services model and promoting a strong corporate culture, we leverage a shared value system...

  • Page 8
    ...2010 Annual Report Innovation that sets us apart from the rest. Innovation is our competitive advantage. It permeates every aspect of our business and consistently drives us to be more relevant and effective. We ensure that we are continually setting the standard for leadership in casual and family...

  • Page 9
    ... allows us to leverage the combined purchasing power of the Applebee's and IHOP systems, so that our franchisees and company-operated restaurants benefit from the best food costs possible. It is the only such purchasing co-operative of its kind in either casual or family dining. We are also driving...

  • Page 10
    08 DineEquity 2010 Annual Report connection It's all connected. The Applebee's and IHOP brands are beloved American favorites. From this position of strength, we connect with our guests in powerful and relevant ways.

  • Page 11
    ... awareness by infusing genuine elements of the guest experience with humor, and showcasing our differentiated menu offerings. Applebee's "There's No Place Like the Neighborhood" campaign is in its second year, and is having a positive impact, and IHOP's "Come hungry, Leave happy®" campaign has been...

  • Page 12
    ...'s and IHOP restaurants. Whether by promoting "Kids Eat Free" to expand IHOP's dinner business, or increasing awareness of Applebee's as a late night destination, we are tailoring our approach and offerings to respond to guests' needs in order to maintain our market share leadership positions and...

  • Page 13
    11

  • Page 14
    ...'s one-month financial data subsequent to the acquisition date. 3 Comprised of actual IHOP General & Administrative expense plus pro forma Applebee's General & Administrative expense as disclosed in the Company's 2007 Form 10-K, less certain one-time costs primarily related to additional stock-based...

  • Page 15
    ... strong free cash ï¬,ow generation now, and into the future. Our highly franchised model allows our team to focus only on those activities like marketing, menu, operations and remodel programs that continue to strengthen and grow our brands. As a result, Applebee's same-restaurant sales performance...

  • Page 16
    14 DineEquity 2010 Annual Report Applebee's and IHOP leading the way. Momentum for the future. At DineEquity, we know how to build and maintain category leadership. Today, Applebee's and IHOP enjoy market-leading positions in their respective categories of casual and family dining. We are ...

  • Page 17
    ... number, including area code: (818) 240-6055 Name of each exchange on which registered New York Stock Exchange Smaller reporting company អ No ፤ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes អ State the aggregate market value...

  • Page 18
    ... SUBSIDIARIES Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2010 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...

  • Page 19
    ... 52 weeks in our 2008 fiscal year, which ended on December 28, 2008. Background The first International 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...

  • Page 20
    ...as franchise revenue and expense. Franchise operations expenses include IHOP advertising expense, the cost of proprietary products, pre-opening training expenses and other franchise-related costs. Company Operations Segment As of December 31, 2010, the company restaurant operations segment consisted...

  • Page 21
    .... 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 22
    ... business environment in which they propose to develop and operate Applebee's restaurants. We currently are focusing on international franchising primarily in Canada, Mexico, Central and South America, and the Mediterranean/Middle East. We work closely with our international franchisees to develop...

  • Page 23
    ... two-year 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...

  • Page 24
    ... development agreements with the new franchisees setting forth requirements for additional development in each market. In 2011, we expect franchisees to open a total of between 24 to 28 new Applebee's franchise restaurants. We currently do not plan to open any domestic company-operated restaurants...

  • Page 25
    .... IHOP We develop, franchise and operate restaurants in the family dining category of the restaurant industry under the names ''IHOP'' and ''International House of Pancakes.'' As of December 31, 2010, there were a total of 1,504 IHOP restaurants of which 1,329 were subject to franchise agreements...

  • Page 26
    ... the $20,000 development fee will be credited) for each restaurant developed under a multi-store development agreement, in each case paid upon execution of the franchise agreement; (c) franchise royalties equal to 4.5% of weekly gross sales; (d) revenue from the sale of pancake and waffle dry-mixes...

  • Page 27
    ... operated or sub-franchised a total of 12 IHOP restaurants. The area license agreements provide for royalties ranging from 0.5% to 2.0% of gross sales and advertising fees equal to 0.25% of gross sales. The area license agreements provide the licensees with the right to develop new IHOP restaurants...

  • Page 28
    ...do not currently intend to build additional company-operated 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. We expect...

  • Page 29
    ... 28 restaurants under international development agreements. The signed agreements include options to build an additional 104 restaurants over the next 17 years. In 2011, we expect to open a total of 55 to 65 new IHOP restaurants, including 50 to 55 restaurants under domestic franchise agreements and...

  • Page 30
    ...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 31
    ... country in the casual dining segment. Casual dining restaurants offer full table service and typically have bars or serve liquor, wine and beer. Applebee's is the largest casual dining brand in the world, in terms of number of restaurants and market share. IHOP competes in the family dining segment...

  • Page 32
    .... Restaurants operating in the quick-service and fast-casual segments have been a particular focus. The State of California, New York City and a growing number of other jurisdictions around the United States have adopted regulations requiring that chain restaurants include calorie information on...

  • Page 33
    ...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...

  • Page 34
    ... assets are primarily estimated using discounted cash flows based on five-year forecasts of financial results that incorporate assumptions as to same-restaurant sales trends, future development plans and brand-enhancing initiatives, among other things. Fair values of long-lived tangible assets...

  • Page 35
    ... be assured. These factors could reduce the gross sales or profitability at Applebee's or IHOP restaurants, which would reduce the revenues generated by company-owned restaurants and the franchise payments received from franchisees. Our business strategy may not achieve the anticipated results. We...

  • Page 36
    ...-related expenses and credit card processing fees; • the inability to open new restaurants that achieve and sustain acceptable sales volumes; • the inability to increase menu pricing to offset increased operating expenses; • failure to effectively manage further penetration into mature markets...

  • Page 37
    ... 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 38
    ...property damages incurred in connection with wrongfully serving alcoholic beverages to an intoxicated person. We may also initiate legal proceedings against franchisees for breach of the terms of their franchise agreements. Such claims may reduce the profits generated by company-operated restaurants...

  • Page 39
    ...The State of California (the state in which the largest number of our restaurants, 340 as December 31, 2010, are located), New York City and a growing number of other jurisdictions around the United States have adopted regulations requiring that chain restaurants include calorie information on their...

  • Page 40
    ... of 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...

  • Page 41
    ...flows. Of the 1,493 IHOP restaurants subject to franchise and area license agreements as of December 31, 2010, a total of 1,096 operate under the Previous Business Model. The Company was involved in all aspects of the development and financing of the IHOP restaurants established prior to 2003. Under...

  • Page 42
    ... the limited number of existing franchisees. The inability of franchisees to fund capital expenditures may adversely impact future growth. Our business strategy includes the periodic updating of Applebee's and IHOP restaurant locations through new remodel programs and other operational changes. The...

  • Page 43
    ... the nature and type of product involved. Any such actions could reduce restaurant revenues and corresponding franchise payments to us. We are heavily dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business. We rely...

  • Page 44
    Item 2. Properties. The table below shows the location and ownership of Applebee's and IHOP restaurants as of December 31, 2010: Applebee's CompanyFranchise Operated IHOP CompanyArea Operated License Total Franchise Total United States Alabama ...Alaska ...Arizona ...Arkansas ...California ......

  • Page 45
    ... Emirates . . St. Croix, Virgin Islands ... Total International ...Totals ... As of December 31, 2010, we operated 309 Applebee's restaurants and 11 IHOP restaurants for a total of 320 company-operated restaurants. Of these restaurants, we leased the building for 37 sites, owned the building and...

  • Page 46
    ... corporate offices and IHOP restaurant support center in Glendale, California, under a lease expiring in June 2020. The Applebee's restaurant support center is located in Lenexa, Kansas under a lease expiring in July 2023. We also lease a small executive suite space for our company operations...

  • Page 47
    ..., Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is traded on the NYSE under the symbol ''DIN''. The following table sets forth the high and low sales prices of our common stock on the NYSE for each quarter of 2010 and 2009. We did not pay...

  • Page 48
    ..., in the Notes to the Consolidated Financial Statements for a description of each plan. Issuer Purchases of Equity Securities During 2010, a total of 50,543 shares of restricted stock were surrendered to the Company at an average price of $37.28 per share to satisfy tax withholding obligations in...

  • Page 49
    ... Composite Index and the Value-Line Restaurants Index (''Restaurant Index'') over the five-year period ended December 31, 2010. The graph and table assume $100 invested at the close of trading on the last day of trading in 2005 in our common stock and in each of the market indices, with reinvestment...

  • Page 50
    ... balance sheet data for the years ended and as of December 31, 2010, 2009, 2008, 2007 and 2006 are derived from our audited consolidated financial statements. Fiscal Year Ended December 31, 2010 Segment Revenues Franchise revenues ...Company restaurant sales Rental income ...Financing revenues...

  • Page 51
    ... largest full-service restaurant company in the world. Key Overall Strategies DineEquity's Key Strategies At DineEquity, we have a fundamentally differentiated approach to brand management that centers on the powerful and strategic combination of marketing, menu, operations and remodel initiatives...

  • Page 52
    ... of Applebee's company operated restaurants, resulting in a 40 basis point profit margin improvement from the prior year. The improved margins resulted from implementing cost management tools to reduce food waste and optimize hourly labor. We continued to reap the benefits of our supply chain co...

  • Page 53
    ...capture and report a broad range of sales and product mix data. This information is used by management to, among other things, to gauge guest acceptance of menu items and the success of promotions and limited time offers. Maximize Franchise Development Under the Current Business Model, IHOP seeks to...

  • Page 54
    ... our customers to change historic purchasing behavior and choose lower-cost dining options or alternatives to dining out. These factors could have an adverse effect on our business, results of operations and financial condition. Sales Trends Domestic Same-Restaurant Percentage Sales Change 2009 2010...

  • Page 55
    ... of Franchising Company-Operated Restaurants As of December 31, 2010, we have franchised 193 Applebee's company-operated restaurants since the second quarter of 2008 and have signed agreements to franchise an additional 66 restaurants. The sale of 36 restaurants in the St. Louis market closed in...

  • Page 56
    ...their sales. Management also uses this information to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations. Year Ended December 31, 2010 2009 2008 Applebee's Restaurant Data Effective restaurants(a) Franchise ...Company ...Total...

  • Page 57
    ... not include data on IHOP restaurants located in Florida. (e) Applebee's domestic franchise restaurant sales, IHOP franchise restaurant sales and IHOP area license restaurant sales for the years ended December 31, 2010, 2009 and 2008 were as follows: Reported sales (unaudited) Year Ended December 31...

  • Page 58
    ... Company-developed ...Franchisee-developed ...Total new openings ...Closings Company ...Franchise ...Total closings ...Total restaurants, end of year ...Summary-end of year Franchise ...Company ...Total ...Applebee's Franchise Restaurant Activity Domestic franchisee-developed ...International...

  • Page 59
    ...restaurant to re-open under new ownership in 2011. 2010 Year Ended December 31, 2009 2008 2007 2006 IHOP Restaurant Development Activity Total restaurants, beginning of year ...New openings Company-developed ...Franchisee-developed ...Area license ...Total new openings Closings Company ...Franchise...

  • Page 60
    ... 53rd calendar week in fiscal 2009, a decline in same-restaurant sales of (1.3%) at Applebee's company-operated restaurants and the closure of seven Applebee's restaurants in 2010, partially offset by an increase in IHOP and Applebee's effective franchise units. • Segment profit for 2010 decreased...

  • Page 61
    ... week of operations in 2009 and revenues from temporary liquor license agreements related to franchised Applebee's company-operated restaurants in 2009 that did not recur, partially offset by increased franchise fees primarily related to the franchising of 83 company-operated Applebee's restaurants...

  • Page 62
    ... IHOP franchisee. The 53rd week contributed additional franchise segment profit of approximately $5.9 million in 2009. Company Restaurant Operations Favorable (Unfavorable) 2009 Variance (In millions) % Change(1) 2010 Company restaurant sales ...Company restaurant expenses ...Company restaurant...

  • Page 63
    ... in facility expenses for property and liability insurance and repair and maintenance, higher national gift card program cost and credit card fees, and the 53rd week in 2009. The 53rd week contributed additional company restaurant segment profit of approximately $4.6 million for Applebee's in 2009...

  • Page 64
    ... stock price on equity grants accounted for as liabilities. The increase in salaries and benefits is primarily due to an increase in managers and related training costs and the filling of open positions at Applebee's. The increase in recruiting costs was primarily due to the hiring of more executive...

  • Page 65
    ... or regulatory developments, or a significant decline in the market price of our 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...

  • Page 66
    ...by the estimated sales price, to assets held for sale and an impairment of $0.5 million was recognized. Other minor impairments totaled $0.3 million. Closure charges in 2010 of $2.0 million related primarily to two company-operated IHOP Cafe restaurants (a non-traditional restaurant test format that...

  • Page 67
    ... 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. We had fee ownership of the properties on which four Applebee's company-operated restaurants were located. These restaurants were franchised in the fourth...

  • Page 68
    ....8 Total segment profit ... The increase was primarily due to the favorable impact of the 53rd week, an increase in IHOP and Applebee's effective franchise units and margin improvements in Applebee's company-operated restaurants partially offset by the net effect of franchising 110 company-operated...

  • Page 69
    ... fees was due to fewer net franchise openings in 2009. The increase in IHOP franchise revenue was primarily attributable to growth in effective franchise and area license restaurants of 59 units and the 53rd week of operations that impacted revenues from royalties, pancake and waffle dry mix sales...

  • Page 70
    ... conditions affecting customers and impacting the restaurant industry as a whole. The increase in IHOP franchise expenses is due to the costs of sales associated with the increased revenues from pancake and waffle dry mix sales and franchise advertising fees. Applebee's franchise expenses are...

  • Page 71
    ... company restaurant sales decreased primarily due to lower natural gas rates and lower depreciation and straight-line rent adjustments due to 2008 purchase price allocation adjustments. The 53rd week contributed additional company restaurant segment profit of approximately $4.9 million for Applebee...

  • Page 72
    ... 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...

  • Page 73
    ... legal or regulatory developments, 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...

  • Page 74
    ... negotiated 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...

  • Page 75
    ... assets comprised three IHOP companyoperated restaurants, various assets related to one IHOP franchise restaurant, one Applebee's company-operated restaurant, a write-down to the estimated sales value based on a current letter of intent of one Applebee's restaurant that had been closed in a prior...

  • Page 76
    ...as having a larger proportion of underperforming restaurants than the other geographic markets in which the remaining company-operated restaurants are located; (ii) while Applebee's year-to-date September 30, 2008 same-restaurant sales for company-operated stores had decreased slightly compared with...

  • Page 77
    ... 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 78
    ... repayment date of 2012, subject to certain short-term extensions. Credit Facilities On October 8, 2010, we entered into a credit agreement with a group of lenders and financial institutions (the ''Credit Agreement'') that established a senior secured credit facility (the ''Senior Secured Credit...

  • Page 79
    ... additional shares. The material agreements entered into related to the October 2010 Refinancing were included as Exhibit 4.1 and Exhibits 10.1and 10.2 of our quarterly report on Form 10-Q for the period ended September 30, 2010 filed on November 3, 2010. Based on our current level of operations, we...

  • Page 80
    ... after the closing date of the Credit Agreement in the case of the Revolving Facility, or one year after the February 2011 Refinancing in the case of the Term Facility, in any such case connection with any transaction that results in a lower effective interest rate (as described above), we must pay...

  • Page 81
    ...significant majority of the remaining 243 company-operated Applebee's over the next several years 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...

  • Page 82
    ... financing operations. Franchise revenues consist of royalties, IHOP advertising fees and sales of proprietary products for IHOP, each of which fluctuates with increases or decreases in franchise retail sales. Franchise retail sales are impacted by the development of IHOP and Applebee's restaurants...

  • Page 83
    ... of restricted stock awards. Such shares are purchased at the closing price of our common stock on the vesting date. Currently, we do not pay a dividend on our common stock. Under our current debt agreements, we are restricted from paying dividends on common stock until certain financial ratios are...

  • Page 84
    ...the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements: Goodwill and Intangibles Goodwill is recorded when the aggregate purchase price of an acquisition exceeds the estimated fair value of the net...

  • Page 85
    ..., 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 restaurants. Step one of the impairment test compares the fair value of each of our reporting units to its carrying...

  • Page 86
    ...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 87
    ... 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. Leases Our restaurants are located on (i) sites owned by us...

  • Page 88
    ... 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 estimate the fair value of our share-based compensation. The...

  • Page 89
    ... the consolidated financial statements for the period ended March 31, 2010. The adoption of these provisions of this ASU only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company's balance sheets, statements of operations or statements of cash...

  • Page 90
    New Accounting Pronouncements ASU 2010-06 also requires that disclosures about purchase, sale, issuance, and settlement activity related to assets and liabilities whose fair value is measured using Level 3 inputs be presented on a gross basis rather than as a net number as currently permitted. This ...

  • Page 91
    ... 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 CSCS to manage procurement activities for the Applebee's and IHOP restaurants...

  • Page 92
    ... for each of the three years in the period ended December 31, 2010 ...Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2010 ...Notes to the Consolidated Financial Statements ...Report of Independent Registered Public Accounting Firm ... ... 77 78 79...

  • Page 93
    ... Balance Sheets (In thousands, except share amounts) December 31, 2010 2009 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 94
    DineEquity, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2010 2009 2008 Segment Revenues Franchise revenues ...Company restaurant sales Rental income ...Financing revenues ... ... ... ... ... ... ... ... ... ... ... ......

  • Page 95
    ... income ...Repurchase of restricted shares ...Net issuance of shares pursuant to stock plans . . Reissuance of treasury stock Stock-based compensation . . Tax benefit from stock options exercised ...Dividends-preferred stock . Accretion of Series B preferred stock ...Balance, December 31, 2010...

  • Page 96
    ... from stock options exercised ...(Gain) loss on disposition of assets ...Other ...Changes in operating assets and liabilities Receivables ...Inventories ...Prepaid expenses ...Current income tax receivables and payables ...Accounts payable ...Accrued employee compensation and benefits ...Gift card...

  • Page 97
    ... 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, 2010, there were a total of 1,504 IHOP restaurants of which 1,329 were subject to franchise agreements...

  • Page 98
    ... account current economic conditions. Cash and Cash Equivalents The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. These cash equivalents are stated at cost which approximates market value...

  • Page 99
    ... 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 (Loss...

  • Page 100
    ...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 as a charge against operations. The Company may decide to close certain company-operated restaurants. Typically such decisions are based on...

  • Page 101
    ... IHOP products, IHOP advertising fees and the portion of the franchise fees allocated to the Company's intellectual property. Company restaurant sales are retail sales at company-operated restaurants. Rental operations revenue includes revenue from operating leases and interest income from...

  • Page 102
    ...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 103
    ... as a reduction to company restaurant expenses in the consolidated statements of 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...

  • Page 104
    ... Retirement Obligations The Company currently has certain leases which may require it to return the property to the landlord in its original condition. The Company records expenses for these leases in its consolidated financial statements as company restaurant expenses. At December 31, 2010 and 2009...

  • Page 105
    ... grant date fair values. The Company also reports the benefits of tax deduction in excess of recognized compensation cost 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. The value...

  • Page 106
    .... Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products (primarily IHOP pancake and waffle dry-mixes) and the portion of the franchise fees allocated to IHOP and Applebee's intellectual property. Additionally, franchise fees designated for IHOP...

  • Page 107
    ... recognized as franchise revenue and expense. Franchise operations expenses include IHOP advertising expense, the cost of proprietary products, pre-opening training expenses and other franchise-related costs. Company Segment As of December 31, 2010, the company restaurant operations segment consists...

  • Page 108
    ...impact on the Company's financial statements. New Accounting Pronouncements ASU 2010-06 also requires that disclosures about purchase, sale, issuance, and settlement activity related to assets and liabilities whose fair value is measured using Level 3 inputs be presented on a gross basis rather than...

  • Page 109
    ... due from credit card companies used by the Company to process customer transactions. Notes receivable include IHOP franchise fee notes in the amount of $6.3 million and $10.4 million at December 31, 2010 and 2009, respectively. IHOP franchise fee notes have a term of five to eight years and are...

  • Page 110
    ...for sale primarily consisted of four parcels of land previously intended for future restaurant development, four parcels of land on which Applebee's franchised restaurants are situated, the net assets of one Applebee's restaurant expected to be sold, property and equipment from one previously closed...

  • Page 111
    ... $ 37.9 Balance December 31, 2010 ... During the twelve months ended December 31, 2010, the Company entered into asset purchase agreements for the sale of 149 company-operated Applebee's restaurants, 63 located in Minnesota and parts of Wisconsin, 36 in the St. Louis market area of Missouri, 30...

  • Page 112
    ..., 2007 acquisition of Applebee's. The following table summarizes changes in the carrying value of goodwill: IHOP Franchise Reporting Unit Applebee's Applebee's Franchise Company (In millions) Total Balance, December 31, 2007 . Purchase price adjustments . . Refranchising ...Annual impairment test...

  • Page 113
    ... decline in the market price of the Company's common stock. In the process of the Company's annual impairment review, the Company primarily uses the income approach method of valuation that utilizes a discounted cash flow model to estimate the fair value of its reporting units. Significant...

  • Page 114
    ... Financial Statements (Continued) 6. Goodwill (Continued) 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...

  • Page 115
    ... fixed rate of 7.0588% ...Discount ...Total debt ...Less current maturities ...Long-term debt ...Long-Term Debt Instruments Outstanding $ 844.0 825.0 28.5) 1,640.5 (9.0) $1,631.5 $ - - 599.1 434.2 104.0 100.0 175.0 25.0 245.0 (19.9) 1,662.4 (25.2) $1,637.2 In October 2010, the Company effected...

  • Page 116
    ... corporate purposes, including working capital, permitted acquisitions, capital expenditure, dividends and investments. The Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured credit facility...

  • Page 117
    ... Credit Agreement). The Credit Agreement permits the Company to purchase loans under the Term Facility pursuant to customary Dutch auction provisions and subject to customary conditions and limitations. Covenants/Restrictions The Credit Agreement requires the Company to comply with certain financial...

  • Page 118
    ... to incur additional indebtedness (excluding certain indebtedness under the Senior Secured Credit Facility), issue certain preferred shares, pay dividends and make other equity distributions, purchase or redeem capital stock, make certain investments, create certain liens on its assets to secure...

  • Page 119
    ... the Closing Date, in connection with the issuance of the Notes, the Company entered into a Registration Rights Agreement (the ''Registration Rights Agreement''), by and among the Company, the Guarantors and Barclays Capital Inc. and Goldman, Sachs & Co., as representatives of the initial purchasers...

  • Page 120
    ... date in March 2012, and a final payment date in March 2037. The effective interest rate on the Series 2007-1 FRN was 7.218%, after taking account of the premium on the Insurance Policy (described below under ''Third Party Credit Enhancement'') and the amortization of certain transaction-related...

  • Page 121
    ... franchise agreements, franchise notes, area license agreements (related to the United States and Mexico), product sales agreements, equipment leases and other assets related to the IHOP restaurant franchising business were transferred to IHOP Franchising, LLC, the intellectual property related to...

  • Page 122
    ... 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 the Series 2007...

  • Page 123
    ...a financial guaranty insurance policy. These notes had an expected life of approximately four years, with a legal maturity of 30 years. The Applebee's Indenture included provisions which would accelerate certain of the payment dates which, if not met, would require the Company to use operating funds...

  • Page 124
    ... a portion of the weekly residual cash flow from the IHOP securitization program. The servicing and repayment obligations related to the Applebee's November 2007-1 Notes and certain ongoing fees and expenses, including the premiums payable to the financial guaranty insurance company, were solely the...

  • Page 125
    ..., then the Company would have had the ability to extend the scheduled repayment date for six months if in compliance with applicable covenant ratios and system-wide sales levels at that time. Upon extension, the interest rate on the Series 2007-3 IHOP securitization debt would have increased by 0.50...

  • Page 126
    ... the Consolidated Financial Statements (Continued) 8. Debt (Continued) 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, including by the related supplement to the IHOP Base Indenture dated as of...

  • Page 127
    ... in the consolidated balance sheets. Interest Rate Swap On July 16, 2007, the Company entered into an interest rate swap (the ''Swap''), which was intended to hedge the interest payments on the securitized notes that were issued in November 2007 to finance the Applebee's acquisition. The Swap had...

  • Page 128
    ... 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-Leaseback Transaction, the Company entered into a Master Land and Building Lease...

  • Page 129
    ... interest ...Total financing obligations ...Less current portion(2) ...Long-term financing obligations ... (1) Due to the varying closing date of the Company's fiscal year, 11 monthly payments will be made in fiscal 2012. (2) Included in other accrued expenses on the consolidated balance sheet. 113

  • Page 130
    ... primarily of land, buildings and improvements. The following is the Company's net investment in direct financing lease receivables: 2010 2009 (In millions) Total minimum rents receivable ...Less unearned income ...Net investment in direct financing lease receivables ...Less current portion ...Long...

  • Page 131
    ... payments ...Less interest ...Capital lease obligations ...Less current portion(1) ...Long-term capital lease obligations ... $1,340.9 (1) Included in other accrued expenses on the consolidated balance sheet. The asset cost and carrying amount on company-owned property leased at December 31, 2010...

  • Page 132
    ... to the Consolidated Financial Statements (Continued) 10. Leases (Continued) The Company has noncancelable leases, expiring at various dates through 2032, which require payment of contingent rents based upon a percentage of sales of the related restaurant as well as property taxes, insurance and...

  • Page 133
    ... market funds . . Auction-rate securities ... $1.0 $2.9 $- $- $ - $(0.3) $1.0 $2.6 There were no sales or purchases of auction-rate securities for the year ended December 31, 2010. The scheduled maturity of the auction-rate security is December, 2030. The fair values of non-current financial...

  • Page 134
    ...-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, 2010...

  • Page 135
    ... 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 cases of this type, conditional...

  • Page 136
    ... that the franchise agreements are not VIEs. In adopting the amendments, the Company also assessed whether Centralized Supply Chain Services, LLC (''CSCS''), a purchasing co-operative formed in February 2009 by the Company and owners of Applebee's and IHOP franchise restaurants to manage procurement...

  • Page 137
    ... to the applicable per annum dividend rate under the Series A Certificate of Designations. As of the time of redemption, all required dividends had been paid in cash on the scheduled dividend payment dates. The Certificate of Designations for Series A Perpetual Preferred Stock required that, upon...

  • Page 138
    ... 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 common stock, and any series of preferred stock specifically designated as junior to the...

  • Page 139
    ... common shares in 2010 or 2009. Under our current debt agreements, we are restricted from paying dividends on common stock until certain financial ratios are achieved. Those ratios have not been achieved as of December 31, 2010. At such time as those financial ratios are achieved, dividend payments...

  • Page 140
    ... legal or regulatory developments, or a significant decline in the market price of our common stock. In the process of the annual impairment review, the Company primarily uses the income approach method of valuation that uses a discounted cash flow model to estimate the fair value of reporting units...

  • Page 141
    ... income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate and a discount rate to be applied to the forecast revenue stream. During the course of fiscal 2010, 2009 and 2008, the Company...

  • Page 142
    ...assets comprised three IHOP company-operated restaurants, various assets related to one IHOP franchise restaurants, one Applebee's company-operated restaurant, a write-down to the estimated sales value, based on a current letter of intent, of one Applebee's restaurant that had been closed in a prior...

  • Page 143
    ... 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 exercisable one-third after one year, two...

  • Page 144
    ...ten years from the issuance date. Option exercise prices equal the closing price on the New York Stock Exchange of the Company's common stock on the date of grant. Restricted Stock is issued at no cost to the holder and vests over terms determined by the Compensation Committee of the Company's Board...

  • Page 145
    ... to the Consolidated Financial Statements (Continued) 18. Stock-Based Incentive Plans (Continued) Stock Options Stock option activity for the years ended December 31, 2010, 2009 and 2008 is summarized as follows: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining...

  • Page 146
    ... 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, 2010: Number of Shares Outstanding as of 12/31/2010 Weighted Average Remaining Contractual Life...

  • Page 147
    ... Stock Units. For the year ended December 31, 2010, a total of 3,000 units were settled for a cash payment of $0.1 million. 19. Employee Benefit Plans 401(k) Savings and Investment Plan Effective January 1, 2009, the Company amended the DineEquity, Inc. 401(k) Plan to (i) include salaried and hourly...

  • Page 148
    ... plan, a profit sharing cash contribution equal to 3% of eligible compensation. The Company's profit sharing contribution was $0.9 million for the plan year 2008. Prior to the acquisition, Applebee's had established a defined contribution plan authorized under Section 401(k) of the Internal Revenue...

  • Page 149
    ... income tax receivables adjustment ...Compensation related tax credits, net of deduction offsets . Changes in tax rates and state tax laws ...Kansas High Performance Incentive Program credits ...Goodwill intangibles adjustment ...Goodwill impairment ...Non-deductible preferred stock issuance costs...

  • Page 150
    ... in revenue recognition ...Michigan business tax ...Kansas High Performance Incentive Program credits ...Other ...Deferred tax assets ...Valuation allowance ...Total deferred tax assets after valuation allowance ...Differences between financial and tax accounting in the recognition of franchise and...

  • Page 151
    .... The Company is currently under audit by the United States Internal Revenue Service for the period ended December 30, 2007. At December 31, 2010, the Company had a liability for unrecognized tax benefit including potential interest and penalties, net of related tax benefit, totaling $13.9 million...

  • Page 152
    ...legislation requiring unitary businesses to file combined reports and $1.4 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 153
    ...Financial Statements (Continued) 22. Segment Reporting Information on segments and a reconciliation to (loss) income before income taxes are as follows: Year Ended December 31, 2010 2009 2008 (In millions) Revenues Franchise operations Company restaurants Rental operations . . Financing operations...

  • Page 154
    ... 100% owned by the Parent Company at the date of each balance sheet presented. The notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary. Each entity in the consolidating financial information follows the same accounting policies as described in the...

  • Page 155
    ... Statements (Continued) 23. Consolidating Financial Information (Continued) Supplemental Condensed Consolidating Balance Sheet December 31, 2010 (in millions) Combined Combined Eliminations Guarantor Non-guarantor and Subsidiaries Subsidiaries Reclassification Consolidated Parent Assets Current...

  • Page 156
    ...Equity Current Liabilities Current maturities of long-term debt ...Accounts payable ...Accrued employee compensation and benefits Gift card liability ...Other accrued expenses ...Long-term debt ...Financing obligations . . Capital lease obligations Deferred income taxes . Other liabilities ... Total...

  • Page 157
    ... Statement of Operations For the Year Ended December 31, 2010 (in millions) Combined Guarantor Subsidiaries Combined Non-guarantor Subsidiaries Eliminations and Reclassification Parent Consolidated Revenues Franchise revenues Restaurant sales . . Rental revenues . . Financing revenues...

  • Page 158
    ... Statement of Operations For the Year Ended December 31, 2009 (in millions) Combined Guarantor Subsidiaries Combined Non-guarantor Subsidiaries Eliminations and Reclassification Parent Consolidated Revenues Franchise revenues Restaurant sales . . Rental revenues . . Financing revenues...

  • Page 159
    ... Statement of Operations For the Year Ended December 31, 2008 (in millions) Combined Guarantor Subsidiaries Combined Nonguarantor Subsidiaries Parent Eliminations and Reclassification Consolidated Revenues Franchise revenues . Restaurant sales ...Rental revenues ...Financing revenues...

  • Page 160
    ... Statement of Cash Flows For the Year Ended December 31, 2010 (in millions) Combined Guarantor Subsidiaries Combined Nonguarantor Subsidiaries Parent Eliminations and Reclassification Consolidated Cash flows provided by (used in) operating activities ...Investing cash flows Additions to property...

  • Page 161
    ... Statement of Cash Flows For the Year Ended December 31, 2009 (in millions) Combined Guarantor Subsidiaries Combined Nonguarantor Subsidiaries Parent Eliminations and Reclassification Consolidated Cash flows provided by (used in) operating activities ...Investing cash flows Additions to property...

  • Page 162
    ... Statement of Cash Flows For the Year Ended December 31, 2008 (in millions) Combined Guarantor Subsidiaries Combined Nonguarantor Subsidiaries Parent Eliminations and Reclassification Consolidated Cash flows provided by (used in) operating activities ...Investing cash flows Additions to property...

  • Page 163
    ...'s company-operated restaurants in the St. Louis, Missouri area. On February 17, 2011, The Company completed the sale of 29 Applebee's company-operated restaurants in the Washington, D.C. area. On February 25, 2011, the Company entered into Amendment No. 1 (the ''Amendment'') to the Credit Agreement...

  • Page 164
    Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of DineEquity, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of DineEquity Inc. and Subsidiaries (''the Company'') as of December 31, 2010 and 200, and the related ...

  • Page 165
    ... 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 166
    ...consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010 of DineEquity, Inc. and Subsidiaries and our report dated March 3, 2011 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Los Angeles, California...

  • Page 167
    ... fourth quarter of fiscal 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. None. PART III Item 10. Directors, Executive Officers and Corporate Governance. Other Information. The information required by this Item...

  • Page 168
    ... of the three years in the period ended December 31, 2010. Notes to the Consolidated Financial Statements. Reports of Independent Registered Public Accounting Firm. (a)(2) Financial Statement Schedules All schedules are omitted because they are not applicable or the required information is shown in...

  • Page 169
    ... 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 170
    ..., Inc. 2010 Cash Long Term Incentive Plan (LTIP) for Company Officers. 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...

  • Page 171
    ...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 172
    ...). Purchase Agreement, dated as of November 29, 2007, by and among Applebee's Enterprises LLC, Applebee's IP LLC, certain other entities listed therein, Applebee's Holdings LLC, Applebee's Franchising LLC, IHOP Corp., Applebee's International, Inc., Applebee's Services, Inc., Applebee's Holdings...

  • Page 173
    ...for the year ended December 31, 2010. IHOP Corp. Code of Ethics for Chief Executive and Senior Financial Officers (Exhibit 14.0 to Registrant's 2004 Form 10-K is incorporated herein by reference). Subsidiaries of DineEquity, Inc. Consent of Ernst & Young LLP, Independent Registered Public Accounting...

  • Page 174
    ... day of March 2011. Name Title /s/ JULIA A. STEWART Julia A. Stewart Chairman and Chief Executive Officer (Principal Executive Officer) /s/ JOHN F. TIERNEY John F. Tierney Chief Financial Officer (Principal Financial Officer) /s/ GREGGORY KALVIN Greggory Kalvin Senior Vice President, Corporate...

  • Page 175
    Name Title /s/ MICHAEL S. GORDON Michael S. Gordon Director /s/ LARRY ALAN KAY Larry Alan Kay Director /s/ CAROLINE W. NAHAS Caroline W. Nahas Director /s/ GILBERT T. RAY Gilbert T. Ray Director /s/ PATRICK W. ROSE Patrick W. Rose Director 159

  • Page 176
    ...Coverage Ratio As of December 31, 2010 Consolidated Leverage Ratio Calculation: Financial Covenant Debt(1) ...Consolidated EBITDA(1) ... in calculating the above ratios are found in the Credit Agreement, dated October 8, 2010, filed as Exhibit 10.2 to our Current Report on Form 8-K filed on October 21...

  • Page 177
    ..., LLC ...IHOP Realty, LLC ...IHOP Real Estate, LLC ...IHOP IP, LLC ...IHOP Franchise Company, LLC ...IHOP TPGC, LLC ...ACM Cards, Inc...Anne Arundel Apple Holding Corporation ...Applebee's Brazil, LLC ...Applebee's Canada Corp...Applebee's International, Inc...Applebee's Investments, LLC ...Applebee...

  • Page 178
    ... 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, 2010. /s/ ERNST & YOUNG LLP Los Angeles, California...

  • Page 179
    ... financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 3, 2011 /s/ JULIA A. STEWART Julia A. Stewart Chairman and Chief Executive Officer...

  • Page 180
    ...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 181
    ... In connection with the Annual Report on Form 10-K of DineEquity, Inc. (the ''Company'') for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, Julia A. Stewart, Chairman and Chief Executive Officer of the Company, do hereby...

  • Page 182
    ... In connection with the Annual Report on Form 10-K of DineEquity, Inc. (the ''Company'') for the year ended December 31, 2010, 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 183
    ... Board, President and Chief Executive Officer, Van Camp Seafood, Inc. management team Julia A. Stewart Chairman and Chief Executive Officer John "Jack" F. Tierney Chief Financial Officer Michael J. Archer President, Applebee's Services Jean M. Birch President, IHOP Restaurants Bryan R. Adel Senior...

  • Page 184
    DINE EQUITY 2010 ANNUAL REPORT 16 PAGES + COVER Trim Size: 8.25 x 10.75 Spot colors used in job: PMS 268 PMS 179 Overall Satin AQ ___ SPINE: Background is 100% PMS 268 Type prints 4cp (match 1375) + RO Please center type on spine width