IHOP 2010 Annual Report Download - page 134

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
12. Fair Value of Financial Instruments (Continued)
At December 31, 2010, the fair value of the non-current financial liabilities was determined based
on Level 2 inputs. At December 31, 2009, the fair value of the non-current financial liabilities was
determined based on Level 3 inputs using a risk-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, the
outstanding purchase commitments were $84.1 million, the majority of which related to advertising.
Lease Guarantees and Contingencies
In connection with the sale of Applebee’s restaurants to franchisees and other parties, the
Company has, in certain cases, guaranteed or had potential continuing liability for lease payments. As
of December 31, 2010 and 2009, the Company has outstanding lease guarantees or is contingently liable
for approximately $149.7 million and $119.0 million, respectively. This amount represents the maximum
potential liability of future payments under these leases. These leases have been assigned to the buyers
and expire at the end of the respective lease terms, which range from 2011 through 2044. In the event
of default, the indemnity and default clauses in our sale or assignment agreements govern our ability to
pursue and recover damages incurred. No material liabilities have been recorded as of December 31,
2010.
In 2004, Applebee’s arranged for a third-party financing company to provide up to $250.0 million
to qualified franchisees for loans to fund development of new restaurants, subject to its approval. The
Company provided a limited guarantee of 10% of certain loans advanced under this program. The
Company will be released from its guarantee if certain operating results are met after the restaurant
has been open for at least two years. As of December 31, 2010, there were loans outstanding under this
program to four franchisees for approximately $33.6 million, net of any guarantees from which the
Company was released. The fair value of the Company’s guarantees under this financing program were
approximately $161,000 and $287,000 as of December 31, 2010 and 2009, respectively, and are recorded
in non-current liabilities in the consolidated balance sheet. This program expired on October 31, 2007;
however, the Company’s guarantee will remain outstanding until the provisions for release have been
satisfied, as defined in the related agreement.
Litigation, Claims and Disputes
The Company is subject to various lawsuits, claims and governmental inspections or audits arising
in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek
substantial damages. In the opinion of management, these matters are adequately covered by insurance
or, if not so covered, are without merit or are of such a nature or involve amounts that would not have
a material adverse impact on the Company’s business or consolidated financial statements.
Gerald Fast v. Applebee’s
The Company is currently defending a collective action in United States District Court for the
Western District of Missouri, Central Division filed on July 14, 2006 under the Fair Labor Standards
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