IHOP 2010 Annual Report Download - page 136

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
14. Consolidation of Variable Interest Entities (Continued)
a VIE and require enhanced disclosures about an entity’s involvement in a VIE. The Company adopted
these amendments effective January 1, 2010.
In adopting the amendments, the Company performed an assessment as to whether franchise
agreements between the Company and its franchisees (both IHOP and Applebee’s) were VIEs. The
Company concluded that both the IHOP and Applebee’s franchisees have key decision-making abilities
which enable them to have a significant impact on the success and the fair value of their respective
franchises and, therefore, 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 activities for the
Applebee’s and IHOP restaurants choosing to join CSCS, was a VIE and whether the Company was
the primary beneficiary. Under the terms of the membership agreements, each member restaurant
belonging to CSCS has equal and identical voting rights, ownership rights and obligations. The
Company does not have voting control of CSCS. Accordingly, the Company is not considered to be the
primary beneficiary of the VIE and therefore does not consolidate the results of CSCS. This assessment
was reaffirmed as of each quarter-end during 2010 and as of December 31, 2010 as there have been no
changes in the significant facts and circumstances related to the Company’s involvement with CSCS.
CSCS does not purchase items on behalf of member restaurants; rather, it facilitates purchasing
agreements and distribution arrangements between suppliers and member restaurants. Because of this,
CSCS acquires a minimal amount of assets and incurs a minimal amount of liabilities. Each member
restaurant is responsible for only the goods and services it chooses to purchase and bears no
responsibility or risk of loss for goods and services purchased by other member restaurants. Based on
these facts, the Company believes its maximum estimated loss related to its membership in the CSCS is
insignificant.
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 was paid as of December 31, 2009 and
$0.8 million was paid 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.
15. Preferred Stock and Stockholders’ Equity
Preferred Stock
As part of the financing for the Applebee’s acquisition, on November 29, 2007, the Company
completed two separate private placements of preferred stock.
Series A Perpetual Preferred Stock
On November 29, 2007, the Company issued and sold 190,000 shares of Series A Perpetual
Preferred Stock (the ‘‘Series A Perpetual Preferred Stock’’) for an aggregate purchase price of
$190.0 million in cash. Total issuance costs were approximately $3.0 million. All of the shares were sold
to MSD SBI, L.P., an affiliate of MSD Capital, L.P., pursuant to a purchase agreement dated as of
July 15, 2007, as amended as of November 29, 2007. The shares of Series A Perpetual Preferred Stock
rank (i) senior to the common stock, and any series of preferred stock specifically designated as junior
to the Series A Perpetual Preferred Stock, with respect to the payment of dividends and distributions,
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