IHOP 2011 Annual Report Download - page 103

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
13. Commitments and Contingencies (Continued)
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The parties stipulated to a bench trial which was set to begin on September 8, 2009 in Jefferson City, Missouri. Just prior
to trial, however, the court vacated the trial setting in order to submit key legal issues to the Eighth Circuit Court of Appeals for
review on interlocutory appeal. On April 21, 2011, the Eighth Circuit affirmed the trial court's denial of the Company's motion
for summary judgment. On July 6, 2011, the Eighth Circuit denied the Company's petition for rehearing.
On October 4, 2011, the Company filed a petition for certiorari asking the United States Supreme Court to review the
decision of the Eighth Circuit. On January 17, 2012, the Supreme Court declined to review the case. The bench trial is currently
scheduled to begin on September 10, 2012.
The Company believes it has meritorious defenses and intends to vigorously defend this case. An estimate of the possible
loss, if any, or the range of the loss cannot be made and, therefore, the Company has not accrued a loss contingency related to this
matter.
Letters of Credit
The Company provides letters of credit, primarily to various insurance carriers to collateralize obligations for outstanding
claims. As of December 31, 2011, the Company had approximately $15.7 million of unused letters of credit outstanding. These
letters expire on various dates in 2012 and are automatically renewed for an additional year if no cancellation notice is submitted.
14. Consolidation of Variable Interest Entities
The Company has potential involvement with variable interest entities ("VIEs") in the form of franchise agreements between
the Company and franchisees of IHOP and Applebee's restaurants. 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.
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.
The Company does not have voting control of CSCS. Under the terms of the membership agreements, each member restaurant
belonging to CSCS has equal and identical voting rights, ownership rights and obligations. Accordingly, the Company is not
considered to be the primary beneficiary of the VIE and therefore does not consolidate the results of CSCS. There have been no
changes in the significant facts and circumstances related to the Company's involvement with CSCS during the year ended
December 31, 2011.
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 the maximum estimated loss related to its membership in the CSCS is insignificant. The Company is not
obligated to provide any support to the Co-op under any express or implied agreement.
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, in a liquidation, dissolution or winding up, and upon any other distribution
of the Company's assets; and (ii) on a parity with all other series of preferred stock, including the Series B Convertible Preferred