IHOP 2011 Annual Report Download - page 90

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DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
72
Net Income (Loss) Per Share
Earnings per share is calculated using the two-step method prescribed in U.S. GAAP. Basic net income (loss) per share is
computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss)
available to common stockholders for the period by the weighted average number of common shares and potential shares of
common stock outstanding during the period if their effect is dilutive. The Company uses the treasury stock method to calculate
the weighted average shares used in the diluted earnings per share calculation. Potentially dilutive common shares include the
assumed exercise of stock options, assumed vesting of restricted stock units and assumed conversion of Series B Preferred Stock
using the if-converted method.
Treasury Stock
The Company may from time to time utilize treasury stock when vested stock options are exercised, when restricted stock
awards are granted and restricted stock units settle in stock upon vesting. The cost of treasury stock re-issued is determined on the
first-in, first-out method.
Business Segments
The Company identifies its segments based on the organizational units used by management to monitor performance and
make operating decisions. The Company's segments are as follows: franchise operations, company restaurant operations, rental
operations and financing operations. Within these segments, as applicable, the Company operates two distinct restaurant concepts:
Applebee's and IHOP.
Franchise Segment
As of December 31, 2011, the franchise operations segment consists of restaurants operated by Applebee's franchisees in
the United States, one United States territory and 15 countries outside of the United States and restaurants operated by IHOP
franchisees and area licensees in the United States, two United States territories and three countries outside of the United States.
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's national advertising fund and local marketing and advertising cooperatives are
recognized as revenue and expense of franchise operations; however, Applebee's national advertising fund activity constitutes
agency transactions and therefore is not 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, 2011, the company restaurant operations segment consists of Applebee's company-operated restaurants,
IHOP company-operated restaurants and five restaurants reacquired from franchisees and operated by IHOP on a temporary basis
until refranchised. All company-operated restaurants are located in the United States.
Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating
expenses at company-operated restaurants and include food, beverage, labor, benefits, utilities, rent and other restaurant operating
costs.
Rental Segment
Rental operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental
operations expenses are costs of operating leases and interest expense on capital leases on franchisee-operated restaurants. The
rental operations revenue and expenses are primarily generated by IHOP. Applebee's has an insignificant amount of rental activity
that only relates to properties that are retained after refranchising company-operated restaurants. Rental activity occurs until such
time as the properties can be disposed of by sale.
Financing Segment
Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases,
as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants taken
back from franchisees not allocated to IHOP intellectual property. Financing expenses are primarily the cost of restaurant equipment.