IHOP 2013 Annual Report Download - page 82

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61
December 31, 2013 rates would have no impact on interest expense as the current interest rate is below the floor rate as defined
in the Credit Agreement.
Investments in instruments earning a fixed rate of interest carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates. We currently do not hold any fixed rate investments. As
of December 31, 2013, our long-term investments are comprised primarily of certificates of deposit, mutual funds invested in
auction rate securities and one auction rate security; these investments are included in restricted assets related to the captive
insurance subsidiary. We have classified these investments as available-for-sale. Due to the short time period between reset
dates of the interest rates, there are no unrealized gains or losses associated with the interest rate related to the auction rate
securities. The one auction rate security has a contractual maturity of December 2030. Based on our cash and cash equivalents,
restricted cash and long-term restricted investment holdings as of 2013, a 1% increase in interest rates would increase our
annual interest income by approximately $0.2 million. A 1% decline in interest rates would decrease our annual interest income
by less than $0.2 million as the majority of our cash and cash equivalents, restricted cash and long-term investment holdings
are currently yielding less than 1%.
Commodity Prices
Many of the food products purchased by us and our franchisees and area licensees are affected by commodity pricing and
are, therefore, subject to unpredictable price volatility. Extreme increases in commodity prices and/or long-term changes could
affect our franchisees, area licensees and company-operated restaurants adversely. The risk with respect to company-operated
restaurants has lessened now that both of our brands are 99% franchised. We expect that, in most cases, the IHOP and
Applebee's systems would be able to pass increased commodity prices through to our consumers via increases in menu prices.
From time to time, competitive circumstances could limit short-term menu price flexibility, and in those cases, margins would
be negatively impacted by increased commodity prices. We believe that any changes in commodity pricing that cannot be
adjusted for by changes in menu pricing or other strategies would not be material to our financial condition, results of
operations or cash flows.
The Company and owners of Applebee's and IHOP franchise restaurants are members of CSCS, a Co-op that manages
procurement activities for the Applebee's and IHOP restaurants that belong to the Co-op. We believe the larger scale created by
combining the supply chain requirements of both brands under one organization can provide cost savings and efficiency in the
purchasing function. As of December 31, 2013, 100% of Applebee's franchise restaurants and 99% of IHOP franchise
restaurants are members of CSCS. In some instances, IHOP and Applebee's may be required to guarantee their purchase of any
remaining inventory of certain food and other items purchased by CSCS for the purpose of supplying limited time promotions
on behalf of the Applebee's and IHOP systems as a whole. None of these food product guarantees is a derivative instrument. At
December 31, 2013, our outstanding guarantees for food product purchases were $8.5 million.