10-K 1 din-12312012x10k.htm 10-K DIN-12.31.2012-10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________
FORM 10-K
(Mark One)
 
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                
Commission File Number 001-15283
DineEquity, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
 
95-3038279
(I.R.S. Employer
Identification No.)
450 North Brand Boulevard, Glendale, California
(Address of principal executive offices)
 
91203-2306
(Zip Code)
Registrant's telephone number, including area code: (818) 240-6055
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $.01 Par Value
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was Required to submit and post such files). Yes x    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012: $680.9 million.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of February 22, 2013
 
 
Common Stock, $.01 par value
 
19,177,147
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on Tuesday, May 14, 2013 (the "2013 Proxy Statement") are incorporated by reference into Part III.


DINEEQUITY, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2012
Table of Contents
 
Page
 
 
 
 

2

PART I

Item 1.    Business
General
The Company was incorporated under the laws of the State of Delaware in 1976 with the name IHOP Corp. Effective June 2, 2008, the name of the Company was changed to DineEquity, Inc. (the "Company," "we," "our" or "us"). Our common stock is listed on the New York Stock Exchange ("NYSE") and trades under the ticker symbol "DIN." Our principal executive offices are located at 450 North Brand Boulevard, Glendale, California 91203-2306 and our telephone number is (818) 240-6055. Our Internet address is www.dineequity.com.
We have a 52/53 week fiscal year ending on the Sunday nearest to December 31 of each year. For convenience, we refer to all fiscal years as ending on December 31 and all interim fiscal quarters as ending on March 31, June 30 and September 30 of the respective fiscal year. There were 52 weeks in our 2012, 2011 and 2010 fiscal years, which ended on December 30, 2012, January 1, 2012 and January 2, 2011, respectively.
Background
The first International House of Pancakes® ("IHOP®") restaurant opened in 1958 in Toluca Lake, California. Since that time, the Company or its predecessors have engaged in the development, franchising and operation of IHOP restaurants. In November 2007, we completed the acquisition of Applebee's International, Inc., which became our wholly-owned subsidiary. Through various subsidiaries we own, franchise and operate two restaurant concepts: Applebee's Neighborhood Grill & Bar®, ("Applebee's"), in the bar and grill segment of the casual dining category of the restaurant industry, and IHOP, in the family dining category of the restaurant industry. References herein to Applebee's and IHOP restaurants are to these two restaurant concepts, whether operated by franchisees, area licensees or the Company. Retail sales at restaurants that are operated by franchisees and area licensees are not attributable to the Company. Unless the context reflects otherwise, franchisees and area licensees are referred to collectively as franchisees and restaurants operated by them are referred to collectively as franchise restaurants. With more than 3,600 restaurants combined in 17 countries and over 400 franchisees, DineEquity is one of the largest full-service restaurant companies in the world.
We achieved a significant milestone in 2012. With the refranchising and sale of related assets of 154 Applebee's company-operated restaurants during 2012, we realized our vision of becoming a 99% franchised company put in motion when we completed the acquisition of Applebee's five years ago. We believe this highly franchised business model requires less capital investment and general and administrative overhead, generates higher gross profit margins and reduces the volatility of free cash flow performance, as compared to a model based on operating a significant number of company-owned restaurants.
This report should be read in conjunction with the cautionary statements on page 30 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.—Forward Looking Statements."
Financial Information about Industry Segments
We identify our segments based on the organizational units used by management to monitor performance and make operating decisions. Our segments, unchanged from prior years, are as follows: franchise operations, company restaurant operations, rental operations and financing operations. IHOP operates within all four segments; Applebee's operates primarily in the franchise and company operations segments.
Franchise Operations Segment
As of December 31, 2012, the franchise operations segment consisted of 2,011 restaurants operated by Applebee's franchisees in the United States, one United States territory and 15 foreign countries and 1,569 restaurants operated by IHOP franchisees and area licensees in the United States, two United States territories and five foreign countries. Franchise operations revenue consists 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; due to differing contractual arrangements, Applebee's national advertising fund transactions constitute agency activity and therefore are 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.

3

Company Operations Segment
As of December 31, 2012, the company restaurant operations segment consisted of 23 Applebee's company-operated restaurants, 10 IHOP company-operated restaurants and two IHOP restaurants reacquired from franchisees and operated by IHOP on a temporary basis until refranchised. All company-operated restaurants are in the United States and are primarily used to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.
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, utilities, rent and other restaurant operating costs.
Rental Operations 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 until such time as the properties can be disposed of by sale.
Financing Operations 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.
Financial information for our four operating segments for the last three fiscal years is set forth in Note 20, Segment Reporting, of the Notes to the Consolidated Financial Statements included in this report. Revenue derived from all foreign countries, in the aggregate, comprises less than 2% of total consolidated revenue.
Restaurant Concepts
Applebee's
We develop, franchise and operate restaurants in the bar and grill segment of the casual dining category of the restaurant industry under the name "Applebee's Neighborhood Grill & Bar." With 2,034 system-wide restaurants as of December 31, 2012, Applebee's is the largest casual dining concept in the world, in terms of number of restaurants and market share(1). As of December 31, 2012, 68 franchise groups operated 2,011 of these restaurants and 23 restaurants were company-operated. The restaurants were located in 49 states, one United States territory and 15 countries outside of the United States.
Each Applebee's restaurant is designed as an attractive, friendly, neighborhood establishment featuring high quality, moderately-priced food, alcoholic and non-alcoholic beverage items, table service and a comfortable atmosphere. Applebee's restaurants appeal to a wide range of customers including young adults, senior citizens and families with children.
Menu
Applebee's restaurants offer a diverse menu offering fresh, flavorful and fun-to-eat food at a great value. The menu features a broad selection of signature dishes and traditional entrées, as well as appetizers, salads, sandwiches, specialty drinks and desserts. All Applebee's restaurants offer beer, wine, liquor and premium specialty drinks. Applebee's updates its menu offerings regularly to better serve our customers and give them new reasons to return to our restaurants. Since 2007, more than 90% of Applebee's menu now consists of either new offerings or improved offerings with high quality ingredients.
Our signature “2 for $20” menu, first introduced in 2009, and the “2 for $24” trade-up option continue to resonate with our guests, and have been imitated by many of our competitors. Our "Sizzling Entrees" menu, introduced in 2010, has also generated strong guest appeal. The innovative “Unbelievably Great Tasting & Under 550 CaloriesTM” menu provides our guests with great tasting, generous portions that support their health and nutritional goals. Each of these platforms is refreshed regularly throughout the year with new menu choices to give guests reasons to come to Applebee's every day.
In 2009, Applebee's entered into a non-exclusive endorsement agreement with Weight Watchers International, Inc. ("Weight Watchers") to offer Weight Watchers® branded menu items to our guests. Under the agreement, Applebee's and participating franchisees pay Weight Watchers a royalty equal to 2.5% of the proceeds from the sale of Weight Watchers-endorsed items on the Applebee's menu. The agreement has been extended through at least November 2014.
__________________________________________________________________________
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 25, 2012 (market share based on U.S. system-wide sales in the casual dining category).


4

Franchise Operations
We continuously monitor franchise restaurant operations, principally through our Franchise Area Directors and our Directors of Franchise Operations. Company and third-party representatives make both scheduled and unannounced inspections of restaurants to ensure that only approved products are in use and that our prescribed operations practices and procedures are being followed. We have the right to terminate a franchise agreement if a franchisee does not operate and maintain a restaurant in accordance with our requirements. We also monitor the financial health of our franchisees through business and financial reviews.
We maintain a domestic Franchise Business Council which provides input about operations, marketing, product development and other aspects of restaurants for the purpose of improving the franchise system. As of December 31, 2012, the Franchise Business Council consisted of eight franchisee representatives and three members of our senior management team. One franchisee representative, the founder of Applebee's, is a member for life. The other franchisee representatives are elected by franchisees to staggered two-year terms. The Franchise Business Council is also responsible for the appointment of members to advisory committees related to marketing, restaurant operations, information technology, product development and human resources.
Franchising
Generally, franchise arrangements for Applebee's restaurants consist of a development agreement and separate franchise agreements for each restaurant. Development agreements grant to the franchise developer the exclusive right to develop Applebee's restaurants in a designated geographical area over a specified period of time. The term of a domestic development agreement is generally 20 years. The development agreements typically provide for an initial development schedule of one to five years as agreed upon by the Company and the franchisee. At or shortly prior to the completion of the initial development schedule or any subsequent supplemental development schedule, the Company and the franchisee generally execute supplemental development schedules providing for the development of additional Applebee's restaurants in the franchise developer's exclusive territory.
Prior to the opening of each new Applebee's restaurant, the franchisee and the Company enter into a separate franchise agreement for that restaurant. Our current standard domestic Applebee's franchise agreement provides for an initial term of 20 years and permits four renewals, in five-year increments, for up to an additional 20 years, upon payment of an additional franchise fee. Our current standard domestic Applebee's franchise arrangement calls for an initial franchisee fee of $35,000 and a royalty fee equal to 4% of the restaurant's monthly net sales. We have agreements with a majority of our franchisees for Applebee's restaurants opened before January 1, 2000 which provide for royalty rates of 4% and extend the initial term of the franchise agreements until 2020. The terms, royalties and advertising fees under a limited number of franchise agreements and other franchise fees under older development agreements vary from the currently offered arrangements.
As of December 31, 2012, we had 68 franchise groups, including 28 international franchise groups. We have generally selected franchisees that are experienced multi-unit restaurant operators. Many franchisees have operated or concurrently operate other restaurant concepts. We have assigned development rights to the vast majority of domestic areas in all states except Hawaii and the company-operated market in the Kansas City area.
Domestic Franchising
As of December 31, 2012, there were 1,862 domestic Applebee's franchise restaurants. During 2012, 20 domestic franchise restaurants opened, six domestic franchise restaurants closed. 154 company-operated restaurants were franchised, of which 56 went to existing franchise groups and 98 to new franchise groups. The number of restaurants held by an individual franchisee ranges from one to 438 restaurants. The table below sets forth information regarding the number of Applebee's restaurants owned by domestic franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the listed ownership ranges.
 
Franchisees
 
Restaurants
Number of Restaurants Held by Franchisee
Number
 
Percent
of Total
 
Number
 
Percent
of Total
One to ten
9

 
22.5
%
 
56

 
3.0
%
Eleven to twenty-five
11

 
27.5
%
 
198

 
10.6
%
Twenty-six to fifty
8

 
20.0
%
 
328

 
17.6
%
Fifty-one to one hundred
9

 
22.5
%
 
608

 
32.7
%
Greater than one hundred
3

 
7.5
%
 
672

 
36.1
%
Total(a)
40

 
100.0
%
 
1,862

 
100.0
%
_______________________________________________
(a)
Percentages may not add due to rounding.

5

International Franchising
We continue to pursue franchising of the Applebee's concept internationally. To this end we seek qualified franchisees that possess the resources needed to open multiple restaurants in each territory and are familiar with the specific local business environment in which they propose to develop and operate Applebee's restaurants. We currently are focusing on international franchising primarily in Canada, Mexico, Central and South America, Southeast Asia and the Mediterranean/Middle East region.
We work closely with our international franchisees to develop and implement the Applebee's system outside the United States, recognizing commercial, cultural and dietary diversity. Differences in tastes and cultural norms and standards mean we need to be flexible and pragmatic regarding many elements of the Applebee's system, including menu, restaurant design, restaurant operations, training, marketing, purchasing and financing.
As of December 31, 2012, there were 149 international Applebee's franchise restaurants. During 2012, 14 international franchise restaurants opened and 13 international franchise restaurants closed. The number of restaurants held by an individual franchisee ranges from one to 22 restaurants. The table below sets forth information regarding the number of Applebee's restaurants owned by international franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the listed ownership ranges.
 
Franchisees
 
Restaurants
Number of Restaurants Held by Franchisee
Number
 
Percent
of Total
 
Number
 
Percent
of Total
One
5

 
17.9
%
 
5

 
3.4
%
Two to five
14

 
50.0
%
 
41

 
27.5
%
Six to ten
5

 
17.9
%
 
40

 
26.8
%
Eleven to twenty
3

 
10.7
%
 
41

 
27.5
%
Greater than twenty
1

 
3.6
%
 
22

 
14.8
%
Total(a)
28

 
100.0
%
 
149

 
100.0
%
_______________________________________________
(a)
Percentages may not add due to rounding.
The success of further international expansion will depend on, among other things, local acceptance of the Applebee's concept and menu offerings and our ability to attract qualified franchisees and operating personnel. Our franchisees must comply with the regulatory requirements of the local jurisdictions.
Company-Operated Restaurants
In 2012, we completed the refranchising and sale of related restaurant assets of 154 Applebee's company-operated restaurants, comprised as follows:17 restaurants located in a six-state market area geographically centered around Memphis, Tennessee, 33 restaurants located primarily in Missouri and Indiana, 65 restaurants located in Michigan and 39 restaurants located primarily in Virginia. In total, of the 510 Applebee's company-operated restaurants open when the acquisition was completed, we have refranchised 479 restaurants since the refranchising strategy was initiated in 2008 and closed eight.
As of December 31, 2012, the remaining 23 Applebee's company-operated restaurants were located in the Kansas City market area. We intend to operate these restaurants primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.
Restaurant Development
We make the design specifications for a typical restaurant available to franchisees, and we retain the right to prohibit or modify the use of any set of plans. Each franchisee is responsible for selecting the site for each restaurant within its territory. We may assist franchisees in selecting appropriate sites, and any selection made by a franchisee is subject to our approval. We also conduct a physical inspection, review any proposed lease or purchase agreement and make available to franchisees demographic and other studies.
There are currently 89 development agreements with 35 franchise groups in place covering the entire United States (except Hawaii and our company-operated market) and 11 development agreements with 11 franchise groups calling for restaurant development in foreign countries. In conjunction with the refranchising of company-operated restaurants, we entered into development agreements with the new franchisees setting forth requirements for additional development in each market.


6

During 2013, we expect franchisees to open a total of between 40 to 50 new Applebee's franchise restaurants, the majority of which are expected to be opened domestically. We do not plan to open any company-operated restaurants. The following table represents commitments for 2013 and 2014 by franchisees under development agreements to develop Applebee's restaurants. We disclose development commitments for only a two-year period as the Applebee's development agreements generally provide for a series of two-year development commitments after the initial development period.
 
Contractual Opening of Restaurants by Year
 
2013
 
2014
Domestic development agreements
35
 
51
International development agreements
11
 
5
Total
46
 
56
The actual number of openings may differ from both our expectations and development commitments due to various factors, including economic conditions, franchisee access to capital, and the impact of currency fluctuations on our international franchisees. The timing of new restaurant openings also may be affected by various factors including weather-related and other construction delays and difficulties in obtaining regulatory approvals.
Marketing and Advertising
Applebee's has historically concentrated its marketing and advertising efforts primarily on food-specific promotions, as well as on Weight Watchers and other Applebee's branded messaging. Our marketing and advertising includes national, regional and local expenditures, utilizing primarily television, radio, direct mail and print media, as well as alternative channels such as the Internet, social media, digital, product placements and the use of third-party retailers to market our gift cards.
During 2012, we launched Applebee's new campaign, “See You Tomorrow®,” which communicates that we are doing whatever it takes to make sure our guests return. The campaign includes TV, radio, online, and outdoor ads to encourage repeat visits by highlighting recent changes to the Applebee's brand, such as the revitalization of the restaurants.
For the year ended December 31, 2012, approximately 4% of Applebee's company restaurant sales were allocated for marketing activities. This amount includes contributions to the national advertising fund, which develops and funds the national promotions and the development of television and radio commercials and print advertising materials. We focus the remainder of our company-operated restaurant marketing expenditures on local marketing in the Kansas City area.
We currently require domestic franchisees of Applebee's restaurants to contribute 2.75% of their gross sales to the national advertising fund and to spend at least 1% of their gross sales on local marketing and promotional activities. Under the current Applebee's franchise agreements, we have the ability to increase the amount of the required combined contribution to the national advertising fund and the amount required to be spent on local marketing and promotional activities to a maximum of 5% of gross sales.
Supply Chain
Maintaining high food quality, system-wide consistency and availability is the central focus of our supply chain program, which includes the franchisee-owned purchasing cooperative established in 2009. We establish quality specifications for products used in the restaurants, and we maintain a list of approved suppliers and distributors from which we and our franchisees must select. We periodically review the quality of the products served in our domestic restaurants in an effort to ensure compliance with these standards. Due to cultural and regulatory differences, we may have different requirements for restaurants opened outside of the United States.
IHOP
We develop, franchise and operate restaurants in the family dining category of the restaurant industry under the names IHOP and International House of Pancakes. IHOP is the largest family dining brand in the world in terms of system-wide sales(2) . As of December 31, 2012 there were a total of 1,581 IHOP restaurants of which 1,404 were subject to franchise agreements, 165 were subject to area license agreements, 10 were company-operated restaurants and two restaurants were reacquired from franchisees and operated by IHOP on a temporary basis. Franchisees and area licensees are independent third parties who are licensed by us to operate their restaurants using our trademarks, operating systems and methods and offer a broad range of entrées, appetizers, desserts and non-alcoholic beverages specified by IHOP, including our award-winning pancakes.
____________________________________________________________________________

(2)Source: Nation's Restaurant News, "Special Report: Top 100," June 25, 2012 (based on U.S. system-wide sales in the family dining category).

7

We own and operate ten IHOP restaurants in the Cincinnati market area primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models. In addition, from time to time we may also operate, on a temporary basis until refranchised, IHOP restaurants that we reacquire for a variety of reasons from IHOP franchisees. There were two such restaurants included as company-operated restaurants as of December 31, 2012. IHOP restaurants are located in all 50 states of the United States, the District of Columbia, Puerto Rico and the United States Virgin Islands and internationally in Canada, the Dominican Republic, Guatemala, Mexico and the United Arab Emirates.
IHOP restaurants feature full table service and high quality, moderately priced food and beverage offerings in an attractive and comfortable atmosphere. Although the restaurants are best known for their award-winning pancakes, omelets and other breakfast specialties, IHOP restaurants offer a variety of lunch, dinner and snack items as well. IHOP restaurants are open throughout the day and evening hours. Approximately half of our IHOP restaurants operate 24 hours a day, seven days a week and approximately 200 additional restaurants operate 24 hours a day for some portion of the week.
Menu

The IHOP menu offers a large selection of high-quality, moderately priced products designed to appeal to a broad base of customers. These include a wide variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak, sandwiches, salads and lunch and dinner specialties. IHOP restaurants offer special Under 600 Calories items for children. Most restaurants offer special items for seniors at reduced prices. In recognition of local tastes, IHOP restaurants typically offer a few regional specialties that complement the IHOP core menu. Our Food and Beverage Innovation Department works together with franchisees and our Marketing Department to develop new menu and promotion ideas. These new items are thoroughly evaluated in our test kitchen and in limited regional tests with consumers, including operational tests, before being introduced throughout the system through core menu updates. The purpose of adding new items and improving existing items is to broaden the appeal of our food to our guests and continually give them new reasons to return to our restaurants. These efforts are based on consumer research, feedback and benchmarking, which help to identify opportunities to improve existing items as well as for developing new items.

The IHOP menu is being redesigned and simplified to capture the essence of our iconic brand. We plan to provide our guests with the best combination of value that aligns with our mission of being their first choice for breakfast and their destination for items "only IHOP can make." When the new menu is introduced in 2013, it will feature fewer items overall, and will include core items, such as our signature pancakes, in addition to platforms comprised of unique offerings that will be updated on a regular basis, similar to the strategy we successfully applied at Applebee's.

Franchising
Franchised restaurants include both company-financed and franchisee-financed development. Under the strategy adopted in January 2003 (the "Current Business Model"), substantially all new IHOP restaurants are developed by franchise developers with the intention of operating them as franchised restaurants. Under our business model as it was in effect prior to 2003 (the "Previous Business Model"), we developed a substantial majority of all IHOP restaurants with the intention of leasing them to franchisees. More than half of our current franchise restaurants were developed under the Previous Business Model.
Current Business Model
Under our Current Business Model, a potential franchisee first negotiates and enters into either a single-restaurant development agreement or a multi-restaurant development agreement with us and, upon completion of a prescribed approval procedure, is primarily responsible for the development and financing of one or more new IHOP franchised restaurants. In general, we do not provide any financing with respect to the franchise fee or otherwise under the Current Business Model. The franchise developer uses its own capital and financial resources along with third-party financial sources arranged for by the franchise developer to purchase or lease a restaurant site, build and equip the business and fund its working capital needs. The principal terms of the franchise agreements entered into under the Previous Business Model and the Current Business Model, including the franchise royalties and the franchise advertising fees, are substantially the same except with respect to the terms relating to the franchise fee. Of the 1,404 IHOP restaurants subject to franchise agreements as of December 31, 2012, a total of 495 operate under the Current Business Model.


8

The revenues we receive from a typical franchise development arrangement under the Current Business Model include (a) (i) a location fee equal to $15,000 upon execution of a single-restaurant development agreement or (ii) a development fee equal to $20,000 for each IHOP restaurant that the franchisee contracts to develop upon execution of a multi-restaurant development agreement; (b) a franchise fee equal to (i) $50,000 (against which the $15,000 location fee will be credited) for a restaurant developed under a single-restaurant development agreement or (ii) $40,000 (against which the $20,000 development fee will be credited) for each restaurant developed under a multi-restaurant development agreement, in each case paid upon execution of the franchise agreement; (c) franchise royalties equal to 4.5% of weekly gross sales; (d) revenue from the sale of pancake and waffle dry-mixes; and (e) franchise advertising fees. The franchise agreements generally provide for advertising fees comprised of (i) a local advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which was typically used to cover the cost of local media purchases and other local advertising expenses incurred by a local advertising cooperative, and (ii) a national advertising fee equal to 1.0% of weekly gross sales under the franchise agreement. Area licensees are generally required to pay lesser amounts toward advertising. Beginning in 2005, every year, the Company and the IHOP franchisees agreed to reallocate portions of the local advertising fees to purchase national broadcast, syndication and cable television time in order to reach our target audience more frequently and more cost effectively (see "Marketing and Advertising").
Previous Business Model
IHOP franchised restaurants established prior to 2003 under our Previous Business Model were generally developed by us, and we were involved in all aspects of the development and financing of the restaurants. Under the Previous Business Model, we typically identified and leased or purchased the restaurant sites for new company-developed IHOP restaurants, built and equipped the restaurants and then franchised them to franchisees. In addition, IHOP typically financed as much as 80% of the franchise fee for periods ranging from five to eight years and leased the restaurant and equipment to the franchisee over a 25-year period.
The revenues received from a restaurant franchised under the Previous Business Model include: (a) the franchise fee, a portion of which (typically 20%) was paid upon execution of the franchise agreement; (b) interest income from the financing arrangements for the unpaid portion of the franchise fee under the franchise notes and from the equipment notes; (c) franchise royalties typically equal to 4.5% of weekly gross sales; (d) lease or sublease rents for the restaurant property and building; (e) rent under an equipment lease; (f) revenues from the sale of pancake and waffle dry-mixes; and (g) franchise advertising fees as described above.
In a few instances, we have agreed to accept reduced royalties and/or lease payments from franchisees or have provided other accommodations to franchisees for specified periods of time in order to assist them in either establishing or reinvigorating their businesses.
From time to time, we will reacquire restaurants developed under the Previous Business Model from a franchisee that is struggling to fulfill its financial obligations or is otherwise in default of its agreements with us. In most cases we have been able to refranchise these restaurants to new franchisees fairly quickly. Where that is not the case, we typically operate the reacquired restaurant pending refranchising. These reacquired restaurants may require investments in remodeling and rehabilitation before they can be refranchised. As a consequence, our reacquired restaurants frequently incur operating losses for some period of time. Where appropriate, we may negotiate modified payment terms or agree to other accommodations with franchisees to assist them to rehabilitate these restaurants. More than half of our franchise restaurants operate under the Previous Business Model.
Area License Agreements and International Franchise Agreements
We have entered into three long-term area license agreements covering the state of Florida and certain counties in the state of Georgia and the province of British Columbia, Canada. As of December 31, 2012, the area licensee for the state of Florida and certain counties in Georgia operated or sub-franchised a total of 152 IHOP restaurants. The area licensee for the province of British Columbia, Canada operated or sub-franchised a total of 13 IHOP restaurants. The area license for British Columbia expires in 2026. The area license agreements provide for royalties ranging from 0.5% to 2.0% of gross sales and advertising fees equal to 0.25% of gross sales. The area license agreements provide the licensees with the right to develop new IHOP restaurants in their respective territories. We also derive revenues from the sale of proprietary products to these area licensees and in certain instances their sub-franchisees. Revenues from our area licensees are included in franchise operations revenues for segment reporting purposes.
Franchise Operations
IHOP's Operations Department is charged with ensuring that high operational standards are met at all times by our franchisees. Operating standards have been developed in consultation with franchisees and are detailed in the "IHOP Manual of Standard Operating Procedures." Company and third-party representatives make both scheduled and unannounced inspections of restaurants to ensure that only approved products are in use and that our prescribed operations practices and procedures are being followed. Due to cultural and regulatory differences, we may have different requirements for restaurants opened outside of the United States.

9

We highly value good franchisor/franchisee relations and strive to maintain positive working relationships with our franchisees. We sponsor the IHOP Franchise Leadership Council, an elected and appointed body of IHOP franchisees formed to advise and assist IHOP management with respect to a broad range of matters relating to the operation of IHOP restaurants. The group meets with IHOP management at least three times a year to discuss operational issues, marketing matters, development and construction issues, information technology and many other topics.
Company-Operated Restaurants
Company-operated IHOP restaurants are primarily comprised of our IHOP-owned restaurants in the Cincinnati, Ohio market. In addition, from time to time, franchise restaurants may be returned by franchisees to us and these restaurants may be operated by us for an indefinite period until they can be refranchised. We utilize the company-operated restaurants in the Cincinnati market primarily to test new remodel programs, operating procedures, products, technology, cooking platforms and service models.
Restaurant Development
The Current Business Model relies on franchisees to obtain their own financing to develop IHOP restaurants. We review and approve the franchisees' proposed sites but do not contribute capital or become the franchisees' landlord. Under the Current Business Model, substantially all new IHOP restaurants are financed and developed by franchisees or area licensees. In 2012, our franchisees and area licensees financed and developed 48 new restaurants. We do not currently intend to build additional company-operated IHOP restaurants in the Cincinnati market.
New IHOP restaurants are only developed after a detailed site selection process is completed. All restaurant development is approved by the Franchise Review Committee comprised of senior management. We expect our franchisees to add restaurants to the IHOP system in major markets where we already have a core guest base. We believe that concentrating growth in existing markets allows us to achieve economies of scale in our supervisory and advertising functions. We also look to have our franchisees strategically add restaurants in new markets in which we currently have no presence or our presence is limited.
Future Restaurant Development
In 2012, IHOP entered into 23 new franchise development agreements for the development of 55 IHOP restaurants. As of December 31, 2012, we had signed commitments and options from franchisees to build 245 IHOP restaurants over the next 17 years, comprised of 5 restaurants under single-restaurant or non-traditional development agreements, 120 restaurants under multi-restaurant development agreements and 63 restaurants under international development agreements. The signed agreements include options to build an additional 57 restaurants over the next 10 years.
During 2013, we expect our franchisees to open a total of 50 to 60 new IHOP restaurants, primarily in the domestic market.
The following table represents our IHOP restaurant development commitments, including options, as of December 31, 2012:
 
Number of Signed Agreements at 12/31/12
 
Contractual Openings of Restaurants by Year
 
2013
 
2014
 
2015
 
2016
 
2017 and
thereafter
 
Total
Single-restaurant development agreements
5
 
5
 
—
 
—
 
—
 
—
 
5
Multi-restaurant development agreements
43
 
38
 
28
 
23
 
6
 
25
 
120
Multi-restaurant development options
5
 
—
 
—
 
3
 
8
 
34
 
45
International territory agreements
5
 
12
 
11
 
15
 
20
 
5
 
63
International territory options
3
 
2
 
1
 
2
 
1
 
6
 
12
Total
61
 
57
 
40
 
43
 
35
 
70
 
245
The actual number of openings in any period may differ from both our expectations and the number of signed commitments. Historically, the actual number of restaurants developed in a particular year has been less than the total number committed to be developed due to various factors including weather-related delays, other construction delays, difficulties in obtaining timely regulatory approvals, franchisee noncompliance with development agreements and various economic factors.

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Composition of Franchise System
As of December 31, 2012, there were 1,525 domestic IHOP franchise and area license restaurants. During 2012, our franchisees and area licensees opened 40 domestic franchise restaurants and 17 domestic franchise and area license restaurants were closed. The number of restaurants held by an individual franchisee ranges from one to 152 restaurants. The table below sets forth information regarding the number of IHOP restaurants owned by domestic franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the listed ownership ranges.
 
Franchisees
 
Restaurants
Number of Restaurants Held by Franchisee
Number
 
Percent of
Total
 
Number
 
Percent of
Total
One
158

 
46.7
%
 
158

 
10.4
%
Two to five
119

 
35.2
%
 
332

 
21.8
%
Six to ten
30

 
8.9
%
 
237

 
15.5
%
Eleven to fifteen
14

 
4.1
%
 
183

 
12.0
%
Sixteen and over
17

 
5.0
%
 
615

 
40.3
%
Total(a)
338

 
100.0
%
 
1,525

 
100.0
%
________________________________
(a)
Percentages may not add due to rounding.
As of December 31, 2012, there were 44 international IHOP franchise and area license restaurants. During 2012, our franchisees opened eight international franchise restaurants and no restaurants were closed. The number of restaurants held by an individual franchisee ranges from one to 13 restaurants. The table below sets forth information regarding the number of IHOP restaurants owned by international franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the listed ownership ranges.
 
Franchisees
 
Restaurants
Number of Restaurants Held by Franchisee
Number
 
Percent of
Total
 
Number
 
Percent of
Total
One
3

 
23.1
%
 
3

 
6.8
%
Two to ten
9

 
69.2
%
 
28

 
63.6
%
Greater than ten
1

 
7.7
%
 
13

 
29.5
%
Total(a)
13

 
100.0
%
 
44

 
100.0
%
________________________________
(a)
Percentages may not add due to rounding.
Marketing and Advertising
IHOP franchisees and company-operated restaurants contribute a percentage of their sales to local advertising cooperatives and a national advertising fund. The franchise agreements provide for local and national advertising fees. The local advertising cooperatives have historically used advertising fees for various local marketing programs. The national marketing fund is primarily used for buying media and national advertising and also for the production of advertising. The national marketing fund is also used to defray certain expenses associated with our marketing and advertising functions.
Since 2005, we and our franchisees have allocated a portion of the local advertising fees to national media in order to take advantage of purchasing efficiencies associated with national broadcast, syndication and cable media. For the past four years, the franchisees agreed to reallocate a greater portion of their local advertising fees to national media, which resulted in more television advertising on national broadcast, syndication and cable media. We also have expanded the scope of our gift card program and increased our third-party retailer base to market our gift cards.

Our goal is to attract new guests to our restaurants and to encourage our existing guests to come more often through focused and compelling communications. To make sure we are breaking through today's competitive media landscape and maximizing our advertising spending through an improved buying process, we are focusing our media planning on strengthening media weights in key decision time periods, developing a stronger on-air presence and diversifying our media mix to reach our guests more effectively.


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Purchasing Cooperative
In February 2009, Centralized Supply Chain Services, LLC ("CSCS" or the "Co-op"), an independent cooperative entity, was formed to operate as a purchasing cooperative for the operators of Applebee's and IHOP domestic restaurants who have chosen to join the Co-op. We have appointed CSCS as the sole authorized purchasing organization and purchasing agent for goods, equipment and distribution services for Applebee's and IHOP restaurants in the United States. We (as a restaurant operator) are a member of CSCS and have committed to purchase substantially all goods, equipment and distribution services for company-operated restaurants through the CSCS supply chain program. CSCS combines the purchasing volume for goods, equipment and distribution services within and across the Applebee's and IHOP concepts. Its mission is to achieve for its members the benefit of continuously available goods, equipment and distribution services in adequate quantities at the lowest possible sustainable prices. The operations of CSCS are funded by a separately stated administrative fee added to one or more products purchased by operators. As of December 31, 2012, 100% of Applebee's franchise restaurants and 99% of IHOP franchise restaurants were members of CSCS.
We believe the larger scale provided by combining the supply chain requirements of both brands provides continuing cost savings and efficiencies while helping to ensure compliance with Company quality and safety standards. 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 IHOP Applebee's and IHOP systems as a whole.
Industry Overview and Competition
The Applebee's and IHOP restaurant chains are among the numerous restaurant chains and independent restaurants competing in the $650 billion restaurant industry in the United States. The restaurant industry is generally categorized into segments by price point ranges, the types of food and beverages offered and the types of service available to consumers. These segments include, among others, fast food or quick service restaurants ("QSR"), family dining, casual dining and fine dining. Each of these segments can be broken down further into the type of food served by the restaurant. For example, the QSR category includes sandwich chains, hamburger chains and other chains.
Applebee's competes in the casual dining segment and the bar and grill sub-segment against national and multi-state operators such as Chili's, T.G.I. Friday's and Ruby Tuesday, among others. In addition, there are many independent restaurants across the country in the casual dining segment. Casual dining restaurants offer full table service and typically have bars or serve liquor, wine and beer. Applebee's is the largest casual dining brand in the world, in terms of number of restaurants and market share.
IHOP competes in the family dining segment and the breakfast sub-segment against national and multi-state operators such as Denny's, Cracker Barrel Old Country Store and Bob Evans Restaurants. IHOP also faces a growing level of competition from fast food chains that serve breakfast. In addition, there are many independent restaurants and diners across the country in the family dining segment. Family dining restaurants offer full table service, typically do not have bars or serve liquor, and usually offer breakfast in addition to lunch and dinner items. IHOP is the largest family dining brand in the world in terms of system-wide sales.
The restaurant business is highly competitive and is affected by, among other things, economic conditions, price levels, on-going changes in eating habits and food preferences, population trends and traffic patterns. The principal bases of competition in the industry are the type, quality and price of the food products served. Additionally, restaurant location, quality and speed of service, advertising, name identification and attractiveness of facilities are important.
The market for high quality restaurant sites is also highly competitive. We and our franchisees often compete with other restaurant chains and retail businesses for suitable sites for the development of new restaurants.
We also compete against other franchising organizations both within and outside the restaurant industry for new franchise developers.
Trademarks and Service Marks
We and our affiliates have registered certain trademarks and service marks with the United States Patent and Trademark Office and various international jurisdictions, including “DineEquity®” and “Great Franchisees. Great Brands.®”  We own trademarks and service marks used in the Applebee's system, including “Applebee's®” and "Applebee's Neighborhood Grill & Bar®,” and variations of each, as well as “Brewtus®,” “Carside To Go®,” “There's No Place Like The Neighborhood®,” “Pick 'N Pair®,” “Main Street 'Rita®,” “Fiesta Lime Chicken®,” “Fire Grilled Favorites®,” “Triple Chocolate Meltdown®,” “Summer Squeeze®,” “Mucho Margarita®”, and “See You Tomorrow®.” In addition, through our affiliate, we own trademarks and service marks used in the IHOP system, including “IHOP®” and “International House of Pancakes®,” and variations of each, as well as “Never Empty Coffee Pot®,” “Rooty Tooty Fresh 'N Fruity®,” “Rooty Jr.®,” “Harvest Grain 'N Nut®,” “Come Hungry. Leave Happy.®,” “IHOP at Home®,” “IHOP Cafe®,” and “IHOP Express®,” “Cinn-A-Stack®,” “Create-A-Face®,” “Funny Face®,” “Pancake Revolution®,” “IHOP Splashers®,” and “IHOP 'N Go®.”

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We consider our trademarks and service marks important to the identification of our company and our restaurants and believe they are of material importance to the conduct of our business. We generally intend to renew trademarks and service marks which come up for renewal. We own or have rights to all trademarks we believe are material to our restaurant operations. In addition, we have registered various domain names on the Internet that incorporate certain of our trademarks and service marks, and believe these domain name registrations are an integral part of our identity. From time to time, we may take appropriate legal action to defend and protect the use of our intellectual property.
Seasonal Operations
We do not consider our operations to be seasonal to any material degree.
Government Regulation
We are subject to Federal Trade Commission ("FTC") regulation and a number of state laws which regulate the offer and sale of franchises. We also are subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee relationship. The FTC's Trade Regulation Rule on Franchising, as amended (the "FTC Rule"), requires us to furnish to prospective franchisees a Franchise Disclosure Document containing information prescribed by the FTC Rule.
State laws that regulate the offer and sale of franchises and the franchisor-franchisee relationship presently exist in a number of states. State laws that regulate the offer and sale of franchises require registration of the franchise offering with the state authorities. Those states that regulate the franchise relationship generally require that the franchisor deal with its franchisees in good faith, prohibit interference with the right of free association among franchisees, limit the imposition of unreasonable standards of performance on a franchisee and regulate discrimination against franchisees with respect to charges, royalty fees or other fees. Although such laws may restrict a franchisor in the termination and/or non-renewal of a franchise agreement by, for example, requiring "good cause" to exist as a basis for the termination and/or non-renewal, advance notice to the franchisee of the termination or non-renewal, an opportunity to cure a default and a repurchase of inventory or other compensation upon termination, these provisions have not historically had a significant effect on our franchise operations.
Each restaurant is subject to licensing and regulation by a number of governmental authorities, which may include liquor license authorities (primarily in the case of Applebee's restaurants), health, sanitation, safety, fire, building and other agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining, or failure to obtain, the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area or cause the temporary closure of existing restaurants. We are also subject to new laws and regulations, which vary from jurisdiction to jurisdiction, relating to nutritional content and menu labeling. Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation.
We are subject to federal and state environmental regulations, but these have not had a material effect on our operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent the development of new restaurants in particular areas.
Various federal and state labor laws govern both our own and our franchisees' relationships with our respective employees. These include such matters as minimum wage requirements, overtime and other working conditions. Significant additional government-imposed increases in minimum wages, paid leaves of absence, mandated health benefits or increased tax reporting and tax payment requirements with respect to employees who receive gratuities could be detrimental to the economic viability of our restaurants.
In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010. The legislation is far-reaching and is intended to expand access to health insurance coverage over time by adjusting the eligibility thresholds for most state Medicaid programs and providing certain other individuals and small businesses with tax credits to subsidize a portion of the cost of health insurance coverage. The legislation includes a requirement that most individuals obtain health insurance coverage beginning in 2014 and also a requirement that certain large employers offer coverage to their employees or pay a financial penalty. We are evaluating the impact the new law will have on our business. Although we cannot predict with certainty the financial and operational impacts the new law will have on us, we expect that our expenses will increase over the long term as a result of this legislation, and any such increases could adversely affect our business, cash flows, financial condition and results of operations.
In recent years, there has been an increased legislative, regulatory and consumer focus at the federal, state and municipal levels on the food industry including nutrition and advertising practices. Restaurants operating in the quick-service and fast-casual segments have been a particular focus. The State of California, New York City and a growing number of other jurisdictions around the United States have adopted regulations requiring that chain restaurants include calorie information on their menus or make other nutritional information available. The recently-enacted United States health care reform law included nation-wide menu labeling and nutrition disclosure requirements as well. Initiatives in the area of nutrition disclosure or advertising, such as

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requirements to provide information about the nutritional content of our food, may result in increased costs of compliance with the requirements and may also change customer buying habits in a way that adversely impacts our sales.
Environmental Matters
We are not aware of any federal, state or local environmental laws or regulations that are likely to materially impact our revenues, cash flow or competitive position, or result in any material capital expenditure. However, we cannot predict the effect of possible future environmental legislation or regulations.
Employees
At December 31, 2012, we had approximately 2,450 employees, of whom approximately 500 were full-time, non-restaurant, corporate personnel. Our employees are not presently represented by any collective bargaining agreements and we have never experienced a work stoppage. We believe our relations with employees are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings with the United States Securities and Exchange Commission (the "SEC") are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The information contained on our website is not incorporated into this annual report. Further, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. In addition, the public may read and copy the materials we file with the SEC at the SEC's Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC.

Item 1A.    Risk Factors.
General
This Item 1A includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements included in Item 7.
The occurrence of any of the events discussed in the following risk factors may materially adversely affect our business, financial condition and results of operations, which may materially adversely affect the value of our shares of common stock.
Our business is affected by general economic conditions that are largely out of our control.    Our business is dependent to a significant extent on national, regional and local economic conditions, and, to a lesser extent, on global economic conditions, particularly those conditions affecting the demographics of the guests that frequently patronize Applebee's or IHOP restaurants. If our customers' disposable income available for discretionary spending is reduced (because of circumstances such as job losses, credit constraints, higher housing costs, increased tax rates, energy costs, interest rates or other costs) or if the perceived wealth of customers decreases (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our business could experience lower sales and customer traffic as potential customers choose lower-cost alternatives (such as quick-service restaurants or fast casual dining) or choose alternatives to dining out. Any resulting decreases in customer traffic or average value per transaction will negatively impact the financial performance of Applebee's or IHOP company-operated restaurants, as reduced gross sales result in downward pressure on margins and profitability. These factors could also:
•
reduce gross sales at franchise restaurants, resulting in lower royalty payments from franchisees, and
•
reduce the profitability of franchise restaurants, potentially impacting the ability of franchisees (i) to make royalty payments when they are due and (ii) to develop new restaurants as called for in their respective development agreements.
Our indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our debt. As of December 31, 2012, we had $1.2 billion of outstanding Senior Notes and Term Loans. In addition, we had approximately $0.2 billion in financing and capital lease obligations as of December 31, 2012. Our level of indebtedness which could have important consequences to our financial health. For example, it could:
•
make it more difficult for us to satisfy our obligations with respect to our debt;
•
increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;
•
require us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•
place us at a competitive disadvantage compared to our competitors that are not as highly leveraged;

14

•
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds; and
•
result in an event of default if we fail to satisfy our obligations under our debt or fail to comply with the financial and other restrictive covenants contained in our debt documents, which event of default could result in all of our debt becoming immediately due and payable and could permit certain of our lenders to foreclose on our assets securing such debt.
In addition, we may incur substantial additional indebtedness in the future. If new debt is added to our current debt levels, the related risks that we now face could intensify.
To service our indebtedness, we will require a significant amount of cash, which depends on many factors beyond our control.    There is no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our senior secured credit facility in amounts sufficient to enable us to fund our liquidity needs, including with respect to our other indebtedness. As we are required to satisfy amortization requirements under our senior secured credit facility or as other debt matures, we may also need to raise funds to refinance all or a portion of our debt when it becomes due. Further, there is no assurance that we will be able to refinance any of our debt on attractive terms, commercially reasonable terms or at all. Our future operating performance and our ability to service, extend or refinance our debt will be subject to future economic conditions and to financial, business and other factors.
Declines in our financial performance could result in additional impairment charges in future periods.    United States generally accepted accounting principles ("U.S. GAAP") require annual (or more frequently if events or changes in circumstances warrant) impairment tests of goodwill, intangible assets and other long-lived assets. Generally speaking, if the carrying value of the asset is in excess of the estimated fair value of the asset, the carrying value will be adjusted to fair value through an impairment charge. Fair values of goodwill and intangible assets are primarily estimated using discounted cash flows based on five-year forecasts of financial results that incorporate assumptions as to same-restaurant sales trends, future development plans and brand-enhancing initiatives, among other things. Fair values of long-lived tangible assets are primarily estimated using discounted cash flows over the estimated useful lives of the assets. Significant underachievement of forecasted results could reduce the estimated fair value of these assets below the carrying value, requiring non-cash impairment charges to reduce the carrying value of the asset. As of December 31, 2012, our total stockholders' equity was $308.8 million. A significant impairment write-down of goodwill, intangible assets or long-lived assets in the future could result in a deficit balance in stockholders' equity. While such a deficit balance would not create an incident of default in any of our contractual agreements, the negative perception of such a deficit could have an adverse effect on our stock price and could impair our ability to obtain new financing, or refinance existing indebtedness on commercially reasonable terms or at all.
Many factors, including those over which we have no control, affect the trading volatility and price of our stock. Many factors, in addition to our operating results, may have an impact on the trading volatility and price of our common stock. These factors include general economic and market conditions, publicity regarding us, our competitors, or the restaurant industry generally, changes in financial estimates by securities analysts, changes in financial or tax reporting and accounting principles or practices, trading activity in our common stock, and the impact of our capital allocation initiatives, including any future stock repurchase programs or dividend declarations. A number of these factors are outside of our control, and any failure to meet market expectations whether for sales growth rates, earnings per share or other metrics could cause our share price to decline.
Our actual operating and financial results in any given period may differ from guidance we provide to the public, including our most recent public guidance.    From time to time, in press releases, SEC filings, public conference calls and other contexts, we have provided guidance to the public regarding current business conditions and our expectations for our future financial results. We expect that we will provide guidance periodically in the future. Our guidance is based upon a number of assumptions, expectations and estimates that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In providing our guidance, we also make various assumptions with respect to our future business decisions, some of which will change. Our actual financial results, therefore, may vary from our guidance due to our inability to meet the assumptions upon which our guidance is based and the impact on our business of the various risks and uncertainties described in these risk factors and in our public filings with the SEC. Variances between our actual results and our guidance may be material. To the extent that our actual financial results do not meet or exceed our guidance, the trading prices of our securities may be materially adversely affected.
The restaurant industry is highly competitive, and that competition could lower our revenues, margins and market share.    The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographics and the type, number and location of competing restaurants. The restaurant industry is highly competitive with respect to price, service, location, personnel and the type and quality of food. Each Applebee's and IHOP restaurant competes directly and indirectly with a large number of national and regional restaurant chains, as well as independent businesses. The trend toward convergence in grocery, deli, and restaurant services, as well as the continued expansion of restaurants into the breakfast daypart, may increase the number and variety of Applebee's and IHOP restaurants' competitors. In addition to the prevailing baseline level of competition, major market players in non-competing industries may choose to enter the food services market which could decrease the market

15

share of Applebee's and IHOP in each of their respective categories. Such increased competition could have a material adverse effect on the financial condition and results of operations of Applebee's or IHOP restaurants in affected markets. Applebee's and IHOP restaurants also compete with other restaurant chains for qualified management and staff, and we compete with other restaurant chains for available locations for new restaurants. Applebee's and IHOP restaurants also face competition from the introduction of new products and menu items by other restaurant chains, as well as substantial price discounting, and are likely to face such competition in the future. The future success of new products, initiatives and overall strategies is highly difficult to predict and will be influenced by competitive product offerings, pricing and promotions offered by competitors. Our ability to differentiate the Applebee's and IHOP brands from their competitors, which is in part limited by the advertising monies available to us and by consumer perception, cannot be assured. These factors could reduce the gross sales or profitability at Applebee's or IHOP restaurants, which would reduce the revenues generated by company-owned restaurants and the franchise payments received from franchisees.
Our business strategy may not achieve the anticipated results. We expect to continue to apply a business strategy that includes, among other things, (i) operation of a 99% franchised restaurant system; (ii) the maintenance of a purchasing cooperative that procures products and services for our Applebee's and IHOP restaurants; (iii) the possible introduction of new restaurant concepts; and (iv) the continued implementation of a shared service model across the brands for various functions, including legal, human resources, communications, finance and centers of excellence in development and operations support. However, the Applebee's business is different in many respects from the IHOP business. In particular, the Applebee's restaurants are part of the casual dining segment of the restaurant industry whereas the IHOP restaurants are part of the family dining segment, and the Applebee's business is larger, distributed differently across the United States and appeals to a somewhat different segment of the consumer market. Therefore, there can be no assurance that the business strategy we apply to the Applebee's business will be suitable or will achieve similar results to the application of such business strategy to the IHOP system. The actual benefit from the refranchising of the Applebee's company-operated restaurants is uncertain and may be less than anticipated. Finally, our operational improvement initiatives or purchasing initiatives may not be successful or achieve the desired results. In particular, there can be no assurance that the existing franchisees or prospective new franchisees will respond favorably to such initiatives.
Our performance is subject to risks associated with the restaurant industry.    The sales and profitability of our restaurants and, in turn, payments from our franchisees may be negatively impacted by a number of factors, some of which are outside of our control. The most significant are:
•
declines in comparable-restaurant sales growth rates due to: (i) failing to meet customers' expectations for food quality and taste or to innovate new menu items to retain the existing customer base and attract new customers; (ii) competitive intrusions in our markets; (iii) opening new restaurants that cannibalize the sales of existing restaurants; (iv) failure of national or local marketing to be effective; (v) weakening national, regional and local economic conditions; and (vi) natural disasters or adverse weather conditions.
•
negative trends in operating expenses such as: (i) increases in food costs including rising commodity costs; (ii) increases in labor costs including increases mandated by minimum wage and other employment laws, immigration reform, the potential impact of union organizing efforts, increases due to tight labor market conditions and the Patient Protection and Affordable Care Act; and (iii) increases in other operating costs including advertising, utilities, lease-related expenses and credit card processing fees;
•
the inability to open new restaurants that achieve and sustain acceptable sales volumes;
•
the inability to increase menu pricing to offset increased operating expenses;
•
failure to effectively manage further penetration into mature markets;
•
negative trends in the availability of credit and in expenses such as interest rates and the cost of construction materials that will affect our ability or our franchisees' ability to maintain and refurbish existing restaurants;
•
the inability to manage our company-owned restaurants due to unanticipated changes in executive management, and availability of qualified restaurant management, staff and other personnel; and
•
the inability to operate effectively in new and/or highly competitive geographic regions or local markets in which we or our franchisees have limited operating experience.
A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current restaurants may adversely affect our sales and results of operations. The success of our restaurants depends in large part on their locations. As demographic and economic patterns change, current locations may not continue to be attractive or profitable. Potential declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced sales in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation. Additionally, restaurant revitalization initiatives may not be completed as and when projected.

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A failure to address cost pressures, including rising costs for labor, food commodities and utilities used by our and our franchisees' restaurants, and a failure of the Co-op to effectively deliver cost management activities and achieve economies of scale in purchasing, may compress our franchisees' operating margins and adversely affect our and our franchisees' business results. Our and our franchisees' business results depend highly on the ability to anticipate and react to changes in the availability and pricing of food commodities, utilities, and other related costs over which we may have little control. Operating margins for our and our franchisees' restaurants are subject to increases in labor costs mandated by health care laws, employment laws, immigration reform, union organizing efforts and labor market conditions. In addition, our and our franchisees' operating margins are subject to changes in the pricing and availability of beef, pork, eggs, cheese, coffee and produce. We attempt to leverage our size to achieve economies of scale in purchasing through the Co-op, but there can be no assurances that we can always do so effectively. We are subject to the general risks of inflation. Restaurant operating margins are also affected by fluctuations in the price of utilities such as electricity and natural gas, whether as a result of inflation or otherwise, on which the restaurants depend for their energy supply. Our inability to anticipate and respond effectively to any of these cost pressures could have an adverse effect on our business results.
We may experience shortages or interruptions in the supply or delivery of food and other products from third parties or in the availability of utilities. Our franchised and company-operated restaurants are dependent on frequent deliveries of fresh produce, food, beverage and other products. This subjects us to the risk of shortages or interruptions in food and beverage supplies which may result from a variety of causes including, but not limited to, shortages due to adverse weather, labor unrest, political unrest, terrorism, outbreaks of food-borne illness, disruption of operation of production facilities or other unforeseen circumstances. Such shortages could adversely affect our revenue and profits. The inability to secure adequate and reliable supplies or distribution of food and beverage products could limit our ability to make changes to our core menus or offer promotional "limited time only" menu items, which may limit our ability to implement our business strategies. Our restaurants bear risks associated with the timeliness of deliveries by suppliers and distributors as well as the solvency, reputation, labor relationships, freight rates, prices of raw materials and health and safety standards of each supplier and distributor. Other significant risks associated with our suppliers and distributors include improper handling of food and beverage products and/or the adulteration or contamination of such food and beverage products. Disruptions in our relationships with suppliers and distributors may reduce the profits generated by company-operated restaurants or the payments we receive from franchisees. In addition, interruptions to the availability of gas, electric, water or other utilities may adversely affect our operations.
A failure to develop and implement innovative marketing and guest relationship initiatives, ineffective or improper use of social media or other marketing initiatives, and increased advertising and marketing costs, could adversely affect our business results. If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, or if our advertising and promotions become less effective than those of our competitors, we could experience a material adverse effect on our business results. A failure to sufficiently innovate, develop guest relationship initiatives, or maintain adequate and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.

As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests. These efforts may not be successful, resulting in expenses incurred without the benefit of higher revenues or increased employee engagement. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our franchisees, guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation. These efforts may not be successful, and pose a variety of other risks, as discussed above under the heading: “We rely heavily on information technology in our operations, and insufficient guest or employee facing technology, or any material failure, inadequacy, interruption or breach of security of any of our technology, could harm our ability to effectively operate our business.”
Changing health or dietary preferences may cause consumers to avoid Applebee's and IHOP's products in favor of alternative foods.    The food service industry as a whole rests on consumer preferences and demographic trends at the local, regional, national and international levels, and the impact on consumer eating habits of new information regarding diet, nutrition and health. Our franchise development and system-wide sales depend on the sustained demand for our products, which may be affected by factors we do not control. Changes in nutritional guidelines issued by the United States Department of Agriculture, issuance of similar guidelines or statistical information by federal, state or local municipalities, or academic studies, among other things, may impact consumer choice and cause consumers to select foods other than those that are offered by Applebee's or IHOP restaurants. We may not be able to adequately adapt Applebee's or IHOP restaurants' menu offerings to keep pace with developments in consumer preferences, which may result in reductions to the revenues generated by our company-operated restaurants and the franchise payments we receive from franchisees.
We face a variety of risks associated with doing business with franchisees and vendors in foreign markets. Our expansion into international markets could create risks to our brands and reputation. We believe that we have selected high-caliber international franchisees with significant experience in restaurant operations. However, the ultimate success and quality of any franchise

17

restaurant rests with the franchisee. If the franchisee does not successfully operate its restaurants in a manner consistent with our standards, or customers have negative experiences due to issues with food quality or operational execution, our brand values could suffer, which could have an adverse effect on our business.
There also is no assurance that international operations will be profitable or that international growth will continue. Our international operations are subject to all of the same risks associated with our domestic operations, as well as a number of additional risks. These include, among other things, international economic and political conditions, foreign currency fluctuations, and differing cultures and consumer preferences.
We also are subject to governmental regulations throughout the world that impact the way we do business with our international franchisees and vendors. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
Factors outside our control may harm our brands' reputations.    The success of our restaurant business is largely dependent upon brand recognition and the strength of our franchise systems. The continued success of our company-operated restaurants and our franchisees will be directly dependent upon the maintenance of a favorable public view of the Applebee's and IHOP brands. Negative publicity (e.g., crime, scandal, litigation, on-site accidents and injuries or other harm to customers) at a single Applebee's or IHOP location can have a substantial negative impact on the operations of all restaurants within the Applebee's or IHOP system. Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any type, but particularly regarding food quality, food-borne illness, food tampering, obesity, injury or other health concerns with respect to certain foods, whether or not accurate or valid. The risk of food-borne illness or food tampering cannot be completely eliminated. Any outbreak of food-borne illness or other food-related incidents attributed to Applebee's or IHOP restaurants or within the food service industry or any widespread negative publicity regarding the Applebee's or IHOP brands or the restaurant industry in general could harm our reputation. Although the Company maintains liability insurance, and each franchisee is required to maintain liability insurance pursuant to its franchise agreements, a liability claim could injure the reputation of all Applebee's or IHOP restaurants, whether or not it is ultimately successful.
We may be subject to legal proceedings that could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. There have been a growing number of lawsuits in recent years. There has also been a rise in employment-related lawsuits. From time to time, we have been subject to these types of lawsuits. The cost of defending claims against us or the ultimate resolution of such claims may harm our business and operating results. In addition, the increasingly regulated business environment may result in a greater number of enforcement actions and private litigation. This could subject us to increased exposure to stockholder lawsuits.
We and our franchisees are subject to a variety of litigation.    We and our franchisees are subject to complaints or litigation from guests alleging illness, injury or other food quality, food safety, health or operational concerns. We and our franchisees are also subject to "dram shop" laws in some states pursuant to which we and our franchisees may be subject to liability in connection with personal injuries or property damages incurred in connection with wrongfully serving alcoholic beverages to an intoxicated person. We may also initiate legal proceedings against franchisees for breach of the terms of their franchise agreements, including underreporting of sales , failure to operate restaurants according to standard operating procedures and payment defaults. Such claims may reduce the profits generated by company-operated restaurants and the ability of franchisees to make payments to us. These claims may also reduce the ability of franchisees to enter into new franchise agreements with us. Although our franchise agreements require our franchisees to defend and indemnify us, we may be named as a defendant and sustain liability in legal proceedings against franchisees under the doctrines of vicarious liability, agency, negligence or otherwise.
Third-party claims with respect to intellectual property assets, if decided against us, may result in competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues. We regard our service marks and trademarks related to our restaurant businesses as having significant value and being important to our marketing efforts. To protect our restaurants and services from infringement, we rely on contracts, copyrights, patents, trademarks, service marks and other common law rights, such as trade secret and unfair competition laws. We have registered certain trademarks and service marks in the United States and foreign jurisdictions; however, effective intellectual property protection may not be available in every country in which we have or intend to open or franchise a restaurant. Although we believe we have taken appropriate measures to protect our intellectual property, there can be no assurance that these protections will be adequate.


18

In addition, there can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that our rights in our trademarks, service marks and other intellectual property assets are invalid or unenforceable. Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our rights in any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual property which, in turn, could lead to a decline in restaurant revenues and sales of other branded products and services (if any). If the intellectual property became subject to third-party infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated to acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation, or other third-party claims.
Ownership of real property exposes us to potential environmental liabilities.    The ownership of real property exposes us to potential environmental liabilities from United States federal, state and local governmental authorities and private lawsuits by individuals or businesses. The potential environmental liabilities in connection with the ownership of real estate are highly uncertain. We currently do not have actual knowledge of any environmental liabilities that would have a material adverse effect on the Company. From time to time, we have experienced some non-material environmental liabilities resulting from environmental issues at our properties. While we are unaware of any material environmental liabilities, it is possible that material environmental liabilities relating to our properties may arise in the future.
Matters involving employees at certain company-operated restaurants expose us to potential liability.    We are subject to United States federal, state and local employment laws that expose us to potential liability if we are determined to have violated such employment laws. Failure to comply with federal and state labor laws pertaining to minimum wage, overtime pay, meal and rest breaks, unemployment tax rates, workers' compensation rates, citizenship or residency requirements, child labor requirements, sales taxes and other employment-related matters may have a material adverse effect on our business or operations. In addition, employee claims based on, among other things, discrimination, harassment or wrongful termination may divert financial and management resources and adversely affect operations. The losses that may be incurred as a result of any violation of such employment laws are difficult to quantify.
Our failure or the failure of our franchisees to comply with federal, state and local governmental regulations may subject us to losses and harm our brands.   We are subject to the Fair Labor Standards Act (which governs such matters as minimum wages, overtime and other working conditions), along with the Americans with Disabilities Act, the Immigration Reform and Control Act of 1986, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated by federal, state and local governmental authorities that govern these and other employment matters, including tip credits, working conditions, safety standards and immigration status. We expect increases in payroll expenses as a result of federal and state mandated increases in the minimum wage, and although such increases are not expected to be material, we cannot assure you that there will not be material increases in the future. Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants in a particular area or across the United States. Other labor shortages or increased team member turnover could also increase labor costs. In addition, our vendors may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us. We continue to review the health care reform law enacted by Congress in March of 2010 and regulations issued related to the law to evaluate the potential impact of this new law on our business, and to accommodate various parts of the law as they take effect. There are no assurances that a combination of cost management and price increases can accommodate all of the costs associated with compliance.
We are subject to extensive federal, state and local governmental regulations, including those relating to the food safety and inspection and the preparation and sale of food and alcoholic beverages. Disruptions within any government agencies could impact the U.S. food industry which may have an adverse affect on our business. We are also subject to laws and regulations relating to building and zoning requirements. Each of our and our franchisees' restaurants is also subject to licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies in the state, county and/or municipality where the restaurant is located. We generally have not encountered any material difficulties or failures in obtaining and maintaining the required licenses and approvals that could impact the continuing operations of an existing restaurant, or delay or prevent the opening of a new restaurant. Although we do not, at this time, anticipate any occurring in the future, we cannot assure you that we or our franchisees will not experience material difficulties or failures that could impact the continuing operations of an existing restaurant, or delay the opening of restaurants in the future.
In addition, we are subject to laws and regulations, which vary from jurisdiction to jurisdiction, relating to nutritional content and menu labeling. Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation. In connection with the continued operation or remodeling of certain restaurants, we or our franchisees may be required to expend funds to meet federal, state and local and foreign regulations. The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of such laws could have an adverse effect on our results of operations.

19

Finally, we are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws contain provisions that supersede the terms of franchise agreements, including provisions concerning the termination or non-renewal of a franchise. Some state franchise laws require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and the franchisees. Changes in, and the cost of compliance with, government regulations could have a material effect on operations.
Restaurant development plans under development agreements may not be implemented effectively.    We rely on franchisees to develop Applebee's and IHOP restaurants. Restaurant development involves substantial risks, including the following:
•
the availability of suitable locations and terms for potential development sites;
•
the ability of franchisees to fulfill their commitments to build new restaurants in the numbers and the time frames specified in their development agreements;
•
the availability of financing, at acceptable rates and terms, to both franchisees and third-party landlords, for restaurant development;
•
delays in obtaining construction permits and in completion of construction;
•
developed properties not achieving desired revenue or cash flow levels once opened;
•
competition for suitable development sites;
•
changes in governmental rules, regulations, and interpretations (including interpretations of the requirements of the Americans with Disabilities Act); and
•
general economic and business conditions.
We cannot assure that the development and construction of facilities will be completed, or that any such development will be completed in a timely manner. We cannot assure that present or future development plans will perform in accordance with our expectations.
The opening and success of Applebee's and IHOP restaurants depend on various factors, including the demand for Applebee's and IHOP restaurants and the selection of appropriate franchisee candidates, the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, costs of construction, permit issuance and regulatory compliance, the ability to meet construction schedules, the availability of financing and other capabilities of franchisees. There is no assurance that franchisees planning the opening of restaurants will have the business abilities or sufficient access to financial resources necessary to open the restaurants required by their agreements. It cannot be assured that franchisees will successfully participate in our strategic initiatives or operate their restaurants in a manner consistent with our concepts and standards.
Approximately 99% of our restaurants are owned and operated by our franchisees and, as a result, we are highly dependent upon our franchisees. We have significantly increased the percentage of restaurants owned and operated by our franchisees. As a result, we expect to receive less revenue from company restaurant sales and any increase in general and administrative expenses may have a greater impact on our financial condition and business results. While our franchise agreements are designed to maintain brand consistency, this increase in the franchised-operated restaurants reduces our direct day-to-day control over these restaurants and may expose us to risks not otherwise encountered if we maintained ownership and control of the restaurants. These risks include franchisee defaults in their obligations to us arising from financial or other difficulties encountered by them, such as payments to us or maintenance and improvement obligations; limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings; unwillingness of franchisees to support our marketing programs and strategic initiatives; inability to participate in business strategy changes due to financial constraints; inability to meet rent obligations on leases on which we retain contingent liability; failure to operate restaurants in accordance with required standards; failure to report sales information accurately; efforts by one or more large franchisees or an organized franchise association to cause poor franchise relations; and failure to comply with food quality and preparation requirements subjecting us to potential losses even when we are not legally liable for a franchisee's actions or failure to act. Although we believe that our current relationships with our franchisees are generally good, there can be no assurance that we will maintain strong franchise relationships. Our dependence on franchisees could adversely affect us, our reputation and our brands, and could adversely affect our business, financial condition and results of operations.
Concentration of Applebee's franchised restaurants in a limited number of franchisees subjects us to greater credit risk.    As of December 31, 2012, Applebee's franchisees operated 1,862 Applebee's restaurants in the United States, comprising 99% of the total Applebee's restaurants in the United States. Of those restaurants, the twelve largest Applebee's franchisees owned 1,280 restaurants, representing 69% of all franchised Applebee's restaurants in the United States. The concentration of franchised restaurants in a limited number of franchisees subjects us to a potentially higher level of credit risk in respect of such franchisees because their financial obligations to us are greater as compared to those franchisees with fewer restaurants. The risk associated with these franchisees is also greater where franchisees are the sole or dominant franchisee for a particular region of the United States, as is the case for most domestic Applebee's franchised territories. In particular, if any of these franchisees experiences financial or other difficulties, the franchisee may default on its obligations under multiple franchise agreements including payments to us and the maintenance and improvement of its restaurants. If any of these franchisees are subject to bankruptcy or insolvency

20

proceedings, a bankruptcy court may prevent the termination of the related franchise agreements and development agreements. Any franchisee that is experiencing financial difficulties may also be unable to participate in implementing changes to our business strategy. Any franchisee that owns and operates a significant number of Applebee's restaurants and fails to comply with its other obligations under the franchise agreement, such as those relating to the quality and preparation of food and maintenance of restaurants, could cause significant harm to the Applebee's brand and subject us to claims by consumers even if we are not legally liable for the franchisee's actions or failure to act. Development rights for Applebee's restaurants are also concentrated among a limited number of existing franchisees. If any of these existing franchisees experience financial difficulties, future development of Applebee's restaurants may be materially adversely affected.
We are subject to credit risk from our IHOP franchisees operating under our Previous Business Model, and a default by these franchisees may negatively affect our cash flows.    Of the 1,404 IHOP restaurants subject to franchise agreements as of December 31, 2012, over half operate under the Previous Business Model. The Company was involved in all aspects of the development and financing of the IHOP restaurants established prior to 2003. Under the Previous Business Model, the Company typically identified and leased or purchased the restaurant sites, built and equipped the restaurants and then franchised them to franchisees. In addition, IHOP typically financed as much as 80% of the franchise fee for periods ranging from five to eight years and leased the restaurant and equipment to the franchisee over a 25-year period. Therefore, in addition to franchise fees and royalties, the revenues received from an IHOP franchisee operating under the Previous Business Model include, among other things, lease or sublease rents for the restaurant property building, rent under an equipment lease and interest income from the financing arrangements for the unpaid portion of the franchise fee under the franchise notes. If any of these IHOP franchisees were to default on their payment obligations to us, we may be unable to collect the amounts owed under the building property lease/sublease agreement and our notes and equipment contract receivables, as well as outstanding franchise royalties. The additional amounts owed to us by each of these IHOP franchisees subject us to greater credit risk and defaults by IHOP franchisees operating under our Previous Business Model may negatively affect our cash flows.
Termination or non-renewal of franchise agreements may disrupt restaurant performance.  Each franchise agreement is subject to termination by us in the event of default by the franchisee after applicable cure periods. Upon the expiration of the initial term of a franchise agreement, the franchisee generally has an option to renew the franchise agreement for an additional term. There is no assurance that franchisees will meet the criteria for renewal or will desire or be able to renew their franchise agreements. If not renewed, a franchise agreement and the related payments will terminate. We may be unable to find a new franchisee to replace such lost revenues. Furthermore, while we will be entitled to terminate franchise agreements following a default that is not cured within the applicable grace period, if any, such termination may disrupt the performance of the restaurants affected.
Franchisees may breach the terms of their franchise agreements in a manner that adversely affects our brands.    Franchisees are required to conform to specified product quality standards and other requirements pursuant to their franchise agreements in order to protect our brands and to optimize restaurant performance. However, franchisees may receive through the supply chain or produce sub-standard food or beverage products, which may adversely impact the reputation of our brands. Franchisees may also breach the standards set forth in their respective franchise agreements.
Franchisees are subject to potential losses that are not covered by insurance that may negatively impact their ability to make payments to us and perform other obligations under franchise agreements.    Franchisees may have insufficient insurance coverage to cover all of the potential risks associated with the ownership and operation of their restaurants. A franchisee may have insufficient funds to cover unanticipated increases in insurance premiums or losses that are not covered by insurance. Certain extraordinary hazards may not be covered and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, there is no assurance that any loss incurred will not exceed the limits on the policies obtained, or that payments on such policies will be received on a timely basis, or even if obtained on a timely basis, that such payments will prevent losses to such franchisee or enable timely franchise payments. Accordingly, in cases in which a franchisee experiences increased insurance premiums or must pay claims out-of-pocket, the franchisee may not have the funds necessary to make franchise payments.
Franchisees generally are not "limited purpose entities," making them subject to business, credit, financial and other risks.    Franchisees may be natural persons or legal entities. Franchisees are often not "limited-purpose entities," making them subject to business, credit, financial and other risks which may be unrelated to the operations of Applebee's or IHOP restaurants. These unrelated risks could materially and adversely affect a franchisee and its ability to make its franchise payments in full or on a timely basis. Any such decrease in franchise payments may have a material adverse effect on us. See the Risk Factor titled "An insolvency or bankruptcy proceeding involving a franchisee could prevent the collection of payments or the exercise of rights under the related franchise agreement," below.
An insolvency or bankruptcy proceeding involving a franchisee could prevent the collection of payments or the exercise of rights under the related franchise agreement.    An insolvency proceeding involving a franchisee could prevent us from collecting payments or exercising any of our other rights under the related franchise agreement. In particular, the protection of the statutory automatic stay that arises under Section 362 of the United States Bankruptcy Code upon the commencement of a

21

bankruptcy proceeding by or against a franchisee would prohibit us from terminating a franchise agreement previously entered into with a franchisee. Furthermore, a franchisee that is subject to bankruptcy proceedings may reject the franchise agreement in which case we would be limited to a general unsecured claim against the franchisee's bankruptcy estate on account of breach-of-contract damages arising from the rejection. Payments previously made to us by a franchisee that is subject to a bankruptcy proceeding also may be recoverable on behalf of the franchisee as a preferential transfer under the United States Bankruptcy Code.
The number and quality of franchisees is subject to change over time, which may negatively affect our business.    Our Applebee's business is highly concentrated in a limited number of franchisees. We cannot guarantee the retention of any, including the top performing, franchisees in the future, or that we will maintain the ability to attract, retain, and motivate sufficient numbers of franchisees of the same caliber. The quality of existing franchisee operations may be diminished by factors beyond our control, including franchisees' failure or inability to hire or retain qualified managers and other personnel. Training of managers and other personnel may be inadequate. These and other such negative factors could reduce the franchisee's restaurant revenues, impact payments under the franchise agreements and could have a material adverse effect on us. In the case of Applebee's, these negative factors would be magnified by the limited number of existing franchisees.
The inability of franchisees to fund capital expenditures may adversely impact future growth.    Our business strategy includes the periodic updating of Applebee's and IHOP restaurant locations through new remodel programs and other operational changes. The success of that business strategy will depend to a significant extent on the ability of the franchisees to fund the necessary capital expenditures to aid the repositioning and re-energizing of the brand. Labor and material costs expended will vary by geographical location and are subject to general price increases. To the extent the franchisees are not able to fund the necessary capital expenditures, our business strategy may take longer to implement and may not be as successful as we expect.
If franchisees and other licensees do not observe the required quality and trademark usage standards, our brands may suffer reputational damage, which could in turn adversely affect our business.    We license our intellectual property to our franchisees, product suppliers, manufacturers, distributors, advertisers and other third parties. The franchise agreements and other license agreements require that each franchisee or other licensee use the intellectual property in accordance with established or approved quality control guidelines. However, there can be no assurance that the franchisees or other licensees will use the intellectual property assets in accordance with such guidelines. Franchisee and licensee noncompliance with the terms and conditions of the governing franchise agreement or other license agreement may reduce the overall goodwill associated with our brands. Franchisees and other licensees may refer to our intellectual property improperly in communications, resulting in the weakening of the distinctiveness of our intellectual property. There can be no assurance that the franchisees or other licensees will not take actions that could have a material adverse effect on the Applebee's or IHOP intellectual property.
In addition, even if the licensee product suppliers, manufacturers, distributors, or advertisers observe and maintain the quality and integrity of the intellectual property assets in accordance with the relevant license agreement, any product manufactured by such suppliers may be subject to regulatory sanctions and other actions by third parties which can, in turn, negatively impact the perceived quality of our restaurants and the overall goodwill of our brands, regardless of the nature and type of product involved. Any such actions could reduce restaurant revenues and corresponding franchise payments to us.
We are heavily dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business.    We rely heavily on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, fraudulent manipulation of sales reporting from our restaurants resulting in loss of sales and royalty payments, or a breach in security of these systems could be harmful and cause delays in customer service and reduce efficiency in our operations. Significant capital investments might be required to remediate any problems.
As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests. These efforts may not be successful, and pose a variety of other risks, as discussed above under the heading: “A failure to develop and implement innovative marketing and guest relationship initiatives, ineffective or improper use of social media or other marketing initiatives, and increased advertising and marketing costs, could adversely affect our results of operations.”
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our employee and business relationships, all of which could subject us to loss and harm our brands. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information about our customers, franchisees, vendors and employees. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationship

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with our tenants, and private data exposure. In addition to maintaining insurance coverage to address cyber incidents, we also have implemented processes, procedures and controls to help mitigate these risks. These measures, as well as our increased awareness of a risk of a cyber incident, do not guarantee that our reputation and financial results will not be negatively impacted by such an incident.
Our use of personally identifiable information is regulated by foreign, federal and state laws, as well as by certain third-party agreements. If our security and information systems are compromised or if our employees or franchisees fail to comply with these laws and regulations, and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation and could result in costly litigation, judgments, or penalties resulting from violation of federal and state laws and payment card industry regulations. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance with those laws and regulations.
Our inability or failure to execute on a comprehensive business continuity plan following a major natural disaster such as an earthquake, tornado or man-made disaster, including terrorism, at our corporate facilities could materially adversely impact our business. Our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our two restaurant support centers. We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including earthquakes, tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.
Our business depends on our ability to attract and retain talented employees. Our business is based on successfully attracting and retaining talented employees. The market for highly skilled employees and leaders in our industry is extremely competitive. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
Retail brand development initiatives could negatively impact our IHOP brand. Our business expansion into retail product licensing could create new risks to our IHOP brand and reputation. During 2011, IHOP launched a line of premium frozen breakfast entrées and pancake syrups in retail outlets. We believe that this new retail product offering is a growth opportunity that allows our brand to reach additional customers more often. If customers have negative perceptions or experiences with retail products, our brand value could suffer which could have an adverse effect on our business.     

Failure of our internal controls over financial reporting and future changes in accounting standards may cause adverse unexpected operating results, affect our reported results of operations or otherwise harm our business and financial results. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our common stock.

A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing accounting rules or the questioning of current accounting practices may adversely affect our reported financial results. Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations are highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us could significantly change our reported or expected financial performance.

Item 1B.    Unresolved Staff Comments.
None.


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Item 2.    Properties.
The table below shows the location and ownership type of Applebee's and IHOP restaurants as of December 31, 2012:
 
Applebee's
 
IHOP
 
 
 
Franchise
 
Company
 
Total
 
Franchise
 
Company
 
Area License
 
Total
United States
 
 
 
 
 
 
 
 
 
 
 
 
 
Alabama
30

 
—

 
30

 
19

 
—

 
—

 
19

Alaska
2

 
—

 
2

 
4

 
—

 
—

 
4

Arizona
33

 
—

 
33

 
39

 
—

 
—

 
39

Arkansas
11

 
—

 
11

 
15

 
—

 
—

 
15

California
114

 
—

 
114

 
228

 
—

 
—

 
228

Colorado
26

 
—

 
26

 
29

 
—

 
—

 
29

Connecticut
7

 
—

 
7

 
7

 
—

 
—

 
7

Delaware
12

 
—

 
12

 
7

 
—

 
—

 
7

District of Columbia
—

 
—

 
—

 
3

 
—

 
—

 
3

Florida
111

 
—

 
111

 
—

 
—

 
148

*
148

Georgia
69

 
—

 
69

 
75

 
1

 
4

*
80

Hawaii
—

 
—

 
—

 
6

 
—

 
—

 
6

Idaho
12

 
—

 
12

 
9

 
—

 
—

 
9

Illinois
65

 
—

 
65

 
54

 
—

 
—

 
54

Indiana
66

 
—

 
66

 
23

 
—

 
—

 
23

Iowa
27

 
—

 
27

 
9

 
—

 
—

 
9

Kansas
24

 
10

 
34

 
20

 
1

 
—

 
21

Kentucky
37

 
—

 
37

 
6

 
1

 
—

 
7

Louisiana
18

 
—

 
18

 
28

 
—

 
—

 
28

Maine
11

 
—

 
11

 
1

 
—

 
—

 
1

Maryland
26

 
—

 
26

 
35

 
—

 
—

 
35

Massachusetts
29

 
—

 
29

 
20

 
—

 
—

 
20

Michigan
86

 
—

 
86

 
20

 
—

 
—

 
20

Minnesota
58

 
—

 
58

 
12

 
—

 
—

 
12

Mississippi
20

 
—

 
20

 
11

 
—

 
—

 
11

Missouri
47

 
13

 
60

 
27

 
—

 
—

 
27

Montana
8

 
—

 
8

 
5

 
—

 
—

 
5

Nebraska
20

 
—

 
20

 
5

 
—

 
—

 
5

Nevada
14

 
—

 
14

 
24

 
—

 
—

 
24

New Hampshire
14

 
—

 
14

 
4

 
—

 
—

 
4

New Jersey
57

 
—

 
57

 
39

 
—

 
—

 
39

New Mexico
18

 
—

 
18

 
17

 
—

 
—

 
17

New York
112

 
—

 
112

 
55

 
—

 
—

 
55

North Carolina
58

 
—

 
58

 
49

 
—

 
—

 
49

North Dakota
11

 
—

 
11

 
2

 
—

 
—

 
2

Ohio
95

 
—

 
95

 
21

 
9

 
—

 
30

Oklahoma
22

 
—

 
22

 
27

 
—

 
—

 
27

Oregon
21

 
—

 
21

 
7

 
—

 
—

 
7

Pennsylvania
78

 
—

 
78

 
18

 
—

 
—

 
18

Rhode Island
8

 
—

 
8

 
3

 
—

 
—

 
3

South Carolina
40

 
—

 
40

 
27

 
—

 
—

 
27

South Dakota
6

 
—

 
6

 
5

 
—

 
—

 
5

Tennessee
41

 
—

 
41

 
35

 
—

 
—

 
35

Texas
100

 
—

 
100

 
189

 
—

 
—

 
189

Utah
16

 
—

 
16

 
19

 
—

 
—

 
19

Vermont
3

 
—

 
3

 
1

 
—

 
—

 
1

Virginia
73

 
—

 
73

 
60

 
—

 
—

 
60

Washington
40

 
—

 
40

 
30

 
—

 
—

 
30

West Virginia
17

 
—

 
17

 
7

 
—

 
—

 
7

Wisconsin
44

 
—

 
44

 
14

 
—

 
—

 
14

Wyoming
5

 
—

 
5

 
3

 
—

 
—

 
3

Total Domestic
1,862

 
23

 
1,885

 
1,373

 
12

 
152

 
1,537


24

 
Applebee's
 
IHOP
 
 
 
Franchise
 
Company
 
Total
 
Franchise
 
Company
 
Area License
 
Total
International
 
 
 
 
 
 
 
 
 
 
 
 
 
Brazil
13

 
—

 
13

 
—

 
—

 
—

 
—

Canada
19

 
—

 
19

 
7

 
—

 
13

*
20

Chile
4

 
—

 
4

 
—

 
—

 
—

 
—

Costa Rica
3

 
—

 
3

 
—

 
—

 
—

 
—

Dominican Republic
—

 
—

 
—

 
1

 
—

 
—

 
1

Greece
1

 
—

 
1

 
—

 
—

 
—

 
—

Guatemala
3

 
—

 
3

 
2

 
—

 
—

 
2

Honduras
5

 
—

 
5

 
—

 
—

 
—

 
—

Jordan
1

 
—

 
1

 
—

 
—

 
—

 
—

Kuwait
5

 
—

 
5

 
—

 
—

 
—

 
—

Lebanon
1

 
—

 
1

 
—

 
—

 
—

 
—

Mexico
66

 
—

 
66

 
16

 
—

 
—

 
16

Puerto Rico
3

 
—

 
3

 
2

 
—

 
—

 
2

Qatar
6

 
—

 
6

 
—

 
—

 
—

 
—

Saudi Arabia
14

 
—

 
14

 
—

 
—

 
—

 
—

Singapore
1

 
—

 
1

 
—

 
—

 
—

 
—

St. Croix, Virgin Islands
—

 
—

 
—

 
1

 
—

 
—

 
1

United Arab Emirates
4

 
—

 
4

 
2

 
—

 
—

 
2

Total International
149

 
—

 
149

 
31

 
—

 
13

 
44

Totals
2,011

 
23

 
2,034

 
1,404

 
12

 
165

 
1,581

* of these restaurants 63 in Florida, 4 in Georgia and 11 in Canada have been sub-licensed by the area licensee

As of December 31, 2012, we operated 23 Applebee's restaurants and 12 IHOP restaurants for a total of 35 company-operated restaurants. Our intention is to continue to operate the 23 Applebee's restaurants in the Kansas CIty market and 10 IHOP restaurants in the Cincinnati market. Of these restaurants, we leased the building for five sites, owned the building and leased the land for 11 sites, owned the land and building for two sites and leased the land and building for 17 sites.
Of the 1,404 IHOP restaurants operated by franchisees, 61 were located on sites owned by us, 678 were located on sites leased by us from third parties and 665 were located on sites owned or leased by franchisees. All of the IHOP restaurants operated by area licensees and 2,010 of the franchisee-operated Applebee's restaurants were located on sites owned or leased by the area licensees or the franchisees. We owned one site on which a franchisee-operated Applebee's restaurant was located.
Leases of IHOP restaurants generally provide for an initial term of 20 to 25 years, with most having one or more five-year renewal options. Leases of Applebee's restaurants generally have an initial term of 10 to 20 years, with renewal terms of five to 20 years. In addition, a substantial number of the leases for both IHOP and Applebee's restaurants include provisions calling for the periodic escalation of rents during the initial term and/or during renewal terms. The leases typically provide for payment of rents in an amount equal to the greater of a fixed amount or a specified percentage of gross sales and for payment of taxes, insurance premiums, maintenance expenses and certain other costs. Historically, it has been our practice to seek to extend, through negotiation, those leases that expire without renewal options. However, from time to time, we choose not to renew a lease or are unsuccessful in negotiating satisfactory renewal terms. When this occurs, the restaurant is closed and possession of the premises is returned to the landlord.
Under our Applebee's franchise agreements, we have certain rights to gain control of a restaurant site in the event of default under the franchise agreement. Because most IHOP franchised restaurants developed by us under our Previous Business Model are subleased to the franchisees, IHOP has the ability to regain possession of the subleased restaurant if the franchisee defaults in the payment of rent or other terms of the sublease.
We currently occupy our principal corporate offices and IHOP restaurant support center in Glendale, California, under a lease expiring in June 2020. The Applebee's restaurant support center is located in Kansas City, Missouri under a lease expiring in October 2021.


25


Item 3.    Legal Proceedings.
We are subject to various lawsuits, administrative proceedings, audits, and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. We are required to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred. Management regularly assesses our insurance deductibles, analyzes litigation information with our attorneys and evaluates our loss experience in connection with pending legal proceedings. While we do not presently believe that any of the legal proceedings to which we are currently a party will ultimately have a material adverse impact on us, there can be no assurance that we will prevail in all the proceedings we are party to, or that we will not incur material losses from them.

As previously disclosed, we defended a collective action, Gerald Fast v. Applebee's International, Inc., in the United States District Court for the Western District of Missouri, Central Division that commenced in July 2006. In this case, the plaintiffs claimed that tipped servers and bartenders in Applebee's company-operated restaurants spent more than 20% of their time performing general preparation and maintenance duties, or “non-tipped work,” for which they should be compensated at the minimum wage. Under this action, plaintiffs sought unpaid wages and other relief of up to $17 million plus plaintiffs' attorneys' fees and expenses. We entered into a settlement agreement on September 25, 2012 to settle the action for $9.1 million, and the court granted final approval of the settlement and dismissed the action on November 1, 2012. We funded the settlement on December 6, 2012.

Item 4.   Mine Safety Disclosure.

Not Applicable.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the NYSE under the symbol "DIN". The following table sets forth the high and low sales prices of our common stock on the NYSE for each quarter of 2012 and 2011. We did not pay dividends on our common stock in 2012 and 2011.
 
Fiscal Year 2012
 
Fiscal Year 2011
 
Prices
 
Prices
Quarter
High
 
Low
 
High
 
Low
First
$
54.74

 
$
40.28

 
$
60.11

 
$
49.46

Second
$
53.90

 
$
41.63

 
$
56.78

 
$
46.26

Third
$
57.40

 
$
41.49

 
$
56.37

 
$
35.47

Fourth
$
68.47

 
$
55.51

 
$
49.64

 
$
35.20


Holders
The number of stockholders of record and beneficial owners of our common stock as of February 8, 2013 was estimated to be 6,200.
Dividends
Under our Credit Agreement, we are limited as to the total amount of permitted restricted payments, including dividends on common stock, that may be made (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Restricted Payments"). At December 31, 2012, the permitted amount of restricted payments was approximately $85 million. We evaluate dividend payments on our common stock within the context of our overall capital allocation strategy with our Board of Directors on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements, the limitations referenced above and other factors. On February 26, 2013, our Board of Directors approved payment of a cash dividend of $0.75 per share of our common stock, payable at the close of business on March 29, 2013 to the stockholders of record as of the close of business on March 15, 2013.

26

 

Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2012, regarding shares outstanding and available for issuance under our existing equity compensation plans:
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
958,246

 
$
39.67

 
1,123,384

Equity compensation plans not approved by security holders
—

 
—

 
—

Total
958,246

 
$
39.67

 
1,123,384

The number of securities remaining available for future issuance represents shares under our 2011 Stock Incentive Plan. Please refer to Note 16, Stock-Based Incentive Plans, in the Notes to the Consolidated Financial Statements for a description of the Plan.
Issuer Purchases of Equity Securities
Under our Credit Agreement, we are limited as to the total amount of permitted restricted payments, including repurchase of our common stock, that may be made (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Restricted Payments"). At December 31, 2012, the permitted amount of restricted payments was approximately $85 million.

In August 2011, our Board of Directors authorized the repurchase of up to $45 million of common stock. Repurchases are subject to prevailing market prices and may take place in open market transactions and in privately negotiated transactions, based on business, market, applicable legal requirements and other considerations. The program does not require the repurchase of a specific number of shares and may be terminated at any time. We did not repurchase any shares of our common stock during 2012. As of December 31, 2012, we have repurchased 534,101 shares of common stock under this program at an average price of $39.64 per share.

On February 26, 2013, our Board of Directors approved a stock repurchase authorization of up to $100 million of our common stock, replacing the previously announced $45 million stock repurchase authorization. We may now repurchase up to an additional $78.8 million of our common stock under the revised authorization.
During 2012, a total of 34,829 shares of restricted stock were surrendered to the Company at an average price of $49.96 per share to satisfy tax withholding obligations in connection with the vesting of restricted stock awards issued to employees under our stock compensation plans. Of that total, 866 shares were surrendered during the fourth quarter at an average price of $56.17 per share.


27

Stock Performance Graph
The graph below shows a comparison of the cumulative total shareholder return on our common stock with the cumulative total return on the Standard & Poor's 500 Composite Index and the Value-Line Restaurants Index ("Restaurant Index") over the five-year period ended December 31, 2012. The graph and table assume $100 invested at the close of trading on the last day of trading in 2007 in our common stock and in each of the market indices, with reinvestment of all dividends. Stockholder returns over the indicated periods should not be considered indicative of future stock prices or stockholder returns.
Comparison of Five-Year Cumulative Total Shareholder Return
DineEquity, Inc., Standard & Poor's 500 And Value Line Restaurant Index
(Performance Results Through December 31, 2012)


 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
DineEquity, Inc. 
$
100.00

 
$
33.16

 
$
69.68

 
$
141.65

 
$
121.08

 
$
192.20

Standard & Poor's 500
100.00

 
63.00

 
79.67

 
91.67

 
93.60

 
108.58

Restaurant Index
100.00

 
93.28

 
119.49

 
166.29

 
219.32

 
231.00



28

Item 6.    Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations information and the consolidated balance sheet data for the years ended and as of December 31, 2012, 2011, 2010, 2009 and 2008 are derived from our audited consolidated financial statements.

 
Fiscal Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In millions, except per share amounts)
Segment Revenues
 
 
 
 
 
 
 
 
 
Franchise revenues
$
421.4

 
$
398.5

 
$
377.1

 
$
373.0

 
$
353.3

Company restaurant sales(a)
291.1

 
531.0

 
815.6

 
890.0

 
1,103.2

Rental income
122.9

 
126.0

 
124.5

 
133.9

 
131.4

Financing revenues
14.5

 
19.7

 
16.4

 
17.9

 
25.7

Total revenues
849.9

 
1,075.2

 
1,333.6

 
1,414.8

 
1,613.6

Segment Expenses
 
 
 
 
 
 
 
 
 
Franchise expenses
109.9

 
105.0

 
103.5

 
102.2

 
96.2

Company restaurant expenses(a)
249.3

 
458.4

 
699.3

 
766.5

 
978.2

Rental expenses
97.2

 
98.2

 
99.0

 
100.2

 
98.1

Financing expenses
1.6

 
6.0

 
2.0

 
0.4

 
7.3

Total segment expenses
458.0

 
667.6

 
903.8

 
969.3

 
1,179.8

Gross segment profit
391.9

 
407.6

 
429.8

 
445.5

 
433.8

General and administrative expenses
163.2

 
155.8

 
160.3

 
157.7

 
182.3

Interest expense
114.3

 
132.7

 
171.5

 
186.3

 
203.2

Impairment and closure charges
4.2

 
29.9

 
4.3

 
105.6

 
240.6

Amortization of intangible assets
12.3

 
12.3

 
12.3

 
12.3

 
12.1

Loss (gain) on extinguishment of debt and temporary equity
5.6

 
11.2

 
107.0

 
(45.7
)
 
(15.2
)
(Gain) loss on disposition of assets
(102.6
)
 
(43.3
)
 
(13.5
)
 
(7.3
)
 
0.3

Other (income) expense, net
—

 
4.0

 
—

 
—

 
(1.3
)
Income (loss) before income taxes
194.9

 
105.0

 
(12.1
)
 
36.6

 
(188.2
)
Income tax (provision) benefit
(67.2
)
 
(29.8
)
 
9.3

 
(5.2
)
 
33.7

Net income (loss)
$
127.7

 
$
75.2

 
$
(2.8
)
 
$
31.4

 
(154.5
)
Net income (loss)
$
127.7

 
$
75.2

 
$
(2.8
)
 
$
31.4

 
$
(154.5
)
Less: Series A preferred stock dividends
—

 
—

 
(25.9
)
 
(19.5
)
 
(19.0
)
Less: Accretion of Series B preferred stock
(2.5
)
 
(2.6
)
 
(2.5
)
 
(2.3
)
 
(2.1
)
Less: Net (income) loss allocated to unvested participating restricted stock
(2.7
)
 
(1.9
)
 
1.2

 
(0.4
)
 
6.4

Net income (loss) available to common stockholders
$
122.5

 
$
70.7

 
$
(30.0
)
 
$
9.2

 
$
(169.2
)
Net income (loss) available to common stockholders per share:
 
 
 
 
 
 
 
 
 
Basic
$
6.81

 
$
3.96

 
$
(1.74
)
 
$
0.55

 
$
(10.09
)
Diluted
$
6.63

 
$
3.89

 
$
(1.74
)
 
$
0.55

 
$
(10.09
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
18.0

 
17.8

 
17.2

 
16.9

 
16.8

Diluted
18.9

 
18.2

 
17.2

 
16.9

 
16.8

Dividends declared per common share(b)
$
—

 
$
—

 
$
—

 
$
—

 
$
1.00

Dividends paid per common share(b)
$
—

 
$
—

 
$
—

 
$
—

 
$
1.00

Balance Sheet Data (end of year)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
64.5

 
$
60.7

 
$
102.3

 
$
82.3

 
$
114.4

Restricted cash—short-term(c)
1.9

 
1.2

 
0.9

 
72.7

 
83.4

Restricted cash—long-term(c)
—

 
—

 
0.8

 
48.2

 
53.4

Property and equipment, net
294.4

 
474.2

 
612.2

 
771.4

 
824.5

Total assets
2,415.4

 
2,614.3

 
2,856.6

 
3,100.9

 
3,361.2

Long-term debt, less current maturities
1,202.1

 
1,411.4

 
1,631.5

 
1,637.2

 
1,853.4

Financing obligations, less current maturities
52.0

 
162.7

 
237.8

 
309.4

 
318.7

Capital lease obligations, less current maturities
124.4

 
134.4

 
144.0

 
152.8

 
161.3

Stockholders' equity
308.8

 
155.2

 
83.6

 
69.9

 
42.8

_________________________________________________________________________
(a)
We have refranchised 479 Applebee's company-operated restaurants since December 31, 2007.
(b)
Effective December 11, 2008, the Company suspended payments of dividends on DineEquity common stock.
(c)
Cash restrictions related to securitized debt were eliminated by a refinancing of long-term debt in 2010.

29

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking Statements
Statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. The forward-looking statements contained in this report are made as of the date hereof and the Company assumes no obligation to update or supplement any forward-looking statements.
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this report.
Business Overview
The Company
The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter, the Company's predecessor began developing and franchising additional restaurants. The Company was incorporated under the laws of the State of Delaware in 1976 with the name IHOP Corp. In November 2007, the Company completed the acquisition of Applebee's International, Inc., which became a wholly-owned subsidiary of the Company. Effective June 2, 2008, the name of the Company was changed to DineEquity, Inc. ("DineEquity," "we" or "our"). Through various subsidiaries (see Exhibit 21, Subsidiaries of DineEquity, Inc.) we own, franchise and operate two restaurant concepts: Applebee's Neighborhood Grill & Bar® ("Applebee's"), in the bar and grill segment of the casual dining category of the restaurant industry, and International House of Pancakes® ("IHOP®"), in the family dining category of the restaurant industry. References herein to Applebee's and IHOP restaurants are to these two restaurant concepts, whether operated by franchisees, area licensees or the Company.
Domestically, IHOP restaurants are located in all 50 states and the District of Columbia, while Applebee's restaurants are located in every state except Hawaii. Internationally, IHOP restaurants are located in two United States territories and five foreign countries; Applebee's restaurants are located in one United States territory and 15 foreign countries. With over 3,600 restaurants combined, we believe we are the largest full-service restaurant company in the world.
Our Vision
To become the preferred franchisor of choice and deliver maximum franchisee and shareholder value.
Our Mission
To unite great franchisees, iconic brands and team members to create the world's leading restaurant company - one guest at a time. To achieve this mission, our strategies are designed to ensure strong brands; drive profitable, organic growth; identify and exploit complementary concepts and extensions; and create and monetize new value-added services.
2012 Highlights
2012 marked the fifth anniversary of bringing together two of the world's most-iconic dining brands under one enterprise. The highlight of this anniversary year was the achievement of our vision of becoming a 99% franchised company with the completion of refranchising the vast majority of the company-owned restaurants operated by Applebee’s when we closed the acquisition five years ago. We believe a highly franchised business model requires less capital investment and general and administrative overhead, generates higher gross profit margins and reduces the volatility of free cash flow performance, as compared to a model based on operating a significant number of company-owned restaurants.






30

Other highlights of our fiscal 2012 performance include:
•
Reducing our long-term debt by $332.6 million, which lowered our consolidated leverage ratio to 4.6:1 at December 31, 2012 from 5.3:1 at December 31, 2011. The reduction primarily came from a combination of after-tax cash proceeds and elimination of financing obligations from the refranchising of Applebee's company-operated restaurants and from our free cash flow;
•
Increasing Applebee's domestic same-restaurant sales by 1.2% during 2012, the third consecutive year of same-restaurant sales growth. Applebee's same-restaurant sales have increased in nine of the last ten quarters;
•
Opening 48 new restaurants worldwide by IHOP franchisees and area licensees and 34 new restaurants by Applebee's franchisees. IHOP's international footprint was expanded with franchise openings in the Middle East and the Dominican Republic;
•
Remodeling over 560 restaurants system-wide during 2012. Applebee's and its franchisees remodeled 370 restaurants during 2012, while IHOP and its franchisees remodeled 191 restaurants. Over the past two years, 51% of Applebee's restaurants and approximately one-third of IHOP restaurants have been remodeled;
•
Executing a comprehensive restructuring of general and administrative functions that will reduce future costs. While the severance costs associated with headcount reductions exceeded savings in fiscal 2012, we estimate these actions will save approximately $10 million to $12 million on a annualized basis in the future; and
•
Establishing new Centers of Excellence to pool talent from across our organization to realize synergies, share best practices and eliminate duplication of effort.
Key Performance Indicators
In evaluating and assessing the performance of our business, we consider our key performance indicators to be: (i) the percentage change in domestic system-wide same-restaurant sales; (ii) net franchise restaurant development; (iii) consolidated cash from operations; and (iv) consolidated free cash flow. An overview of our 2012 performance in these metrics is as follows:
 
Applebee's
 
IHOP
Percentage change in domestic system-wide same-restaurant sales
1.2%
 
(1.6
)%
Net franchise restaurant development(1)
15
 
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(1)
Franchise and area license openings, net of closings and the refranchising of 154 Applebee's company-operated restaurants and two rehabilitated and refranchised IHOP restaurants
For the year ended December 31, 2012, our consolidated cash from operations was $52.9 million and our consolidated free cash flow was $48.2 million.
We achieved mixed results on these metrics in 2012. Applebee's achieved an increase in domestic system-wide same-restaurant sales for the third consecutive year. Applebee's cumulative increase over those three years is 3.5%, a significant achievement in light of the headwinds we faced as the country and our guests recovered from the 2008 economic crisis. IHOP, on the other hand, had a decline in its domestic system-wide same-restaurant sales for the second consecutive year, although the decline in 2012 was less than in 2011.
IHOP franchisees and area licensees opened 48 new franchise restaurants in 2012, with net openings (openings less closings and refranchisings) of 31 restaurants. Over the past three years, IHOP has achieved 125 net openings, an annual growth rate of nearly 3%. Applebee's franchisees opened 34 new franchise restaurants in 2012, with net openings of 15 restaurants. Over the past three years, Applebee's net openings totaled 33 restaurants, an annual growth rate of under 1%.
Both cash from operations and free cash flow decreased approximately 55% from the prior year. The majority of the decline was the expected result of the refranchising of Applebee's company-operated restaurants in terms of both restaurant operating profit foregone and payment of taxes on gains from the sale of restaurant assets. While proceeds from asset sales are an investing cash inflow, all income taxes paid are an operating cash outflow.
Additional information on each of these metrics is presented under the captions "Restaurant Data," "Company Restaurant Operations" and "Liquidity and Capital Resources" below.


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Key Overall Strategies
DineEquity's Key Strategies
With the completion of our refranchising initiative, DineEquity is continuing with its efforts to drive shareholder and franchisee value. We have an ongoing program to leverage core competencies across the entire enterprise that is focused on three primary goals:
•
Optimize organization capability;
•
Drive profitable organic growth; and
•
Reduce costs for both ourselves and our franchisees.
We have a fundamentally differentiated approach to brand management that centers on the powerful and strategic combination of marketing, menu, operations and remodel initiatives that creates a distinctive and relevant connection with our guests. Additionally, our shared services operating platform allows our brands to focus on key factors that drive the business while leveraging the resources and expertise of our scalable, centralized support structure. We believe this is a competitive point of difference. Together, this closely integrated approach is expected to result in strong brand performance that drives DineEquity's growth and delivers results for our shareholders.
Applebee's Key Strategies

We are revitalizing the Applebee's brand. Applebee's domestic system-wide same-restaurant sales increased 1.2% in 2012. This was Applebee's third year of increased same-restaurant sales and we outpaced our group of competitors. We are growing by executing on the following key strategies: (i) drive profitable sales and traffic; (ii) invest in process and product innovation; (iii) transform the business; and (iv) improve margins and restaurant level economics.

Drive Profitable Sales and Traffic

•
Continued focus on meeting the consumer's need for value throughout 2012, with such promotions as the return of our successful "Sizzling Entrées" starting at $9.99 nationwide, the introduction of our Fresh Flavors of the Season, and the rotation of new products into our “2 for $20” offering. We ended the year with Spirited Cuisine featuring our new Napa Chicken and Portobellos and highly popular new Brew Pub Pretzels & Beer Cheese Dip;

•
Continued innovation of the menu. Since the acquisition in 2007, more than 90% of Applebee's menu now consists of either new offerings or improved offerings with high quality ingredients;

•
Continued our unique healthy food offerings by refreshing our "Under 550" calorie menu in January 2011, which combined with our Weight Watchers menu has established us as a category leader in providing healthy dining options to our guests; and

•
Focused on late-night business through beverage and appetizer innovation and local restaurant marketing efforts.

Invest in Process and Product Innovation

We continue to invest in and drive innovation at Applebee's from both a product and process perspective. We maintain a significant test and implementation focus to both develop and discover new trends and opportunities within the casual dining segment and beyond. Our history of innovation is readily apparent in our continual evolution of limited-time product offerings as well as core menu items. We take a similar approach to evaluation of media strategies and consumer touch points

Transform the Business

In June 2010, we rolled out “Connections,” the new comprehensive restaurant revitalization program involving people, place and promotional aspects. The people aspect involves re-training and re-certification for kitchen staff and team members. The place aspect involves exterior and interior modifications to the restaurant to signal change. The promotional aspect involves a local public relations and marketing plan to re-connect with the neighborhood. Our franchisees have embraced this initiative and by year-end 2012, over 50% of the restaurants in the domestic system have been revitalized.

The Company achieved its strategy to transition to a 99% franchise-operated Applebee's system in 2012 which includes buyers who are financially qualified, share our vision for revitalizing the Applebee's brand, are willing to invest in the business, and have

32

well-qualified management teams. During 2012, we refranchised 154 company-operated restaurants. This highly franchised business model is expected to require less capital investment and general and administrative overhead, improve overall segment profit margins and reduce the volatility of cash flow performance.

Improve Margins and Restaurant Level Economics

We have continued to build upon process and system improvements deployed in prior years by improving our operating metrics. Food inventory management and labor efficiencies were realized during the first half of 2012 in Company-operated restaurants. These operational improvements helped mitigate the impact of increasing commodity costs and higher payroll expense. We continued to reap the benefits of our supply chain co-op by leveraging our scale to manage through commodity cost inflation, which was also mitigated by the realignment of our distribution centers in 2010.

With our transition to a 99% franchised system, restaurant operating margin at the remaining 23 company-operated restaurants will become less impactful to our results of operations. Given that the primary focus of these restaurants in the future will be to test new products and processes, their operating margin as a percentage of sales is expected to decline. However, we will continue to invest in product and process innovation to help our franchisees maintain and improve their restaurant level economics for the overall financial well-being of the overall Applebee's system.

We continue to monitor our franchisees through our franchisee operations rating system, which provides visibility concerning their performance in relation to guest experience, food safety and training.

In a challenging economic environment and a highly competitive casual dining category, there can be no assurance that the strategies described above, when implemented, will achieve the intended results.

IHOP's Key Strategies

To re-ignite growth we have been pursuing key initiatives within the three pillars of our strategic framework: (1) re-energize and grow the IHOP brand; (2) improve operations performance; and (3) optimize franchise development.

Re-energize and Grow the IHOP Brand

To re-energize and grow the IHOP brand, we are implementing several key initiatives: 1) enhancing our menu; 2) increasing media effectiveness and 3) improving our advertising. We continuously evolve our menu to maximize consumer acceptance, ease of use and appeal of the individual items offered. This is an ongoing and continuous process. The expanded "Simple and Fit" line of items with less than 600 calories and Signature Pancakes line of items are recent examples of this work. Substantially all IHOP restaurants are using pollable point-of-sale systems to capture and report a broad range of sales and product mix data. This information is used by management to, among other things, gauge guest acceptance of menu items and the success of promotions and limited time offers.

Over the years, we have adjusted where and when our advertisements are run to maximize the impact of our advertising dollars. These decisions are based on market conditions for advertising and an understanding of how best to reach our target customers. Our focus remains national advertising as we believe this is the best way to drive traffic to our restaurants. Gaining the attention of consumers in a highly competitive market requires that we constantly update and modify our advertising campaigns to maintain guest engagement. Recently, we launched a campaign with the “Everything You Love About Breakfast” as the tagline and theme, accompanied by a “Brandthem” which extols the customer satisfaction gained from dining at IHOP.

Finally, we have increased our efforts in key social media outlets, reflecting the growing importance of these channels. In 2012, we re-launched IHOP.com improving its interactivity and connections with key social media sites. Our e-club, launched in 2010, continues to grow and provide a valuable direct communication channel to a key group of IHOP consumers.

Improve Operations Performance

We constantly strive to improve every aspect of restaurant operations. To enhance our guest-centric culture, and enable our franchisees to assess and improve their service and the condition of their restaurants, we have developed several new tools that augment our guest feedback tool, the “Voice of the Guest” program, which provides real-time consumer responses to the operators and the brand.

In 2012, we implemented an enhanced Operations Evaluations process whereby all IHOP locations are assessed three times per year on a wide range of operational attributes, allowing franchisees to understand their performance against a set of predetermined

33

standards. Specific training is offered to franchisees to assist them in remediating any areas of opportunity identified in the Operations Evaluation. In addition, IHOP modified its service procedures in 2012 to improve speed of service and improve guest satisfaction. While results from both programs have been positive, we recognize that operations excellence is a continuous process without end.

Optimize Franchise Development and Franchise System Health

Under the Current Business Model, IHOP seeks to optimize franchise development by recruiting franchise developers within and outside the current system and working with these franchise developers in the site selection and building process. This strategy has proved successful as our franchisees have developed approximately 516 restaurants since the inception of the Current Business Model and our franchisees have a pipeline of 285 additional new restaurants committed, optioned or pending. In 2012, an IHOP franchisee opened the first IHOP restaurants in the Middle East demonstrating the interest in the IHOP brand outside of North America. In 2013, a new international franchisee opened the first IHOP restaurant in the Philippines. We continue to explore opportunities in new international markets. The existing franchisee base accounts for most of these future development obligations.

In addition, we may take steps to consolidate and rehabilitate existing markets if we believe that doing so is advisable in order to fully realize development potential. We consistently monitor individual franchisee health and compliance with franchise agreements and we may also take steps to exercise our contractual rights within the franchise agreement in the event of noncompliance.

In a challenging economic environment and a highly competitive family dining category, there can be no assurance that the strategies described above, when implemented, will achieve the intended results within the time frame anticipated.
Significant Known Events, Trends or Uncertainties Impacting or Expected to Impact Comparisons of Reported or Future Results
Current Economic Conditions
The consumer continues to receive a mixture of positive and negative economic information. Gross Domestic Product ("GDP") grew at a modest pace for the full year of 2012, but preliminary estimates for the fourth quarter of 2012 showed a slight decline. The unemployment rate declined from December 2011 to December 2012, but the unemployment rate rose in January 2013. We believe uncertainty over the degree and duration of the economic recovery, the impact of the expiration of the 2% payroll tax cut that had been in place for the last two years and possible deficit reduction measures may continue to temper consumer discretionary spending. A decline or lack of growth in disposable income for discretionary spending could cause our customers to change purchasing behavior and choose lower-cost dining options or alternatives to dining out. These factors could have an adverse effect on our business, results of operations and financial condition.
Sales Trends
 
 
Domestic System-wide Same-restaurant Sales
 
 
Increase (Decrease)
 
 
2010
 
2011
 
2012
 
 
Q1
 
Q2
 
Q3
 
Q4
 
Q1
 
Q2
 
Q3
 
Q4
 
Q1
 
Q2
 
Q3
 
Q4
Applebee’s
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter
 
(2.7
)%
 
(1.6
)%
 
3.3
 %
 
2.9
%
 
3.9
 %
 
3.1
 %
 
(0.3
)%
 
1.0
 %
 
1.2
 %
 
0.7
 %
 
2.0
 %
 
0.9
 %
YTD
 
(2.7
)%
 
(2.2
)%
 
(0.5
)%
 
0.3
%
 
3.9
 %
 
3.5
 %
 
2.3
 %
 
2.0
 %
 
1.2
 %
 
1.0
 %
 
1.3
 %
 
1.2
 %
IHOP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter
 
(0.4
)%
 
(1.0
)%
 
0.1
 %
 
1.1
%
 
(2.7
)%
 
(2.9
)%
 
(1.5
)%
 
(1.0
)%
 
(0.5
)%
 
(1.4
)%
 
(2.0
)%
 
(2.6
)%
YTD
 
(0.4
)%
 
(0.7
)%
 
(0.4
)%
 
0.0
%
 
(2.7
)%
 
(2.8
)%
 
(2.4
)%
 
(2.0
)%
 
(0.5
)%
 
(0.9
)%
 
(1.3
)%
 
(1.6
)%
Applebee’s domestic system-wide same-restaurant sales increased 1.2% for the year ended December 31, 2012. This marked the third consecutive year of same-restaurant sales growth, with increases in nine of the last ten consecutive quarters. The increase in same-restaurant sales during 2012 was driven by an increase in average guest check offset by a decline in guest traffic. The higher average guest check came from an increase in menu pricing and an increase from favorable product mix changes.
 
IHOP’s domestic system-wide same-restaurant sales decreased 1.6% for the year ended December 31, 2012. The decrease was primarily due to a decline in guest traffic, partially offset by a higher average guest check compared to fiscal 2011. The decline in IHOP's domestic system-wide same-restaurant sales in 2012 reflects, in part, that the initiatives we are undertaking to improve our sales performance were not fully implemented for all of 2012.  We expect that it will take several visitation and product promotion cycles for consumers to see, experience and taste the actions we have taken.

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Capital Allocation Strategy

On February 26, 2013, our Board of Directors approved a capital allocation strategy that contemplates the return of a significant portion of our free cash flow to our stockholders. The Board of Directors approved the payment of a cash dividend of $0.75 per share of our common stock, payable at the close of business on March 29, 2013 to the stockholders of record as of the close of business on March 15, 2013. The Board of Directors also approved a stock repurchase authorization of up to $100 million of our common stock, replacing the previously announced $45 million authorization, pursuant to which $21.2 million of common stock was repurchased.

Debt Modification and Retirements
 
On February 4, 2013, we entered into an amendment to our Credit Agreement. The amendment lowers the interest rate floor on our term loan borrowings under the Credit Agreement by 0.50%, eliminates the interest rate floor on our revolving loans under the Credit Agreement, reduces the amount of required debt repayments from our excess cash flow and modifies the calculation of the permitted amount of restricted payments (see "Liquidity and Capital Resources of the Company - February 2013 Amendment"). We will recognize costs of approximately $1.2 million in our 2013 Consolidated Statements of Operations related to this debt modification.
 
During the year ended December 31, 2012, we repaid $210.5 million of outstanding borrowings under the Credit Agreement and we repurchased $5.0 million of our 9.5% Senior Notes. Including the write-off of the discount and deferred financing costs related to the debt retired and a $0.5 million premium paid on the Senior Notes, we recognized a loss on the retirement of debt of $5.6 million. Additionally, as the result of refranchising 154 Applebee’s company-operated restaurants, we were released from financing obligations of $111.5 million related to 66 of the properties refranchised.
 
Financial Statement Effect of Refranchising Company-Operated Restaurants
 
As noted under “2012 Highlights” above, we have reached our goal of transitioning Applebee's to a 99% franchised system. Compared to amounts that have been reported historically since the Applebee's acquisition, the amounts reported in future periods for company-operated restaurant revenues and expenses will be considerably smaller, while franchise royalty revenues and expenses should increase. Our segment profit margin percentage will increase but total segment profit will likely be smaller because royalties from franchised restaurants are a smaller percentage of restaurant revenues than the historic restaurant operating profit margin percentage of company-operated restaurants. However, changes in same-restaurant sales will create less of an impact on operating income now that the Applebee's system is 99% franchised.

Additionally, our interest expense will be lower because the after-tax proceeds from the sale of restaurant assets were used to retire debt. The completed refranchising of the Applebee’s company-operated restaurants also will result in a reduction of both general and administrative expenses and required capital investment in restaurant assets as compared to amounts reported prior to the completion of our refranchising strategy.
 
Significant Gains and Charges

There were several significant gains and charges that affect the comparisons of fiscal year 2012 results with the previous periods presented herein, as shown in the following table:
 
Year ended December 31,
 
2012
 
2011
 
2010
 
(In millions)
Impairment and closure charges
$
4.2

 
$
29.9

 
$
4.3

Loss on extinguishment of debt and temporary equity
5.6

 
11.2

 
107.0

Gain on disposition of assets
(102.6
)
 
(43.3
)
 
(13.6
)

Each transaction is discussed in further detail as to the activity that occurred in each year under paragraphs captioned with these descriptions elsewhere in Item 7. Our long-lived tangible and intangible assets (including goodwill) must be assessed continually for indicators of impairment. Goodwill and intangible assets comprised 62% of our total assets as of December 31, 2012. While there have been no impairments of goodwill or intangible assets over the past three years, given the uncertainty as to future economic and other assumptions used in assessing impairments, it is possible that significant impairment charges may occur in future periods.


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We incurred significant charges in connection with the refinancing of debt in October 2010. While we have retired more than$200 million in debt each year subsequent to that refinancing, the loss on debt extinguishment has been substantially smaller than the amount recorded in 2010. This decrease is because discount and deferred issuance costs associated with our refinanced debt that are written off on a pro rata basis as debt is retired are substantially less than those associated with our debt instruments that were extinguished in the 2010 refinancing. Therefore, while we may continue to dedicate a portion of excess cash flow towards early debt retirement, we do not anticipate recognizing significant losses on the extinguishment of debt unless we enter into another refinancing transaction that extinguishes all then-current debt.
Gains on disposition of assets relate primarily to the refranchising and sale of related restaurant assets of Applebee’s company-operated restaurants. Since we have achieved our goal of becoming 99% franchised, we do not anticipate significant gains or losses on the disposition of assets in the future.


36

Restaurant Data
The following table sets forth, for each of the past three years, the number of effective restaurants in the Applebee's and IHOP systems and information regarding the percentage change in sales at those restaurants compared to the same period in the prior year. "Effective restaurants" are the number of restaurants in a given period, adjusted to account for restaurants open for only a portion of the period. Information is presented for all effective restaurants in the Applebee's and IHOP systems, which includes company-operated restaurants, as well as those operated by franchisees and area licensees. Sales of restaurants that are operated by franchisees and area licensees are not attributable to the Company. However, we believe that presentation of this information is useful in analyzing our revenues because franchisees and area licensees pay us royalties and advertising fees that are generally based on a percentage of their sales, as well as, in some cases, rental payments under leases that are usually based on a percentage of their sales. Management also uses this information to make decisions about future plans for the development of additional restaurants as well as evaluation of current operations.
 
Year Ended December 31,
 
2012
 
2011
 
2010
Applebee's Restaurant Data