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Article by DailyStocks_admin    (09-29-08 07:13 AM)

Filed with the SEC from Sep 18 to Sep 24:

DineEquity (DIN)
MSD Capital, the investment vehicle of Dell (ticker: DELL) founder Michael Dell, intends to talk to DineEquity about hiring a new financial chief, among other things. (Thomas G. Conforti resigned last week as DineEquity's financial chief.) MSD also plans to have talks with the company regarding debt repayment, changes in its capitalization and dividend policy, and disposition of company restaurants, among other things. MSD beneficially holds 2.51 million shares (14.4% of the total outstanding).

BUSINESS OVERVIEW

Company Overview

IHOP Corp. (the "Company," "we," "our" or "us") was incorporated under the laws of the State of Delaware in 1976. Our common stock is listed on the New York Stock Exchange and trades under the ticker symbol "IHP". The first International House of Pancakes ("IHOP") restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter we began developing and franchising additional restaurants. In November 2007, we completed the acquisition of Applebee's International, Inc. ("Applebee's") which became a wholly-owned subsidiary of the Company. We own and operate two restaurant concepts in the casual dining and family dining niches: Applebee's Neighborhood Grill and Bar® and IHOP. With more than 3,300 restaurants combined, we are one of the largest full-service restaurant companies in the world.

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.ihop.com . 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 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 on Form 10-K. Further, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

This Annual Report on Form 10-K should be read in conjunction with the cautionary statements on page 36 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 are recorded in four categories: franchise operations, company restaurant operations, rental operations, and financing operations. Within each applicable category, we operate two distinct restaurant concepts: Applebee's and IHOP.

Applebee's

The franchise operations segment consists of restaurants operated by Applebee's franchisees in the United States, one U.S. territory and 17 countries outside the United States. Franchise operations revenue consists primarily of franchise royalty revenues. Franchise operations expenses include costs related to intellectual property provided to certain franchisees.

The company restaurant operations segment consists of company-operated restaurants in the United States and China. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, benefits, utilities, rent and other restaurant operating costs. The operating results of this segment are substantially generated by Applebee's restaurants.

Rental operations activities are not currently a part of Applebee's business.

Financing operations activities are not currently a part of Applebee's business.

IHOP

The franchise operations segment consists of restaurants operated by IHOP franchisees and area licensees in the United States, one U.S. territory and two countries outside the U.S. Franchise operations revenue consists primarily of franchise royalty revenues, sales of proprietary products, franchise advertising fees and the portion of the franchise fees allocated to IHOP intellectual property. Franchise operations expenses include advertising expense, the cost of proprietary products and pre-opening training expenses and other franchise-related costs.

The company restaurant operations segment consists of company-operated restaurants in the United States. In addition, from time to time, restaurants that are reacquired from franchisees are operated by IHOP on a temporary basis. Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating expenses at company-operated restaurants and include food, labor, benefits, utilities, rent and other restaurant operating costs.

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 segment is exclusively generated by IHOP.

Financing operations revenue consists of the portion of franchise fees not allocated to IHOP intellectual property, sales of equipment, as well as interest income from the financing of franchise fees and equipment leases. Financing expenses are primarily the cost of restaurant equipment.

Restaurant Concepts

Applebee's

We develop, franchise and operate restaurants in the bar and grill segment of the casual dining industry under the name "Applebee's Neighborhood Grill & Bar®." With 1,976 system-wide restaurants as of December 31, 2007, Applebee's Neighborhood Grill & Bar is one of the largest casual dining concepts in the world, in terms of number of restaurants and market share.

As of December 31, 2007 franchisees operated 1,465 of these restaurants and 511 restaurants were company-operated. The restaurants were located in 49 states, 18 countries outside of the United States and one U.S. territory. During the one month subsequent to the acquisition, 14 new restaurants were opened, comprised of 12 franchise restaurants and two company restaurants. During 2007, 66 new restaurants were opened by Applebee's prior to the acquisition date ("Predecessor Applebee's"), comprised of 54 franchise restaurants and 12 company restaurants.

Each Applebee's restaurant is designed as an attractive, friendly, neighborhood establishment featuring moderately-priced high quality food and beverage items, table service and a comfortable atmosphere. Our restaurants appeal to a wide range of customers including young adults, senior citizens and families with children.

Franchising

Generally, franchise arrangements consist of a development agreement and separate franchise agreement. Development agreements grant the exclusive right to develop a minimum number of 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 provide for an initial development schedule of one to five years as agreed upon by the Company and the franchisee. After the initial development schedule, the Company and the franchisee generally execute a series of two-year supplemental development schedules established by a methodology included within the development agreement and modified as agreed upon by the Company and the franchisee.

The franchisee enters into a separate franchise agreement for the operation of each Applebee's restaurant. Our standard franchise agreement has a term of 20 years and permits renewal for up to an additional 20 years upon payment of an additional franchise fee. For each restaurant developed, our standard franchise arrangement requires 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 maintain the existing royalty rate 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 the remaining franchise fees under older development agreements vary from the currently offered arrangements.

Our intention is to refranchise most of Applebee's 510 domestic company-operated restaurants while retaining one company market in Kansas City. Our planned franchising efforts assume we will sell approximately 100 company-operated Applebee's restaurants in 2008, and complete the sale process in 2010.

We currently have 78 franchise groups, including 35 international franchisees. We have generally selected franchisees that are experienced multi-unit restaurant operators. Most franchisees have operated other restaurant concepts. Our franchisees operate Applebee's restaurants in 43 states in the United States, 17 countries outside of the United States and one U.S. territory. We have assigned development rights to the vast majority of domestic areas in all states except Hawaii and the company-operated markets.

As of December 31, 2007, there were 1,465 franchise restaurants. During the one month ended December 31, 2007, Applebee's franchisees opened 12 restaurants. Franchisees of Predecessor Applebee's opened 54, 108 and 92 restaurants in 2007, 2006 and 2005, respectively.

International Franchising

We continue to pursue franchising of the Applebee's concept as the primary method of international expansion. This strategy includes seeking qualified franchisees that have the resources to open multiple restaurants in each territory and are familiar with the specific local business environment. We currently are focusing on international franchising primarily in Canada, Central and South America, the Mediterranean/Middle East and Mexico. We currently have 35 international franchisees. These franchisees operated 111 Applebee's restaurants as of December 31, 2007. The success of further international expansion will depend on, among other things, local acceptance of the Applebee's concept and our ability to attract qualified franchisees and operating personnel. Our franchisees must comply with the regulatory requirements of the local jurisdictions.

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. These local issues involve the need to be flexible and pragmatic regarding all elements of the system, including menu, restaurant design, restaurant operations, training, marketing, purchasing and financing.

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 maintain a 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, 2007, 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. Franchisees elect the other franchisee representatives annually. The Franchise Business Council is also responsible for the appointment of members to advisory committees related to marketing, supply chain, information technology and product development.

Company-Operated Restaurants

Historically, company-operated Applebee's restaurants have been clustered in targeted markets to increase consumer awareness and convenience and enable us to take advantage of operational, distribution and advertising efficiencies. We plan to pursue a strategy which includes transitioning to an approximately 98% franchised system, and to sell the real estate on which company-operated restaurants are situated. We plan to execute this strategy by refranchising most of the 510 Applebee's domestic company-operated restaurants, and selling most of the approximately 200 fee-owned Applebee's properties through sale/leaseback transactions. This heavily franchised business model is expected to demand less capital, generate higher margins, and reduce the volatility of cash flow performance over time.

During the one month ended December 31, 2007, we opened two restaurants. Franchisees of Predecessor Applebee's opened 12 restaurants in 2007.

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.

Future Restaurant Development

Beginning in 2008, we will start the process of refranchising most of our 510 domestic company-operated restaurants. This process is expected to extend into 2010. As these restaurants are refranchised, we will enter into development agreements with franchisees which will set forth requirements for development in each market. In 2008, we expect franchisees to open a total of 50 to 65 new Applebee's restaurants including 30 to 40 domestic franchise restaurants, 20 to 25 international franchise restaurants and no more than two domestic company-operated restaurants.

The following table represents Applebee's restaurant development commitments for 2008 and 2009. We have disclosed 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.

Composition of Franchise System

There were 32 international franchisees with 111 restaurants open as of December 31, 2007. All of these franchisees had less than 25 restaurants open as of December 31, 2007. In addition, we had three new international franchisees that had not opened a restaurant as of December 31, 2007.

Menu

Applebee's restaurants offer a diverse menu of moderately-priced food and beverage items consisting of traditional favorites and signature dishes. The restaurants feature a broad selection of entrees prepared in a variety of cuisines, as well as appetizers, salads, sandwiches, specialty drinks and desserts. Substantially all Applebee's restaurants offer beer, wine, liquor and premium specialty drinks.

During 2004, we entered into a five-year exclusive strategic alliance with Weight Watchers International, Inc. to offer Weight Watchers® branded menu alternatives to our guests. As part of our exclusive arrangement with Weight Watchers, we and our franchisees pay a percentage royalty on the total domestic sales of Weight Watchers menu items.

Marketing and Advertising

Applebee's has historically concentrated its advertising and marketing efforts primarily on food-specific promotions, as well as on Weight Watchers®, Carside To Go and other Applebee's branded messaging. Our advertising and marketing includes national, regional and local expenditures, utilizing primarily television, radio, direct mail and print media, as well as alternative channels such as the Internet, product placements and the use of third-party retailers to market our gift cards. For the one-month ended December 31, 2007, approximately 4% of Applebee's company restaurant sales were allocated for marketing purposes. This amount includes contributions to the national advertising fund, which develops and funds the specific national promotions, including Weight Watchers and Carside To Go. We focus the remainder of our marketing expenditures on local marketing in areas with company-operated restaurants.

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.

Purchasing

Maintaining high food quality, system-wide consistency and availability is the central focus of our supply chain program. We establish quality standards 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. We have negotiated purchasing agreements with most of our approved suppliers which result in volume discounts for us and our franchisees. We are exploring the feasibility of establishing an independent purchasing co-operative to manage all procurement activities for the Applebee's and IHOP restaurant systems. 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 IHOP restaurants, a well known family restaurant chain. As of December 31, 2007, there were a total of 1,344 IHOP restaurants of which (i) 1,176 were subject to franchise agreements, (ii) 157 were subject to area license agreements and (iii) 11 were company-operated restaurants. Franchisees and area licensees are independent third parties who are licensed by us to operate their restaurants using our trademarks, operating systems and methods. We own and operate 10 IHOP restaurants in the Cincinnati market with the additional objective of testing new menu items and operational or procedural systems and for other research and development purposes. We also operate, from time to time on a temporary basis, reacquired IHOP restaurants. IHOP restaurants are located in 49 states in the United States, U.S. Virgin Islands, Canada and Mexico.

IHOP restaurants feature full table service and moderately priced, high-quality 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 broad array of lunch, dinner and snack items as well. IHOP restaurants are open throughout the day and evening hours, and many operate 24 hours a day.

Franchising

Our franchising activities for the years ended December 31, 2007 and 2006 included both company-financed and franchisee-financed development. For clarity of presentation, the discussion below is separated between those activities specific to the Old Business Model and those which apply to the New Business Model.

Old Business Model

IHOP franchised restaurants established prior to 2004 under our old business model (the "Old Business Model") were developed by the Company, and required our substantial involvement in all aspects of the development and financing of the restaurants. In particular, under the Old Business Model, we identified the site for a new IHOP restaurant, purchased or leased the site from a third party, built and equipped the restaurant and then franchised it to the franchisee. In addition, IHOP typically financed approximately 80% of the franchise fee over five to eight years and leased the restaurant and equipment to the franchisee over a 25-year period.

The cash received from a typical franchise arrangement under the Old Business Model included: (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; (c) franchise royalties typically equal to 4.5% of weekly gross sales; (d) income from the subleasing of the leased real property under a franchisee sublease, and income from the leasing of the owned real property under the related leases to franchisees; (e) income from the leasing of equipment under an equipment lease; (f) revenue from the sale of pancake and waffle dry-mixes; and (g) franchise advertising fees. The franchise advertising fees are comprised of (i) a local advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which was usually collected by us and then paid to a local advertising cooperative to cover the cost of local media purchases and other local advertising expenses and (ii) a national advertising fee equal to 1.0% of weekly gross sales under the franchise agreement. In a few cases, with respect to the reacquired restaurants, or otherwise, we have agreed to accept reduced royalties and/or lease payments from franchisees or have provided other accommodations to franchisees for a period of time in order to assist them in either establishing or reinvigorating their business.

With respect to the reacquired restaurants, which relate solely to restaurants developed under the Old Business Model, we often have advance warning that a franchisee plans to turn back a restaurant, enabling us to refranchise the restaurant to a new operator without substantial interruption. Where that is not the case, we operate the reacquired restaurant while marketing it to be refranchised. The reacquired restaurants may require investment in remodeling and rehabilitation before being refranchised. As a consequence, our reacquired restaurants often incur operating losses during the period of their rehabilitation. Where appropriate, we continue to enter into franchise arrangements with modified payment terms or other accommodations to the franchisees in a manner consistent with our business practice.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

IHOP Corp. (the "Company," "we" or "our") was incorporated under the laws of the State of Delaware in 1976. The first International House of Pancakes ("IHOP") restaurant opened in 1958 in Toluca Lake, California. Shortly thereafter we began developing and franchising additional restaurants. In November 2007, we completed the acquisition of Applebee's International, Inc. ("Applebee's") which became a wholly owned subsidiary of the Company. We own and operate two restaurant concepts in the casual dining and family dining niches: Applebee's Neighborhood Grill and Bar® and IHOP. Reference herein to Applebee's and IHOP restaurants are to those franchise-operated restaurants and company-operated restaurants. Sales of restaurants that are owned by franchises and area licensees are not attributable to the Company. With more than 3,300 restaurants combined, we are one of the largest full-service restaurant companies in the world.

Key Overall Strategies

We believe the Applebee's acquisition will add a complementary growth vehicle in the casual dining segment of the restaurant industry. We will seek to enhance shareholder value by implementing the following business strategies for Applebee's and IHOP restaurants.

Applebee's Key Strategies

Refranchise Company-Operated Restaurants and Sell Owned Real Estate

We intend to implement a strategy that is based on our experience of transitioning the IHOP business from a more capital-intensive development model to a less capital-intensive development model. To implement this strategy, we intend to:

•
enter into sale-leaseback transactions for the approximately 190 company-owned real estate parcels; and

•
refranchise approximately 480 company-operated domestic restaurants. This process is expected to extend until 2010.

We expect to apply the net after-tax cash proceeds from these two initiatives to repay certain principal of the debt issued in conjunction with the Applebee's acquisition. In addition, these two

initiatives and the strategic emphasis on franchising going forward are designed to reduce the operating and overhead costs attributable to the domestic company-operated restaurants and reduce the capital requirements needed to operate the business.

Re-energize the Applebee's Brand

We will seek to apply many of the same strategies applied previously to the IHOP restaurant business to improve performance and enhance customer demand at Applebee's restaurants. This strategy will emphasize clear brand positioning of Applebee's based on consumer feedback and marketing research and seek to deliver a clear, focused and consistent message relating to the dining experience. In connection with this strategy, we will seek to:

•
strengthen our advertising campaign and message;

•
improve a selected number of products on the Applebee's menu, as well as reduce the number of items on the menu and change the manner of presentation of the menu;

•
establish a clear approach to the appearance of the restaurants by developing a re-vamped remodel image while retaining the "neighborhood" characteristics that are a hallmark of Applebee's; and

•
align all elements of the customer experience including uniforms, silverware and plateware to communicate a unified customer message.

Improve Restaurant Operations

We will seek to improve operations at Applebee's restaurants by further improving the quality and consistency of the food and guest experience through enhanced training, more effective quality control and menu initiatives. We will require franchisees to participate in this strategy through the use of a new franchisee ratings system and other tools to improve the performance of the Applebee's system. We will also seek to improve overall service levels and operations efficiency by providing new ways to receive customer feedback. In addition, we will seek to reduce costs and improve supply chain efficiency by capitalizing on supply chain synergies between the IHOP system and the Applebee's system.

Strengthen Company Restaurant Profitability

We will focus on improving the profitability of company-owned Applebee's restaurants. We will seek to improve food cost margins on limited-time offers by creating higher margin promotions, and on regular menu items by combining purchases within the Applebee's and IHOP systems. We will try to reduce labor costs by simplifying the rollout of new initiatives and limited-time promotions. We also believe there is an opportunity to increase prices at Company operated restaurants.

Partner with Franchisees

We will leverage the expertise and qualifications of the current Applebee's franchisee base and will seek to keep a high level of collaboration with franchisees to build a closer relationship.

There can be no assurance that the strategies described above, when implemented, will achieve the intended results, including the sale-leaseback of the approximately 190 company-owned real parcels and the refranchising of approximately 480 domestic company-operated restaurants, within the expected time frame described above.

IHOP's Key Strategies

We pursue growth through a three part strategic framework: (1) energize the IHOP brand; (2) improve operations performance; and (3) maximize franchise development.

Energize the IHOP Brand

We seek to energize our brand by continuing our "Come Hungry. Leave Happy" advertising campaign. This message has successfully resonated with our guests for almost five years and we expect to continue with this campaign in the future. In addition, we seek to enhance our media strategies to emphasize national advertising on broadcast, cable and syndicated television and strengthen our product promotion process. Over the last two years, we have shifted the allocation of our media spending towards national advertising. Five of the six media windows utilized by us in 2007 placed significant emphasis on national media spending. We had not utilized any national media prior to 2003. In 2003, we also initiated the strategy of limited time offers on promotional products. Since that time, we have enhanced our execution of this promotional product approach by improving the appeal of these promotions and the franchisees' execution.

In addition, by the end of 2011, our franchisees will have completed the remodel of all restaurants to our current updated look. We developed new prototype and remodel programs in 2004 which have become the standards for all development and remodel activity going forward. We also launched our "IHOP 'n Go" takeout program in February 2007 and a successful gift card program in 2006 in order to ensure that we remain relevant with our customers and meet their changing dining patterns.

Improve Operations Performance

We will seek to continue to improve the operations of the restaurants. During 2003, we established an IHOP franchisee ratings system to evaluate the operational standards of each of our restaurant units. This franchisee rating system is a comprehensive scorecard in which we assign grades that cover mystery shop scores, operational assessment scores and health department ratings, among other things. By December 31, 2007, 85% of all franchisees had received grades of "A" or "B" restaurants. In addition, we intend to continue focusing on making exceptional service a priority for franchisees by providing tools for improved restaurant execution, while highlighting our motto "service is as good as our pancakes." Substantially all IHOP restaurants are using pollable point-of-sale (POS) 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.

Maximize Franchise Development

Under the New Business Model, IHOP seeks to maximize franchise development by emphasizing the recruitment of franchise developers within and outside the current system in order to grow its revenues. Because of our strong existing franchisee base, since 2003, more than 88% of new restaurants have been opened by pre-existing franchisees. This strategy has proven very successful as franchisees have developed approximately 220 units since the inception of the New Business Model and we have a pipeline of 467 additional new units committed, optioned or pending. In addition, we may take steps to intervene, consolidate, and rehabilitate one or two existing markets if we believe that doing so is advisable in order to fully realize development potential. To effect this strategy, we would repurchase units from certain existing franchisees and package them in a sale to a franchise developer who would commit to maximize development in the market.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

Purchase Price Allocation

The purchase price for acquisitions is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations ("SFAS 141"). The determination of estimated fair values of identifiable intangible assets and certain tangible assets require significant estimates and assumptions, including but not limited to, determining the estimated future cash flows, estimated useful lives of assets and appropriate discount rates. We believe the estimated fair values assigned to the Applebee's assets acquired and liabilities assumed are based on reasonable assumptions. However, the fair value estimates for the purchase price allocation may change during the allowable allocation period under SFAS 141, which is up to one year from the acquisition date, if additional information becomes available that would require changes to our estimates.

Long-Lived Assets

We assess long-lived and intangible assets with finite lives for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. We consider factors such as the number of years the restaurant has been operated by us, sales trends, cash flow trends, remaining lease life, and other factors which apply on a case-by-case basis. The analysis is performed at the individual restaurant level for indicators of permanent impairment. Recoverability of the restaurant's assets is measured by comparing the assets' carrying value to the undiscounted cash flows expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. If the total expected undiscounted future cash flows are less than the carrying amount of the assets, the carrying amount is written down to the estimated fair value, and a loss resulting from impairment is recognized by charging to earnings. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Goodwill and Intangibles

Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired businesses. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as (i) any future declines in our operating results, (ii) a decline in the valuation of our common stock, or (iii) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets, including intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. In the process of our annual impairment review, we primarily use the income approach method of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies to determine the fair value of our intangible assets. Management's judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation.

Leases

Our restaurants are located on (i) sites owned by us, (ii) sites leased by us from third parties and (iii) sites owned or leased by franchisees. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, Accounting for Leases ("SFAS 13") and subsequent amendments.

The lease term used for straight-line rent expense is calculated from the date we obtain possession of the leased premises through the lease termination date. Prior to January 2, 2006, we capitalized rent expense from possession date through construction completion and reported the related asset in property and equipment. Capitalized rent was amortized through depreciation and amortization expense over the estimated useful life of the related assets limited to the lease term. Straight-line rent recorded during the preopening period (construction completion through restaurant open date) was recorded as expense. Commencing January 2, 2006, we expense rent from possession date through restaurant open date, in accordance with FASB Staff Position No. 13-1, Accounting for Rental Costs Incurred during a Construction Period. Once a restaurant opens for business, we record straight-line rent over the lease term plus contingent rent to the extent it exceeded the minimum rent obligation per the lease agreement. We use a consistent lease term when calculating depreciation of leasehold improvements, when determining straight-line rent expense and when determining classification of our leases as either operating or capital.

There is potential for variability in the rent holiday period, which begins on the possession date and ends on the restaurant open date, during which no cash rent payments are typically due under the terms of the lease. Factors that may affect the length of the rent holiday period generally relate to construction related delays. Extension of the rent holiday period due to delays in restaurant opening will result in greater preopening rent expense recognized during the rent holiday period and lesser occupancy expense during the rest of the lease term (post-opening).

For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on the straight-line basis over the term of the lease (including the rent holiday period beginning upon our possession of the premises), and record the difference between the minimum rents paid and the straight-line rent as a lease obligation. Certain leases contain provisions that require additional rental payments based upon restaurant sales volume ("contingent rent"). Contingent rentals are accrued each period as the liabilities are incurred, in addition to the straight-line rent expense noted above.

Certain of our lease agreements contain tenant improvement allowances. For purposes of recognizing incentives, we amortize the incentives over the shorter of the estimated useful life or lease term. For tenant improvement allowances, we also record a deferred rent liability or an obligation in our non-current liabilities on the consolidated balance sheets.

Management makes judgments regarding the probable term for each restaurant property lease, which can impact the classification and accounting for a lease as capital or operating, the rent holiday and/or escalations in payment that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements for each restaurant are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense that would be reported if different assumed lease terms were used.

Insurance Reserves

We use estimates in the determination of the appropriate liabilities for general liability, workers' compensation and health insurance. The estimated liability is established based upon historical claims data and third-party actuarial estimates of settlement costs for incurred claims. Unanticipated changes in these factors may require us to revise our estimates. We periodically reassess our assumptions and judgments and make adjustments when significant facts and circumstances dictate. A change in any of the above estimates could impact our consolidated statements of earnings, and the related asset or liability recorded in our consolidated balance sheets would be adjusted accordingly. Historically, actual results have not been materially different than the estimates that are described above.

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"). Accordingly, we measure stock-based compensation expense at the grant date, based on the fair value of the award, and recognize the expense over the employee's requisite service period using the straight-line method. Under SFAS 123(R), the fair value of each employee stock option and restricted stock award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based compensation. The Black-Scholes model meets the requirements of SFAS 123(R). The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and forfeiture rate. These inputs are subjective and are determined using management's judgment. If differences arise between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining future stock-based compensation expense. Any such changes could materially impact our operations in the period in which the changes are made and in subsequent periods.

Results of Operations

The following table contains information derived from our consolidated statements of operations expressed as a percentage of total operating revenues, except where otherwise noted. Percentages may not add due to rounding.

Comparison of the fiscal years ended December 31, 2007 and 2006

Overview

Our 2007 financial results were significantly impacted by one month of Applebee's operations since the date of acquisition, a loss on a derivative financial instrument and increased interest expense on $2.3 billion worth of funded debt. In comparing the Company's financial results for 2007 to those in 2006, we note that:

•
net loss of $0.5 million in 2007 was comprised of IHOP net income of $0.8 million offset by Applebee's net loss of $1.3 million;

•
IHOP net income decreased in 2007 to $0.8 million from $44.6 million in 2006 primarily due to the loss on derivative financial instrument of $62.1 million ($37.8 million net of tax) in 2007;

•
franchise operations profit for IHOP restaurants in 2007 increased by $7.4 million or 7.7% due to higher revenues associated with franchise restaurant retail sales;



•
general and administrative expenses for IHOP increased by $5.8 million or 9.1% primarily due to costs related to the Applebee's acquisition; and

•
diluted weighted average shares outstanding decreased by 5.8% in 2007.

Franchise Operations

Consolidated franchise revenues grew by $26.4 million or 14.7% in 2007 as compared to 2006. Consolidated franchise revenues grew due to the Applebee's acquisition which increased franchise revenues by $14.2 million or 7.9%, as well as a 7.1% increase in IHOP franchise restaurant retail sales in 2007 as compared to 2006. The 7.1% increase in IHOP franchise restaurant retail sales was primarily attributable to the following:

•
effective IHOP franchise restaurants increased by 4.5%; and

•
same-store sales for IHOP franchise restaurants increased by 2.2%.

"Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open for only a portion of the period. IHOP effective franchise restaurants increased by 49 or 4.5% due to new restaurant openings in 2007 and the annualized effect of new restaurant development in 2006.

In 2007, IHOP had various promotions including the rollout of new menu items in November 2007, and other promotions throughout the year which included "Pancake Surrender," "Fruit Crepe Fever," "Sweet Strawberry Serenade," "Stuffed French Toast Treasures," and "Cinn-A-Stacks Celebration." IHOP also increased national advertising spending (to include an additional promotional period in November and December 2007) over local media spending in 2006 for that period.

Consolidated franchise expenses increased by $5.0 million or 6.0% in 2007 as compared to 2006, which was primarily due to the increase in franchise expenses for IHOP restaurants in the amount of $4.8 million or 5.8%. IHOP franchise expenses such as advertising and the cost of proprietary products are related to IHOP franchise restaurant retail sales. The increase in IHOP franchise expenses was primarily a result of the 7.1% increase in IHOP franchise restaurant retail sales. Partially offsetting this increase, IHOP franchise expenses benefited from lower incentives to IHOP franchisees for point-of-sale system purchases, as well as a reduction in the amount of financial relief granted to IHOP franchisees. The reduction in franchisee relief granted was primarily due to fewer underperforming restaurants in our system than in previous periods.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Comparison of the Three Months and Six Months ended June 30, 2008 and 2007

Overview

Our results for the three-month and six-month periods ended June 30, 2008 were significantly impacted by the amount of interest expense on $2.3 billion of funded debt incurred during fiscal 2007 and the impact on both segment profit and general and administrative expenses of the consolidation of Applebee’s results of operations (see “Pro Forma Comparison of Three Months and Six Months ended June 30, 2008 with Three Months and Six Months ended June 30, 2007 —Applebee’s”).

• Revenues for the second quarter increased $334.6 million, including $330.6 million from Applebee’s operations and an increase of $4.1 million, or 4.5%, at IHOP. Year-to-date revenues increased $687.3 million, including $676.5 million from Applebee’s operations and an increase of $10.8 million, or 6.0%, at IHOP.

• Segment profit for the second quarter increased $76.8 million, primarily consisting of $74.4 million from the acquisition of Applebee’s, along with a $2.4 million, or 6.4%, improvement at IHOP. Year-to-date segment profit increased $152.4 million, primarily consisting of $147.8 million from the acquisition of Applebee’s, along with a $4.6 million, or 6.0%, improvement at IHOP.

• Consolidated interest expense increased by $48.3 million and $96.7 million, respectively, for the three-month and six-month periods ended June 30, 2008 compared to the same periods of the prior year. The increases related primarily to interest on acquisition-related debt.


• Consolidated pre-tax income decreased by $50.2 million and $52.6 million, respectively, for the three-month and six-month periods ended June 30, 2008 compared to the same periods of the prior year, as the increase in segment profit was more than offset by increases in interest expense and general and administrative expenses and an impairment loss of $40.9 million on 182 parcels of company-owned real estate recognized in the second quarter of 2008.


Franchise Operations


Consolidated franchise revenues grew by 86.3% and 88.7%, respectively, for the three-month and six-month periods ended June 30, 2008 compared to the same periods of the prior year. Consolidated franchise revenues primarily grew due to the Applebee’s acquisition (see “Pro Forma Comparison of Three Months and Six Months ended June 30, 2008 with Three Months and Six Months ended June 30, 2007 —Applebee’s”). In addition, IHOP franchise revenues increased $2.8 million, or 5.9%, and $7.7 million, or 8.2%, respectively, for the three-month and six-month periods ended June 30, 2008 compared to the same periods of the prior year. The increase in IHOP franchise revenues was primarily due to a 6.3% increase in IHOP franchise restaurant sales in the second quarter of 2008 compared to the same period of 2007 and a 7.1% increase for the first six months of 2008 compared to the same period of 2007. These increases were primarily attributable to the following:

• effective IHOP franchise restaurants increased by 48 restaurants (4.2%) and 47 restaurants (4.1%), respectively, in the second quarter and first six months of 2008; and

• same-store sales for IHOP franchise restaurants increased by 2.6% and 3.2%, respectively, in the second quarter and first six months of 2008. The increases for both periods reflected a higher average guest check and modestly positive guest traffic growth.

“Effective restaurants” are the number of restaurants in a given fiscal period adjusted to account for restaurants open for only a portion of the period. Franchise restaurant retail sales are sales recorded at restaurants that are owned by franchisees and area licensees and are not attributable to the Company. Franchise restaurant retail sales are useful in analyzing our franchise revenues because franchisees and area licensees pay us royalties and other fees that are generally based on a percentage of their sales.

Consolidated franchise operations profit, which is franchise revenues less franchise expenses, increased by $39.5 million and $80.2 million, respectively, comparing the three-month and six-month periods ended June 30, 2008 with the same periods of the prior year, of which $37.1 million and $74.7 million, respectively, was due to the Applebee’s acquisition (see “Pro Forma Comparison of Three Months and Six Months ended June 30, 2008 with Three Months and Six Months ended June 30, 2007 —Applebee’s “).

IHOP franchise operations profit increased by $2.3 million in the second quarter of 2008 compared to the same period in 2007. This increase was due primarily to the $2.8 million increase in revenue discussed above, partially offset by higher franchise expenses, which increased only $0.5 million, resulting in a 1.6% improvement in margin. IHOP franchise operations profit increased by $5.6 million in the first six months of 2008 compared to the same period in 2007. This increase was due primarily to the $7.7 million increase in revenue discussed above, partially offset by higher franchise expenses, which increased only $2.2 million, resulting in a 1.3% improvement in margin. The improvement in margin in both periods was due primarily to lower bad debt and pre-opening expenses.

Total company restaurant sales increased by $291.9 million and $599.8 million, respectively, for the three-month and six-month periods ended June 30, 2008 compared to the same periods of the prior year. The increase in total company restaurant sales was primarily due to the Applebee’s acquisition (see “Pro Forma Comparison of Three Months and Six Months ended June 30, 2008 with Three Months and Six Months ended June 30, 2007 —Applebee’s ” ). Company restaurant expenses increased by $254.4 million and $526.3 million, respectively, for the three-month and six-month periods ended June 30, 2008 compared to the same periods of the prior year. These increases were due exclusively to Applebee’s, which contributed $255.6 million and $527.7 million to the increases in the respective periods.

Company restaurant operations loss for IHOP company restaurants was $0.5 million and $1.0 million for the second quarter and first six months of 2008, respectively, which was a slight improvement over losses of $0.7 million and $1.4 million in the same respective periods of 2007. This improvement was primarily due to lower salary and benefits costs.

CONF CALL

Stacy Roughan

Good morning and thank you for participating on DineEquity's second quarter 2008 conference call. Today with us from management are Julia Stewart, Chairman and CEO, and Tom Conforti, CFO.

Before I turn the call over to Julia and Tom, let me remind you of our Safe Harbor regarding forward-looking information. Today, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be materially different than those expressed or implied in such statements. We caution you to evaluate such forward-looking information in the context of these factors, which are detailed in today's news release as well as in our most recent Form 10-Q filing with the Securities and Exchange Commission.

In addition, DineEquity disclaims any intent or obligation to update these forward-looking statements. In conjunction with our prepared remarks today, we have prepared or/and provided additional information on our IR Web site at dineequity.com for your viewing. The document can be found under the calls and presentation section of the IR site, which is posted as supporting material for today's webcast. If you haven't already done so, we encourage you to download the deck. Additionally, on this call we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news release today, which is also available on our Web site. Now I would like to turn the call over to Julia Stewart.

Julia Stewart

Thanks, Stacy, and good morning everyone. Today, Tom and I will first walk through the details of our second quarter performance and update you on our strategies to revitalize and restructure the Applebee's business. We also intend to provide perspective on previously disclosed information concerning certain debt covenants. We've got a lot to cover today with regard to Applebee's, but I first want to start off with the continued strong results of the IHOP business.

IHOP performed well in this second quarter 2008 given a challenging consumer environment with system-wide same store sales growing in line with our expectations at 2.6% for the second quarter 2008 and a strong 3.2% performance year to date. The IHOP team is delivering on all fronts. Our strong limited time offers, continued strength of our Come Hungry, Leave Happy advertising campaign, new promotional events, and PR activities around IHOP's 50th birthday celebration have brought our marketing efforts to a whole new level this year. We are also focused on driving meaningful operational improvements system-wide as measured by IHOP's AB operator and restaurant rating systems.

Franchisees continue to execute their remodels in a timely manner. The system should be completely remodeled by the end of 2009. In addition, franchisees are developing new restaurants in the numbers and time frames expected. With 15 IHOPs open during the quarter, one of which was in Mexico City, representing IHOP's second restaurant opening in Mexico. Additionally, just last week, we appointed Des Hague as President of IHOP. With Des's leadership, we plan to build upon IHOP's strategy as we optimize the performance of our brand. IHOP's success is the result of the focused execution of our core marketing, operations, and development strategies.

I want to thank IHOP's management team, all of our employees, and each franchisee for their extraordinary efforts. We are going to celebrate our accomplishments at IHOP's upcoming National Franchise Conference in August. It really doesn't get much better. IHOP's 22 consecutive quarters of same store sales growth is indicative of the type of sustainable system momentum that we envision is possible at Applebee's. But it won't happen overnight. We have a lot of heavy lifting in front of us to get there. So, let's walk through where we are in the process.

Applebee's domestic, system-wide same store sales performance fell below our expectation, decreasing 1.7% for the second quarter 2008 and down 0.6% year to date. This compared unfavorably to positive growth in the prior quarter. We believe the reason for this sequential decline was primarily the result of advertised promotions that did not perform as well as expected in a value-oriented competitive environment. We began to see signs of traffic weakness worsening at the end of first quarter, which continued consistently through the second quarter and took immediate steps to create value offerings based on Applebee's guest favorites from our existing menu.

We tested these offerings with advertised support in several Company markets and the franchise market. The positive impact of same stores sales growth in these markets was significant, and we will roll out a value promotion system wide in late August. We believe a value message is critical for Applebee's to be successful given the challenging consumer and competitive environment at this time. We have now developed a line up of value-oriented sales driving offerings slated [ph] for the balance of the year and are optimistic about the results our value strategy should yield. With a successful value message, we expect Applebee's full year 2008 domestic system-wide same store sales growth to range between a positive 1% to a negative 1%.

Now, in the longer term, we believe that the key to turning around Applebee's business centers on improving our food. Using the framework of Applebee's new brand positioning and refined customer targets as our guide, during the first half of the year we developed a long-term menu plan designed to differentiate the brand. In 2008, our work primarily involved eliminating previously planned limited time offers in favor of increasing our operational focus around flawlessly executing our existing menu. This should benefit us greatly as our upcoming value offerings are based on existing items. Additionally, we are also focused on an operation simplification process designed to reduce preparation steps and eliminate single use ingredients to the greatest extent possible.

Guests will begin to see more submissive menu changes in 2009 as we work toward a systemic overhaul of Applebee's menu. We will improve the quality of ingredients. Our recipes will produce destination products and flavors that guests can only get at Applebee's and ease of preparation and delivery will also be a focus. We have renewed our relationship with Weight Watchers which will result in new health conscious offerings next year as well. To support our menu work during this second quarter, we completed a short-term marketing and media plan to drive the business over the next 18 months.

Applebee's advertising campaign is a whole new neighborhood, communicates change within our restaurant, and is an invitation to our guest to come and experience the new Applebee's. To build upon the campaign, we are making value the news of the neighborhood in conjunction with our planned offerings starting next month. Now for 2009, we are pursuing a variety of marketing strategies that will leverage our neighborhood position. The equity Applebee's possesses around the notion of neighborhood differentiates us from the competition, and we plan to take full advantage of it in our marketing approach.

Turning to Applebee's Company operations, operating margin improved 120 basis points to 12.7% compared to an 11.5% operating margin, excluding pre-opening expense in the second quarter of last year. The increase was primarily due to an approximate 170 basis point improvement in net depreciation and rental expense. This was the result of purchase price accounting allocations, which extended the usable lives of restaurant assets. This more than offset the higher lease expense associated with reestablishing leases.

As a percentage of sales, total food and beverage costs decreased by 30 basis points due primarily to the impact of menu price increases. Total labor costs increased by 60 basis points, primarily due to restaurant management retention bonuses and other factors partially offset by improving hourly labor management. These operating margin performance factors resulted in an 11.8% increase in segment profitability to $37.2 million in the second quarter 2008. We acknowledge to date that some of our operational improvements have not come to fruition because of a favorable mix shift to higher cost items, higher commodity costs in general and the continued effect of the field bonus and benefit programs. However, we are aggressively pursuing several new and existing operational improvements to ensure we meet our commitments for margin improvements for the full year.

The following are key improvements we are very focused on. Conceptual changes to the field benefits program in general, continued benefit of the revised manager bonus program implemented in the second quarter 2008, which should provide a greater benefit in the third and fourth quarter, easier comparisons against higher food cost items that were promoted in the second half of last year, and continued aggressive management of comps and discounts at the store level. So net-net, we are reiterating our expectation of producing 150 basis point to 200 basis point improvement in Applebee's Company operating margin for the full year 2008.

We expect operational improvements to drive approximately 30% of this improvement while accounting benefits will make up the balance of the gain.

During the quarter, we were pleased to announce the appointment of Mike Archer as President of Applebee's. Driving margin improvement will be Mike's number one focus. He possesses a keen understanding of the restaurant industry, particularly the grill and bar category and has immersed himself in the needs of our organization. Mike has the expertise in turning around brands and improving operational performance.

Now, turning to refranchising, the team is making good progress in its efforts to sell Company- operated Applebee's restaurants. We completed the sale of 26 Southern California restaurants in the third quarter 2008. We are on track with the sale of 15 Company Applebee's in Nevada and now expect to complete the transactions some time in the fourth quarter, as we work through a relatively complex process to transfer liquor licenses within the State of Nevada. Additionally, we signed an asset purchase agreement for the sale of three Company restaurants in Delaware to an existing franchisee during the second quarter 2008, and expect the deal to close some time during the third quarter this year.

Now, looking at our pipeline of interest, currently we are in various stages of negotiations that if successful would result in the sale of approximately 60 additional restaurants before year end. We are engaged with parties who believe in Applebee's future growth prospects based on the turn around strategies currently underway and the power of the Applebee's brand. We are reiterating our expectations of refranchising, a total of approximately 100 Company-operated Applebee's restaurants in 2008. It's our intention to announce deals only after definitive contracts have been signed and financing without contingencies has been secured by the buyers. So updates on deal activity could be backend loaded this year.

Our prior guidance of $90 million to $100 million of after tax cash proceeds for the sale of approximately 100 Company restaurants this year was based on an average profit margin across more than 475 restaurants. However, depending on which markets are sold, proceeds will vary based on the cash flow profile of the restaurants being sold. We now expect after tax cash proceeds from the sale of Company-operated restaurants to range between $70 million and $80 million this year. This decrease is based on the composition of restaurants which are expected to be sold in 2008, a number of which generate lower cash margins than is the case for the average Applebee's Company-operated restaurant.

In all, we are pleased with the refranchising efforts and are cautiously optimistic that deals should progress as planned. We are managing every aspect of the process within our control closely. Please continue to keep in mind that refranchising deals will vary in size, proceeds and timing, and not all the elements of timing are fully within our control. For example, the time it takes to obtain approvals of liquor license transfers varies significantly from state to state, and as we are selling whole markets and not one-off restaurants, deals can take time to consummate.

Turning to another aspect of our asset disposition strategy, we are pleased to completion for the sale-leaseback of 181 Company-owned Applebee's restaurant properties during this second quarter. Earlier this month, we also completed a transaction for the sale-leaseback of Applebee's corporate headquarters in Lenexa, Kansas. Between these two transactions and the sale of Applebee's Southern California, we were able to pay off $350 million of short-term funded debt in July and avoid triggering a make whole provision associated with this note.

With that, I would like to turn the call over to Tom Conforti.

Tom Conforti

Thanks, Julia, and good morning everyone. I would like to quickly walk through our financial performance for the second quarter 2008 focusing our discussion around the key performance measures of our business and touch on our debt covenants.

Our second quarter results reflect the strong performance of our core IHOP franchising business and the addition of Applebee's franchising businesses. This produced $39.5 million increase in franchise operations profitability, primarily due to a full quarter's recognition of Applebee's franchise operations process and 9.1% increase in IHOP franchise operations product.

EPS for the quarter was impacted by a one time non-cash impairment charge of $41.1 million associated with the sale-leaseback of Applebee's Company-owned restaurant properties. All of the parcels involves in the transaction were assigned an estimated fair value as part of the purchase price allocation at the time of our acquisition of Applebee's. Since that time, we noted deterioration in the real estate and credit markets between the date of the purchase price allocation, which was November 29, 2007, and the June 17, 2008 sale-leaseback transaction date.

We ultimately concluded that the estimated fair value of the real estate determined in the purchase price allocation was reasonable and appropriate as of the time of the acquisition, and that the decline in value related to market events subsequent to the acquisition date. This decision resulted in an impairment charge as opposed to an adjustment to the allocated purchase price. Again, this was a non-cash charge. Our decline in EPS exclusive of one time charges was impacted by an increase in interest expense to $51.6 million during the quarter, primarily due to Applebee's debt. Approximately $9.8 million of this interest expense was non-cash, primarily associated with financing related costs.

Going forward, we will also be recognizing the expense associated with the sale-leaseback transactions for Applebee's restaurant real estate and Applebee's Lenexa headquarters building in our consolidated interest expense line. The accounting treatment for the restaurant sale-leaseback reflects that we will have an ongoing economic involvement with the restaurant properties until we can assign the leases to franchisees. Because of the fact that we expect to sub-lease, we will also have an ongoing economic involvement with the Applebee's Lenexa headquarters. As a result, the transactions are accounted for as corporate borrowings with the related interest expense hitting our corporate interest expense line.

For 2008, the restaurant property and headquarters transactions will result in approximately $15 million of interest expense. Accordingly, we increased our interest expense guidance for the full year to approximately $203 million at the time of our completion of the restaurant real estate transaction in mid-June. Approximately $40 million of this is non-cash interest expense, as previously disclosed.

Turning to an important operating lever in our business, G&A. Consolidated G&A increased to $49.2 million, reflecting a full quarter of overhead expense at Applebee's. G&A was $25.2 million at Applebee's, $9.4 million at IHOP and $14.6 million at the corporate level during the quarter. Consolidated G&A included $4 million in non-cash stock compensation expense and $2.4 million worth of primarily retention and related expenses for the quarter. We are pleased with our G&A management progress year to date and are on track to meet our full year consolidated spending expectation between $196 million – $186 million and $199 million.

Looking at income taxes, our effective tax rate for the second quarter 2008 was 35.8%. This is higher than the first quarter level of 9.9% which reflected the benefit of compensation related tax credits associated with the Applebee's Company-owned restaurant operations on a lower net income base. Our tax rate will be highly variable depending on extraordinary activities like franchising Company-owned Applebee's.

Now, I would like to provide a brief update on purchase price accounting. As you know, our fair value estimates for the purchase price allocation may change during the allowable allocation period, which is up to one year from the acquisition date, if additional information becomes available. A significant portion of the fair value assigned to property and equipment in the preliminary purchase price allocation was related to 511 Applebee's operated restaurants owned at the time of the acquisition. Initially, we used global assumptions as to rental rates and capitalization rates. We now have analyzed this information on a restaurant specific versus a global basis, as well as updated certain capitalization rates.

As a result of further review, the estimated fair value allocated to property and equipment was revised downward by approximately $146 million. Accordingly, we have revised our depreciation and amortization expectations to range between $105 million and $115 million in fiscal 2008. This compares to our prior expectations of depreciation and amortization ranging between $115 million and $125 million this year. We have included purchase price accounting information in the supplemental materials we have provided on our IR Web site in conjunction with today's webcast.

Turning to our cash performance, consolidated cash from operating activities was $56.8 million for the first six months ended June 30th, 2008, a 141% increase from the first six months of 2007. The growth in cash from operations was driven by higher cash earnings as a result of the acquisition of Applebee's. The IHOP business also generated $7.9 million of cash from the structural run off of principal payments related to its long-term notes receivable for the first six months of 2008.

During the same period, consolidated capital expenditures increased to $23.2 million due to the capital needs of Applebee's Company-operated restaurants and final construction expenditures on Applebee's corporate headquarters in Lenexa, Kansas. Displaces consolidate free cash flow, which we define at this point as cash from operations plus the receivable run off, less CapEx at $41.5 million for the first six months of 2008. This is a 37% increase versus the same period last year. Uses of this cash primarily included the payment of our common dividend as well as $21.5 million in unpaid transaction related expenses associated with the acquisition of Applebee's.

Now, I would like to take time to discuss some of the debt covenants in our securitizations. As a reminder, all of the covenants that govern our securitizations are disclosed in securitization documents filed as an exhibit to our 2007 10-K. There are two specific covenants that have become the source of recent investor inquiry, which I would like to cover with you today. The first covenant I would like to cover appears in both the Applebee's and IHOP's securitizations and measures Company-wide adjusted debt to EBTIDAR calculated on the same basis. The targeted ratios differ in each securitization and the ratios reduce over time.

The IHOP securitization calls for adjusted debt to EBITDAR to be maintained below 7.75 times through November 28, 2008, below 7.5 times through November 28, 2009, and below 7 times thereafter. The Applebee's securitization calls for adjusted debt to EBITDAR to be maintained below 8 times through November 28, 2008, below 7.75 times through November 28, 2009, and below 7.25 times thereafter. At the end of June, our Company-wide ratio measured 7.35 times, satisfying both the IHOP and Applebee's leverage test thresholds. A description of how to calculate our adjusted debt to EBITDAR ratio is provided in supplemental materials posted on our IR Web site in conjunction with today's webcast on this call.

The second covenant I would like to discuss is the Debt-Service Coverage Ratio or DSCR, a requirement that is independent for each of the securitizations. The securitizations call for the respective DSCR to be maintained above specified levels. At the end of June, IHOP's three- month DSCR was 3.15 times, comfortably above the applicable DSCR threshold detailed in the IHOP securitization documents. Applebee's covenant is based on the three months adjusted DSCR that incorporates a cash residual it receives from the IHOP securitization.

The cash residual is a portion of IHOP's cash after payment of expenses specified in the IHOP securitization that is redirected to the Applebee's securitization. The three-month adjusted DSCR for Applebee's at the end of June was 2.63 times, again comfortably above the applicable DSCR threshold detailed in Applebee's securitization. The consequences of each securitization DSCR falling below certain levels is summarized in the supplemental materials available on our website. Several components which are used to calculate the DSCRs are generated through cash based accounting and are not publicly available.

In summary, we are comfortably in compliance with our current consolidated leverage and DSCR tests.

With that, I would like to now turn the call back to Julia.

Julia Stewart

Thanks, Tom. So I want to say clearly that based on our current plans, we fully expect to remain in compliance with these debt covenants. As Tom noted, we are meeting our current consolidated leverage and DSCR test, and expect that will continue to be the case as the consolidated leverage test covenant for the IHOP securitization reduces to 7.5 times this November.

Looking ahead, the consolidated leverage ratio covenant and the IHOP securitization reduces to 7 times in November 2009. Based on current plans related to refranchising and the performance of Applebee's Company restaurant business, which are the key drivers of this leverage ratio, we expect to remain in compliance. Our base plan calls for refranchising approximately 190 Applebee's restaurants in 2009. Prospective buyers have expressed interest in every Company market and we are in various stages of negotiation for each of these markets.

In addition, we expect to deliver modest same store sales growth next year, which will enable us to improve the performance of Company-operated Applebee's. However, our margin of error to be below this 7 times level in November 2009 is tighter than we might like. As a result, we have already begun the process to increase our financial flexibility. There are several steps we are currently evaluating. First, there are opportunities to enhance our EBITDA performance, including cost reductions that are within our control. To size it for you, each $7 million of increased EBITDA represents an approximate 10 basis points improvement in our leverage test.

Secondly, we might seek a covenant amendment to provide us with more financial flexibility. And third, under the documents for both of the securitization transactions, we have the option, but not the obligation to use free cash flow to make capital contribution to the securitization subsidiaries, which we could use to reduce the amount of securitization debt. So I hope this provides you with a clearer perspective on our debt covenants and the steps we are considering to increase our financial flexibility.

Lastly, I want to express my confidence in our plans to revitalize Applebee's brand and transform the business model to a highly franchised one. Our marketing and operations initiatives for Applebee's are strategically aligned with our business objectives. Our refranchising pipeline is solid, with interest from new and existing franchisees. In the last seven months, we've put in place the right building blocks to drive sustainable system momentum over time. But Applebee's turnaround won't happen overnight. And as I said earlier, IHOP's success and track record of 22 consecutive quarters of same store sales growth is the result of the focused execution of our core marketing, operations, and development strategies. This is exactly what we plan to do with Applebee's. We are focused on those things within our control that enable us to manage our business as effectively as possible, and we have a solid plan to drive both the near and the long- term performance of our Company.

Now, Tom and I would be happy to answer any questions you have. Operator?

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