IHOP 2008 Annual Report Download - page 25

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from the sale of pancake and waffle dry-mixes; and (g) 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 usually collected by us
and then 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, 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. 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 the Company. 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.
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, 2008, the area licenses for the state of Florida and certain counties in Georgia operated
or sub-franchised a total of 148 IHOP restaurants, and the area licensees for the province of British
Columbia, Canada operated or sub-franchised a total of 12 IHOP restaurants. The area license
agreements provide for royalties ranging from 0.5% to 2.0% of gross sales, and license 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. We treat the
revenues from our area licensees as franchise operations revenues for financial 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.’’
We highly value good franchisor/franchisee relations and strive to maintain positive working
relationships with our franchisees. We sponsor the IHOP Franchise Board of Advisors, an elected 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 quarterly to discuss operational issues, marketing matters, development and construction issues,
information technology and many other topics. IHOP management also works closely with the IHOP
Franchise Procurement Committee, a group formed to negotiate joint purchase arrangements for food
and supplies to take advantage of economies of scale. In February 2009 we announced the formation of
CSCS, an independent purchasing co-operative to manage all procurement activities for the Applebee’s
and IHOP restaurants choosing to join the co-operative. Due to cultural and regulatory differences we
may have different requirements for restaurants opened outside of the United States.
11