IHOP 2008 Annual Report Download - page 39

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. These negative factors will 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 revitalizing Applebee’s store locations through a new remodel program 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, which could have a material adverse effect on our business.
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 by
operation of Section 362 of the United States Bankruptcy Code upon the commencement of a
bankruptcy proceeding 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 may also be recoverable on behalf of the franchisee as a preferential transfer
under the United States Bankruptcy Code.
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. There can be no assurance that third parties will not assert infringement or
misappropriation claims against us, or 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, then we could
be required to develop or adopt non-infringing intellectual property or 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.
If franchisees and other sublicensees 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 sublicense
our intellectual property to our franchisees and to product suppliers, manufacturers, distributors,
advertisers and other third parties. The franchise agreements and other sublicense agreements require
that each franchisee or other sublicensee use the intellectual property in accordance with established or
approved quality control guidelines. However, there can be no assurance that the franchisees or other
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