IHOP 2009 Annual Report Download - page 30

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 (see ‘‘Marketing and Advertising’’).
Previous Business Model
IHOP franchised restaurants established prior to 2003 under our Previous Business Model were
generally developed by the Company. The Company was involved in all aspects of the development and
financing of the restaurants. Under the Previous Business Model, the Company 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. Of the 1,443 IHOP restaurants
subject to franchise and area license agreements as of December 31, 2009, a total of 1,096 operate
under the Previous Business Model.
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; (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 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, 2009, the area licensees for the state of Florida and certain counties in Georgia operated
or sub-franchised a total of 152 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 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.
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