IHOP 2010 Annual Report Download - page 26

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 entrees, appetizers, desserts
and non-alcoholic beverages specified by IHOP, including our award-winning pancakes. We own and
operate ten IHOP restaurants in the Cincinnati market primarily for testing new remodel designs, new
menu items equipment, new operational procedures systems and new marketing, brand and design
elements. In addition we may also operate, from time to time on a temporary basis until refranchised,
IHOP restaurants that we reacquire for a variety of reasons from IHOP franchisees. There was one
such restaurant included as a company-operated restaurant as of December 31, 2010. IHOP restaurants
are located in all 50 states of the United States, in the District of Columbia, Puerto Rico and the
United States Virgin Islands and internationally in Canada and Mexico.
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, and many operate 24 hours a day.
Franchising
Franchised restaurants include both company-financed and franchisee-financed development. For
clarity of presentation, the discussion below is separated between those activities specific to the
Company’s business model as it was in effect prior to 2003 (the ‘‘Previous Business Model’’) and those
adopted in January 2003 (the ‘‘Current Business Model’’). As discussed in greater detail below, under
the Previous Business Model the Company developed a substantial majority of all IHOP restaurants
with the intention of leasing them to franchisees. Under the Current Business Model substantially all
new IHOP restaurants are developed by franchise developers with the intention of operating them as
franchised restaurants.
Current Business Model
Under our Current Business Model, a potential franchisee first negotiates and enters into a single-
store development agreement or a multi-store development agreement with the Company 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 1,493 IHOP restaurants subject to franchise and area license
agreements as of December 31, 2010, a total of 397 operate under the Current Business Model.
The revenues received by the Company 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-
store 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-store 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-store development agreement or (ii) $40,000 (against which the
$20,000 development fee will be credited) for each restaurant developed under a multi-store
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
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