IHOP 2011 Annual Report Download - page 22

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4
Company Operations Segment
As of December 31, 2011, the company restaurant operations segment consisted of 177 company-operated Applebee's
restaurants, 10 company-operated IHOP restaurants and five IHOP restaurants reacquired from franchisees and operated by IHOP
on a temporary basis until refranchised. Three of the five reacquired restaurants were refranchised in January 2012. All company-
operated restaurants are in the United States.
Company restaurant sales are retail sales at company-operated restaurants. Company restaurant expenses are operating
expenses at company-operated restaurants and include food, beverage, labor, utilities, rent and other restaurant operating costs.
Rental Operations Segment
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 revenue and expenses are primarily generated by IHOP. Applebee's has an insignificant amount of rental activity
that only relates to properties that are temporarily retained after refranchising company-operated restaurants until such time as the
properties can be disposed of by sale.
Financing Operations Segment
Financing operations revenue primarily consists of interest income from the financing of franchise fees and equipment leases,
as well as sales of equipment associated with refranchised IHOP restaurants and a portion of franchise fees for restaurants taken
back from franchisees not allocated to IHOP intellectual property. Financing expenses are primarily the cost of restaurant equipment.
Financial information for our four operating segments for the last three fiscal years is set forth in Note 22, Segment Reporting,
of the Notes to the Consolidated Financial Statements included in this report. Revenue derived from all foreign countries, in the
aggregate, comprises 1% of total consolidated revenue.
Restaurant Concepts
Applebee's
We develop, franchise and operate restaurants in the bar and grill segment of the casual dining category of the restaurant
industry under the name "Applebee's Neighborhood Grill & Bar." With 2,019 system-wide restaurants as of December 31, 2011,
Applebee's Neighborhood Grill & Bar is the largest casual dining concept in the world, in terms of number of restaurants and
market share(1). As of December 31, 2011, franchisees operated 1,842 of these restaurants and 177 restaurants were company-
operated. The restaurants were located in 49 states, one United States territory and 15 countries outside of the United States.
Each Applebee's restaurant is designed as an attractive, friendly, neighborhood establishment featuring high quality,
moderately-priced food, alcoholic and non-alcoholic beverage items, table service and a comfortable atmosphere. Applebee's
restaurants appeal to a wide range of customers including young adults, senior citizens and families with children.
Franchising
Generally, franchise arrangements for Applebee's restaurants consist of a development agreement and separate franchise
agreements for each restaurant. Development agreements grant to the franchise developer the exclusive right to develop Applebee's
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 typically provide for an initial development schedule of one to five years as
agreed upon by the Company and the franchisee. At or shortly prior to the completion of the initial development schedule or any
subsequent supplemental development schedule, the Company and the franchisee generally execute supplemental development
schedules providing for the development of additional Applebee's restaurants in the franchise developer's exclusive territory.
Prior to the opening of each new Applebee's restaurant, the franchisee and the Company enter into a separate franchise
agreement for that restaurant. Our current standard domestic Applebee's franchise agreement provides for an initial term of 20 years
and permits four renewals, in five-year increments, for up to an additional 20 years, upon payment of an additional franchise fee.
Our current standard domestic Applebee's franchise arrangement calls for 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 provide for royalty rates 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 other franchise fees under
older development agreements vary from the currently offered arrangements.
__________________________________________________________________________
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 27, 2011 (market share based on U.S. system-wide sales in the casual dining category).