IHOP 2011 Annual Report Download - page 39

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rates) with respect to many other risks. Moreover, there is no assurance that any loss incurred will not exceed the limits on the
policies obtained, or that payments on such policies will be received on a timely basis, or even if obtained on a timely basis, that
such payments will prevent losses to such franchisee or enable timely franchise payments. Accordingly, in cases in which a
franchisee experiences increased insurance premiums or must pay claims out-of-pocket, the franchisee may not have the funds
necessary to make franchise payments.
Franchisees generally are not "limited purpose entities," making them subject to business, credit, financial and other
risks. Franchisees may be natural persons or legal entities. Franchisees are often not "limited-purpose entities," making them
subject to business, credit, financial and other risks which may be unrelated to the operations of Applebee's or IHOP restaurants.
These unrelated risks could materially and adversely affect a franchisee and its ability to make its franchise payments in full or
on a timely basis. Any such decrease in franchise payments may have a material adverse effect on us. See the Risk Factor titled
"An insolvency or bankruptcy proceeding involving a franchisee could prevent the collection of payments or the exercise of rights
under the related franchise agreement," below.
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 under Section 362 of the United States Bankruptcy Code upon the commencement of a
bankruptcy proceeding by or 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 also may be recoverable on behalf of the franchisee as a preferential transfer under the United States Bankruptcy Code.
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. In the case of Applebee's, these negative
factors would 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 the periodic updating of Applebee's and IHOP restaurant locations through new remodel programs 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.
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 assert 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, we may be forced
to pay damages, be required to develop or adopt non-infringing intellectual property or be obligated to 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 licensees 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 license our intellectual property to our
franchisees, product suppliers, manufacturers, distributors, advertisers and other third parties. The franchise agreements and other
license agreements require that each franchisee or other licensee use the intellectual property in accordance with established or
approved quality control guidelines. However, there can be no assurance that the franchisees or other licensees will use the
intellectual property assets in accordance with such guidelines. Franchisee and licensee noncompliance with the terms and
conditions of the governing franchise agreement or other license agreement may reduce the overall goodwill associated with our
brands. Franchisees and other licensees may refer to our intellectual property improperly in communications, resulting in the
weakening of the distinctiveness of our intellectual property. There can be no assurance that the franchisees or other licensees will