IHOP 2011 Annual Report Download - page 43

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As of December 31, 2011, we operated 177 Applebee's restaurants and 15 IHOP restaurants for a total of 192 company-
operated restaurants. Of these restaurants, we leased the building for 19 sites, owned the building and leased the land for 74 sites,
owned the land and building for four sites and leased the land and building for 95 sites.
Of the 1,369 IHOP restaurants operated by franchisees, 61 were located on sites owned by us, 684 were located on sites
leased by us from third parties and 624 were located on sites owned or leased by franchisees. All of the IHOP restaurants operated
by area licensees and all of the franchisee-operated Applebee's restaurants were located on sites owned or leased by the area
licensees or the franchisees.
Leases of IHOP restaurants generally provide for an initial term of 20 to 25 years, with most having one or more five-year
renewal options. Leases of Applebee's restaurants generally have an initial term of 10 to 20 years, with renewal terms of five to
20 years. In addition, a substantial portion of the leases for both IHOP and Applebee's restaurants include provisions calling for
the periodic escalation of rents during the initial term and/or during renewal terms. The leases typically provide for payment of
rents in an amount equal to the greater of a fixed amount or a specified percentage of gross sales and for payment of taxes, insurance
premiums, maintenance expenses and certain other costs. Historically, it has been our practice to seek to extend, through negotiation,
those leases that expire without renewal options. However, from time to time, we choose not to renew a lease or are unsuccessful
in negotiating satisfactory renewal terms. When this occurs, the restaurant is closed and possession of the premises is returned to
the landlord.
Under our Applebee's franchise agreements, we have certain rights to gain control of a restaurant site in the event of default
under the franchise agreement. Because most IHOP franchised restaurants developed by us under our Previous Business Model
are subleased to the franchisees, IHOP has the ability to regain possession of the subleased restaurant if the franchisee defaults in
the payment of rent or other terms of the sublease.
We currently occupy our principal corporate offices and IHOP restaurant support center in Glendale, California, under a
lease expiring in June 2020. The Applebee's restaurant support center is located in Kansas City, Missouri under a lease expiring
in October 2021.
Item 3. Legal Proceedings.
We are subject to various lawsuits, claims and governmental inspections or audits arising in the ordinary course of business.
Some of these lawsuits purport to be class actions and/or seek substantial damages. In the opinion of management, these matters
are adequately covered by insurance or, if not so covered, are without merit or are of such a nature or involve amounts that, if
adversely determined, would not have a material adverse impact on our business or consolidated financial statements.
Gerald Fast v. Applebee's
We are currently defending a collective action in United States District Court for the Western District of Missouri, Central
Division filed on July 14, 2006 under the Fair Labor Standards Act, Gerald Fast v. Applebee's International, Inc., in which named
plaintiffs claim that tipped workers in company restaurants perform excessive amounts of non-tipped work for which they should
be compensated at the minimum wage. The court has conditionally certified a nationwide class of servers and bartenders who
have worked in company-operated Applebee's restaurants since June 19, 2004. Unlike a class action, a collective action requires
potential class members to “opt in” rather than “opt out.” On February 12, 2008, 5,540 opt-in forms were filed with the court.
In cases of this type, conditional certification of the plaintiff class is granted under a lenient standard. On January 15, 2009,
we filed a motion seeking to have the class de-certified and the plaintiffs filed a motion for summary judgment, both of which
were denied by the court.
The parties stipulated to a bench trial which was set to begin on September 8, 2009 in Jefferson City, Missouri. Just prior
to trial, however, the court vacated the trial setting in order to submit key legal issues to the Eighth Circuit Court of Appeals for
review on interlocutory appeal. On April 21, 2011, the Eighth Circuit affirmed the trial court's denial of our motion for summary
judgment. On July 6, 2011, the Eighth Circuit denied our petition for rehearing.
On October 4, 2011, we filed a petition for certiorari asking the United States Supreme Court to review the decision of the
Eighth Circuit. On January 17, 2012, the Supreme Court declined to review the case. The bench trial is currently scheduled to
begin on September 10, 2012.
We believe we have meritorious defenses and intend to vigorously defend this case. An estimate of the possible loss, if
any, or the range of the loss cannot be made and, therefore, we have not accrued a loss contingency related to this matter.