IHOP 2012 Annual Report Download - page 27

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The revenues we receive 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-restaurant 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-restaurant 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-restaurant development agreement or (ii) $40,000 (against which the $20,000 development fee will be
credited) for each restaurant developed under a multi-restaurant 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 fees comprised of (i) a
local advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which was typically used to
cover the cost of local media purchases and other local advertising expenses incurred by a local advertising cooperative, and (ii) a
national advertising fee 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, every year, 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 us,
and we were involved in all aspects of the development and financing of the restaurants. Under the Previous Business Model, we
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.
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 and from the equipment 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 us. 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. More than half of our franchise restaurants operate under the Previous Business Model.
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, 2012, the area licensee for the state of Florida and
certain counties in Georgia operated or sub-franchised a total of 152 IHOP restaurants. The area licensee for the province of British
Columbia, Canada operated or sub-franchised a total of 13 IHOP restaurants. The area license for British Columbia expires in
2026. 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. Revenues from our area licensees are included in franchise operations revenues for segment reporting
purposes.
Franchise Operations
IHOP's Operations Department is charged with ensuring that high operational standards are met at all times by our franchisees.
Operating standards have been developed in consultation with franchisees and are detailed in the "IHOP Manual of Standard
Operating Procedures." Company and third-party representatives make both scheduled and unannounced inspections of restaurants
to ensure that only approved products are in use and that our prescribed operations practices and procedures are being followed.
Due to cultural and regulatory differences, we may have different requirements for restaurants opened outside of the United States.