UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to _________________ Commission File Number 0-8360 IHOP CORP. (Exact name of registrant as specified in its charter) Delaware 95-3038279 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 525 North Brand Boulevard, Glendale, California 91203-1903 (Address of principal executive offices) (Zip Code) (818) 240-6055 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <TABLE> <CAPTION> Class Outstanding as of September 30, 1996 ---------------------------- ------------------------------------ <S> <C> Common Stock, $.01 par value 9,467,294 </TABLE>
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES (Unaudited and in thousands, except share amounts) - ------------------------------------------------------------------------------------------------------ September 30, December 31, 1996 1995 ------------- ------------ <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 2,185 $ 3,860 Receivables 26,640 21,476 Reacquired franchises and equipment held for sale, net 1,613 1,157 Inventories 1,064 792 Prepaid expenses 427 233 -------- -------- Total current assets 31,929 27,518 -------- -------- Long-term receivables 129,349 115,800 Property and equipment, net 115,166 87,795 Reacquired franchises and equipment held for sale, net 10,113 6,553 Excess of costs over net assets acquired, net 13,015 13,336 Other assets 906 1,055 -------- -------- Total assets $300,478 $252,057 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 4,622 $ 4,672 Accounts payable 16,770 15,979 Accrued employee compensation and benefits 3,010 1,562 Other accrued expenses 5,045 2,349 Deferred income taxes 3,271 3,436 Capital lease obligations and other 829 719 -------- -------- Total current liabilities 33,547 28,717 -------- -------- Long-term debt 43,844 30,584 Deferred income taxes 24,086 21,495 Capital lease obligations and other 76,228 62,964 Shareholders' equity Preferred stock, $1 par value, 10,000,000 shares authorized; shares issued and outstanding: no shares - - Common stock, $.01 par value, 40,000,000 shares authorized; shares issued and outstanding: September 30, 1996, 9,467,294 shares; December 31, 1995, 9,375,515 shares 95 94 Additional paid-in capital 48,478 46,363 Retained earnings 73,460 60,640 Contribution to ESOP 740 1,200 -------- -------- Total shareholders' equity 122,773 108,297 -------- -------- Total liabilities and shareholders' equity $300,478 $252,057 ======== ======== </TABLE> See the accompanying notes to the consolidated financial statements. 2
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF OPERATIONS IHOP CORP. AND SUBSIDIARIES (Unaudited and in thousands, except per share amounts) - -------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1996 1995 1996 1995 -------- ------- -------- -------- <S> <C> <C> <C> <C> Revenues Franchise operations Rent $ 7,459 $ 7,178 $ 21,832 $ 20,854 Service fees and other 18,267 16,790 53,593 47,904 ------- ------- -------- -------- 25,726 23,968 75,425 68,758 Company operations 14,342 10,484 38,778 30,216 Other 11,501 8,118 22,123 16,897 ------- ------- -------- -------- Total revenues 51,569 42,570 136,326 115,871 ------- ------- -------- -------- Costs and expenses Franchise operations Rent 4,190 3,811 12,109 11,303 Other direct costs 7,735 7,302 22,843 20,846 ------- ------- -------- -------- 11,925 11,113 34,952 32,149 Company operations 13,541 10,384 36,448 29,282 Field, corporate and administrative 6,745 5,282 19,647 16,580 Depreciation and amortization 2,095 1,703 5,965 5,070 Interest 2,842 2,217 8,231 6,378 Other 5,513 4,028 9,893 8,114 Severance charges - - - 800 ------- ------- -------- -------- Total costs and expenses 42,661 34,727 115,136 98,373 ------- ------- -------- -------- Income before income taxes 8,908 7,843 21,190 17,498 Provision for income taxes 3,519 3,102 8,370 6,912 ------- ------- -------- -------- Net income $ 5,389 $ 4,741 $ 12,820 $ 10,586 ======= ======= ======== ======== Net income per common and common equivalent share $.56 $.50 $1.34 $1.12 ======= ======= ======== ======== Weighted average common and common equivalent shares outstanding 9,600 9,521 9,584 9,478 ======= ======= ======== ======== </TABLE> See the accompanying notes to the consolidated financial statements. 3
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES (Unaudited and in thousands) - ------------------------------------------------------------------------------------ Nine Months Ended September 30, --------------------- 1996 1995 --------- --------- <S> <C> <C> Cash flows from operating activities Net income $ 12,820 $ 10,586 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 5,965 5,070 Deferred taxes 2,426 3,911 Contribution to ESOP 740 665 Changes in current assets and liabilities Accounts receivable (4,685) (2,320) Inventories (272) (40) Prepaid expenses (194) 403 Accounts payable 791 2,121 Accrued employee compensation and benefits 1,448 (402) Other accrued expenses 2,696 477 Other, net (195) (40) -------- -------- Cash provided by operating activities 21,540 20,431 -------- -------- Cash flows from investing activities Additions to property and equipment (41,007) (31,455) Proceeds from sale and leaseback arrangements 5,200 10,079 Additions to notes, equipment contracts and direct financing leases receivable (6,112) (4,959) Principal receipts from notes, equipment contracts and direct financing leases receivable 5,146 4,341 Additions to reacquired franchises held for sale (405) (721) -------- -------- Cash used by investing activities (37,178) (22,715) -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt 17,800 5,900 Repayment of long-term debt (4,437) (5,400) Principal payments on capital lease obligations (316) (381) Exercise of stock options 916 2,508 -------- -------- Cash provided by financing activities 13,963 2,627 -------- -------- Net change in cash and cash equivalents (1,675) 343 Cash and cash equivalents at beginning of period 3,860 2,036 -------- -------- Cash and cash equivalents at end of period $ 2,185 $ 2,379 ======== ======== Supplemental disclosures Interest paid, net of capitalized amounts $ 7,343 $ 5,958 Income taxes paid 6,371 1,667 Capital lease obligations incurred 14,377 12,356 </TABLE> See the accompanying notes to the consolidated financial statements. 4
IHOP CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. The accompanying unaudited consolidated financial statements include all adjustments, consisting of normal, recurring accruals, which in the opinion of the management of IHOP Corp. and Subsidiaries ("IHOP" or the "Company") are necessary for a fair presentation of the financial position and the results of operations for the periods presented. The results of operations for the nine months ended September 30, 1996, are not necessarily indicative of the results to be expected for the full year ending December 31, 1996. 2. In the first quarter of 1995, the Company recognized severance charges of $800,000 associated with a realignment of responsibilities in its restaurant operations, restaurant development and purchasing functions. The effect of the charges was $484,000, net of income tax benefit, or $.05 per share. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- The following table sets forth certain operating data for IHOP restaurants. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- 1996 1995 1996 1995 -------- ---------- --------- -------- (Unaudited and dollars in thousands) <S> <C> <C> <C> <C> Restaurant Data Effective restaurants (a) Franchise 505 468 498 458 Company 59 48 56 47 Area license 132 127 132 126 -------- -------- -------- -------- Total 696 643 686 631 ======== ======== ======== ======== System-wide Sales (b) $208,512 $185,440 $591,504 $530,857 Percent increase 12.4% 12.1% 11.4% 13.1% Average sales per effective restaurant $ 299 $ 288 $ 862 $ 841 Percent increase 3.8% 2.9% 2.5% 4.6% Comparable average sales per restaurant (c) $ 306 $ 289 $ 882 $ 840 Percent change 2.7% (0.4%) 1.3% 1.0% Franchise Sales $163,061 $142,173 $460,309 $406,416 Percent increase 14.7% 12.2% 13.3% 13.7% Average sales per effective restaurant $ 323 $ 304 $ 924 $ 887 Percent increase 6.3% 2.4% 4.2% 3.5% Comparable average sales per restaurant (c) $ 314 $ 298 $ 906 $ 867 Percent change 2.8% (0.6%) 1.3% 1.1% Company Sales $ 14,342 $ 10,484 $ 38,778 $ 30,216 Percent change 36.8% 5.4% 28.3% (2.4%) Average sales per effective restaurant $ 243 $ 218 $ 692 $ 643 Percent change 11.5% (1.4%) 7.6% (0.3%) Area License Sales $ 31,109 $ 32,783 $ 92,417 $ 94,225 Percent change (5.1%) 14.4% (1.9%) 16.0% Average sales per effective restaurant $ 235 $ 258 $ 700 $ 748 Percent change (8.9%) 7.1% (6.4%) 9.5% </TABLE> - -------------------- (a) "Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open only a portion of the period. (b) "System-wide sales" are retail sales of franchisees, Company-operated restaurants, and area licensees as reported to the Company. (c) "Comparable average sales" reflects sales for restaurants that are operated for the entire fiscal period indicated as well as the entire prior fiscal period. Comparable average sales do not include data on area license restaurants located in Florida and Japan. 6
The following table summarizes IHOP restaurant development and franchising activity: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 ------ ------ ------ ------ (Unaudited) <S> <C> <C> <C> <C> RESTAURANT DEVELOPMENT ACTIVITY (a) - -------------------------------------- IHOP - beginning of period 697 639 678 620 New openings IHOP-developed 17 12 29 21 Investor program 1 5 10 14 Area license 1 1 3 5 ---- ---- ---- ---- Total new openings 19 18 42 40 Closings Company and franchised (3) (3) (7) (6) Area license (2) - (2) - ---- ---- ---- ---- IHOP - end of period 711 654 711 654 ==== ==== ==== ==== Summary - end of period Franchise 518 478 518 478 Company 61 48 61 48 Area license 132 128 132 128 ---- ---- ---- ---- Total - IHOP 711 654 711 654 ==== ==== ==== ==== RESTAURANT FRANCHISING ACTIVITY (a) - -------------------------------------- IHOP-developed 16 10 27 20 Investor program 1 5 10 14 Rehabilitated and refranchised - 2 - 2 ---- ---- ---- ---- Total restaurants franchised 17 17 37 36 Reacquired by Company (4) (1) (11) (6) Closed (2) (1) (4) (2) ---- ---- ---- ---- Net addition 11 15 22 28 ==== ==== ==== ==== </TABLE> - -------------------- (a) The Company reports restaurants in Canada as franchise restaurants although nine of the ten restaurants are operated under an area license agreement. IHOP's quarterly results are subject to seasonal fluctuation. Revenues from sales of franchises are affected by the timing of new restaurant openings and the restaurants in the Company's "inventory" of restaurants available from time to time for franchising; the impact of such factors is not evenly distributed throughout the year. As a consequence, the results of operations for the nine months ended September 30, 1996, are not necessarily indicative of the results to be expected for the full year ending December 31, 1996. System-wide retail sales for the third quarter and first nine months of 1996 increased 12.4% and 11.4%, respectively, over system-wide retail sales for the comparable 1995 periods. This was due to increases in the number of effective restaurants of 8.2% and 8.7% and increases in average per unit revenues of 3.8% and 2.5% over the respective prior year periods. The above increases were mitigated by unfavorable exchange fluctuations in the Japanese yen. If the Japanese sales were excluded from the comparison, system-wide sales would have increased by 14.5% in the third quarter and 13.4% in the first nine months of 1996. System-wide comparable average sales per restaurant (exclusive of area license restaurants) for the third quarter and first nine 7
months of 1996 increased 2.7% and 1.3%, respectively, over those in the comparable 1995 periods. Management continues to pursue sales increases through the Company's restaurant development program, improved marketing efforts, improvements in customer service and operations, and the Company's remodeling program. Franchise operations revenues for the third quarter and first nine months of 1996 increased 7.3% and 9.7%, respectively, over revenues for the comparable 1995 periods. This was primarily due to increases in the number of effective franchise restaurants of 7.9% and 8.7% coupled with increases in average per unit revenues of 6.3% and 4.2% in the third quarter and the first nine months of 1996, respectively, in comparison with the same periods in 1995. Franchise operations costs and expenses for the third quarter and first nine months of 1996 increased 7.3% and 8.7%, respectively, over costs and expenses for the comparable 1995 periods. As a result of franchise revenues increasing in excess of franchise expenses, the margin from franchise operations improved to 53.7% in both the third quarter and first nine months of 1996 versus 53.6% and 53.2% in the comparable 1995 periods. The improvements in margin were primarily because of increases in interest income associated with IHOP's financing of sales of franchises and equipment to its franchisees. Company-operated restaurant revenues for the third quarter and first nine months of 1996 increased 36.8% and 28.3%, respectively, over revenues for the comparable periods in 1995. This was primarily due to increases in the number of effective Company-operated restaurants of 22.9% and 19.1% coupled with increases in the revenues per effective Company operated restaurant of 11.5% and 7.6%, respectively, in the third quarter and the first nine months of 1996 over the comparable 1995 periods. Company-operated restaurant costs and expenses for the third quarter and first nine months of 1996 increased 30.4% and 24.5%, respectively, from those in the comparable 1995 periods. Margin from Company- operated restaurants increased to 5.6% and 6.0% in the third quarter and first nine months of 1996, respectively, from margins of 1.0% and 3.1% in the comparable 1995 periods. The improvements in margin were primarily due to operating reductions in food costs, salaries and wages as a percentage of revenues. Other revenues for the third quarter and first nine months of 1996 increased 41.7% and 30.9%, respectively, from other revenues for the comparable 1995 periods. The primary reason for the increases were sales of franchises and equipment which increased to $9,333,000 and $15,911,000 in the third quarter and first nine months of 1996, respectively, from $6,566,000 and $12,407,000 in the comparable 1995 periods. Augmenting the increased sales of franchises and equipment were gains in interest income from direct financing leases. The Company franchised 17 and 37 restaurants in the third quarter and first nine months of 1996, respectively, compared to 17 and 36 restaurants in the comparable 1995 periods. Other costs and expenses for the third quarter and first nine months of 1996 increased 36.9% and 21.9%, respectively, over the 1995 periods. The increases were primarily due to franchise and equipment costs of sales which increased to $5,091,000 and $8,387,000, respectively, from $3,436,000 and $6,327,000 in the comparable 1995 periods. Revenues from sales of franchises and equipment and their associated costs of sales are affected by the mix and number of restaurants franchised, as follows: (i) restaurants newly developed by IHOP normally franchise for $200,000 to $350,000, have little if any franchise cost of sales and have equipment in excess of $300,000 that is usually sold at about break-even, (ii) restaurants developed by franchisees normally franchise for $50,000, have minor associated franchise cost of sales and do not include an equipment sale; and (iii) previously reacquired franchises normally refranchise for $100,000 to $300,000, include an 8
equipment sale, and may have substantial costs of sales associated with both the franchise and the equipment. As noted earlier, sales of franchises are also affected by the timing of new restaurant openings and the restaurants in the Company's "inventory" of restaurants available from time to time for franchising. Field, corporate and administrative expenses for the third quarter and first nine months of 1996 increased 27.7% and 18.5%, respectively, over the comparable 1995 periods. In general, field, corporate and administrative expenses have been increasing as a result of normal increases in salaries and wages, inflation and increases in headcount to support higher workloads as the Company grows. Field, corporate and administrative expenses were 3.2% and 3.3% of system-wide sales in the third quarter and first nine months of 1996, respectively, compared with 2.9% and 3.1% in the comparable 1995 periods. Depreciation and amortization expense increased 23.0% and 17.7% in the third quarter and first nine months of 1996, respectively, over the comparable 1995 periods primarily reflecting the addition of new, larger restaurants. Interest expense increased 28.2% and 29.1% in the third quarter and first nine months of 1996, respectively, over the comparable 1995 periods primarily due to interest associated with increased capital lease obligations. Severance charges of $800,000, or $484,000 net of income tax benefit, or $.05 per share, were recognized in the first quarter of 1995. The charges were associated with a realignment of responsibilities in the Company's restaurant operations, restaurant development and purchasing functions. (See Note 2 to the Consolidated Financial Statements.) Provision for income taxes was 39.5% of income before income taxes in the third quarter and first nine months of 1996 and in the comparable 1995 periods. Liquidity and Capital Resources - ------------------------------- The Company invests available funds into its business through the development of additional restaurants and the remodeling of older Company-operated restaurants. In 1996, IHOP and its franchisees and area licensees plan to develop and open approximately 65 to 70 restaurants. Included in that number are the development of 45 to 50 restaurants by the Company and approximately 20 by IHOP franchisees and area licensees. This is an adjustment from the previous forecast of 50 to 55 new restaurants to be developed by the Company and 25 by franchisees and area licensees. Intense competition for the limited number of restaurant locations which are available at fair value is the primary reason for the change in forecast. Projected capital expenditures in 1996 for IHOP's portion of the above development program are approximately $55 million. In November 1996, the first annual installment of $4.6 million in principal becomes due on the Company's senior notes due 2002. The Company is currently finalizing the placement of $35 million in unsecured senior notes due 2008 at a favorable fixed interest rate. Principal payments on these notes will commence in the year 2000. Management projects that the sale of the notes will be completed in November 1996. The proceeds will be used to fund capital expenditures, refinance existing debt and for 9
general corporate purposes. The Company expects that funds from operations, sale and leaseback arrangements (estimated to be about $8 million), its revolving line of credit and the senior notes will be sufficient to cover its operating requirements and its projected capital expenditures in 1996. At September 30, 1996, $16.0 million had been borrowed under the Company's unsecured bank revolving credit agreement. These borrowings are expected to be repaid with a portion of the proceeds from the senior notes. Part II. OTHER INFORMATION - --------------------------- Item 6.Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibits not incorporated by reference are filed herewith. The remainder of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference. 3.1 Certificate of Incorporation of IHOP Corp. Exhibit 3.1 to Form 10-K for the fiscal year ended December 31, 1991, Commission file number 0-8360, (the "1991 Form 10-K") is hereby incorporated by reference. 3.2 Bylaws of IHOP Corp. Exhibit 3.2 to Registration Statement on Form S-1 No. 33-40431 is hereby incorporated by reference. 10 Amendment No. 3 to the Amended and Restated International House of Pancakes Employee Stock Ownership Plan. 11 Statement Regarding Computation of Per Share Earnings. 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter ended September 30, 1996. 10
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IHOP Corp. -------------------------- (Registrant) October 24, 1996 BY: /s/ Richard K. Herzer - ---------------- ------------------------------ (Date) Richard K. Herzer Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) October 24, 1996 BY: /s/ Frederick G. Silny - --------------- ---------------------------- (Date) Frederick G. Silny Vice President-Finance and Treasurer (Principal Financial Officer) 11