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 March 31, 1997 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. Class Outstanding as of March 31,1997 - ---------------------------- ------------------------------- Common Stock, $.01 par value 9,517,299
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES (In thousands, except share amounts) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> March 31, December 31, 1997 1996 --------- ------------ <S> <C> <C> Assets Current assets Cash and cash equivalents $ 8,347 $ 8,658 Receivables 25,553 29,324 Reacquired franchises and equipment held for sale, net 1,834 1,474 Inventories 1,284 1,180 Prepaid expenses 356 676 -------- -------- Total current assets 37,374 41,312 -------- -------- Long-term receivables 139,583 143,338 Property and equipment, net 128,019 120,854 Reacquired franchises and equipment held for sale, net 10,393 8,352 Excess of costs over net assets acquired, net 12,801 12,908 Other assets 2,079 2,125 -------- -------- Total assets $330,249 $328,889 ======== ======== Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 4,731 $ 4,731 Accounts payable 14,799 17,474 Accrued employee compensation and benefits 2,970 2,674 Other accrued expenses 5,093 5,024 Deferred income taxes 3,827 4,311 Capital lease obligations 910 870 -------- -------- Total current liabilities 32,330 35,084 -------- -------- Long-term debt 58,554 58,564 Deferred income taxes 24,504 25,061 Capital lease obligations and other 81,630 80,823 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: March 31, 1997, 9,517,299 shares; December 31, 1996, 9,467,294 shares 95 95 Additional paid-in capital 50,122 48,768 Retained earnings 82,794 79,244 Contribution to ESOP 220 1,250 -------- ------- Total shareholders' equity 133,231 129,357 -------- -------- Total liabilities and shareholders' equity $330,249 $328,889 ======== ======== </TABLE> See the accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS IHOP CORP. AND SUBSIDIARIES (In thousands, except per share amounts) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended March 31, ------------------ 1997 1996 -------- ------- <S> <C> <C> Revenues Franchise operations Rent $ 8,096 $ 7,183 Service fees and other 18,833 17,368 ------- ------- 26,929 24,551 Company operations 14,048 11,453 Other 5,464 4,288 ------- ------- Total revenues 46,441 40,292 ------- ------- Costs and Expenses Franchise operations Rent 4,194 3,996 Other direct costs 7,721 7,432 ------- ------- 11,915 11,428 Company operations 13,425 10,682 Field, corporate and administrative 7,053 6,721 Depreciation and amortization 2,449 1,898 Interest 3,506 2,632 Other 2,273 1,870 ------- ------- Total costs and expenses 40,621 35,231 ------- ------- Income before income taxes 5,820 5,061 Provision for income taxes 2,270 1,999 ------- ------- Net income $ 3,550 $ 3,062 ======= ======= Net Income Per Share Net income per common and common equivalent share $ .37 $ .32 ======= ======= Weighted average common and common equivalent shares outstanding 9,568 9,547 ======= ======= </TABLE> See the accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES (In thousands) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended March 31, -------------------- 1997 1996 --------- --------- <S> <C> <C> Cash flows from operating activities Net income $ 3,550 $ 3,062 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 2,449 1,898 Deferred taxes (1,041) (459) Contribution to ESOP 220 188 Change in current assets and liabilities Accounts receivable 3,949 (837) Inventories (104) (122) Prepaid expenses 320 (437) Accounts payable (2,675) (1,637) Accrued employee compensation and benefits 296 1,232 Other accrued expenses 69 913 Other, net 1,452 228 ------- -------- Cash provided by operating activities 8,485 4,029 ------- -------- Cash flows from investing activities Additions to property and equipment (9,490) (11,383) Proceeds from sale and leaseback arrangements - 1,196 Additions to notes, equipment contracts and direct financing leases receivable (1,215) (817) Principal receipts from notes, equipment contracts and direct financing leases receivable 1,979 1,386 Additions to reacquired franchises held for sale (8) (214) ------- -------- Cash used by investing activities (8,734) (9,832) ------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt 20 5,800 Repayment of long-term debt (30) (1,600) Principal payments on capital lease obligations (156) (125) Reacquisition of treasury shares (39) - Exercise of stock options 143 95 ------- -------- Cash (used) provided by financing activities (62) 4,170 ------- -------- Net change in cash and cash equivalents (311) (1,633) Cash and cash equivalents at beginning of period 8,658 3,860 ------- -------- Cash and cash equivalents at end of period $ 8,347 $ 2,227 ======= ======== Supplemental disclosures Interest paid, net of capitalized amounts $ 2,410 $ 1,964 Income taxes paid 569 276 Capital lease obligations incurred 503 3,041 </TABLE> See the accompanying notes to the consolidated financial statements.
IHOP CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. The accompanying consolidated financial statements for the three months ended March 31, 1997 and 1996 have been prepared in accordance with generally accepted accounting principles ("GAAP"). These financial statements have not been audited by independent public accountants but include all adjustments, consisting of normal, recurring accruals, which in the opinion of 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 accompanying consolidated balance sheet as of December 31, 1996 has been derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. 2. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 supersedes and simplifies the existing computational guidelines under Accounting Principles Board Opinion No. 15, "Earnings Per Share." It is effective for financial statements issued for periods ending after December 15, 1997. Among other changes, SFAS No. 128 eliminates the presentation of primary EPS and replaces it with basic EPS for which common stock equivalents are not considered in the computation. It also revises the computation of diluted EPS. It is not expected that the adoption of SFAS No. 128 will have a material impact on the earnings per share results reported by the Company under the Company's current capital structure.
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 March 31, -------------------- 1997 1996 -------- --------- (Dollars in thousands) <S> <C> <C> Restaurant Data Effective restaurants (a) Franchise 533 495 Company 60 52 Area license 137 132 --- --- Total 730 679 === === System-wide Sales (b) $216,459 $189,486 Percent increase 14.2% 11.8% Average sales per effective restaurant $ 297 $ 279 Percent increase 6.5% 2.2% Comparable average sales per restaurant (c) $ 302 $ 283 Percent increase 3.9% 0.3% Franchise Sales $168,547 $146,766 Percent increase 14.8% 12.9% Average sales per effective restaurant $ 316 $ 296 Percent increase 6.8% 2.8% Comparable average sales per restaurant (c) $ 311 $ 290 Percent increase 4.2% 0.2% Company Sales $ 14,048 $ 11,453 Percent increase 22.7% 24.3% Average sales per effective restaurant $ 234 $ 220 Percent increase 6.4% 7.3% Area License Sales $ 33,864 $ 31,267 Percent increase 8.3% 3.3% Average sales per effective restaurant $ 247 $ 237 Percent change 4.2% (2.9%) - ---------------- </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, area licensees and Company-operated restaurants as reported to the Company. (c) "Comparable average sales" reflects sales for restaurants that are operated for the entire fiscal period in which they are being compared. Comparable average sales do not include data on restaurants located in Florida and Japan.
The following table summarizes IHOP's restaurant development and franchising activity: <TABLE> <CAPTION> Three Months Ended March 31, ----------------- 1997 1996 -------- ------ <S> <C> <C> RESTAURANT DEVELOPMENT ACTIVITY (a) ----------------------------------- IHOP - beginning of period 729 678 New openings IHOP-developed 4 6 Investor program - 2 Area license 2 1 --- --- Total new openings 6 9 Closings Company and franchise (1) (2) Area license - - --- --- IHOP - end of period 734 685 === === Summary - end of period Franchise 534 498 Company 62 55 Area license 138 132 --- --- Total IHOP 734 685 === === RESTAURANT FRANCHISING ACTIVITY(a) ---------------------------------- IHOP-developed 5 4 Investor program - 2 Rehabilitated and refranchised 1 - --- --- Total restaurants franchised 6 6 Reacquired by Company (6) (4) Closed (1) - --- --- Net addition (decrease) (1) 2 === === </TABLE> - --------------- (a) The Company reports restaurants in Canada as franchise restaurants although the ten restaurants are operated under an area license agreement. The following discussion and analysis provides information management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") relate to certain matters involving risks and uncertainties, including anticipated financial performance, business prospects, anticipated capital expenditures and other similar matters, which reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in MD&A. Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements.
IHOP's quarterly results are subject to seasonal fluctuation. IHOP's results of operations are impacted by the timing of additions of new restaurants, by the timing of the franchising of those restaurants, and by the number of restaurants in the Company's inventory of restaurants that are available for refranchising. 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 sell for a franchise fee of $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 sell for a franchise fee of $50,000, have minor associated franchise cost of sales and do not include an equipment sale; and (iii) previously reacquired franchises normally sell for a franchise fee of $100,000 to $300,000, include an equipment sale, and may have substantial costs of sales associated with both the franchise and the equipment. As a consequence of the forgoing factors, the results of operations for the three months ended March 31, 1997, are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. System-wide retail sales for the first quarter of 1997 grew 14.2% over system- wide retail sales for the first quarter of 1996. This was due to increases of 7.5% in the number of effective restaurants and 6.5% in average per unit revenues. System-wide comparable average sales per restaurant (exclusive of area license restaurants) for the first quarter of 1997 grew by 3.9% over those in the first quarter of 1996. Management believes that unusually severe winter weather experienced in the United States during the first quarter of 1996 had a negative impact on sales in that quarter. Management continues to pursue growth in sales 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 first quarter of 1997 grew 9.7% over franchise operations revenues for the first quarter of 1996. This was primarily due to increases in the number of effective franchised restaurants of 7.7% and in revenues per effective franchised restaurant of 6.8%. Franchise operations costs and expenses for the first quarter of 1997 increased 4.3% over costs and expenses for the first quarter of 1996. As a result of franchise revenues increasing in excess of franchise expenses, franchise margin increased to 55.8% in the first quarter of 1997 versus 53.5% in the comparable 1996 period. The margin improved primarily because of increases in rental income and in interest income associated with IHOP's financing of sales of franchises and equipment to its franchisees. Company-operated restaurant revenues in the first quarter of 1997 grew 22.7% over revenues for the first quarter of 1996. This was primarily due to increases in the number of effective Company-operated restaurants of 15.4% and in revenues per effective Company-operated restaurant of 6.3%. Company-operated restaurant costs and expenses for the first quarter of 1997 increased 25.7% from costs and expenses for the first quarter of 1996. Margin at Company-operated restaurants in the first quarter of 1997 was 4.4% compared to 6.7% in the comparable 1996 period. The change in margin was primarily due to operating increases in employee costs and controllable expenses, excluding food costs, as a percentage of revenues. Other revenues in the first quarter of 1997 grew 27.4% over other revenues for the first quarter of 1996 primarily due to an increase in revenues from the sale of franchises and equipment to $2,924,000 from $2,247,000 and an increase of 30.4% in interest income from direct financing leases. Other costs and expenses in the first quarter of 1997 increased 21.6% over those in the first quarter of 1996 primarily from the increase in franchise and equipment cost of sales to $1,655,000 from $1,230,000. IHOP franchised six restaurants in both the first quarter of 1997 and the first quarter of 1996.
Field, corporate and administrative costs and expenses in the first quarter of 1997 increased 4.9% over costs and expenses in the first quarter of 1996 principally due to increases in employee related expenses including salaries and wages. Field, corporate and administrative expenses were 3.3% of system-wide sales in the first quarter of 1997 compared to 3.5% in the first quarter of 1996. Depreciation and amortization expense in the first quarter of 1997 increased 29.0% over that of the comparable 1996 period primarily reflecting the addition of new, larger restaurants and an increase in the number of Company-operated restaurants. Interest expense increased 33.2% in the first quarter of 1997 over that of the comparable 1996 period due to interest associated with increased capital lease obligations and the private placement of $35 million in senior notes in November 1996. Provision for income taxes was 39.0% of income before income taxes in the first quarter of 1997 and 39.5% in the first quarter of 1996. 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 1997, IHOP and its franchisees and area licensees plan to develop and open approximately 75 restaurants. Included in that number are the development of 54 new restaurants by the Company and the development of 21 restaurants by IHOP franchisees and area licensees. Capital expenditures budgeted in 1997, which include IHOP's portion of the above development program, are approximately $60 million. In November 1997, the second annual installment of $4.6 million in principal becomes due on the Company's senior notes due 2002. The Company expects that funds from operations, sale and leaseback arrangements (estimated to be about $18 million) and its revolving line of credit will be sufficient to cover its operating requirements, its budgeted capital expenditures and its principal repayment on its senior notes in 1997. At March 31, 1997, $20 million was available to be borrowed under the Company's unsecured bank revolving credit agreement.
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. Management contracts or compensatory plans or arrangements are marked with an asterisk. 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 Employment Agreement between the Company and Richard C. Celio. 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 March 31, 1997.
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) April 29, 1997 BY: /s/ Richard K. Herzer -------------- --------------------------------- (Date) Richard K. Herzer Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) April 29, 1997 BY: /s/ Frederick G. Silny -------------- --------------------------------- (Date) Frederick G. Silny Vice President-Finance and Treasurer (Principal Financial Officer)