FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (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, 1998 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 31,1998 - ---------------------------- ------------------------------- Common Stock, $.01 par value 9,813,589
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES (In thousands, except share amounts) - -------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 1998 1997 --------------------- ---------------------- <S> <C> <C> Assets Current assets Cash and cash equivalents $ 9,556 $ 5,964 Receivables 29,585 30,490 Reacquired franchises and equipment held for sale, net 2,614 2,321 Inventories 1,290 1,378 Prepaid expenses 309 629 -------- -------- Total current assets 43,354 40,782 -------- -------- Long-term receivables 173,687 171,967 Property and equipment, net 149,751 142,751 Reacquired franchises and equipment held for sale, net 14,812 13,151 Excess of costs over net assets acquired, net 12,375 12,481 Other assets 1,443 1,461 -------- -------- Total assets $395,422 $382,593 ======== ======== Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 5,009 $ 4,973 Accounts payable 18,681 20,626 Accrued employee compensation and benefits 3,523 4,595 Other accrued expenses 6,326 4,602 Deferred income taxes 3,468 3,468 Capital lease obligations 1,105 1,062 -------- -------- Total current liabilities 38,112 39,326 -------- -------- Long-term debt 55,046 54,950 Deferred income taxes 30,287 28,862 Capital lease obligations and other 109,023 103,271 Shareholders' equity Preferred stock, $1 par value, 10,000,000 shares authorized; None issued - - Common stock, $.01 par value, 40,000,000 shares authorized; shares issued and outstanding: March 31, 1998, 9,813,589 shares (net of 3,080 treasury shares); December 31, 1997, 9,709,261 shares (net of 1,539 treasury shares) 98 97 Additional paid-in capital 57,732 54,629 Retained earnings 104,859 100,158 Contribution to ESOP 265 1,300 -------- -------- Total shareholders' equity 162,954 156,184 -------- -------- Total liabilities and shareholders' equity $395,422 $382,593 ======== ======== </TABLE> See the accompanying notes to the consolidated financial statements. 2
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF OPERATIONS IHOP CORP. AND SUBSIDIARIES (In thousands, except per share amounts) - ------------------------------------------------------------------------------- Three Months Ended March 31, --------------------------------- 1998 1997 ------------ ------------ <S> <C> <C> Revenues Franchise operations Rent $ 8,984 $ 8,096 Service fees and other 21,816 18,833 ------- ------- 30,800 26,929 Company operations 17,685 14,048 Other 7,392 5,464 ------- ------- Total revenues 55,877 46,441 ------- ------- Costs and Expenses Franchise operations Rent 4,754 4,194 Other direct costs 8,830 7,721 ------- ------- 13,584 11,915 Company operations 16,449 13,425 Field, corporate and administrative 7,784 7,053 Depreciation and amortization 2,691 2,449 Interest 4,109 3,506 Other 3,554 2,273 ------- ------- Total costs and expenses 48,171 40,621 ------- ------- Income before income taxes 7,706 5,820 Provision for income taxes 3,005 2,270 ------- ------- Net income $ 4,701 $ 3,550 ======= ======= Net Income Per Share Basic $ .48 $ .37 ======= ======= Diluted $ .47 $ .37 ======= ======= Weighted Average Shares Outstanding Basic 9,749 9,487 ======= ======= Diluted 9,916 9,568 ======= ======= </TABLE> See the accompanying notes to the consolidated financial statements. 3
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES (In thousands) - -------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------------------- 1998 1997 ------------------ ------------------- <S> <C> <C> Cash flows from operating activities Net income $ 4,701 $ 3,550 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 2,691 2,449 Deferred taxes 1,425 (1,041) Contribution to ESOP 265 220 Change in current assets and liabilities Accounts receivable 1,023 3,949 Inventories 88 (104) Prepaid expenses 320 321 Accounts payable (1,945) (2,675) Accrued employee compensation and benefits (1,072) 296 Other accrued expenses 1,724 69 Other, net 1,044 1,451 -------- ------- Cash provided by operating activities 10,264 8,485 -------- ------- Cash flows from investing activities Additions to property and equipment (14,230) (9,490) Proceeds from sale and leaseback arrangements 5,570 - Additions to notes, equipment contracts and direct financing leases receivable (1,387) (1,215) Principal receipts from notes, equipment contracts and direct financing leases receivable 2,260 1,979 Additions to reacquired franchises held for sale (752) (8) -------- ------- Cash used by investing activities (8,539) (8,734) -------- ------- Cash flows from financing activities Proceeds from issuance of long-term debt 235 20 Repayment of long-term debt (17) (30) Principal payments on capital lease obligations (154) (156) Exercise of stock options 1,803 104 -------- ------- Cash provided (used) by financing activities 1,867 (62) -------- ------- Net change in cash and cash equivalents 3,592 (311) Cash and cash equivalents at beginning of period 5,964 8,658 -------- ------- Cash and cash equivalents at end of period $ 9,556 $ 8,347 ======== ======= Supplemental disclosures Interest paid, net of capitalized amounts $ 2,910 $ 2,410 Income taxes paid 18 569 Capital lease obligations incurred 6,058 503 </TABLE> See the accompanying notes to the consolidated financial statements. 4
IHOP CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. The accompanying consolidated financial statements for the three months ended March 31, 1998 and 1997 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, 1997 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, 1998, are not necessarily indicative of the results to be expected for the full year ending December 31, 1998. 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 March 31, ------------------------------------------ 1998 1997 --------------- --------------- (Dollars in thousands) <S> <C> <C> Restaurant Data Effective restaurants (a) Franchise 567 533 Company 74 60 Area license 144 137 -------- -------- Total 785 730 ======== ======== System-wide Sales (b) $247,412 $216,459 Percent increase 14.3% 14.2% Average sales per effective restaurant $ 315 $ 297 Percent increase 6.1% 6.5% Comparable average sales per restaurant (c) $ 322 $ 302 Percent increase 3.7% 3.9% Franchise Sales $194,549 $168,547 Percent increase 15.4% 14.8% Average sales per effective Restaurant $ 343 $ 316 Percent increase 8.5% 6.8% Comparable average sales per restaurant (c) $ 334 $ 311 Percent increase 4.2% 4.2% Company Sales $ 17,685 $ 14,048 Percent increase 25.9% 22.7% Average sales per effective Restaurant $ 239 $ 234 Percent increase 2.1% 6.4% Area License Sales $ 35,178 $ 33,864 Percent increase 3.9% 8.3% Average sales per effective Restaurant $ 244 $ 247 Percent change (1.2)% 4.2% </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. 6
The following table summarizes IHOP's restaurant development and franchising activity: <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------- 1998 1997 ------------- ------------- <S> <C> <C> RESTAURANT DEVELOPMENT ACTIVITY (a) - ----------------------------------- IHOP - beginning of period 787 729 New openings IHOP-developed 7 4 Investor program 2 - Area license 1 2 ---- ---- Total new openings 10 6 Closings Company and franchise (4) (1) Area license (1) - ---- ---- IHOP - end of period 792 734 ==== ==== Summary - end of period Franchise 570 534 Company 77 62 Area license 145 138 ---- ---- Total IHOP 792 734 ==== ==== RESTAURANT FRANCHISING ACTIVITY(a) - ----------------------------------- IHOP-developed 6 5 Investor program 2 - Rehabilitated and refranchised 1 1 ---- ---- Total restaurants franchised 9 6 Reacquired by Company (7) (6) Closed (3) (1) ---- ---- Net decrease (1) (1) ==== ==== </TABLE> - -------------- (a) The Company reports restaurants in Canada as franchise restaurants although the eleven 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, 1997. Certain forward-looking statements are contained in this quarterly report. They use such words as "may," "will," "expect," "believe," "plan," or other similar terminology. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to: availability of suitable locations and terms of the sites designated for development; legislation and government regulation including the ability to obtain satisfactory regulatory approvals; conditions beyond the Company's control such as weather or natural disasters; availability and cost of materials and labor; cost and availability of capital; competition; continuing acceptance of the International House of Pancakes brand and concept by guests and franchisees; the Company's overall marketing, operational and financial performance; 7
economic and political conditions; adoption of new, or changes in, accounting policies and practices and other factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. Forward-looking information is provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. 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 and profitability 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) franchise rights with respect to restaurants newly developed by IHOP normally sell for a franchise fee of $200,000 to $350,000, and such restaurants have little if any franchise cost of sales and have equipment in excess of $300,000 that is usually sold at a price that includes little or no profit margin; (ii) franchise rights with respect to restaurants developed by franchisees normally sell for a franchise fee of $50,000, and such restaurants 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 foregoing factors, the results of operations for the three months ended March 31, 1998, are not necessarily indicative of the results to be expected for the full year ending December 31, 1998. System-wide retail sales for the first quarter of 1998 grew 14.3% over system- wide retail sales for the first quarter of 1997. This was due to increases of 7.5% in the number of effective restaurants and 6.1% in average per unit revenues. System-wide comparable average sales per restaurant (exclusive of area license restaurants) for the first quarter of 1998 grew by 3.7% over those in the first quarter of 1997. Management continues to pursue growth in sales through the Company's restaurant development program, its advertising and marketing efforts, improvements in customer service and operations, and the Company's remodeling program. Franchise operations revenues for the first quarter of 1998 grew 14.4% over franchise operations revenues for the first quarter of 1997. This was primarily due to an increase in revenues per effective franchised restaurant of 8.5% and an increase in the number of effective franchised restaurants of 6.4%. Franchise operations costs and expenses for the first quarter of 1998 increased 14.0% over costs and expenses for the first quarter of 1997. As a result of franchise revenues increasing in excess of franchise expenses, franchise margin increased to 55.9% in the first quarter of 1998 versus 55.8% in the comparable 1997 period. Company-operated restaurant revenues in the first quarter of 1998 grew 25.9% over revenues for the first quarter of 1997. This was primarily due to an increase in the number of effective Company-operated restaurants of 23.3% and an increase in revenues per effective Company-operated restaurant of 2.1%. Company- operated restaurant costs and expenses for the first quarter of 1998 increased 22.5% from costs and expenses for the first quarter of 1997. Margin at Company- operated restaurants in the first quarter of 1998 increased to 7.0% compared with 4.4% in the comparable 1997 period. The change in margin was primarily due to reductions in employee costs and operating expenses as a percentage of revenues. 8
Other revenues in the first quarter of 1998 grew 35.3% over other revenues for the first quarter of 1997. This was primarily due to an increase in revenues from the sale of franchises and equipment to $4,047,000, from $2,924,000, and an increase of 31.2% in interest income from direct financing leases. Other costs and expenses in the first quarter of 1998 increased 56.4% over those in the first quarter of 1997 primarily from the increase in franchise and equipment cost of sales to $2,339,000, from $1,655,000, and a significant increase in preopening expenses associated with opening more new IHOP restaurants than in the comparable period. IHOP franchised nine restaurants in the first quarter of 1998 compared with six in the first quarter of 1997. Field, corporate and administrative costs and expenses in the first quarter of 1998 increased 10.4% over costs and expenses in the first quarter of 1997, principally due to increases in employee-related expenses, including salaries and wages. Field, corporate and administrative expenses were 3.1% of system-wide sales in the first quarter of 1998 compared to 3.3% in the first quarter of 1997. Depreciation and amortization expense in the first quarter of 1998 increased 9.9% over that of the comparable 1997 period, primarily reflecting the addition of new, larger restaurants, and an increase in the number of Company-operated restaurants. Interest expense increased 17.2% in the first quarter of 1998 over that of the comparable 1997 period primarily due to interest associated with increased capital lease obligations. Provision for income taxes was 39.0% of income before income taxes in both the first quarter of 1998 and the first quarter of 1997. Liquidity and Capital Resources - ------------------------------- The Company invests available funds into its business primarily through the development of additional restaurants and, to a lesser extent, through the remodeling of older Company-operated restaurants. In 1998, IHOP and its franchisees and area licensees plan to develop and open approximately 70 to 85 restaurants. Included in that number are the development of 50 to 60 new restaurants by the Company and the development of 20 to 25 restaurants by IHOP franchisees and area licensees. Capital expenditure projections for 1998, which include IHOP's portion of the above development program, are approximately $60 to $75 million. In November 1998, the third 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 $35 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 1998. At March 31, 1998, $20 million was available to be borrowed under the Company's unsecured bank revolving credit agreement. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 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, 1997, Commission file number 0-8360, (the "1997 Form 10-K") is hereby incorporated by reference. 3.2 Bylaws of IHOP Corp. Exhibit 3.2 to the 1997 Form 10-K is hereby incorporated by reference. *10.1 Revised IHOP Corp. Executive Incentive Plan effective January 1, 1998. 11.0 Statement Regarding Computation of Per Share Earnings. 27.0 Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter ended March 31, 1998. 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) April 30, 1998 BY: /s/ Richard K. Herzer -------------- ---------------------------------- (Date) Richard K. Herzer Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) April 30, 1998 BY: /s/ Frederick G. Silny -------------- ---------------------------------- (Date) Frederick G. Silny Vice President-Finance and Treasurer (Principal Financial Officer) 11