<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999
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>
<S> <C>
Class Outstanding as of March 31, 1999
- --------------------------------------------- ---------------------------------------------
Common Stock, $.01 par value 9,928,848
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents................................. $ 4,527 $ 8,577
Receivables............................................... 31,761 28,461
Reacquired franchises and equipment held for sale, net.... 2,691 2,284
Inventories............................................... 1,185 1,222
Prepaid expenses.......................................... 3,656 274
---------- ----------
Total current assets.................................... 43,820 40,818
---------- ----------
Long-term receivables....................................... 217,068 217,156
Property and equipment, net................................. 165,662 161,689
Reacquired franchises and equipment held for sale, net...... 15,247 12,943
Excess of costs over net assets acquired, net............... 11,947 12,054
Other assets................................................ 1,187 1,239
---------- ----------
Total assets............................................ $454,931 $445,899
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt...................... $ 5,395 $ 5,386
Accounts payable.......................................... 22,005 22,589
Accrued employee compensation and benefits................ 4,813 6,017
Other accrued expenses.................................... 6,118 5,309
Deferred income taxes..................................... 2,857 2,560
Capital lease obligations................................. 1,429 1,388
---------- ----------
Total current liabilities............................... 42,617 43,249
---------- ----------
Long-term debt.............................................. 49,642 49,765
Deferred income taxes....................................... 35,283 34,708
Capital lease obligations and other......................... 132,107 130,309
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,
1999, 9,928,848 shares; December 31, 1998, 9,881,580
shares (net of 4,620 treasury shares)................... 99 99
Additional paid-in capital (net of treasury shares at
cost: 1998, $154)....................................... 62,034 60,100
Retained earnings......................................... 132,854 126,269
Contribution to ESOP...................................... 295 1,400
---------- ----------
Total shareholders' equity.............................. 195,282 187,868
---------- ----------
Total liabilities and shareholders' equity.............. $454,931 $445,899
---------- ----------
---------- ----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
2
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Revenues
Franchise operations
Rent.................................................................................. $11,052 $ 8,984
Service fees and other................................................................ 28,552 24,926
------- -------
39,604 33,910
Sale of franchises and equipment........................................................ 5,711 4,047
Company operations...................................................................... 16,007 17,685
------- -------
Total revenues...................................................................... 61,322 55,642
------- -------
Costs and Expenses
Franchise operations
Rent.................................................................................. 5,672 4,754
Other direct costs.................................................................... 10,420 9,055
------- -------
16,092 13,809
Cost of sales of franchises and equipment............................................... 3,745 3,023
Company operations...................................................................... 15,183 16,449
Field, corporate and administrative..................................................... 8,307 7,433
Depreciation and amortization........................................................... 3,016 2,691
Interest................................................................................ 4,457 4,109
Other (income) and expense, net......................................................... (185) 422
------- -------
Total costs and expenses............................................................ 50,615 47,936
------- -------
Income before income taxes................................................................ 10,707 7,706
Provision for income taxes................................................................ 4,122 3,005
------- -------
Net income.......................................................................... $ 6,585 $ 4,701
------- -------
------- -------
Net Income Per Share
Basic................................................................................... $ .66 $ .48
------- -------
------- -------
Diluted................................................................................. $ .65 $ .47
------- -------
------- -------
Weighted Average Shares Outstanding
Basic................................................................................... 9,909 9,749
------- -------
------- -------
Diluted................................................................................. 10,105 9,916
------- -------
------- -------
</TABLE>
See the accompanying notes to the consolidated financial statements.
3
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................................................. $ 6,585 $ 4,701
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization......................................................... 3,016 2,691
Deferred taxes........................................................................ 872 1,425
Contribution to ESOP.................................................................. 295 265
Change in current assets and liabilities
Accounts receivable................................................................. (2,839) 1,023
Inventories......................................................................... 37 88
Prepaid expenses.................................................................... (3,382) 320
Accounts payable.................................................................... (584) (1,945)
Accrued employee compensation and benefits.......................................... (1,204) (1,072)
Other accrued expenses.............................................................. 809 1,724
Other, net............................................................................ 324 1,044
-------- --------
Cash provided by operating activities............................................. 3,929 10,264
-------- --------
Cash flows from investing activities
Additions to property and equipment..................................................... (12,475) (14,230)
Proceeds from sale and leaseback arrangements........................................... 4,015 5,570
Additions to notes, equipment contracts and direct financing leases receivable.......... (2,123) (1,387)
Principal receipts from notes, equipment contracts and direct financing leases
receivable............................................................................ 2,967 2,260
Additions to reacquired franchises held for sale........................................ (655) (752)
-------- --------
Cash used by investing activities................................................. (8,271) (8,539)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt................................................ 2,900 235
Repayment of long-term debt............................................................. (2,912) (17)
Principal payments on capital lease obligations......................................... (230) (154)
Exercise of stock options............................................................... 534 1,803
-------- --------
Cash provided by financing activities............................................. 292 1,867
-------- --------
Net change in cash and cash equivalents................................................... (4,050) 3,592
Cash and cash equivalents at beginning of period.......................................... 8,577 5,964
-------- --------
Cash and cash equivalents at end of period........................................ $ 4,527 $ 9,556
-------- --------
-------- --------
Supplemental disclosures
Interest paid, net of capitalized amounts............................................... $ 3,397 $ 2,910
Income taxes paid....................................................................... 168 18
Capital lease obligations incurred...................................................... 5,586 6,058
</TABLE>
See the accompanying notes to the consolidated financial statements.
4
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General--The accompanying consolidated financial statements for the
three months ended March 31, 1999 and 1998 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") 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, 1998, 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, 1999, are not necessarily indicative of the results
to be expected for the full year ending December 31, 1999.
2. Segments--IHOP identifies its operating segments based on the
organizational units used by our management to monitor performance and make
operating decisions. The Franchise Operations segment includes restaurants
operated by franchisees and area licensees in the United States, Canada and
Japan. The Company Operations segment includes company-operated restaurants in
the United States. We measure segment profit as operating income, which is
defined as income before field, corporate and administrative expense, interest
expense, and income taxes. Information on segments and a reconciliation to
income before income taxes are as follows:
<TABLE>
<CAPTION>
SALES OF CONSOLIDATING
FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED
(IN THOUSANDS) OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL
- --------------------------------------------- ---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
Revenues from external customers............. $ 39,624 $16,007 $ 5,711 $ (20) $ 61,322
Intercompany real estate charges
(revenues)................................. 1,425 111 (1,536) --
Depreciation and amortization................ 959 916 1,141 3,016
Operating income (loss)...................... 17,869 (681) 1,966 4,317 23,471
Field, corporate and administrative.......... 8,307
Interest expense............................. 4,457
Income before income taxes................... 10,707
Additions to long-lived assets............... 6,510 1,280 655 4,685 13,130
Total assets................................. 324,286 42,405 17,938 70,302 454,931
QUARTER ENDED MARCH 31, 1998
Revenues from external customers............. 33,948 17,685 4,047 (38) 55,642
Intercompany real estate charges
(revenues)................................. 1,248 222 (1,470) --
Depreciation and amortization................ 736 938 1,017 2,691
Operating income (loss)...................... 15,394 (352) 1,024 3,182 19,248
Field, corporate and administrative.......... 7,433
Interest expense............................. 4,109
Income before income taxes................... 7,706
Additions to long-lived assets............... 3,830 2,893 752 7,508 14,983
Total assets................................. 261,850 42,813 17,426 73,333 395,422
</TABLE>
For management reporting purposes, we treat all restaurant lease revenues
and expenses as operating lease revenues and expenses, although most of these
leases are direct financing leases (revenues) or capital leases (expenses). The
accounting adjustments required to bring lease revenues and expenses into
conformance with GAAP are included in the Consolidated Adjustments and Other
segment. All of IHOP's owned land and restaurant buildings are included in the
total assets of the Consolidating Adjustments and Other segment and are leased
to the Franchise Operations and Company Operations segments.
5
<PAGE>
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,
-------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Restaurant Data
Effective restaurants (a)
Franchise............................................... 619 567
Company................................................. 69 74
Area license............................................ 145 144
---------- ----------
Total................................................. 833 785
---------- ----------
---------- ----------
System-wide
Sales (b)................................................. $ 269,633 $ 247,412
Percent increase........................................ 9.0% 14.3%
Average sales per effective restaurant.................... $ 324 $ 315
Percent increase........................................ 2.9% 6.1%
Comparable average sales per restaurant (c)............... $ 335 $ 322
Percent change.......................................... (0.4)% 3.7%
Franchise
Sales..................................................... $ 219,796 $ 194,549
Percent increase........................................ 13.0% 15.4%
Average sales per effective restaurant.................... $ 355 $ 343
Percent increase........................................ 3.5% 8.5%
Comparable average sales per restaurant (c)............... $ 346 $ 334
Percent change.......................................... (0.5)% 4.2%
Company
Sales..................................................... $ 16,007 $ 17,685
Percent change.......................................... (9.5)% 25.9%
Average sales per effective restaurant.................... $ 232 $ 239
Percent change.......................................... (2.9)% 2.1%
Area License
Sales..................................................... $ 33,830 $ 35,178
Percent change.......................................... (3.8)% 3.9%
Average sales per effective restaurant.................... $ 233 $ 244
Percent change.......................................... (4.5)% (1.2)%
</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 IHOP.
(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
<PAGE>
The following table summarizes IHOP's restaurant development and franchising
activity:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1999 1998
----- -----
<S> <C> <C>
RESTAURANT DEVELOPMENT ACTIVITY
IHOP--beginning of period........................................................................ 835 787
New openings
IHOP--developed.............................................................................. 10 7
Investor and conversion programs............................................................. 2 2
Area license................................................................................. -- 1
--- ---
Total new openings............................................................................. 12 10
Closings
Company and franchise........................................................................ (3) (4)
Area license................................................................................. -- (1)
--- ---
IHOP--end of period.............................................................................. 844 792
--- ---
--- ---
Summary--end of period
Franchise...................................................................................... 626 570
Company........................................................................................ 73 77
Area license................................................................................... 145 145
--- ---
Total IHOP................................................................................... 844 792
--- ---
--- ---
RESTAURANT FRANCHISING ACTIVITY(a)
IHOP--developed.................................................................................. 9 6
Investor and conversion programs................................................................. 2 2
Rehabilitated and refranchised................................................................... -- 1
--- ---
Total restaurants franchised................................................................... 11 9
Reacquired by IHOP............................................................................... (6) (7)
Closed........................................................................................... (3) (3)
--- ---
Net increase (decrease)........................................................................ 2 (1)
--- ---
--- ---
</TABLE>
The following discussion and analysis provides information we believe is
relevant to an assessment and understanding of IHOP'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 IHOP's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 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 that 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 IHOP'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; IHOP's overall marketing, operational and financial performance;
IHOP's ability to mitigate the impact of the year 2000 issue successfully;
economic and political conditions; adoption of new, or changes in, accounting
policies and practices and other factors discussed from time to time in our
filings with the Securities and Exchange Commission. Forward-looking information
is provided by us 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. In addition, we disclaim any intent or obligation to update
these forward-looking statements.
7
<PAGE>
Our quarterly results are subject to seasonal fluctuation. The mix and
number of restaurants franchised affect revenues from sales of franchises and
equipment and their associated costs of sales. We franchise four kinds of
restaurants: restaurants newly developed by IHOP, restaurants developed by
franchisees, restaurants developed by area licensees and restaurants that have
been previously reacquired from franchisees. Franchise rights for 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 a price that includes little or no
profit margin. Franchise rights for 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. Area license rights are
normally granted in return for a one-time development fee that is recognized
ratably as restaurants are developed in the area. 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. The timing of sales of franchises is affected by
the timing of new restaurant openings and the number of restaurants in our
inventory of restaurants that are available for refranchising. As a consequence
of the foregoing factors, the results of operations for the three months ended
March 31, 1999, are not necessarily indicative of the results to be expected for
the full year ending December 31, 1999.
IHOP's system-wide retail sales in the first quarter of 1999 were
$269,633,000, a 9.0% increase over the prior year's first quarter. This growth
was due to an increase of 6.1% in the number of effective restaurants and a 2.9%
increase in the retail sales per effective restaurant. System-wide comparable
average sales per restaurant for the first quarter of 1999 declined by 0.4%. We
continue to pursue growth in sales through our restaurant development program,
our advertising, marketing and product development efforts, improvements in
customer service and operations, and our remodeling program.
Franchise operations revenues in the first quarter of 1999 grew 16.8%. This
was primarily due to increases in the number of effective franchised restaurants
of 9.2% and increases in the retail sales per effective franchised restaurant of
3.5%. Franchise operations costs and expenses for the same period increased
16.5%. As a result of franchise operations revenues increasing in excess of
franchise operations expenses, franchise operations margin improved to 59.4% in
the first quarter of 1999 from 59.3% in the prior year period.
Sales of franchises and equipment grew 41.1%. This was due to an increase in
the number of restaurants franchised to 11 in the first quarter of 1999 from 9
in the prior year period and increases in the average sales prices for
franchises and equipment. The cost of sales of franchises and equipment rose
23.9% due to the increase in the number of restaurants franchised and increases
in the average cost of the equipment sold. Margin from sales of franchises and
equipment increased to 34.4% in the first quarter of 1999 from 25.3% in the
prior year period. The change in margin was due to the mix of restaurants
franchised in the respective periods.
Company-operated restaurant revenues in the first quarter of 1999 declined
9.5%. This was primarily due to a decrease in the effective number of
company-operated restaurants of 6.8% and a decrease in the revenues per
effective company-operated restaurant of 2.9%. Company-operated restaurant costs
and expenses for the first quarter of 1999 decreased 7.7%. Margin at
company-operated restaurants in the first quarter of 1999 was 5.0% compared to
7.0% in the comparable 1998 period. The change in margin was primarily due to
increases in salaries and wages, food costs and utilities costs as a percentage
of revenues.
Field, corporate and administrative costs and expenses in the first quarter
of 1999 increased 11.8%. The rise in expenses was primarily due to normal
increases in salaries and wages and additional employees necessary to support
our growth. Field, corporate and administrative expenses were 3.1% of
system-wide sales in the first quarter of 1999 and 3.0% in the prior year
period.
Depreciation and amortization expense in the first quarter of 1999 increased
by 12.1%. This was primarily due to the addition of new restaurants to the IHOP
chain from our ongoing restaurant development program.
8
<PAGE>
Interest expense increased 8.5% due to interest associated with additional
capital leases which was partially offset by a reduction in interest paid on our
senior notes due 2002.
LIQUIDITY AND CAPITAL RESOURCES
We invest in our business primarily through the development of additional
restaurants and, to a lesser extent, through the remodeling of older
company-operated restaurants.
In 1999 IHOP and its franchisees and area licensees plan to develop and open
approximately 80 to 90 restaurants. Included in that number are the development
of 60 to 65 new restaurants by us and the development of 20 to 25 restaurants by
our franchisees and area licensees. Capital expenditure projections for 1999,
which include our portion of the above development program, are approximately
$75 to $85 million. In November 1999, the fourth annual installment of $4.6
million in principal becomes due on our senior notes due 2002. We expect that
funds from operations, sale and leaseback arrangements (estimated to be about
$30 to $35 million) and our $20 million revolving line of credit will be
sufficient to cover our operating requirements, our budgeted capital
expenditures and our principal repayment on our senior notes in 1999. At March
31, 1999, $20 million was available to be borrowed under our unsecured bank
revolving credit agreement.
YEAR 2000 COMPLIANCE
The Year 2000 issue is primarily a result of computer programs being written
using two digits, e.g. "99," to define a year. Date sensitive hardware and
software may recognize the year "00" as the year 1900 rather than the year 2000.
This would result in errors and miscalculations or even system failure causing
disruptions in everyday business activities and transactions. Software is termed
Year 2000 compliant when it is capable of performing transactions correctly in
the year 2000.
IHOP's information technology ("IT") systems include our financial software
for accounting and payroll, our network hardware and software and our restaurant
point-of-sale ("POS") systems. In 1996 and 1997 we installed new client-server
software and hardware to perform accounting and payroll functions. In 1998 we
upgraded our network hardware and software to current release versions. The
various vendors of these hardware and software systems have represented to IHOP
that they are Year 2000 compliant. Most of our POS systems have been supplied by
one vendor. That vendor had represented to IHOP in 1997 that these systems were
Year 2000 compliant, but has now informed us that the systems are not Year 2000
compliant. We are currently finalizing our agreement with the vendor to supply,
free of charge, upgrades to make our POS systems Year 2000 compliant. In some
older POS systems, upgraded hardware will be necessary to run the new versions
of the software. Costs to upgrade or replace existing hardware range from $500
to $5,000 per POS system for these older systems. Costs to be incurred in
company-operated restaurants are included in IHOP's estimated future remediation
and testing costs discussed below. We expect to have our POS systems Year 2000
compliant by September 30, 1999.
Our non-IT systems consist primarily of our telephone switching equipment
and restaurant operating equipment. We have upgraded our telephone switching
equipment where necessary. Our initial assessment of our restaurant operating
equipment has indicated that modification or replacement will not be necessary
as a result of the Year 2000 issue. Therefore we are not currently remediating
this operating equipment. However, the existence of non-compliant embedded
technology in this type of equipment is, by nature, more difficult to identify
and repair than in computer hardware and software.
We are working with a major IT consulting company to develop plans to test
all of our IT and non-IT systems to ensure that they are Year 2000 compliant.
Completion of the testing phase for all significant systems is expected by
September 30, 1999.
IHOP's most significant third-party business partners consist of restaurant
food and supplies vendors who serve the IHOP chain. An initial inventory of our
significant third-party partners has been completed
9
<PAGE>
and letters mailed requesting information regarding each party's Year 2000
compliance status. To date we have received responses from about 85% of these
vendors, all of which indicate that the vendor is now or will be Year 2000
compliant prior to January 1, 2000. IHOP intends to develop contingency plans by
July 31, 1999 for any vendors that appear to have substantial Year 2000
operational risks. Such contingency plans may include a change of vendors to
minimize our risk.
Information received from our primary bank indicates that the bank will be
Year 2000 compliant prior to January 1, 2000.
A Year 2000 information package has been sent to all franchisees. It
explains the Year 2000 issue and associated business risks and provides
information to assist the franchisees in assessing and remediating their Year
2000 risks. IHOP will continue its efforts to raise awareness and inform
franchisees of the risks posed by the Year 2000 throughout fiscal year 1999.
To date IHOP's costs specifically related to the Year 2000 issue in IT and
non-IT systems have been less than $250,000. Future remediation and testing
costs are currently estimated at $250,000 or less, although these costs could
increase substantially if remediation of restaurant operating equipment becomes
necessary.
We believe that we have an effective plan in place to resolve the Year 2000
issue in a timely manner. However, due to the unusual nature of the problem and
lack of historical experience with Year 2000 issues, it is difficult to predict
with certainty what will happen after December 31, 1999. For example, if there
are general public infrastructure failures, IHOP will not have contingency plans
available to it to operate restaurants under those conditions. As a result,
those restaurants affected will be unable to operate until the failures are
resolved.
Despite our Year 2000 remediation, testing efforts and contingency planning,
there may be disruptions and unexpected business problems caused by IT systems,
non-IT systems or third-party vendors during the early months of the year 2000.
IHOP is making diligent efforts to assess the Year 2000 readiness of our
significant business partners and will develop contingency plans for critical
areas where we believe our exposure to Year 2000 risk is the greatest. However,
despite our best efforts, we may encounter unanticipated third party failures or
a failure to have successfully concluded our systems remediation efforts. Any of
these unforeseen events could have a material adverse impact on IHOP's results
of operations, financial condition or cash flows. Additionally, any prolonged
inability of a significant number of our franchisees to operate their
restaurants and remit payments to us could have a material adverse effect on us.
The amount of any potential losses related to these occurrences cannot be
reasonably estimated at this time.
The most likely worst case scenario for IHOP is that a significant number of
our restaurants will be unable to operate for a few days due to public
infrastructure failures and/or food supply problems. Some restaurants may have
longer-term problems lasting a few weeks. The failure of restaurants to operate
would result in reduced revenues and cash flows for IHOP during the period of
disruption. Loss of company-operated restaurant revenues would be partially
mitigated by reduced costs. Loss of revenues from franchise operations would
more directly impact our profitability. The impact to IHOP of one lost day of
operations, on average, for all franchised restaurants is projected to be
approximately $500,000. Our gross profit on franchise operations in 1998 was
59.9%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
IHOP is exposed to market risk from changes in interest rates on debt and
changes in commodity prices.
IHOP's exposure to interest rate risk relates to its $20 million revolving
credit agreement with its bank. Borrowings under the agreement bear interest at
the bank's reference rate (prime) or, at IHOP's option, at the bank's quoted
rate or at a Eurodollar rate. There were no borrowings outstanding under this
10
<PAGE>
agreement at March 31, 1999, and the largest amount outstanding under the
agreement during the past twelve months was $12 million. The impact on our
results of operations due to a hypothetical 1% interest rate change would be
immaterial.
Many of the food products purchased by IHOP and its franchisees and area
licensees are affected by commodity pricing and are, therefore, subject to
unpredictable price volatility. We attempt to mitigate price fluctuations by
entering into forward-purchasing agreements on items such as coffee, pancake
mixes, pork products, soft drinks and orange juice. Extreme changes in commodity
prices and/or long-term changes could affect IHOP's franchisees, area licensees
and company-operated restaurants adversely. However, any changes in commodity
prices would also affect IHOP's competitors at about the same time as IHOP. We
expect that in most cases the IHOP system could pass increased commodity prices
through to its consumers via increases in menu prices. From time to time,
competitive circumstances could limit menu price flexibility, and in those cases
margins would be negatively impacted by increased commodity prices. We believe
that any changes in commodity pricing that cannot be adjusted for by changes in
menu pricing or other strategies would not be material to IHOP's results of
operations.
11
<PAGE>
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.
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of IHOP Corp. Exhibit 3.1 to IHOP Corp.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, (the "1999 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.
11.0 Statement Regarding Computation of Per Share Earnings.
27.0 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999.
12
<PAGE>
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.
<TABLE>
<C> <S> <C>
IHOP Corp.
-----------------------------------------
(Registrant)
April 29, 1999 By: /s/ RICHARD K. HERZER
- ------------------------------ -----------------------------------------
(Date) Richard K. Herzer
Chairman of the Board, President and Chief
Executive Officer (Principal Executive
Officer)
April 29, 1999 By: /s/ FREDERICK G. SILNY
- ------------------------------ -----------------------------------------
(Date) Frederick G. Silny
Vice President-Finance and Treasurer
(Principal Financial Officer)
</TABLE>
13
<PAGE>
EXHIBIT 11.0
IHOP CORP. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
---- ----
<S> <C> <C>
NET INCOME PER COMMON SHARE--BASIC
Weighted average shares outstanding 9,909 9,749
------- -------
------- -------
Net income available to common shareholders $ 6,585 $ 4,701
------- -------
------- -------
Net income per share--Basic $ .66 $ .48
------- -------
------- -------
NET INCOME PER COMMON SHARE--DILUTED
Weighted average shares outstanding 9,909 9,749
Net effect of dilutive stock options
based on the treasury stock method
using the average market price 196 167
------- -------
Total 10,105 9,916
------- -------
------- -------
Net income available to common shareholders $ 6,585 $ 4,701
------- -------
------- -------
Net income per share--Diluted $ .65 $ .47
------- -------
------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF IHOP CORP. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,527
<SECURITIES> 0
<RECEIVABLES> 31,761
<ALLOWANCES> 0
<INVENTORY> 1,185
<CURRENT-ASSETS> 43,820
<PP&E> 165,662
<DEPRECIATION> 0
<TOTAL-ASSETS> 454,931
<CURRENT-LIABILITIES> 42,617
<BONDS> 181,749
0
0
<COMMON> 99
<OTHER-SE> 195,183
<TOTAL-LIABILITY-AND-EQUITY> 454,931
<SALES> 21,718
<TOTAL-REVENUES> 61,322
<CGS> 18,928
<TOTAL-COSTS> 35,020
<OTHER-EXPENSES> 3,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,457
<INCOME-PRETAX> 10,707
<INCOME-TAX> 4,122
<INCOME-CONTINUING> 6,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,585
<EPS-PRIMARY> .66<F1>
<EPS-DILUTED> .65
<FN>
<F1> REPRESENTS BASIC EARNINGS PER SHARE
</FN>
</TABLE>
