<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR COMMISSION FILE NUMBER:
ENDED: 0-8360
DECEMBER 31, 1998
</TABLE>
------------------------
IHOP CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-3038279
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
525 NORTH BRAND BOULEVARD, GLENDALE, 91203-1903
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 240-6055
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
------------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of January 31, 1999. $386 million
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF JANUARY 31, 1999
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Common Stock, $.01 par value 9,886,200
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Shareholders to be
held on Tuesday, May 11, 1999, (the "1999 Proxy Statement") are incorporated by
reference into Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
IHOP Corp. and its subsidiaries, also referred to as "IHOP," develop,
operate and franchise International House of Pancakes restaurants, one of
America's best-known, national, family restaurant chains. At December 31, 1998,
there were 835 IHOP restaurants. Franchisees operated 624 of these restaurants,
area licensees operated 145 restaurants and IHOP operated 66 restaurants.
Franchisees and area licensees are independent third parties who operate their
restaurants under legal agreements with IHOP. IHOP restaurants are located in 37
states, Canada and Japan.
IHOP Corp. was incorporated under the laws of the State of Delaware in 1976.
In July 1991 we completed an initial public offering of common stock. There were
no significant changes to our corporate structure during 1998, and no material
changes to our methods of conducting business.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
IHOP is engaged exclusively in the foodservice industry, primarily in the
United States. Information about our revenues, operating profits and assets is
contained in Part II, Item 6 of this Annual Report on Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS
IHOP restaurants feature table service and moderately priced, high-quality
food and beverage items in an attractive and comfortable atmosphere. Although
the restaurants are best known for their award-winning pancakes, omelets and
other breakfast specialties, IHOP restaurants offer a broad array of lunch,
dinner and snack items as well. Restaurants are open throughout the day and
evening hours, and many operate 24 hours a day.
Franchisees and area licensees operate more than 90% of IHOP restaurants.
Our approach to franchising is founded on the franchisees' active involvement in
the day-to-day operations of their respective restaurants. We are selective in
granting franchises and we prefer to franchise to individuals who intend to be
active in the management of their restaurant(s) and not to passive investors or
investment groups. We believe that they provide a quality of management and
dedication that, in our view, is generally unmatched by salaried employees or
absentee owners.
IHOP develops most new restaurants prior to franchising them. When the
restaurant is franchised, we then become the franchisee's landlord. This
landlord/tenant relationship provides us with enhanced profits and greater
control over our franchise system. Some franchisees develop their own IHOP
restaurants under our Investor and Conversion Programs for franchisees. In those
instances, IHOP approves the site for development but does not contribute
capital or become the franchisee's landlord. Area licensees located in Japan,
Canada and Florida operate about 17% of IHOP restaurants. We provide support to
these area licensees, but we are not actively involved in developing new
restaurants in these areas.
We seek to increase our revenues and profits by focusing on several areas of
our business. These areas include: (1) development and franchising of new IHOP
restaurants, (2) marketing, advertising and product development programs aimed
at attracting new guests and retaining our existing customers, and (3)
implementation of restaurant-level operating changes designed to improve sales
and profitability.
RESTAURANT DEVELOPMENT
New restaurants are developed after a stringent site selection process
supervised by our senior management. In 1998 we developed 56 new restaurants and
our franchisees and area licensees developed an additional 17 new restaurants.
1
<PAGE>
We intend to continue to add restaurants to the IHOP system primarily by
developing new restaurants in major markets where we already have a core
customer base. We believe that concentrating growth in existing markets allows
us to achieve economies of scale in our supervisory, advertising and
distribution functions. We also acquire existing restaurants and convert them to
IHOP restaurants.
IHOP also looks to strategically develop new markets in which we have no
presence or our presence is limited. This occurs primarily where these new
markets are geographically near to existing markets and present significant
business opportunities. At times we have acquired several existing restaurants
in new markets for conversion to IHOP restaurants. We evaluate such
opportunities on a case-by-case basis.
In 1998 we built two general types of new restaurant buildings. The larger
format restaurant is approximately 4,500 square feet in size and contains about
174 seats. The second building type is designed for use in smaller,
high-potential markets. It is approximately 3,900 square feet in size and seats
about 130 people. We also converted purchased restaurants to IHOP restaurants.
The square footage and number of seats in a restaurant conversion vary by
location. In 1998 restaurant conversions averaged 166 seats per restaurant. Our
older A-Frame style restaurants, which have not been built since 1985, contain
approximately 3,000 square feet and about 100 seats. Of the 56 new IHOP
restaurants we developed in 1998, 40 were the larger format building, 12 were
the smaller format building and 4 were restaurant conversions.
To the greatest extent possible, subject to local zoning restrictions, we
continue to use our familiar signature blue color on the roof, awnings and other
exterior decor of our restaurants.
The table below sets forth our average development cost per restaurant in
1998. For leased restaurants the discounted present value of the lease and any
additional sums paid to acquire the lease have been allocated to land, building
and site improvements and other costs, as appropriate.
<TABLE>
<CAPTION>
AVERAGE PER
RESTAURANT
---------------------
<S> <C>
Land................................................................... $ 550,000
Building............................................................... 739,000
Equipment.............................................................. 335,000
Site improvements and other costs...................................... 186,000
-----------
Total.......................................................... $ 1,810,000
-----------
-----------
</TABLE>
New IHOP restaurants that opened in 1997 realized average sales of
$1,691,000 per restaurant in their first twelve full months of operations.
FRANCHISING
IHOP's approach to franchising is somewhat different from that of our
franchising competitors in the foodservice industry. In most franchise systems,
the franchisee is called upon to pay a modest initial fee to the franchisor. The
franchisee then uses his/her own capital to acquire a site, build and equip the
business and fund working capital needs. While we offer Investor and Conversion
Programs to certain experienced franchisees that allow them to fund the
development of their own restaurants, the large majority of IHOP restaurants are
developed directly by us.
When we develop a restaurant, we identify the site for the new restaurant,
purchase the site or lease it from a third party, and build the restaurant and
equip it with all required equipment. We then select the franchisee and train
the franchisee and supervisory personnel who will run the restaurant. In
addition, we finance the purchase of the franchise and lease the restaurant and
equipment to the franchisee. After the franchisee is operating the restaurant,
we provide continuing support with respect to operations, marketing and new
product development.
2
<PAGE>
Our involvement in the development of new restaurants allows IHOP to command
a substantial franchise and development fee. In addition, we derive income from
the partial financing of the franchise and development fee and from the leasing
of property and equipment to franchisees. However, we also incur substantial
obligations in the development, franchising and start-up operations of new
restaurants. IHOP's involvement in site selection and development, the training
and supervising of franchisees, as well as our control over restaurant property,
products and services, are an integral part of our operating philosophy.
IHOP franchisees are predominantly owner/operators, not passive investors.
The majority of franchisees own only one restaurant and only 12 franchisees
currently own more than six restaurants. We believe that franchisees who are
actively involved in the operation of their restaurants provide a quality of
management and commitment to our guests that cannot be matched by salaried
managers.
A majority of new restaurants are franchised to current franchisees or
restaurant managers who already understand IHOP's approach to the restaurant
business. In the past five years sales to existing franchisees and IHOP
employees, or to their immediate families, constituted approximately 85% of
franchise sales transactions.
An initial franchise fee of approximately $200,000 to $350,000 is generally
required for a newly developed restaurant, depending on the site. The franchisee
normally pays approximately 20% in cash, and we finance the remaining amount
over five to eight years. We also receive continuing revenues from the
franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales;
(2) income from the leasing of the restaurant and related equipment; (3) revenue
from the sale of certain proprietary products, primarily pancake mixes; (4) a
local advertising fee equal to about 2% of the restaurant's sales which is
usually paid to a local advertising cooperative; and (5) a national advertising
fee equal to 1% of the restaurant's sales. Franchise agreements for restaurants
developed directly by franchisees under our Investor and Conversion Programs
provide for a reduced initial franchise fee of $50,000, revenue from the sale of
certain proprietary products, and royalties and advertising fees as described
above.
We have entered into long-term area licensing agreements covering the state
of Florida and the Southern-most counties of Georgia, the province of British
Columbia, Canada, and the country of Japan. These agreements provide for
royalties ranging from 0.5% to 2% of sales and advertising fees of 0.25% of
sales except for Japan which does not pay advertising fees. We also derive
revenue from the sale of proprietary products to these area licensees. We treat
the revenues from our area licensees as franchise operations revenues for
financial reporting purposes. Area licensing arrangements may be used in the
future for domestic and/or international expansion.
RESTAURANT OPERATIONS AND SUPPORT
It is our goal to make every dining experience at an IHOP restaurant a
satisfying one. Our franchisees and managers of company-operated restaurants
strive always to exceed guests' expectations. We hold firm to the belief that a
satisfied customer will be a return customer and will tell others about our
restaurants. To help fulfill our guests' expectations, all restaurants are
operated in accordance with uniform operating standards and specifications
relating to the quality and preparation of menu items, selection of menu items,
maintenance, repair and cleanliness of premises, and the appearance and conduct
of employees. We have developed our operating standards in consultation with our
franchisee operators. These standards are detailed in our Manual of Standard
Operating Procedures.
Each restaurant is assigned an Operations Consultant. He or she regularly
visits and evaluates the restaurant to assist that restaurant's management to
remain in compliance with the operating guidelines and procedures. At least
twice per year, the Operations Consultant conducts a comprehensive written
evaluation of every aspect of the restaurant's operations. The Operations
Consultant then meets with the franchisee or manager to discuss the results of
the evaluation and develop a plan to address any areas needing improvement.
3
<PAGE>
The IHOP menu offers a large selection of high-quality, moderately-priced
products designed to appeal to a broad customer base. These include a wide
variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak,
sandwiches and dinner specialties. Most IHOP restaurants offer special items for
children and seniors at reduced prices. In recognition of local tastes, IHOP
restaurants typically offer regional specialties that complement the IHOP core
menu. Our Research and Development Department works together with franchisees
and our Operations and Marketing departments to continually develop new menu
ideas. These new menu items are thoroughly evaluated in our test kitchen and in
limited regional tests before being introduced throughout the system. The
purpose of adding new items to our menu is to be responsive to our guests' needs
and requests, and to keep the menu fresh and appealing to our customers.
Training is ongoing at all IHOP restaurants. Each prospective franchisee is
required to participate in an extensive training program before he or she is
sold a franchise. The training program involves classroom study in IHOP's
training facility in San Dimas, California, and hands-on operational training in
one of our regional training restaurants. Each franchisee learns to cook, wait
on tables, serve as a host, wash dishes and perform each of the other myriad
tasks necessary to operate a successful restaurant. New restaurant opening teams
provide on-site instruction to IHOP restaurant employees to assist in the
opening of all new IHOP restaurants.
The Company's regional headquarters offer additional training courses from
time to time on subjects such as suggestive selling, improving service, managing
people and diversity.
MARKETING AND ADVERTISING
Most IHOP franchisees and company-operated restaurants contribute about 2%
of their sales to local advertising cooperatives. We also provide additional
funding to these cooperatives. The advertising co-ops use these funds to
purchase television advertising time and place advertisements in printed media
or direct mail. In addition to television advertising, IHOP encourages local
area marketing by its franchisees. These marketing programs include discounts
and specials aimed at increasing customer traffic and encouraging repeat
business.
COMPANY-OPERATED RESTAURANTS
Company-operated restaurants are those restaurants newly developed by IHOP
which have not yet been franchised and those restaurants reacquired by us
through negotiation or franchisee defaults. The relative number and identity of
company-operated restaurants varies from time to time as we develop new
restaurants, reacquire franchised restaurants and franchise new and reacquired
restaurants.
Restaurants that we reacquire from franchisees typically require investment
in remodeling and rehabilitation before being refranchised. They may remain as
company-operated restaurants for a substantial period of time. As a consequence,
some company-operated restaurants are likely to incur operating losses during
the period of their rehabilitation.
REMODELING AND REFRANCHISING PROGRAM
Restaurants that we reacquire are usually underperforming as a result of
having been poorly operated and physically neglected. When we reacquire a
restaurant, we begin a multi-step rehabilitation program for that restaurant.
First these restaurants are physically rehabilitated, then we hire and train the
restaurant staff. After these first steps are completed, we implement new
marketing and operations programs designed to regain the business of former
guests and attract new patrons. After a restaurant has been rehabilitated and
its sales volume reaches acceptable levels, the restaurant is refranchised to a
qualified franchisee. In the past five years IHOP reacquired a total of 69
restaurants from franchisees and subsequently closed 11 of those restaurants. In
those same years restaurants that were refranchised totaled 34.
4
<PAGE>
In the past five years, IHOP has remodeled and updated approximately 19 then
company-operated restaurants at an average cost per restaurant of approximately
$81,000. In the period from 1992 through 1997, average sales in remodeled
company-operated restaurants have increased approximately 14.1% in the 12 months
after the remodeling. We intend to continue this remodeling program with respect
to company-operated restaurants on an ongoing basis. Remodeling facilitates the
refranchising of these restaurants, enhances the chain's image, and helps to
maintain and expand our customer base.
We also require most of our franchisees, and strongly encourage all of our
franchisees, to periodically remodel their restaurants. In the past five years,
226 restaurants have been remodeled by franchisees.
PURCHASING
IHOP has entered into long-term supply contracts and pricing agreements for
various products, such as pancake mixes, pork products, coffee, soft drinks,
juices and uniforms to ensure the availability of quality products at
competitive prices. We also have negotiated agreements with food distribution
companies to limit markups charged on food purchased by individual IHOP
restaurants.
COMPETITION AND MARKETS
The restaurant business is highly competitive and is affected by, among
other things, changes in eating habits and preferences, local, regional and
national economic conditions, population trends and traffic patterns. The
principal bases of competition in the industry are the type, quality and price
of the food products served. Additionally, restaurant location, quality and
speed of service, advertising, name identification and attractiveness of
facilities are important.
The acquisition of sites is also highly competitive. We are often competing
with other restaurant chains and retail businesses for suitable sites for the
development of new restaurants.
Foodservice chains in the United States include the following segments:
quick-service sandwich, chicken, pizza, family restaurant, dinner house,
grill-buffet, hotel restaurant and contract/catering. IHOP is part of the family
restaurant segment. Differentiated chains competing within their segments
against each other and local, single-outlet operators characterize the current
structure of the U.S. restaurant and institutional foodservice market.
Information published in 1998 by an industry trade publication ranked IHOP
34th out of the top 100 foodservice chains based on estimated fiscal 1997
system-wide sales in the United States. The same publication included twelve
family restaurant chains in its top 100 chains, and IHOP ranked fourth in this
segment. A national consumer survey, performed by another restaurant industry
publication in 1998, indicated that more than 80% of all Americans are familiar
with International House of Pancakes restaurants, making IHOP one of the top two
family restaurant chains in terms of consumer awareness. During December 1998,
based on a nation-wide sample of IHOP restaurants, the approximate guest check
average per IHOP customer was $6.36.
TRADEMARKS AND SERVICE MARKS
We have registered our trademarks and service marks with the United States
Patent and Trademark Office. These include "International House of Pancakes,"
"IHOP" and variations of each, as well as "Any Time's a Good Time for Breakfast
at IHOP," "the Home of the Never Empty Coffee Pot," "Rooty Tooty Fresh 'N
Fruity," and "Harvest Grain 'N Nut." We also register new trademarks and service
marks from time to time. We are not aware of any infringing uses that could
materially affect our business or any prior claim to these marks that would
prevent us from using or licensing the use thereof for restaurants in any area
of the United States. We have also registered our trademarks and service marks
and variations thereof in Japan and Canada for use by our current licensees.
Where feasible and appropriate, we register our trademarks and service marks in
other nations for future use. Our current registered trademarks and
5
<PAGE>
service marks will expire, unless renewed, at various dates from 1999 to 2012.
We routinely apply to renew our active trademarks prior to their expiration.
SEASONALITY
IHOP's business, like that of most restaurant companies, is somewhat
seasonal. Our restaurants generally experience greater customer traffic and
sales in the warmer months and during the Thanksgiving and Christmas seasons.
Restaurants in some resort areas and warm weather climates tend to experience
greater customer traffic and sales in the winter months.
GOVERNMENT REGULATION
IHOP is subject to various federal, state and local laws affecting our
business as well as a variety of regulatory provisions relating to zoning of
restaurant sites, sanitation, health and safety. As a franchisor, we are subject
to state and federal laws regulating various aspects of franchise operations and
sales. These laws impose registration and disclosure requirements on franchisors
in the offer and sale of franchises. In certain cases, they also apply
substantive standards to the relationship between franchisor and franchisee,
including primarily defaults, termination and non-renewal of franchises.
Various federal and state labor laws govern our relationships with our
employees. These include such matters as minimum wage requirements, overtime and
other working conditions. Environmental requirements have not had a material
effect on the operations of our company-operated restaurants or the restaurants
of our franchisees. Significant additional government-imposed increases in
minimum wages, paid leaves of absence, mandated health benefits or increased tax
reporting and tax payment requirements with respect to employees who receive
gratuities could, however, be detrimental to the economic viability of
franchisee-operated and company-operated IHOP restaurants.
EMPLOYEES
At December 31, 1998, we employed approximately 2,400 persons, of whom 250
were full-time, non-restaurant, corporate personnel. We consider relations with
our employees to be satisfactory.
6
<PAGE>
ITEM 2. PROPERTIES.
The table below shows the location and status of the 835 IHOP restaurants as
of December 31, 1998:
<TABLE>
<CAPTION>
COMPANY- AREA
LOCATION FRANCHISE OPERATED LICENSE TOTAL
- -------------------------------------------------- ---------- --------- -------- ------
<S> <C> <C> <C> <C>
UNITED STATES
Alabama........................................... 8 1 0 9
Arizona........................................... 18 0 0 18
Arkansas.......................................... 3 0 0 3
California........................................ 151 17 0 168
Colorado.......................................... 17 0 0 17
Connecticut....................................... 6 0 0 6
Delaware.......................................... 1 0 0 1
Florida........................................... 0 0 111 111
Georgia........................................... 36 1 1 38
Hawaii............................................ 2 0 0 2
Idaho............................................. 0 1 0 1
Illinois.......................................... 29 8 0 37
Indiana........................................... 4 2 0 6
Kansas............................................ 1 1 0 2
Louisiana......................................... 2 0 0 2
Maine............................................. 1 0 0 1
Maryland.......................................... 21 4 0 25
Massachusetts..................................... 14 0 0 14
Michigan.......................................... 10 3 0 13
Mississippi....................................... 5 0 0 5
Missouri.......................................... 11 0 0 11
Nevada............................................ 10 3 0 13
New Hampshire..................................... 1 0 0 1
New Jersey........................................ 28 1 0 29
New Mexico........................................ 1 0 0 1
New York.......................................... 31 1 0 32
North Carolina.................................... 24 0 0 24
Oklahoma.......................................... 1 0 0 1
Oregon............................................ 5 8 0 13
Pennsylvania...................................... 10 2 0 12
Rhode Island...................................... 1 1 0 2
South Carolina.................................... 12 0 0 12
Tennessee......................................... 17 0 0 17
Texas............................................. 98 1 0 99
Virginia.......................................... 23 0 0 23
Washington........................................ 9 10 0 19
Wisconsin......................................... 1 1 0 2
INTERNATIONAL
Canada(1)......................................... 12 0 0 12
Japan............................................. 0 0 33 33
--- -- --- ------
Totals............................................ 624 66 145 835
--- -- --- ------
--- -- --- ------
</TABLE>
- ------------------------
(1) IHOP reports restaurants in Canada as franchise restaurants although the
restaurants are operated under an area license agreement.
7
<PAGE>
As of December 31, 1998, of the 66 company-operated restaurants, 3 were
located on IHOP-owned sites and 63 were located on IHOP-leased sites; of the 624
franchisee-operated restaurants, 42 were located on IHOP-owned sites, 462 were
located on IHOP-leased sites and 120 were located on sites owned or leased by
franchisees; and all of the restaurants operated by area licensees were located
on sites owned or leased by area licensees.
IHOP's leases with its landlords generally provide for an initial term of 15
to 25 years, with most having one or more five-year renewal options in favor of
IHOP. The leases typically provide for payment of rentals in an amount equal to
the greater of a fixed amount or a specified percentage of gross sales and for
payment by IHOP of taxes, insurance premiums, maintenance expenses and certain
other costs. Historically, we generally have been successful at renewing those
leases that expire without further renewal options. However, from time to time
we choose not to renew a lease or are unsuccessful in negotiating satisfactory
renewal terms. When this occurs the restaurant is closed, deidentified, and
possession of the premises is returned to the landlord.
We lease our principal corporate offices in Glendale, California under a
lease having a remaining term of approximately two years with two five-year
options to renew. We also lease our regional offices in Lyndhurst, New Jersey;
Norcross, Georgia; Lombard, Illinois; Dallas, Texas; Portland, Oregon and
Sylmar, California. The Sylmar office also houses our Purchasing and Product
Development Departments, which includes a warehouse facility of approximately
6,200 square feet and a test kitchen.
ITEM 3. LEGAL PROCEEDINGS.
IHOP is subject to various claims and legal actions which arise in the
ordinary course of business. We believe such claims and legal actions,
individually or in the aggregate, will not have a material adverse effect on the
business or financial condition of our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the Nasdaq Stock Market's National Market
under the symbol "IHOP." As of January 31, 1999, there were approximately 2,500
shareholders.
The following table sets forth the high and low prices of IHOP's common
stock for each quarter of 1998 and 1997 as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ---------------------------------------- ------- -------
<S> <C> <C>
March 31, 1998.......................... $39 1/16 $31 1/4
June 30, 1998........................... 47 1/2 37 3/4
September 30, 1998...................... 45 7/8 35
December 31, 1998....................... 43 29 1/2
<CAPTION>
QUARTER ENDED HIGH LOW
- ---------------------------------------- ------- -------
<S> <C> <C>
March 31, 1997.......................... $27 1/4 $23 5/8
June 30, 1997........................... 31 1/8 23 5/8
September 30, 1997...................... 37 3/8 30 3/8
December 31, 1997....................... 37 3/8 31
</TABLE>
We have not paid any dividends on our common stock in the last five years
and have no plans to do so in 1999. Any future determination to declare
dividends will depend on our earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by our Board of Directors.
The purchase agreements governing our 7.79% senior notes, our 7.42% senior
notes, and our credit agreement with our bank limit the amount of retained
earnings available for dividends and investments. At December 31, 1998,
approximately $55 million of retained earnings were free of restriction as to
distribution as dividends.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998(a) 1997 1996 1995 1994
-------- -------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues
Franchise operations...................................... $145,955 $123,842 $ 110,544 $ 98,973 $ 87,947
Sales of franchises and equipment......................... 40,347 28,864 25,573 22,202 20,869
Company operations........................................ 69,906 61,839 53,677 43,001 40,732
-------- -------- --------- ----------- --------
Total revenues.......................................... 256,208 214,545 189,794 164,176 149,548
-------- -------- --------- ----------- --------
Costs and expenses
Franchise operations...................................... 58,539 51,137 47,783 43,639 39,773
Cost of sales of franchises and equipment................. 26,628 17,814 15,954 13,058 11,381
Company operations........................................ 65,711 58,001 50,852 41,621 37,507
Field, corporate and administrative....................... 32,381 28,409 25,066 21,907 21,881
Depreciation and amortization............................. 11,271 10,029 8,279 6,918 6,382
Interest.................................................. 17,417 14,649 11,691 8,873 6,805
Other (income) and expense, net........................... 1,456 220 (582) 1,459(b) 835
-------- -------- --------- ----------- --------
Total costs and expenses................................ 213,403 180,259 159,043 137,475 124,564
-------- -------- --------- ----------- --------
Income before income taxes.................................. 42,805 34,286 30,751 26,701(b) 24,984
Provision for income tax.................................... 16,694 13,372 12,147 10,547(b) 9,869
-------- -------- --------- ----------- --------
Net income.................................................. $ 26,111 $ 20,914 $ 18,604 $ 16,154(b) $ 15,115
-------- -------- --------- ----------- --------
-------- -------- --------- ----------- --------
Net income per share(c)
Basic..................................................... $ 2.66 $ 2.18 $ 1.97 $ 1.73(b) $ 1.65
-------- -------- --------- ----------- --------
-------- -------- --------- ----------- --------
Diluted................................................... $ 2.61 $ 2.15 $ 1.95 $ 1.70(b) $ 1.60
-------- -------- --------- ----------- --------
-------- -------- --------- ----------- --------
Weighted average shares outstanding(c)
Basic..................................................... 9,829 9,596 9,444 9,319 9,159
-------- -------- --------- ----------- --------
-------- -------- --------- ----------- --------
Diluted................................................... 10,016 9,743 9,523 9,488 9,444
-------- -------- --------- ----------- --------
-------- -------- --------- ----------- --------
BALANCE SHEET DATA (END OF PERIOD)
Cash and cash equivalents................................. $ 8,577 $ 5,964 $ 8,658 $ 3,860 $ 2,036
Property and equipment, net............................... 161,689 142,751 120,854 87,795 69,550
Total assets.............................................. 445,899 382,593 328,889 252,057 202,553
Long-term debt............................................ 49,765 54,950 58,564 30,584 34,855
Capital lease obligations................................. 129,861 102,578 80,673 61,836 43,180
Shareholders' equity(d)................................... 187,868 156,184 129,357 108,297 88,299
</TABLE>
- ------------------------
(a) Fiscal 1998 is comprised of 53 weeks (371 days); all other years are
comprised of 52 weeks (364 days).
(b) Includes severance charges associated with a realignment of responsibilities
in IHOP's restaurant operations, restaurant development and purchasing
functions of $800,000, or $484,000 net of income tax benefit, or $.05 per
share.
(c) Net income per share and weighted average shares outstanding for each of the
three years ended December 31, 1996, have been restated in accordance with
SFAS No. 128 (see Note 1 to the Consolidated Financial Statements).
(d) IHOP has not paid any dividends on our common stock in the last five years
and has no plans to do so in 1999. Any future determination to declare
dividends will depend on our earnings, financial condition, cash
requirements, future prospects and other factors deemed relevant by our
Board of Directors.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
IHOP's revenues are recorded in three categories: franchise operations,
sales of franchises and equipment, and company operations.
Franchise operations includes payments from franchisees of rents, royalties
and advertising fees, proceeds from the sale of proprietary products to
distributors, franchisees and area licensees, interest income received in
connection with the financing of franchise and development fees and equipment
sales, interest income received from direct financing leases on franchised
restaurant buildings, and payments from area licensees of royalties and
advertising fees.
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.
Company operations revenues are retail sales at IHOP-operated restaurants.
We report separately those expenses that are attributable to franchise
operations, the cost of sales of franchises and equipment and company
operations. Expenses recorded under field, corporate and administrative,
depreciation and amortization, and interest relate to franchise operations,
sales of franchises and equipment, and company operations.
Other income and expense, net consists of revenues and expenses not related
to IHOP's core business operations. These include gains and losses realized from
closing and selling restaurants and are unpredictable in timing and amount.
Our results of operations are impacted by the timing of additions of new
restaurants, and by the timing of the franchising of those restaurants. When a
restaurant is franchised, we no longer include in revenues the retail sales from
such restaurant, but receive a one-time franchise and development fee, periodic
interest on the portion of such fee financed by us and recurring payments from
franchisees described above and recorded under franchise operations.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data for IHOP restaurants:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998(a) 1997 1996
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Restaurant Data
Effective restaurants(b)
Franchise............................................... 585 540 503
Company................................................. 72 66 57
Area license............................................ 145 140 134
------------- ----------- -----------
Total................................................. 802 746 694
------------- ----------- -----------
------------- ----------- -----------
System-wide
Sales(c).................................................. $ 1,040,305 $ 903,140 $ 796,555
Percent increase........................................ 15.2% 13.4% 11.4%
Average sales per effective restaurant.................... $ 1,297 $ 1,211 $ 1,148
Percent increase........................................ 7.1% 5.5% 2.6%
Comparable average sales per restaurant(d)................ $ 1,327 $ 1,248 $ 1,174
Percent increase........................................ 2.7% 3.7% 1.7%
Franchise
Sales..................................................... $ 835,957 $ 709,420 $ 622,969
Percent increase........................................ 17.8% 13.9% 13.5%
Average sales per effective restaurant.................... $ 1,429 $ 1,314 $ 1,239
Percent increase........................................ 8.8% 6.1% 4.6%
Comparable average sales per restaurant(d)................ $ 1,365 $ 1,292 $ 1,207
Percent increase........................................ 2.7% 4.0% 1.7%
Company
Sales..................................................... $ 69,906 $ 61,839 $ 53,677
Percent increase........................................ 13.0% 15.2% 24.8%
Average sales per effective restaurant.................... $ 971 $ 937 $ 942
Percent change.......................................... 3.6% (0.5)% 7.3%
Area License
Sales..................................................... $ 134,442 $ 131,881 $ 119,909
Percent change.......................................... 1.9% 10.0% (2.6)%
Average sales per effective restaurant.................... $ 927 $ 942 $ 895
Percent change.......................................... (1.6)% 5.3% (7.6)%
</TABLE>
- ------------------------
(a) Fiscal year 1998 is comprised of 53 weeks (371 days), and fiscal years 1997
and 1996 are each comprised of 52 weeks (364 days).
(b) "Effective restaurants" are the number of restaurants in a given fiscal
period adjusted to account for restaurants open only a portion of the
period.
(c) "System-wide sales" are retail sales of franchisees, area licensees and
company-operated restaurants, as reported to IHOP.
(d) "Comparable average sales" reflect sales for restaurants that are operated
for the entire fiscal period in which they are being compared. System-wide
comparable average sales do not include data on restaurants located in
Florida and Japan.
11
<PAGE>
The following table summarizes IHOP's restaurant development and franchising
activity:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RESTAURANT DEVELOPMENT ACTIVITY
IHOP--beginning of year..................................... 787 729 678 620 572
New openings
IHOP-developed.......................................... 56 45 45 40 30
Investor and conversion programs........................ 13 13 11 17 14
Area license............................................ 4 9 7 8 10
----- ----- ----- ----- -----
Total new openings........................................ 73 67 63 65 54
----- ----- ----- ----- -----
Closings
Company and franchise................................... (21) (9) (10) (7) (5)
Area license............................................ (4) -- (2) -- (1)
----- ----- ----- ----- -----
IHOP--end of year........................................... 835 787 729 678 620
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Summary--end of year
IHOP
Franchise............................................... 624 571 535 496 451
Company................................................. 66 71 58 51 46
Area license............................................ 145 145 136 131 123
----- ----- ----- ----- -----
Total IHOP................................................ 835 787 729 678 620
----- ----- ----- ----- -----
----- ----- ----- ----- -----
RESTAURANT FRANCHISING ACTIVITY
IHOP-developed.............................................. 60 45 41 36 32
Investor and conversion programs............................ 13 13 11 17 14
Rehabilitated and refranchised.............................. 10 6 5 3 10
----- ----- ----- ----- -----
Total restaurants franchised.............................. 83 64 57 56 56
Reacquired by IHOP.......................................... (17) (23) (11) (8) (10)
Closed...................................................... (13) (5) (7) (3) (2)
----- ----- ----- ----- -----
Net addition.............................................. 53 36 39 45 44
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</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. Certain forward-
looking statements are contained in this annual 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
12
<PAGE>
evaluated in the context of these factors. In addition, we disclaim any intent
or obligation to update these forward-looking statements.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
The year ended December 31, 1998, is comprised of 53 weeks (371 days), and
the year ended December 31, 1997, is comprised of 52 weeks (364 days).
IHOP's system-wide retail sales in 1998 were $1,040,305,000, a 15.2%
increase over the prior year. This growth was due to an increase of 7.5% in the
number of effective restaurants and a 7.1% increase in the retail sales per
effective restaurant. System-wide comparable average sales per restaurant for
1998 grew by 2.7%. 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 for 1998 grew 17.9%. This was primarily due to
increases in the number of effective franchised restaurants of 8.3% and
increases in the retail sales per effective franchised restaurant of 8.8%.
Franchise operations costs and expenses for 1998 increased 14.5%. As a result of
franchise operations revenues increasing in excess of franchise operations
expenses, franchise operations margin rose to 59.9% in 1998 from 58.7% in 1997.
The margin increased primarily because of (1) improved rent margin due, in part,
to an increase in the number of IHOP-owned restaurants which do not have rent
expense and (2) growth in interest income from IHOP's financing of sales of
franchises and equipment and from direct financing leases of restaurant
buildings to its franchisees.
Sales of franchises and equipment grew 39.8%. This was primarily due to the
increase in the number of restaurants franchised to 83 in 1998 from 64 in 1997.
The cost of sales of franchises and equipment rose 49.5% primarily due to the
increase in the number of restaurants franchised and the mix of restaurants
franchised. In 1998 IHOP refranchised 10 restaurants which had been previously
reacquired compared with 6 in the prior year.
Company-operated restaurant revenues in 1998 grew 13.0%. This was primarily
due to an increase in the effective number of company-operated restaurants of
9.1% and an increase in the revenues per effective company-operated restaurant
of 3.6%. Company-operated restaurant costs and expenses for 1998 increased
13.3%. Margin at company-operated restaurants in 1998 was 6.0% compared to 6.2%
in 1997. The change in margin was primarily due to moderate increases in
salaries and wages as a percentage of revenues.
Field, corporate and administrative costs and expenses in 1998 increased
14.0%. 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 1998 and
3.2% in 1997.
Depreciation and amortization expense in 1998 increased by 12.4%. This was
primarily due to the addition of new restaurants and an increase in the number
of effective company-operated restaurants during the year.
Interest expense increased 18.9% due to interest associated with additional
capital leases.
The balance of long-term receivables at December 31, 1998, increased
primarily due to IHOP's financing activities associated with the sales of
franchises and equipment and the leasing of restaurants to our franchisees.
The balance of property and equipment, net at December 31, 1998, increased
primarily due to new restaurant development.
13
<PAGE>
The balance of capital lease obligations and other at December 31, 1998,
increased primarily because of capital lease obligations incurred due to new
restaurant development.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
IHOP's system-wide retail sales in 1997 were $903,140,000, a 13.4% increase
over the prior year. This growth was due to an increase of 7.5% in the number of
effective restaurants and a 5.5% increase in the retail sales per effective
restaurant. System-wide comparable average sales per restaurant for 1997 grew by
3.7%.
Franchise operations revenues for 1997 grew 12.0%. This was primarily due to
increases in the number of effective franchised restaurants of 7.4% and in the
retail sales per effective franchised restaurant of 6.1%. Franchise operations
costs and expenses for 1997 increased 7.0%. As a result of franchise operations
revenues increasing in excess of franchise operations expenses, franchise margin
rose to 58.7% in 1997 from 56.8% in 1996. The margin increased primarily because
of (1) improved rent margin due, in part, to an increase in the number of
IHOP-owned restaurants which do not have rent expense and (2) growth in interest
income from IHOP's financing of sales of franchises and equipment and from
direct financing leases of restaurant buildings to its franchisees.
Sales of franchises and equipment grew 12.9%. This was primarily due to an
increase in the number of restaurants franchised to 64 in 1997 from 57 in 1996.
The cost of sales of franchises and equipment increased 11.7%, in line with the
growth in sales.
Company-operated restaurant revenues in 1997 grew 15.2%. This was primarily
due to an increase in the effective number of company-operated restaurants of
15.8% partially offset by a decrease in the revenues per effective
company-operated restaurant of 0.5%. Company-operated restaurant costs and
expenses for 1997 increased 14.1%. Margin at company-operated restaurants in
1997 was 6.2% compared to 5.3% in 1996. The improvement in margin was primarily
due to operating reductions in food costs as a percentage of revenues.
Field, corporate and administrative costs and expenses in 1997 increased
13.3%. The rise in expenses was primarily due to normal increases in salaries
and wages and the addition of employees to support our growth. Field, corporate
and administrative expenses were 3.2% of system-wide sales in both 1997 and
1996.
Depreciation and amortization expense in 1997 increased 21.1%. This was
primarily due to the addition of new restaurants and an increase in the number
of effective company-operated restaurants.
Interest expense increased 25.3% in 1997. This was primarily due to (1)
interest associated with additional capital lease obligations and (2) increased
debt levels due to the private placement of $35 million in senior notes in
November 1997.
The balance of long-term receivables at December 31, 1997, increased
primarily due to IHOP's financing activities associated with the sales of
franchises and equipment and the leasing of restaurants to our franchisees.
The balance of property and equipment, net at December 31, 1997, increased
primarily due to new restaurant development.
The balance of capital lease obligations and other at December 31, 1997,
increased primarily because of capital lease obligations incurred due to new
restaurant development.
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.
14
<PAGE>
In 1998 we and our franchisees and area licensees developed and opened 73
IHOP restaurants. Of these, we developed and opened 56 restaurants, and
franchisees and area licensees developed and opened 17 restaurants. Capital
expenditures in 1998, which included our portion of the above development
program, were $71.8 million. Funds for investment primarily came from
operations, $53.9 million, and sale and leaseback arrangements of restaurant
land and buildings, $26.4 million. We also incurred capital lease obligations of
$28.9 million, a portion of which was due to the sale and leaseback
transactions, and all of which was related to the acquisition of restaurant
buildings.
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 believe 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
December 31, 1998, $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
approximately $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
15
<PAGE>
and letters mailed requesting information regarding each party's Year 2000
compliance status. To date we have received responses from about 80% 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 will be sent to all franchisees by March 31,
1999. It will explain the Year 2000 issue and associated business risks and will
provide 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 7A. 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
16
<PAGE>
agreement at December 31, 1998, and the largest amount outstanding under the
agreement during 1998 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.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
-------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and 1997........................................... 19
Consolidated Statements of Operations for each of the three years in the period ended December 31,
1998................................................................................................. 20
Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December
31, 1998............................................................................................. 21
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
1998................................................................................................. 22
Notes to the Consolidated Financial Statements......................................................... 23
Report of Independent Accountants...................................................................... 35
</TABLE>
18
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents............................................................... $ 8,577 $ 5,964
Receivables............................................................................. 28,461 30,490
Reacquired franchises and equipment held for sale, net.................................. 2,284 2,321
Inventories............................................................................. 1,222 1,378
Prepaid expenses........................................................................ 274 629
---------- ----------
Total current assets.................................................................. 40,818 40,782
---------- ----------
Long-term receivables..................................................................... 217,156 171,967
Property and equipment, net............................................................... 161,689 142,751
Reacquired franchises and equipment held for sale, net.................................... 12,943 13,151
Excess of costs over net assets acquired, net............................................. 12,054 12,481
Other assets.............................................................................. 1,239 1,461
---------- ----------
Total assets.......................................................................... $ 445,899 $ 382,593
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt.................................................... $ 5,386 $ 4,973
Accounts payable........................................................................ 22,589 20,626
Accrued employee compensation and benefits.............................................. 6,017 4,595
Other accrued expenses.................................................................. 5,309 4,602
Deferred income taxes................................................................... 2,560 3,468
Capital lease obligations............................................................... 1,388 1,062
---------- ----------
Total current liabilities............................................................. 43,249 39,326
---------- ----------
Long-term debt............................................................................ 49,765 54,950
Deferred income taxes..................................................................... 34,708 28,862
Capital lease obligations and other....................................................... 130,309 103,271
Shareholders' equity
Preferred stock, $1 par value, 10,000,000 shares authorized; issued and outstanding:
1997 and 1996, no shares.............................................................. -- --
Common stock, $.01 par value, 40,000,000 shares authorized; shares issued and
outstanding: 1998, 9,881,580 shares (net of 4,620 treasury shares); 1997, 9,709,261
shares (net of 1,539 treasury shares)................................................. 99 97
Additional paid-in capital (net of treasury shares at cost: 1998, $154;
1997, $39)............................................................................ 60,100 54,629
Retained earnings....................................................................... 126,269 100,158
Contribution to ESOP.................................................................... 1,400 1,300
---------- ----------
Total shareholders' equity............................................................ 187,868 156,184
---------- ----------
Total liabilities and shareholders' equity............................................ $ 445,899 $ 382,593
---------- ----------
---------- ----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
19
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Franchise operations
Rent....................................................................... $ 39,787 $ 33,692 $ 29,642
Service fees and other..................................................... 106,168 90,150 80,902
---------- ---------- ----------
145,955 123,842 110,544
Sales of franchises and equipment............................................ 40,347 28,864 25,573
Company operations........................................................... 69,906 61,839 53,677
---------- ---------- ----------
Total revenues........................................................... 256,208 214,545 189,794
---------- ---------- ----------
Costs and Expenses
Franchise operations
Rent....................................................................... 19,874 17,784 16,301
Other direct costs......................................................... 38,665 33,353 31,482
---------- ---------- ----------
58,539 51,137 47,783
Cost of sales of franchises and equipment.................................... 26,628 17,814 15,954
Company operations........................................................... 65,711 58,001 50,852
Field, corporate and administrative.......................................... 32,381 28,409 25,066
Depreciation and amortization................................................ 11,271 10,029 8,279
Interest..................................................................... 17,417 14,649 11,691
Other (income) and expense, net.............................................. 1,456 220 (582)
---------- ---------- ----------
Total costs and expenses................................................. 213,403 180,259 159,043
---------- ---------- ----------
Income before income taxes................................................... 42,805 34,286 30,751
Provision for income tax..................................................... 16,694 13,372 12,147
---------- ---------- ----------
Net income................................................................... $ 26,111 $ 20,914 $ 18,604
---------- ---------- ----------
---------- ---------- ----------
Net Income Per Share
Basic...................................................................... $ 2.66 $ 2.18 $ 1.97
---------- ---------- ----------
---------- ---------- ----------
Diluted.................................................................... $ 2.61 $ 2.15 $ 1.95
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Shares Outstanding
Basic...................................................................... 9,829 9,596 9,444
---------- ---------- ----------
---------- ---------- ----------
Diluted.................................................................... 10,016 9,743 9,523
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
20
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CONTRIBUTION
------------------------- PAID-IN RETAINED TO
SHARES AMOUNT CAPITAL EARNINGS ESOP TOTAL
------------ ----------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............. 9,375,515 $ 94 $ 46,363 $ 60,640 $ 1,200 $ 108,297
------------ --- ----------- ---------- ------ ----------
Issuance of shares to ESOP............. 44,445 -- 1,200 -- (1,200) --
Issuance of shares pursuant to stock
plans................................ 47,334 1 1,092 -- -- 1,093
Unearned compensation-- restricted
stock................................ -- -- 113 -- -- 113
Contribution to ESOP................... -- -- -- -- 1,250 1,250
Net income............................. -- -- -- 18,604 -- 18,604
------------ --- ----------- ---------- ------ ----------
Balance, December 31, 1996............. 9,467,294 95 48,768 79,244 1,250 129,357
------------ --- ----------- ---------- ------ ----------
Issuance of shares to ESOP............. 46,083 1 1,249 -- (1,250) --
Issuance of shares pursuant to stock
plans................................ 197,423 1 4,719 -- -- 4,720
Unearned compensation-- restricted
stock................................ -- -- (68) -- -- (68)
Acquisition of treasury shares......... (1,539) -- (39) -- -- (39)
Contribution to ESOP................... -- -- -- -- 1,300 1,300
Net income............................. -- -- -- 20,914 -- 20,914
------------ --- ----------- ---------- ------ ----------
Balance, December 31, 1997............. 9,709,261 97 54,629 100,158 1,300 156,184
------------ --- ----------- ---------- ------ ----------
Issuance of shares to ESOP............. 36,491 -- 1,300 -- (1,300) --
Issuance of shares pursuant to stock
plans................................ 138,909 2 4,094 -- -- 4,096
Unearned compensation-- restricted
stock................................ -- -- 192 -- -- 192
Acquisition of treasury shares......... (3,081) -- (115) -- -- (115)
Contribution to ESOP................... -- -- -- -- 1,400 1,400
Net income............................. -- -- -- 26,111 -- 26,111
------------ --- ----------- ---------- ------ ----------
Balance, December 31, 1998............. 9,881,580 $ 99 $ 60,100 $ 126,269 $ 1,400 $ 187,868
------------ --- ----------- ---------- ------ ----------
------------ --- ----------- ---------- ------ ----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
21
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income..................................................................... $ 26,111 $ 20,914 $ 18,604
Adjustments to reconcile net income to cash provided by operating activities...
Depreciation and amortization.................................................. 11,271 10,029 8,279
Deferred taxes................................................................. 4,938 2,958 4,441
Contribution to ESOP........................................................... 1,400 1,300 1,250
Change in current assets and liabilities
Accounts receivable.......................................................... 2,672 648 (6,250)
Inventories.................................................................. 156 (198) (388)
Prepaid expenses............................................................. 355 47 (443)
Accounts payable............................................................. 1,963 3,152 1,495
Accrued employee compensation and benefits................................... 1,422 1,921 1,112
Other accrued expenses....................................................... 707 (422) 1,697
Other, net..................................................................... 2,914 1,226 1,804
--------- --------- ---------
Cash provided by operating activities...................................... 53,909 41,575 31,601
--------- --------- ---------
Cash flows from investing activities
Additions to property and equipment............................................ (71,821) (59,687) (57,159)
Proceeds from sale and leaseback arrangements.................................. 26,377 17,995 7,593
Additions to notes, equipment contracts and direct financing leases
receivable................................................................... (12,876) (10,209) (11,427)
Principal receipts from notes, equipment contracts and direct financing leases
receivable................................................................... 9,747 8,562 7,019
Additions to reacquired franchises held for sale............................... (1,443) (1,917) (339)
--------- --------- ---------
Cash used by investing activities.......................................... (50,016) (45,256) (54,313)
--------- --------- ---------
Cash flows from financing activities.............................................
Proceeds from issuance of long-term debt....................................... 12,235 1,440 34,514
Repayment of long-term debt.................................................... (16,632) (4,631) (7,478)
Principal payments on capital lease obligations................................ (728) (487) (419)
Exercise of stock options...................................................... 3,845 4,665 893
--------- --------- ---------
Cash provided (used) by financing activities................................. (1,280) 987 27,510
--------- --------- ---------
Net change in cash and cash equivalents.......................................... 2,613 (2,694) 4,798
Cash and cash equivalents at beginning of period................................. 5,964 8,658 3,860
--------- --------- ---------
Cash and cash equivalents at end of period................................... $ 8,577 $ 5,964 $ 8,658
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures
Interest paid, net of capitalized amounts...................................... $ 16,947 $ 14,478 $ 11,300
Income taxes paid.............................................................. 10,196 10,680 7,588
Capital lease obligations incurred............................................. 28,947 22,778 19,786
</TABLE>
See the accompanying notes to the consolidated financial statements.
22
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
IHOP Corp. and its subsidiaries, referred to as "IHOP," engage exclusively
in the food-service industry, primarily in the United States, wherein we
franchise and operate restaurants. IHOP grants credit to our franchisees and
licensees, all of whom are in the restaurant business. In the majority of our
franchised operations, we have developed restaurants on sites that we either own
or control through leases. We then lease or sublease the restaurants to our
franchisees. Additionally, we finance up to 80% of the initial franchise fee,
lease restaurant equipment and fixtures to our franchisees, sell proprietary
products to our franchisees and area licensees, and provide marketing and
promotional services to our franchisees and area licensees.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of IHOP Corp. and
its subsidiaries. Intercompany accounts and transactions have been eliminated.
FISCAL PERIODS
IHOP's fiscal year ends on the Sunday nearest to December 31 of each year.
For convenience, we report all fiscal years as ending on December 31 and fiscal
quarters as ending on March 31, June 30 and September 30. The fiscal year ended
December 31, 1998, is comprised of 53 weeks (371 days), and the fiscal years
ended December 31, 1997 and 1996, are comprised of 52 weeks (364 days).
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires IHOP management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements. They also affect the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
IHOP at times purchases highly liquid, investment-grade securities with an
original maturity of three months or less. These cash equivalents are stated at
cost which approximates market value. We do not believe that we are exposed to
any significant credit risk on cash and cash equivalents.
INVENTORIES
Inventories consisting of merchandise and supplies are stated at the lower
of cost (on a first-in, first-out basis) or market.
23
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful lives as follows:
<TABLE>
<CAPTION>
CATEGORY DEPRECIABLE LIFE
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Buildings and improvements Shorter of lease term or 25 years
Leaseholds and improvements 3-25 years
Equipment and fixtures 3-10 years
Properties under capital lease Primary lease term
</TABLE>
Leaseholds and improvements are amortized over a period not exceeding the
term of the lease.
Impairment losses to long-lived assets are recognized when the carrying
amount of an asset exceeds the estimated fair value of the asset.
EXCESS OF COSTS OVER NET ASSETS ACQUIRED
The excess of costs over net assets acquired is amortized utilizing the
straight-line method over forty years. Accumulated amortization at December 31,
1998 and 1997, was $5,032,000 and $4,606,000, respectively.
FRANCHISE REVENUES
Revenues from the sales of franchises are recognized as income when IHOP has
substantially performed all of its material obligations under the franchise
agreement, and the franchisee has commenced operations. Continuing service fees,
which are a percentage of the net sales of franchised operations, are accrued as
income when earned.
LEASING
IHOP leases equipment consisting of restaurant equipment, furniture and
fixtures to our franchisees and retains title to the leased equipment. These
equipment contracts are accounted for as sales-type leases upon acceptance of
the equipment by the franchisee. Leases of restaurant facilities are recorded as
direct financing leases upon acceptance.
PREOPENING EXPENSES
Expenditures related to the opening of new restaurants, other than those for
capital assets, are charged to expense when incurred.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses for the
years ended December 31, 1998, 1997 and 1996, were $26,960,000, $22,748,000 and
$20,450,000, respectively.
24
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities. They
are measured using the enacted marginal tax rates and laws that will be in
effect when the differences are expected to reverse.
NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income per share is computed
by dividing the net income attributable to common shareholders by the weighted
average number of common and common equivalent shares outstanding during the
period. Common share equivalents included in the diluted computation represent
shares issuable upon assumed exercises of stock options using the treasury stock
method. Net income per share and weighted average shares outstanding for the
period ending December 31, 1996, have been restated in accordance with SFAS No.
128.
COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income
components which under GAAP bypass the income statement and are reported in the
balance sheet as a separate component of equity. For the three years ended
December 31, 1998, IHOP had no other comprehensive income components as defined
by GAAP. As a result, net income is the same as comprehensive income for the
three years ended December 31, 1998.
RECLASSIFICATION
Certain reclassifications have been made to prior year information to
conform to the current year presentation.
2. RECEIVABLES
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable............................................................. $ 18,813 $ 20,881
Notes receivable................................................................ 39,554 34,347
Equipment contracts receivable.................................................. 80,690 63,714
Direct financing leases receivable.............................................. 107,766 84,117
---------- ----------
246,823 203,059
Less allowance for doubtful accounts............................................ 1,206 602
---------- ----------
245,617 202,457
Less current portion............................................................ 28,461 30,490
---------- ----------
Long-term receivables........................................................... $ 217,156 $ 171,967
---------- ----------
---------- ----------
</TABLE>
Notes receivable include franchise fee notes due in five to eight years in
the amount of $37,129,000 and $32,022,000 at December 31, 1998 and 1997,
respectively. Franchise fee notes are due in equal weekly
25
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES (CONTINUED)
installments, primarily bear interest at 12.0% and are secured by the franchise.
The term of an equipment contract coincides with the term of the corresponding
restaurant building direct financing lease. Equipment contracts are due in equal
weekly installments, primarily bear interest at 11.0% and are secured by the
equipment. Where applicable, franchise fee notes, equipment contracts and direct
financing leases contain cross-default provisions wherein a default under one
constitutes a default under all. There is not a disproportionate concentration
of credit risk in any geographic area.
3. PROPERTY AND EQUIPMENT, AT COST
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................................ $ 19,397 $ 17,051
Buildings and improvements...................................................... 32,901 33,603
Leaseholds and improvements..................................................... 102,908 79,025
Equipment and fixtures.......................................................... 11,063 11,853
Construction in progress........................................................ 9,930 13,650
Properties under capital lease.................................................. 23,233 19,174
---------- ----------
199,432 174,356
Less accumulated depreciation and amortization.................................. 37,743 31,605
---------- ----------
Property and equipment, net..................................................... $ 161,689 $ 142,751
---------- ----------
---------- ----------
</TABLE>
Accumulated depreciation and amortization includes accumulated amortization
for properties under capital lease in the amount of $2,977,000 and $2,326,000 at
December 31, 1998 and 1997, respectively.
4. REACQUIRED FRANCHISES AND EQUIPMENT HELD FOR SALE
Reacquired franchises and equipment held for sale are accounted for on the
specific identification basis. At the date of reacquisition the franchise and
equipment are recorded at the lower of (1) the sum of the franchise receivables
and costs of reacquisition or (2) the estimated net realizable value. Pending
the sale of such franchise, the carrying value is amortized ratably over the
remaining life of the asset or lease and the estimated net realizable value is
reassessed each year.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Franchises........................................................................ $ 8,729 $ 8,596
Equipment......................................................................... 10,991 10,436
--------- ---------
19,720 19,032
Less amortization................................................................. 4,493 3,560
--------- ---------
15,227 15,472
Less current portion.............................................................. 2,284 2,321
--------- ---------
Long-term reacquired franchises and equipment held for sale, net.................. $ 12,943 $ 13,151
--------- ---------
--------- ---------
</TABLE>
26
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Senior notes due November 2008, payable in equal annual installments commencing
November 2000, interest at 7.42%................................................ $ 35,000 $ 35,000
Senior notes due November 2002, payable in equal annual installments commencing
November 1996, interest at 7.79%................................................ 18,286 22,858
Other............................................................................. 1,865 2,065
--------- ---------
Total debt........................................................................ 55,151 59,923
Less current maturities........................................................... 5,386 4,973
--------- ---------
Long-term debt.................................................................... $ 49,765 $ 54,950
--------- ---------
--------- ---------
</TABLE>
The senior notes due November 2008 and those due November 2002 are
unsecured.
IHOP has an unsecured $20 million revolving credit agreement with a bank
that was amended in June 1998 to extend the maturity date to June 2001.
Borrowings under the agreement bear interest at the bank's reference rate
(prime) or, at our option, at the bank's quoted rate or at a Eurodollar rate. A
commitment fee of 0.375% per annum is payable on unborrowed funds available
under the agreement. There were no borrowings outstanding under this agreement
at December 31, 1998 and 1997. The largest amount outstanding under the
agreement during 1998 was $12,000,000.
The senior note agreements and the bank revolving credit agreement contain
certain restrictions and conditions, the most restrictive of which limit
dividends and investments. At December 31, 1998, approximately $55 million of
retained earnings was free of restriction as to distribution as dividends.
The prime rate was 7.75% at December 31, 1998, and 8.50% at December 31,
1997.
IHOP's long-term debt maturities are as follows: 1999--$5,386,000;
2000--$8,872,000; 2001--$8,833,000; 2002--$8,717,000; 2003--$3,899,000; and
thereafter--$19,444,000.
6. LEASES
IHOP leases the majority of our restaurants with the exception of those
where a franchisee enters into a lease directly with a landlord and those
associated with area license agreements. The restaurants are subleased to
franchisees or operated by IHOP. These noncancelable leases and subleases
consist primarily of land and buildings and improvements.
Net investment in direct financing leases receivable is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Total minimum rents receivable.................................................. $ 365,386 $ 282,732
Less unearned income.......................................................... 257,620 198,615
---------- ----------
Net investment in direct financing leases receivable............................ 107,766 84,117
Less current portion.......................................................... 733 693
---------- ----------
Long-term direct financing leases receivable.................................... $ 107,033 $ 83,424
---------- ----------
---------- ----------
</TABLE>
27
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASES (CONTINUED)
Contingent rental income for the years ended December 31, 1998, 1997 and
1996, was $18,788,000, $14,812,000 and $13,901,000, respectively.
Minimum future lease payments on noncancelable leases at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
1999............................................................................ $ 15,656 $ 22,273
2000............................................................................ 15,801 21,533
2001............................................................................ 15,902 19,506
2002............................................................................ 16,042 18,449
2003............................................................................ 16,311 17,274
Thereafter...................................................................... 269,521 235,195
---------- ----------
Total minimum lease payments.................................................... 349,233 $ 334,230
----------
----------
Less interest................................................................... 217,983
----------
Capital lease obligations....................................................... 131,250
Less current portion............................................................ 1,388
----------
Long-term capital lease obligations............................................. $ 129,862
----------
----------
</TABLE>
The minimum future lease payments shown above have not been reduced by the
future minimum rents to be received on noncancelable subleases and leases of
owned property at December 31, 1998, as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING OPERATING
LEASES LEASES
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
1999............................................................................ $ 15,288 $ 21,629
2000............................................................................ 15,438 21,089
2001............................................................................ 15,560 20,337
2002............................................................................ 15,789 19,843
2003............................................................................ 15,979 19,616
Thereafter...................................................................... 287,332 315,330
---------- ----------
Total minimum rents receivable.................................................. $ 365,386 $ 417,844
---------- ----------
---------- ----------
</TABLE>
IHOP has noncancelable leases, expiring at various dates through 2048, that
require payment of contingent rents based upon a percentage of sales of the
related restaurant as well as property taxes, insurance and other charges.
Subleases to franchisees of properties under such leases are generally for the
full term of our lease obligation at rents that include our obligations for
property taxes, insurance, contingent rents and other charges. Generally, the
noncancelable leases include renewal options. Contingent rent expense for all
noncancelable leases for the years ended December 31, 1998, 1997 and 1996, was
$3,614,000, $3,385,000 and $3,161,000, respectively. Minimum rent expense for
all noncancelable operating leases for the years ended December 31, 1998, 1997
and 1996, was $21,334,000, $19,137,000 and $17,557,000, respectively.
28
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' EQUITY
The Stock Incentive Plan (the "Plan") was adopted in 1991 and amended and
restated in 1998 to authorize the issuance of up to 1,880,000 shares of common
stock pursuant to options, restricted stock, and other long-term stock-based
incentives to officers and key employees of IHOP. Except for substitute stock
options which were issued in 1991 pursuant to the cancellation of a stock
appreciation rights plan, no option can be granted at an option price of less
than 100% of fair market value at the date of grant. Exercisability of options
is determined at, or after, the date of grant by the administrator of the plan.
Substitute stock options issued in 1991 were immediately exercisable. All other
options granted under the Plan through December 31, 1998, become exercisable 1/3
after one year, 2/3 after two years and 100% after three years or immediately
upon change in control of IHOP, as defined by the Plan.
The Stock Option Plan for Non-Employee Directors (the "Directors Plan") was
adopted in 1994 to authorize the issuance of up to 200,000 shares of common
stock pursuant to options to non-employee members of IHOP's Board of Directors.
Options are to be granted at an option price equal to 100% of the fair market
value of the stock on the date of grant. Options granted pursuant to the
Directors Plan vest and become exercisable 1/3 after one year, 2/3 after two
years and 100% after three years. Options for the purchase of shares are granted
to each non-employee Director under the Directors Plan as follows: (1) 7,500 on
February 23, 1995, or on the Director's election to the Board of Directors if he
or she was not a Director on such date, and (2) 2,500 biennially in conjunction
with IHOP's Annual Meeting of Shareholders for that year.
The following summarizes stock option activity in IHOP's stock option plans
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES UNDER OPTION SHARES EXERCISE PRICE
- -------------------------------------------------------------------------- ---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995.......................................... 875,908 $ 22.24
Granted................................................................... 170,500 27.71
Exercised................................................................. (47,334) 12.55
Terminated................................................................ (50,129) 27.83
----------
Outstanding at December 31, 1996.......................................... 948,945 23.33
Granted................................................................... 214,000 27.16
Exercised................................................................. (186,427) 21.03
Terminated................................................................ (43,275) 27.03
----------
Outstanding at December 31, 1997.......................................... 933,243 24.45
Granted................................................................... 158,782 36.73
Exercised................................................................. (140,448) 22.98
Terminated................................................................ (11,999) 27.08
----------
Outstanding at December 31, 1998.......................................... 939,578 $ 26.71
---------- ------
---------- ------
Exercisable at December 31, 1998.......................................... 607,665 $ 23.99
---------- ------
---------- ------
</TABLE>
At December 31, 1998, the 939,578 outstanding shares under option have a
range of exercise prices from $10.00 to $35.88 and a weighted average
contractual life of 6.4 years.
29
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
There were 9,456 and 13,030 shares of restricted stock awarded in 1997 and
1995, respectively. No shares of restricted stock were awarded in 1998 and 1996.
At December 31, 1998, there were 6,304 shares of restricted stock outstanding.
IHOP has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." We will continue to use the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has been recognized for
the stock option plans. Had compensation cost for IHOP's stock option plans been
determined based on the fair value at the grant date for awards in the three
year period ending December 31, 1998, consistent with the provisions of SFAS No.
123, IHOP's net earnings and diluted earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net earnings, as reported.............................................. $ 26,111 $ 20,914 $ 18,604
Net earnings, pro forma................................................ 25,082 19,956 17,930
Earnings per share--diluted, as reported............................... 2.61 2.15 1.95
Earnings per share--diluted, pro forma................................. 2.50 2.05 1.88
Weighted average fair value of options granted......................... 36.73 27.16 27.71
</TABLE>
The fair value of each option grant issued in the three year period ending
December 31, 1998, is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate.................................................. 5.50% 6.25% 7.22%
Expected volatility...................................................... 37.0% 37.0% 37.0%
Dividend yield........................................................... -- -- --
Weighted average expected life........................................... 3 years 3 years 3 years
</TABLE>
8. INCOME TAXES
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes
Current
Federal...................................................................... $ 9,889 $ 8,806 $ 6,368
State and foreign............................................................ 1,867 1,608 1,338
--------- --------- ---------
11,756 10,414 7,706
--------- --------- ---------
Deferred
Federal...................................................................... 4,755 2,021 3,383
State........................................................................ 183 937 1,058
--------- --------- ---------
4,938 2,958 4,441
--------- --------- ---------
Provision for income taxes....................................................... $ 16,694 $ 13,372 $ 12,147
--------- --------- ---------
--------- --------- ---------
</TABLE>
30
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the expected federal income tax
rates as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate................................................ 35.0% 35.0% 35.0%
State and foreign income taxes, net of federal tax benefit....................... 4.0 4.0 4.2
Other, net....................................................................... -- -- 0.3
--------- --------- ---------
Effective tax rate............................................................... 39.0% 39.0% 39.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred tax liabilities (assets) consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Franchise and equipment sales, including differences in capitalization and revenue
recognition............................................................................... $ 48,550 $ 39,558
Property and equipment, including differences in capitalization and depreciation and
amortization.............................................................................. 8,589 8,025
Reacquired franchises and equipment held for resale, including differences in capitalization
and depreciation and amortization......................................................... (8,241) (6,148)
Direct financing leases and capital lease obligations, including differences in
capitalization and application of cash receipts and disbursements......................... (9,544) (8,067)
Federal tax benefit of net deferred state tax liability..................................... (1,849) (1,766)
Other net liabilities....................................................................... (237) 728
--------- ---------
Deferred tax liabilities.................................................................... $ 37,268 $ 32,330
--------- ---------
--------- ---------
</TABLE>
9. EMPLOYEE BENEFIT PLANS
In 1987 IHOP adopted a noncontributory Employee Stock Ownership Plan
("ESOP"). The ESOP is a stock bonus plan under Section 401(a) of the Internal
Revenue Code. The plan covers IHOP employees who meet the minimum credited
service requirements of the plan. Employees whose terms of service are covered
by a collective bargaining agreement are not eligible for the ESOP unless the
terms of such agreement specifically provide for participation in the ESOP.
The cost of the ESOP is borne by IHOP through contributions determined by
the Board of Directors in accordance with the ESOP provisions and Internal
Revenue Service regulations. The contributions to the plan for the years ended
December 31, 1998, 1997 and 1996, were $1,400,000, $1,300,000, and $1,250,000,
respectively. The contribution for the year ended December 31, 1998, will be
made in shares of IHOP Corp. common stock.
Shares of stock acquired by the ESOP are allocated to each eligible employee
and held by the ESOP. Upon the employee's termination after vesting, or in
certain other limited circumstances, the employee's shares are distributed to
the employee according to his or her direction.
31
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
IHOP is subject to various claims and legal actions that have arisen in the
ordinary course of business. We believe such claims and legal actions,
individually or in the aggregate, will not have a material adverse effect on the
business or financial condition of our company.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
IHOP does not hold or issue financial instruments for trading purposes, nor
are we a party to derivative transactions, interest rate swaps or other
transactions commonly utilized to manage interest rate or foreign currency risk.
The estimated fair values of all cash and cash equivalents, notes receivable
and equipment contracts receivable as of December 31, 1998 and 1997,
approximated their carrying amounts in the Consolidated Balance Sheets as of
those dates. The estimated fair values of notes receivable and equipment
contracts receivable are based on current interest rates offered for similar
loans in our present lending activities.
The estimated fair values of long-term debt are based on current rates
available to IHOP for similar debt of the same remaining maturities. The
carrying values of long-term debt at December 31, 1998 and 1997, were
$49,765,000 and $54,950,000, respectively, and the fair values at those dates
were $51,643,000 and $57,657,000, respectively.
12. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 131, "Disclosures about Segments of an Enterprise
and Related Information," which we have adopted in the current year.
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:
32
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
SALES OF CONSOLIDATING
FRANCHISE COMPANY FRANCHISES AND ADJUSTMENTS CONSOLIDATED
OPERATIONS OPERATIONS EQUIPMENT AND OTHER TOTAL
---------- ---------- -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenues from external customers.................. $146,092 $69,906 $40,347 $ (137) $256,208
Intercompany real estate charges (revenues)....... 5,893 826 -- (6,719) --
Depreciation & amortization....................... 3,200 3,690 -- 4,381 11,271
Operating income (loss)........................... 66,466 (2,046) 13,719 14,464 92,603
Field, corporate and administrative............... 32,381
Interest expense.................................. 17,417
Income before income taxes........................ 42,805
Additions to long lived assets.................... 39,912 3,484 1,443 28,425 73,264
Total assets...................................... 320,204 39,240 15,227 71,228 445,899
YEAR ENDED DECEMBER 31, 1997
Revenues from external customers.................. 124,043 61,839 28,864 (201) 214,545
Intercompany real estate charges (revenues)....... 4,903 865 -- (5,768) --
Depreciation & amortization....................... 2,701 3,221 -- 4,107 10,029
Operating income (loss)........................... 56,150 (1,682) 11,050 11,826 77,344
Field, corporate and administrative............... 28,409
Interest expense.................................. 14,649
Income before income taxes........................ 34,286
Additions to long lived assets.................... 35,203 3,778 1,917 20,706 61,604
Total assets...................................... 261,408 37,215 15,472 68,498 382,593
YEAR ENDED DECEMBER 31, 1996
Revenues from external customers.................. 110,795 53,677 25,573 (251) 189,794
Intercompany real estate charges (revenues)....... 3,033 541 -- (3,574) --
Depreciation & amortization....................... 2,337 2,599 -- 3,343 8,279
Operating income (loss)........................... 50,106 (1,203) 9,619 8,986 67,508
Field, corporate and administrative............... 25,066
Interest expense.................................. 11,691
Income before income taxes........................ 30,751
Additions to long lived assets.................... 19,377 6,726 339 31,056 57,498
Total assets...................................... 217,542 30,541 9,826 70,980 328,889
</TABLE>
Franchise Operations revenues from external customers includes interest
income from the financing of sales of franchises and equipment in the amounts of
$11,338,000, $9,233,000 and $7,895,000 for the three years ended December 31,
1998, 1997 and 1996. 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. These adjustments include interest income from direct
financing leases of restaurant buildings in the amounts of $13,191,000,
$10,120,000 and $8,176,000 for the three years ended December 31, 1998, 1997 and
1996. All of IHOP's owned land and restaurant buildings
33
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT REPORTING (CONTINUED)
are included in the total assets of the Consolidating Adjustments and Other
segment and are leased to the Franchise Operations and Company Operations
segments.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME PER NET INCOME PER
GROSS SHARE- SHARE-
REVENUES PROFIT NET INCOME BASIC(A) DILUTED(A)
--------- ----------- ----------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
1st Quarter...................................... $ 55,877 $ 19,599 $ 4,701 $ .48 $ .47
2nd Quarter...................................... 65,585 23,302 6,463 .66 .64
3rd Quarter...................................... 66,449 24,776 7,245 .74 .72
4th Quarter...................................... 69,176 25,730 7,702 .78 .77
1997
1st Quarter...................................... $ 46,441 $ 16,379 $ 3,550 $ .37 $ .37
2nd Quarter...................................... 51,574 19,192 5,038 .53 .52
3rd Quarter...................................... 56,312 20,536 5,733 .59 .58
4th Quarter...................................... 61,131 22,265 6,593 .68 .67
</TABLE>
- ------------------------
(a) The quarterly amounts may not add to the full year amount due to rounding.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
IHOP Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of IHOP Corp.
and its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of IHOP Corp.'s management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Los Angeles, California
February 12, 1999
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information appearing under the captions "Information Concerning Nominees
and Members of the Board of Directors," "Executive Officers of the Company" and
"Compliance with Section 16(a) of the Securities Exchange Act" contained in the
1999 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under the captions "Executive Compensation--Summary of
Compensation," "Executive Compensation--Stock Options and Stock Appreciation
Rights" and "Executive Officers of the Company--Employment Agreements" contained
in the 1999 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the 1999 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under the caption "Certain Relationships and Related
Transactions" contained in the 1999 Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The following documents are contained in Part II, Item 8 of this
Annual Report on Form 10-K:
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998.
Consolidated Statement of Shareholders' Equity for each of the
three years in the period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998.
Notes to the Consolidated Financial Statements.
Report of Independent Accountants.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
36
<PAGE>
<TABLE>
<C> <S>
(3) EXHIBITS
Exhibits not incorporated by reference are filed herewith. The
remainder of the exhibits have heretofore been filed with the
Securities and Exchange Commission and are incorporated herein by
reference. Management contracts or compensatory plans or
arrangements are marked with an asterisk.
</TABLE>
<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 "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.
4.1 Senior Note Purchase Agreement, dated as of November 19, 1992, among
IHOP Corp., International House of Pancakes, Inc. ("IHOP, Inc.") and
Mutual Life Insurance Company of New York and other purchasers.
Exhibit 4.1 to the 1997 Form 10-K is hereby incorporated by
reference.
4.2 First Amendment to Senior Note Purchase Agreement, dated as of
November 1, 1996, among IHOP Corp., IHOP Inc., and Mutual Life
Insurance Company of New York and other purchasers. Exhibit 4.2 to
IHOP Corp.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, (the "1996 Form 10-K") is hereby incorporated by
reference.
4.3 $10,000,000 Letter Agreement among IHOP, Inc., IHOP Corp. and
Continental Bank, N.A., dated as of June 30, 1993. Exhibit 4.3 to
the 1997 Form 10-K is hereby incorporated by reference.
4.4 First Amendment to Letter Agreement, dated as of December 31, 1994,
among IHOP, Inc., IHOP Corp. and Bank of America Illinois (successor
by merger to Continental Bank, N.A.). Exhibit 4.4 to the 1997 Form
10-K is hereby incorporated by reference.
4.5 Second Amendment to Letter Agreement, dated as of March 11, 1996,
among IHOP, Inc., IHOP Corp. and Bank of America Illinois. Exhibit
4.5 to the 1997 Form 10-K is hereby incorporated by reference.
4.6 Third Amendment to Letter Agreement, dated as of September 3, 1996,
among IHOP, Inc., IHOP Corp. and Bank of America Illinois. Exhibit
4.6 to the 1996 Form 10-K is hereby incorporated by reference.
4.7 Fourth Amendment to Letter Agreement, dated as of November 1, 1996,
among IHOP, Inc., IHOP Corp. and Bank of America Illinois. Exhibit
4.7 to the 1996 Form 10-K is hereby incorporated by reference.
4.8 Fifth Amendment to Letter Agreement dated as of June 30, 1998, among
IHOP Inc., IHOP Corp. and Bank of America National Trust and Savings
Association (successor by merger to Bank of America Illinois).
Exhibit 4.0 to IHOP Corp.'s Form 10-Q for the quarterly period ended
June 30, 1998, is hereby incorporated by reference.
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
4.9 Senior Note Purchase Agreement, dated as of November 1, 1996, among
IHOP, Inc., IHOP Corp. and Jackson National Life Insurance Company
and other purchasers. Exhibit 4.8 to the 1996 Form 10-K is hereby
incorporated by reference.
*10.1 IHOP Corp. Executive Incentive Plan effective January 1, 1999.
*10.2 IHOP Corp. 1991 Stock Incentive Plan as Amended and Restated
February 24, 1998. Annex "A" to the IHOP Corp. Proxy Statement for
the Annual Meeting of Shareholders held on May 12, 1998, is hereby
incorporated by reference.
*10.3 IHOP Corp. 1994 Stock Option Plan for Non-Employee Directors.
Exhibit 10.3 to the 1997 Form 10-K is hereby incorporated by
reference.
*10.4 Employment Agreement between IHOP Corp. and Rand Michael Ferris.
Exhibit 10.6 to the 1996 Form 10-K is hereby incorporated by
reference.
*10.5 Employment Agreement between IHOP Corp. and Susan Henderson-
Hernandez. Exhibit 10.7 to the 1996 Form 10-K is hereby incorporated
by reference.
*10.6 Employment Agreement between IHOP Corp. and Richard K. Herzer.
Exhibit 10.8 to the 1996 Form 10-K is hereby incorporated by
reference.
*10.7 Employment Agreement between IHOP Corp. and Dennis M. Leifheit.
Exhibit 10.9 to the 1996 Form 10-K is hereby incorporated by
reference.
*10.8 Employment Agreement between IHOP Corp. and Naomi K. Shively.
Exhibit 10.10 to the 1996 Form 10-K is hereby incorporated by
reference.
*10.9 Employment Agreement between IHOP Corp. and Frederick G. Silny.
Exhibit 10.11 to the 1996 Form 10-K is hereby incorporated by
reference.
*10.10 Employment Agreement between IHOP Corp. and Anna G. Ulvan. Exhibit
10.12 to the 1996 Form 10-K is hereby incorporated by reference.
*10.11 Employment Agreement between IHOP Corp. and Mark D. Weisberger.
Exhibit 10.13 to the 1996 Form 10-K is hereby incorporated by
reference.
*10.12 Employment Agreement between IHOP Corp. and Richard C. Celio.
Exhibit 10 to IHOP Corp.'s Form 10-Q for the quarterly period ended
March 31, 1997, is hereby incorporated by reference.
*10.13 Employment Agreement between IHOP Corp. and John Jordan. Exhibit
10.13 to the 1997 Form 10-K is hereby incorporated by reference.
10.14 Area Franchise Agreement, effective as of May 5, 1988, by and
between IHOP, Inc. and FMS Management Systems, Inc. Exhibit 10.14 to
the 1997 Form 10-K is hereby incorporated by reference.
*10.15 International House of Pancakes Employee Stock Ownership Plan as
Amended and Restated as of July 12, 1991 ("the ESOP"). Exhibit 10.15
to the 1997 Form 10-K is hereby incorporated by reference.
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
*10.16 Amendment No. 1 to the ESOP. Exhibit 10.16 to the 1997 Form 10-K is
hereby incorporated by reference.
*10.17 Amendment No. 2 to the ESOP. Exhibit 10.17 to the 1997 Form 10-K is
hereby incorporated by reference.
*10.18 Amendment No. 3 to the ESOP. Exhibit 10 to IHOP Corp.'s Form 10-Q
for the quarterly period ended September 30, 1996, is hereby
incorporated by reference.
*10.19 Amendment No. 4 to the ESOP. Exhibit 10 to IHOP Corp.'s Form 10-Q
for the quarterly period ended September 30, 1997, is hereby
incorporated by reference.
*10.20 Second Revised IHOP Corp. Executive Incentive Plan effective January
1, 1998.
11.0 Statement Regarding Computation of Per Share Earnings.
21.0 Subsidiaries of IHOP Corp. Exhibit 21.0 to the 1997 Form 10-K is
hereby incorporated by reference.
23.0 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for the Year Ended December 31,
1997.
27.3 Restated Financial Data Schedule for the Year Ended December 31,
1996.
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 3rd day of
March, 1999.
<TABLE>
<S> <C> <C>
IHOP CORP.
By: /s/ RICHARD K. HERZER
-----------------------------------------
Richard K. Herzer
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, in the capacities indicated, on this 3rd day of March, 1999.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ RICHARD K. HERZER
------------------------------------------- Chairman of the Board, President and Chief Executive
Richard K. Herzer Officer (Principal Executive Officer)
/s/ FREDERICK G. SILNY
------------------------------------------- Vice President-Finance and Treasurer (Principal
Frederick G. Silny Financial Officer)
/s/ GENE A. SCOTT
------------------------------------------- Controller (Principal Accounting Officer)
Gene A. Scott
/s/ H. FREDERICK CHRISTIE
------------------------------------------- Director
H. Frederick Christie
/s/ FRANK EDELSTEIN
------------------------------------------- Director
Frank Edelstein
/s/ MICHAEL S. GORDON
------------------------------------------- Director
Michael S. Gordon
/s/ NEVEN C. HULSEY
------------------------------------------- Director
Neven C. Hulsey
/s/ LARRY ALAN KAY
------------------------------------------- Director
Larry Alan Kay
/s/ DENNIS M. LEIFHEIT
------------------------------------------- Executive Vice President-Operations, Chief Operating
Dennis M. Leifheit Officer and Director
/s/ CAROLINE W. NAHAS
------------------------------------------- Director
Caroline W. Nahas
/s/ PATRICK W. ROSE
------------------------------------------- Director
Patrick W. Rose
</TABLE>
40
<PAGE>
EXHIBIT 10.1
IHOP CORP
EXECUTIVE INCENTIVE PLAN
1
<PAGE>
EFFECTIVE DATE
The Executive Incentive Plan is effective January 1, 1999, and supersedes all
previously implemented plans.
MODIFICATION OF THE PLAN
IHOP Corp. reserves the right to modify, terminate or make exceptions to the
Executive Incentive Plan at any time without prior notice. The Plan will be
reviewed on an annual basis allowing for updates or revisions to be considered.
The Plan and this Plan Document do not constitute or imply an employment
contract, and participants accrue no interest, right or any benefit in the Plan,
except as specifically set forth in this document.
ELIGIBILITY
The Plan includes the President, Vice Presidents and all director level reports
to the Vice Presidents or President, including legal counsels of IHOP Corp. and
its subsidiaries; except those otherwise covered by another plan. Any director
level employee not qualifying to the previous conditions may become eligible
with the written approval of the President. Participants must be actively
employed with IHOP Corp. and its subsidiaries through the plan year of the bonus
plan. The last day worked is the last day an employee is considered active. In
the case of termination, vacation or other payments can not be used to extend
the last day worked.
The incentive calculations are based on the position held at the end of the
fiscal year the incentive was earned, unless otherwise stated below.
NEW HIRES/RE-HIRES
New hires and re-hires eligible for the Plan will have the incentive amount
prorated based on the number of whole months worked in the fiscal year. If the
participant begins work on the first calendar or workday of the month, they will
be credited for a whole month worked. In the event an eligible employee is
terminated and re-hired in the same fiscal year, the re-hire date will be used
to determine the number of whole months to be prorated for the given year. Time
worked prior to re-hire will not be taken into consideration.
PROMOTIONS
Any employee promoted to an eligible position during the fiscal year will have
an incentive prorated based on the number of whole months in the fiscal year.
If the participant is promoted on the first calendar or workday of the month,
they will be credited for a whole month worked. The effective date of the
promotion will be used to determine the number of whole months worked.
DEMOTIONS
When an employee is demoted from one eligible position to another the incentive
will be calculated using the base pay at the end of the fiscal year. The
percentage multiplier will be derived from the factor that relates to the
specific job at the end of the fiscal year. Therefore, the calculations for the
incentive will be based on the attributes of the current job. There will be no
prorated incentives for individuals demoted during the fiscal year to an
eligible position.
JOB CHANGE TO A NON-ELIGIBLE POSITION
Any employee changing from an eligible position to a non-eligible position
during the fiscal year will have an incentive prorated based on the number of
whole months in the fiscal year. The effective date of the job change will be
used to determine the number of whole months worked. If the participant changed
positions on the first calendar or workday of the month, the previous month will
be used to determine the last whole month worked.
2
<PAGE>
SHORT-TERM OR LONG-TERM DISABILITY, WORKERS' COMPENSATION AND OTHER LEAVES OF
ABSENCE
Any participant on leave of absence or otherwise not actively working during the
fiscal year will have an incentive prorated excluding the period on leave. The
date the leave is effective and the date ending leave will be used to calculate
the number of whole months worked in the fiscal year. This incentive will only
be paid upon the employee returning to active duty.
TERMINATION DUE TO DEATH OR RETIREMENT
Any incentive earned will be prorated for the fiscal year earned and awarded
with the normal distribution of incentives. The incentive amount will be based
on the number of whole months worked in the fiscal year earned.
PLAN DESCRIPTION
The Executive Incentive Plan is an annual incentive based on the profitability
growth of IHOP Corp. and the achievement of specific individual business
objectives of the participants.
DETERMINING INCENTIVE
The incentive award is a percentage of base salary which is dependent on the
position of the participant (see "Bonus Allocation Table"). The Target Payout %
multiplied by the participants base salary on the last day of the fiscal year is
the Target Incentive in dollars. Any eligible participant that is not an
Officer will have an incentive based on the Directors Target Payout as a
percentage of Base Salary. The incentive weighting for the CEO is solely based
on Company Performance. The incentive weighting for Executive Vice President,
Vice Presidents, and Directors is 40% Individual Business Objectives and 60%
Company Performance. The incentive weighting for Division Vice Presidents is
30% Company Performance, 30% Division Performance, and 40% Individual Business
Objectives.
BONUS ALLOCATION TABLE
<TABLE>
<CAPTION>
EXECUTIVE
VICE VICE
CEO PRESIDENT PRESIDENTS DIRECTORS
--- --------- ---------- ---------
<S> <C> <C> <C> <C>
TARGET PAYOUT AS A
% OF BASE SALARY 60% 50% 35% 20%
</TABLE>
INCENTIVE PAYOUT CALCULATION
The incentive payout is based solely on performance, therefore no limiting
factors will be used in calculating the incentive. The Level of Performance is
always based on the last whole percentage actually achieved.
EXAMPLES OF INCENTIVE CALCULATIONS IN VARIOUS SCENARIOS ARE ATTACHED TO THE PLAN
DOCUMENT.
COMPANY PERFORMANCE The Company Performance is based on a comparison of the
actual profit before taxes, bonus and extraordinary items to the budgeted
figure for the Plan Year. To determine the Profit Achievement for the
organization divide the actual profit before taxes, bonus and extraordinary
items by the budgeted profit before taxes, bonus and extraordinary items.
Refer to the "Company/Division Payout Table" to determine the bonus achieved
for the Company portion of the incentive. The bonus achieved is multiplied
by the percentage weighting for the respective position (see "Determining
Incentive") and then multiplied by the individual's base salary to determine
the company portion of the payout.
3
<PAGE>
COMPANY/DIVISION PAYOUT TABLE
<TABLE>
<CAPTION>
ACTUAL PROFIT ACHIEVED % OF BONUS ACHIEVED
---------------------- -------------------
<S> <C>
Less than 90 % 0 %
90 % 75.0%
91 % 77.5%
92 % 80.0%
93 % 82.5%
94 % 85.0%
95 % 87.5%
96 % 90.0%
97 % 92.5%
98 % 95.0%
99 % 97.5%
100 % 100.0%
101 % 105.0%
102 % 110.0%
103 % 115.0%
104 % 120.0%
105 % 125.0%
106 % 130.0%
107 % 135.0%
108 % 140.0%
109 % 145.0%
110 % 150.0%
111 % 155.0%
112 % 160.0%
113 % 165.0%
114 % or more 170.0%
</TABLE>
DIVISION PERFORMANCE
The Division Performance is based on the comparison of actual division profit to
the flex budget for the Plan Year. To determine the Profit Achievement for the
division, divide the actual profit by the flex budget profit. Refer to the
"Company/Division Payout Table" to determine the bonus achieved for the Division
portion of the incentive. The bonus achieved is multiplied by the percentage
weighting for the respective position (see "Determining Incentive") and then
multiplied by the individual's base salary to determine the company portion of
the payout.
INDIVIDUAL BUSINESS OBJECTIVES
Annually, each eligible participant in the plan sets individual business
objectives in conjunction with his or her immediate supervisor in December of
each year. During this process challenging, measurable objectives that
significantly impact the Company business objectives are to be mutually
determined.
4
<PAGE>
After the fiscal year, a percentage of Achievement is then established by the
immediate supervisor and approved by the CEO. This percentage of Achievement is
multiplied by the percentage weighting for the respective position (see
"Determining Incentive") and then multiplied by the individual's base salary to
determine the individual portion of the payout.
In addition to the calculated individual portion of the incentive, an award may
be granted at the discretion of the President to individuals exceeding expected
levels of performance.
PAYMENT DISTRIBUTION
Incentive payouts will be distributed as soon as possible following the closing
of the fiscal year. Payouts will be paid in a separate check from the regular
payroll check, and is subject to normal withholding deductions.
PLAN ADMINISTRATION
The Executive Incentive plan is administered by the IHOP Human Resources
Department. This Plan Document and its provisions regulate all plan guidelines
and participant eligibility. Any special circumstances must be submitted in
writing to the Human Resources Department and approved by the President at the
time of the exception.
5
<PAGE>
INCENTIVE CALCULATION SCENARIOS
6
<PAGE>
EXAMPLE #1: LOW INDIVIDUAL ACHIEVER & LOW COMPANY
Assume a Vice President has a Base Salary of $170,000.
INDIVIDUAL COMPONENT
- --------------------
The Individual Performance was reviewed and found 1 out of 4 goals were
achieved. Assuming each goal was weighted equally, the Individual Component
is 25%. Assume the Profit Achievement for the fiscal year was 95% of the
Target Amount.
COMPANY COMPONENT
- -----------------
Profit Before Taxes, Bonus and Extraordinary Items for the year is 95% of the
Target Amount. Therefore, the Bonus Achieved is 87.5% for the Company
Component (see "Company/Division Payout Table" on page 4 of the Plan).
STEP # 1 -- TARGET PAYOUT
- --------------------------
Base Salary * Target Payout % = Target Payout
$170,000 * (35%) = $59,500
STEP # 2 -- INDIVIDUAL PAYOUT
- ----------------------------
Individual * Weighted as 40% = Individual Payout
Component of Target Payout
25% * (40% * $59,500) = $5,950
STEP # 3 -- COMPANY PAYOUT
- -------------------------
Company * Weighted as 60% = Company Target
Component of Target
87.5% * (60% * $59,500) = $31,237.50
STEP # 4 -- INCENTIVE PAYOUT
- ---------------------------
Individual Payout + Company Payout = Incentive Payout
$5,950 + $31,237.50 = $37,187.50
7
<PAGE>
EXAMPLE #2: HIGH INDIVIDUAL ACHIEVER & HIGH COMPANY
Assume a Vice President has a Base Salary of $170,000.
INDIVIDUAL COMPONENT
- --------------------
The Individual Performance was reviewed and found 4 out of 4 goals were
achieved. Assuming each goal was weighted equally, the Individual Component
is 100%. Assume the Profit Achievement for the fiscal year was 108% of the
Target Amount.
COMPANY COMPONENT
- -----------------
Profit Before Taxes, Bonus and Extraordinary Items for the year is 108% of
the Target Amount. Therefore, the Bonus Achieved is 140% for the Company
Component (see "Company/Division Payout Table" on page 4 of the Plan).
STEP # 1 -- TARGET PAYOUT
Base Salary * Target Payout % = Target Payout
$170,000 * (35%) = $59,500
STEP # 2 -- INDIVIDUAL PAYOUT
- -----------------------------
Individual * Weighted as 40% = Individual Payout
Component of Target Payout
100% * (40% * $59,500) = $23,800
STEP # 3 -- COMPANY PAYOUT
- -------------------------
Company * Weighted as 60% = Company Target
Component of Target
140% * (60% * $59,500) = $49,980
STEP # 4 -- INCENTIVE PAYOUT
- ---------------------------
Individual Payout + Company Payout = Incentive Payout
$23,800 + $49,980 = $73,780
8
<PAGE>
EXHIBIT 10.20
IHOP CORP
EXECUTIVE INCENTIVE PLAN
1
<PAGE>
EFFECTIVE DATE
The Executive Incentive Plan is effective January 1, 1998, and supersedes all
previously implemented plans.
MODIFICATION OF THE PLAN
IHOP CORP reserves the right to modify, terminate or make exceptions to the
Executive Incentive Plan at any time without prior notice. The Plan will be
reviewed on an annual basis allowing for updates or revisions to be considered.
The Plan and this Plan Document do not constitute or imply an employment
contract, and participants accrue no interest, right or any benefit in the Plan,
except as specifically set forth in this document.
ELIGIBILITY
The Plan includes the President, Vice Presidents and all director level reports
to the Vice Presidents or President, including legal counsels of the IHOP
Corporation and its subsidiaries; except those otherwise covered by another
plan. Any director level employee not qualifying to the previous conditions may
become eligible with the written approval of the President. Participants must
be actively employed with IHOP Corp. and its subsidiaries through the plan year
of the bonus plan. The last day worked is the last day an employee is
considered active. In the case of termination, vacation or other payments can
not be used to extend the last day worked.
The incentive calculations are based on the position held at the end of the
fiscal year the incentive was earned, unless otherwise stated below.
NEW HIRES/RE-HIRES
New hires and re-hires eligible for the Plan will have the incentive amount
prorated based on the number of whole months worked in the fiscal year. If the
participant begins work on the first calendar or workday of the month, they will
be credited for a whole month worked. In the event an eligible employee is
terminated and re-hired in the same fiscal year, the re-hire date will be used
to determine the number of whole months to be prorated for the given year. For
re-hired participants, incentive will not consider any time worked prior to the
re-hire date.
PROMOTIONS
Any employee promoted to an eligible position during the fiscal year will have
an incentive prorated based on the number of whole months in the fiscal year.
If the participant is promoted on the first calendar or workday of the month,
they will be credited for a whole month worked. The effective date of the
promotion will be used to determine the number of whole months worked.
DEMOTIONS
When an employee is demoted from one eligible position to another the incentive
will be calculated using the base pay at the end of the fiscal year. The
percentage multiplier will be derived from the factor that relates to the
specific job at the end of the fiscal year. Therefore, the calculations for the
incentive will be based on the attributes of the current job. There will be no
prorated incentives for individuals demoted during the fiscal year to an
eligible position.
JOB CHANGE TO A NON-ELIGIBLE POSITION
Any employee changing from an eligible position to a non-eligible position
during the fiscal year will have an incentive prorated based on the number of
whole months in the fiscal year. The effective date of the job change will be
used to determine the number of whole months worked. If the participant changed
positions on the first calendar or workday of the month, the previous month will
be used to determine the last whole month worked.
2
<PAGE>
SHORT-TERM OR LONG-TERM DISABILITY, WORKERS' COMPENSATION AND OTHER LEAVES OF
ABSENCE
Any participant on leave of absence, or otherwise not actively working during
the fiscal year will have an incentive prorated excluding the period on leave.
The date the leave is effective and the date ending leave will be used to
calculate the number of whole months worked in the fiscal year. This incentive
will only be paid upon the employees returning to active duty.
TERMINATION DUE TO DEATH OR RETIREMENT
Any incentive earned will be prorated for the fiscal year earned and awarded
with the normal distribution of incentives. The incentive amount will be based
on the number of whole months worked in the fiscal year earned.
PLAN DESCRIPTION
The Executive Incentive Plan is an annual incentive based on the profitability
growth of IHOP Corp. and on the achievement of specific individual business
objectives of the participants.
DETERMINING INCENTIVE
The incentive award is a percentage of base salary which is dependent on the
position of the participant (see "Bonus Allocation Table"). The Target Payout %
multiplied by the participants base salary on the last day of the fiscal year is
the Target Incentive in dollars. Any eligible participant that is not an
Officer will have an incentive based on the Directors Target Payout as a
percentage of Base Salary. The incentive weighting for the CEO is solely based
on Company Performance. The incentive weighting for Executive Vice President,
Vice Presidents, and Directors is 40% Individual Business Objectives and 60%
Company Performance. The incentive weighting for Division Vice Presidents is
30% Company Performance, 30% Division Performance, and 40% Individual Business
Objectives.
BONUS ALLOCATION TABLE
<TABLE>
<CAPTION>
EXECUTIVE
VICE VICE
CEO PRESIDENT PRESIDENTS DIRECTORS
--- --------- ---------- ---------
<S> <C> <C> <C> <C>
TARGET PAYOUT AS A
% OF BASE SALARY 60% 50% 35% 20%
</TABLE>
INCENTIVE PAYOUT CALCULATION
The incentive payout is based solely on performance, therefore no limiting
factors will be used in calculating the incentive. The Level of Performance is
always based on the last whole percentage actually achieved.
EXAMPLES OF INCENTIVE CALCULATIONS IN VARIOUS SCENARIOS ARE ATTACHED TO THE PLAN
DOCUMENT.
COMPANY PERFORMANCE
The Company Performance is based on a comparison of the actual profit before
taxes and extraordinary items to the budgeted figure for the Plan Year. To
determine the Profit Achievement for the organization divide the actual profit
before taxes, bonus and extraordinary items by the budgeted profit before taxes,
bonus and extraordinary items. Refer to the "Company Payout Table" to determine
the bonus achieved for Company portion of the incentive. The bonus achieved is
multiplied by the percentage weighting for the respective position (see
"Determining Incentive") and then multiplied by the individual's base salary to
determine the company portion of the payout.
3
<PAGE>
COMPANY/DIVISION PAYOUT TABLE
<TABLE>
<CAPTION>
ACTUAL PROFIT ACHIEVED % OF BONUS ACHIEVED
---------------------- -------------------
<S> <C>
Less than 90 % 0 %
90 % 75.0%
91 % 77.5%
92 % 80.0%
93 % 82.5%
94 % 85.0%
95 % 87.5%
96 % 90.0%
97 % 92.5%
98 % 95.0%
99 % 97.5%
100 % 100.0%
101 % 105.0%
102 % 110.0%
103 % 115.0%
104 % 120.0%
105 % 125.0%
106 % 130.0%
107 % 135.0%
108 % 140.0%
109 % 145.0%
110 % 150.0%
111 % 155.0%
112 % 160.0%
113 % 165.0%
114 % or more 170.0%
</TABLE>
DIVISION PERFORMANCE
The Division Performance is based on the comparison of actual division profit to
the flex budget for the Plan Year. To determine the Profit Achievement for the
division, divide the actual profit by the flex budget profit. Refer to the
"Company/Division Payout Table" to determine the bonus achieved for the Division
portion of the incentive. The bonus achieved is multiplied by the percentage
weighting for the respective position (see "Determining Incentive") and then
multiplied by the individual's base salary to determine the company portion of
the payout.
INDIVIDUAL BUSINESS OBJECTIVES
Annually, each eligible participant in the plan sets individual business
objectives in conjunction with his or her immediate supervisor in December of
each year. During this process challenging, measurable objectives that
significantly impact the Company business objectives are to be mutually
determined.
4
<PAGE>
After the fiscal year, a percentage of Achievement is then established by the
immediate supervisor and approved by the CEO. This percentage of Achievement is
multiplied by the percentage weighting for the respective position (see
"Determining Incentive") and then multiplied by the individual's base salary to
determine the individual portion of the payout.
In addition to the calculated individual portion of the incentive, an award may
be granted at the discretion of the President to individuals exceeding expected
levels of performance.
PAYMENT DISTRIBUTION
Incentive payouts will be distributed as soon as possible following the closing
of the fiscal year. Payouts will be paid in a separate check from the regular
payroll check, and is subject to normal withholding deductions.
PLAN ADMINISTRATION
The Executive Incentive plan is administered by the IHOP Human Resources
Department. This Plan Document and its provisions regulate all plan guidelines
and participant eligibility. Any special circumstances must be submitted in
writing to the Human Resources Department and approved by the President at the
time of the exception.
5
<PAGE>
INCENTIVE CALCULATION SCENARIOS
6
<PAGE>
EXAMPLE #1: LOW INDIVIDUAL ACHIEVER & LOW COMPANY
Assume a Vice President has a Base Salary of $170,000.
INDIVIDUAL COMPONENT
- --------------------
The Individual Performance was reviewed and found 1 out of 4 goals were
achieved. Assuming each goal was weighted equally, the Individual Component
is 25%. Assume the EPS growth for the fiscal year was 11%.
COMPANY COMPONENT
- -----------------
Profit Before Taxes and Extraordinary Items for the year is 95% of the Target
Amount. Therefore, the Bonus Achieved is 87.5% for the Company Component (see
"Company Payout Table" on page 4 of the Plan).
STEP # 1 -- TARGET PAYOUT
- --------------------------
Base Salary * Target Payout % = Target Payout
$170,000 * (35%) = $59,500
STEP # 2 -- INDIVIDUAL PAYOUT
- -----------------------------
Individual * Weighted as 40% = Individual Payout
Component of Target Payout
25% * (40% * $59,500) = $5,950
STEP # 3 -- COMPANY PAYOUT
- --------------------------
Company * Weighted as 60% = Company Target
Component of Target
87.5% * (60% * $59,500) = $31,237.50
STEP # 4 -- INCENTIVE PAYOUT
- ----------------------------
Individual Payout + Company Payout = Incentive Payout
$5,950 + $31,237.50 = $37,187.50
7
<PAGE>
EXAMPLE #2: HIGH INDIVIDUAL ACHIEVER & HIGH COMPANY
Assume a Vice President has a Base Salary of $170,000.
INDIVIDUAL COMPONENT
- --------------------
The Individual Performance was reviewed and found 4 out of 4 goals were
achieved. Assuming each goal was weighted equally, the Individual Component
is 100%. Assume the EPS growth for the fiscal year was 17%.
COMPANY COMPONENT
- -----------------
Profit Before Taxes and Extraordinary Items for the year is 108% of the
Target Amount. Therefore, the Bonus Achieved is 140% for the Company
Component (see "Company Payout Table" on page 4 of the Plan).
STEP # 1 -- TARGET PAYOUT
- --------------------------
Base Salary * Target Payout % = Target Payout
$170,000 * (35%) = $59,500
STEP # 2 -- INDIVIDUAL PAYOUT
- -----------------------------
Individual * Weighted as 40% = Individual Payout
Component of Target Payout
100% * (40% * $59,500) = $23,800
STEP # 3 -- COMPANY PAYOUT
- --------------------------
Company * Weighted as 60% = Company Target
Component of Target
140% * (60% * $59,500) = $49,980
STEP # 4 -- INCENTIVE PAYOUT
- ----------------------------
Individual Payout + Company Payout = Incentive Payout
$23,800 + $49,980 = $73,780
8
<PAGE>
EXHIBIT 11.0
IHOP CORP. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
NET INCOME PER SHARE - BASIC
Weighted average common shares outstanding 9,829 9,596 9,444
------- ------- -------
------- ------- -------
Net income available to common shareholders $26,111 $20,914 $18,604
------- ------- -------
------- ------- -------
Net income per share - basic $ 2.66 $ 2.18 $ 1.97
------- ------- -------
------- ------- -------
NET INCOME PER SHARE - DILUTED
Weighted average common shares outstanding 9,829 9,596 9,444
Net effect of dilutive stock options
based on the treasury stock method
using the average market price 187 147 79
------- ------- -------
Total 10,016 9,743 9,523
------- ------- -------
------- ------- -------
Net income available to common shareholders $26,111 $20,914 $18,604
------- ------- -------
------- ------- -------
Net income per share - diluted $ 2.61 $ 2.15 $ 1.95
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
EXHIBIT 23.0
[LETTERHEAD OF PRICEWATERHOUSECOOPERS]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of IHOP Corp. and Subsidiaries on Form S-8 (File No. 33-46361) of our report
dated February 12, 1999, on our audits of the consolidated financial statements
of IHOP Corp. and Subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, which report is included
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 3, 1999
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,577
<SECURITIES> 0
<RECEIVABLES> 28,461
<ALLOWANCES> 0
<INVENTORY> 1,222
<CURRENT-ASSETS> 40,818
<PP&E> 161,689
<DEPRECIATION> 0
<TOTAL-ASSETS> 445,899
<CURRENT-LIABILITIES> 43,249
<BONDS> 180,074
0
0
<COMMON> 99
<OTHER-SE> 187,769
<TOTAL-LIABILITY-AND-EQUITY> 445,899
<SALES> 110,253
<TOTAL-REVENUES> 256,208
<CGS> 92,339
<TOTAL-COSTS> 150,878
<OTHER-EXPENSES> 11,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,417
<INCOME-PRETAX> 42,805
<INCOME-TAX> 16,694
<INCOME-CONTINUING> 26,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,111
<EPS-PRIMARY> 2.66<F1>
<EPS-DILUTED> 2.61
<FN>
<F1> REPRESENTS BASIC EARNINGS PER SHARE
</FN>
</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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,964
<SECURITIES> 0
<RECEIVABLES> 30,490
<ALLOWANCES> 0
<INVENTORY> 1,378
<CURRENT-ASSETS> 40,782
<PP&E> 142,751
<DEPRECIATION> 0
<TOTAL-ASSETS> 382,593
<CURRENT-LIABILITIES> 39,326
<BONDS> 158,221
0
0
<COMMON> 97
<OTHER-SE> 156,087
<TOTAL-LIABILITY-AND-EQUITY> 382,593
<SALES> 90,703
<TOTAL-REVENUES> 214,545
<CGS> 75,815
<TOTAL-COSTS> 126,952
<OTHER-EXPENSES> 10,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,649
<INCOME-PRETAX> 34,286
<INCOME-TAX> 13,372
<INCOME-CONTINUING> 20,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,914
<EPS-PRIMARY> 2.18<F1>
<EPS-DILUTED> 2.15
<FN>
<F1>REPRESENTS BASIC EARNINGS PER SHARE
CERTAIN RECLASSIFICATIONS HAVE BEEN MADE TO PRIOR YEAR INFORMATION TO CONFORM
TO THE CURRENT YEAR PRESENTATION.
</FN>
</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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,658
<SECURITIES> 0
<RECEIVABLES> 29,324
<ALLOWANCES> 0
<INVENTORY> 1,180
<CURRENT-ASSETS> 41,312
<PP&E> 120,854
<DEPRECIATION> 0
<TOTAL-ASSETS> 328,889
<CURRENT-LIABILITIES> 35,084
<BONDS> 139,387
0
0
<COMMON> 95
<OTHER-SE> 129,262
<TOTAL-LIABILITY-AND-EQUITY> 328,889
<SALES> 79,250
<TOTAL-REVENUES> 189,794
<CGS> 66,806
<TOTAL-COSTS> 114,589
<OTHER-EXPENSES> 8,279
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,691
<INCOME-PRETAX> 30,751
<INCOME-TAX> 12,147
<INCOME-CONTINUING> 18,604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,604
<EPS-PRIMARY> 1.97<F1>
<EPS-DILUTED> 1.95
<FN>
<F1>REPRESENTS BASIC EARNINGS PER SHARE
CERTAIN RELASSIFICATIONS HAVE BEEN MADE TO PRIOR YEAR INFORMATION TO CONFORM TO
THE CURRENT YEAR PRESENTATION.
</FN>
</TABLE>
