<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-8360
------------------------
IHOP CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3038279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
525 NORTH BRAND BOULEVARD, GLENDALE, CALIFORNIA 91203-1903
(Address of principal executive offices) (Zip Code)
(818) 240-6055
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF SEPTEMBER 30, 1999
----- ------------------------------------
<S> <C>
Common Stock, $.01 par value 20,110,647
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 10,215 $ 8,577
Receivables............................................... 29,135 28,461
Reacquired franchises and equipment held for sale, net.... 2,662 2,284
Inventories............................................... 1,238 1,222
Prepaid expenses.......................................... 4,032 274
-------- --------
Total current assets.................................... 47,282 40,818
-------- --------
Long-term receivables....................................... 237,535 217,156
Property and equipment, net................................. 185,594 161,689
Reacquired franchises and equipment held for sale, net...... 15,085 12,943
Excess of costs over net assets acquired, net............... 11,732 12,054
Other assets................................................ 1,100 1,239
-------- --------
Total assets............................................ $498,328 $445,899
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 5,498 $ 5,386
Accounts payable.......................................... 19,933 22,589
Accrued employee compensation and benefits................ 7,316 6,017
Other accrued expenses.................................... 7,971 5,309
Deferred income taxes..................................... 3,486 2,560
Capital lease obligations................................. 1,550 1,388
-------- --------
Total current liabilities............................... 45,754 43,249
-------- --------
Long-term debt.............................................. 49,740 49,765
Deferred income taxes....................................... 38,019 34,708
Capital lease obligations and other......................... 147,903 130,309
Shareholders' equity
Preferred stock, $1 par value, 10,000,000 shares
authorized; none issued................................... -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; shares issued and outstanding:
September 30, 1999, 20,110,647 shares; December 31,
1998, 19,763,160 shares (net of 9,240 treasury
shares)................................................. 202 199
Additional paid-in capital (net of treasury shares at
cost: 1998, $154)......................................... 66,379 60,100
Retained earnings......................................... 149,247 126,169
Contribution to ESOP...................................... 1,084 1,400
-------- --------
Total shareholders' equity.............................. 216,912 187,868
-------- --------
Total liabilities and shareholders' equity.............. $498,328 $445,899
======== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
1
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Franchise operations
Rent.............................................. $11,457 $ 9,964 $ 33,899 $ 28,428
Service fees and other............................ 30,176 26,836 87,605 77,066
------- ------- -------- --------
41,633 36,800 121,504 105,494
Sale of franchises and equipment.................... 12,114 12,649 27,052 28,725
Company operations.................................. 18,271 16,855 52,298 52,891
------- ------- -------- --------
Total revenues.................................. 72,018 66,304 200,854 187,110
------- ------- -------- --------
Costs and Expenses
Franchise operations
Rent.............................................. 5,939 4,885 17,533 14,523
Other direct costs................................ 10,234 9,799 30,884 27,939
------- ------- -------- --------
16,173 14,684 48,417 42,462
Cost of sales of franchises and equipment........... 7,586 7,778 16,674 18,060
Company operations.................................. 17,366 15,941 49,573 49,598
Field, corporate and administrative................. 8,848 7,963 26,010 23,794
Depreciation and amortization....................... 3,153 2,891 9,245 8,397
Interest............................................ 4,869 4,460 13,715 12,676
Other (income) and expense, net..................... (29) 710 (307) 1,944
------- ------- -------- --------
Total costs and expenses........................ 57,966 54,427 163,327 156,931
------- ------- -------- --------
Income before income taxes............................ 14,052 11,877 37,527 30,179
Provision for income taxes............................ 5,411 4,632 14,449 11,770
------- ------- -------- --------
Net income...................................... $ 8,641 $ 7,245 $ 23,078 $ 18,409
======= ======= ======== ========
Net Income Per Share
Basic............................................... $ 0.43 $ 0.37 $ 1.16 $ 0.94
======= ======= ======== ========
Diluted............................................. $ 0.42 $ 0.36 $ 1.13 $ 0.92
======= ======= ======== ========
Weighted Average Shares Outstanding
Basic............................................... 20,068 19,710 19,940 19,628
======= ======= ======== ========
Diluted............................................. 20,496 20,103 20,364 20,009
======= ======= ======== ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
2
<PAGE>
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 23,078 $ 18,409
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation and amortization........................... 9,245 8,397
Deferred taxes.......................................... 4,237 3,066
Contribution to ESOP.................................... 1,084 969
Change in current assets and liabilities
Accounts receivable................................... 774 2,493
Inventories........................................... (16) 58
Prepaid expenses...................................... (3,758) 418
Accounts payable...................................... (2,656) (3,586)
Accrued employee compensation and benefits............ 1,299 1,056
Other accrued expenses................................ 2,662 3,634
Other, net.............................................. 269 4,680
-------- --------
Cash provided by operating activities............... 36,218 39,594
-------- --------
Cash flows from investing activities
Additions to property and equipment....................... (54,269) (57,012)
Proceeds from sale and leaseback arrangements............. 17,684 11,684
Additions to notes, equipment contracts and direct
financing leases receivable............................... (9,414) (9,588)
Principal receipts from notes, equipment contracts and
direct financing leases receivable...................... 8,174 7,149
Additions to reacquired franchises held for sale.......... (929) (1,289)
-------- --------
Cash used by investing activities................... (38,754) (49,056)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt.................. 3,372 6,535
Repayment of long-term debt............................... (3,285) (3,341)
Principal payments on capital lease obligations........... (795) (526)
Exercise of stock options................................. 4,882 3,452
-------- --------
Cash provided by financing activities............... 4,174 6,120
-------- --------
Net change in cash and cash equivalents..................... 1,638 (3,342)
Cash and cash equivalents at beginning of period............ 8,577 5,964
-------- --------
Cash and cash equivalents at end of period.......... $ 10,215 $ 2,622
======== ========
Supplemental disclosures
Interest paid, net of capitalized amounts................. $ 12,536 $ 11,373
Income taxes paid......................................... 10,315 7,598
Capital lease obligations incurred........................ 19,865 18,017
</TABLE>
See the accompanying notes to the consolidated financial statements.
3
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL--The accompanying, unaudited, consolidated financial statements
for the three months and nine months ended September 30, 1999 and 1998, have
been prepared in accordance with generally accepted accounting principles
("GAAP"). These financial statements have not been audited by independent public
accountants but include all adjustments, consisting of normal, recurring
accruals, which in the opinion of management of IHOP Corp. and Subsidiaries
("IHOP") are necessary for a fair statement of the financial position and the
results of operations for the periods presented. The accompanying consolidated
balance sheet as of December 31, 1998, has been derived from audited financial
statements, but does not include all disclosures required by GAAP. The results
of operations for the three months and nine months ended September 30, 1999, are
not necessarily indicative of the results to be expected for the full year
ending December 31, 1999.
2. STOCK SPLIT--On April 29, 1999, IHOP Corp.'s Board of Directors
authorized a 2-for-1 split of IHOP's common stock effective May 27, 1999, in the
form of a stock dividend for stockholders of record at the close of business on
May 13, 1999. All share, per-share retained earnings, and common stock amounts
in the accompanying consolidated financial statements have been restated to give
effect to the stock split.
3. SEGMENTS--IHOP identifies its operating segments based on the
organizational units used by management to monitor performance and make
operating decisions. The Franchise Operations segment includes restaurants
operated by franchisees and area licensees in the United States, Canada and
Japan. The Company Operations segment includes company-operated restaurants in
the United States. We measure segment profit as operating income, which is
defined as income before field, corporate and administrative expense, interest
expense, and income taxes. Information on segments and a reconciliation to
income before income taxes are as follows:
<TABLE>
<CAPTION>
SALES OF CONSOLIDATING
FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED
OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL
---------- ---------- ------------- ------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers......... $ 41,618 $18,271 $12,114 $ 15 $ 72,018
Intercompany real estate charges
(revenues) 1,502 167 -- (1,669) --
Depreciation and amortization............ 917 1,001 -- 1,235 3,153
Operating income (loss).................. 19,331 (770) 4,528 4,680 27,769
Field, corporate and administrative...... 8,848
Interest expense......................... 4,869
Income before income taxes............... 14,052
Additions to long-lived assets........... 8,915 1,837 79 5,150 15,981
Total assets............................. 351,616 49,938 17,747 79,027 498,328
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers......... 36,838 16,855 12,649 (38) 66,304
Intercompany real estate charges
(revenues)............................. 1,575 205 -- (1,780) --
Depreciation and amortization............ 837 910 -- 1,144 2,891
Operating income (loss).................. 16,635 (642) 4,871 3,436 24,300
Field, corporate and administrative...... 7,963
Interest expense......................... 4,460
Income before income taxes............... 11,877
Additions to long-lived assets........... 12,594 -- 638 7,668 20,900
Total assets............................. 301,528 40,926 17,577 69,321 429,352
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SALES OF CONSOLIDATING
FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED
OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL
---------- ---------- ------------- ------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers......... $121,532 $52,298 $27,052 $ (28) $200,854
Intercompany real estate charges
(revenues)............................. 4,320 422 -- (4,742) --
Depreciation and amortization............ 2,808 2,930 -- 3,507 9,245
Operating income (loss).................. 55,724 (2,118) 10,378 13,268 77,252
Field, corporate and administrative...... 26,010
Interest expense......................... 13,715
Income before income taxes............... 37,527
Additions to long-lived assets........... 35,606 4,119 929 14,544 55,198
Total assets............................. 351,616 49,938 17,747 79,027 498,328
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers......... 105,617 52,891 28,725 (123) 187,110
Intercompany real estate charges
(revenues)............................. 4,156 714 -- (4,870) --
Depreciation and amortization............ 2,348 2,798 -- 3,251 8,397
Operating income (loss).................. 47,964 (1,490) 10,665 9,510 66,649
Field, corporate and administrative...... 23,794
Interest expense......................... 12,676
Income before income taxes............... 30,179
Additions to long-lived assets........... 33,484 3,484 1,289 20,044 58,301
Total assets............................. 301,528 40,926 17,577 69,321 429,352
</TABLE>
For management reporting purposes, we treat all restaurant lease revenues
and expenses as operating lease revenues and expenses, although most of these
leases are direct financing leases (revenues) or capital leases (expenses). The
accounting adjustments required to bring lease revenues and expenses into
conformance with GAAP are included in the Consolidated Adjustments and Other
segment. All of IHOP's owned land and restaurant buildings are included in the
total assets of the Consolidating Adjustments and Other segment and are leased
to the Franchise Operations and Company Operations segments.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operating data for IHOP restaurants:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Restaurant Data
Effective restaurants(a)
Franchise................................ 644 589 630 576
Company.................................. 75 72 73 74
Area license............................. 149 146 147 145
-------- -------- -------- --------
Total.................................. 868 807 850 795
======== ======== ======== ========
System-wide
Sales(b)................................... $289,644 $261,159 $837,740 $758,917
Percent increase......................... 10.9% 12.2 % 10.4 % 13.2 %
Average sales per effective restaurant..... $ 334 $ 324 $ 986 $ 955
Percent increase......................... 3.1% 4.2 % 3.2 % 5.2 %
Comparable average sales per
restaurant(c)............................ $ 351 $ 338 $ 1,031 $ 993
Percent increase......................... 0.6% 1.3 % 1.1 % 2.7 %
Franchise
Sales...................................... $236,994 $211,568 $684,067 $604,808
Percent increase......................... 12.0% 15.2 % 13.1 % 15.0 %
Average sales per effective restaurant..... $ 368 $ 359 $ 1,086 $ 1,050
Percent increase......................... 2.5% 5.6 % 3.4 % 7.0 %
Comparable average sales per
restaurant(c)............................ $ 363 $ 349 $ 1,067 $ 1,026
Percent increase......................... 0.5% 1.4 % 1.0 % 2.9 %
Company
Sales...................................... $ 18,271 $ 16,855 $ 52,298 $ 52,891
Percent change........................... 8.4% 5.0 % (1.1)% 17.8 %
Average sales per effective restaurant..... $ 244 $ 234 $ 716 $ 715
Percent change........................... 4.3% (2.5)% 0.1 % 0.3 %
Area License
Sales...................................... $ 34,379 $ 32,736 $101,375 $101,218
Percent change........................... 5.0% (0.5)% 0.2 % 1.9 %
Average sales per effective restaurant..... $ 231 $ 224 $ 690 $ 698
Percent change........................... 3.1% (3.9)% (1.1)% (2.2)%
</TABLE>
- ------------------------
(a) "Effective restaurants" are the number of restaurants in a given fiscal
period adjusted to account for restaurants open only a portion of the
period.
(b) "System-wide sales" are retail sales of franchisees, area licensees and
company-operated restaurants as reported to IHOP.
(c) "Comparable average sales" reflects sales for restaurants that are operated
for the entire fiscal period in which they are being compared. Comparable
average sales do not include data on restaurants located in Florida and
Japan.
6
<PAGE>
The following table summarizes IHOP's restaurant development and franchising
activity:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
RESTAURANT DEVELOPMENT ACTIVITY
IHOP--beginning of period................................... 864 804 835 787
New openings
IHOP-developed.......................................... 18 18 45 40
Investor and conversion programs........................ 1 3 5 9
Area license............................................ 1 - 4 2
--- --- --- ---
Total new openings........................................ 20 21 54 51
Closings
Company and franchise................................... (1) (6) (6) (18)
Area license............................................ - - - (1)
--- --- --- ---
IHOP--end of period......................................... 883 819 883 819
=== === === ===
Summary--end of period
Franchise................................................. 660 603 660 603
Company................................................... 74 70 74 70
Area license.............................................. 149 146 149 146
--- --- --- ---
Total IHOP.............................................. 883 819 883 819
=== === === ===
RESTAURANT FRANCHISING ACTIVITY
IHOP-developed.............................................. 18 20 42 44
Investor and conversion programs............................ 1 3 5 9
Rehabilitated and refranchised.............................. 3 3 4 6
--- --- --- ---
Total restaurants franchised.............................. 22 26 51 59
Reacquired by IHOP.......................................... (2) (5) (10) (14)
Closed...................................................... - (4) (5) (13)
--- --- --- ---
Net addition.............................................. 20 17 36 32
=== === === ===
</TABLE>
- --------------------------
GENERAL
The following discussion and analysis provides information we believe is
relevant to an assessment and understanding of IHOP's consolidated results of
operations and financial condition. The discussion should be read in conjunction
with the consolidated financial statements and notes thereto contained in IHOP's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Certain
forward-looking statements are contained in this quarterly report. They use such
words as "may," "will," "expect," "believe," "plan," or other similar
terminology. These statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results to be materially different than
those expressed or implied in such statements. These factors include, but are
not limited to: availability of suitable locations and terms of the sites
designated for development; legislation and government regulation including the
ability to obtain satisfactory regulatory approvals; conditions beyond IHOP's
control such as weather or natural disasters; availability and cost of materials
and labor; cost and availability of capital; competition; continuing acceptance
of the International House of Pancakes brand and concept by guests and
franchisees; IHOP's overall marketing, operational and financial performance;
IHOP's ability to mitigate the impact of the year 2000 issue successfully;
economic and political conditions; adoption of new, or changes in, accounting
policies and practices; and other factors discussed from time to time in our
filings with the Securities and Exchange Commission. Forward-looking information
is provided by us pursuant to the safe harbor established under the Private
Securities Litigation Reform Act of 1995 and should be evaluated in the context
of these factors. In addition, we disclaim any intent or obligation to update
these forward-looking statements.
7
<PAGE>
Our quarterly results are subject to seasonal fluctuation. The mix and
number of restaurants franchised affect revenues from sales of franchises and
equipment and their associated costs of sales. We franchise four kinds of
restaurants: restaurants newly developed by IHOP, restaurants developed by
franchisees, restaurants developed by area licensees and restaurants that have
been previously reacquired from franchisees. Franchise rights for restaurants
newly developed by IHOP normally sell for a franchise fee of $200,000 to
$350,000, have little if any franchise cost of sales and have equipment in
excess of $300,000 that is usually sold at a price that includes little or no
profit margin. Franchise rights for restaurants developed by franchisees
normally sell for a franchise fee of $50,000, have minor associated franchise
cost of sales and do not include an equipment sale. Area license rights are
normally granted in return for a one-time development fee that is recognized
ratably as restaurants are developed in the area. Previously reacquired
franchises normally sell for a franchise fee of $100,000 to $300,000, include an
equipment sale, and may have substantial costs of sales associated with both the
franchise and the equipment. The timing of sales of franchises is affected by
the timing of new restaurant openings and the number of restaurants in our
inventory of restaurants that are available for refranchising. As a consequence
of the foregoing factors, the results of operations for the nine months ended
September 30, 1999, are not necessarily indicative of the results to be expected
for the full year ending December 31, 1999.
SYSTEM-WIDE RETAIL SALES
System-wide retail sales include the sales of all IHOP restaurants as
reported to IHOP by its franchisees, area licensees and company-operated
restaurants. System-wide retail sales grew $28,485,000 or 10.9% in the third
quarter of 1999 and $78,823,000 or 10.4% in the first nine months of 1999.
Growth in the number of effective restaurants and increases in average per unit
sales caused the growth in system-wide sales. "Effective restaurants" are the
number of restaurants in operation in a given fiscal period adjusted to account
for restaurants in operation for only a portion of the period. Effective
restaurants grew by 61 or 7.6% in the third quarter of 1999 and by 55 or 6.9% in
the first nine months of 1999 due to new restaurant development. Newly developed
restaurants generally have seating and sales above the system-wide averages.
System-wide comparable average sales per restaurant (exclusive of area license
restaurants in Florida and Japan) grew 0.6% in the third quarter of 1999 and
1.1% in the first nine months of 1999. Management continues to pursue growth in
sales through new restaurant development, advertising and marketing efforts,
improvements in customer service and operations, and remodeling of existing
restaurants.
FRANCHISE OPERATIONS
Franchise operations revenues are the revenues received by IHOP from its
franchisees and include rent, royalties, sales of proprietary products,
advertising fees and interest. Franchise operations revenues were 57.8% of total
revenues in the third quarter of 1999 and 60.5% of total revenues in the first
nine months of 1999. Franchise operations revenues grew $4,833,000 or 13.1% in
the third quarter of 1999 and $16,010,000 or 15.2% in the first nine months of
1999. An increase in the number of effective franchise restaurants coupled with
higher average sales per franchise restaurant caused the growth in franchise
operations revenues. Effective franchise restaurants grew by 55 or 9.3% in the
third quarter of 1999 and by 54 or 9.4% in the first nine months of 1999.
Average sales per franchise restaurant grew 2.5% in the third quarter of 1999
and 3.4% in the first nine months of 1999.
Franchise operations costs and expenses include rent, advertising, the cost
of sales of proprietary products and other direct costs associated with
franchise operations. Franchise operations costs and expenses increased
$1,489,000 or 10.1% in the third quarter of 1999 and $5,955,000 or 14.0% in the
first nine months of 1999. Increases in franchise operations costs were
generally in line with the growth in franchise operations revenue. A reduction
in the number of IHOP-owned restaurant properties due to sale and leaseback
arrangements completed in the second quarter of 1999 caused an increase in rent
expense in the third quarter of 1999.
8
<PAGE>
Franchise operations margin is equal to franchise operations revenues less
franchise operations costs and expenses. Franchise operations margin increased
$3,344,000 to $25,460,000 in the third quarter of 1999 and $10,055,000 to
$73,087,000 in the first nine months of 1999. Franchise operations margin was
61.2% and 60.2% of franchise operations revenues in the third quarter and first
nine months of 1999 compared with 60.1% and 59.7% in the same periods in the
prior year. Increased interest income associated with IHOP's financing of sales
of franchises and equipment to its franchisees was primarily responsible for the
improvement in franchise operations margin in 1999.
SALES OF FRANCHISES AND EQUIPMENT
Sales of franchises and equipment were 16.8% of total revenues in the third
quarter of 1999 and 13.5% of total revenues in the first nine months of 1999.
Sales of franchises and equipment declined $535,000 or 4.2% in the third quarter
of 1999 and $1,673,000 or 5.8% in the first nine months of 1999. A decrease in
the number of restaurants franchised was the primary cause of the decline in
sales of franchises and equipment. IHOP franchised 22 and 51 restaurants in the
third quarter and first nine months of 1999 compared with 26 and 59 in the same
periods in the prior year.
Cost of sales of franchises and equipment declined $192,000 or 2.5% in the
third quarter of 1999 and $1,386,000 or 7.7% in the first nine months of 1999.
The decline was generally in line with the decrease in the number of restaurants
franchised, although the mix of restaurants franchised also impacted the cost of
sales.
Margin on sales of franchises and equipment is equal to sales of franchises
and equipment less the cost of sales of franchises and equipment. Margin on
sales of franchises and equipment decreased $343,000 to $4,528,000 in the third
quarter of 1999 and decreased $287,000 to $10,378,000 in the first nine months
of 1999. Margin on sales of franchises and equipment was 37.4% and 38.4% in the
third quarter and first nine months of 1999 compared with 38.5% and 37.1% in the
same periods in the prior year. The change in margin was primarily due to the
mix of restaurants franchised in the respective periods.
COMPANY OPERATIONS
Company operations revenues are sales to customers at restaurants operated
by IHOP. Company operations revenues were 25.4% of total revenues in the third
quarter of 1999 and 26.0% of total revenues in the first nine months of 1999.
Company operations revenues increased $1,416,000 or 8.4% in the third quarter of
1999 and decreased $593,000 or 1.1% in the first nine months of 1999. Changes in
the number of effective IHOP operated restaurants were primarily responsible for
the changes in revenues. Effective IHOP operated restaurants increased by three
or 4.2% in the third quarter of 1999 and decreased by one or 1.4% in the first
nine months of 1999. Average sales per IHOP operated restaurant increased by
4.3% in the third quarter of 1999 and by 0.1% in the first nine months of 1999.
Company operations costs and expenses include food, labor and benefits,
utilities and occupancy costs. Company operations costs increased $1,425,000 or
8.9% in the third quarter of 1999 and decreased $25,000 or 0.1% in the first
nine months of 1999. IHOP experienced slight increases in the costs of food,
labor and benefits as a percentage of company operations revenues in the third
quarter and first nine months of 1999.
Company operations margin is equal to company operations revenues less
company operations costs and expenses. Company operations margin declined $9,000
to $905,000 in the third quarter of 1999 and $568,000 to $2,725,000 in the first
nine months of 1999. Company operations margin was 5.0% and 5.2% of company
operations revenues in the third quarter and first nine months of 1999 compared
with 5.4% and 6.2% in the same periods in the prior year.
9
<PAGE>
OTHER COSTS AND EXPENSES AND BALANCE SHEET ACCOUNTS
Field, corporate and administrative costs and expenses increased $885,000 or
11.1% and $2,216,000 or 9.3% in the third quarter and first nine months of 1999
compared with the same periods in the prior year. The increases were primarily
caused by normal increases in salaries and wages and the addition of employees
to support our growth. Field, corporate and administrative costs were 3.1% of
system-wide sales in both the third quarter and first nine months of 1999
compared with 3.0% and 3.1% in the same periods in the prior year.
Depreciation and amortization expense increased $262,000 or 9.1% and
$848,000 or 10.1% in the third quarter and first nine months of 1999. The
increases were caused primarily by the addition of new restaurants to the IHOP
chain from our ongoing restaurant development program.
Interest expense increased $409,000 or 9.2% and $1,039,000 or 8.2% in the
third quarter and first nine months of 1999. The increases were due to interest
associated with capital leases which were partially offset by reductions in
interest on our senior notes due 2002 as the principal balance is paid down.
The balance of long-term receivables at September 30, 1999, increased over
that of the prior year end primarily due to IHOP's financing activities
associated with the sale of franchises and equipment and the leasing of
restaurants to its franchisees.
The net balance of long-term reacquired franchises and equipment held for
sale at September 30, 1999, increased over that of the prior year end primarily
due to the reacquisition of ten restaurants during the first nine months of
1999. The increase was partially offset by the refranchising of four restaurants
in the same period.
Balances of property and equipment, net and capital lease obligations at
September 30, 1999, increased over those of the prior year end primarily due to
new restaurant development and IHOP's capital lease obligations associated with
that 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.
In 1999 IHOP and its franchisees and area licensees forecast developing and
opening approximately 70 to 80 restaurants. Included in that number are the
development of 60 to 65 new restaurants by us and the development of 10 to 15
restaurants by our franchisees and area licensees. This forecast differs from
earlier projections due to a decrease by ten in the number of restaurants
projected to be developed and opened by our franchisees and area licensees.
Capital expenditure projections for 1999, which include our portion of the above
development program, are approximately $75 to $85 million. In November 1999 the
fourth annual installment of $4.6 million in principal becomes due on our senior
notes due 2002. We expect that funds from operations, sale and leaseback
arrangements (estimated to be about $30 to $35 million) and our $20 million
revolving line of credit will be sufficient to cover our operating requirements,
our budgeted capital expenditures and our principal repayment on our senior
notes in 1999. At September 30, 1999, $20 million was available to be borrowed
under our unsecured bank revolving credit agreement. In June 1999 IHOP's
unsecured bank revolving credit agreement was extended by one year, through June
30, 2002, under similar terms and conditions.
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
10
<PAGE>
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. This software
was upgraded to the latest release in 1999. 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
later informed us that the systems were not Year 2000 compliant. Our vendor
agreed to supply, free of charge to all sites under software maintenance
contracts, software upgrades to make our franchise and company operated POS
systems Year 2000 compliant. The software upgrade is available to sites not
under software maintenance contracts at a cost of $1,000 per site. In some older
POS systems, upgraded hardware will be necessary to run the new versions of the
software. Costs to upgrade or replace existing hardware range from $500 to
$5,000 per POS system for these older systems. Costs to be incurred in
company-operated restaurants are included in IHOP's estimated future remediation
and testing costs discussed below. We expect to have substantially all of our
POS systems Year 2000 compliant before December 31, 1999, however, IHOP
franchisees are independent operators and some franchisees may choose to not
upgrade their systems. As of October 27, 1999, upgraded software has been
shipped to approximately 90% of the sites using this POS equipment.
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 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 developed plans in conjunction with a major IT consulting company to
independently test all of our IT and non-IT systems to ensure that they are Year
2000 compliant. We completed the testing phase for all significant systems by
September 30, 1999, and all systems tested as Year 2000 compliant except for
certain POS systems, as discussed above.
IHOP's most significant third-party business partners consist of restaurant
food and supplies vendors who serve the IHOP chain. An inventory of our
significant third-party partners has been completed and letters mailed
requesting information regarding each party's Year 2000 compliance status. We
received responses from all of these vendors indicating that the vendor is now
or will be Year 2000 compliant prior to January 1, 2000.
Information received from our primary bank indicates that the bank will be
Year 2000 compliant prior to January 1, 2000.
A Year 2000 information package has been sent to all franchisees. It
explains the Year 2000 issue and associated business risks and provides
information to assist the franchisees in assessing and remediating their Year
2000 risks. Additional mailings to franchisees have been made as IHOP learns of
new Year 2000 related facts. 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 $100,000 or less, although these costs could
increase substantially if remediation of restaurant operating equipment becomes
necessary.
11
<PAGE>
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 has made diligent efforts to assess the Year 2000 readiness of our
significant business partners and have developed 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 margin on franchise operations in the
first nine months of 1999 was 60.2%.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits not incorporated by reference are filed herewith. The remainder of
the exhibits have heretofore been filed with the Commission and are incorporated
herein by reference.
3.1 Certificate of Incorporation of IHOP Corp. Exhibit 3.1 to IHOP Corp.'s
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 IHOP Corp.'s 1997 Form 10-K is hereby
incorporated by reference.
11.0 Statement Regarding Computation of Per Share Earnings.
27.0 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IHOP CORP.
(Registrant)
<TABLE>
<S> <C> <C>
October 28, 1999 BY: /s/ RICHARD K. HERZER
-------------- ------------------------------------------
(Date) CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
October 28, 1999 BY: /s/ GENE A. SCOTT
-------------- ------------------------------------------
(Date) CONTROLLER, ACTING CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
14
<PAGE>
EXHIBIT 11.0
IHOP CORP. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE
EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1999 1998 1999 1998
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE-BASIC
Weighted average shares outstanding....................... 20,068 19,710 19,940 19,628
======= ======= ======= =======
Net income available to common shareholders............... $ 8,641 $ 7,245 $23,078 $18,409
======= ======= ======= =======
Net income per share-basic................................ $ 0.43 $ 0.37 $ 1.16 $ 0.94
======= ======= ======= =======
NET INCOME PER COMMON SHARE-DILUTED
Weighted average shares outstanding....................... 20,068 19,710 19,940 19,628
Net effect of dilutive stock options based on the
treasury stock method using the average market price...... 428 393 424 381
------- ------- ------- -------
Total................................................. 20,496 20,103 20,364 20,009
======= ======= ======= =======
Net income available to common shareholders............... $ 8,641 $ 7,245 $23,078 $18,409
======= ======= ======= =======
Net income per share-diluted.............................. $ 0.42 $ 0.36 $ 1.13 $ 0.92
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF IHOP CORP. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,215
<SECURITIES> 0
<RECEIVABLES> 29,135
<ALLOWANCES> 0
<INVENTORY> 1,238
<CURRENT-ASSETS> 47,282
<PP&E> 185,594
<DEPRECIATION> 0
<TOTAL-ASSETS> 498,328
<CURRENT-LIABILITIES> 45,754
<BONDS> 197,643
0
0
<COMMON> 202
<OTHER-SE> 216,710
<TOTAL-LIABILITY-AND-EQUITY> 498,328
<SALES> 79,350
<TOTAL-REVENUES> 200,854
<CGS> 66,247
<TOTAL-COSTS> 114,664
<OTHER-EXPENSES> 9,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,715
<INCOME-PRETAX> 37,527
<INCOME-TAX> 14,449
<INCOME-CONTINUING> 23,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,078
<EPS-BASIC> 1.16<F1>
<EPS-DILUTED> 1.13
<FN>
<F1>REPRESENTS BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
