<PAGE>
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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 JUNE 30, 2000
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 JUNE 30, 2000
----- -------------------------------
<S> <C>
Common Stock, $.01 par value 20,000,342
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 164 $ 4,176
Receivables............................................... 30,974 35,335
Reacquired franchises and equipment held for sale, net.... 2,869 2,842
Inventories............................................... 790 1,223
Prepaid expenses.......................................... 4,340 4,309
-------- --------
Total current assets.................................... 39,137 47,885
-------- --------
Long-term receivables....................................... 269,071 265,983
Property and equipment, net................................. 197,517 177,743
Reacquired franchises and equipment held for sale, net...... 16,260 16,102
Excess of costs over net assets acquired, net............... 11,411 11,625
Other assets................................................ 1,026 1,064
-------- --------
Total assets............................................ $534,422 $520,402
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 8,956 $ 8,956
Accounts payable.......................................... 16,400 18,016
Accrued employee compensation and benefits................ 5,842 7,804
Other accrued expenses.................................... 8,231 5,896
Deferred income taxes..................................... 3,609 3,833
Capital lease obligations................................. 1,812 1,682
-------- --------
Total current liabilities............................... 44,850 46,187
-------- --------
Long-term debt.............................................. 40,935 41,218
Deferred income taxes....................................... 42,365 39,768
Capital lease obligations and other......................... 166,667 166,749
Shareholders' equity
Preferred stock, $1 par value, 10,000,000 shares
authorized; none issued................................. -- --
Common stock, $.01 par value, 40,000,000 shares authorized
(June 30, 2000, 20,167,314 shares issued and 20,000,342
shares outstanding; December 31, 1999, 20,117,314
shares issued and 20,117,314 shares outstanding)........ 201 201
Additional paid-in capital................................ 67,407 66,485
Retained earnings......................................... 173,817 158,294
Treasury stock, at cost (June 30, 2000, 166,972 shares;
December 31, 1999, none).............................. (2,580) --
Contribution to ESOP........................................ 760 1,500
-------- --------
Total shareholders' equity.............................. 239,605 226,480
-------- --------
Total liabilities and shareholders' equity.............. $534,422 $520,402
======== ========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Franchise operations
Rent.............................................. $12,697 $11,390 $ 24,418 $ 22,442
Service fees and other............................ 32,525 28,877 65,461 57,429
------- ------- -------- --------
45,222 40,267 89,879 79,871
Sale of franchises and equipment.................... 8,425 9,227 14,402 14,938
Company operations.................................. 16,657 18,020 34,429 34,027
------- ------- -------- --------
Total revenues.................................. 70,304 67,514 138,710 128,836
------- ------- -------- --------
Costs and Expenses
Franchise operations
Rent.............................................. 6,814 5,922 13,105 11,594
Other direct costs................................ 10,945 10,230 22,366 20,650
------- ------- -------- --------
17,759 16,152 35,471 32,244
Cost of sales of franchises and equipment........... 5,459 5,343 9,741 9,088
Company operations.................................. 15,938 17,024 32,858 32,207
Field, corporate and administrative................. 9,546 8,855 17,809 17,162
Depreciation and amortization....................... 3,338 3,076 6,652 6,092
Interest............................................ 5,221 4,389 10,821 8,846
Other (income) and expense, net..................... (443) (93) 117 (278)
------- ------- -------- --------
Total costs and expenses........................ 56,818 54,746 113,469 105,361
------- ------- -------- --------
Income before income taxes............................ 13,486 12,768 25,241 23,475
Provision for income taxes............................ 5,192 4,916 9,718 9,038
------- ------- -------- --------
Net income...................................... $ 8,294 $ 7,852 $ 15,523 $ 14,437
======= ======= ======== ========
Net Income Per Share
Basic............................................... $ 0.41 $ 0.39 $ 0.78 $ 0.73
======= ======= ======== ========
Diluted............................................. $ 0.41 $ 0.39 $ 0.77 $ 0.71
======= ======= ======== ========
Weighted Average Shares Outstanding
Basic............................................... 19,988 19,935 20,026 19,876
======= ======= ======== ========
Diluted............................................. 20,202 20,385 20,223 20,297
======= ======= ======== ========
</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>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 15,523 $ 14,437
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation and amortization............................. 6,652 6,092
Deferred taxes............................................ 2,373 1,821
Contribution to ESOP...................................... 760 667
Change in current assets and liabilities
Accounts receivable..................................... 4,095 3,766
Inventories............................................. 433 (6)
Prepaid expenses........................................ (31) (150)
Accounts payable........................................ (1,616) (4,203)
Accrued employee compensation and benefits.............. (1,962) (136)
Other accrued expenses.................................. 2,335 33
Other, net................................................ 778 (184)
-------- --------
Cash provided by operating activities................. 29,340 22,075
-------- --------
Cash flows from investing activities
Additions to property and equipment....................... (37,473) (38,367)
Additions to notes........................................ (4,344) (5,377)
Principal receipts from notes and equipment contracts
receivable.............................................. 6,172 5,584
Additions to reacquired franchises held for sale.......... (698) (850)
-------- --------
Cash used by investing activities....................... (36,343) (39,010)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt, including
revolving line of credit................................ 4,700 3,372
Proceeds from sale and lease back arrangements............ 7,056 12,482
Repayment of long-term debt, including revolving line of
credit.................................................. (4,983) (3,151)
Principal payments on capital lease obligations........... (624) (543)
Treasury stock transactions............................... (4,041) 154
Exercise of stock options................................. 883 2,327
-------- --------
Cash provided by financing activities................... 2,991 14,641
-------- --------
Net change in cash and cash equivalents..................... (4,012) (2,294)
Cash and cash equivalents at beginning of period............ 4,176 2,294
-------- --------
Cash and cash equivalents at end of period.............. $ 164 $ 62
======== ========
Supplemental disclosures
Interest paid, net of capitalized amounts................. $ 10,711 $ 8,740
Income taxes paid......................................... 7,052 5,785
Capital lease obligations incurred........................ 461 21,945
</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 six months ended June 30, 2000 and 1999, 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, 1999, 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 six months ended June 30, 2000, are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2000.
2. Certain reclassifications have been made to prior year information to
conform to the current year presentation.
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 JUNE 30, 2000
Revenues from external customers... $ 45,222 $16,657 $ 8,425 $ -- $ 70,304
Intercompany real estate charges
(revenues)....................... 1,662 144 -- (1,806) --
Depreciation and amortization...... 1,059 965 -- 1,314 3,338
Operating income (loss)............ 20,564 (948) 2,966 5,671 28,253
Field, corporate and
administrative................... 9,546
Interest expense................... 5,221
Income before income taxes......... 13,486
Additions to long-lived assets..... 12,433 3,381 215 5,886 21,915
Total assets....................... 393,427 47,221 19,129 74,645 534,422
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers... $ 40,267 $18,020 $ 9,227 $ -- $ 67,514
Intercompany real estate charges
(revenues)....................... 1,393 144 -- (1,537) --
Depreciation and amortization...... 932 1,013 -- 1,131 3,076
Operating income (loss)............ 18,524 (667) 3,884 4,271 26,012
Field, corporate and
administrative................... 8,855
Interest expense................... 4,389
Income before income taxes......... 12,768
Additions to long-lived assets..... 20,181 1,002 195 4,709 26,087
Total assets....................... 341,313 45,250 18,191 63,716 468,470
</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>
SIX MONTHS ENDED JUNE 30, 2000
Revenues from external customers... $ 89,879 $34,429 $14,402 $ -- $138,710
Intercompany real estate charges
(revenues)....................... 3,157 315 -- (3,472) --
Depreciation and amortization...... 2,067 2,022 -- 2,563 6,652
Operating income (loss)............ 40,588 (1,901) 4,661 10,523 53,871
Field, corporate and
administrative................... 17,809
Interest expense................... 10,821
Income before income taxes......... 25,241
Additions to long-lived assets..... 25,488 4,500 698 7,485 38,171
Total assets....................... 393,427 47,221 19,129 74,645 534,422
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers... $ 79,871 $34,027 $14,938 $ -- $128,836
Intercompany real estate charges
(revenues)....................... 2,818 255 -- (3,073) --
Depreciation and amortization...... 1,891 1,929 -- 2,272 6,092
Operating income (loss)............ 36,393 (1,348) 5,850 8,588 49,483
Field, corporate and
administrative................... 17,162
Interest expense................... 8,846
Income before income taxes......... 23,475
Additions to long-lived assets..... 26,691 2,282 850 9,394 39,217
Total assets....................... 341,313 45,250 18,191 63,716 468,470
</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 or capital lease obligations. The accounting
adjustments required to bring lease revenues and expenses into conformance with
GAAP are included in the Consolidating Adjustments and Other. All of IHOP's
owned land and restaurant buildings are included in total assets in
Consolidating Adjustments and Other.
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Restaurant Data
Effective restaurants(a)
Franchise................................ 690 625 684 622
Company.................................. 71 75 74 72
Area license............................. 150 146 149 145
-------- -------- -------- --------
Total.................................. 911 846 907 839
======== ======== ======== ========
System-wide
Sales(b)................................... $308,663 $278,463 $607,485 $548,096
Percent increase......................... 10.8 % 11.2 % 10.8 % 10.1 %
Average sales per effective restaurant..... $ 339 $ 329 $ 670 $ 653
Percent increase......................... 3.0 % 4.4 % 2.6 % 3.5 %
Comparable average sales per
restaurant(c)............................ $ 355 $ 344 $ 699 $ 679
Percent increase......................... 0.6 % 1.7 % 0.2 % 0.8 %
Franchise
Sales...................................... $255,459 $227,277 $499,556 $447,073
Percent increase......................... 12.4 % 14.4 % 11.7 % 13.7 %
Average sales per effective restaurant..... $ 370 $ 364 $ 730 $ 719
Percent increase......................... 1.6 % 4.9 % 1.5 % 4.1 %
Comparable average sales per
restaurant(c)............................ $ 367 $ 356 $ 724 $ 701
Percent increase......................... 0.8 % 1.7 % 0.5 % 0.8 %
Company
Sales...................................... $ 16,657 $ 18,020 $ 34,429 $ 34,027
Percent change........................... (7.6)% (1.8)% 1.2 % (5.6)%
Average sales per effective restaurant..... $ 235 $ 240 $ 465 $ 473
Percent change........................... (2.1)% (0.4)% (1.7)% (1.5)%
Area License
Sales...................................... $ 36,547 $ 33,166 $ 73,500 $ 66,996
Percent change........................... 10.2 % (0.4)% 9.7 % (2.2)%
Average sales per effective restaurant....... $ 244 $ 227 $ 493 $ 462
Percent change........................... 7.5 % (0.4)% 6.7 % (2.1)%
</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. The
restaurants included in the calculations typically will be different from
period to period. 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
RESTAURANT DEVELOPMENT ACTIVITY
IHOP--beginning of period................................... 909 844 903 835
New openings
IHOP-developed.......................................... 15 17 22 27
Investor and conversion programs........................ 2 2 3 4
Area license............................................ 4 3 4 3
--- --- --- ---
Total new openings.................................... 21 22 29 34
Closings
Company and franchise................................. (7) (2) (8) (5)
Area license.......................................... -- -- (1) --
--- --- --- ---
IHOP--end of period......................................... 923 864 923 864
=== === === ===
Summary--end of period
Franchise................................................. 697 640 697 640
Company................................................... 74 76 74 76
Area license.............................................. 152 148 152 148
--- --- --- ---
Total IHOP.............................................. 923 864 923 864
=== === === ===
RESTAURANT FRANCHISING ACTIVITY
IHOP-developed.............................................. 12 15 20 24
Investor and conversion programs............................ 2 2 3 4
Rehabilitated and refranchised.............................. 2 1 5 1
--- --- --- ---
Total restaurants franchised.............................. 16 18 28 29
Reacquired by IHOP.......................................... (3) (2) (6) (8)
Closed...................................................... (2) (2) (3) (5)
--- --- --- ---
Net addition.............................................. 11 14 19 16
=== === === ===
</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, 1999. 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;
economic and political conditions; adoption of new, or changes in, accounting
policies and practices; and other factors discussed
7
<PAGE>
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.
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, and have little if any associated cost of sales. Equipment for newly
developed IHOP restaurants generally sells for approximately $300,000 and has
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 occasionally 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 $350,000,
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, the condition of reacquired
franchise locations and the availability of qualified franchisees. The timing of
new restaurant openings is affected by a variety of real estate construction
issues including obtaining regulatory approvals and weather conditions. As a
consequence of the foregoing factors, the results of operations for the six
months ended June 30, 2000, are not necessarily indicative of the results to be
expected for the full year ending December 31, 2000.
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 $30,200,000 or 10.8% in the second
quarter of 2000 and $59,389,000 or 10.8% in the first six months of 2000. Growth
in the number of effective restaurants and increases in average sales per
effective unit 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 65 or 7.7% in the second quarter of 2000 and by 68 or 8.1%
in the first six months of 2000 due to new restaurant development. Newly
developed restaurants generally have seating and sales above the system-wide
averages. System-wide average sales per effective restaurant grew 3.0% in the
second quarter of 2000 and 2.6% in the first six months of 2000. 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 64.3% of total
revenues in the second quarter of 2000 and 64.8% of total revenues in the first
six months of 2000. Franchise operations revenues grew $4,955,000 or 12.3% in
the second quarter of 2000 and $10,008,000 or 12.5% in the first six months of
2000. 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 65 or 10.4% in the
second quarter of 2000 and 62 or 10.0% in the first six months of 2000. Average
sales per effective franchise restaurant grew 1.6% in the second quarter of 2000
and 1.5% in the first six months of 2000.
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
8
<PAGE>
expenses increased $1,607,000 or 9.9% in the second quarter of 2000 and
$3,227,000 or 10.0% in the first six months of 2000. Increases in franchise
operations costs were generally in line with the growth in franchise operations
revenue.
Franchise operations margin is equal to franchise operations revenues less
franchise operations costs and expenses. Franchise operations margin increased
$3,348,000 to $27,463,000 in the second quarter of 2000 and $6,781,000 to
$54,408,000 in the first six months of 2000. Franchise operations margin was
60.7% and 60.5% of franchise operations revenues in the second quarter and first
six months of 2000, respectively, compared with 59.9% and 59.6% in the same
periods in the prior year. Increased royalty income and increased interest
income associated with IHOP's financing of sales of franchises and equipment to
its franchisees were primarily responsible for the improvement in franchise
operations margin in 2000.
SALES OF FRANCHISES AND EQUIPMENT
Sales of franchises and equipment were 12.0% of total revenues in the second
quarter of 2000 and 10.4% of total revenues in the first six months of 2000.
Sales of franchises and equipment decreased $802,000 or 8.7% in the second
quarter of 2000 and $536,000 or 3.6% in the first six months of 2000. A decrease
in the number of restaurants franchised was the primary cause of the decrease in
sales of franchises and equipment. IHOP franchised 16 and 28 restaurants in the
second quarter and first six months of 2000, respectively, compared with 18 and
29 in the same periods in the prior year.
Cost of sales of franchises and equipment increased $116,000 or 2.2% in the
second quarter of 2000 and $653,000 or 7.2% in the first six months of 2000. The
increase was primarily due to the sale of more rehabilitated and refranchised
restaurants in the second quarter and the first six months of 2000 compared with
the same periods in the prior year.
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 $918,000 to $2,966,000 in the second
quarter of 2000 and decreased $1,189,000 to $4,661,000 in the first six months
of 2000. Margin on sales of franchises and equipment was 35.2% and 32.4% in the
second quarter and first six months of 2000, respectively, compared with 42.1%
and 39.2% in the same periods in the prior year.
COMPANY OPERATIONS
Company operations revenues are sales to customers at restaurants operated
by IHOP. Company operations revenues were 23.7% of total revenues in the second
quarter of 2000 and 24.8% of total revenues in the first six months of 2000.
Company operations revenues decreased $1,363,000 or 7.6% in the second quarter
of 2000 and increased $402,000 or 1.2% in the first six months of 2000. Changes
in the number of effective IHOP-operated restaurants in each period were
primarily responsible for the changes in revenues. Effective IHOP-operated
restaurants decreased by four or 5.3% in the second quarter of 2000 and
increased by two or 2.8% in the first six months of 2000. Average sales per
effective IHOP-operated restaurant decreased 2.1% in the second quarter of 2000
and 1.7% in the first six months of 2000.
Company operations costs and expenses include food, labor and benefits,
utilities and occupancy costs. Company operations costs decreased $1,086,000 or
6.4% in the second quarter of 2000 and increased $651,000 or 2.0% in the first
six months of 2000. As certain costs are variable in nature, the decrease or
increase in company operations costs were generally in line with the decrease or
increase in company operations revenues.
Company operations margin is equal to company operations revenues less
company operations costs and expenses. Company operations margin declined
$277,000 to $719,000 in the second quarter of 2000 and $249,000 to $1,571,000 in
the first six months of 2000. Company operations margin was 4.3% and 4.6% of
company operations revenues in the second quarter and first six months of 2000,
respectively, compared with 5.5% and 5.3% in the same periods in the prior year.
Decreasing average sales per restaurant
9
<PAGE>
combined with the existence of certain fixed costs resulted in the decrease in
margins of company operations.
OTHER COSTS AND EXPENSES
Field, corporate and administrative costs and expenses increased $691,000 or
7.8% and $647,000 or 3.8% in the second quarter and first six months of 2000,
respectively, compared with the same periods in the prior year. The increase was
primarily caused by higher compensation expenses in the second quarter and first
six months of 2000 compared with the same periods in the prior year. Field,
corporate and administrative costs were 3.1% and 2.9% of system-wide sales in
the second quarter and first six months of 2000, respectively, compared with
3.2% and 3.1% in the same periods in the prior year.
Depreciation and amortization expense increased $262,000 or 8.5% and
$560,000 or 9.2% in the second quarter and first six months of 2000,
respectively. The increases were caused primarily by the addition of new
restaurants to the IHOP chain from our ongoing restaurant development program.
Interest expense increased $832,000 or 19.0% and $1,975,000 or 22.3% in the
second quarter and first six months of 2000, respectively. The increases were
due to interest associated with new capital leases that were partially offset by
reductions in interest on our senior notes due 2002 as the principal balance is
paid down.
BALANCE SHEET ACCOUNTS
Balances of property and equipment, net at June 30, 2000, increased
$19,774,000 or 11.1% from December 31, 1999 primarily 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. Also, the company began repurchasing shares of its
common stock in 2000.
In 2000 IHOP and its franchisees and area licensees forecast developing and
opening approximately 75 to 85 restaurants. Included in that number are the
development of 65 to 70 new restaurants by us and the development of 10 to 15
restaurants by our franchisees and area licensees. Capital expenditure
projections for 2000, which include our portion of the above development
program, are approximately $80 to $90 million. In November 2000 the fifth annual
installment of $4.6 million in principal becomes due on our senior notes due
2002 and the first annual installment of $3.8 million in principal becomes due
on our senior notes due 2008. 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, our principal repayment on our
senior notes and any further stock repurchases in 2000. At June 30, 2000,
$20 million was available to be borrowed under our unsecured bank revolving
credit agreement.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders (the "Meeting") was held on May 16, 2000.
Shareholders voted in person or by proxy for the following purposes.
(a) Shareholders voted to elect three Class II directors, each to serve for
a term of three years, as follows:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
------- ---------- --------------
<S> <C> <C>
H. Frederick Christie.............................. 18,489,713 64,600
Richard K. Herzer.................................. 18,491,717 62,596
Patrick W. Rose.................................... 18,490,843 63,470
</TABLE>
There were no abstentions or broker non-votes. Directors whose terms of
office continued after the meeting were Frank Edelstein, Michael S. Gordon,
Neven C. Hulsey, Larry Alan Kay, Dennis M. Leifheit, and Caroline W. Nahas.
(b) Shareholders voted to approve and ratify the appointment of
PricewaterhouseCoopers L.L.P as the Company's independent accountants for the
year ending December 31, 2000. 18,529,896 shares were voted for this proposal,
18,787 were voted against, there were 5,540 abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
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).
10.1 Employment agreement between IHOP Corp. and Robin L. Elledge
effective April 1, 2000.
11.0 Statement Regarding Computation of Per Share Earnings.
27.0 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended June 30,
2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<C> <S> <C>
IHOP CORP.
(Registrant)
July 27, 2000 BY: /s/ RICHARD K. HERZER
------------ ---------------------------------------
(Date) CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
July 27, 2000 BY: /s/ ALAN S. UNGER
------------ ---------------------------------------
(Date) V.P.--FINANCE, TREASURER AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER)
</TABLE>
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