<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 September 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 (IRS Employer Identification No.)
of
incorporation or organization)
</TABLE>
450 NORTH BRAND BOULEVARD, GLENDALE, CALIFORNIA 91203-1903
(Address of principal executive offices) (Zip Code)
(818) 240-6055
(Registrant's telephone number, including area code)
525 North Brand Boulevard,
Glendale, California 91203-1903
(Former Address)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AS OF SEPTEMBER 30, 2000
---------------------------- ------------------------------------------
Common Stock, $.01 par value 20,008,341
</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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 741 $ 4,176
Receivables............................................... 33,575 35,335
Reacquired franchises and equipment held for sale, net.... 3,008 2,842
Inventories............................................... 817 1,223
Prepaid expenses.......................................... 4,545 4,309
-------- --------
Total current assets.................................... 42,686 47,885
-------- --------
Long-term receivables....................................... 275,898 265,983
Property and equipment, net................................. 210,181 177,743
Reacquired franchises and equipment held for sale, net...... 17,046 16,102
Excess of costs over net assets acquired, net............... 11,303 11,625
Other assets................................................ 984 1,064
-------- --------
Total assets............................................ $558,098 $520,402
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 8,974 $ 8,956
Accounts payable.......................................... 17,368 18,016
Accrued employee compensation and benefits................ 6,761 7,804
Other accrued expenses.................................... 8,250 5,896
Deferred income taxes..................................... 3,596 3,833
Capital lease obligations................................. 1,874 1,682
-------- --------
Total current liabilities............................... 46,823 46,187
-------- --------
Long-term debt.............................................. 49,613 41,218
Deferred income taxes....................................... 43,569 39,768
Capital lease obligations and other......................... 167,870 166,749
Shareholders' equity
Preferred stock, $1 par value, 10,000,000 shares
authorized; none issued................................. -- --
Common stock, $.01 par value, 40,000,000 shares authorized
(September 30, 2000, 20,197,313 shares issued and
20,008,341 shares outstanding; December 31, 1999,
20,117,314 shares issued and outstanding)............... 202 201
Additional paid-in capital................................ 67,904 66,485
Retained earnings......................................... 183,896 158,294
Treasury stock, at cost (September 30, 2000, 188,972
shares; December 31, 1999, none).......................... (2,986) --
Contribution to ESOP...................................... 1,207 1,500
-------- --------
Total shareholders' equity.............................. 250,223 226,480
-------- --------
Total liabilities and shareholders' equity.............. $558,098 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Franchise operations
Rent............................................ $13,144 $11,457 $ 37,562 $ 33,899
Service fees and other.......................... 33,863 30,176 99,324 87,605
------- ------- -------- --------
47,007 41,633 136,886 121,504
Sale of franchises and equipment.................. 12,675 12,114 27,077 27,052
Company operations................................ 18,985 18,271 53,414 52,298
------- ------- -------- --------
Total revenues................................ 78,667 72,018 217,377 200,854
------- ------- -------- --------
Costs and Expenses
Franchise operations
Rent............................................ 7,018 5,939 20,123 17,533
Other direct costs.............................. 11,415 10,234 33,781 30,884
------- ------- -------- --------
18,433 16,173 53,904 48,417
Cost of sales of franchises and equipment......... 7,800 7,586 17,541 16,674
Company operations................................ 18,036 17,366 50,894 49,573
Field, corporate and administrative............... 8,856 8,848 26,665 26,010
Depreciation and amortization..................... 3,398 3,153 10,050 9,245
Interest.......................................... 5,364 4,869 16,185 13,715
Other (income) and expense, net................... 391 (29) 508 (307)
------- ------- -------- --------
Total costs and expenses...................... 62,278 57,966 175,747 163,327
------- ------- -------- --------
Income before income taxes.......................... 16,389 14,052 41,630 37,527
Provision for income taxes.......................... 6,310 5,411 16,028 14,449
------- ------- -------- --------
Net income.................................... $10,079 $ 8,641 $ 25,602 $ 23,078
======= ======= ======== ========
Net Income Per Share
Basic............................................. $ 0.50 $ 0.43 $ 1.28 $ 1.16
======= ======= ======== ========
Diluted........................................... $ 0.50 $ 0.42 $ 1.27 $ 1.13
======= ======= ======== ========
Weighted Average Shares Outstanding
Basic............................................. 20,004 20,068 20,019 19,940
======= ======= ======== ========
Diluted........................................... 20,268 20,496 20,238 20,364
======= ======= ======== ========
</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,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 25,602 $ 23,078
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation and amortization........................... 10,050 9,245
Deferred taxes.......................................... 3,564 4,237
Contribution to ESOP.................................... 1,207 1,084
Change in current assets and liabilities
Accounts receivable................................... 1,947 774
Inventories........................................... 406 (16)
Prepaid expenses...................................... (236) (342)
Accounts payable...................................... (648) (7,392)
Accrued employee compensation and benefits............ (1,043) 1,299
Other accrued expenses................................ 2,354 2,662
Other, net............................................ 4,038 269
-------- --------
Cash provided by operating activities............... 47,241 34,898
-------- --------
Cash flows from investing activities
Additions to property and equipment....................... (70,860) (54,269)
Additions to notes........................................ (8,638) (9,414)
Principal receipts from notes and equipment contracts
receivable.............................................. 9,136 8,174
Additions to reacquired franchises held for sale.......... (1,280) (929)
-------- --------
Cash used by investing activities....................... (71,642) (56,438)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt, including
revolving line of credit................................ 8,803 3,372
Proceeds from sale and lease back arrangements............ 16,625 17,684
Repayment of long-term debt, including revolving line of
credit.................................................. (390) (3,285)
Principal payments on capital lease obligations........... (1,006) (795)
Treasury stock transactions............................... (4,447) --
Exercise of stock options................................. 1,381 4,882
-------- --------
Cash provided by financing activities................... 20,966 21,858
-------- --------
Net change in cash and cash equivalents..................... (3,435) 318
Cash and cash equivalents at beginning of period............ 4,176 2,294
-------- --------
Cash and cash equivalents at end of period.............. $ 741 $ 2,612
======== ========
Supplemental disclosures
Interest paid, net of capitalized amounts................. $ 15,235 $ 12,536
Income taxes paid......................................... 12,470 10,315
Capital lease obligations incurred........................ 2,017 29,958
</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, 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 nine months ended September 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 SEPTEMBER 30, 2000
Revenues from external customers..... $ 47,007 $18,985 $12,675 $ -- $ 78,667
Intercompany real estate charges
(revenues)......................... 1,741 186 -- (1,927) --
Depreciation and amortization........ 1,016 1,065 -- 1,317 3,398
Operating income (loss).............. 21,416 (850) 4,875 5,168 30,609
Field, corporate and administrative
expenses........................... 8,856
Interest expense..................... 5,364
Income before income taxes........... 16,389
Additions to long-lived assets....... 17,402 4,036 1,450 11,949 34,837
Total assets......................... 406,125 51,677 20,054 80,242 558,098
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers..... $ 41,633 $18,271 $12,114 $ -- $ 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
expenses........................... 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 71,424 490,725
</TABLE>
4
<PAGE>
IHOP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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, 2000
Revenues from external customers..... $136,886 $53,414 $27,077 $ -- $217,377
Intercompany real estate charges
(revenues)......................... 4,898 501 -- (5,399) --
Depreciation and amortization........ 3,083 3,087 -- 3,880 10,050
Operating income (loss).............. 62,004 (2,751) 9,536 15,691 84,480
Field, corporate and administrative
expenses........................... 26,665
Interest expense..................... 16,185
Income before income taxes........... 41,630
Additions to long-lived assets....... 42,890 8,536 2,647 19,434 73,507
Total assets......................... 406,125 51,677 20,054 80,242 558,098
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers..... $121,504 $52,298 $27,052 $ -- $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
expenses........................... 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 71,424 490,725
</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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Restaurant Data
Effective restaurants(a)
Franchise................................. 698 644 689 630
Company................................... 77 75 75 73
Area license.............................. 151 149 150 147
-------- -------- -------- --------
Total................................. 926 868 914 850
======== ======== ======== ========
System-wide
Sales(b).................................... $321,546 $289,644 $929,031 $837,740
Percent increase.......................... 11.0% 10.9% 10.9% 10.4%
Average sales per effective restaurant...... $ 347 $ 334 $ 1,016 $ 986
Percent increase.......................... 3.9% 3.1% 3.0% 3.2%
Comparable average sales per
restaurant(c)............................... $ 365 $ 351 $ 1,068 $ 1,031
Percent increase.......................... 1.6% 0.6% 0.9% 1.1%
Franchise
Sales....................................... $265,867 $236,994 $765,423 $684,067
Percent increase.......................... 12.2% 12.0% 11.9% 13.1%
Average sales per effective restaurant...... $ 381 $ 368 $ 1,111 $ 1,086
Percent increase.......................... 3.5% 2.5% 2.3% 3.4%
Comparable average sales per
restaurant(c)............................... $ 378 $ 363 $ 1,105 $ 1,067
Percent increase.......................... 1.9% 0.5% 1.1% 1.0%
Company
Sales....................................... $ 18,985 $ 18,271 $ 53,414 $ 52,298
Percent change............................ 3.9% 8.4% 2.1% (1.1)%
Average sales per effective restaurant...... $ 247 $ 244 $ 712 $ 716
Percent change............................ 1.2% 4.3% (0.6)% 0.1%
Area License
Sales....................................... $ 36,694 $ 34,379 $110,194 $101,375
Percent increase.......................... 6.7% 5.0% 8.7% 0.2%
Average sales per effective restaurant...... $ 243 $ 231 $ 735 $ 690
Percent change............................ 5.2% 3.1% 6.5% (1.1)%
</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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
RESTAURANT DEVELOPMENT ACTIVITY
IHOP--beginning of period................................... 923 864 903 835
New openings
IHOP-developed.......................................... 23 18 45 45
Investor and conversion programs........................ 6 1 9 5
Area license............................................ -- 1 4 4
--- --- --- ---
Total new openings........................................ 29 20 58 54
Closings
Company and franchise................................... (5) (1) (13) (6)
Area license............................................ (1) -- (2) --
--- --- --- ---
IHOP--end of period......................................... 946 883 946 883
=== === === ===
Summary--end of period
Franchise................................................. 717 660 717 660
Company................................................... 78 74 78 74
Area license.............................................. 151 149 151 149
--- --- --- ---
Total IHOP.............................................. 946 883 946 883
=== === === ===
RESTAURANT FRANCHISING ACTIVITY
IHOP-developed.............................................. 20 18 40 42
Investor and conversion programs............................ 6 1 9 5
Rehabilitated and refranchised.............................. 1 3 6 4
--- --- --- ---
Total restaurants franchised.............................. 27 22 55 51
Reacquired by IHOP.......................................... (3) (2) (9) (10)
Closed...................................................... (4) -- (7) (5)
--- --- --- ---
Net addition.............................................. 20 20 39 36
=== === === ===
</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 from time to time in our
filings with the Securities
7
<PAGE>
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 nine
months ended September 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 $31,902,000 or 11.0% in the third
quarter of 2000 and $91,291,000 or 10.9% in the first nine 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. The
number of effective restaurants grew by 58 or 6.7% in the third quarter of 2000
and by 64 or 7.5% in the first nine 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 3.9% in the third quarter of 2000 and 3.0% in the first nine 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 59.8% of
total revenues in the third quarter of 2000 and 63.0% in the first nine months
of 2000. Franchise operations revenues grew $5,374,000 or 12.9% in the third
quarter of 2000 and $15,382,000 or 12.7% in the first nine 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. The number of effective franchise restaurants grew by 54 or 8.4% in
the third quarter of 2000 and 59 or 9.4% in the first nine months of 2000.
Average sales per effective franchise restaurant grew 3.5% in the third quarter
of 2000 and 2.3% in the first nine months of 2000.
8
<PAGE>
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
$2,260,000 or 14.0% in the third quarter of 2000 and $5,487,000 or 11.3% in the
first nine months of 2000.
Franchise operations margin is equal to franchise operations revenues less
franchise operations costs and expenses. Franchise operations margin increased
$3,114,000 to $28,574,000 in the third quarter of 2000 and $9,895,000 to
$82,982,000 in the first nine months of 2000. Franchise operations margin was
60.8% and 60.6% of franchise operations revenues in the third quarter and first
nine months of 2000, respectively, compared with 61.2% and 60.2% in the same
periods in the prior year. The change in margin for the third quarter was
primarily due to the decrease in rent margin due to an increase in the number of
operating leases. The increase in margin for the first nine months of 2000 was
primarily due to increased royalty income and increased interest income
associated with the Company's financing of sales of franchises and equipment to
its franchisees.
SALES OF FRANCHISES AND EQUIPMENT
Sales of franchises and equipment were 16.1% of total revenues in the third
quarter of 2000 and 12.5% of total revenues in the first nine months of 2000.
Sales of franchises and equipment increased $561,000 or 4.6% in the third
quarter of 2000 and $25,000 or 0.1% in the first nine months of 2000. An
increase in the number of restaurants franchised was the primary cause of the
increase in sales of franchises and equipment. IHOP franchised 27 and 55
restaurants in the third quarter and first nine months of 2000, respectively,
compared with 22 and 51 in the same periods in the prior year.
Cost of sales of franchises and equipment increased $214,000 or 2.8% in the
third quarter of 2000 and $867,000 or 5.2% in the first nine months of 2000. The
increase was primarily due to the sale of more restaurants in the third quarter
and the first nine 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 increased $347,000 to $4,875,000 in the third
quarter of 2000 and decreased $842,000 to $9,536,000 in the first nine months of
2000. Margin on sales of franchises and equipment was 38.5% and 35.2% in the
third quarter and first nine months of 2000, respectively, compared with 37.4%
and 38.4% in the same periods in the prior year. The margin in the third quarter
was positively impacted by the franchising of more company developed and
investor program restaurants in the third quarter of 2000 compared with the same
period in the prior year. The margin in the first nine months was negatively
impacted by the franchising of more rehabilitated restaurants in the first nine
months of 2000 compared with the same period in the prior year.
COMPANY OPERATIONS
Company operations revenues are sales to customers at restaurants operated
by IHOP. Company operations revenues were 24.1% of total revenues in the third
quarter of 2000 and 24.6% of total revenues in the first nine months of 2000.
Company operations revenues increased $714,000 or 3.9% in the third quarter of
2000 and increased $1,116,000 or 2.1% in the first nine months of 2000.
Increases in the number of effective IHOP-operated restaurants in each period
were primarily responsible for the changes in revenues. The number of effective
IHOP-operated restaurants increased by 2 or 2.7% in the third quarter and the
first nine months of 2000. Average sales per effective IHOP-operated restaurant
increased 1.2% in the third quarter of 2000 and decreased 0.6% in the first nine
months of 2000.
Company operations costs and expenses include food, labor and benefits,
utilities and occupancy costs. Company operations costs increased $670,000 or
3.9% in the third quarter of 2000 and increased
9
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$1,321,000 or 2.7% in the first nine months of 2000. Company operations costs
were affected by increases in the number of effective restaurants and labor
costs.
Company operations margin is equal to company operations revenues less
company operations costs and expenses. Company operations margin increased
$44,000 to $949,000 in the third quarter of 2000 and declined $205,000 to
$2,520,000 in the first nine months of 2000. Company operations margin was 5.0%
and 4.7% of company operations revenues in the third quarter and first nine
months of 2000, respectively, compared with 5.0% and 5.2% in the same periods in
the prior year. The decline in margin for the first nine months of 2000 was
primarily the result of the decrease in average sales per effective
IHOP-operated restaurant.
OTHER COSTS AND EXPENSES
Field, corporate and administrative costs and expenses increased $8,000 or
0.1% and $655,000 or 2.5% in the third quarter and first nine months of 2000,
respectively, compared with the same periods in the prior year. The increase was
primarily caused by higher compensation expenses in the third quarter and first
nine months of 2000 compared with the same periods in the prior year. The higher
compensation expenses were offset primarily by lower professional service
expenses. Field, corporate and administrative costs were 2.8% and 2.9% of
system-wide sales in the third quarter and first nine months of 2000,
respectively, compared with 3.1% in the same periods in the prior year.
Depreciation and amortization expense increased $245,000 or 7.8% and
$805,000 or 8.7% in the third quarter and first nine 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 $495,000 or 10.2% and $2,470,000 or 18.0% in the
third quarter and first nine 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
The balance of property and equipment, net at September 30, 2000, increased
$32,438,000 or 18.2% from December 31, 1999 primarily due to new restaurant
development.
The balance of long-term receivables at September 30, 2000, increased
$9,915,000 or 3.7% over that of the prior year-end primarily due to IHOP's
financing activities associated with the sale of franchises and equipment.
The balance of long-term debt at September 30, 2000, increased over that of
the prior year-end primarily due to an increase in the balance of our unsecured
bank revolving line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company invests in its 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. As of September 30, 2000, the Company has repurchased
289,390 shares of its common stock.
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
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principal becomes due on our senior notes due 2008. The Company expects 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 September 30, 2000, $11.3 million was available to be
borrowed under the Company's unsecured bank revolving credit agreement. In
October 2000, the Company closed on approximately $17 million in sale leaseback
transactions. The sale leaseback transactions increased the amount available
under the Company's unsecured bank revolving credit agreement to $20 million.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
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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.
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(b) No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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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)
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October 31, 2000 BY: /s/ RICHARD K. HERZER
------------------------------- ----------------------------------------------
(Date) CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
October 31, 2000 BY: /s/ ALAN S. UNGER
------------------------------- ----------------------------------------------
(Date) V.P.--FINANCE, TREASURER AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER)
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