UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to _________________
Commission File Number 0-8360
IHOP CORP.
(Exact name of registrant as specified in its charter)
Delaware 95-3038279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 North Brand Boulevard, Glendale, California 91203-1903
(Address of principal executive offices) (Zip Code)
(818) 240-6055
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of September 30, 1996
---------------------------- ------------------------------------
Common Stock, $.01 par value 9,467,294
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES
(Unaudited and in thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 2,185 $ 3,860
Receivables 26,640 21,476
Reacquired franchises and equipment held for sale, net 1,613 1,157
Inventories 1,064 792
Prepaid expenses 427 233
-------- --------
Total current assets 31,929 27,518
-------- --------
Long-term receivables 129,349 115,800
Property and equipment, net 115,166 87,795
Reacquired franchises and equipment held for sale, net 10,113 6,553
Excess of costs over net assets acquired, net 13,015 13,336
Other assets 906 1,055
-------- --------
Total assets $300,478 $252,057
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 4,622 $ 4,672
Accounts payable 16,770 15,979
Accrued employee compensation and benefits 3,010 1,562
Other accrued expenses 5,045 2,349
Deferred income taxes 3,271 3,436
Capital lease obligations and other 829 719
-------- --------
Total current liabilities 33,547 28,717
-------- --------
Long-term debt 43,844 30,584
Deferred income taxes 24,086 21,495
Capital lease obligations and other 76,228 62,964
Shareholders' equity
Preferred stock, $1 par value, 10,000,000 shares
authorized; shares issued and outstanding: no shares - -
Common stock, $.01 par value, 40,000,000 shares
authorized; shares issued and outstanding: September 30,
1996, 9,467,294 shares; December 31, 1995, 9,375,515
shares 95 94
Additional paid-in capital 48,478 46,363
Retained earnings 73,460 60,640
Contribution to ESOP 740 1,200
-------- --------
Total shareholders' equity 122,773 108,297
-------- --------
Total liabilities and shareholders' equity $300,478 $252,057
======== ========
See the accompanying notes to the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS IHOP CORP. AND SUBSIDIARIES
(Unaudited and in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
-------- ------- -------- --------
Revenues
Franchise operations
Rent $ 7,459 $ 7,178 $ 21,832 $ 20,854
Service fees and other 18,267 16,790 53,593 47,904
------- ------- -------- --------
25,726 23,968 75,425 68,758
Company operations 14,342 10,484 38,778 30,216
Other 11,501 8,118 22,123 16,897
------- ------- -------- --------
Total revenues 51,569 42,570 136,326 115,871
------- ------- -------- --------
Costs and expenses
Franchise operations
Rent 4,190 3,811 12,109 11,303
Other direct costs 7,735 7,302 22,843 20,846
------- ------- -------- --------
11,925 11,113 34,952 32,149
Company operations 13,541 10,384 36,448 29,282
Field, corporate and administrative 6,745 5,282 19,647 16,580
Depreciation and amortization 2,095 1,703 5,965 5,070
Interest 2,842 2,217 8,231 6,378
Other 5,513 4,028 9,893 8,114
Severance charges - - - 800
------- ------- -------- --------
Total costs and expenses 42,661 34,727 115,136 98,373
------- ------- -------- --------
Income before income taxes 8,908 7,843 21,190 17,498
Provision for income taxes 3,519 3,102 8,370 6,912
------- ------- -------- --------
Net income $ 5,389 $ 4,741 $ 12,820 $ 10,586
======= ======= ======== ========
Net income per common and common
equivalent share $.56 $.50 $1.34 $1.12
======= ======= ======== ========
Weighted average common and common
equivalent shares outstanding 9,600 9,521 9,584 9,478
======= ======= ======== ========
See the accompanying notes to the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES
(Unaudited and in thousands)
- ------------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------
1996 1995
--------- ---------
Cash flows from operating activities
Net income $ 12,820 $ 10,586
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation and amortization 5,965 5,070
Deferred taxes 2,426 3,911
Contribution to ESOP 740 665
Changes in current assets and liabilities
Accounts receivable (4,685) (2,320)
Inventories (272) (40)
Prepaid expenses (194) 403
Accounts payable 791 2,121
Accrued employee compensation and benefits 1,448 (402)
Other accrued expenses 2,696 477
Other, net (195) (40)
-------- --------
Cash provided by operating activities 21,540 20,431
-------- --------
Cash flows from investing activities
Additions to property and equipment (41,007) (31,455)
Proceeds from sale and leaseback arrangements 5,200 10,079
Additions to notes, equipment contracts and
direct financing leases receivable (6,112) (4,959)
Principal receipts from notes, equipment contracts
and direct financing leases receivable 5,146 4,341
Additions to reacquired franchises held for sale (405) (721)
-------- --------
Cash used by investing activities (37,178) (22,715)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt 17,800 5,900
Repayment of long-term debt (4,437) (5,400)
Principal payments on capital lease obligations (316) (381)
Exercise of stock options 916 2,508
-------- --------
Cash provided by financing activities 13,963 2,627
-------- --------
Net change in cash and cash equivalents (1,675) 343
Cash and cash equivalents at beginning of period 3,860 2,036
-------- --------
Cash and cash equivalents at end of period $ 2,185 $ 2,379
======== ========
Supplemental disclosures
Interest paid, net of capitalized amounts $ 7,343 $ 5,958
Income taxes paid 6,371 1,667
Capital lease obligations incurred 14,377 12,356
See the accompanying notes to the consolidated financial statements.
4
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which in the opinion
of the management of IHOP Corp. and Subsidiaries ("IHOP" or the "Company")
are necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The results of operations
for the nine months ended September 30, 1996, are not necessarily indicative
of the results to be expected for the full year ending December 31, 1996.
2. In the first quarter of 1995, the Company recognized severance charges of
$800,000 associated with a realignment of responsibilities in its restaurant
operations, restaurant development and purchasing functions. The effect of
the charges was $484,000, net of income tax benefit, or $.05 per share.
5
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.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1996 1995 1996 1995
-------- ---------- --------- --------
(Unaudited and dollars in thousands)
Restaurant Data
Effective restaurants (a)
Franchise 505 468 498 458
Company 59 48 56 47
Area license 132 127 132 126
-------- -------- -------- --------
Total 696 643 686 631
======== ======== ======== ========
System-wide
Sales (b) $208,512 $185,440 $591,504 $530,857
Percent increase 12.4% 12.1% 11.4% 13.1%
Average sales per
effective restaurant $ 299 $ 288 $ 862 $ 841
Percent increase 3.8% 2.9% 2.5% 4.6%
Comparable average sales
per restaurant (c) $ 306 $ 289 $ 882 $ 840
Percent change 2.7% (0.4%) 1.3% 1.0%
Franchise
Sales $163,061 $142,173 $460,309 $406,416
Percent increase 14.7% 12.2% 13.3% 13.7%
Average sales per
effective restaurant $ 323 $ 304 $ 924 $ 887
Percent increase 6.3% 2.4% 4.2% 3.5%
Comparable average sales
per restaurant (c) $ 314 $ 298 $ 906 $ 867
Percent change 2.8% (0.6%) 1.3% 1.1%
Company
Sales $ 14,342 $ 10,484 $ 38,778 $ 30,216
Percent change 36.8% 5.4% 28.3% (2.4%)
Average sales per
effective restaurant $ 243 $ 218 $ 692 $ 643
Percent change 11.5% (1.4%) 7.6% (0.3%)
Area License
Sales $ 31,109 $ 32,783 $ 92,417 $ 94,225
Percent change (5.1%) 14.4% (1.9%) 16.0%
Average sales per
effective restaurant $ 235 $ 258 $ 700 $ 748
Percent change (8.9%) 7.1% (6.4%) 9.5%
- --------------------
(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, Company-operated
restaurants, and area licensees as reported to the Company.
(c) "Comparable average sales" reflects sales for restaurants that are operated
for the entire fiscal period indicated as well as the entire prior fiscal
period. Comparable average sales do not include data on area license restaurants
located in Florida and Japan.
6
The following table summarizes IHOP restaurant development and franchising
activity:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
(Unaudited)
RESTAURANT DEVELOPMENT ACTIVITY (a)
- --------------------------------------
IHOP - beginning of period 697 639 678 620
New openings
IHOP-developed 17 12 29 21
Investor program 1 5 10 14
Area license 1 1 3 5
---- ---- ---- ----
Total new openings 19 18 42 40
Closings
Company and franchised (3) (3) (7) (6)
Area license (2) - (2) -
---- ---- ---- ----
IHOP - end of period 711 654 711 654
==== ==== ==== ====
Summary - end of period
Franchise 518 478 518 478
Company 61 48 61 48
Area license 132 128 132 128
---- ---- ---- ----
Total - IHOP 711 654 711 654
==== ==== ==== ====
RESTAURANT FRANCHISING ACTIVITY (a)
- --------------------------------------
IHOP-developed 16 10 27 20
Investor program 1 5 10 14
Rehabilitated and refranchised - 2 - 2
---- ---- ---- ----
Total restaurants franchised 17 17 37 36
Reacquired by Company (4) (1) (11) (6)
Closed (2) (1) (4) (2)
---- ---- ---- ----
Net addition 11 15 22 28
==== ==== ==== ====
- --------------------
(a) The Company reports restaurants in Canada as franchise restaurants although
nine of the ten restaurants are operated under an area license agreement.
IHOP's quarterly results are subject to seasonal fluctuation. Revenues from
sales of franchises are affected by the timing of new restaurant openings and
the restaurants in the Company's "inventory" of restaurants available from time
to time for franchising; the impact of such factors is not evenly distributed
throughout the year. As a consequence, the results of operations for the nine
months ended September 30, 1996, are not necessarily indicative of the results
to be expected for the full year ending December 31, 1996.
System-wide retail sales for the third quarter and first nine months of 1996
increased 12.4% and 11.4%, respectively, over system-wide retail sales for the
comparable 1995 periods. This was due to increases in the number of effective
restaurants of 8.2% and 8.7% and increases in average per unit revenues of 3.8%
and 2.5% over the respective prior year periods. The above increases were
mitigated by unfavorable exchange fluctuations in the Japanese yen. If the
Japanese sales were excluded from the comparison, system-wide sales would have
increased by 14.5% in the third quarter and 13.4% in the first nine months of
1996. System-wide comparable average sales per restaurant (exclusive of area
license restaurants) for the third quarter and first nine
7
months of 1996 increased 2.7% and 1.3%, respectively, over those in the
comparable 1995 periods. Management continues to pursue sales increases through
the Company's restaurant development program, improved marketing efforts,
improvements in customer service and operations, and the Company's remodeling
program.
Franchise operations revenues for the third quarter and first nine months of
1996 increased 7.3% and 9.7%, respectively, over revenues for the comparable
1995 periods. This was primarily due to increases in the number of effective
franchise restaurants of 7.9% and 8.7% coupled with increases in average per
unit revenues of 6.3% and 4.2% in the third quarter and the first nine months of
1996, respectively, in comparison with the same periods in 1995. Franchise
operations costs and expenses for the third quarter and first nine months of
1996 increased 7.3% and 8.7%, respectively, over costs and expenses for the
comparable 1995 periods. As a result of franchise revenues increasing in excess
of franchise expenses, the margin from franchise operations improved to 53.7% in
both the third quarter and first nine months of 1996 versus 53.6% and 53.2% in
the comparable 1995 periods. The improvements in margin were primarily because
of increases in interest income associated with IHOP's financing of sales of
franchises and equipment to its franchisees.
Company-operated restaurant revenues for the third quarter and first nine months
of 1996 increased 36.8% and 28.3%, respectively, over revenues for the
comparable periods in 1995. This was primarily due to increases in the number of
effective Company-operated restaurants of 22.9% and 19.1% coupled with increases
in the revenues per effective Company operated restaurant of 11.5% and 7.6%,
respectively, in the third quarter and the first nine months of 1996 over the
comparable 1995 periods. Company-operated restaurant costs and expenses for the
third quarter and first nine months of 1996 increased 30.4% and 24.5%,
respectively, from those in the comparable 1995 periods. Margin from Company-
operated restaurants increased to 5.6% and 6.0% in the third quarter and first
nine months of 1996, respectively, from margins of 1.0% and 3.1% in the
comparable 1995 periods. The improvements in margin were primarily due to
operating reductions in food costs, salaries and wages as a percentage of
revenues.
Other revenues for the third quarter and first nine months of 1996 increased
41.7% and 30.9%, respectively, from other revenues for the comparable 1995
periods. The primary reason for the increases were sales of franchises and
equipment which increased to $9,333,000 and $15,911,000 in the third quarter and
first nine months of 1996, respectively, from $6,566,000 and $12,407,000 in the
comparable 1995 periods. Augmenting the increased sales of franchises and
equipment were gains in interest income from direct financing leases. The
Company franchised 17 and 37 restaurants in the third quarter and first nine
months of 1996, respectively, compared to 17 and 36 restaurants in the
comparable 1995 periods. Other costs and expenses for the third quarter and
first nine months of 1996 increased 36.9% and 21.9%, respectively, over the 1995
periods. The increases were primarily due to franchise and equipment costs of
sales which increased to $5,091,000 and $8,387,000, respectively, from
$3,436,000 and $6,327,000 in the comparable 1995 periods. Revenues from sales
of franchises and equipment and their associated costs of sales are affected by
the mix and number of restaurants franchised, as follows: (i) restaurants newly
developed by IHOP normally franchise for $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 about break-even, (ii) restaurants developed by franchisees
normally franchise for $50,000, have minor associated franchise cost of sales
and do not include an equipment sale; and (iii) previously reacquired franchises
normally refranchise for $100,000 to $300,000, include an
8
equipment sale, and may have substantial costs of sales associated with both the
franchise and the equipment. As noted earlier, sales of franchises are also
affected by the timing of new restaurant openings and the restaurants in the
Company's "inventory" of restaurants available from time to time for
franchising.
Field, corporate and administrative expenses for the third quarter and first
nine months of 1996 increased 27.7% and 18.5%, respectively, over the comparable
1995 periods. In general, field, corporate and administrative expenses have
been increasing as a result of normal increases in salaries and wages, inflation
and increases in headcount to support higher workloads as the Company grows.
Field, corporate and administrative expenses were 3.2% and 3.3% of system-wide
sales in the third quarter and first nine months of 1996, respectively, compared
with 2.9% and 3.1% in the comparable 1995 periods.
Depreciation and amortization expense increased 23.0% and 17.7% in the third
quarter and first nine months of 1996, respectively, over the comparable 1995
periods primarily reflecting the addition of new, larger restaurants.
Interest expense increased 28.2% and 29.1% in the third quarter and first nine
months of 1996, respectively, over the comparable 1995 periods primarily due to
interest associated with increased capital lease obligations.
Severance charges of $800,000, or $484,000 net of income tax benefit, or $.05
per share, were recognized in the first quarter of 1995. The charges were
associated with a realignment of responsibilities in the Company's restaurant
operations, restaurant development and purchasing functions. (See Note 2 to the
Consolidated Financial Statements.)
Provision for income taxes was 39.5% of income before income taxes in the third
quarter and first nine months of 1996 and in the comparable 1995 periods.
Liquidity and Capital Resources
- -------------------------------
The Company invests available funds into its business through the development of
additional restaurants and the remodeling of older Company-operated restaurants.
In 1996, IHOP and its franchisees and area licensees plan to develop and open
approximately 65 to 70 restaurants. Included in that number are the development
of 45 to 50 restaurants by the Company and approximately 20 by IHOP franchisees
and area licensees. This is an adjustment from the previous forecast of 50 to
55 new restaurants to be developed by the Company and 25 by franchisees and area
licensees. Intense competition for the limited number of restaurant locations
which are available at fair value is the primary reason for the change in
forecast. Projected capital expenditures in 1996 for IHOP's portion of the above
development program are approximately $55 million. In November 1996, the first
annual installment of $4.6 million in principal becomes due on the Company's
senior notes due 2002.
The Company is currently finalizing the placement of $35 million in unsecured
senior notes due 2008 at a favorable fixed interest rate. Principal payments on
these notes will commence in the year 2000. Management projects that the sale of
the notes will be completed in November 1996. The proceeds will be used to fund
capital expenditures, refinance existing debt and for
9
general corporate purposes. The Company expects that funds from operations,
sale and leaseback arrangements (estimated to be about $8 million), its
revolving line of credit and the senior notes will be sufficient to cover its
operating requirements and its projected capital expenditures in 1996. At
September 30, 1996, $16.0 million had been borrowed under the Company's
unsecured bank revolving credit agreement. These borrowings are expected to be
repaid with a portion of the proceeds from the senior notes.
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 Form 10-K for the
fiscal year ended December 31, 1991, Commission file number 0-8360, (the
"1991 Form 10-K") is hereby incorporated by reference.
3.2 Bylaws of IHOP Corp. Exhibit 3.2 to Registration Statement on Form S-1 No.
33-40431 is hereby incorporated by reference.
10 Amendment No. 3 to the Amended and Restated International House of Pancakes
Employee Stock Ownership Plan.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1996.
10
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)
October 24, 1996 BY: /s/ Richard K. Herzer
- ---------------- ------------------------------
(Date) Richard K. Herzer
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
October 24, 1996 BY: /s/ Frederick G. Silny
- --------------- ----------------------------
(Date) Frederick G. Silny
Vice President-Finance and Treasurer
(Principal Financial Officer)
11