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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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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 March 31,1997
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Common Stock, $.01 par value 9,517,299
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES
(In thousands, except share amounts)
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March 31, December 31,
1997 1996
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Assets
Current assets
Cash and cash equivalents $ 8,347 $ 8,658
Receivables 25,553 29,324
Reacquired franchises and equipment held for sale, net 1,834 1,474
Inventories 1,284 1,180
Prepaid expenses 356 676
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Total current assets 37,374 41,312
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Long-term receivables 139,583 143,338
Property and equipment, net 128,019 120,854
Reacquired franchises and equipment held for sale, net 10,393 8,352
Excess of costs over net assets acquired, net 12,801 12,908
Other assets 2,079 2,125
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Total assets $330,249 $328,889
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 4,731 $ 4,731
Accounts payable 14,799 17,474
Accrued employee compensation and benefits 2,970 2,674
Other accrued expenses 5,093 5,024
Deferred income taxes 3,827 4,311
Capital lease obligations 910 870
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Total current liabilities 32,330 35,084
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Long-term debt 58,554 58,564
Deferred income taxes 24,504 25,061
Capital lease obligations and other 81,630 80,823
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:
March 31, 1997, 9,517,299 shares;
December 31, 1996, 9,467,294 shares 95 95
Additional paid-in capital 50,122 48,768
Retained earnings 82,794 79,244
Contribution to ESOP 220 1,250
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Total shareholders' equity 133,231 129,357
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Total liabilities and shareholders' equity $330,249 $328,889
======== ========
See the accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS IHOP CORP. AND SUBSIDIARIES
(In thousands, except per share amounts)
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Three Months Ended
March 31,
------------------
1997 1996
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Revenues
Franchise operations
Rent $ 8,096 $ 7,183
Service fees and other 18,833 17,368
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26,929 24,551
Company operations 14,048 11,453
Other 5,464 4,288
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Total revenues 46,441 40,292
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Costs and Expenses
Franchise operations
Rent 4,194 3,996
Other direct costs 7,721 7,432
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11,915 11,428
Company operations 13,425 10,682
Field, corporate and administrative 7,053 6,721
Depreciation and amortization 2,449 1,898
Interest 3,506 2,632
Other 2,273 1,870
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Total costs and expenses 40,621 35,231
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Income before income taxes 5,820 5,061
Provision for income taxes 2,270 1,999
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Net income $ 3,550 $ 3,062
======= =======
Net Income Per Share
Net income per common and common
equivalent share $ .37 $ .32
======= =======
Weighted average common and common
equivalent shares outstanding 9,568 9,547
======= =======
See the accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES
(In thousands)
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Three Months Ended
March 31,
--------------------
1997 1996
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Cash flows from operating activities
Net income $ 3,550 $ 3,062
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation and amortization 2,449 1,898
Deferred taxes (1,041) (459)
Contribution to ESOP 220 188
Change in current assets and liabilities
Accounts receivable 3,949 (837)
Inventories (104) (122)
Prepaid expenses 320 (437)
Accounts payable (2,675) (1,637)
Accrued employee compensation and benefits 296 1,232
Other accrued expenses 69 913
Other, net 1,452 228
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Cash provided by operating activities 8,485 4,029
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Cash flows from investing activities
Additions to property and equipment (9,490) (11,383)
Proceeds from sale and leaseback arrangements - 1,196
Additions to notes, equipment contracts and direct
financing leases receivable (1,215) (817)
Principal receipts from notes, equipment contracts
and direct financing leases receivable 1,979 1,386
Additions to reacquired franchises held for sale (8) (214)
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Cash used by investing activities (8,734) (9,832)
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Cash flows from financing activities
Proceeds from issuance of long-term debt 20 5,800
Repayment of long-term debt (30) (1,600)
Principal payments on capital lease obligations (156) (125)
Reacquisition of treasury shares (39) -
Exercise of stock options 143 95
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Cash (used) provided by financing activities (62) 4,170
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Net change in cash and cash equivalents (311) (1,633)
Cash and cash equivalents at beginning of period 8,658 3,860
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Cash and cash equivalents at end of period $ 8,347 $ 2,227
======= ========
Supplemental disclosures
Interest paid, net of capitalized amounts $ 2,410 $ 1,964
Income taxes paid 569 276
Capital lease obligations incurred 503 3,041
See the accompanying notes to the consolidated financial statements.
IHOP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. The accompanying consolidated financial statements for the three months
ended March 31, 1997 and 1996 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" or the
"Company") are necessary for a fair presentation of the financial position
and the results of operations for the periods presented. The accompanying
consolidated balance sheet as of December 31, 1996 has been derived from
audited financial statements, but does not include all disclosures required
by GAAP. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the
full year ending December 31, 1997.
2. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
SFAS No. 128 supersedes and simplifies the existing computational
guidelines under Accounting Principles Board Opinion No. 15, "Earnings Per
Share." It is effective for financial statements issued for periods ending
after December 15, 1997. Among other changes, SFAS No. 128 eliminates the
presentation of primary EPS and replaces it with basic EPS for which common
stock equivalents are not considered in the computation. It also revises
the computation of diluted EPS. It is not expected that the adoption of
SFAS No. 128 will have a material impact on the earnings per share results
reported by the Company under the Company's current capital structure.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
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The following table sets forth certain operating data for IHOP restaurants:
Three Months Ended
March 31,
--------------------
1997 1996
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(Dollars in thousands)
Restaurant Data
Effective restaurants (a)
Franchise 533 495
Company 60 52
Area license 137 132
--- ---
Total 730 679
=== ===
System-wide
Sales (b) $216,459 $189,486
Percent increase 14.2% 11.8%
Average sales per effective
restaurant $ 297 $ 279
Percent increase 6.5% 2.2%
Comparable average sales
per restaurant (c) $ 302 $ 283
Percent increase 3.9% 0.3%
Franchise
Sales $168,547 $146,766
Percent increase 14.8% 12.9%
Average sales per effective
restaurant $ 316 $ 296
Percent increase 6.8% 2.8%
Comparable average sales
per restaurant (c) $ 311 $ 290
Percent increase 4.2% 0.2%
Company
Sales $ 14,048 $ 11,453
Percent increase 22.7% 24.3%
Average sales per effective
restaurant $ 234 $ 220
Percent increase 6.4% 7.3%
Area License
Sales $ 33,864 $ 31,267
Percent increase 8.3% 3.3%
Average sales per effective
restaurant $ 247 $ 237
Percent change 4.2% (2.9%)
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(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 the Company.
(c) "Comparable average sales" reflects sales for restaurants that are operated
for the entire fiscal period in which they are being compared. Comparable
average sales do not include data on restaurants located in Florida and
Japan.
The following table summarizes IHOP's restaurant development and franchising
activity:
Three Months
Ended March 31,
-----------------
1997 1996
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RESTAURANT DEVELOPMENT ACTIVITY (a)
-----------------------------------
IHOP - beginning of period 729 678
New openings
IHOP-developed 4 6
Investor program - 2
Area license 2 1
--- ---
Total new openings 6 9
Closings
Company and franchise (1) (2)
Area license - -
--- ---
IHOP - end of period 734 685
=== ===
Summary - end of period
Franchise 534 498
Company 62 55
Area license 138 132
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Total IHOP 734 685
=== ===
RESTAURANT FRANCHISING ACTIVITY(a)
----------------------------------
IHOP-developed 5 4
Investor program - 2
Rehabilitated and refranchised 1 -
--- ---
Total restaurants franchised 6 6
Reacquired by Company (6) (4)
Closed (1) -
--- ---
Net addition (decrease) (1) 2
=== ===
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(a) The Company reports restaurants in Canada as franchise restaurants although
the ten restaurants are operated under an area license agreement.
The following discussion and analysis provides information management believes
is relevant to an assessment and understanding of the Company'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 the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. The forward-looking statements included in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") relate to certain matters involving risks and uncertainties, including
anticipated financial performance, business prospects, anticipated capital
expenditures and other similar matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements as a result of a number of factors,
including but not limited to those discussed in MD&A. Forward-looking
information provided by the Company pursuant to the safe harbor established
under the Private Securities Litigation Reform Act of 1995 should be evaluated
in the context of these factors. In addition, the Company disclaims any intent
or obligation to update these forward-looking statements.
IHOP's quarterly results are subject to seasonal fluctuation. IHOP's results of
operations are impacted by the timing of additions of new restaurants, by the
timing of the franchising of those restaurants, and by the number of restaurants
in the Company's inventory of restaurants that are available for refranchising.
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 sell for a franchise fee of
$200,000 to $350,000, have little if any franchise cost of sales and have
equipment in excess of $300,000 that is usually sold at about break-even; (ii)
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; and (iii) previously reacquired franchises normally sell for a
franchise fee of $100,000 to $300,000, include an equipment sale, and may have
substantial costs of sales associated with both the franchise and the equipment.
As a consequence of the forgoing factors, the results of operations for the
three months ended March 31, 1997, are not necessarily indicative of the results
to be expected for the full year ending December 31, 1997.
System-wide retail sales for the first quarter of 1997 grew 14.2% over system-
wide retail sales for the first quarter of 1996. This was due to increases of
7.5% in the number of effective restaurants and 6.5% in average per unit
revenues. System-wide comparable average sales per restaurant (exclusive of
area license restaurants) for the first quarter of 1997 grew by 3.9% over those
in the first quarter of 1996. Management believes that unusually severe winter
weather experienced in the United States during the first quarter of 1996 had a
negative impact on sales in that quarter. Management continues to pursue growth
in sales 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 first quarter of 1997 grew 9.7% over
franchise operations revenues for the first quarter of 1996. This was primarily
due to increases in the number of effective franchised restaurants of 7.7% and
in revenues per effective franchised restaurant of 6.8%. Franchise operations
costs and expenses for the first quarter of 1997 increased 4.3% over costs and
expenses for the first quarter of 1996. As a result of franchise revenues
increasing in excess of franchise expenses, franchise margin increased to 55.8%
in the first quarter of 1997 versus 53.5% in the comparable 1996 period. The
margin improved primarily because of increases in rental income and in interest
income associated with IHOP's financing of sales of franchises and equipment to
its franchisees.
Company-operated restaurant revenues in the first quarter of 1997 grew 22.7%
over revenues for the first quarter of 1996. This was primarily due to
increases in the number of effective Company-operated restaurants of 15.4% and
in revenues per effective Company-operated restaurant of 6.3%. Company-operated
restaurant costs and expenses for the first quarter of 1997 increased 25.7% from
costs and expenses for the first quarter of 1996. Margin at Company-operated
restaurants in the first quarter of 1997 was 4.4% compared to 6.7% in the
comparable 1996 period. The change in margin was primarily due to operating
increases in employee costs and controllable expenses, excluding food costs, as
a percentage of revenues.
Other revenues in the first quarter of 1997 grew 27.4% over other revenues for
the first quarter of 1996 primarily due to an increase in revenues from the sale
of franchises and equipment to $2,924,000 from $2,247,000 and an increase of
30.4% in interest income from direct financing leases. Other costs and expenses
in the first quarter of 1997 increased 21.6% over those in the first quarter of
1996 primarily from the increase in franchise and equipment cost of sales to
$1,655,000 from $1,230,000. IHOP franchised six restaurants in both the first
quarter of 1997 and the first quarter of 1996.
Field, corporate and administrative costs and expenses in the first quarter of
1997 increased 4.9% over costs and expenses in the first quarter of 1996
principally due to increases in employee related expenses including salaries and
wages. Field, corporate and administrative expenses were 3.3% of system-wide
sales in the first quarter of 1997 compared to 3.5% in the first quarter of
1996.
Depreciation and amortization expense in the first quarter of 1997 increased
29.0% over that of the comparable 1996 period primarily reflecting the addition
of new, larger restaurants and an increase in the number of Company-operated
restaurants.
Interest expense increased 33.2% in the first quarter of 1997 over that of the
comparable 1996 period due to interest associated with increased capital lease
obligations and the private placement of $35 million in senior notes in November
1996.
Provision for income taxes was 39.0% of income before income taxes in the first
quarter of 1997 and 39.5% in the first quarter of 1996.
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 1997, IHOP and its franchisees and area licensees plan to develop and open
approximately 75 restaurants. Included in that number are the development of 54
new restaurants by the Company and the development of 21 restaurants by IHOP
franchisees and area licensees. Capital expenditures budgeted in 1997, which
include IHOP's portion of the above development program, are approximately $60
million. In November 1997, the second annual installment of $4.6 million in
principal becomes due on the Company's senior notes due 2002. The Company
expects that funds from operations, sale and leaseback arrangements (estimated
to be about $18 million) and its revolving line of credit will be sufficient to
cover its operating requirements, its budgeted capital expenditures and its
principal repayment on its senior notes in 1997. At March 31, 1997, $20 million
was available to be borrowed under the Company's unsecured bank revolving credit
agreement.
Part II. OTHER INFORMATION
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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. Management contracts or compensatory plans or arrangements
are marked with an asterisk.
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 Employment Agreement between the Company and Richard C. Celio.
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 March 31,
1997.
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)
April 29, 1997 BY: /s/ Richard K. Herzer
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(Date) Richard K. Herzer
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
April 29, 1997 BY: /s/ Frederick G. Silny
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(Date) Frederick G. Silny
Vice President-Finance and
Treasurer (Principal
Financial Officer)