FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1998
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 March 31,1998
- ---------------------------- -------------------------------
Common Stock, $.01 par value 9,813,589
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES
(In thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
--------------------- ----------------------
Assets
Current assets
Cash and cash equivalents $ 9,556 $ 5,964
Receivables 29,585 30,490
Reacquired franchises and equipment held for sale, net 2,614 2,321
Inventories 1,290 1,378
Prepaid expenses 309 629
-------- --------
Total current assets 43,354 40,782
-------- --------
Long-term receivables 173,687 171,967
Property and equipment, net 149,751 142,751
Reacquired franchises and equipment held for sale, net 14,812 13,151
Excess of costs over net assets acquired, net 12,375 12,481
Other assets 1,443 1,461
-------- --------
Total assets $395,422 $382,593
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 5,009 $ 4,973
Accounts payable 18,681 20,626
Accrued employee compensation and benefits 3,523 4,595
Other accrued expenses 6,326 4,602
Deferred income taxes 3,468 3,468
Capital lease obligations 1,105 1,062
-------- --------
Total current liabilities 38,112 39,326
-------- --------
Long-term debt 55,046 54,950
Deferred income taxes 30,287 28,862
Capital lease obligations and other 109,023 103,271
Shareholders' equity
Preferred stock, $1 par value, 10,000,000 shares authorized;
None issued - -
Common stock, $.01 par value, 40,000,000 shares authorized;
shares issued and outstanding: March 31, 1998, 9,813,589
shares (net of 3,080 treasury shares); December 31, 1997,
9,709,261 shares (net of 1,539 treasury shares) 98 97
Additional paid-in capital 57,732 54,629
Retained earnings 104,859 100,158
Contribution to ESOP 265 1,300
-------- --------
Total shareholders' equity 162,954 156,184
-------- --------
Total liabilities and shareholders' equity $395,422 $382,593
======== ========
See the accompanying notes to the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS IHOP CORP. AND SUBSIDIARIES
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------------
1998 1997
------------ ------------
Revenues
Franchise operations
Rent $ 8,984 $ 8,096
Service fees and other 21,816 18,833
------- -------
30,800 26,929
Company operations 17,685 14,048
Other 7,392 5,464
------- -------
Total revenues 55,877 46,441
------- -------
Costs and Expenses
Franchise operations
Rent 4,754 4,194
Other direct costs 8,830 7,721
------- -------
13,584 11,915
Company operations 16,449 13,425
Field, corporate and administrative 7,784 7,053
Depreciation and amortization 2,691 2,449
Interest 4,109 3,506
Other 3,554 2,273
------- -------
Total costs and expenses 48,171 40,621
------- -------
Income before income taxes 7,706 5,820
Provision for income taxes 3,005 2,270
------- -------
Net income $ 4,701 $ 3,550
======= =======
Net Income Per Share
Basic $ .48 $ .37
======= =======
Diluted $ .47 $ .37
======= =======
Weighted Average Shares Outstanding
Basic 9,749 9,487
======= =======
Diluted 9,916 9,568
======= =======
See the accompanying notes to the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES
(In thousands)
- --------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------------------
1998 1997
------------------ -------------------
Cash flows from operating activities
Net income $ 4,701 $ 3,550
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation and amortization 2,691 2,449
Deferred taxes 1,425 (1,041)
Contribution to ESOP 265 220
Change in current assets and liabilities
Accounts receivable 1,023 3,949
Inventories 88 (104)
Prepaid expenses 320 321
Accounts payable (1,945) (2,675)
Accrued employee compensation and benefits (1,072) 296
Other accrued expenses 1,724 69
Other, net 1,044 1,451
-------- -------
Cash provided by operating activities 10,264 8,485
-------- -------
Cash flows from investing activities
Additions to property and equipment (14,230) (9,490)
Proceeds from sale and leaseback arrangements 5,570 -
Additions to notes, equipment contracts and direct
financing leases receivable (1,387) (1,215)
Principal receipts from notes, equipment contracts
and direct financing leases receivable 2,260 1,979
Additions to reacquired franchises held for sale (752) (8)
-------- -------
Cash used by investing activities (8,539) (8,734)
-------- -------
Cash flows from financing activities
Proceeds from issuance of long-term debt 235 20
Repayment of long-term debt (17) (30)
Principal payments on capital lease obligations (154) (156)
Exercise of stock options 1,803 104
-------- -------
Cash provided (used) by financing activities 1,867 (62)
-------- -------
Net change in cash and cash equivalents 3,592 (311)
Cash and cash equivalents at beginning of period 5,964 8,658
-------- -------
Cash and cash equivalents at end of period $ 9,556 $ 8,347
======== =======
Supplemental disclosures
Interest paid, net of capitalized amounts $ 2,910 $ 2,410
Income taxes paid 18 569
Capital lease obligations incurred 6,058 503
See the accompanying notes to the consolidated financial statements.
4
IHOP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The accompanying consolidated financial statements for the three months
ended March 31, 1998 and 1997 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, 1997 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,
1998, are not necessarily indicative of the results to be expected for the
full year ending December 31, 1998.
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
March 31,
------------------------------------------
1998 1997
--------------- ---------------
(Dollars in thousands)
Restaurant Data
Effective restaurants (a)
Franchise 567 533
Company 74 60
Area license 144 137
-------- --------
Total 785 730
======== ========
System-wide
Sales (b) $247,412 $216,459
Percent increase 14.3% 14.2%
Average sales per effective
restaurant $ 315 $ 297
Percent increase 6.1% 6.5%
Comparable average sales
per restaurant (c) $ 322 $ 302
Percent increase 3.7% 3.9%
Franchise
Sales $194,549 $168,547
Percent increase 15.4% 14.8%
Average sales per effective
Restaurant $ 343 $ 316
Percent increase 8.5% 6.8%
Comparable average sales
per restaurant (c) $ 334 $ 311
Percent increase 4.2% 4.2%
Company
Sales $ 17,685 $ 14,048
Percent increase 25.9% 22.7%
Average sales per effective
Restaurant $ 239 $ 234
Percent increase 2.1% 6.4%
Area License
Sales $ 35,178 $ 33,864
Percent increase 3.9% 8.3%
Average sales per effective
Restaurant $ 244 $ 247
Percent change (1.2)% 4.2%
- ----------------
(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.
6
The following table summarizes IHOP's restaurant development and franchising
activity:
Three Months
Ended March 31,
-------------------------------
1998 1997
------------- -------------
RESTAURANT DEVELOPMENT ACTIVITY (a)
- -----------------------------------
IHOP - beginning of period 787 729
New openings
IHOP-developed 7 4
Investor program 2 -
Area license 1 2
---- ----
Total new openings 10 6
Closings
Company and franchise (4) (1)
Area license (1) -
---- ----
IHOP - end of period 792 734
==== ====
Summary - end of period
Franchise 570 534
Company 77 62
Area license 145 138
---- ----
Total IHOP 792 734
==== ====
RESTAURANT FRANCHISING ACTIVITY(a)
- -----------------------------------
IHOP-developed 6 5
Investor program 2 -
Rehabilitated and refranchised 1 1
---- ----
Total restaurants franchised 9 6
Reacquired by Company (7) (6)
Closed (3) (1)
---- ----
Net decrease (1) (1)
==== ====
- --------------
(a) The Company reports restaurants in Canada as franchise restaurants although
the eleven 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, 1997. 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, which 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 the Company'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; the Company's overall marketing,
operational and financial performance;
7
economic and political conditions; adoption of new, or changes in, accounting
policies and practices and other factors discussed from time to time in the
Company's filings with the Securities and Exchange Commission. Forward-looking
information is provided by the Company 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. 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 and
profitability 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) franchise rights with respect to
restaurants newly developed by IHOP normally sell for a franchise fee of
$200,000 to $350,000, and such restaurants have little if any franchise cost of
sales and have equipment in excess of $300,000 that is usually sold at a price
that includes little or no profit margin; (ii) franchise rights with respect to
restaurants developed by franchisees normally sell for a franchise fee of
$50,000, and such restaurants 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 foregoing factors, the results of
operations for the three months ended March 31, 1998, are not necessarily
indicative of the results to be expected for the full year ending December 31,
1998.
System-wide retail sales for the first quarter of 1998 grew 14.3% over system-
wide retail sales for the first quarter of 1997. This was due to increases of
7.5% in the number of effective restaurants and 6.1% in average per unit
revenues. System-wide comparable average sales per restaurant (exclusive of
area license restaurants) for the first quarter of 1998 grew by 3.7% over those
in the first quarter of 1997. Management continues to pursue growth in sales
through the Company's restaurant development program, its advertising and
marketing efforts, improvements in customer service and operations, and the
Company's remodeling program.
Franchise operations revenues for the first quarter of 1998 grew 14.4% over
franchise operations revenues for the first quarter of 1997. This was primarily
due to an increase in revenues per effective franchised restaurant of 8.5% and
an increase in the number of effective franchised restaurants of 6.4%. Franchise
operations costs and expenses for the first quarter of 1998 increased 14.0% over
costs and expenses for the first quarter of 1997. As a result of franchise
revenues increasing in excess of franchise expenses, franchise margin increased
to 55.9% in the first quarter of 1998 versus 55.8% in the comparable 1997
period.
Company-operated restaurant revenues in the first quarter of 1998 grew 25.9%
over revenues for the first quarter of 1997. This was primarily due to an
increase in the number of effective Company-operated restaurants of 23.3% and an
increase in revenues per effective Company-operated restaurant of 2.1%. Company-
operated restaurant costs and expenses for the first quarter of 1998 increased
22.5% from costs and expenses for the first quarter of 1997. Margin at Company-
operated restaurants in the first quarter of 1998 increased to 7.0% compared
with 4.4% in the comparable 1997 period. The change in margin was primarily due
to reductions in employee costs and operating expenses as a percentage of
revenues.
8
Other revenues in the first quarter of 1998 grew 35.3% over other revenues for
the first quarter of 1997. This was primarily due to an increase in revenues
from the sale of franchises and equipment to $4,047,000, from $2,924,000, and an
increase of 31.2% in interest income from direct financing leases. Other costs
and expenses in the first quarter of 1998 increased 56.4% over those in the
first quarter of 1997 primarily from the increase in franchise and equipment
cost of sales to $2,339,000, from $1,655,000, and a significant increase in
preopening expenses associated with opening more new IHOP restaurants than in
the comparable period. IHOP franchised nine restaurants in the first quarter of
1998 compared with six in the first quarter of 1997.
Field, corporate and administrative costs and expenses in the first quarter of
1998 increased 10.4% over costs and expenses in the first quarter of 1997,
principally due to increases in employee-related expenses, including salaries
and wages. Field, corporate and administrative expenses were 3.1% of system-wide
sales in the first quarter of 1998 compared to 3.3% in the first quarter of
1997.
Depreciation and amortization expense in the first quarter of 1998 increased
9.9% over that of the comparable 1997 period, primarily reflecting the addition
of new, larger restaurants, and an increase in the number of Company-operated
restaurants.
Interest expense increased 17.2% in the first quarter of 1998 over that of the
comparable 1997 period primarily due to interest associated with increased
capital lease obligations.
Provision for income taxes was 39.0% of income before income taxes in both the
first quarter of 1998 and the first quarter of 1997.
Liquidity and Capital Resources
- -------------------------------
The Company invests available funds into its business primarily through the
development of additional restaurants and, to a lesser extent, through the
remodeling of older Company-operated restaurants.
In 1998, IHOP and its franchisees and area licensees plan to develop and open
approximately 70 to 85 restaurants. Included in that number are the development
of 50 to 60 new restaurants by the Company and the development of 20 to 25
restaurants by IHOP franchisees and area licensees. Capital expenditure
projections for 1998, which include IHOP's portion of the above development
program, are approximately $60 to $75 million. In November 1998, the third
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 $35 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
1998. At March 31, 1998, $20 million was available to be borrowed under the
Company's unsecured bank revolving credit agreement.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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. 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, 1997, Commission file number 0-8360,
(the "1997 Form 10-K") is hereby incorporated by reference.
3.2 Bylaws of IHOP Corp. Exhibit 3.2 to the 1997 Form 10-K is hereby
incorporated by reference.
*10.1 Revised IHOP Corp. Executive Incentive Plan effective January 1, 1998.
11.0 Statement Regarding Computation of Per Share Earnings.
27.0 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1998.
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)
April 30, 1998 BY: /s/ Richard K. Herzer
-------------- ----------------------------------
(Date) Richard K. Herzer
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
April 30, 1998 BY: /s/ Frederick G. Silny
-------------- ----------------------------------
(Date) Frederick G. Silny
Vice President-Finance and
Treasurer (Principal
Financial Officer)
11