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, 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 September 30, 1998
---------------------------- ------------------------------------
Common Stock, $.01 par value 9,857,259
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES
(In thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 2,622 $ 5,964
Receivables 28,242 30,490
Reacquired franchises and equipment held for sale, net 2,637 2,321
Inventories 1,320 1,378
Prepaid expenses 211 629
-------- --------
Total current assets 35,032 40,782
-------- --------
Long-term receivables 197,704 171,967
Property and equipment, net 168,073 142,751
Reacquired franchises and equipment held for sale, net 14,940 13,151
Excess of costs over net assets acquired, net 12,161 12,481
Other assets 1,442 1,461
-------- --------
Total assets $429,352 $382,593
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 4,997 $ 4,973
Accounts payable 17,040 20,626
Accrued employee compensation and benefits 5,651 4,595
Other accrued expenses 8,236 4,602
Deferred income taxes 2,941 3,468
Capital lease obligations 1,301 1,062
-------- --------
Total current liabilities 40,166 39,326
-------- --------
Long-term debt 57,836 54,950
Deferred income taxes 32,455 28,862
Capital lease obligations and other 119,881 103,271
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,
1998, 9,857,259 shares (net of 3,080 treasury shares);
December 31, 1997, 9,709,261 shares (net of 1,529
treasury shares) 99 97
Additional paid-in capital 59,379 54,629
Retained earnings 118,567 100,158
Contribution to ESOP 969 1,300
-------- --------
Total shareholders' equity 179,014 156,184
-------- --------
Total liabilities and shareholders' equity $429,352 $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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- -------- --------
Revenues
Franchise operations
Rent $ 9,964 $ 8,643 $ 28,428 $ 24,992
Service fees and other 23,427 20,644 67,581 59,357
------- ------- -------- --------
33,391 29,287 96,009 84,349
Company operations 16,855 16,055 52,891 44,897
Other 16,203 10,970 39,011 25,081
------- ------- -------- --------
Total revenues 66,449 56,312 187,911 154,327
------- ------- -------- --------
Costs and Expenses
Franchise operations
Rent 4,885 4,684 14,523 13,237
Other direct costs 9,449 8,453 27,289 24,303
------- ------- -------- --------
14,334 13,137 41,812 37,540
Company operations 15,941 14,966 49,598 41,990
Field, corporate and administrative 8,439 7,395 24,822 21,883
Depreciation and amortization 2,891 2,481 8,397 7,394
Interest 4,460 3,742 12,676 10,747
Other 8,507 5,192 20,427 11,296
------- ------- -------- --------
Total costs and expenses 54,572 46,913 157,732 130,850
------- ------- -------- --------
Income before income taxes 11,877 9,399 30,179 23,477
Provision for income taxes 4,632 3,666 11,770 9,156
------- ------- -------- --------
Net income $ 7,245 $ 5,733 $ 18,409 $ 14,321
======= ======= ======== ========
Net Income Per Share
Basic $ 0.74 $ 0.59 $ 1.88 $ 1.50
======= ======= ======== ========
Diluted $ 0.72 $ 0.58 $ 1.84 $ 1.48
======= ======= ======== ========
Weighted Average Shares Outstanding
Basic 9,855 9,645 9,814 9,563
======= ======= ======== ========
Diluted 10,051 9,860 10,005 9,702
======= ======= ======== ========
See the accompanying notes to the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES
(In thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
1998 1997
-------- --------
Cash flows from operating activities
Net income $ 18,409 $ 14,321
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation and amortization 8,397 7,394
Deferred taxes 3,066 753
Contribution to ESOP 969 894
Changes in current assets and liabilities
Accounts receivable 2,493 (706)
Inventories 58 (343)
Prepaid expenses 418 147
Accounts payable (3,586) (248)
Accrued employee compensation and benefits 1,056 1,780
Other accrued expenses 3,634 276
Other, net 4,680 1,921
-------- --------
Cash provided by operating activities 39,594 26,189
-------- --------
Cash flows from investing activities
Additions to property and equipment (57,012) (37,472)
Proceeds from sale and leaseback arrangements 11,684 16,852
Additions to notes, equipment contracts and direct
financing leases receivable (9,588) (5,891)
Principal receipts from notes, equipment contracts
and direct financing leases receivable 7,149 6,030
Additions to reacquired franchises held for sale (1,289) (1,072)
-------- --------
Cash used by investing activities (49,056) (21,553)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt 6,535 1,440
Repayment of long-term debt (3,341) (47)
Principal payments on capital lease obligations (526) (400)
Issuance of common stock 3,452 3,811
-------- --------
Cash provided by financing activities 6,120 4,804
-------- --------
Net change in cash and cash equivalents (3,342) 9,440
Cash and cash equivalents at beginning of period 5,964 8,658
-------- --------
Cash and cash equivalents at end of period $ 2,622 $ 18,098
======== ========
Supplemental disclosures
Interest paid, net of capitalized amounts $ 11,373 $ 9,425
Income taxes paid 7,598 7,978
Capital lease obligations incurred 18,017 16,178
See the accompanying notes to the consolidated financial statements.
4
IHOP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
1. The accompanying consolidated financial statements for the nine months
ended September 30, 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 nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the
full year ending December 31, 1998.
2. In May 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued Issue No. 98-9 "Accounting for Contingent Rent in
Interim Financial Periods" (EITF 98-9), which provides that recognition of
contingent rental income be deferred until the specified target that
triggers the contingent rent is achieved. EITF 98-9 became effective for
financial statements issued after May 21, 1998. EITF 98-9 has not had a
material impact on IHOP's financial position or results of operations as the
Company has weekly targets for recognizing contingent rental income in its
leases and subleases with its franchisees.
3. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends
a number of existing standards. Upon implementation, all derivatives are
required to be recognized on the balance sheet as either assets or
liabilities and measured at fair value. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999, but earlier application is permitted.
Management believes that adoption of SFAS No 133 will not have any material
impact on the Company's financial position or results of operations.
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,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in thousands)
Restaurant Data
Effective restaurants (a)
Franchise 589 540 576 536
Company 72 67 74 63
Area license 146 141 145 139
-------- -------- -------- --------
Total 807 748 795 738
======== ======== ======== ========
System-wide
Sales (b) $261,159 $232,679 $758,917 $670,204
Percent increase 12.2% 11.6% 13.2% 13.3%
Average sales per
effective restaurant $ 324 $ 311 $ 955 $ 908
Percent increase 4.2% 4.0% 5.2% 5.3%
Comparable average sales
per restaurant (c) $ 338 $ 322 $ 993 $ 933
Percent increase 1.3% 2.5% 2.7% 3.8%
Franchise
Sales $211,568 $183,718 $604,808 $526,009
Percent increase 15.2% 12.7% 15.0% 14.3%
Average sales per
effective restaurant $ 359 $ 340 $ 1,050 $ 981
Percent increase 5.6% 5.3% 7.0% 6.2%
Comparable average sales
per restaurant (c) $ 349 $ 333 $ 1,026 $ 967
Percent increase 1.4% 2.8% 2.9% 4.0%
Company
Sales $ 16,855 $ 16,055 $ 52,891 $ 44,897
Percent increase 5.0% 11.9% 17.8% 15.8%
Average sales per
effective restaurant $ 234 $ 240 $ 715 $ 713
Percent change (2.5%) (1.2%) 0.3% 3.0%
Area License
Sales $ 32,736 $ 32,906 $101,218 $ 99,298
Percent change (0.5%) 5.8% 1.9% 7.4%
Average sales per
effective restaurant $ 224 $ 233 $ 698 $ 714
Percent change (3.9%) (0.9%) (2.2%) 2.0%
- ------------------------
(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,
------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
RESTAURANT DEVELOPMENT ACTIVITY (a)
- -----------------------------------
IHOP - beginning of period 804 746 787 729
New openings
IHOP-developed 18 12 40 26
Investor program 3 3 9 6
Area license - 2 2 6
---- ---- ---- ----
Total new openings 21 17 51 38
Closings
Company and franchise (6) (1) (18) (5)
Area license - - (1) -
---- ---- ---- ----
IHOP - end of period 819 762 819 762
==== ==== ==== ====
Summary - end of period
Franchise 603 552 603 552
Company 70 68 70 68
Area license 146 142 146 142
---- ---- ---- ----
Total IHOP 819 762 819 762
==== ==== ==== ====
RESTAURANT FRANCHISING ACTIVITY (a)
- -----------------------------------
IHOP-developed 20 12 44 27
Investor program 3 3 9 6
Rehabilitated and refranchised 3 1 6 2
---- ---- ---- ----
Total restaurants franchised 26 16 59 35
Reacquired by Company (5) (7) (14) (15)
Closed (4) - (13) (3)
---- ---- ---- ----
Net addition 17 9 32 17
==== ==== ==== ====
- -------------------------------
(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
7
concept by guests and franchisees; the Company'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 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. In addition,
the Company disclaims any intent or obligation to update these forward-looking
statements.
IHOP's quarterly results are subject to seasonal fluctuation with sales
generally higher in the warmer months and during holiday periods. 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) franchise rights with respect to
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 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, 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 and other factors, the results of operations for the nine
months ended September 30, 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 third quarter and first nine months of 1998
grew 12.2% and 13.2%, respectively, over system-wide retail sales for the
comparable 1997 periods. This was due to growth in the number of effective
restaurants of 7.9% and 7.7%, respectively, and increases in average per unit
revenues of 4.2% and 5.2%, respectively, over the prior year periods. System-
wide comparable average sales per restaurant (exclusive of area license
restaurants) for the third quarter and first nine months of 1998 grew 1.3% and
2.7%, respectively, over those in the comparable 1997 periods. 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 third quarter and first nine months of
1998 grew 14.0% and 13.8%, respectively, over revenues for the comparable 1997
periods. This was primarily due to growth in the number of effective franchise
restaurants of 9.1% and 7.5% coupled with increases in average per unit revenues
of 5.6% and 7.0% in the third quarter and the first nine months of 1998,
respectively, over the prior year periods. Franchise operations costs and
expenses for the third quarter and first nine months of 1998 increased 9.1% and
11.4%, respectively, over costs and expenses for the comparable 1997 periods.
As a result of franchise revenues increasing in excess of franchise expenses,
the margin from franchise operations improved to 57.1% in the third quarter and
to 56.5% in the first nine months of 1998 versus 55.1% and 55.5% in the
comparable 1997 periods. The improvements in margin were primarily because of
improved rent margins due, in part, to an increase in the relative number of
IHOP-owned restaurants which do not have rent expense coupled with growth in
interest income associated with IHOP's financing of sales of franchises and
equipment to its franchisees.
8
Company-operated restaurant revenues for the third quarter and first nine months
of 1998 grew 5.0% and 17.8%, respectively, over revenues for the comparable 1997
periods. This was primarily due to increases in the number of effective
Company-operated restaurants of 7.5% and 17.5% in the third quarter and the
first nine months of 1998, respectively, over the comparable 1997 periods. In
the third quarter of 1998, the growth was mitigated by a decrease of 2.5% in
revenues per effective company-operated restaurant versus the comparable prior
year period. For the first nine months of 1998, the growth was augmented by an
increase of 0.3% in revenues per effective company-operated restaurant versus
the first nine months of 1997. Company-operated restaurant costs and expenses
for the third quarter and first nine months of 1998 increased 6.5% and 18.1%,
respectively, over those in the comparable 1997 periods. Margin from Company-
operated restaurants was 5.4% and 6.2% in the third quarter and first nine
months of 1998, respectively, versus margins of 6.8% and 6.5% in the comparable
1997 periods. The changes in margin were primarily due to increases in
compensation-related expenses as a percentage of revenues.
Other revenues for the third quarter and first nine months of 1998 grew 47.7%
and 55.5%, respectively, over other revenues for the comparable 1997 periods.
The primary reason for the changes were sales of franchises and equipment which
were $12,649,000 and $28,725,000 in the third quarter and first nine months of
1998, respectively, versus $7,765,000 and $16,797,000 in the same prior year
periods. The Company franchised 26 and 59 restaurants in the third quarter and
first nine months of 1998, respectively, compared to 16 and 35 restaurants in
the comparable 1997 periods. Augmenting the increases were gains in interest
income from direct financing leases. Other costs and expenses for the third
quarter and first nine months of 1998 increased 63.8% and 80.8%, respectively,
from the 1997 periods. The changes were primarily due to franchise and
equipment costs of sales which were $7,256,000 and $16,423,000, in the third
quarter and first nine months of 1998 respectively, versus $4,476,000 and
$9,359,000 in the comparable 1997 periods.
Field, corporate and administrative expenses for the third quarter and first
nine months of 1998 increased 14.1% and 13.4%, respectively, over the comparable
1997 periods. The increases were principally due to increases in employee-
related compensation and expenses. Field, corporate and administrative expenses
were 3.2% and 3.3% of system-wide sales in the third quarter and first nine
months of 1998, respectively, the same as the percentages in the comparable 1997
periods.
Depreciation and amortization expense increased 16.5% and 13.6% in the third
quarter and first nine months of 1998, respectively, over the comparable 1997
periods primarily reflecting the addition of new, larger restaurants and an
increase in the number of Company-operated restaurants.
Interest expense increased 19.2% and 18.0% in the third quarter and first nine
months of 1998, respectively, over the comparable 1997 periods due to interest
associated with increased capital lease obligations.
Provision for income taxes was 39.0% of income before income taxes in the third
quarter and first nine months of both 1998 and 1997.
The balance of long-term receivables at September 30, 1998, increased over that
of the prior year-end primarily due to IHOP's financing activities associated
with the sale of franchises and equipment and the leasing of restaurants to its
franchisees.
9
Balances of property and equipment, net and capital lease obligations and other
at September 30, 1998, increased over those of the prior year end primarily due
to new restaurant development and the Company's capital lease obligations
associated with that development.
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 1998, IHOP and its franchisees and area licensees plan to develop and open
approximately 73 to 76 restaurants. Included in that number are the development
of 56 or 57 restaurants by the Company and 17 to 19 by IHOP franchisees and area
licensees. The Company's prior forecast for restaurant development in 1998 was
70 to 85 new restaurants comprised of 50 to 60 restaurants developed by the
Company and 20 to 25 by franchisees and area licensees. Capital expenditures
projected for 1998, which include IHOP's portion of the above development
program, are approximately $70 million 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 $25 to $30
million) and its revolving line of credit will be sufficient to cover its
operating requirements, its projected capital expenditures and its principal
repayment on its senior notes in 1998. At September 30, 1998, $17 million was
available to be borrowed under the Company's unsecured bank revolving credit
agreement. In June 1998, the Company's unsecured bank revolving credit
agreement was extended one year, through June 30, 2001, under similar terms and
conditions, although certain borrowings would be subject to more favorable
interest rates.
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.
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,
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 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.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 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)
October 29, 1998 BY: /s/ Richard K. Herzer
- ---------------- --------------------------------------
(Date) Richard K. Herzer
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
October 29, 1998 BY: /s/ Frederick G. Silny
- ---------------- --------------------------------------
(Date) Frederick G. Silny
Vice President-Finance and Treasurer
(Principal Financial Officer)
11