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 June 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 June 30, 1996
----- -------------------------------
Common Stock, $.01 par value 9,463,960
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS IHOP CORP. AND SUBSIDIARIES
(Unaudited and in thousands, except share amounts)
- --------------------------------------------------------------------------------
June 30, December 31,
1996 1995
-------- ------------
Assets
Current assets
Cash and cash equivalents $ 3,616 $ 3,860
Receivables 23,438 21,476
Reacquired franchises and equipment
held for sale, net 1,588 1,157
Inventories 1,091 792
Prepaid expenses 678 233
-------- --------
Total current assets 30,411 27,518
-------- --------
Long-term receivables 120,216 115,800
Property and equipment, net 96,060 87,795
Reacquired franchises and equipment
held for sale, net 8,983 6,553
Excess of costs over net assets
acquired, net 13,122 13,336
Other assets 995 1,055
-------- --------
Total assets $269,787 $252,057
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 4,672 $ 4,672
Accounts payable 12,091 15,979
Accrued employee compensation and
benefits 2,805 1,562
Other accrued expenses 2,696 2,349
Deferred income taxes 2,240 3,436
Capital lease obligations and other 769 719
-------- --------
Total current liabilities 25,273 28,717
-------- --------
Long-term debt 36,803 30,584
Deferred income taxes 22,299 21,495
Capital lease obligations and other 68,694 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: June
30, 1996, 9,463,960 shares;
December 31, 1995, 9,375,515
shares 95 94
Additional paid-in capital 48,090 46,363
Retained earnings 68,071 60,640
Contribution to ESOP 462 1,200
-------- --------
Total shareholders' equity 116,718 108,297
-------- --------
Total liabilities and shareholders'
equity $269,787 $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 Six Months Ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
-------- ------- ------- -------
Revenues
Franchise operations
Rent $ 7,190 $ 6,867 $14,373 $13,676
Service fees and other 17,958 15,636 35,326 31,114
------- ------- ------- -------
25,148 22,503 49,699 44,790
Company operations 12,983 10,514 24,436 19,732
Other 6,334 7,106 10,622 8,779
------- ------- ------- -------
Total revenues 44,465 40,123 84,757 73,301
------- ------- ------- -------
Costs and expenses
Franchise operations
Rent 3,923 3,718 7,919 7,492
Other direct costs 7,676 6,689 15,108 13,544
------- ------- ------- -------
11,599 10,407 23,027 21,036
Company operations 12,225 10,076 22,907 18,898
Field, corporate and administrative 6,181 5,601 12,902 11,298
Depreciation and amortization 1,972 1,745 3,870 3,367
Interest 2,757 2,090 5,389 4,161
Other 2,510 3,485 4,380 4,086
Severance charges - - - 800
------- ------- ------- -------
Total costs and expenses 37,244 33,404 72,475 63,646
------- ------- ------- -------
Income before income taxes 7,221 6,719 12,282 9,655
Provision for income taxes 2,852 2,650 4,851 3,810
------- ------- ------- -------
Net income $ 4,369 $ 4,069 $ 7,431 $ 5,845
======= ======= ======= =======
Net income per common and
common equivalent share $ .46 $ .43 $ .78 $ .62
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 9,592 9,502 9,575 9,466
======= ======= ======= =======
See the accompanying notes to the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS IHOP CORP. AND SUBSIDIARIES
(Unaudited and in thousands)
- --------------------------------------------------------------------------------
Six Months Ended
June 30 ,
---------------------
1996 1995
--------- ---------
Cash flows from operating activities
Net income $ 7,431 $ 5,845
Adjustments to reconcile net income
to cash provided
by operating activities
Depreciation and amortization 3,870 3,367
Deferred taxes 392 1,242
Contribution to ESOP 462 334
Change in current assets and
liabilities
Accounts receivable (2,287) (1,186)
Inventories (299) 71
Prepaid expenses (445) 412
Accounts payable (3,888) (1,755)
Accrued employee compensation and 1,243 (297)
benefits
Other accrued expenses 347 527
Other, net 583 (146)
-------- --------
Cash provided by operating
activities 7,409 8,414
-------- --------
Cash flows from investing activities
Additions to property and equipment (17,779) (16,200)
Proceeds from sale and leaseback
arrangements 3,791 8,271
Additions to notes, equipment
contracts and direct financing
leases receivable (2,685) (2,398)
Principal receipts from notes,
equipment contracts and direct
financing leases receivable 3,065 3,061
Additions to reacquired franchises (549) (588)
held for sale -------- --------
Cash used by investing activities (14,157) (7,854)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term
debt 9,300 3,100
Repayment of long-term debt (3,026) (5,400)
Principal payments on capital lease
obligations (298) (262)
Exercise of stock options 528 1,996
-------- --------
Cash provided (used) by financing
activities 6,504 (566)
-------- --------
Net change in cash and cash equivalents (244) (6)
Cash and cash equivalents at beginning
of period 3,860 2,036
-------- --------
Cash and cash equivalents at end
of period $ 3,616 $ 2,030
======== ========
Supplemental disclosures
Interest paid, net of capitalized
amounts $ 5,238 $ 4,258
Income taxes paid 4,081 1,418
Capital lease obligations incurred 5,966 8,720
See the accompanying notes to the consolidated financial statements.
4
IHOP CORP. AND SUBSIDIARIES
NOTES TO 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 six months ended June 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 Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Dollars in thousands)
Restaurant Data
Effective restaurants (a)
Franchise 496 455 495 453
Company 56 49 54 47
Area license 133 126 132 125
-------- -------- -------- --------
Total 685 630 681 625
======== ======== ======== ========
System-wide
Sales (b) $193,506 $175,914 $382,992 $345,417
Percent increase 10.0% 14.0% 10.9% 13.6%
Average sales per
effective restaurant $ 282 $ 279 $ 562 $ 553
Percent increase 1.1% 4.9% 1.6% 5.1%
Comparable average sales
per restaurant (c) $ 290 $ 281 $ 573 $ 552
Percent increase 0.3% 1.7% 0.4% 1.5%
Franchise
Sales $150,482 $134,227 $297,248 $264,243
Percent increase 12.1% 14.2% 12.5% 14.6%
Average sales per
effective restaurant $ 303 $ 295 $ 601 $ 583
Percent increase 2.7% 3.9% 3.1% 4.1%
Comparable average sales
per restaurant (c) $ 298 $ 291 $ 588 $ 571
Percent increase 0.3% 1.9% 0.4% 1.7%
Company
Sales $ 12,983 $ 10,514 $ 24,436 $ 19,732
Percent change 23.5% (0.1%) 23.8% (6.0%)
Average sales per
effective restaurant $ 232 $ 215 $ 453 $ 420
Percent change 7.9% 0.0% 7.9% 0.0%
Area License
Sales $ 30,041 $ 31,173 $ 61,308 $ 61,442
Percent change (3.6%) 18.8% (0.2%) 16.8%
Average sales per
effective restaurant $ 226 $ 247 $ 464 $ 492
Percent change (8.5%) 10.3% (5.7%) 8.6%
(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 Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1996 1995 1996 1995
------- ------ ------- ------
RESTAURANT DEVELOPMENT ACTIVITY (a)
- --------------------------------------
IHOP - beginning of period 685 627 678 620
New openings
IHOP-developed 6 8 12 9
Investor program 7 3 9 9
Area license 1 2 2 4
---- ---- ---- ----
Total new openings 14 13 23 22
Closings
Company and franchise (2) (1) (4) (3)
Area license - - - -
---- ---- ---- ----
IHOP - end of period 697 639 697 639
==== ==== ==== ====
Summary - end of period
Franchise 507 464 507 464
Company 57 48 57 48
Area license 133 127 133 127
---- ---- ---- ----
Total IHOP 697 639 697 639
==== ==== ==== ====
RESTAURANT FRANCHISING ACTIVITY (a)
- --------------------------------------
IHOP-developed 7 10 11 10
Investor program 7 3 9 9
Rehabilitated and refranchised - - - -
---- ---- ---- ----
Total restaurants franchised 14 13 20 19
Reacquired by Company (3) (3) (7) (5)
Closed (2) - (2) (1)
---- ---- ---- ----
Net addition 9 10 11 13
==== ==== ==== ====
- ---------------------
(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 fluctuations. 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 usually not evenly
distributed throughout the year. As a consequence, the results of operations
for the six months ended June 30, 1996, are not necessarily indicative of the
results to be expected for the full year ending December 31, 1996.
7
System-wide retail sales for the second quarter and first six months of 1996
increased 10.0% and 10.9%, respectively, over system-wide retail sales for the
comparable 1995 periods. This was due to increases in the number of effective
restaurants of 8.7% and 9.0% and increases in average per unit revenues of 1.1%
and 1.6% 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 12.5% in the second quarter and 12.8% in the first six months of
1996. System-wide comparable average sales per restaurant (exclusive of area
license restaurants in Florida and Japan) for the second quarter and first six
months of 1996 increased 0.3% and 0.4%, 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 second quarter and first six months of
1996 increased 11.8% and 11.0%, respectively, over revenues for the comparable
1995 periods. This was primarily due to increases in the number of effective
franchised units of 9.0% and 9.3% coupled with increases in average per unit
revenues of 2.7% and 3.1% for the quarter and the first six months,
respectively, over the prior year periods. Franchise operations costs and
expenses for the second quarter and first six months of 1996 increased 11.5% and
9.5%, 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 53.9% and 53.7% in the second
quarter and first six months of 1996, respectively, versus 53.7% and 53.0% in
the comparable 1995 periods. The margin improved primarily because of
increasing interest income associated with IHOP's financing of sales of
franchises and equipment to its franchisees.
Company-operated restaurant revenues for the second quarter and first six months
of 1996 increased 23.5% and 23.8%, respectively, over revenues for the
comparable 1995 periods. This was primarily due to increases in the number of
effective Company-operated restaurants of 14.3% and 14.9%, respectively, and
the revenues per effective Company-operated restaurant of 7.9% in both the
second quarter and first six months of 1996 over the comparable 1995 periods.
Company-operated restaurant costs and expenses for the second quarter and first
six months of 1996 increased 21.3% and 21.2%, respectively, over costs and
expenses for the comparable 1995 periods. Margin from Company-operated
restaurants was 5.8% in the second quarter and 6.3% for the first six months of
1996 versus a margin of 4.2% for both the quarter and the first six months of
1995. The changes in margin were primarily due to decreases in food costs,
salaries, wages and rent expense as a percentage of revenues.
Other revenues for the second quarter of 1996 decreased 10.9% from other
revenues for the second quarter of 1995. Other revenues for the first six
months of 1996 increased 21.0% from those in the comparable 1995 period. The
primary reason for the decrease in the quarter was a decrease in the sales of
franchises and equipment to $4,330,000 in the second quarter of 1996 from
$5,587,000 in the comparable 1995 period. The increase in the six months was
due to the sales of franchises and equipment increasing to $6,578,000 in the
first six months of 1996 from $5,841,000 in the comparable 1995 period and
increases in interest income from direct financing leases. The Company
franchised 14 and 20 restaurants in the second quarter and first six months of
1996, respectively, compared with 13 and 19 restaurants in the comparable 1995
periods. Revenues from sales of franchises and equipment and their associated
costs of sales are
8
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 associated franchise cost of sales and have equipment in
excess of $300,000 that is sold usually at about breakeven; (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 equipment sale and may have substantial costs of sales associated
with both the franchise and the equipment. As noted earlier, sales of franchises
and equipment 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.
Other costs and expenses for the second quarter decreased by 28% from the
comparable 1995 period. Other costs and expenses for the first six months of
1996 increased 7.2% from the comparable 1995 period. The decrease was primarily
due to lower franchise and equipment cost of sales in the second quarter of 1996
of $2,066,000 versus $2,891,000 in the second quarter of 1995. The increase in
the six months was primarily due to higher franchise and equipment cost of sales
of $3,296,000 in the first six months of 1996 versus $2,891,000 in the
comparable 1995 period.
Field, corporate and administrative expenses for the second quarter and first
six months of 1996 increased 10.4% and 14.2%, respectively, over the comparable
1995 periods. In general, field, corporate and administrative expenses have
been increasing moderately as a result of normal increases in salaries and
wages, inflation and increases in headcount due to the increased workloads as
the company grows. Field, corporate and administrative expenses were 3.2% and
3.4% of system-wide sales in the second quarter and first six months of 1996,
respectively, compared with 3.2% and 3.3%, respectively, in the comparable 1995
periods.
Depreciation and amortization expense increased 13.0% and 14.9% in the second
quarter and first six months of 1996, respectively, over the comparable 1995
periods primarily due to depreciation and amortization associated with the
addition of new, larger restaurants.
Interest expense increased 31.9% and 29.5% in the second quarter and first six
months of 1996, respectively, over the comparable 1995 periods due primarily 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 second
quarter and first six months of 1996 and in the comparable 1995 periods.
9
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 75 to 80 restaurants. Included in that number are the development
of 50 to 55 new restaurants by the Company and 25 by IHOP franchisees and area
licensees. Capital expenditures budgeted for 1996, which include IHOP's portion
of the above development program, are approximately $60 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 expects that funds from
operations, sale and leaseback arrangements (estimated to be about $26 million)
and its revolving line of credit will be sufficient to cover its operating
requirements and its projected capital expenditures in 1996. At June 30, 1996,
$11 million was available to be borrowed under the Company's unsecured bank
revolving credit agreement.
10
Part II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders (the "Meeting") was held on May 16, 1996.
Shareholders voted in person or by proxy for the following purposes.
(a) Shareholders voted to elect three Class II directors, each to serve for a
term of three years as follows:
Votes Votes
Nominee For Withheld
---------------- --------- --------
Michael S. Gordon 7,716,894 17,478
Larry Alan Kay 7,717,894 16,478
Dennis M. Leifheit 7,718,894 15,478
There were no abstentions or broker non-votes. Directors whose terms of
office continued after the Meeting included the above three directors and
H. Frederick Christie, Frank Edelstein, Neven C. Hulsey, Richard K. Herzer,
Caroline W. Nahas and Patrick W. Rose.
(b) Shareholders voted to approve and ratify the appointment of Coopers &
Lybrand L.L.P. as the Company's independent accountants for the year ending
December 31, 1996. 7,711,907 shares were voted for this proposal, 15,244
were voted against, there were 7,221 abstentions and no broker non-votes.
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, 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 IHOP Corp.'s Registration Statement
on Form S-1 No. 33-40431 is hereby incorporated by reference.
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 June 30, 1996.
11
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)
July 25, 1996 BY: /s/ Richard K. Herzer
- ------------- --------------------------
(Date) Richard K. Herzer
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
July 25, 1996 BY: /s/ Frederick G. Silny
- ------------- --------------------------
(Date) Frederick G. Silny
Vice President-Finance and
Treasurer (Principal Financial
Officer)
12
EXHIBIT 11
IHOP CORP. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
-------- ------- ------- ------
NET INCOME PER COMMON SHARE - PRIMARY
Weighted average shares outstanding 9,447 9,330 9,421 9,279
Net effect of dilutive stock options
based on the treasury stock method
using average market price 145 172 149 187
------ ------ ------ ------
Total 9,592 9,502 9,570 9,466
====== ====== ====== ======
Net income available to common
shareholders $4,369 $4,069 $7,431 5,845
====== ====== ====== ======
Net income per share - primary $ .46 $ .43 $ .78 $ .62
====== ====== ====== ======
NET INCOME PER COMMON SHARE - FULLY
DILUTED
Weighted average shares outstanding 9,447 9,330 9,421 9,279
Net effect of dilutive stock options
based on the treasury
stock method using the period-end
market price,
if higher than the average market
price 145 176 154 189
------ ------ ------ ------
Total 9,592 9,506 9,575 9,468
====== ====== ====== ======
Net income available to common
shareholders $4,369 $4,069 $7,431 $4,069
====== ====== ====== ======
Net income per share - fully diluted
$ .46 $ .43 $ .78 $ .62
====== ====== ====== ======
5
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
3,616
0
23,438
0
1,091
30,411
96,060
0
269,787
25,273
105,497
0
0
95
116,623
269,787
0
84,757
0
51,323
3,870
0
5,389
12,282
4,851
7,431
0
0
0
7,431
0.78
0.78
