SEC Filing | Dine Brands

- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 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, 1999 ----- ------------------------------------ Common Stock, $.01 par value 20,110,647 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IHOP CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents................................. $ 10,215 $ 8,577 Receivables............................................... 29,135 28,461 Reacquired franchises and equipment held for sale, net.... 2,662 2,284 Inventories............................................... 1,238 1,222 Prepaid expenses.......................................... 4,032 274 -------- -------- Total current assets.................................... 47,282 40,818 -------- -------- Long-term receivables....................................... 237,535 217,156 Property and equipment, net................................. 185,594 161,689 Reacquired franchises and equipment held for sale, net...... 15,085 12,943 Excess of costs over net assets acquired, net............... 11,732 12,054 Other assets................................................ 1,100 1,239 -------- -------- Total assets............................................ $498,328 $445,899 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt...................... $ 5,498 $ 5,386 Accounts payable.......................................... 19,933 22,589 Accrued employee compensation and benefits................ 7,316 6,017 Other accrued expenses.................................... 7,971 5,309 Deferred income taxes..................................... 3,486 2,560 Capital lease obligations................................. 1,550 1,388 -------- -------- Total current liabilities............................... 45,754 43,249 -------- -------- Long-term debt.............................................. 49,740 49,765 Deferred income taxes....................................... 38,019 34,708 Capital lease obligations and other......................... 147,903 130,309 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: September 30, 1999, 20,110,647 shares; December 31, 1998, 19,763,160 shares (net of 9,240 treasury shares)................................................. 202 199 Additional paid-in capital (net of treasury shares at cost: 1998, $154)......................................... 66,379 60,100 Retained earnings......................................... 149,247 126,169 Contribution to ESOP...................................... 1,084 1,400 -------- -------- Total shareholders' equity.............................. 216,912 187,868 -------- -------- Total liabilities and shareholders' equity.............. $498,328 $445,899 ======== ======== See the accompanying notes to the consolidated financial statements. 1

IHOP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1999 1998 1999 1998 -------- -------- -------- -------- Revenues Franchise operations Rent.............................................. $11,457 $ 9,964 $ 33,899 $ 28,428 Service fees and other............................ 30,176 26,836 87,605 77,066 ------- ------- -------- -------- 41,633 36,800 121,504 105,494 Sale of franchises and equipment.................... 12,114 12,649 27,052 28,725 Company operations.................................. 18,271 16,855 52,298 52,891 ------- ------- -------- -------- Total revenues.................................. 72,018 66,304 200,854 187,110 ------- ------- -------- -------- Costs and Expenses Franchise operations Rent.............................................. 5,939 4,885 17,533 14,523 Other direct costs................................ 10,234 9,799 30,884 27,939 ------- ------- -------- -------- 16,173 14,684 48,417 42,462 Cost of sales of franchises and equipment........... 7,586 7,778 16,674 18,060 Company operations.................................. 17,366 15,941 49,573 49,598 Field, corporate and administrative................. 8,848 7,963 26,010 23,794 Depreciation and amortization....................... 3,153 2,891 9,245 8,397 Interest............................................ 4,869 4,460 13,715 12,676 Other (income) and expense, net..................... (29) 710 (307) 1,944 ------- ------- -------- -------- Total costs and expenses........................ 57,966 54,427 163,327 156,931 ------- ------- -------- -------- Income before income taxes............................ 14,052 11,877 37,527 30,179 Provision for income taxes............................ 5,411 4,632 14,449 11,770 ------- ------- -------- -------- Net income...................................... $ 8,641 $ 7,245 $ 23,078 $ 18,409 ======= ======= ======== ======== Net Income Per Share Basic............................................... $ 0.43 $ 0.37 $ 1.16 $ 0.94 ======= ======= ======== ======== Diluted............................................. $ 0.42 $ 0.36 $ 1.13 $ 0.92 ======= ======= ======== ======== Weighted Average Shares Outstanding Basic............................................... 20,068 19,710 19,940 19,628 ======= ======= ======== ======== Diluted............................................. 20,496 20,103 20,364 20,009 ======= ======= ======== ======== See the accompanying notes to the consolidated financial statements. 2

IHOP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1999 1998 -------- -------- Cash flows from operating activities Net income................................................ $ 23,078 $ 18,409 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization........................... 9,245 8,397 Deferred taxes.......................................... 4,237 3,066 Contribution to ESOP.................................... 1,084 969 Change in current assets and liabilities Accounts receivable................................... 774 2,493 Inventories........................................... (16) 58 Prepaid expenses...................................... (3,758) 418 Accounts payable...................................... (2,656) (3,586) Accrued employee compensation and benefits............ 1,299 1,056 Other accrued expenses................................ 2,662 3,634 Other, net.............................................. 269 4,680 -------- -------- Cash provided by operating activities............... 36,218 39,594 -------- -------- Cash flows from investing activities Additions to property and equipment....................... (54,269) (57,012) Proceeds from sale and leaseback arrangements............. 17,684 11,684 Additions to notes, equipment contracts and direct financing leases receivable............................... (9,414) (9,588) Principal receipts from notes, equipment contracts and direct financing leases receivable...................... 8,174 7,149 Additions to reacquired franchises held for sale.......... (929) (1,289) -------- -------- Cash used by investing activities................... (38,754) (49,056) -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt.................. 3,372 6,535 Repayment of long-term debt............................... (3,285) (3,341) Principal payments on capital lease obligations........... (795) (526) Exercise of stock options................................. 4,882 3,452 -------- -------- Cash provided by financing activities............... 4,174 6,120 -------- -------- Net change in cash and cash equivalents..................... 1,638 (3,342) Cash and cash equivalents at beginning of period............ 8,577 5,964 -------- -------- Cash and cash equivalents at end of period.......... $ 10,215 $ 2,622 ======== ======== Supplemental disclosures Interest paid, net of capitalized amounts................. $ 12,536 $ 11,373 Income taxes paid......................................... 10,315 7,598 Capital lease obligations incurred........................ 19,865 18,017 See the accompanying notes to the consolidated financial statements. 3

IHOP CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL--The accompanying, unaudited, consolidated financial statements for the three months and nine months ended September 30, 1999 and 1998, 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") are necessary for a fair statement of the financial position and the results of operations for the periods presented. The accompanying consolidated balance sheet as of December 31, 1998, has been derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months and nine months ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year ending December 31, 1999. 2. STOCK SPLIT--On April 29, 1999, IHOP Corp.'s Board of Directors authorized a 2-for-1 split of IHOP's common stock effective May 27, 1999, in the form of a stock dividend for stockholders of record at the close of business on May 13, 1999. All share, per-share retained earnings, and common stock amounts in the accompanying consolidated financial statements have been restated to give effect to the stock split. 3. SEGMENTS--IHOP identifies its operating segments based on the organizational units used by management to monitor performance and make operating decisions. The Franchise Operations segment includes restaurants operated by franchisees and area licensees in the United States, Canada and Japan. The Company Operations segment includes company-operated restaurants in the United States. We measure segment profit as operating income, which is defined as income before field, corporate and administrative expense, interest expense, and income taxes. Information on segments and a reconciliation to income before income taxes are as follows: SALES OF CONSOLIDATING FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL ---------- ---------- ------------- ------------- ------------ (IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, 1999 Revenues from external customers......... $ 41,618 $18,271 $12,114 $ 15 $ 72,018 Intercompany real estate charges (revenues) 1,502 167 -- (1,669) -- Depreciation and amortization............ 917 1,001 -- 1,235 3,153 Operating income (loss).................. 19,331 (770) 4,528 4,680 27,769 Field, corporate and administrative...... 8,848 Interest expense......................... 4,869 Income before income taxes............... 14,052 Additions to long-lived assets........... 8,915 1,837 79 5,150 15,981 Total assets............................. 351,616 49,938 17,747 79,027 498,328 THREE MONTHS ENDED SEPTEMBER 30, 1998 Revenues from external customers......... 36,838 16,855 12,649 (38) 66,304 Intercompany real estate charges (revenues)............................. 1,575 205 -- (1,780) -- Depreciation and amortization............ 837 910 -- 1,144 2,891 Operating income (loss).................. 16,635 (642) 4,871 3,436 24,300 Field, corporate and administrative...... 7,963 Interest expense......................... 4,460 Income before income taxes............... 11,877 Additions to long-lived assets........... 12,594 -- 638 7,668 20,900 Total assets............................. 301,528 40,926 17,577 69,321 429,352 4

SALES OF CONSOLIDATING FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL ---------- ---------- ------------- ------------- ------------ (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenues from external customers......... $121,532 $52,298 $27,052 $ (28) $200,854 Intercompany real estate charges (revenues)............................. 4,320 422 -- (4,742) -- Depreciation and amortization............ 2,808 2,930 -- 3,507 9,245 Operating income (loss).................. 55,724 (2,118) 10,378 13,268 77,252 Field, corporate and administrative...... 26,010 Interest expense......................... 13,715 Income before income taxes............... 37,527 Additions to long-lived assets........... 35,606 4,119 929 14,544 55,198 Total assets............................. 351,616 49,938 17,747 79,027 498,328 NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenues from external customers......... 105,617 52,891 28,725 (123) 187,110 Intercompany real estate charges (revenues)............................. 4,156 714 -- (4,870) -- Depreciation and amortization............ 2,348 2,798 -- 3,251 8,397 Operating income (loss).................. 47,964 (1,490) 10,665 9,510 66,649 Field, corporate and administrative...... 23,794 Interest expense......................... 12,676 Income before income taxes............... 30,179 Additions to long-lived assets........... 33,484 3,484 1,289 20,044 58,301 Total assets............................. 301,528 40,926 17,577 69,321 429,352 For management reporting purposes, we treat all restaurant lease revenues and expenses as operating lease revenues and expenses, although most of these leases are direct financing leases (revenues) or capital leases (expenses). The accounting adjustments required to bring lease revenues and expenses into conformance with GAAP are included in the Consolidated Adjustments and Other segment. All of IHOP's owned land and restaurant buildings are included in the total assets of the Consolidating Adjustments and Other segment and are leased to the Franchise Operations and Company Operations segments. 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 NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) (UNAUDITED) Restaurant Data Effective restaurants(a) Franchise................................ 644 589 630 576 Company.................................. 75 72 73 74 Area license............................. 149 146 147 145 -------- -------- -------- -------- Total.................................. 868 807 850 795 ======== ======== ======== ======== System-wide Sales(b)................................... $289,644 $261,159 $837,740 $758,917 Percent increase......................... 10.9% 12.2 % 10.4 % 13.2 % Average sales per effective restaurant..... $ 334 $ 324 $ 986 $ 955 Percent increase......................... 3.1% 4.2 % 3.2 % 5.2 % Comparable average sales per restaurant(c)............................ $ 351 $ 338 $ 1,031 $ 993 Percent increase......................... 0.6% 1.3 % 1.1 % 2.7 % Franchise Sales...................................... $236,994 $211,568 $684,067 $604,808 Percent increase......................... 12.0% 15.2 % 13.1 % 15.0 % Average sales per effective restaurant..... $ 368 $ 359 $ 1,086 $ 1,050 Percent increase......................... 2.5% 5.6 % 3.4 % 7.0 % Comparable average sales per restaurant(c)............................ $ 363 $ 349 $ 1,067 $ 1,026 Percent increase......................... 0.5% 1.4 % 1.0 % 2.9 % Company Sales...................................... $ 18,271 $ 16,855 $ 52,298 $ 52,891 Percent change........................... 8.4% 5.0 % (1.1)% 17.8 % Average sales per effective restaurant..... $ 244 $ 234 $ 716 $ 715 Percent change........................... 4.3% (2.5)% 0.1 % 0.3 % Area License Sales...................................... $ 34,379 $ 32,736 $101,375 $101,218 Percent change........................... 5.0% (0.5)% 0.2 % 1.9 % Average sales per effective restaurant..... $ 231 $ 224 $ 690 $ 698 Percent change........................... 3.1% (3.9)% (1.1)% (2.2)% - ------------------------ (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 IHOP. (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 NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (UNAUDITED) RESTAURANT DEVELOPMENT ACTIVITY IHOP--beginning of period................................... 864 804 835 787 New openings IHOP-developed.......................................... 18 18 45 40 Investor and conversion programs........................ 1 3 5 9 Area license............................................ 1 - 4 2 --- --- --- --- Total new openings........................................ 20 21 54 51 Closings Company and franchise................................... (1) (6) (6) (18) Area license............................................ - - - (1) --- --- --- --- IHOP--end of period......................................... 883 819 883 819 === === === === Summary--end of period Franchise................................................. 660 603 660 603 Company................................................... 74 70 74 70 Area license.............................................. 149 146 149 146 --- --- --- --- Total IHOP.............................................. 883 819 883 819 === === === === RESTAURANT FRANCHISING ACTIVITY IHOP-developed.............................................. 18 20 42 44 Investor and conversion programs............................ 1 3 5 9 Rehabilitated and refranchised.............................. 3 3 4 6 --- --- --- --- Total restaurants franchised.............................. 22 26 51 59 Reacquired by IHOP.......................................... (2) (5) (10) (14) Closed...................................................... - (4) (5) (13) --- --- --- --- Net addition.............................................. 20 17 36 32 === === === === - -------------------------- GENERAL The following discussion and analysis provides information we believe is relevant to an assessment and understanding of IHOP'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 IHOP's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 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 that 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 IHOP'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; IHOP's overall marketing, operational and financial performance; IHOP's ability to mitigate the impact of the year 2000 issue successfully; economic and political conditions; adoption of new, or changes in, accounting policies and practices; and other factors discussed from time to time in our filings with the Securities and Exchange Commission. Forward-looking information is provided by us 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, we disclaim any intent or obligation to update these forward-looking statements. 7

Our quarterly results are subject to seasonal fluctuation. The mix and number of restaurants franchised affect revenues from sales of franchises and equipment and their associated costs of sales. We franchise four kinds of restaurants: restaurants newly developed by IHOP, restaurants developed by franchisees, restaurants developed by area licensees and restaurants that have been previously reacquired from franchisees. Franchise rights for 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. Franchise rights for 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. Area license rights are normally granted in return for a one-time development fee that is recognized ratably as restaurants are developed in the area. 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. The timing of sales of franchises is affected by the timing of new restaurant openings and the number of restaurants in our inventory of restaurants that are available for refranchising. As a consequence of the foregoing factors, the results of operations for the nine months ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year ending December 31, 1999. SYSTEM-WIDE RETAIL SALES System-wide retail sales include the sales of all IHOP restaurants as reported to IHOP by its franchisees, area licensees and company-operated restaurants. System-wide retail sales grew $28,485,000 or 10.9% in the third quarter of 1999 and $78,823,000 or 10.4% in the first nine months of 1999. Growth in the number of effective restaurants and increases in average per unit sales caused the growth in system-wide sales. "Effective restaurants" are the number of restaurants in operation in a given fiscal period adjusted to account for restaurants in operation for only a portion of the period. Effective restaurants grew by 61 or 7.6% in the third quarter of 1999 and by 55 or 6.9% in the first nine months of 1999 due to new restaurant development. Newly developed restaurants generally have seating and sales above the system-wide averages. System-wide comparable average sales per restaurant (exclusive of area license restaurants in Florida and Japan) grew 0.6% in the third quarter of 1999 and 1.1% in the first nine months of 1999. Management continues to pursue growth in sales through new restaurant development, advertising and marketing efforts, improvements in customer service and operations, and remodeling of existing restaurants. FRANCHISE OPERATIONS Franchise operations revenues are the revenues received by IHOP from its franchisees and include rent, royalties, sales of proprietary products, advertising fees and interest. Franchise operations revenues were 57.8% of total revenues in the third quarter of 1999 and 60.5% of total revenues in the first nine months of 1999. Franchise operations revenues grew $4,833,000 or 13.1% in the third quarter of 1999 and $16,010,000 or 15.2% in the first nine months of 1999. An increase in the number of effective franchise restaurants coupled with higher average sales per franchise restaurant caused the growth in franchise operations revenues. Effective franchise restaurants grew by 55 or 9.3% in the third quarter of 1999 and by 54 or 9.4% in the first nine months of 1999. Average sales per franchise restaurant grew 2.5% in the third quarter of 1999 and 3.4% in the first nine months of 1999. Franchise operations costs and expenses include rent, advertising, the cost of sales of proprietary products and other direct costs associated with franchise operations. Franchise operations costs and expenses increased $1,489,000 or 10.1% in the third quarter of 1999 and $5,955,000 or 14.0% in the first nine months of 1999. Increases in franchise operations costs were generally in line with the growth in franchise operations revenue. A reduction in the number of IHOP-owned restaurant properties due to sale and leaseback arrangements completed in the second quarter of 1999 caused an increase in rent expense in the third quarter of 1999. 8

Franchise operations margin is equal to franchise operations revenues less franchise operations costs and expenses. Franchise operations margin increased $3,344,000 to $25,460,000 in the third quarter of 1999 and $10,055,000 to $73,087,000 in the first nine months of 1999. Franchise operations margin was 61.2% and 60.2% of franchise operations revenues in the third quarter and first nine months of 1999 compared with 60.1% and 59.7% in the same periods in the prior year. Increased interest income associated with IHOP's financing of sales of franchises and equipment to its franchisees was primarily responsible for the improvement in franchise operations margin in 1999. SALES OF FRANCHISES AND EQUIPMENT Sales of franchises and equipment were 16.8% of total revenues in the third quarter of 1999 and 13.5% of total revenues in the first nine months of 1999. Sales of franchises and equipment declined $535,000 or 4.2% in the third quarter of 1999 and $1,673,000 or 5.8% in the first nine months of 1999. A decrease in the number of restaurants franchised was the primary cause of the decline in sales of franchises and equipment. IHOP franchised 22 and 51 restaurants in the third quarter and first nine months of 1999 compared with 26 and 59 in the same periods in the prior year. Cost of sales of franchises and equipment declined $192,000 or 2.5% in the third quarter of 1999 and $1,386,000 or 7.7% in the first nine months of 1999. The decline was generally in line with the decrease in the number of restaurants franchised, although the mix of restaurants franchised also impacted the cost of sales. Margin on sales of franchises and equipment is equal to sales of franchises and equipment less the cost of sales of franchises and equipment. Margin on sales of franchises and equipment decreased $343,000 to $4,528,000 in the third quarter of 1999 and decreased $287,000 to $10,378,000 in the first nine months of 1999. Margin on sales of franchises and equipment was 37.4% and 38.4% in the third quarter and first nine months of 1999 compared with 38.5% and 37.1% in the same periods in the prior year. The change in margin was primarily due to the mix of restaurants franchised in the respective periods. COMPANY OPERATIONS Company operations revenues are sales to customers at restaurants operated by IHOP. Company operations revenues were 25.4% of total revenues in the third quarter of 1999 and 26.0% of total revenues in the first nine months of 1999. Company operations revenues increased $1,416,000 or 8.4% in the third quarter of 1999 and decreased $593,000 or 1.1% in the first nine months of 1999. Changes in the number of effective IHOP operated restaurants were primarily responsible for the changes in revenues. Effective IHOP operated restaurants increased by three or 4.2% in the third quarter of 1999 and decreased by one or 1.4% in the first nine months of 1999. Average sales per IHOP operated restaurant increased by 4.3% in the third quarter of 1999 and by 0.1% in the first nine months of 1999. Company operations costs and expenses include food, labor and benefits, utilities and occupancy costs. Company operations costs increased $1,425,000 or 8.9% in the third quarter of 1999 and decreased $25,000 or 0.1% in the first nine months of 1999. IHOP experienced slight increases in the costs of food, labor and benefits as a percentage of company operations revenues in the third quarter and first nine months of 1999. Company operations margin is equal to company operations revenues less company operations costs and expenses. Company operations margin declined $9,000 to $905,000 in the third quarter of 1999 and $568,000 to $2,725,000 in the first nine months of 1999. Company operations margin was 5.0% and 5.2% of company operations revenues in the third quarter and first nine months of 1999 compared with 5.4% and 6.2% in the same periods in the prior year. 9

OTHER COSTS AND EXPENSES AND BALANCE SHEET ACCOUNTS Field, corporate and administrative costs and expenses increased $885,000 or 11.1% and $2,216,000 or 9.3% in the third quarter and first nine months of 1999 compared with the same periods in the prior year. The increases were primarily caused by normal increases in salaries and wages and the addition of employees to support our growth. Field, corporate and administrative costs were 3.1% of system-wide sales in both the third quarter and first nine months of 1999 compared with 3.0% and 3.1% in the same periods in the prior year. Depreciation and amortization expense increased $262,000 or 9.1% and $848,000 or 10.1% in the third quarter and first nine months of 1999. The increases were caused primarily by the addition of new restaurants to the IHOP chain from our ongoing restaurant development program. Interest expense increased $409,000 or 9.2% and $1,039,000 or 8.2% in the third quarter and first nine months of 1999. The increases were due to interest associated with capital leases which were partially offset by reductions in interest on our senior notes due 2002 as the principal balance is paid down. The balance of long-term receivables at September 30, 1999, 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. The net balance of long-term reacquired franchises and equipment held for sale at September 30, 1999, increased over that of the prior year end primarily due to the reacquisition of ten restaurants during the first nine months of 1999. The increase was partially offset by the refranchising of four restaurants in the same period. Balances of property and equipment, net and capital lease obligations at September 30, 1999, increased over those of the prior year end primarily due to new restaurant development and IHOP's capital lease obligations associated with that development. LIQUIDITY AND CAPITAL RESOURCES We invest in our business primarily through the development of additional restaurants and, to a lesser extent, through the remodeling of older company-operated restaurants. In 1999 IHOP and its franchisees and area licensees forecast developing and opening approximately 70 to 80 restaurants. Included in that number are the development of 60 to 65 new restaurants by us and the development of 10 to 15 restaurants by our franchisees and area licensees. This forecast differs from earlier projections due to a decrease by ten in the number of restaurants projected to be developed and opened by our franchisees and area licensees. Capital expenditure projections for 1999, which include our portion of the above development program, are approximately $75 to $85 million. In November 1999 the fourth annual installment of $4.6 million in principal becomes due on our senior notes due 2002. We expect that funds from operations, sale and leaseback arrangements (estimated to be about $30 to $35 million) and our $20 million revolving line of credit will be sufficient to cover our operating requirements, our budgeted capital expenditures and our principal repayment on our senior notes in 1999. At September 30, 1999, $20 million was available to be borrowed under our unsecured bank revolving credit agreement. In June 1999 IHOP's unsecured bank revolving credit agreement was extended by one year, through June 30, 2002, under similar terms and conditions. YEAR 2000 COMPLIANCE The Year 2000 issue is primarily a result of computer programs being written using two digits, e.g. "99," to define a year. Date sensitive hardware and software may recognize the year "00" as the year 1900 rather than the year 2000. This would result in errors and miscalculations or even system failure causing 10

disruptions in everyday business activities and transactions. Software is termed Year 2000 compliant when it is capable of performing transactions correctly in the year 2000. IHOP's information technology ("IT") systems include our financial software for accounting and payroll, our network hardware and software and our restaurant point-of-sale (POS) systems. In 1996 and 1997 we installed new client-server software and hardware to perform accounting and payroll functions. This software was upgraded to the latest release in 1999. In 1998 we upgraded our network hardware and software to current release versions. The various vendors of these hardware and software systems have represented to IHOP that they are Year 2000 compliant. Most of our POS systems have been supplied by one vendor. That vendor had represented to IHOP in 1997 that these systems were Year 2000 compliant, but later informed us that the systems were not Year 2000 compliant. Our vendor agreed to supply, free of charge to all sites under software maintenance contracts, software upgrades to make our franchise and company operated POS systems Year 2000 compliant. The software upgrade is available to sites not under software maintenance contracts at a cost of $1,000 per site. In some older POS systems, upgraded hardware will be necessary to run the new versions of the software. Costs to upgrade or replace existing hardware range from $500 to $5,000 per POS system for these older systems. Costs to be incurred in company-operated restaurants are included in IHOP's estimated future remediation and testing costs discussed below. We expect to have substantially all of our POS systems Year 2000 compliant before December 31, 1999, however, IHOP franchisees are independent operators and some franchisees may choose to not upgrade their systems. As of October 27, 1999, upgraded software has been shipped to approximately 90% of the sites using this POS equipment. Our non-IT systems consist primarily of our telephone switching equipment and restaurant operating equipment. We have upgraded our telephone switching equipment where necessary. Our assessment of our restaurant operating equipment has indicated that modification or replacement will not be necessary as a result of the Year 2000 issue. Therefore we are not currently remediating this operating equipment. However, the existence of non-compliant embedded technology in this type of equipment is, by nature, more difficult to identify and repair than in computer hardware and software. We developed plans in conjunction with a major IT consulting company to independently test all of our IT and non-IT systems to ensure that they are Year 2000 compliant. We completed the testing phase for all significant systems by September 30, 1999, and all systems tested as Year 2000 compliant except for certain POS systems, as discussed above. IHOP's most significant third-party business partners consist of restaurant food and supplies vendors who serve the IHOP chain. An inventory of our significant third-party partners has been completed and letters mailed requesting information regarding each party's Year 2000 compliance status. We received responses from all of these vendors indicating that the vendor is now or will be Year 2000 compliant prior to January 1, 2000. Information received from our primary bank indicates that the bank will be Year 2000 compliant prior to January 1, 2000. A Year 2000 information package has been sent to all franchisees. It explains the Year 2000 issue and associated business risks and provides information to assist the franchisees in assessing and remediating their Year 2000 risks. Additional mailings to franchisees have been made as IHOP learns of new Year 2000 related facts. IHOP will continue its efforts to raise awareness and inform franchisees of the risks posed by the Year 2000 throughout fiscal year 1999. To date IHOP's costs specifically related to the Year 2000 issue in IT and non-IT systems have been less than $250,000. Future remediation and testing costs are currently estimated at $100,000 or less, although these costs could increase substantially if remediation of restaurant operating equipment becomes necessary. 11

We believe that we have an effective plan in place to resolve the Year 2000 issue in a timely manner. However, due to the unusual nature of the problem and lack of historical experience with Year 2000 issues, it is difficult to predict with certainty what will happen after December 31, 1999. For example, if there are general public infrastructure failures, IHOP will not have contingency plans available to it to operate restaurants under those conditions. As a result, those restaurants affected will be unable to operate until the failures are resolved. Despite our Year 2000 remediation, testing efforts and contingency planning, there may be disruptions and unexpected business problems caused by IT systems, non-IT systems or third party vendors during the early months of the year 2000. IHOP has made diligent efforts to assess the Year 2000 readiness of our significant business partners and have developed contingency plans for critical areas where we believe our exposure to Year 2000 risk is the greatest. However, despite our best efforts, we may encounter unanticipated third party failures or a failure to have successfully concluded our systems remediation efforts. Any of these unforeseen events could have a material adverse impact on IHOP's results of operations, financial condition or cash flows. Additionally, any prolonged inability of a significant number of our franchisees to operate their restaurants and remit payments to us could have a material adverse effect on us. The amount of any potential losses related to these occurrences cannot be reasonably estimated at this time. The most likely worst case scenario for IHOP is that a significant number of our restaurants will be unable to operate for a few days due to public infrastructure failures and/or food supply problems. Some restaurants may have longer-term problems lasting a few weeks. The failure of restaurants to operate would result in reduced revenues and cash flows for IHOP during the period of disruption. Loss of company-operated restaurant revenues would be partially mitigated by reduced costs. Loss of revenues from franchise operations would more directly impact our profitability. The impact to IHOP of one lost day of operations, on average, for all franchised restaurants is projected to be approximately $500,000. Our gross profit margin on franchise operations in the first nine months of 1999 was 60.2%. 12

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 (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, 1999. 13

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 28, 1999 BY: /s/ RICHARD K. HERZER -------------- ------------------------------------------ (Date) CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) October 28, 1999 BY: /s/ GENE A. SCOTT -------------- ------------------------------------------ (Date) CONTROLLER, ACTING CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) 14

EXHIBIT 11.0 IHOP CORP. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 1999 1998 1999 1998 - ---- ------- ------- ------- ------- NET INCOME PER COMMON SHARE-BASIC Weighted average shares outstanding....................... 20,068 19,710 19,940 19,628 ======= ======= ======= ======= Net income available to common shareholders............... $ 8,641 $ 7,245 $23,078 $18,409 ======= ======= ======= ======= Net income per share-basic................................ $ 0.43 $ 0.37 $ 1.16 $ 0.94 ======= ======= ======= ======= NET INCOME PER COMMON SHARE-DILUTED Weighted average shares outstanding....................... 20,068 19,710 19,940 19,628 Net effect of dilutive stock options based on the treasury stock method using the average market price...... 428 393 424 381 ------- ------- ------- ------- Total................................................. 20,496 20,103 20,364 20,009 ======= ======= ======= ======= Net income available to common shareholders............... $ 8,641 $ 7,245 $23,078 $18,409 ======= ======= ======= ======= Net income per share-diluted.............................. $ 0.42 $ 0.36 $ 1.13 $ 0.92 ======= ======= ======= =======

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF IHOP CORP. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 10,215 0 29,135 0 1,238 47,282 185,594 0 498,328 45,754 197,643 0 0 202 216,710 498,328 79,350 200,854 66,247 114,664 9,245 0 13,715 37,527 14,449 23,078 0 0 0 23,078 1.16

1.13 REPRESENTS BASIC EARNINGS PER SHARE.