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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001   Commission file number 0-8360

IHOP CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)
  95-3038279
(I.R.S. Employer
Identification No.)

450 North Brand Boulevard, Glendale, California
(Address of principal executive offices)

 

91203-2306
(Zip Code)

Registrant's telephone number, including area code: (818) 240-6055

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  Name of each exchange on which registered
Common Stock, $.01 Par Value   New York Stock Exchange, Inc.

        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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/

        State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of January 31, 2002: $567 million.

        Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Class

  Outstanding as of January 31, 2002
Common Stock, $.01 par value   20,715,201

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for Annual Meeting of Shareholders to be held on Tuesday, May 14, 2002, (the "2002 Proxy Statement") are incorporated by reference into Part III.





PART I

General Development of Business

Item 1.    Business.

        IHOP Corp. and its subsidiaries ("IHOP" or the "Company") develop, operate and franchise International House of Pancakes restaurants, one of America's best-known, national, family restaurant chains. At December 31, 2001, there were 1,017 IHOP restaurants. Franchisees operated 823 of these restaurants, area licensees operated 122 restaurants, and IHOP operated 72 restaurants. Franchisees and area licensees are independent third parties who operate their restaurants under legal agreements with IHOP. IHOP restaurants are located in 41 states and Canada.

        IHOP Corp. was incorporated under the laws of the State of Delaware in 1976. In July 1991, we completed an initial public offering of common stock. There were no significant changes to our corporate structure during 2001, and no material changes to our methods of conducting business.

Financial Information about Industry Segments

        IHOP is engaged in the development, operation and franchising of International House of Pancakes restaurants primarily in the United States. Information about our revenues, operating profits and assets is contained in Part II, Item 6 of this Annual Report on Form 10-K.

Narrative Description of Business

        IHOP restaurants feature table service and moderately priced, high-quality food and beverage items in an attractive and comfortable atmosphere. Although the restaurants are best known for their award-winning pancakes, omelets and other breakfast specialties, IHOP restaurants offer a broad array of lunch, dinner and snack items as well. They are open throughout the day and evening hours, and some operate 24 hours a day.

        Franchisees and area licensees operate more than 90% of IHOP restaurants. Our approach to franchising is founded on the franchisees' active involvement in the day-to-day operations of their respective restaurants. We are selective in granting franchises and we prefer to franchise to those who intend to be active in the management of their restaurant(s), rather than to passive investors or investment groups. We believe that they provide a quality of management and dedication that, in our view, is generally unmatched by salaried employees or absentee owners.

        IHOP develops most new restaurants prior to franchising them. When the restaurant is franchised, we then become the franchisee's landlord. This landlord/tenant relationship provides us with enhanced profits and greater control over our franchise system. Some franchisees develop their own IHOP restaurants under our Investor and Conversion Programs for franchisees. In those instances, IHOP approves the site for development but does not contribute capital or become the franchisee's landlord. Area licensees located in Canada and Florida operate 12% of IHOP restaurants. We provide support to these area licensees, but we are not actively involved in developing new restaurants in these areas.

        We seek to increase our revenues and profits by focusing on several areas of our business. These areas include: (1) development and franchising of new IHOP restaurants, (2) marketing, advertising and product development programs aimed at attracting new guests and retaining our existing customers, and (3) implementation of restaurant-level operating changes designed to improve sales and profitability.

1



Restaurant Development

        New restaurants are developed after a stringent site selection process supervised by our senior management. In 2001, we developed 76 new restaurants and our franchisees and area licensees developed an additional 17 new restaurants.

        We intend to continue to add restaurants to the IHOP system primarily by developing new restaurants in major markets where we already have a core customer base. We believe that concentrating growth in existing markets allows us to achieve economies of scale in our supervisory and advertising functions. At times, we acquire existing restaurants and convert them to IHOP restaurants.

        IHOP also looks to strategically develop new markets in which we have no presence or our presence is limited. This occurs primarily where these new markets are geographically near to existing markets and present significant business opportunities. At times, we have acquired several existing restaurants in new markets for conversion to IHOP restaurants. We evaluate such opportunities on a case-by-case basis.

        Our development involves obtaining rights to land either through a purchase of fee property, or through ground or "build to suit" leases. A "build to suit" lease is one in which the landlord provides the capital to construct and equip the restaurant. Fee and ground lease properties are developed with our own capital. Some time after the restaurant is franchised and leased to the franchisee, the Company raises additional capital for further development, most often via sale and leaseback transactions involving the land and building on fee properties or leasehold improvements on ground leases. Timing of financing activities is dictated by cash flow requirements, not franchising activities. The mix of fee properties, ground leases and "build to suit" leases is not predictable. However, our recent experience has increasingly been to obtain rights to land via ground leases.

        In 2001, we built two general types of new restaurant buildings. The larger format restaurant is approximately 4,900 square feet in size and contains 176 seats. The second building type is designed for use in smaller, high-potential markets. It is approximately 4,000 square feet in size and seats about 132 people. We also purchased and converted existing buildings into IHOP restaurants. The square footage and number of seats in a restaurant conversion vary by location. In 2001, restaurant conversions averaged 163 seats per restaurant. Our older A-Frame style restaurants, which have not been built since 1985, contain approximately 3,000 square feet and about 100 seats. Of the 76 new IHOP restaurants we developed in 2001, 17 were the larger format building, 46 were the smaller format building and 13 were restaurant conversions or leased spaces in multi-tenant buildings.

        To the greatest extent possible, subject to local zoning restrictions, we continue to use our familiar signature blue color on the roof, awnings and other exterior decor of our restaurants.

        The table below sets forth our average development cost per restaurant in 2001. For leased restaurants the discounted present value of the lease and any additional sums paid to acquire the lease have been allocated to land, building and site improvements and other costs, as appropriate.

 
  Average Per Restaurant
Land   $ 667,000
Building     800,000
Equipment     341,000
Site improvements and other costs     185,000
   
  Total   $ 1,993,000
   

        New IHOP restaurants that opened in 2000 realized average sales of approximately $1,559,000 per restaurant in their first twelve full months of operations.

2



Franchising

        IHOP's approach to franchising is somewhat different from that of most of our franchising competitors in the foodservice industry. In most franchise systems, the franchisee is called upon to pay a modest initial fee to the franchisor. The franchisee then uses his/her own capital to acquire a site, build and equip the business and fund working capital needs. While we offer programs to certain experienced franchisees that allow them to fund the development of their own restaurants, typically approximately 85% of IHOP restaurants are developed directly by us.

        When we develop a restaurant, we identify the site for the new restaurant, purchase the site or lease it from a third party, and build the restaurant and equip it with all required equipment. We then select the franchisee and train the franchisee and supervisory personnel who will run the restaurant. In addition, we finance approximately 80% of the franchise fee and lease the restaurant and equipment to the franchisee. After the franchisee is operating the restaurant, we provide continuing support with respect to operations, marketing and new product development.

        Our involvement in the development of new restaurants allows IHOP to command a substantial franchise and development fee. In addition, we derive income from the financing of the franchise and development fee and from the leasing of property and equipment to franchisees. However, we also incur substantial obligations in the development, franchising and start-up operations of new restaurants. IHOP's involvement in site selection and development, the training and supervision of franchisees, as well as our control over restaurant property, products and services, are an integral part of our operating philosophy.

        IHOP franchisees are predominantly owner/operators, not passive investors. The majority of franchisees own only one restaurant and only 20 franchisees currently own more than six restaurants. We believe that franchisees who are actively involved in the operation of their restaurants provide a quality of management and commitment to our guests that cannot be matched by salaried managers.

        A substantial majority of new restaurants are franchised to current franchisees or restaurant managers who already understand IHOP's approach to the restaurant business. In the past five years, sales to existing franchisees and IHOP employees, or to their immediate families, constituted approximately 91% of franchise sales transactions.

        An initial franchise fee of approximately $200,000 to $375,000 or more is generally required for a newly developed restaurant, depending on the site. The franchisee typically pays approximately 20% of the initial franchise fee in cash, and we finance the remaining amount over five to eight years. We also receive continuing revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) income from the leasing of the restaurant and related equipment; (3) revenue from the sale of certain proprietary products, primarily pancake mixes; (4) a local advertising fee equal to about 2% of the restaurant's sales, which is usually paid to a local advertising cooperative; and (5) a national advertising fee equal to 1% of the restaurant's sales. Franchise agreements for restaurants developed directly by franchisees under our Investor and Conversion Programs provide for an initial franchise fee of $50,000, revenue from the sale of certain proprietary products, and royalties and advertising fees as described above.

        We have entered into long-term area licensing agreements covering the state of Florida and the Southern-most counties of Georgia and the province of British Columbia, Canada. These agreements provide for royalties ranging from 0.5% to 2% of sales, and advertising fees of 0.25% of sales. We also derive revenue from the sale of proprietary products to these area licensees. We treat the revenues from our area licensees as franchise operations revenues for financial reporting purposes. Area licensing arrangements may be used in the future for domestic and/or international expansion.

3



Restaurant Operations and Support

        It is our goal to make every dining experience at an IHOP restaurant a satisfying one. Our franchisees and managers of company-operated restaurants strive always to exceed guests' expectations. We hold firm to the belief that a satisfied customer will both be a return customer and will tell others about our restaurants. To ensure that our guests' expectations are fulfilled, all restaurants are operated in accordance with uniform operating standards and specifications relating to the quality and preparation of menu items, selection of menu items, maintenance, repair and cleanliness of premises, and the appearance and conduct of employees.

        Our Operations Department is charged with ensuring that these high standards are met at all times. We have developed our operating standards in consultation with our franchisee operators. These standards are detailed in our Manual of Standard Operating Procedures.

        Each restaurant is assigned an Operations Consultant. He or she regularly visits and evaluates the restaurant to ensure that it remains in compliance with the operating guidelines and procedures. At least twice per year, the Operations Consultant conducts a comprehensive written evaluation of every aspect of the restaurant's operations. The Operations Consultant then meets with the franchisee or manager to discuss the results of the evaluation and develop a plan to address any areas needing improvement.

        The IHOP menu offers a large selection of high-quality, moderately priced products designed to appeal to a broad customer base. These include a wide variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak, sandwiches, salads and lunch and dinner specialties. Most IHOP restaurants offer special items for children and seniors at reduced prices. In recognition of local tastes, IHOP restaurants typically offer regional specialties that complement the IHOP core menu. Our Research and Development Department works together with franchisees and our Operations and Marketing Departments to continually develop new menu ideas. These new menu items are thoroughly evaluated in our test kitchen and in limited regional tests before being introduced throughout the system. The purpose of adding new items to our menu is to be responsive to our guests' needs and requests, and to keep the menu fresh and appealing to our customers.

        Training is ongoing at all IHOP restaurants. Prospective franchisees are required to participate in an extensive training program before he or she is first sold a franchise. The training program involves classroom study and hands-on operational training in one of our regional training restaurants. Each franchisee learns to cook, wait on tables, serve as a host, wash dishes and perform each of the other tasks necessary to operate a successful restaurant. New restaurant opening teams provide on-site instruction to restaurant employees to assist in the opening of all new IHOP restaurants.

        The Company offers additional training courses from time to time on subjects such as suggestive selling, improving service, managing people and diversity.

Marketing and Advertising

        Most IHOP franchisees and company-operated restaurants contribute about 2% of their sales to local advertising cooperatives. We also provide additional funding to these cooperatives. The advertising co-ops use these funds to purchase television advertising time and place advertisements in printed media or direct mail. In addition to television advertising, IHOP encourages local area marketing by its franchisees. These marketing programs include discounts and specials aimed at increasing customer traffic and encouraging repeat business.

Company-Operated Restaurants

        Company-operated restaurants are those restaurants newly developed by IHOP that have not yet been franchised and those restaurants reacquired by us through negotiation or franchisee defaults. The

4



type and number of company-operated restaurants varies from time to time as we develop new restaurants, reacquire franchised restaurants and franchise new and reacquired restaurants.

        Restaurants that we reacquire from franchisees typically require investment in remodeling and rehabilitation before being refranchised. They may remain as company-operated restaurants for a substantial period of time. As a consequence, a significant number of company-operated restaurants are likely to incur operating losses during the initial period of their rehabilitation.

Remodeling and Refranchising Program

        Restaurants that we reacquire are often underperforming as a result of having been poorly operated and physically neglected. When we reacquire a restaurant, we begin a multi-step rehabilitation program for that restaurant. First these restaurants are physically rehabilitated, then we hire and train the restaurant staff. After these first steps are completed, we implement new marketing and operations programs designed to regain the business of former guests and attract new patrons. After a restaurant has been rehabilitated and its sales volume reaches acceptable levels, the restaurant is refranchised to a qualified franchisee. In the past five years IHOP reacquired a total of 85 restaurants from franchisees and subsequently closed 15 of those restaurants. In those same years, a total of 46 restaurants were refranchised.

        We also require most of our franchisees, and strongly encourage all of our franchisees, to periodically remodel their restaurants.

Purchasing

        IHOP has entered into supply contracts and pricing agreements for various products, such as pancake mixes, pork products, coffee, soft drinks and juices to ensure the availability of quality products at competitive prices. We also have negotiated agreements with food distribution companies to limit markups charged on food and restaurant supplies purchased by individual IHOP restaurants.

Competition and Markets

        The restaurant business is highly competitive and is affected by, among other things, changes in eating habits and preferences, local, regional and national economic conditions, population trends and traffic patterns. The principal bases of competition in the industry are the type, quality and price of the food products served. Additionally, restaurant location, quality and speed of service, advertising, name identification and attractiveness of facilities are important.

        The acquisition of sites is also highly competitive. We are often competing with other restaurant chains and retail businesses for suitable sites for the development of new restaurants.

        Foodservice chains in the United States include the following segments: quick-service sandwich, chicken, pizza, family restaurant, dinner house, grill-buffet, hotel restaurant and contract/catering. Differentiated chains competing within their segments against each other and local, single-outlet operators characterize the current structure of the U.S. restaurant and institutional foodservice market.

        Information published in 2001 by The Nations Restaurant News ranked IHOP 27th out of the top 100 foodservice chains based on estimated fiscal 2000 system-wide sales in the United States. The same publication included eleven family restaurant chains in its top 100 chains, and IHOP ranked second in this segment. During December 2001, based on a nationwide sample of IHOP company-operated and franchised restaurants, the approximate guest check average per IHOP customer was $7.00.

5



Trademarks and Service Marks

        We have registered our trademarks and service marks with the United States Patent and Trademark Office. These include "International House of Pancakes," "IHOP" and variations of each, as well as "Any Time's a Good Time for IHOP," "The Home of the Never Empty Coffee Pot," "Rooty Tooty Fresh 'N Fruity," and "Harvest Grain 'N Nut." We also register new trademarks and service marks from time to time. We are not aware of any infringing uses that could materially affect our business or any prior claim to these marks that would prevent us from using or licensing the use thereof for restaurants in any area of the United States. We have also registered our trademarks and service marks and variations thereof in Japan and Canada for use by our current licensees. Where feasible and appropriate, we register our trademarks and service marks in other nations for future use. Our current registered trademarks and service marks will expire, unless renewed, at various dates from 2002 to 2012. We routinely apply to renew our active trademarks prior to their expiration.

Seasonality

        IHOP's business, like that of most restaurant companies, is somewhat seasonal. Our restaurants generally experience greater customer traffic and sales in the summer months and during various holidays when children are out of school and family vacations are more frequent. Restaurants in some resort areas and warm weather climates tend to experience greater customer traffic and sales in the winter months.

Government Regulation

        IHOP is subject to various federal, state and local laws affecting our business as well as a variety of regulatory provisions relating to zoning of restaurant sites, sanitation, health and safety. As a franchisor, we are subject to state and federal laws regulating various aspects of franchise operations and sales. These laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. In certain cases, they also apply substantive standards to the relationship between franchisor and franchisee, including primarily defaults, termination, non-renewal of franchises, and the potential impact of new IHOP restaurants on sales levels at existing IHOP restaurants.

        Various federal and state labor laws govern our relationships with our employees. These include such matters as minimum wage requirements, overtime and other working conditions. Environmental requirements have not had a material effect on the operations of our company-operated restaurants or the restaurants of our franchisees. Significant additional government-imposed increases in minimum wages, paid leaves of absence, mandated health benefits or increased tax reporting and tax payment requirements with respect to employees who receive gratuities could, however, be detrimental to the economic viability of franchisee-operated and company-operated IHOP restaurants.

Employees

        At December 31, 2001, we employed 3,921 persons, of whom 278 were full-time, non-restaurant, corporate personnel.

6



Item 2.    Properties.

        The table below shows the location and status of the 1,017 IHOP restaurants as of December 31, 2001:

Location

  Franchise
  Company-
Operated

  Area
License

  Total
United States                
Alabama   12   4   0   16
Arizona   23   1   0   24
Arkansas   8   0   0   8
California   190   6   0   196
Colorado   25   0   0   25
Connecticut   8   0   0   8
Delaware   1   0   0   1
Florida   0   0   121   121
Georgia   40   3   1   44
Hawaii   1   0   0   1
Idaho   3   1   0   4
Illinois   30   5   0   35
Indiana   6   2   0   8
Iowa   2   0   0   2
Kansas   9   0   0   9
Louisiana   9   0   0   9
Maine   1   0   0   1
Maryland   23   5   0   28
Massachusetts   13   0   0   13
Michigan   5   7   0   12
Mississippi   7   0   0   7
Missouri   15   2   0   17
Nebraska   4   1   0   5
Nevada   17   0   0   17
New Hampshire   2   0   0   2
New Jersey   30   3   0   33
New Mexico   5   0   0   5
New York   37   2   0   39
North Carolina   26   2   0   28
Oklahoma   15   0   0   15
Oregon   8   5   0   13
Pennsylvania   12   2   0   14
Rhode Island   2   0   0   2
South Carolina   15   2   0   17
Tennessee   18   4   0   22
Texas   126   0   0   126
Utah   10   0   0   10
Virginia   37   1   0   38
Washington   14   13   0   27
Wisconsin   2   1   0   3
Wyoming   1   0   0   1
International                
Canada(1)   11   0   0   11
   
 
 
 
Totals   823   72   122   1,017
   
 
 
 

(1)
IHOP reports restaurants in Canada as franchise restaurants although the restaurants are operated under an area license agreement.

7


        As of December 31, 2001, 8 of the 72 company-operated restaurants were located on sites owned by IHOP and 64 were located on sites leased by IHOP from third parties; of the 823 franchisee-operated restaurants, 45 were located on sites owned by IHOP, 636 were located on sites leased by IHOP from third parties and 142 were located on sites owned or leased by franchisees; and all of the restaurants operated by area licensees were located on sites owned or leased by the area licensees.

        IHOP's leases with its landlords generally provide for an initial term of 15 to 25 years, with most having one or more five-year renewal options in favor of IHOP. The leases typically provide for payment of rentals in an amount equal to the greater of a fixed amount or a specified percentage of gross sales and for payment by IHOP of taxes, insurance premiums, maintenance expenses and certain other costs. Historically, we generally have been successful at renewing those leases that expire without further renewal options. However, from time to time we choose not to renew a lease or are unsuccessful in negotiating satisfactory renewal terms. When this occurs, the restaurant is closed and possession of the premises is returned to the landlord.

        We currently lease our principal corporate offices in Glendale, California under a lease having a remaining term of approximately nine years. We also lease regional offices in Lyndhurst, New Jersey; Norcross, Georgia; Lombard, Illinois; Dallas, Texas; Portland, Oregon; Fredericksburg, Virginia; and Greenwood Village, Colorado.

Item 3.    Legal Proceedings.

        IHOP is subject to various claims and legal actions that arise in the ordinary course of business, many of which are covered by insurance. We believe such claims and legal actions, individually or in the aggregate, will not have a material adverse effect on the business or either the financial condition, results of operations, or cash flows of our company.

Item 4.    Submission of Matters to A Vote of Security Holders.

        There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

8



PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters.

        Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "IHP". The Company's common stock began trading on the New York Stock Exchange on September 17, 1999. Prior to commencing trading on the New York Stock Exchange, our common stock was traded on the Nasdaq Stock Market National Market. As of January 31, 2002, there were approximately 4,554 stockholders, including the beneficial owners of shares held in "street name."

        The following table sets forth the high and low prices of IHOP's common stock for each quarter of 2001 and 2000 as reported by the NYSE.

Quarter Ended

  High
  Low
  Quarter Ended

  High
  Low
March 31, 2001   $ 24.00   $ 18.90   March 31, 2000   $ 18.19   $ 13.63
June 30, 2001     27.40     19.10   June 30, 2000     18.00     14.00
September 30, 2001     29.15     21.03   September 30, 2000     20.09     15.75
December 31, 2001     31.03     24.40   December 31, 2000     22.63     17.75

        We have not paid any dividends on our common stock in the last five years and have no plans to do so in 2002. Any future determination to declare dividends will depend on our earnings, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors. The purchase agreements governing our 7.79% senior notes, our 7.42% senior notes, and our credit agreement with our bank limit the amount of retained earnings available for dividends and investments. At December 31, 2001, approximately $105 million of retained earnings were potentially free of restriction as to distribution of dividends.

9


Item 6.    Selected Financial Data.

Five-Year Financial Summary

 
  Year Ended December 31,
 
  2001(a)
  2000(a)
  1999(a)
  1998(a)
  1997(a)
 
  (In thousands, except per share amounts)

Income Statement Data                              
  Revenues                              
    Franchise operations   $ 208,630   $ 183,361   $ 163,486   $ 145,955   $ 123,842
    Sales of franchises and equipment     46,996     47,065     39,545     40,347     28,864
    Company operations     68,810     72,818     70,204     69,906     61,839
   
 
 
 
 
      Total revenues     324,436     303,244     273,235     256,208     214,545
   
 
 
 
 
  Costs and expenses                              
    Franchise operations     86,136     72,394     64,189     58,539     51,137
    Cost of sales of franchises and equipment     31,086     30,944     23,958     26,628     17,814
    Company operations     66,330     70,085     66,016     65,711     58,001
    Field, corporate and administrative     40,621     36,481     34,531     32,381     28,409
    Depreciation and amortization     14,818     13,562     12,310     11,271     10,029
    Interest     21,107     21,751     19,391     17,417     14,649
    Other (income) expense, net     (123 )   567     604     1,456     220
   
 
 
 
 
      Total costs and expenses     259,975     245,784     220,999     213,403     180,259
   
 
 
 
 
  Income before income taxes     64,461     57,460     52,236     42,805     34,286
  Provision for income taxes     24,173     22,122     20,111     16,694     13,372
   
 
 
 
 
  Net income   $ 40,288   $ 35,338   $ 32,125   $ 26,111   $ 20,914
   
 
 
 
 
  Net income per share(b)                              
    Basic   $ 1.98   $ 1.77   $ 1.61   $ 1.33   $ 1.09
   
 
 
 
 
    Diluted   $ 1.94   $ 1.74   $ 1.58   $ 1.30   $ 1.07
   
 
 
 
 
  Weighted average shares outstanding(b)                              
    Basic     20,398     20,017     19,983     19,659     19,192
   
 
 
 
 
    Diluted     20,762     20,263     20,358     20,033     19,486
   
 
 
 
 
Balance Sheet Data (end of period)                              
  Cash and cash equivalents   $ 6,252   $ 7,208   $ 4,176   $ 2,294   $ 2,789
  Property and equipment, net     238,026     193,624     177,743     161,689     142,751
  Total assets     641,429     562,212     520,402     443,032     379,418
  Long-term debt     50,209     36,363     41,218     49,765     54,950
  Capital lease obligations     168,105     167,594     165,557     129,861     102,578
  Stockholders' equity(c)     312,430     259,995     226,480     187,868     156,184

(a)
Fiscal 1998 is comprised of 53 weeks (371 days); all other years are comprised of 52 weeks (364 days).

(b)
All share and per-share amounts have been restated to reflect the stock split on May 27, 1999 (see Note 1 to the Consolidated Financial Statements).

(c)
We have not paid any dividends on our common stock in the last five years and have no plans to do so in 2002. Any future determination to declare dividends will depend on our earnings, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

        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. Certain forward-looking statements are contained in this 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 for 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, natural disasters or acts of war or terrorism; 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; economic and political conditions; adoption of new, or changes in, accounting policies and practices and other factors discussed from time to time in our Press Releases, Public Statements and/or 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.

General

        IHOP's revenues are recorded in three categories: franchise operations, sales of franchises and equipment, and company operations.

        Franchise operations includes payments from franchisees of rents, royalties and advertising fees, proceeds from the sale of proprietary products to distributors, franchisees and area licensees, interest income received in connection with the financing of franchise and development fees and equipment sales, interest income received from direct financing leases on franchised restaurant buildings, and payments from area licensees of royalties and advertising fees.

        Revenues from the sale of franchises and equipment and the associated costs of such sales are affected by the number and mix of restaurants franchised. 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 $375,000 or more, have little if any associated franchise cost of sales, and include an equipment sale in excess of $300,000 that is usually 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 $375,000 or more, 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, number of restaurants in our inventory of restaurants that are available for refranchising and the level of interest among potential franchisees.

        Company operations revenues are retail sales at IHOP-operated restaurants.

        We report separately those expenses that are attributable to franchise operations, the cost of sales of franchises and equipment and company operations. Expenses recorded under field, corporate and

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administrative, depreciation and amortization, and interest relate to franchise operations, sales of franchises and equipment, and company operations.

        Other (income) expense, net consists of revenues and expenses not related to IHOP's core business operations. These include gains and losses realized from closing and selling restaurants and are unpredictable in timing and amount.

        Our results of operations are impacted by the timing of additions of new restaurants, and by the timing of the franchising of those restaurants. When a restaurant is franchised, we no longer include in our revenues the retail sales from such restaurant, but recognize a one-time franchise and development fee, periodic interest on the portion of such fee financed by us, and recurring payments from franchisees as described above and recorded under franchise operations revenues.

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Results of Operations

        The following table sets forth certain operating data for IHOP restaurants.

 
  Year Ended December 31,
 
 
  2001
  2000
  1999
 
 
  (Dollars in Thousands)

 
Restaurant Data                    
  Effective restaurants(a)(d)                    
    Franchise     767     696     638  
    Company     72     76     74  
    Area license     131     150     147  
   
 
 
 
      Total     970     922     859  
   
 
 
 
System-wide                    
  Sales(b)(d)   $ 1,345,757   $ 1,246,177   $ 1,126,624  
    Percent increase     8.0 %   10.6 %   8.3 %
  Average sales per effective restaurant(d)   $ 1,387   $ 1,352   $ 1,312  
    Percent increase     2.6 %   3.0 %   1.2 %
  Comparable average sales per restaurant(c)   $ 1,451   $ 1,424   $ 1,375  
    Percent increase     0.8 %   0.8 %   1.1 %
Franchise                    
  Sales   $ 1,146,124   $ 1,026,783   $ 920,957  
    Percent increase     11.6 %   11.5 %   10.2 %
  Average sales per effective restaurant   $ 1,494   $ 1,475   $ 1,444  
    Percent increase     1.3 %   2.1 %   1.0 %
  Comparable average sales per restaurant(c)   $ 1,493   $ 1,467   $ 1,424  
    Percent increase     0.9 %   1.1 %   1.0 %
Company                    
  Sales   $ 68,810   $ 72,818   $ 70,204  
    Percent change     (5.5 %)   3.7 %   0.4 %
  Average sales per effective restaurant   $ 956   $ 958   $ 949  
    Percent change     (0.2 %)   0.9 %   (2.3 %)
Area License                    
  Sales   $ 130,823   $ 146,576   $ 135,463  
    Percent change     (10.7 %)   8.2 %   0.8 %
  Average sales per effective restaurant   $ 999   $ 977   $ 922  
    Percent change     2.3 %   6.0 %   (0.5 %)

(a)
"Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open for 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" reflect sales for restaurants that are operated for the entire fiscal period in which they are being compared. Because of new unit openings and store closures, the restaurants opened for an entire fiscal period being compared will be different from period to period. Comparable average sales do not include data on restaurants located in Florida and Japan.

(d)
The Company's area licensee in Japan negotiated an early termination of the area license agreement as of April 30, 2001. Excluding the units in Japan, system-wide sales increased 10.1%, 10.9% and 9.3% for 2001, 2000 and 1999, respectively; total effective restaurants grew by 8.0%, 7.6% and 7.7% for 2001, 2000 and 1999, respectively; and average system-wide sales per effective restaurant increased 2.0%, 3.0% and 1.5% for 2001, 2000 and 1999, respectively.

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        The following table summarizes IHOP's restaurant development and franchising activity:

 
  Year Ended December 31,
 
 
  2001
  2000
  1999
  1998
  1997
 
Restaurant Development Activity                      
IHOP—beginning of year   968   903   835   787   729  
  New openings                      
    IHOP-developed   76   70   65   56   45  
    Investor and conversion programs   12   10   7   13   13  
    Area license   5   4   4   4   9  
   
 
 
 
 
 
  Total new openings   93   84   76   73   67  
   
 
 
 
 
 
  Closings                      
    Company and franchise   (11 ) (16 ) (8 ) (21 ) (9 )
    Area license   (33 ) (3 )   (4 )  
   
 
 
 
 
 
IHOP—end of year   1,017   968   903   835   787  
   
 
 
 
 
 
Summary—end of year                      
  IHOP                      
    Franchise   823   747   678   624   571  
    Company   72   71   76   66   71  
    Area license   122   150   149   145   145  
   
 
 
 
 
 
  Total IHOP   1,017   968   903   835   787  
   
 
 
 
 
 
Restaurant Franchising Activity                      
IHOP-developed   74   70   61   60   45  
Investor and conversion programs   12   10   7   13   13  
Rehabilitated and refranchised   9   15   6   10   6  
   
 
 
 
 
 
  Total restaurants franchised   95   95   74   83   64  
Reacquired by IHOP   (12 ) (19 ) (14 ) (17 ) (23 )
Closed   (7 ) (7 ) (6 ) (13 ) (5 )
   
 
 
 
 
 
  Net addition   76   69   54   53   36  
   
 
 
 
 
 

Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000

        The fiscal years ended December 31, 2001 and 2000 were comprised of 52 weeks (364 days).

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 by $99,580,000 or 8.0% in 2001. Growth in the number of effective restaurants and increases in average sales per effective restaurant 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 fiscal period. Effective restaurants grew by 5.2% in 2001 due to new restaurant development. Average sales per effective restaurant increased by 2.6% in 2001 over the prior year period. Newly developed restaurants generally have seating capacity and sales greater than the system-wide averages. System-wide comparable average sales per restaurant (exclusive of area license restaurants in Florida and Japan) grew 0.8% in 2001. Management continues to pursue growth in sales through new restaurant development, advertising and marketing efforts, new products, improvements in customer service and operations, and remodeling of existing restaurants.

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        During the second quarter of 2001, the Company's area licensee in Japan negotiated an early termination of its area license agreement. IHOP received a fee of approximately $250,000 for this early termination and the area licensee discontinued operations of its 32 IHOP restaurants. Excluding these units in Japan, system-wide sales increased 10.1% for the year ended December 31, 2001; effective restaurants grew by 8.0% for the year ended December 31, 2001; and average sales per effective restaurants increased 2.0% for the year ended December 31, 2001 over the same period in 2000.

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 grew by 13.8% in 2001. Franchise operations revenues grew primarily due to an increase in retail sales in franchise restaurants of 11.6% in 2001. Retail sales in franchised restaurants grew primarily due to a 10.2% increase in effective franchise restaurants and a 1.3% increase in average sales per effective franchise restaurant in 2001 over 2000.

        Franchise operations costs and expenses include facility rent, advertising, the cost of proprietary products, and other direct costs associated with franchise operations. Franchise operations costs and expenses increased by 19.0% in 2001. Increases in franchise operations costs and expenses were greater than the growth in franchise operations revenue primarily due to higher rent expense.

        Rent expense has been primarily affected by our new unit development program. New unit development will initially have a negative effect on rent margin percentages. The timing of lease transactions also has an impact on rent expense. Actual profit margin on rent transactions increased $4.5 million to $27.9 million in 2001, a 19.1% improvement over the $23.4 million rent margin in 2000.

        Franchise operations margin as a percent of revenues was 58.7% in 2001 compared with 60.5% in 2000. The decrease in the margin percentage was primarily due to the rent expense mentioned above.

Sales of Franchises and Equipment

        Sales of franchises and equipment decreased by 0.1% in 2001. IHOP franchised 95 restaurants in both 2001 and 2000, however, the units franchised in 2001 had a lower average franchise sales price than those in 2000.

        Cost of sales of franchises and equipment increased 0.5% in 2001. The increase was primarily due to preopening costs and site related costs that are not directly linked to the number of units franchised.

        Margin on sales of franchises and equipment was 33.9% in 2001 compared with 34.3% in 2000. The decrease in margins primarily resulted from the mix of units franchised and an increase in preopening and site related costs.

Company Operations

        Company operations revenues are sales to customers at restaurants operated by IHOP. Company operation revenues decreased 5.5% in 2001. A decrease in the number of effective IHOP-operated restaurants coupled with a decrease in the average sales per IHOP-operated restaurant caused the revenue decrease. Effective IHOP-operated restaurants decreased by 5.3% in 2001. Average sales per effective IHOP-operated restaurant decreased by 0.2% in 2001.

        Company operations costs and expenses include food, labor and benefits, utilities and occupancy costs. Company operations costs decreased 5.4% in 2001. Company operations costs were primarily affected by decreases in the number of effective restaurants.

        Company operations gross profit margin as a percent of Company operations revenues was 3.6% and 3.8% of company operations revenues in 2001 and 2000, respectively.

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Other Costs and Expenses

        Field, corporate and administrative costs and expenses increased by 11.3% in 2001. The rise in expenses was primarily due to higher compensation and rent expenses. The primary cause of the increases in rent expense was the initiation of a new 10-year lease for the Company's corporate headquarters in late 2000 and the opening of a new regional office in the Rocky Mountain area in early 2001. Field, corporate and administrative expenses were 3.0% of system-wide sales in 2001, compared to 2.9% in 2000.

        Depreciation and amortization expense in 2001 increased 9.3%. The increases were caused primarily by the addition of new restaurants to the IHOP chain from our restaurant development program.

        Interest expense decreased by 3.0% in 2001. Long term debt increased by approximately $14 million since December 31, 2000. However, the Company has benefited from lower interest rates in 2001 compared to the prior year.

Income Tax Provision

        The Company's effective tax rate was 37.5% for 2001 and 38.5% for 2000. The decrease in the effective tax rate for 2001 was due to the positive results of the Company's tax planning efforts.

Balance Sheet Accounts

        The balance of property and equipment, net at December 31, 2001, increased 22.9% primarily due to new restaurant development.

        The balance of long-term receivables at December 31, 2001, increased 7.1% from the prior year primarily due to IHOP's financing activities associated with sales of franchises and equipment.

        The balance of long-term debt increased by 38.1% in 2001 primarily due to the $11,649,000 leasehold mortgage term loan the company entered into in 2001 and an increase in the balance of our revolving line of credit. These additions were partially offset by a $8,460,000 repayment of our senior notes.

Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999

        The fiscal years ended December 31, 2000 and 1999 were comprised of 52 weeks (364 days).

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 10.6% in 2000. 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 fiscal period. Effective restaurants grew 7.3% in 2000 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 0.8% in 2000. 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.

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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 grew 12.2% in 2000. Retail sales in franchise restaurants increased 11.5%. Effective franchise restaurants grew by 9.1% in 2000. Average sales per effective franchise restaurant grew 2.1% in 2000. The percentage increase in franchise operations revenue exceeded the percentage increase in retail sales due to a 14.3% increase in rental income, partially offset by a decline in per unit merchandise sales. In 2000, the Company stopped supplying franchise restaurants with certain replacement fixtures and equipment. This decision is part of an effort to reduce inventory, and eliminate certain general and administrative costs.

        Franchise operations costs and expenses include facility rent, advertising, the cost of proprietary products, and other direct costs associated with franchise operations. Franchise operations costs and expenses increased 12.8% in 2000. Increases in franchise operations costs and expenses were generally in line with the growth in franchise operations revenue. However, the percentage increase exceeded that of revenues because of increases in rent expense and certain non-recurring costs associated with discontinuing certain merchandise sales. Increases in rent expense are impacted by the pricing, timing, and mix of lease transactions.

        Franchise operations margin was 60.5% in 2000 compared with 60.7% in 1999.

Sales of Franchises and Equipment

        Sales of franchises and equipment increased 19.0% in 2000. An increase in the number of restaurants franchised was the primary cause of the increase in sales of franchises and equipment. IHOP franchised 95 restaurants in 2000 compared to 74 in 1999. However, IHOP rehabilitated and refranchised 15 units in 2000 compared to 6 in 1999. Refranchised units generally have lower average franchise sales prices and lower average equipment values. In 2000, the Company increased its efforts to reduce or eliminate some underproducing property and equipment.

        Cost of sales of franchises and equipment increased 29.2% in 2000. The increase was generally in line with the increase 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 was 34.3% in 2000 compared with 39.4% in 1999. The margin was negatively impacted by the franchising of more rehabilitated restaurants in 2000 compared with the prior year.

Company Operations

        Company operations revenues are sales to customers at restaurants operated by IHOP. Company operations revenues increased 3.7% in 2000. Increases in the number of effective IHOP-operated restaurants coupled with an increase in the average sales per IHOP-operated restaurant caused the revenue increase. Effective IHOP-operated restaurants increased by 2.7% in 2000. Average sales per effective IHOP-operated restaurant increased by 0.9% in 2000.

        Company operations costs and expenses include food, labor and benefits, utilities and occupancy costs. Company operations costs increased 6.2% in 2000. Company operations costs were affected by increases in the number of effective restaurants and increases in certain costs, primarily labor, rent and utilities.

        Company operations gross profit margin was 3.8% and 6.0% of company operations revenues in 2000 and 1999, respectively. The decline in margin for 2000 was primarily the result of higher salaries and wages as a percent of sales in 2000 as compared to 1999.

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Other Costs and Expenses

        Field, corporate and administrative costs and expenses in 2000 increased 5.6%. The rise in expenses was primarily due to higher compensation expenses offset by lower professional service expenses. Field, corporate and administrative expenses were 2.9% and 3.1% of system-wide sales in 2000 and 1999, respectively.

        Depreciation and amortization expense in 2000 increased 10.2%. The increases were caused primarily by the addition of new restaurants to the IHOP chain from our ongoing restaurant development program.

        Interest expense increased 12.2% in 2000. The increases were due to interest associated with new capital leases that were partially offset by reductions in interest on our senior notes as the principal balances are paid down.

Balance Sheet Accounts

        The balance of property and equipment, net at December 31, 2000, increased 8.9% primarily due to new restaurant development.

        The balance of long-term receivables at December 31, 2000, increased 8.0% primarily due to IHOP's financing activities associated with sales of franchises and equipment.

Liquidity and Capital Resources

        The Company invests in its business primarily through the development of additional restaurants and, to a lesser extent, through the remodeling of older company-operated restaurants. Also, the Company began repurchasing shares of its common stock in 2000. As of December 31, 2001, the Company has cumulatively repurchased 389,168 shares of its common stock, of which 182,086 were contributed to the Employee Stock Ownership Plan.

        In 2001, IHOP and its franchisees and area licensees developed and opened 93 IHOP restaurants. Of these, we developed and opened 76 restaurants, and franchisees and area licensees developed and opened 17 restaurants. Capital expenditures in 2001, which included our portion of the above development program, were $119.8 million. Funds for investment primarily came from cash generated from operations ($55.7 million), and proceeds from sale and leaseback arrangements of restaurant land and buildings ($45.7 million). We also incurred leasehold mortgages of $12.0 million.

        In 2002, IHOP and its franchisees and area licensees plan to develop and open approximately 90 to 105 restaurants. Included in that number is the development of 80 to 90 new restaurants by us and the development of 10 to 15 restaurants by our franchisees and area licensees. Capital expenditure projections for 2002, which include our portion of the above development program, are estimated to be approximately $130 to $140 million. In November 2002, the seventh and final annual installment of $4.6 million in principal is due on our 7.79% senior notes due 2002 and the third installment of $3.9 million in principal is due on our senior notes due 2008. We expect that funds from operations, leasehold mortgage term debt, proceeds from sale and leaseback arrangements (estimated to be about $55 to $65 million) and our $25 million revolving line of credit will be sufficient to cover our operating requirements, our budgeted capital expenditures and our principal repayments on our senior notes in 2002. At December 31, 2001, $10 million was available to be borrowed under our noncollateralized bank revolving credit agreement.

Critical Accounting Policies

        The consolidated financial statements include accounts of the Company and all subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the

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United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

        IHOP leases equipment consisting of restaurant equipment, furniture and fixtures to our franchisees and retains title to the leased equipment. These equipment contracts are accounted for as sales-type leases upon acceptance of the equipment by the franchisee. Leases of restaurant facilities that meet the criteria are recorded as direct financing leases or are treated as operating leases.

        The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. In evaluating whether an asset has been impaired, the Company compares the anticipated undiscounted future cash flows to be generated by the asset to the asset's carrying value. If the sum of the undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized.

        Restaurants that we reacquire are often underperforming as a result of having been poorly operated and sometimes physically neglected. When we reacquire a restaurant and assume operations, we begin a multi-step rehabilitation program for that restaurant. First these restaurants are physically rehabilitated, then we hire and train the restaurant staff. After these first steps are completed, we implement new marketing and operations programs designed to regain the business of former guests and attract new patrons. After a restaurant has been rehabilitated and its sales volume reaches acceptable levels, the restaurant is refranchised to a qualified franchisee.

        Reacquired franchises and equipment held for sale are accounted for on the specific identification basis. At the date of reacquisition, the franchise and equipment are recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable value. Pending the sale of such franchise, the carrying value is amortized ratably over the remaining life of the asset or lease and the estimated net realizable value is reassessed each year.

        Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities. They are measured using the enacted marginal tax rates and laws that will be in effect when the differences are expected to reverse.

New Accounting Pronouncements

        In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued and are effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules for accounting for goodwill and other intangible assets beginning in the first quarter of

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fiscal year 2002. The Company is currently evaluating its impact on the Company's financial position or results of operations.

        In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued and is effective for fiscal years beginning after June 15, 2002. This Statement addresses the financial accounting and reporting for obligations associated with the retirement of a tangible long-lived asset and the associated asset retirement costs. It applies to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and, or the normal operation of a long-lived asset. The Company believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations.

        In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued and is effective for fiscal years beginning after December 15, 2001. This Statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 established a single accounting model for long-lived assets to be disposed of by sale. This Statement provides guidance on differentiating between assets held and used, held for sale and held for disposal other than by sale (e.g., abandonment, exchanged, distributed). The Company believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.

        IHOP is exposed to market risk from changes in interest rates on debt and changes in commodity prices.

        IHOP's exposure to interest rate risk relates to its $25 million revolving credit agreement and its $12 million mortgage term loan with its banks. Borrowings under the revolving credit agreement bear interest at the bank's reference rate (prime) or, at IHOP's option, at the bank's quoted rate or at a Eurodollar rate. There was $15 million outstanding under this agreement at December 31, 2001, and the largest amount outstanding under the agreement during 2001 was $19.6 million. Borrowings under the mortgage term loan agreement bear interest at the London interbank offered rate ("LIBOR") plus the applicable margin. The applicable margin will be a function of the funded debt to EBITDA ratio as defined under the loan agreement. The impact on our results of operations due to a hypothetical 1% interest rate change would be immaterial.

        Many of the food products purchased by IHOP and its franchisees and area licensees are affected by commodity pricing and are, therefore, subject to unpredictable price volatility. We attempt to mitigate price fluctuations by entering into forward purchase agreements on all our major products purchased such as coffee, pancake mixes, pork products, soft drinks and orange juice. None of these food product contracts or agreements are derivative instruments. Extreme changes in commodity prices and/or long-term changes could affect IHOP's franchisees, area licensees and company-operated restaurants adversely. However, any changes in commodity prices would also generally affect IHOP's competitors at about the same time as IHOP. We expect that in most cases the IHOP system would be able to pass increased commodity prices through to its consumers via increases in menu prices. From time to time, competitive circumstances could limit short-term menu price flexibility, and in those cases margins would be negatively impacted by increased commodity prices. This would be mitigated by the fact that the majority of IHOP restaurants are franchised and IHOP's revenue stream from franchisees is based on the gross sales of the restaurants. We believe that any changes in commodity pricing that cannot be adjusted for by changes in menu pricing or other strategies would not be material to IHOP's results of operations.

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Item 8.    Financial Statements and Supplementary Data.


Index to Consolidated Financial Statements

 
  Page
Reference

Consolidated Balance Sheets as of December 31, 2001 and 2000   22

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001

 

23

Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2001

 

24

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001

 

25

Notes to the Consolidated Financial Statements

 

26

Report of Independent Accountants

 

40

21


IHOP Corp. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share amounts)

 
  December 31,
 
 
  2001
  2000
 
Assets              
Current assets              
  Cash and cash equivalents   $ 6,252   $ 7,208  
  Receivables, net     47,451     39,600  
  Reacquired franchises and equipment held for sale, net     3,234     3,172  
  Inventories     837     691  
  Prepaid expenses     1,386     431  
   
 
 
    Total current assets     59,160     51,102  
   
 
 
Long-term receivables     307,859     287,346  
Property and equipment, net     238,026     193,624  
Reacquired franchises and equipment held for sale, net     18,327     17,973  
Excess of costs over net assets acquired, net     10,767     11,196  
Other assets     7,290     971  
   
 
 
    Total assets   $ 641,429   $ 562,212  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities              
  Current maturities of long-term debt   $ 9,711   $ 8,939  
  Accounts payable     16,666     20,588  
  Accrued employee compensation and benefits     7,621     6,776  
  Other accrued expenses     7,238     7,835  
  Deferred income taxes     1,129     3,957  
  Capital lease obligations     2,164     1,878  
   
 
 
    Total current liabilities     44,529     49,973  
   
 
 
Long-term debt     50,209     36,363  
Deferred income taxes     59,084     46,585  
Capital lease obligations and other     175,177     169,296  

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 
  Preferred stock, $1 par value, 10,000,000 shares authorized; shares issued and outstanding: 2001 and 2000, none          
  Common stock, $.01 par value, 40,000,000 shares authorized: 2001; 20,918,283 shares issued and 20,711,201 shares outstanding; 2000; 20,299,091 shares issued and 20,011,341 shares outstanding     209     203  
  Additional paid in capital     79,837     69,655  
  Retained earnings     233,920     193,632  
  Treasury stock, at cost (2001; 207,082 shares; 2000; 287,750 shares)     (3,386 )   (5,170 )
  Contribution to ESOP     1,850     1,675  
   
 
 
    Total stockholders' equity     312,430     259,995  
   
 
 
    Total liabilities and stockholders' equity   $ 641,429   $ 562,212  
   
 
 

See the accompanying notes to the consolidated financial statements.

22


IHOP Corp. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

 
  Year Ended December 31,
 
  2001
  2000
  1999
Revenues                  
  Franchise operations                  
    Rent   $ 65,780   $ 51,135   $ 44,722
    Service fees and other     142,850     132,226     118,764
   
 
 
      208,630     183,361     163,486
  Sales of franchises and equipment     46,996     47,065     39,545
  Company operations     68,810     72,818     70,204
   
 
 
    Total revenues     324,436     303,244     273,235
   
 
 
Costs and Expenses                  
  Franchise operations                  
    Rent     37,867     27,695     23,233
    Other direct costs     48,269     44,699     40,956
   
 
 
      86,136     72,394     64,189
  Cost of sales of franchises and equipment     31,086     30,944     23,958
  Company operations     66,330     70,085     66,016
  Field, corporate and administrative     40,621     36,481     34,531
  Depreciation and amortization     14,818     13,562     12,310
  Interest     21,107     21,751     19,391
  Other (income) expense, net     (123 )   567     604
   
 
 
    Total costs and expenses     259,975     245,784     220,999
   
 
 
Income before income taxes     64,461     57,460     52,236
Provision for income taxes     24,173     22,122     20,111
   
 
 
Net income   $ 40,288   $ 35,338   $ 32,125
   
 
 
Net Income Per Share                  
  Basic   $ 1.98   $ 1.77   $ 1.61
   
 
 
  Diluted   $ 1.94   $ 1.74   $ 1.58
   
 
 
Weighted Average Shares Outstanding                  
  Basic     20,398     20,017     19,983
   
 
 
  Diluted     20,762     20,263     20,358
   
 
 

See the accompanying notes to the consolidated financial statements.

23


IHOP Corp. and Subsidiaries

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

 
  Common Stock
   
   
   
   
   
 
 
  Additional
Paid-In
Capital

  Retained
Earnings

  Treasury
Stock

  Contribution
to ESOP

   
 
 
  Shares
  Amount
  Total
 
  Balance, December 31, 1998   9,881,580   $ 99   $ 60,100   $ 126,269   $   $ 1,400   $ 187,868  
   
 
 
 
 
 
 
 
Issuance of shares to ESOP   28,714         1,206             (1,206 )    
Reissuance of treasury shares to ESOP   4,620         348             (194 )   154  
Issuance of shares pursuant to stock plans   219,952     2     3,560                 3,562  
Tax benefit from stock options exercised           1,190                 1,190  
Unearned compensation—restricted stock.           81                 81  
Contribution to ESOP                       1,500     1,500  
2-for-1 stock split effective May 27, 1999, in the form of a 100% stock dividend   9,982,448     100         (100 )            
Net income               32,125             32,125  
   
 
 
 
 
 
 
 
  Balance, December 31, 1999   20,117,314     201     66,485     158,294         1,500     226,480  
   
 
 
 
 
 
 
 
Repurchase of treasury shares                   (6,631 )       (6,631 )
Reissuance of treasury shares to ESOP           39         1,461     (1,500 )    
Issuance of shares pursuant to stock plans   181,777     2     2,576                 2,578  
Tax benefit from stock options exercised           536                 536  
Unearned compensation—restricted stock           19                 19  
Contribution to ESOP                       1,675     1,675  
Net income               35,338             35,338  
   
 
 
 
 
 
 
 
  Balance, December 31, 2000   20,299,091     203     69,655     193,632     (5,170 )   1,675     259,995  
   
 
 
 
 
 
 
 
Repurchase of treasury shares                   (23 )       (23 )
Reissuance of treasury shares to ESOP           (132 )       1,807     (1,675 )    
Issuance of shares pursuant to stock plans   619,192     6     7,123                 7,129  
Tax benefit from stock options exercised           3,191                 3,191  
Contribution to ESOP                       1,850     1,850  
Net income               40,288             40,288  
   
 
 
 
 
 
 
 
  Balance, December 31, 2001   20,918,283   $ 209   $ 79,837   $ 233,920   $ (3,386 ) $ 1,850   $ 312,430  
   
 
 
 
 
 
 
 

See the accompanying notes to the consolidated financial statements.

24


IHOP Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 
  Year Ended December 31,
 
 
  2001
  2000
  1999
 
Cash flows from operating activities                    
  Net income   $ 40,288   $ 35,338   $ 32,125  
  Adjustments to reconcile net income to cash provided by operating activities                    
    Depreciation and amortization     14,818     13,562     12,310  
    Deferred income taxes     9,671     6,941     6,333  
    Contribution to ESOP     1,850     1,675     1,500  
    Tax benefit from stock options exercised     3,191     536     1,190  
    Change in current assets and liabilities                    
      Accounts receivable     (7,852 )   (2,200 )   (4,814 )
      Inventories     (146 )   532     (1 )
      Prepaid expenses     (955 )   3,878     (619 )
      Accounts payable     (3,922 )   2,572     (1,706 )
      Accrued employee compensation and benefits     845     (1,028 )   1,787  
      Other accrued expenses     (597 )   1,939     587  
    Other, net     (1,488 )   4,310     2,700  
   
 
 
 
        Cash provided by operating activities     55,703     68,055     51,392  
   
 
 
 
Cash flows from investing activities                    
  Additions to property and equipment     (119,797 )   (99,378 )   (72,290 )
  Additions to notes     (14,993 )   (13,916 )   (14,209 )
  Principal receipts from notes and equipment contracts receivable     14,668     12,594     10,963  
  Additions to reacquired franchises held for sale     (2,320 )   (2,570 )   (1,567 )
   
 
 
 
        Cash used in investing activities     (122,442 )   (103,270 )   (77,103 )
   
 
 
 
Cash flows from financing activities                    
  Proceeds from issuance of long-term debt     26,532     12,703     3,372  
  Proceeds from sale and leaseback arrangements     45,652     48,274     30,159  
  Repayment of long-term debt     (11,915 )   (17,575 )   (8,349 )
  Principal payments on capital lease obligations     (1,592 )   (1,121 )   (1,386 )
  Treasury stock transactions     (23 )   (6,631 )    
  Proceeds from stock options exercised     7,129     2,597     3,797  
   
 
 
 
        Cash provided by financing activities     65,783     38,247     27,593  
   
 
 
 
Net change in cash and cash equivalents     (956 )   3,032     1,882  
Cash and cash equivalents at beginning of period     7,208     4,176     2,294  
   
 
 
 
        Cash and cash equivalents at end of period   $ 6,252   $ 7,208   $ 4,176  
   
 
 
 
Supplemental disclosures                    
  Interest paid, net of capitalized amounts   $ 21,238   $ 21,752   $ 19,162  
  Income taxes paid     15,257     15,974     12,411  
  Capital lease obligations incurred     2,388     4,153     32,169  

See the accompanying notes to the consolidated financial statements.

25


IHOP Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

1.    Summary of Significant Accounting Policies

Operations

        IHOP Corp. and its subsidiaries ("IHOP" or the "Company") engage exclusively in the food-service industry, primarily in the United States, wherein we franchise and operate restaurants. IHOP grants credit to our franchisees and licensees, all of whom are in the restaurant business. In the majority of our franchised operations, we have developed restaurants on sites that we either own or control through leases. We then lease or sublease the restaurants to our franchisees. Additionally, we finance approximately 80% of the initial franchise fee, lease restaurant equipment and fixtures to our franchisees, and sell proprietary products to our franchisees and licensees and provide marketing and promotional services to our franchisees and area licensees.

Basis of Presentation

        The consolidated financial statements include the accounts of IHOP Corp. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Fiscal Periods

        IHOP's fiscal year ends on the Sunday nearest to December 31 of each year. For convenience, we report all fiscal years as ending on December 31 and fiscal quarters as ending on March 31, June 30 and September 30.

Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires IHOP management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

        IHOP at times purchases highly liquid, investment-grade securities with an original maturity of three months or less. These cash equivalents are stated at cost which approximates market value. We do not believe that we are exposed to any significant credit risk on cash and cash equivalents. At times, cash and cash equivalent balances may be in excess of FDIC insurance limits.

Inventories

        Inventories consisting of merchandise and supplies are stated at the lower of cost (on a first-in, first-out basis) or market.

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Property and Equipment

        Property and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives as follows:

Category

  Depreciable Life
Buildings and improvements   Shorter of lease term or 40 years
Leaseholds and improvements   3—25 years
Equipment and fixtures   3—10 years
Properties under capital lease   Primary lease term

        Leaseholds and improvements are amortized over a period not exceeding the primary term of the lease.

        Effective January 1, 2000, IHOP changed the estimated useful life for new buildings from 25 years to 40 years to better reflect their proven economic lives. This change is applied to new buildings completed in 2000 and later, and does not change the estimated useful lives of previously constructed restaurants. Because most buildings are leased or located on leased land, the effective depreciation period is limited to the term of the underlying lease. Therefore, the effect of this change in estimated useful lives was insignificant to either depreciation expense, net income, or earnings per share for the years ended December 31, 2001 and 2000.

Excess of Costs Over Net Assets Acquired

        The excess of costs over net assets acquired is amortized utilizing the straight-line method over forty years. Accumulated amortization at December 31, 2001 and 2000 was $6,320,000 and $5,891,000, respectively.

Leasing

        IHOP leases equipment consisting of restaurant equipment, furniture and fixtures to our franchisees and retains title to the leased equipment. These equipment contracts are accounted for as sales-type leases upon acceptance of the equipment by the franchisee. Leases of restaurant facilities that meet the criteria are recorded as direct financing leases or are treated as operating leases.

Accounting for Long-lived Assets

        The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. In evaluating whether an asset has been impaired, the Company compares the anticipated undiscounted future cash flows to be generated by the asset to the asset's carrying value. If the sum of the undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized.

Franchise Revenues

        Revenues from the sales of franchises are recognized as income when IHOP has substantially performed all of its material obligations under the franchise agreement, and the franchisee has

27



commenced operations. Continuing service fees, which are a percentage of the net sales of franchised operations, are accrued as income when earned.

Preopening Expenses

        Expenditures related to the opening of new restaurants, other than those for capital assets, are charged to expense when incurred.

Advertising

        Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2001, 2000 and 1999 were $36,617,000, $32,678,000 and $29,163,000, respectively.

Income Taxes

        Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities. They are measured using the enacted marginal tax rates and laws that will be in effect when the differences are expected to reverse.

Net Income Per Share

        Basic net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercises of outstanding stock options using the treasury stock method.

Comprehensive Income

        Comprehensive income includes net income and other comprehensive income components which, under GAAP, bypass the income statement and are reported in the balance sheet as a separate component of stockholders' equity. For the three years ended December 31, 2001, IHOP had no other comprehensive income components, as defined by GAAP. As a result, net income is the same as comprehensive income for the years ended December 31, 2001, 2000 and 1999.

Stock Split

        On April 29, 1999, IHOP's Board of Directors approved a 2 for 1 stock split of its common stock effective May 27, 1999, in the form of a 100% stock dividend for stockholders of record at the close of business on May 13, 1999. All share and per-share amounts in the accompanying consolidated financial statements, except for the statement of stockholders' equity, have been restated to reflect the stock split.

Reclassification

        Certain reclassifications have been made to prior year information to conform to the current year presentation.

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New Accounting Pronouncements

        In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued and are effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules for accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2002. The Company is currently evaluating its impact on the Company's financial position or results of operations.

        In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was issued and is effective for fiscal years beginning after June 15, 2002. This Statement addresses the financial accounting and reporting for obligations associated with the retirement of a tangible long-lived asset and the associated asset retirement costs. It applies to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and, or the normal operation of a long-lived asset. The Company believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations.

        In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued and is effective for fiscal years beginning after December 15, 2001. This Statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 established a single accounting model for long-lived assets to be disposed of by sale. This Statement provides guidance on differentiating between assets held and used, held for sale and held for disposal other than by sale (e.g., abandonment, exchanged, distributed). The Company believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations.

2.    Receivables

 
  2001
  2000
 
  (In thousands)

Accounts receivable   $ 34,005   $ 25,964
Notes receivable     52,901     48,445
Equipment contracts receivable     134,851     114,969
Direct financing leases receivable     135,085     138,911
   
 
      356,842     328,289
Less allowance for doubtful accounts     1,532     1,343
   
 
      355,310     326,946
Less current portion     47,451     39,600
   
 
Long-term receivables   $ 307,859   $ 287,346
   
 

        Notes receivable include franchise fee notes due in five to eight years in the amount of $50,158,000 and $45,230,000 at December 31, 2001 and 2000, respectively. Franchise fee notes are due in equal

29



weekly installments, primarily bear interest at 12.0%, and are collateralized by the franchise. The term of an equipment contract coincides with the term of the corresponding restaurant building lease. Equipment contracts are due in equal weekly installments, primarily bear interest at 11.0%, and are collateralized by the equipment. Where applicable, franchise fee notes, equipment contracts and building leases contain cross-default provisions wherein a default under one constitutes a default under all. There is not a disproportionate concentration of credit risk in any geographic area.

3.    Property and Equipment, at Cost

 
  2001
  2000
 
  (In thousands)

Land   $ 25,283   $ 18,424
Buildings and improvements     42,760     32,610
Leaseholds and improvements     159,536     137,604
Equipment and fixtures     14,668     15,034
Construction in progress     14,693     12,372
Properties under capital lease     37,516     31,609
   
 
      294,456     247,653
Less accumulated depreciation and amortization     56,430     54,029
   
 
Property and equipment, net   $ 238,026   $ 193,624
   
 

        Accumulated depreciation and amortization includes accumulated amortization for properties under capital lease in the amount of $5,982,000 and $4,502,000 at December 31, 2001 and 2000, respectively.

4.    Reacquired Franchises and Equipment Held for Sale

        Reacquired franchises and equipment held for sale are accounted for on the specific identification basis. At the date of reacquisition, the franchise and equipment are recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable value. Pending the sale of such franchise, the carrying value is amortized ratably over the remaining life of the asset or lease and the estimated net realizable value is reassessed each year.

 
  2001
  2000
 
  (In thousands)

Franchises   $ 12,960   $ 11,780
Equipment     15,485     14,505
   
 
      28,445     26,285
Less amortization     6,884     5,140
   
 
      21,561     21,145
Less current portion     3,234     3,172
   
 
Long-term reacquired franchises and equipment held for sale, net   $ 18,327   $ 17,973
   
 

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5.    Debt

        Debt consists of the following:

 
  2001
  2000
 
  (In thousands)

Senior notes due November 2008, payable in equal annual installments commencing November 2000, fixed interest at 7.42%   $ 27,222   $ 31,111
Senior notes due November 2002, payable in equal annual installments commencing November 1996, fixed interest at 7.79%     4,571     9,142
Leasehold mortgage term loan     11,609    
Revolving line of credit     15,000     4,000
Other     1,518     1,049
   
 
Total debt     59,920     45,302
Less current maturities     9,711     8,939
   
 
Long-term debt   $ 50,209   $ 36,363
   
 

        The senior notes due November 2002 and 2008 are noncollateralized.

        The leasehold mortgage term loan due May 2013 is collateralized by certain IHOP restaurants. Borrowings under this loan agreement bear interest at the London interbank offered rate ("LIBOR") plus the applicable margin. The applicable margin will be a function of the funded debt to EBITDA ratio as defined under the loan agreement.

        IHOP has a noncollateralized revolving credit agreement with a bank in the amount of $25,000,000 with a maturity date of May 31, 2004. Borrowings under the agreement bear interest at the bank's reference rate (prime) or, at our option, at the bank's quoted rate or at a Eurodollar rate. A commitment fee of 0.375% per annum is payable on unborrowed funds available under the agreement. There was $15 million and $4 million outstanding under this agreement at December 31, 2001 and 2000, respectively. The largest amount outstanding under the agreement during 2001 was $19,600,000.

        The senior note agreements, the leasehold mortgage term loan and the bank revolving credit agreement contain certain restrictions and conditions, the most restrictive of which limit dividends and investments. At December 31, 2001, approximately $105 million of retained earnings were free of restriction as to distribution as dividends.

        The prime rate was 4.75% at December 31, 2001 and 9.50% at December 31, 2000.

        IHOP's long-term debt maturities are as follows: 2002—$9,711,000; 2003—$4,977,000; 2004—$19,972,000; 2005—$4,800,000; 2006—$4,744,000 and thereafter—$15,716,000.

6.    Leases

        The Company leases the majority of its restaurants with the exception of those where a franchisee enters into a lease directly with a landlord and those associated with area license agreements. The restaurants are subleased to franchisees or operated by IHOP. These noncancelable leases and subleases consist primarily of land and buildings and improvements.

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        Net investment in direct financing leases receivable is as follows:

 
  2001
  2000
 
  (In thousands)

Total minimum rents receivable   $ 395,492   $ 426,375
Less unearned income     260,407     287,464
   
 
Net investment in direct financing leases receivable     135,085     138,911
Less current portion     985     874
   
 
Long-term direct financing leases receivable   $ 134,100   $ 138,037
   
 

        Contingent rental income for the years ended December 31, 2001, 2000 and 1999 was $21,899,000, $21,238,000, and $19,828,000 respectively.

        Minimum future lease payments on noncancelable leases at December 31, 2001, are as follows:

 
  Capital
Leases

  Operating
Leases

 
  (In thousands)

2002   $ 20,621   $ 44,597
2003     20,880     43,798
2004     21,173     43,028
2005     21,522     42,567
2006     21,551     42,046
Thereafter     307,587     656,722
   
 
Total minimum lease payments     413,334   $ 872,758
         
Less interest     243,065      
   
     
Capital lease obligations     170,269      
Less current portion     2,164      
   
     
Long-term capital lease obligations   $ 168,105      
   
     

32


        The minimum future lease payments shown above have not been reduced by the future minimum rents to be received on noncancelable subleases and leases of owned property at December 31, 2001, as follows:

 
  Direct
Financing
Leases

  Operating Leases
 
  (In thousands)

2002   $ 18,441   $ 55,857
2003     18,820     55,808
2004     19,027     56,164
2005     19,254     56,823
2006     19,331     57,413
Thereafter     300,619     1,072,811
   
 
Total minimum rents receivable   $ 395,492   $ 1,354,876
   
 

        IHOP has noncancelable leases, expiring at various dates through 2031, that require payment of contingent rents based upon a percentage of sales of the related restaurant as well as property taxes, insurance and other charges. Subleases to franchisees of properties under such leases are generally for the full term of our lease obligation at rents that include our obligations for property taxes, insurance, contingent rents and other charges. Generally, the noncancelable leases include renewal options. Contingent rent expense for all noncancelable leases for the years ended December 31, 2001, 2000 and 1999 was $2,902,000, $3,317,000 and $3,416,000, respectively. Minimum rent expense for all noncancelable operating leases for the years ended December 31, 2001, 2000 and 1999 was $40,312,000, $30,084,000 and $25,130,000, respectively.

7.    Stockholders' Equity

        The Stock Incentive Plan (the "Plan") was adopted in 1991 and amended and restated in 1998 to authorize the issuance of up to 3,760,000 shares of common stock pursuant to options, restricted stock, and other long-term stock-based incentives to officers and key employees of IHOP. The 2001 Stock Incentive Plan was adopted in 2001 to authorize the issuance of up to 1,200,000 shares of common stock. Except for substitute stock options which were issued in 1991 pursuant to the cancellation of a stock appreciation rights plan, no option can be granted at an option price of less than the fair market value at the date of grant as defined by the plan. Exercisability of options is determined at, or after, the date of grant by the administrator of the Plan. Substitute stock options issued in 1991 were immediately exercisable. All other options granted under the Plan through December 31, 2001, become exercisable 1/3 after one year, 2/3 after two years and 100% after three years or immediately upon a change in control of IHOP, as defined by the Plan.

        The Stock Option Plan for Non-Employee Directors (the "Directors Plan") was adopted in 1994 and amended and restated in 1999 to authorize the issuance of up to 400,000 shares of common stock pursuant to options to non-employee members of IHOP's Board of Directors. Options are to be granted at an option price equal to 100% of the fair market value of the stock on the date of grant. Options granted pursuant to the Directors Plan vest and become exercisable 1/3 after one year, 2/3 after two years and 100% after three years. Options for the purchase of shares are granted to each non-employee Director under the Directors Plan as follows: (1) 15,000 on February 23, 1995, or on the

33



Director's election to the Board of Directors if he or she was not a Director on such date, and (2) 5,000 annually in conjunction with IHOP's Annual Meeting of Stockholders for that year.

        In 2000, IHOP initiated a plan to repurchase up to 1,000,000 shares of its common stock. This plan will reduce the dilutive effect of employee stock option exercises and contributions to IHOP's Employee Stock Ownership Plan; however, the repurchase program does not obligate IHOP to acquire any specific number of shares and it may be suspended at any time. As of December 31, 2001, 389,168 shares were repurchased by IHOP under this plan, of which 182,086 shares were contributed to the Employee Stock Ownership Plan.

        Information regarding activity for stock options outstanding under IHOP's stock option plans is as follows:

Shares Under Option

  Shares
  Weighted Average
Exercise Price

Outstanding at December 31, 1998   1,879,156   $ 13.35
Granted   307,000     20.69
Exercised   (287,486 )   12.71
Terminated   (37,331 )   18.34
   
     
Outstanding at December 31, 1999   1,861,339     14.56
Granted   261,000     15.10
Exercised   (181,777 )   14.18
Terminated   (33,999 )   18.80
   
     
Outstanding at December 31, 2000   1,906,563     14.59
Granted   323,000     23.64
Exercised   (619,192 )   11.53
Terminated   (22,001 )   17.37
   
     
Outstanding at December 31, 2001   1,588,370   $ 17.58
   
 
Exercisable at December 31, 2001   1,023,026   $ 15.81
   
 

        Information regarding options outstanding and exercisable at December 31, 2001 is as follows:

Range of Exercise Prices

  Number
Outstanding
as of
12/31/2001

  Weighted
Average
Remaining
Contractual
Life

  Weighted
Average
Exercise
Price

  Number
Exercisable as of 12/31/2001

  Weighted
Average
Exercise
Price

$  8.25 - $13.88   452,200   3.41   $ 13.59   452,200   $ 13.59
$13.94 - $17.81   523,165   6.13   $ 15.52   361,169   $ 15.70
$19.22 - $21.06   398,005   7.87   $ 20.29   176,319   $ 20.41
$21.69 - $27.33   215,000   9.29   $ 25.99   33,338   $ 22.67
   
           
     
$  8.25 - $27.33   1,588,370   6.22   $ 17.58   1,023,026   $ 15.81
   
           
     

        IHOP has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." We will continue to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost

34



has been recognized for the stock option plans. Had compensation cost for IHOP's stock option plans been determined based on the fair value at the grant date for awards in the three year period ended December 31, 2001, consistent with the provisions of SFAS No. 123, IHOP's net income and diluted net income per share would have been reduced to the pro forma amounts indicated below:

 
  2001
  2000
  1999
 
  (In thousands, except
per share amounts)

Net income, as reported   $ 40,288   $ 35,338   $ 32,125
Net income, pro forma     39,328     34,342     31,029
Net income per share — diluted, as reported     1.94     1.74     1.58
Net income per share — diluted, pro forma     1.89     1.69     1.52
Weighted average fair value of options granted     24.18     15.22     21.42

        The fair value of each option grant issued in the three year period ended December 31, 2001, is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 
  2001
  2000
  1999
 
Risk free interest rate   5.75 % 5.875 % 5.25 %
Expected volatility   37.0 % 37.0 % 37.0 %
Dividend yield        
Weighted average expected life   5 years   3 years   3 years  

8.    Income Taxes

        The provision for income taxes is as follows:

 
  2001
  2000
  1999
 
  (In thousands)

Provision for income taxes:                  
  Current                  
    Federal   $ 13,008   $ 13,160   $ 12,051
    State and foreign     1,494     2,021     1,766
   
 
 
      14,502     15,181     13,817
   
 
 
  Deferred                  
    Federal     8,224     5,623     5,455
    State     1,447     1,318     839
   
 
 
      9,671     6,941     6,294
   
 
 
Provision for income taxes   $ 24,173   $ 22,122   $ 20,111
   
 
 

35


        The provision for income taxes differs from the expected federal income tax rates as follows:

 
  2001
  2000
  1999
 
Statutory federal income tax rate   35.0 % 35.0 % 35.0 %
State and other taxes, net of federal tax benefit   2.5   3.5   3.5  
   
 
 
 
Effective tax rate   37.5 % 38.5 % 38.5 %
   
 
 
 

        Deferred tax liabilities (assets) consist of the following:

 
  2001
  2000
 
 
  (In thousands)

 
Franchise and equipment sales, including differences in capitalization and revenue recognition   $ 72,615   $ 62,328  
Property and equipment, including differences in capitalization and depreciation and amortization     10,129     10,828  
Reacquired franchises and equipment held for resale, including differences in capitalization and depreciation and amortization     (9,298 )   (10,050 )
Direct financing leases and capital lease obligations, including differences in capitalization and application of cash receipts and disbursements     (13,922 )   (12,093 )
Federal tax benefit of net deferred state tax liability     (2,497 )   (2,551 )
Other net liabilities     3,186     2,080  
   
 
 
Deferred tax liabilities, net   $ 60,213   $ 50,542  
   
 
 

9.    Employee Benefit Plans

        In 1987, IHOP adopted a noncontributory Employee Stock Ownership Plan ("ESOP"). The ESOP is a stock bonus plan under Section 401(a) of the Internal Revenue Code. The plan covers IHOP employees who meet the minimum credited service requirements of the plan. Employees whose terms of service are covered by a collective bargaining agreement are not eligible for the ESOP unless the terms of such agreement specifically provide for participation in the ESOP.

        The cost of the ESOP is borne by IHOP through contributions determined by the Board of Directors in accordance with the ESOP provisions and Internal Revenue Service regulations. The contributions to the plan for the years ended December 31, 2001, 2000 and 1999 were $1,850,000, $1,675,000 and $1,500,000, respectively. The contribution for the year ended December 31, 2001, will be made in shares of IHOP Corp. common stock.

        Shares of stock acquired by the ESOP are allocated to each eligible employee and held by the ESOP. Upon the employee's termination after vesting, or in certain other limited circumstances, the employee's shares are distributed to the employee according to his or her direction.

        In 2001, IHOP adopted a defined contribution plan authorized under Section 401(k) of the Internal Revenue Code. The plan covers IHOP employees who meet the minimum credited service requirements of the plan. Employees whose terms of service are covered by a collective bargaining

36



agreement are not eligible. Employees may contribute up to 15 percent of their pre-tax covered compensation subject to limitations of the tax codes. IHOP Corp. Common Stock is currently not an investment option for employees in the Plan. The administrative cost of the 401(k) plan is borne by IHOP. The Company does not contribute towards the plan.

10.    Commitments and Contingencies

        IHOP is subject to various claims and legal actions that have arisen in the ordinary course of business. We believe such claims and legal actions, individually or in the aggregate, will not have a material adverse effect on the business or financial condition of our company.

11.    Derivative and Financial Instruments

        On January 1, 2001, IHOP adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in the other contracts. During 2001, IHOP purchased 25% of estimated requirements through December 2002 of natural gas contracts to limit exposure to market increases in natural gas prices for IHOP-operated restaurants. The derivative instruments do not qualify under SFAS No. 133 as either a fair value or cash flow hedge. They are valued at fair value with the resultant gain or loss recognized in current earnings. The adoption of SFAS No. 133 had no material impact on either IHOP's results of operations, financial position or cash flows.

        IHOP does not hold or issue financial instruments for trading purposes. The estimated fair values of all cash and cash equivalents, notes receivable and equipment contracts receivable as of December 31, 2001 and 2000, approximated their carrying amounts in the Consolidated Balance Sheets as of those dates. The estimated fair values of notes receivable and equipment contracts receivable are based on current interest rates offered for similar loans in our present lending activities.

        The estimated fair values of long-term debt are based on current rates available to IHOP for similar debt of the same remaining maturities. The carrying values of long-term debt at December 31, 2001 and 2000 were $50,209,000 and $36,363,000, respectively, and the fair values at those dates were $52,957,000 and $34,268,000, respectively.

12.    Segment Reporting

        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

37



administrative expense, interest expense, and income taxes. Information on segments and a reconciliation to income before income taxes are as follows:

 
  Franchise
Operations

  Company
Operations

  Sales of
Franchises and
Equipment

  Consolidating
And Other Adjustments

  Consolidated Total
 
  (In thousands)

  Year Ended December 31, 2001                              
Revenues from external customers   $ 204,970   $ 68,810   $ 46,996   $ 3,660   $ 324,436
Intercompany real estate charges (revenues)     6,083     901         (6,984 )  
Depreciation & amortization     5,703     4,157         4,958     14,818
Operating income (loss)     91,555     (4,447 )   15,910     23,171     126,189
Field, corporate and administrative                             40,621
Interest expense                             21,107
Income before income taxes                             64,461
Additions to long lived assets     62,382     8,188     2,320     49,227     122,117
Total assets     484,438     52,143     21,561     83,287     641,429
 
Year Ended December 31, 2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 183,361   $ 72,818   $ 47,065   $   $ 303,244
Intercompany real estate charges (revenues)     6,376     726         (7,102 )  
Depreciation & amortization     4,228     4,221         5,113     13,562
Operating income (loss)     82,953     (4,450 )   16,121     21,068     115,692
Field, corporate and administrative                             36,481
Interest expense                             21,751
Income before income taxes                             57,460
Additions to long lived assets     54,520     12,626     2,570     32,232     101,948
Total assets     423,877     49,437     21,145     67,753     562,212
 
Year Ended December 31, 1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 163,449   $ 70,204   $ 39,545   $ 37   $ 273,235
Intercompany real estate charges (revenues)     5,768     578         (6,346 )  
Depreciation & amortization     3,681     3,973         4,656     12,310
Operating income (loss)     75,067     (2,379 )   15,587     17,883     106,158
Field, corporate and administrative                             34,531
Interest expense                             19,391
Income before income taxes                             52,236
Additions to long lived assets     41,350     5,568     1,567     25,372     73,857
Total assets     380,680     47,848     18,944     72,930     520,402

        Franchise Operations, Company Operations and Sales of Franchises and Equipment are reported on the same basis as used by IHOP's management. Franchise Operations revenues from external customers includes interest income from the financing of sales of franchises and equipment in the amounts of $18,165,000, $15,573,000 and $13,465,000 for the years ended December 31, 2001, 2000 and

38



1999 respectively. 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. These adjustments include interest income from direct financing leases of restaurant buildings in the amounts of $18,257,000, $18,779,000 and $15,918,000 for the three years ended December 31, 2001, 2000 and 1999 respectively. All of IHOP's owned land and restaurant buildings are included in the total assets of the Consolidating and Other Adjustments segment and are leased to the Franchise Operations and Company Operations segments.

13.    Selected Quarterly Financial Data (Unaudited)

 
  Revenues
  Operating
Income

  Net Income
  Net Income
Per Share—
Basic(a)

  Net Income
Per Share—
Diluted(a)

 
  (In thousands, except per share amounts)

2001                              
1st Quarter   $ 70,106   $ 27,043   $ 7,474   $ .37   $ .37
2nd Quarter     82,825     32,251     10,168     .50     .49
3rd Quarter     81,096     32,421     11,076     .54     .53
4th Quarter     90,409     34,474     11,570     .56     .55

2000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
1st Quarter   $ 68,406   $ 25,618   $ 7,229   $ .36   $ .36
2nd Quarter     70,304     28,253     8,294     .41     .41
3rd Quarter     78,667     30,609     10,079     .50     .50
4th Quarter     85,867     31,212     9,736     .49     .48

(a)
The quarterly amounts may not add to the full year amount due to rounding.

39



Report of Independent Accountants

The Stockholders and Board of Directors
IHOP Corp.

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of IHOP Corp. and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of IHOP Corp.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Los Angeles, California
February 15, 2002

40


Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

        None.


PART III

Item 10.    Directors and Executive Officers of the Registrant.

        Information appearing under the captions "Information Concerning Nominees and Members of the Board of Directors," "Executive Officers of the Company" and "Compliance with Section 16(a) of the Securities Exchange Act" contained in the 2002 Proxy Statement is incorporated herein by reference.

Item 11.    Executive Compensation.

        Information appearing under the captions "Executive Compensation—Summary of Compensation," "Executive Compensation—Stock Options and Stock Appreciation Rights" and "Executive Officers of the Company—Employment Agreements" contained in the 2002 Proxy Statement is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management.

        Information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the 2002 Proxy Statement is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions.

        Information appearing under the caption "Certain Relationships and Related Transactions" contained in the 2002 Proxy Statement is incorporated herein by reference.


PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1)    Consolidated Financial Statements

        The following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K:

(a)(2)    Financial Statement Schedules

        All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

41


(a)(3)    Exhibits

        Exhibits not incorporated by reference are filed herewith. The remainder of the exhibits have heretofore been filed with the Securities and Exchange Commission and are incorporated herein by reference. Management contracts or compensatory plans or arrangements are marked with an asterisk.

3.1   Restated Certificate of Incorporation of IHOP Corp. Exhibit 3.1 to IHOP Corp.'s Annual Report on 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 the 1997 Form 10-K is hereby incorporated by reference.

4.1

 

Senior Note Purchase Agreement, dated as of November 19, 1992, among IHOP Corp., International House of Pancakes, Inc. ("IHOP, Inc.") and Mutual Life Insurance Company of New York and other purchasers. Exhibit 4.1 to the 1997 Form 10-K is hereby incorporated by reference.

4.2

 

Senior Note Purchase Agreement, dated as of November 1, 1996, among IHOP, Inc., IHOP Corp. and Jackson National Life Insurance Company and other purchasers. Exhibit 4.8 to IHOP Corp.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), is hereby incorporated by reference.

4.3

 

First Amendment to Senior Note Purchase Agreement, dated as of November 1, 1996, among IHOP Corp., IHOP Inc., and Mutual Life Insurance Company of New York and other purchasers. Exhibit 4.2 to IHOP Corp.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), is hereby incorporated by reference.

4.4

 

Revolving line of credit note among International House of Pancakes, Inc., a Delaware Corporation and Wells Fargo Bank, N.A. dated as of June 28, 2001 is filed herewith.

4.5

 

Loan Agreement dated as of April 27, 2001, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., and Bank of America, N.A., is filed herewith.

*10.1

 

Employment Agreement between IHOP Corp. and Rand Michael Ferris. Exhibit 10.6 to the 1996 Form 10-K is hereby incorporated by reference.

*10.2

 

Employment Agreement between IHOP Corp. and Susan Henderson-Hernandez. Exhibit 10.7 to the 1996 Form 10-K is hereby incorporated by reference.

*10.3

 

Employment Agreement between IHOP Corp. and Richard K. Herzer. Exhibit 10.8 to the 1996 Form 10-K is hereby incorporated by reference.

*10.4

 

Employment Agreement between IHOP Corp. and Anna G. Ulvan. Exhibit 10.12 to the 1996 Form 10-K is hereby incorporated by reference.

*10.5

 

Employment Agreement between IHOP Corp. and Mark D. Weisberger. Exhibit 10.13 to the 1996 Form 10-K is hereby incorporated by reference.

*10.6

 

Employment Agreement between IHOP Corp. and Richard C. Celio. Exhibit 10 to IHOP Corp.'s Form 10-Q for the quarterly period ended March 31, 1997, is hereby incorporated by reference.

*10.7

 

Employment Agreement between IHOP Corp. and John Jordan. Exhibit 10.13 to the 1997 Form 10-K is hereby incorporated by reference.

 

 

 

42



*10.8

 

Employment Agreement between IHOP Corp. and Alan S. Unger. Exhibit 10.21 to IHOP Corp.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, is hereby incorporated by reference.

*10.9

 

Employment Agreement between IHOP Corp. and Robin S. Elledge. Exhibit 10.1 to IHOP Corp.'s Form 10-Q for the quarterly period ended June 30, 2000, is hereby incorporated by reference.

*10.10

 

Employment Agreement between IHOP Corp. and Julia A. Stewart is filed herewith.

*10.11

 

Area Franchise Agreement, effective as of May 5, 1988, by and between IHOP, Inc. and FMS Management Systems, Inc. Exhibit 10.14 to the 1997 Form 10-K is hereby incorporated by reference.

*10.12

 

International House of Pancakes Employee Stock Ownership Plan as Amended and Restated as of January 1, 2001 ("the ESOP") is filed herewith.

*10.13

 

IHOP Corp. 1994 Stock Option Plan for Non-Employee Directors as Amended and Restated February 23, 1999. Annex "A" to the IHOP Corp. Proxy Statement for Annual Meeting of Stockholders held on Tuesday, May 11, 1999, is hereby incorporated by reference.

*10.14

 

IHOP Corp. 2001 Stock Incentive Plan (the "2001 Plan") as Amended and Restated on March 1, 2001. Appendix "B" to the IHOP Corp. Proxy Statement for the Annual Meeting of Stockholders held on May 15, 2001, is hereby incorporated by reference.

*10.15

 

International House of Pancakes 401(k) Plan is filed herewith.

*10.16

 

IHOP Corp. Executive Incentive Plan effective January 1, 2001 and supersedes all previously implemented plans is filed herewith.

11.0

 

Statement Regarding Computation of Per Share Earnings.

21.0

 

Subsidiaries of IHOP Corp. Exhibit 21.0 to the 1997 Form 10-K is hereby incorporated by reference.

23.0

 

Consent of PricewaterhouseCoopers LLP.
(b)
Reports on Form 8-K:

        On October 30, 2001, IHOP Corp. filed a current report on Form 8-K, dated October 30, 2001, disclosing a press release announcing its results for the quarter ended September 30, 2001.

43



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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, on this 11th day of March, 2002.

    IHOP CORP.

 

 

By:

/s/  
RICHARD K. HERZER      
Richard K. Herzer
Chairman of the Board and
Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, in the capacities indicated, on this 11th day of March, 2002.

Name
  Title

 

 

 
/s/  RICHARD K. HERZER      
Richard K. Herzer
  Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

/s/  
JULIA A. STEWART      
Julia A. Stewart

 

President, Chief Operating Officer and Director

/s/  
ALAN S. UNGER      
Alan S. Unger

 

Vice President-Finance, Treasurer and Chief Financial Officer (Principal Financial Officer)

/s/  
A. ALLEN ARROYO      
A. Allen Arroyo

 

Controller and Assistant Treasurer (Principal Accounting Officer)

/s/  
H. FREDERICK CHRISTIE      
H. Frederick Christie

 

Director

/s/  
FRANK EDELSTEIN      
Frank Edelstein

 

Director

/s/  
MICHAEL S. GORDON      
Michael S. Gordon

 

Director

/s/  
NEVEN C. HULSEY      
Neven C. Hulsey

 

Director

/s/  
LARRY ALAN KAY      
Larry Alan Kay

 

Director

/s/  
CAROLINE W. NAHAS      
Caroline W. Nahas

 

Director

/s/  
PATRICK W. ROSE      
Patrick W. Rose

 

Director

44




QuickLinks

PART I
PART II
Index to Consolidated Financial Statements
IHOP Corp. and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts)
IHOP Corp. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts)
IHOP Corp. and Subsidiaries Consolidated Statements of Shareholders' Equity (In thousands, except share amounts)
IHOP Corp. and Subsidiaries Consolidated Statements of Cash Flows (In thousands)
IHOP Corp. and Subsidiaries Notes to the Consolidated Financial Statements
Report of Independent Accountants
PART III
PART IV
SIGNATURES

EXHIBIT 4.4

 

REVOLVING LINE OF CREDIT NOTE

$25,000,000.00

Los Angeles, California

 

June 28, 2001

 

FOR VALUE RECEIVED, the undersigned, INTERNATIONAL HOUSE OF PANCAKES, INC., a Delaware corporation (“Borrower”), promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) at its office at Los Angeles RCBO, 333 South Grand Avenue, Third Floor, Los Angeles, California 90071, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty-Five Million and No/100 Dollars ($25,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.

DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

(a)           “Business Day” means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close.

(b)           “Fixed Rate Term” means a period during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR or the SAF Rate, with each Fixed Rate Term to commence on a Business Day and to continue:

(i)            for a period of one (1), two (2) or three (3) months for a LIBOR interest selection; and

(ii)           for a period of not less than one (1) Business Day nor more than twenty-eight (28) days for a SAF Rate interest selection;

provided however, that no Fixed Rate Term for a LIBOR interest option may be selected for a principal amount less than One Hundred Thousand Dollars ($100,000.00) and no Fixed Rate Term for a SAF Rate interest option may be selected for a principal amount less than One Hundred Thousand Dollars ($100,000.00); and provided further, that no Fixed Rate Term shall extend beyond the Line of Credit Maturity Date.  If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.

(c)           “LIBOR” means the rate per annum (rounded upward, if necessary, to the nearest whole 1/16 of 1%) and determined pursuant to the following formula:

LIBOR =

Base LIBOR

 

 

100% — LIBOR Reserve Percentage

 

 

 

1



 

(i)            “Base LIBOR” means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies.  Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

(ii)           “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term.

(d)           “Line of Credit Maturity Date” shall have the meaning specified for such term in the Credit Agreement described below.

(e)           “Prime Rate” means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank’s base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.

(f)            “SAF Rate” means the fixed rate per annum determined solely for Borrower by Bank to be the Special Advance Facility Rate applicable to all or a portion of the outstanding principal balance of this Note, with the understanding that:  (i) the SAF Rate shall be determined separately by Bank at the time of each request therefor; (ii) Bank’s agreement to make the SAF Rate available is subject to cancellation by Bank at any time at Bank’s sole discretion; and (iii) upon any such cancellation, Bank shall have no further obligation to provide any new SAF Rate for this Note.

INTEREST:

(a)           Interest.  The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum one percent (1.000%) below the Prime Rate in effect from time to time, (ii) at a fixed rate per annum determined by Bank to be three-quarters percent (0.750%) above LIBOR in effect on the first day of the applicable Fixed Rate Term for a LIBOR interest selection, or (iii) at a fixed rate per annum determined by Bank to be ninety-five one hundredths of one percent (0.950%) above the SAF Rate in effect on the first day of any Fixed Rate Term for a SAF Rate interest selection.  When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate

 

2



 

change is announced within Bank.  With respect to each LIBOR or SAF Rate interest selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.

(b)           Selection of Interest Rate Options.  At any time any portion of this Note bears interest determined in relation to LIBOR or the SAF Rate, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or in relation to LIBOR or the SAF Rate for a new Fixed Rate Term designated by Borrower.  At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR or the SAF Rate for a Fixed Rate Term designated by Borrower.  At such time as Borrower requests an advance hereunder or wishes to select a LIBOR or SAF Rate option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying:  (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR or SAF Rate selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR or SAF Rate selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) with respect to each LIBOR option requested hereunder, such notice is given to Bank prior to 2:00 p.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it’s sole option but without obligation to do so, accepts Borrower’s notice and quotes a LIBOR-based rate to Borrower.  If Borrower does not immediately accept a LIBOR-based rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate.  If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied.

(c)           Taxes and Regulatory Costs.  Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR.  In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

 

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(d)           Payment of Interest.  Interest accrued on this Note shall be payable on the first day of each month, commencing August 1, 2001.

(e)           Default Interest.  From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note.

BORROWING AND REPAYMENT:

(a)           Borrowing and Repayment.  Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount set forth above or such lesser amount as shall at any time be available hereunder.  The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder.  The outstanding principal balance of this Note shall be due and payable in full on the Line of Credit Maturity Date.

(b)           Advances.  Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of Alan S. Unger, Katherine G. Mittelman, or Robert H. Dickson, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account.  The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower.

(c)           Application of Payments.  Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof.  All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first, and third, subject to the restrictions set forth below on voluntary prepayments of any principal amount bearing interest in relation to the SAF Rate, to the outstanding principal balance of this Note which bears interest determined in relation to the SAF Rate, with such payments applied to the oldest Fixed Rate Term first.

 

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PREPAYMENT:

(a)           Prime Rate.  Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

(b)           LIBOR.  Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof.  In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month:

(i)            Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.

(ii)           Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.

(iii)          If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above.

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities.  Borrower, therefore, agrees to pay the above–described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank.  If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2.000%) above the Prime Rate in effect from time to time (computed on the basis of a 360–day year, actual days elapsed).  Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank.

(c)           SAF Rate.  Borrower may not voluntarily prepay principal on any portion of this Note which bears interest determined in relation to the SAF Rate.  Notwithstanding the foregoing, in the event that any portion of this Note which bears interest in relation to the SAF Rate shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall reimburse Bank immediately

 

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on demand for the full amount of any loss incurred by Bank as a result of the prepayment of such portion, including any loss of income resulting from Bank’s reinvestment or re-employment of the amount prepaid at a rate which is less than the SAF Rate for such portion.

EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of June 28, 2001, as amended from time to time (the “Credit Agreement”).  Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an “Event of Default” under this Note.

MISCELLANEOUS:

(a)           Remedies.  Upon the occurrence of any Event of Default, the holder of this Note, at the holder’s option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate.  Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

(b)           Governing Law.  This Note shall be governed by and construed in accordance with the laws of the State of California.

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

INTERNATIONAL HOUSE OF PANCAKES, INC.,

a Delaware corporation

By

 

 

 

 

 

 

  [Printed Name and Title]

 

 

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CREDIT AGREEMENT

THIS CREDIT AGREEMENT is entered into as of June 28, 2001, by and between INTERNATIONAL HOUSE OF PANCAKES, INC., a Delaware corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION
(“Bank”).

RECITALS

Borrower has requested that Bank extend credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS

SECTION 1.1         DEFINED TERMS.  The following terms as used herein shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

Additional Permitted Subsidiary Guarantees” means those Guarantees delivered by any Guarantor (other than IHOP) which guarantee Debt of Borrower the beneficiaries of which are or become a party to, and thereby agree to undertake and perform the duties, rights and obligations of a party under, the Intercreditor Agreement.

Advance” means an advance under the Line of Credit.

Affiliate” means any Person (other than a Subsidiary) (a) which directly or indirectly controls, or is controlled by, or is under common control with, IHOP, (b) which beneficially owns or holds 10% or more of any class of the Voting Stock of IHOP, (c) 10% or more of the Voting Stock of which is beneficially owned or held by IHOP or a Subsidiary of IHOP or (d) any officer or director of IHOP or any of its Subsidiaries.  For purposes of this definition, “control” of a Person shall mean the power, direct or indirect, (i) to vote or direct the voting of a majority of the Voting Stock of such Person, or (ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

Agreement” means this Credit Agreement, either as originally executed or as it may from time to time be supplemented, modified, amended, restated or extended.

Appropriate Officer” means, with respect to any corporation, such corporation’s President, Vice President, Chief Executive Officer, Chief Financial Officer, Treasurer or Controller.

Bank” is defined in the preamble.

 

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Board” means the Board of Directors of any corporation or a committee of said corporation having authority to exercise, when the Board of Directors is not in session, the powers of the Board of Directors (subject to any designated limitations) in the management of the business and affairs of said corporation.

Book Value” of an asset of any Person means the value of such asset as reported in the books and records of such Person in accordance with GAAP.

Borrower” is defined in the preamble.

Business Asset Acquisition” is defined in Section 6.7 hereof.

Business Day” means any Monday, Tuesday, Wednesday, Thursday or Friday on which Bank is open for business at its address for notices as designated herein.

Capitalized Lease” means a lease of Property which in accordance with GAAP should be capitalized on the balance sheet of any Person.

Capitalized Lease Obligations” means the aggregate rentals due and to become due under all Capitalized Leases which any Person, as a lessee, would be required to reflect as a liability on the consolidated balance sheet of such Person in accordance with GAAP.

Closing Date” means the date on which all conditions precedent set forth in Article 4 have been met.

Compliance Certificate” means a certificate in the form of Exhibit A, properly completed and signed by an Appropriate Officer of IHOP and Borrower.

Consolidated Debt” means the Debt of IHOP, Borrower and their Subsidiaries, as determined on a consolidated basis in accordance with GAAP.

Consolidated Income Available for Fixed Charges” means the sum of (a) Consolidated Net Income, (b) consolidated income tax expense of IHOP and its Subsidiaries in accordance with GAAP and (c) Fixed Charges.

Consolidated Net Income or Loss” means the Net Income or Loss of IHOP, Borrower and their Subsidiaries, as determined on a consolidated basis in accordance with GAAP.

Consolidated Tangible Net Worth” means shareholders’ equity of IHOP and its Subsidiaries less intangible assets booked after December 31, 1999, less Restricted Investments in excess of 10% of shareholders’ equity of IHOP and its Subsidiaries at any date of determination, all as determined for IHOP and its Subsidiaries on a consolidated basis in accordance with GAAP.

 

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Debt” with respect to any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) the liability of such Person created by granting a Lien to which the property or assets of such Person are subject whether or not such Person has assumed or become legally liable for the payment of any obligation (provided that, if such obligation has not been assumed or become the legal liability of such Person, the amount of the liability shall be deemed to be in an amount not to exceed the Fair Market Value of the property to which the Lien relates, as determined in good faith by such Person), (c) Capitalized Lease Obligations of such Person, to the extent such obligations exceed 95% of the amount of accounts receivable by such Person as lessor under direct financing leases with franchisees so long as such direct financing leases are, at the time of determination to the best knowledge of the lessor thereunder, valid and enforceable against their lessees and are current as to payment and not otherwise in default to the extent that there is a reasonable likelihood that any such lease would be terminated by the lessor prior to its stated expiration and (d) the aggregate amount of all Guarantees given by such Person with respect to any of the foregoing.

Default” means any Event of Default and/or any event that, with the passage of time or the giving of notice or both, would constitute an Event of Default.

Disposition” means any sale, transfer, assignment, lease, conveyance or other disposition of any asset except for sales, transfers, assignments, leases conveyances or other dispositions solely between IHOP, Borrower and/or the other Guarantors.

ERISA” means the Employee Retirement Income Security Act of 1974, as from time to time amended.

Event of Default” shall have the meaning specified in Section 7.1.

Fair Market Value” means what a willing buyer would pay to a willing seller in an arm’s-length transaction.

Fixed Charges” means the sum of (a) Interest Expense and (b) rental expense under operating leases, all as determined for IHOP and its Subsidiaries on a consolidated basis in accordance with GAAP.

Fixed Rate Notes” means, collectively, (a) Borrower’s 7.79% senior notes due in 2002 in the original aggregate principal amount of $32,000,000 issued on November 19, 1992 pursuant to the Note Purchase Agreements-1992 and (b) Borrower’s 7.42% senior notes due in 2008 in the original aggregate principal amount of $35,000,000 issued on November 1, 1996 pursuant to the Note Purchase Agreements-1996.

GAAP” means generally accepted accounting principles in the United States in effect from time to time.

Governmental Agency” means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi–governmental agency, authority, board, bureau, commission, department, instrumentality or public body, or (c) any court, administrative tribunal or public utility.

 

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Gross Assets” means the total assets and Properties of IHOP and its Subsidiaries less accumulated depreciation, as indicated on the audited balance sheets of IHOP and its Subsidiaries for the fiscal year end immediately prior to the date of any determination.

Guarantee” means any guarantee or other contingent liability (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligations of another Person, through an agreement or otherwise, including, without limitation, (a) any other endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (b) any agreement (i) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (ii) to purchase, sell or lease Property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the Property, products, materials or supplies or transportation or services or (iii) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation.  The amount of liability of any Person attributable to any Guarantee shall be equal to the maximum amount for which such Person could be liable under such Guarantee.

Guarantors” means, collectively, IHOP, IHOP Properties, IHOP Realty and IHOP Restaurants, together with any and all other Persons that may now or hereafter guaranty the obligations of Borrower to Bank with respect to the Line of Credit or any part thereof.

IHOP” means IHOP Corp., a Delaware corporation, or any successor thereto.

IHOP Guaranties” is defined in Section 2.4.

IHOP Properties” means IHOP Properties, Inc., a Delaware corporation which is an indirect wholly-owned Subsidiary of Borrower.

IHOP Realty” means IHOP Realty Corp., a Delaware corporation which is a wholly–owned Subsidiary of Borrower.

IHOP Restaurants” means IHOP Restaurants, Inc., a California corporation which is a wholly-owned Subsidiary of Borrower.

Intercreditor Agreement” means the Intercreditor Agreement dated as of June 28, 2001 among the 1992 Noteholders (as defined therein), the 1996 Noteholders (as defined therein), Bank and additional creditors which may become a party thereto from time to time, substantially in the form attached hereto as Exhibit B, either as originally executed or as it may from time to time be supplemented, modified, amended, restated or extended.

 

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Interest Expense” means interest expense, determined for IHOP and its Subsidiaries on a consolidated basis in accordance with GAAP.

Investment” when used with reference to any investment of IHOP, Borrower or any of their Subsidiaries, means any investment so classified under GAAP (and, specifically, shall not include trade receivables which are classified as current assets under GAAP), and, whether or not so classified, includes (a) any loan or advance made by IHOP, Borrower or any of their Subsidiaries to any other Person, and (b) any ownership or similar interest in any other Person; and the amount of any Investment shall be the original principal or capital amount thereof less all cash returns of principal or equity thereof (and without adjustment by reason of the financial condition of such other Person).

Laws” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, regulations, ordinances, codes and administrative or judicial precedents.

Lien” means any security interest, mortgage, pledge, lien, claim, charge, encumbrance, conditional sale or title retention agreement, lessor’s interest under a Capitalized Lease or analogous instrument, in, of or on any of a Person’s Property (whether held on the date hereof or hereafter acquired), or any signed or filed financing statement which names such Person as the debtor, or the execution of any security agreement or the like authorizing any other Person as the secured party thereunder to file such a financing statement; provided that neither (a) the interest of a lessee or a sublessee in its capacity as lessee or sublessee under a lease or sublease entered into by IHOP, Borrower or any of their Subsidiaries in the ordinary course of business nor (b) the rights of franchisees in their capacities as franchisees to use and possession of certain properties and rights pursuant to franchise documentation entered into by IHOP, Borrower or any of their Subsidiaries in the ordinary course of business shall be deemed to constitute a Lien for purposes hereof.

Line of Credit” shall have the meaning specified in Section 2.1(a).

Line of Credit Maturity Date” means May 31, 2004, or such later date as may then be in effect pursuant to Section 2.1(d).

Line of Credit Note” shall have the meaning specified in Section 2.1(a).

Loan Documents” means, collectively, this Agreement, the Line of Credit Note, the IHOP Guaranties and any other certificates, documents or agreements of any type or nature heretofore or hereafter executed or delivered by Borrower and/or any other Person (or any Affiliate) to Bank in any way relating to or in furtherance of the Agreement, in each case either as originally executed or as the same may from time to time be supplemented, modified, amended, restated or extended.

 

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Material Adverse Effect” means any change or changes or effect or effects that individually or in the aggregate are or are likely to be materially adverse to (a) the assets, business, operations, income, prospects or condition (financial or otherwise) of IHOP and its Subsidiaries taken as a whole or Borrower and its Subsidiaries taken as a whole, (b) the transactions contemplated by this Agreement, or (c) taken as a whole, the ability of Borrower and IHOP to fulfill their respective obligations under this Agreement and the Line of Credit Note.

Net Income or Loss” of any Person, with respect to any period, shall mean the net income or net loss of such Person after excluding the sum of (a) any net loss or any undistributed net income of any Person other than a Subsidiary of such Person, (b) the net income or net loss of any Subsidiary of such Person earned or incurred prior to the date on which it became a Subsidiary of such  Person, (c) the gain or loss (net of any tax effect) resulting from the sale of any capital assets other than in the ordinary course of business, and (d) extraordinary or nonrecurring gains or losses (net of any tax effect), all as determined for the relevant period in accordance with GAAP.

Note Purchase Agreements” means, collectively, the Note Purchase Agreements-1992 and the Note Purchase Agreements-1996.

Note Purchase Agreements-1992” means the several Senior Note Purchase Agreements dated as of November 19, 1992 among Borrower, IHOP and the purchasers identified in Schedule I thereto.

Note Purchase Agreements-1996” means the several Senior Note Purchase Agreements dated as of November 1, 1996 among Borrower, IHOP and the purchasers identified in Schedule I thereto.

Opinion of Counsel” means the favorable written legal opinion of Mark Weisberger, as internal counsel to Borrower and the Guarantors, together with copies of all factual certificates and legal opinions upon which such counsel has relied.

Person” means any entity, whether an individual, trustee, corporation, general partnership, limited partnership, joint stock company, trust, unincorporated organization, bank, business association, firm, joint venture, government agency or authority, or otherwise.

Permitted Lien” is defined in Section 6.2.

Prime Rate” means the rate of interest most recently announced by Bank at its principal office in San Francisco as its “Prime Rate.”  The Prime Rate is one of Bank’s base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcements in such internal publication or publications as Bank may designate.  Any change in the interest rate resulting from a change in such Prime Rate shall become effective on the Business Day on which each change in the Prime Rate is announced by Bank.  The Prime Rate may not necessarily be the lowest interest rate at which Bank is willing to extend credit facilities.

 

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Property” with respect to any Person, means any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible, of such Person.

Request for Extension” means a request for an extension of the Line of Credit Maturity Date substantially in the form of Exhibit C, signed by an Appropriate Officer of IHOP and Borrower and properly completed to provide all information required to be included therein.

Responsible Official” means (a) when used with reference to a Person other than an individual, any corporate officer of such Person, general partner of such Person, corporate officer of a corporate general partner of such Person, or corporate officer of a corporate general partner of a partnership that is a general partner of such Person, or any other responsible official thereof duly acting on behalf thereof, and (b) when used with reference to a Person who is an individual, such Person.  Any document or certificate hereunder that is signed or executed by a Responsible Official of a Person shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of that Person.

Restricted Investments” shall mean all Investments made by IHOP, Borrower or their Subsidiaries in or to any Person except (a) Investments in notes of franchisees and receivables of franchisees in the ordinary course of business other than notes and receivables held in settlement of franchise obligations, and in Property of IHOP or its Subsidiaries to be used in the ordinary course of business; (b) Investments in Subsidiaries; (c) Investments in obligations issued or unconditionally guarantied by the United States of America or any agency thereof, in each case maturing within one year from the date of acquisition thereof; (d) Investments in obligations issued by any political subdivision of the United States of America or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc. or some other mutually agreeable rating system if either of these entities no longer exists; (e) commercial paper maturing no more than 270 days from the date of creation thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc. or some other mutually agreeable rating system if either of these entities no longer exists; (f) certificates of deposit, repurchase agreements or bankers’ acceptances maturing within one year from the date of acquisition thereof issued by Borrower’s cash management concentration bank (provided that such bank is rated investment grade or better by either Standard & Poor’s Corporation or Moody’s Investors Services, Inc. or some other mutually agreeable rating system if either of these entities no longer exists), Wells Fargo Bank, N.A., or other commercial banks located in the United States of America and Canada having combined capital, surplus and undivided profits of not less than $100,000,000 and who have a rating at all times from Standard & Poor’s Corporation or Moody’s Investors Services, inc., or some other mutually agreeable rating system if either of these entities no longer exists, of “A-” or better; (g) Investments in mutual funds and money market accounts, which funds or accounts are traded on a national exchange or are managed by a commercial bank and which invests solely in Investments which satisfy the criteria set forth in the foregoing clauses (c) through (f); and (h) other Investments existing on the Closing Date.

 

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Subsidiary” means, with respect to any Person, any corporation or other entity (a) organized under the laws of the United States, the District of Columbia or Canada or any state or political subdivision of any thereof, (b) all or substantially all of whose assets and business operations are located or conducted within the United States of America or Canada and (c) of which at least 51% of the outstanding Voting Stock is at the time directly or indirectly owned or controlled by such Person or by one or more of such Person’s wholly-owned Subsidiaries.

Total Capitalization” means the sum of (i) Consolidated Debt of IHOP, Borrower and their Subsidiaries and (ii) Consolidated Tangible Net Worth.

Voting Stock” with respect to any Person shall mean capital stock of such Person of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of members of the Board (or Persons performing similar functions) of such Person.

SECTION 1.2         USE OF DEFINED TERMS.  Any defined term used in the plural shall refer to all members of the relevant class, and any defined term used in the singular shall refer to any one or more of the members of the relevant class.

SECTION 1.3         ACCOUNTING TERMS.  All accounting terms used in this Agreement shall be applied on a consolidated basis for IHOP, Borrower and their Subsidiaries, unless otherwise specifically indicated herein.  All accounting terms not  specifically defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect on the date hereof, except as otherwise specifically prescribed herein.

SECTION 1.4         EXHIBITS AND SCHEDULES.  All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference.

ARTICLE II.
CREDIT TERMS

SECTION 2.1         LINE OF CREDIT.

(a)           Line of Credit.  Subject to the terms and conditions of this Agreement, Bank hereby agrees to make Advances to Borrower from time to time up to and including the “Maturity Date” (as such term is defined in the Line of Credit Note described below), not to exceed at any time the aggregate principal amount of Twenty-Five Million Dollars ($25,000,000.00) (“Line of Credit”), the proceeds of which shall be used for Borrower’s working capital and other general corporate purposes.  Borrower’s obligation to repay Advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit D attached hereto (“Line of Credit Note”), all terms of which are incorporated herein by this reference.

 

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(b)           Letter of Credit Subfeature.  As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue or cause an affiliate to issue standby letters of credit for the account of Borrower for general corporate purposes, including without limitation to finance the acquisition and development of real estate in the ordinary course of Borrower’s business (each, a “Letter of Credit” and collectively, “Letters of Credit”); provided however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Five Million Dollars ($5,000,000.00).  The form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion.  Each Letter of Credit shall be issued for a term not to exceed eighteen (18) months, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date more than ninety (90) days beyond Line of Credit Maturity Date.  The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder.  Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof.  Each draft paid under a Letter of Credit shall be deemed an Advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such Advances; provided however, that if Advances under the Line of Credit are not available, for any reason, at the time any draft is paid, then Borrower shall pay to Bank within two (2) Business Days of Bank’s written demand therefor the full amount of such draft, together with interest thereon from the date such draft is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to Advances under the Line of Credit.  In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank for the amount of any such draft.

(c)           Borrowing and Repayment.  Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above.

(d)           Extension of Line of Credit Maturity Date.  Provided that Borrower has theretofore delivered to Bank the financial statements required under Section 5.3 for the immediately preceding fiscal year and immediately preceding fiscal quarter, as applicable, Borrower may, by delivery of a written Request for Extension to Bank, request that the Line of Credit Maturity Date (as then in effect) be extended by one year (365 or 366 days, as the case may be).  The Request for Extension shall not be delivered earlier than March 31, 2004 nor later than April 30, 2004 (or each March 31 and April 30 in a subsequent year if the Line of Credit Maturity Date has been extended to such year).  Bank shall use its best efforts to respond either affirmatively or negatively (in its sole and absolute discretion) to such Request for Extension by written notice to Borrower within thirty (30) days after receipt thereof from Borrower.  If Bank so notifies Borrower in writing that Bank consents to the extension of the

 

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Line of Credit Maturity Date, then the Line of Credit Maturity Date shall be deemed so extended and the term “Line of Credit Maturity Date” shall be deemed amended to mean the date which is one year subsequent to the then effective Line of Credit Maturity Date.  If Bank, in its sole and absolute discretion, notifies Borrower in writing within said thirty (30) day period that it does not consent to such extension of the Line of Credit Maturity Date, or fails to respond in writing within said thirty (30) day period, the Line of Credit Maturity Date shall not be so extended.

SECTION 2.2         INTEREST/FEES.

(a)           Interest.  The outstanding principal balance of the Line of Credit shall bear interest, and the amount of each draft paid under any Letter of Credit shall bear interest from the date such draft is paid to the date such amount is fully repaid by Borrower, at the rate(s) of interest set forth in the Line of Credit Note.

(b)           Computation and Payment.  Interest shall be computed on the basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and place set forth in each promissory note or other instrument required hereby.

(c)           Unused Commitment Fee.  Borrower shall pay to Bank a fee equal to three-eighths of one percent (0.375%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears each January 1, April 1, July 1 and October 1.

(d)           Letter of Credit Fees.  Borrower shall pay to Bank (i) fees upon the issuance of each Letter of Credit equal to one and one-quarter percent (1.250%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (ii) fees upon the payment or negotiation of each draft under any Letter of Credit and fees upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank’s standard fees and charges then in effect for such activity.

SECTION 2.3         COLLECTION OF PAYMENTS.  To the extent Borrower shall not have otherwise paid any of the following on or before their due date, Borrower authorizes Bank to collect all principal, interest and fees due under the Line of Credit by charging Borrower’s deposit account number 4950038554 with Bank, or any other deposit account maintained by Borrower with Bank, for the full amount thereof.  Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower.  Notwithstanding the foregoing, Bank shall not charge any such deposit account for fees due hereunder or any other Loan Document (other than unused commitment fees referenced in Section 2.2(c) above) without having first provided Borrower five (5) Business Days prior written notice (or such longer notice period as may be required hereunder or under any other applicable Loan Document) that any such fees are due and payable.

 

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SECTION 2.4         GUARANTIES.  All indebtedness of Borrower to Bank under the Line of Credit shall be guaranteed jointly and severally by each of the IHOP Guarantors as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank (collectively, the “IHOP Guaranties”)..

ARTICLE III.
REPRESENTATIONS AND WARRANTIES

Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement.

SECTION 3.1         LEGAL STATUS.  Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required.

SECTION 3.2         AUTHORIZATION AND VALIDITY.  This Agreement and each other Loan Document required hereby or at any time hereafter delivered to Bank in connection herewith have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms.

SECTION 3.3         NO VIOLATION.  The execution, delivery and performance by IHOP, Borrower and their Subsidiaries of each of the Loan Documents to which they are a party do not violate any provision of any Law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of IHOP, Borrower or any such Subsidiary, or result in any breach of or default under any contract, obligation, indenture or other instrument to which IHOP, Borrower or any such Subsidiary, is a party or by which IHOP, Borrower or any such Subsidiary, may be bound.

SECTION 3.4         LITIGATION.  There are no pending, or to the best of Borrower’s knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a Material Adverse Effect other than those disclosed by Borrower to Bank in writing prior to the date hereof.

SECTION 3.5         CORRECTNESS OF FINANCIAL STATEMENT.  The financial statement of IHOP and its Subsidiaries dated December 31, 2000, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the consolidated financial condition of IHOP and its Subsidiaries, (b) discloses (as of such date) all liabilities of IHOP and its Subsidiaries that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with GAAP consistently applied. 

 

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Since the date of such financial statement there has been no material adverse change in the financial condition of IHOP and its Subsidiaries, nor has IHOP, Borrower or any of their Subsidiaries mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except as permitted herein.

SECTION 3.6         INCOME TAX RETURNS.  Borrower has no knowledge of any pending assessments or adjustments of any income tax payable with respect to any year for IHOP, Borrower or any of their Subsidiaries.

SECTION 3.7         NO SUBORDINATION.  There is no agreement, indenture, contract or instrument to which IHOP, Borrower or any of their Subsidiaries is a party or by which IHOP, Borrower or any of their Subsidiaries may be bound that requires the subordination in right of payment of any of their respective obligations subject to this Agreement to any other obligation of any of them.

SECTION 3.8         PERMITS, FRANCHISES.  IHOP, Borrower and their Subsidiaries possess, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which they are now engaged in compliance with applicable law.

SECTION 3.9         ERISA.  To the best of Borrower’s knowledge, after due inquiry, each of IHOP, Borrower and their Subsidiaries is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time; none of IHOP, Borrower or any of their Subsidiaries has violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by any of them (each, a “Plan”); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by IHOP, Borrower and their Subsidiaries; each of IHOP, Borrower and their Subsidiaries has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under GAAP.

SECTION 3.10       NO MATERIAL ADVERSE CHANGE.  Since the date of the financial statements referenced in Section 3.5 above, no circumstance or event has occurred that constitutes a Material Adverse Effect.

SECTION 3.11       OTHER OBLIGATIONS.  To the best of Borrower’s knowledge, after due inquiry, none of IHOP, Borrower or any of their Subsidiaries is in default on any obligation of $1,000,000 or more for borrowed money, any purchase money obligation of $1,000,000 or more, or any other lease, commitment, contract, instrument or obligation involving an amount payable by Borrower of $1,000,000 or more.

SECTION 3.12       ENVIRONMENTAL MATTERS.  Except as disclosed by Borrower to Bank in writing prior to the date hereof, to the best of Borrower’s knowledge, after due inquiry, each of IHOP, Borrower and their Subsidiaries are in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health

 

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and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of their respective operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time.  To the best of Borrower’s knowledge, after due inquiry, none of the operations of IHOP, Borrower and their Subsidiaries is the subject of any federal or state investigation evaluating whether any remedial action involving an expenditure exceeding $1,000,000 (either singularly or in the aggregate) is needed to respond to a release of any toxic or hazardous waste or substance into the environment.  None of IHOP, Borrower or any of their Subsidiaries has any contingent liability exceeding $1,000,000 (either singularly or in the aggregate) in connection with any release of any toxic or hazardous waste or substance into the environment.

ARTICLE IV.
CONDITIONS

SECTION 4.1         CONDITIONS OF INITIAL EXTENSION OF CREDIT.  The obligation of Bank to extend the initial credit contemplated by this Agreement is subject to the fulfillment to Bank’s satisfaction of all of the following conditions:

(a)           Documentation.  Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed by all applicable parties:

(i)            This Agreement.

(ii)           The Line of Credit Note.

(iii)          The IHOP Guaranties.

(iv)          The Intercreditor Agreement.

(v)           A Continuing Standby Letter of Credit Agreement, which agreement shall constitute a “Letter of Credit Agreement” for purposes of Section 2.1(b).

(vi)          With respect to each of Borrower and the Guarantors, such documentation as Bank may reasonably require to establish the due organization, valid existence and good standing of Borrower and each such Guarantor in its jurisdiction of formation, its qualification to engage in business in California or, if different, the jurisdiction of its principal place of business, its authority to execute, deliver and perform the Loan Documents to which it is a party, the identity, authority and capacity of each responsible official thereof authorized to act on its behalf, including, without limitation, copies of its certificates or articles of incorporation and amendments thereto certified by the applicable Secretary of State (or equivalent government official), bylaws and amendments thereto certified by a responsible official of such party, certificates of good standing and/or qualifications to engage in business, certified copies of corporate resolutions, incumbency certificates, certificates of responsible officials and the like.

 

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(vii)         The Opinion of Counsel.

(viii)        Written evidence that Borrower’s prior revolving (unsecured) credit facility with Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association, successor by merger to Bank of America Illinois) have been or will be concurrently terminated.

(ix)           Such other documents as Bank reasonably may require under any other Section of this Agreement.

(b)           Financial Condition.  There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any Guarantor.

(c)           Insurance.  Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower’s and the Guarantors’ Property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank.

SECTION 4.2         CONDITIONS OF EACH EXTENSION OF CREDIT.  The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank’s satisfaction of each of the following conditions:

(a)           Compliance.  The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Default or Event of Default shall have occurred and be continuing or shall exist.

(b)           Documentation.  Bank shall have received all additional documents which reasonably may be required by Bank in connection with such extension of credit.

ARTICLE V.
AFFIRMATIVE COVENANTS

Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall (and shall cause each of its Subsidiaries to), unless Bank otherwise consents in writing:

SECTION 5.1         PUNCTUAL PAYMENTS.  Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein.

 

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SECTION 5.2         ACCOUNTING RECORDS.  Maintain adequate books and records in accordance with GAAP consistently applied, and permit any representative of Bank, at any reasonable time upon two (2) Business Days’ prior notice, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower, with any such inspection, audit, or examination to occur during regular business hours.  Notwithstanding the foregoing, no prior notice for any such inspection, audit or examination shall be required during any time that an Event of Default shall remain in effect.

SECTION 5.3         FINANCIAL STATEMENTS.  Provide to Bank all of the following, in form and detail satisfactory to Bank:

(a)           as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of IHOP, as of the end of any such fiscal quarter,

(i)            Form 10-Q for IHOP, consolidated balance sheets of IHOP and its Subsidiaries as of the end of each such fiscal quarter and consolidated statements of earnings and cash flow of IHOP and its Subsidiaries for such fiscal quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such fiscal quarter, certified by an Appropriate Officer of IHOP; and

(ii)           a Compliance Certificate executed by an Appropriate Officer of IHOP and Borrower setting forth computations or other pertinent information in reasonable detail showing as at the end of such fiscal quarter (A) whether or not the financial covenants set forth in Sections 6.3 through 6.9 hereof, inclusive, have been met, accompanied by calculations setting forth the maximum amount of Debt that could have been incurred pursuant to Section 6.3 hereof, and the maximum amount of dividends or distributions that could have been declared or paid pursuant to Section 6.6 hereof, and (B) whether or not Liens on property or assets of IHOP or its Subsidiaries or securing Debt of IHOP or its Subsidiaries, as the case may be, exceed the threshold set forth in Section 6.2(i) hereof, accompanied by calculations setting forth the maximum amount of additional Debt secured by Liens that could have been incurred under Section 6.2(i) hereof;

(b)           as soon as available and in any event within 90 days after the end of each fiscal year of IHOP, a Compliance Certificate as of such year end and a copy of the annual report to shareholders for such fiscal year for IHOP and its Subsidiaries, including therein consolidated balance sheets of IHOP and its Subsidiaries as of the end of such fiscal year and consolidated statements of operations and cash flow of IHOP and its Subsidiaries for such fiscal year, in each case certified (without any material qualification) in a manner reasonably acceptable to Bank by PriceWaterhouseCoopers, another of the so-called “Big 5” accounting firms or any other accounting firm reasonably acceptable to Bank, and consolidating balance sheets of IHOP and its Subsidiaries as of the end of such fiscal year and consolidating statements of operations of IHOP and its Subsidiaries as of the end of such fiscal year, certified by an Appropriate Officer of IHOP;

 

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(c)           as soon as available and in any event within 15 days, any information filed by IHOP, Borrower or any of their Subsidiaries with the Securities and Exchange Commission with respect to IHOP, Borrower and/or any of their Subsidiaries;

(d)           as soon as available, any other public information released generally by IHOP, Borrower or any of their Subsidiaries to financial or investment institutions, brokers, investment bankers or any other entity in the financial community; and

(e)           as soon as possible after an Appropriate Officer of IHOP or Borrower has knowledge of the occurrence of a Default or Event of Default, IHOP or Borrower shall furnish Bank with the details thereof.

In addition to the foregoing, Borrower shall furnish Bank with copies of such other statements, reports, notices and information as Bank may from time to time reasonably request in writing.

SECTION 5.4         COMPLIANCE.  Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of Borrower’s and each Guarantor’s business; and comply with the provisions of all documents pursuant to which Borrower or any such Guarantor is organized and/or which govern Borrower’s or such Guarantor’s continued existence and with the requirements of all Laws, rules, regulations and orders of any Governmental Agency applicable to Borrower, any Guarantor and/or any of their respective businesses.

SECTION 5.5         INSURANCE.  Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower or any such Guarantor, including but not limited to fire, extended coverage, public liability, flood, property damage and workers’ compensation, and deliver to Bank from time to time at Bank’s request schedules setting forth all insurance then in effect.

SECTION 5.6         FACILITIES.  Keep all properties useful or necessary to Borrower’s or any such Guarantor’s business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto as are necessary in the reasonable opinion of Borrower’s and/or any such Guarantor’s management.

SECTION 5.7         TAXES AND OTHER LIABILITIES.  Pay and discharge prior to delinquency any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower or any such Guarantor may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower or such Guarantor has made provision, to Bank’s satisfaction, for eventual payment thereof in the event Borrower or such Guarantor is obligated to make such payment.

SECTION 5.8         LITIGATION.  Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower or any such Guarantor with a claim that is $1,000,000 or more in excess of the amount thereof that is fully covered by insurance.

 

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SECTION 5.9          NOTICE TO BANK.  Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of:  (a) the occurrence of any Default or Event of Default; (b) any change in the name or the organizational structure of Borrower or any Guarantor; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower or any Guarantor is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower’s or such Guarantor’s property in excess of an aggregate of $1,000,000.

ARTICLE VI.
NEGATIVE COVENANTS

Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not (and will not permit any Subsidiary of Borrower to) without Bank’s prior written consent:

SECTION 6.1         USE OF FUNDS.  Use any of the proceeds of any credit extended hereunder except for the purposes stated in Section 2.1(a) hereof.

SECTION 6.2         RESTRICTIONS ON LIENS.  Directly or indirectly, create, assume or suffer to exist any Lien upon any of their respective Properties or assets whether now owned or hereafter acquired, except for:

(a)           Liens for taxes, assessments or governmental charges or claims the payment of which is not at the time required by Section 5.7;

(b)           Statutory Liens of landlords, and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being diligently contested in good faith, so long as a reserve or other appropriate provision, if any, shall have been made therefor;

(c)           Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with obligations not due or delinquent with respect to workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

(d)           Any attachment or judgment Lien (including judgment or appeal bonds) which shall, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or which shall have been discharged within 30 days after the expiration of any such stay, or which is being diligently contested in good faith so long as a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor;

 

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(e)           Easements, rights-of-way, restrictions and other similar rights in land which do not, individually or in the aggregate, materially detract from the value of such Property and do not interfere with the ordinary conduct of the business of IHOP, Borrower or any of their Subsidiaries;

(f)            Liens securing Debt of a Subsidiary to Borrower;

(g)           Liens (other than Liens created pursuant to Capitalized Leases) (i) existing on the date hereof, securing Debt not exceeding $1,500,000 in the aggregate in principal amount, and (ii) whether now or hereafter existing, securing Debt provided Borrower by Bank of America NA, provided that such Debt at no time shall exceed $12,000,000 in aggregate principal outstanding;

(h)           Liens pursuant to Capitalized Leases existing on the Closing Date and Liens created following the Closing Date pursuant to Capitalized Leases so long as, with respect to Liens pursuant to Capitalized Leases created following the Closing Date, the Debt represented by such Capitalized Leases is permitted pursuant to Section 6.3; and

(i)            Liens including Liens arising out of purchase money financing not otherwise permitted by the foregoing clauses of this Section 6.2 securing Debt (without duplication) of IHOP, Borrower or any Subsidiary of IHOP or Borrower, provided that the sum of (i) the principal amount of such Debt plus (ii) unsecured Debt (other than Additional Permitted Subsidiary Guarantees) of Subsidiaries of IHOP (other than Borrower) and Subsidiaries of Borrower not otherwise permitted under Section 6.5(a) does not exceed at any time 15% of Consolidated Tangible Net Worth.

The Liens referred to in Section 6.2(a) through (i) are herein collectively referred to as “Permitted Liens,” and individually, as a “Permitted Lien.”

SECTION 6.3         LIMITATION ON CONSOLIDATED DEBT.  Permit the ratio of (i) Consolidated Debt to (ii) Total Capitalization to exceed 0.50 to 1.00 as of the last day of any quarterly accounting period of IHOP and its Subsidiaries.

SECTION 6.4         CONSOLIDATED TANGIBLE NET WORTH.  Permit Consolidated Tangible Net Worth at any time to be less than the sum of $150,000,000 plus 50% of Consolidated Net Income on a cumulative basis from December 31, 1999, to and including any date of determination.

SECTION 6.5         LIMITATION ON DEBT OF SUBSIDIARIES.  Permit any of the Subsidiaries (other than Borrower) to incur any Debt other than:

(a)           Debt owed to IHOP or Borrower or to a wholly-owned Subsidiary of IHOP or Borrower in each case by a direct or indirect wholly-owned Subsidiary of the creditor thereunder; and

(b)           additional Debt (other than Additional Permitted Subsidiary Guarantees), provided that the sum of the aggregate principal amount of such Debt plus the aggregate principal amount of all other Debt (without duplication) of IHOP, Borrower and any of their Subsidiaries which is secured by Permitted Liens permitted by Section 6.2(i) does not exceed 15% of Consolidated Tangible Net Worth.

 

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SECTION 6.6         RESTRICTED PAYMENTS; RESTRICTED INVESTMENTS.  Permit IHOP, directly or indirectly, through any Subsidiary or otherwise, (a) to pay or declare any dividend on any class of its capital stock (but IHOP or any such Subsidiary may declare and pay dividends payable solely in capital stock or warrants, rights or options to acquire capital stock) or make any other distribution on account of any class of its capital stock; retire, redeem, purchase or otherwise acquire, directly or indirectly, any shares of any class of its capital stock or any warrants, rights or options to acquire any such shares (other than any such redemption, retirement, purchase or other acquisition in which the consideration paid by IHOP or such Subsidiary consists solely of shares of capital stock of IHOP); or make or provide for any mandatory sinking fund payments required in connection with any class of its capital stock (all of the foregoing being called “Restricted Payments”) or (b) make any Restricted Investment, unless after giving effect to any Restricted Payment or Restricted Investment the cumulative aggregate amount of all Restricted Payments and Restricted Investments made by IHOP and its Subsidiaries after September 30, 1992 would not exceed the sum of:  (i) $2,000,000, plus (ii) 50% of cumulative Consolidated Net Income from September 30, 1992 through the date of determination (or if IHOP and its Subsidiaries on a consolidated basis have a cumulative Consolidated Net Loss for such period, then minus 100% of such Consolidated Net Loss), plus (iii) the net proceeds from the issuance or sale of any shares of any class of equity securities of IHOP which are not mandatorily redeemable or otherwise subject to repurchase, retirement, call, put or other reacquisition prior to or on the respective maturity dates of the Fixed Rate Notes (and not subject to acceleration or redemption, repurchase, retirement, call, put or other reacquisition prior to the respective maturity dates of the Fixed Rate Notes) received after September 30, 1992; provided that at the time of any such Restricted Payment or Restricted Investment, both immediately before and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing.  So long as no Default or Event of Default has occurred or would be continuing after giving effect thereto, this Section 6.6 shall not prevent (a) the payment of any dividend within 60 days after the date of its declaration if the dividend would have been permitted on the date of its declaration, or (b) the acquisition, repurchase, retirement, call, put or redemption of any shares of capital stock of IHOP out of the proceeds of the substantially concurrent sale (other than to a Subsidiary of IHOP) of, shares of capital stock of IHOP, provided that any such acquisition, repurchase, retirement, call, put or redemption shall be deemed to be a Restricted Payment for the purpose of determining the ability of IHOP and its Subsidiaries to make future Restricted Payments.

SECTION 6.7         SALE OF ASSETS.  Effect a Disposition of any assets unless (x) no Default or Event of Default has occurred (except in the case of subclause (a) below) and is continuing, and (y) one of the following applies:

(a)           such Disposition is in the ordinary course of business, including, without limitation, sales and leases of operating restaurants in accordance with Borrower’s ordinary course franchising operations and is made pursuant to the reasonable business judgment of Borrower in accordance with past practice;

 

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(b)           in each fiscal year, IHOP, Borrower and their respective Subsidiaries may effect Dispositions of assets for Fair Market Value and which (i) have an aggregate Book Value, together with all other assets disposed of in that fiscal year (other than Dispositions permitted by clause (a), (c) or (d) of this Section 6.7, of less than 10% of Gross Assets on a consolidated basis determined as at the date of such sale; (ii) generate, together with all other assets disposed of in that fiscal year (other than Dispositions permitted by clause (a), (c) or (d) of this Section 6.7), net income, which is less than 10% of the Consolidated Net Income (in each case, determined as of the end of the immediately preceding fiscal year); and (iii) together with all assets previously disposed of since September 30, 1996 (other than Dispositions permitted by clause (a), (c) or (d) of this Section 6.7, have an aggregate Book Value of less than 25% of Gross Assets on a consolidated basis determined as at the date of such sale, provided that after giving effect to any Disposition described in this subsection (b), IHOP, Borrower or any of their Subsidiaries could incur at least $1 of additional Debt without being in default of their obligations under Section 6.3.

(c)           such Dispositions are made for Fair Market Value and the proceeds of such Disposition are used (i) within six months following such Disposition, to purchase assets (“Business Asset Acquisition”) used in the operations of Borrower or (ii) to repay Debt of IHOP or its Subsidiaries which is not junior in right of payment to the Line of Credit Note; provided that if the aggregate principal amount of all outstanding Advances, Letters of Credit and unreimbursed drawings under Letters of Credit shall exceed $4,000,000, then the proceeds of such disposition shall be used to repay the Line of Credit Note until the aggregate principal amount of all outstanding Advances, Letters of Credit and unreimbursed drawings under Letters of Credit shall have been reduced to $4,000,000; or

(d)           the assets disposed of were disposed of for Fair Market Value (taking into consideration the rental rate to be paid by Borrower in connection with the Disposition and leaseback of the assets so disposed of) and were constructed or acquired following September 30, 1992 and are immediately leased back from the purchaser thereof by IHOP or any of its Subsidiaries; provided that no assets may be sold and leased back pursuant to this clause (d) following the third anniversary of the acquisition or construction of such assets by IHOP, Borrower or any of their Subsidiaries.

SECTION 6.8         CONSOLIDATION OR MERGER.  Enter into any transaction of merger or consolidation, whether in one transaction or a series of related or unrelated transactions and whether at the same time or over a period of time, provided that:

(a)           (i)            Borrower may merge with IHOP or any of IHOP’s other Subsidiaries, (ii) IHOP may merge with Borrower or any of IHOP’s other Subsidiaries and (iii) any Subsidiary may merge with IHOP, Borrower or any other Subsidiary, so long as, with respect to any mergers of Borrower or any Guarantor (including IHOP) in which such party is not the surviving Person, (a) the surviving Person of such transaction shall be a solvent United States or Canadian corporation, and such surviving Person shall have assumed in writing all of the obligations of Borrower, as the case may be, under this Agreement, the Line of Credit Note and/or any applicable IHOP Guaranty, as the case may be, a copy of which writing shall be provided to Bank not less than 10 Business Days prior to any such transaction and which shall be acceptable in form and substance to Bank, (b) at the time of, and immediately after giving effect to, any such consolidation or merger, no Default or Event of Default shall have occurred and be continuing, and (c) immediately after any such consolidation or merger, the surviving Person could incur an additional $1 of Debt pursuant to Section 6.3 hereof; and

 

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(b)           IHOP or Borrower may merge with any other Person so long as (i) the surviving Person of such transaction shall be a solvent United States or Canadian corporation, and such surviving Person shall have assumed in writing all of the obligations of Borrower under the Line of Credit Note and this Agreement or of IHOP under its IHOP Guaranty, as the case may be, a copy of which writing shall be provided to Bank not less than 10 Business Days prior to any such transaction and which shall be acceptable in form and substance to Bank, (ii) at the time of, and immediately after giving effect to, any such consolidation or merger, no Default or Event of Default shall have occurred and be continuing, and (iii) immediately after any such consolidation or merger, the surviving or continuing Person could incur an additional $1 of Debt pursuant to Section 6.3 hereof.

SECTION 6.9         MAINTENANCE OF FIXED CHARGE COVERAGE.  Permit, as of the last day of any quarterly accounting period, the ratio of Consolidated Income Available for Fixed Charges (excluding extraordinary losses or gains or non-recurring charges) to Fixed Charges for the period consisting of any four of the immediately preceding four quarterly accounting periods to be less than 1.50 to 100.

SECTION 6.10       TRANSACTIONS WITH AFFILIATES.  Directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any Property or the rendering of any service), with any Affiliate on terms that are less favorable to IHOP, Borrower or such Subsidiary, as the case may be, than those that would be obtainable at the time in an arms’-length transaction with any Person who is not such an Affiliate; provided however, that this Section shall not prohibit the payment of compensation and benefits to directors and officers of IHOP, Borrower and their Subsidiaries in the ordinary course of business and consistent with past practices.

SECTION 6.11       ACQUISITION OF MARGIN SECURITIES.  Own, purchase or acquire (or enter into any contract to purchase or acquire) any “margin security” as defined by any regulation of the Board of Governors of the United States Federal Reserve System as now in effect or as the same may hereafter be in effect unless, prior to any such purchase or acquisition or entering into any such contract, Bank shall have received an opinion of counsel satisfactory to Bank to the effect that such purchase or acquisition will not cause this Agreement or the Line of Credit Note to be in violation of Regulation G or any other regulation of such Board then in effect.

SECTION 6.12       CONDUCT OF BUSINESS.  Engage in any business activity if, such business activity would result in a substantial change in the general nature of the business of IHOP and its Subsidiaries, taken as a whole, from that engaged in as of December 31, 2000.

 

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SECTION 6.13       FURTHER UNDERTAKINGS.

(a)           incur capital expenditures (net of all proceeds relating to sale/leaseback transactions) in excess of $80,000,000 during any fiscal year;

(b)           expend more than $5,000,000 in any fiscal year in connection with the purchase of the capital stock of, or the acquisition of all or substantially all of the assets of, any other Person; provided however that to the extent that IHOP’s capital stock is given in connection with any such acquisition, the value of such stock shall be excluded from this calculation and provided, further that expenditures incurred by Borrower in connection with the acquisition of restaurants or leasehold interests for restaurants or with the reacquisition of franchises in the ordinary course of Borrower’s business shall also be excluded from this calculation;

(c)           amend the amortization schedule in effect as of the Closing Date as set forth in the Note Purchase Agreements in such a manner as to increase the amount of, or accelerate, payments of principal thereunder prior to the Line of Credit Maturity Date;

(d)           make any optional prepayment of the principal of any indebtedness outstanding under the Note Purchase Agreements prior to the Line of Credit Maturity Date unless, after giving effect thereto, the aggregate principal amount of all outstanding Advances, Letters of Credit and unreimbursed drawings under Letters of Credit does not exceed $4,000,000; or

(e)           notwithstanding the provisions of Section 6.7 hereof, make any Disposition of any of its accounts receivable or general intangibles.

ARTICLE VII.
EVENTS OF DEFAULT

SECTION 7.1         The occurrence of any of the following shall constitute an “Event of Default” under this Agreement:

(a)           Borrower shall fail to pay when due any principal or interest, or, within five (5) days after Bank’s written notice, any fees or other amounts payable under any of the Loan Documents.

(b)           Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made.

(c)           Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of thirty (30) days from its occurrence.

 

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(d)           Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any Guarantor has incurred any debt or other liability to Bank.

(e)           Borrower or any Guarantor (i) fails to pay the principal, or any  principal installment, of any present or future debt or other liability of $2,500,000 or more, or any guaranty of present or future debt or other liability of $2,500,000 or more on its part to be paid, when due (or with any stated grace period), whether at the stated maturity, upon acceleration, by reason of required prepayment or otherwise or (ii) fails to perform or observe any other term, covenant or agreement on its part to be performed or observed, or suffers any event to occur, in connection with any individual item of present or future debt or other liability of $2,500,000 or more, or of any guaranty of present or future debt or other liability of $2,500,000 or more, if as a result of such failure or sufferance any holder or holders thereof (or an agent or trustee on its or their behalf) has a right to declare such debt or other liability due before the date on which it otherwise would become due.

(f)            The filing of a notice of judgment lien against Borrower or any Guarantor; or the recording of any abstract of judgment against Borrower or any Guarantor in any county in which Borrower or such Guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any Guarantor or the entry of a judgment against Borrower or any Guarantor, in any such case in any amount in excess of $2,500,000, and which is not stayed, dismissed or satisfied within thirty (30) days from the filing, recording, service or entry thereof, as applicable.

(g)           Borrower or any Guarantor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Guarantor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time (“Bankruptcy Code”), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Guarantor and is not stayed or dismissed within ninety (90) days, or Borrower or any such Guarantor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any such Guarantor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any such Guarantor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.

(h)           The dissolution or liquidation of Borrower or any Guarantor or Borrower or any such Guarantor or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such Guarantor.

 

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(i)            IHOP shall fail to own 100% of the issued and outstanding common stock of Borrower.

SECTION 7.2         REMEDIES.  Upon the occurrence of any Event of Default:  (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank’s option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law.  All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.

ARTICLE VIII.
MISCELLANEOUS

SECTION 8.1         NO WAIVER.  No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy.  Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing.

SECTION 8.2         NOTICES.  All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address:

BORROWER:

INTERNATIONAL HOUSE OF PANCAKES, INC.

 

450 N. Brand Boulevard, 7th Floor

 

Glendale, California 91203-2306

 

Attention:  General Counsel

 

Tel. No.:  (818) 240-6055

 

Fax No.:  (818) 240-0270

 

 

BANK:

WELLS FARGO BANK, NATIONAL ASSOCIATION

 

Los Angeles RCBO

 

333 South Grand Avenue, Third Floor

 

Los Angeles, California  90071

 

Attention:  IHOP Account Officer

 

Tel. No.:  (213) 253-6832

 

Fax No.:  (213) 687-3501

 

or to such other address as any party may designate by written notice to all other parties.  Each such notice, request and demand shall be deemed given or made as follows:  (a) if sent

 

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by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, certified mail or registered, return receipt requested; (c) if sent by commercial overnight courier (such as Federal Express, United Parcel Service or DHL), on the scheduled delivery date; and (d) if sent by telecopy, upon receipt.

SECTION 8.3         COSTS, EXPENSES AND ATTORNEYS’ FEES.  Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of Bank’s in-house counsel), expended or incurred by Bank in connection with (a) (i) the negotiation and preparation of this Agreement and the other Loan Documents, (ii) the preparation of any amendments and waivers hereto and thereto, and (iii) if and only if, a Default or Event of Default shall have occurred and be continuing, Bank’s administration of this Agreement and the Loan Documents, including without limitation Bank’s costs and expenses to inspect, audit and examine the books and records of Borrower and its Subsidiaries; (b) the enforcement of Bank’s rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other Person) relating to any Borrower or any other Person.

SECTION 8.4         SUCCESSORS, ASSIGNMENT.  This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank’s prior written consent.  Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank’s rights and benefits under each of the Loan Documents.  In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, or any Guarantor or the business of such Guarantor.

SECTION 8.5         ENTIRE AGREEMENT; AMENDMENT.  This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof.  This Agreement may be amended or modified only in writing signed by each party hereto.

SECTION 8.6         NO THIRD PARTY BENEFICIARIES.  This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other Person shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party.

SECTION 8.7         TIME.  Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents.

 

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SECTION 8.8         SEVERABILITY OF PROVISIONS.  If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement.

SECTION 8.9         COUNTERPARTS.  This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement.

SECTION 8.10       GOVERNING LAW.  This Agreement shall be governed by and construed in accordance with the laws of the State of California.

SECTION 8.11       INDEMNITY BY BORROWER.  Borrower agrees to indemnify, save and hold harmless Bank and its directors, officers, agents, attorneys and employees (collectively, the “Indemnitees”) from and against:  (a) Any and all claims, demands, actions or causes of action that are asserted against any Indemnitee if the claim, demand, action or cause of action arises out of or relates to the relationship between Borrower and Bank under any of the Loan Documents or the transactions contemplated thereby; (b) Any and all administrative or investigative proceedings by any Governmental Agency or authority arising out of or related to any claim, demand, action or cause of action described in clause (a) above; and (c) Any and all liabilities, losses, costs or expenses (including reasonable attorneys’ fees and disbursements and other professional services) that any Indemnitee suffers or incurs as a result of the assertion of any of the foregoing; provided that no Indemnitee shall be entitled to indemnification for any loss caused by its own or its employees’ or agents’ gross negligence or willful misconduct.  Each Indemnitee is authorized to employ counsel in enforcing its rights hereunder and in defending against any claim, demand, action, cause of action or administrative or investigative proceeding covered by this Section 8.11; provided that the Indemnitees as a group may retain only one law firm to represent them with respect to any such matter unless there is, under applicable standards of professional conduct, conflict on any significant issue between the positions of any two or more Indemnitees.  Any obligation or liability of Borrower to any Indemnitee under this Section 8.11 shall be and hereby is covered by the Loan Documents  shall survive the expiration or termination of this Agreement and the repayment of the Line of Credit and the payment and performance of all other obligations owed to Bank.

SECTION 8.12       NONLIABILITY OF BANK.  Borrower acknowledges and agrees that:

(a)           By accepting or approving anything required to be observed, performed, fulfilled or given to Bank pursuant to the Loan Documents, including any certificate, financial statement, insurance policy or other document, Bank shall not be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Bank; and

 

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(b)           The relationship between Borrower and Bank in connection with this Agreement and the other Loan Documents is, and shall at all times remain, solely that of a borrower and lender; Bank shall not under any circumstance be construed to be a partner or joint venturer of Borrower; Bank shall not under any circumstances be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrower, or to owe any fiduciary duty to Borrower as a result of the transactions arising under this Agreement and the other Loan Documents; Bank does not undertake or assume any responsibility or duty to Borrower to select, review, inspect, supervise, pass judgment upon or inform Borrower of any matter in connection with its property or the operations of Borrower; Borrower shall rely entirely upon its own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Bank in connection with such matters is solely for the protection of Bank and neither Borrower nor any other Person is entitled to rely thereon.

SECTION 8.13       FURTHER ASSURANCES.  Borrower shall, at its expense and without expense to Bank, do, execute and deliver such further acts and documents as Bank from time to time reasonably requires for the assuring and confirming unto Bank of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document.

SECTION 8.14       CONFIDENTIALITY.  Bank agrees (and any assignee of all or part of Bank’s interests hereunder and any holder of a participation interest in the Line of Credit Note shall be required) to hold any confidential information that it may receive from Borrower pursuant to this Agreement in confidence, except for disclosure:  (a) to legal counsel and accountants for IHOP, Borrower or any of their Subsidiaries or Bank; (b) to other professional advisors to IHOP, Borrower or any of their Subsidiaries or Bank; provided that the recipient has been informed in advance of the confidential nature of such information; (c) to regulatory officials having jurisdiction over Bank; (d) as required by law or legal process or in connection with any legal proceeding or litigation involving Bank and IHOP, Borrower or any of their Subsidiaries or any Affiliate thereof; and (e) to another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of Bank’s interests hereunder or a participation interest in the Line of Credit Note, provided that the recipient has been informed in advance of the confidential nature of such information.  For purposes of the foregoing, “confidential information” shall mean any information respecting IHOP, Borrower or their Subsidiaries reasonably considered by IHOP, Borrower or such Subsidiary, as applicable, to be confidential, other than (i) information previously filed with any Governmental Agency and available to the public, (ii) information previously published in any public medium from a source other than, directly or indirectly, Bank, and (iii) information previously disclosed by IHOP, Borrower or any Subsidiary to any Person not associated with IHOP, Borrower or such Subsidiary, as applicable, without a confidentiality agreement or obligation substantially similar to this Section 8.14.  Nothing in this Section shall be construed to create or give rise to any fiduciary duty on the part of Bank to IHOP, Borrower or any of their Subsidiaries.

SECTION 8.15       ARBITRATION.

(a)           Arbitration.  The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in

 

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tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit.

(b)           Governing Rules.  Any arbitration proceeding will (i) proceed in a location in Los Angeles, California selected by the American Arbitration Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the
Rules”).  If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control.  Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.

(c)           No Waiver of Provisional Remedies.  The arbitration requirement does not limit the right of any party to obtain provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding.  This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder.

(d)           Arbitrator Qualifications and Powers.  Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00.  Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated.  The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator’s discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a

 

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judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction.  The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.

(e)           Discovery.  In any arbitration proceeding discovery will be permitted in accordance with the Rules.  All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA.  Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party’s presentation and that no alternative means for obtaining information is available.

(f)            Class Proceedings and Consolidations.  The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding.

(g)           Payment Of Arbitration Costs And Fees.  The arbitrator shall award all costs and expenses of the arbitration proceeding.

(h)           Miscellaneous.  To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA.  No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation.  If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control.  This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.

 

INTERNATIONAL HOUSE OF
PANCAKES, INC., a Delaware corporation

WELLS FARGO BANK,
NATIONAL ASSOCIATION

 

 

By:

 

By:

 

 

 

 

 

Title:

 

Title:

 

 

 

29





LOAN AGREEMENT

 

                This Loan Agreement (the “Agreement”) dated as of April 27, 2001, by and between BANK OF AMERICA, N.A., a national banking association (“Bank” or “Lender”), IHOP PROPERTIES, INC., a California corporation (“Borrower”), and International House of Pancakes, Inc., a Delaware corporation, IHOP Corp., a Delaware corporation (“IHOP Parent”), IHOP Realty Corp., a Delaware corporation, and IHOP Restaurants, Inc., a Delaware corporation (collectively, the “Guarantors”).

 

                In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank, Borrower and Guarantors agree as follows:

 

                1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto:

 

Accounting Terms.   All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles (“GAAP”), as in effect from time to time, consistently applied, with respect to the financial statements referenced herein.

 

Affiliate.   Affiliate shall mean any Person (i) which directly or indirectly controls, or is controlled by, or is under common control with, IHOP Corp.

 

Borrower.   IHOP PROPERTIES, INC., a California corporation

 

Borrower’s Address.   450 North Brand Boulevard, 7th Floor, Glendale, CA 91203-2306.

 

Capitalized Lease.   Capitalized Lease means a lease of Property which in accordance with GAAP should be capitalized on the balance sheet of any Person.

 

Capitalized Lease Obligations.   Capitalized Lease Obligations shall mean the aggregate rentals due and to become due under all Capitalized Leases which any Person, as a lessee, would be required to reflect as a liability on the consolidated balance sheet of such Person in accordance with GAAP .

 

Certified.   Certified when used with respect to any financial information of any Person to be certified by any of its officers, indicates that such information is to be accompanied by a certificate to the effect that such financial information has been prepared in accordance with GAAP consistently applied, subject in the case of interim financial information to nonrecurring material year-end audit adjustments, and presents fairly the information contained therein as at the dates and for the periods covered thereby.

 

 



 

 

Consolidated Net Income or Loss.   Consolidated Net Income or Loss shall mean the Net Income or Loss of IHOP Parent, the Borrower and their Subsidiaries, as determined on a consolidated basis in accordance with GAAP.

 

Consolidated Tangible Net Worth.   Consolidated Tangible Net Worth shall mean shareholders’ equity of IHOP Parent and its Subsidiaries less intangible assets booked after the date hereof, less Restricted Investments in excess of 10% of shareholders’ equity of IHOP Parent and its Subsidiaries at any date of determination, all as determined for IHOP Parent and its Subsidiaries on a consolidated basis in accordance with GAAP.

 

Collateral Locations.   Those certain IHOP Restaurants located at the street addresses listed on Exhibit “A” attached hereto and made a part hereof.

 

Debt.   Debt with respect to any Person means, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) the liability of such Person created by granting a Lien to which the property or assets of such Person are subject whether or not such Person has assumed or become legally liable for the payment of any obligation (provided that, if such obligation has not been assumed or become the legal liability of such Person, the amount of the liability shall be deemed to be in an amount not to exceed the Fair Market Value of the property to which the Lien relates, as determined in good faith by such Person), (iii) Capitalized Lease Obligations of such Person, to the extent such obligations exceed accounts receivable by such Person as lessor under direct financing leases with franchisees so long as such direct financing leases are, at the time of determination to the best knowledge of the lessor thereunder, valid and enforceable against their lessees and are current as to payment and not otherwise in default to the extent that there is a reasonable likelihood that any such lease would be terminated by the lessor prior to its stated expiration and (iv) the aggregate amount of all Guarantees given by such Person with respect to any of the foregoing.

 

Default.   Default or Event of Default (whether such terms are capitalized or not) shall have the meaning ascribed to them under the Loan Documents which are subject to any notice and cure rights set forth herein.

 

Disposition.   Disposition shall mean any sale, transfer, assignment, lease, conveyance or other disposition of any asset.

 

EBITDA.   EBITDA means, the following items as defined by GAAP, Earnings Before Interest, Taxes, Depreciation, and Amortization.

 

Equipment.   Equipment shall mean all equipment, signage, furniture, fixtures, machinery and goods of the Borrower and/or IHOP Restaurants, Inc. (“Restaurants”) located at the Collateral Locations (together with all service contracts, manufacturer’s or other warranties and licenses relating thereto) and all accessories and parts now or hereafter affixed thereto, installed therein or held for use in connection therewith.

 

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Equipment Leases.   Those certain leases entered into by Restaurants and the Subtenants (as hereinafter defined) which are described in full on Exhibit “D” attached hereto and made a part hereof.

 

Fair Market Value.   Fair Market Value means what a willing buyer would pay to a willing seller in an arm’s length transaction.

 

Franchise Agreements.   Franchise Agreements shall mean any and all franchise agreements, amendments and other documents entered into by IHOP Corp. with the Subtenants relating to the operation of the IHOP Restaurants at the Collateral Locations.

 

Funded Debt.   Funded Debt shall mean (i) all Debt of a Person (other than Guarantees) having a final maturity of more than one year from the date of incurrence thereof (or which is renewable or extendible at the option of the obligor for a period or periods of more than one year from the date of incurrence), including all payments in respect thereof that are required to be made within one year from the date of any determination of Funded Debt, whether or not included in current liabilities, and (ii) in the case of Guarantees, all Guarantees of obligations maturing more than one year after the date as of which the Guarantee is incurred.

 

Ground Leases.   Those certain leases entered into by Borrower which are described in full on Exhibit “B” attached hereto and made a part hereof.

 

Ground Lease Locations.   Those certain Collateral Locations which are subject to Ground Leases.

 

Guarantee.   Guarantee means any guarantee or other contingent liability (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligations of another Person, through an agreement or otherwise, including, without limitation, (a) any other endorsement or discount with recourse or undertaking substantially equivalent to or having economic effect similar to a guarantee in respect of any such obligations and (b) any agreement (i) to purchase, or to advance or supply funds for the payment or purchase of, any such obligations, (ii) to purchase, sell or lease Property, products, materials or supplies, or transportation or services, in respect of enabling such other Person to pay any such obligation or to assure the owner thereof against loss regardless of the delivery or nondelivery of the Property, products, materials or supplies or transportation or services or (iii) to make any loan, advance or capital contribution to or other investment in, or to otherwise provide funds to or for, such other Person in respect of enabling such Person to satisfy any obligation (including any liability for a dividend, stock liquidation payment or expense) or to assure a minimum equity, working capital or other balance sheet condition in respect of any such obligation. The amount of liability of any Person attributable to any Guarantee shall be equal to the maximum amount for which such Person could be liable under such Guarantee.

 

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Guarantor.   Guarantor shall collectively mean International House of Pancakes, Inc., a Delaware corporation, IHOP Corp., a Delaware corporation, IHOP Realty Corp., a Delaware corporation, and IHOP Restaurants, Inc., a Delaware corporation.

 

Hazardous Materials.   Hazardous Materials include all materials defined as hazardous materials or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos.

 

IHOP Parties.   IHOP Parties means collectively, IHOP PROPERTIES, INC., a California corporation, International House of Pancakes, Inc., a Delaware corporation, IHOP Corp., a Delaware corporation, IHOP Realty Corp., a Delaware corporation, and IHOP Restaurants, Inc., a Delaware corporation.

 

Interest Rate Agreement.   Interest Rate Agreement means any agreement between Borrower and Bank or any affiliate of Bank, now existing or hereafter entered into, which provides for an interest rate or commodity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross-currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Borrower’s exposure to fluctuations in interest rates, currency calculations or commodity prices.

 

Lien.   Lien means any security interest, mortgage, pledge, lien, claim, charge, encumbrance, conditional sale or title retention agreement, lessor’s interest under a Capitalized Lease or analogous instrument, in, of or on any of a Person’s Property (whether held on the date hereof or hereafter acquired), or any signed or filed financing statement which names such Person as the debtor, or the execution of any security agreement or the like authorizing any other Person as the secured party thereunder to file such a financing statement.

 

Loan.   Any loan described in Section 2 hereof and any subsequent loan which states that it is subject to this Loan Agreement.

 

Loan Documents.   Loan Documents means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan.

 

Material Adverse Effect.   Material Adverse Effect means, with respect to Borrower or any of the Guarantors: any change or changes or effect or effects that individually or in the aggregate are or are likely to be materially adverse to: (i) the assets, business, operations, income, prospects or condition (financial or otherwise), (ii) the transactions contemplated by this Agreement; or (iii) taken as a whole, the ability to fulfill their respective obligations under this Agreement or any of the other Loan Documents.

 

Multi-State Security Instrument.   Multi-State Security Instrument means that certain Multi-State Security Instrument executed by Borrower in favor of Lender of even date herewith which is being recorded in the public records of each of the counties where the Collateral Locations are located.

 

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Obligations.   Obligations shall mean any and all indebtedness, liabilities and obligations of Borrower to Bank, including without limiting the generality of the foregoing, any indebtedness, liability or obligation of Borrower to Bank under any loan made to Borrower by Bank prior to the date hereof and any and all extensions or renewals thereof in whole or in part; any indebtedness, liability or obligations of Borrower to Bank arising hereunder or as a result hereof, whether evidenced by the Note, Interest Rate Agreement or otherwise, and any and all extensions or renewals thereof in whole or in part; and any and all future or additional indebtedness, liabilities or obligations of Borrower to Bank whatsoever and in any event, whether existing as of the date hereof or hereafter arising.

 

Operating Rent Expense.   Operating Rent Expense shall mean rent expense excluding: (i) inter-company rent, and (ii) rents re-classified as Capital Lease Obligations.

 

Person.   Person means and includes an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof

 

Related Borrower.   Related Borrower shall mean any of the following corporations: International House of Pancakes, Inc., a Delaware corporation, IHOP Corp., a Delaware corporation, IHOP Realty Corp., a Delaware corporation, and IHOP Restaurants, Inc., a Delaware corporation.

 

Related Loans.   Related Loans shall mean any and all loans heretofore or hereafter made by Bank to Related Borrower, including but not limited to the obligations of International House of Pancakes, Inc. under the $25 Million Letter Agreement.

 

Restricted Investments.   Restricted Investments shall mean all Investments made by the IHOP Parties or their Subsidiaries in or to any Person except (i) Investments in notes of franchisees and receivables of franchisees in the ordinary course of business other than notes and receivables held in settlement of franchise obligations, and in Property of IHOP Parent or its Subsidiaries to be used in the ordinary course of business, (ii) Investments in Subsidiaries, (iii) Investments in obligations issued or unconditionally guaranteed by the U.S. or any agency thereof, in each case maturing within one year from the date of acquisition thereof; (iv) Investments in obligations issued by any political subdivision of the U.S. or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc. or some other mutually agreeable rating system if either of these entities no longer exists; (v) commercial paper maturing no more than 270 days from the date of creation thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc. or some other mutually agreeable rating system if either of these entities no longer exists; (vi) certificates of deposit, repurchase agreements or bankers’

 

 

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acceptances maturing within one year from the date of acquisition thereof issued by commercial banks which are rated “A2’ or better by either Standard & Poor’s Corporation or Moody’s Investors Services, Inc. (or by some other mutually agreeable rating system if either of these entities no longer exists) located in the U.S. and Canada and have combined capital, surplus and undivided profits of not less than $100,000,000; (vii) Investments in mutual funds and money market accounts, which funds or accounts are traded on a national exchange or are managed by a commercial bank and which invests solely in Investments which satisfy the criteria set forth in the foregoing clauses (iii) through (vi); and (viii) other Investments existing on the date hereof which have been disclosed in writing to Bank.

 

Subleases.   Those certain subleases entered into by Borrower and the subtenants (“Subtenants”) which are described in full on Exhibit “C” attached hereto and made a part hereof.  The Subtenants are also the franchisee and operator of the IHOP Restaurants located at the Collateral Locations as designated on Exhibit “C”.

 

Subsidiary.   Subsidiary shall mean, with respect to any Person, any corporation or other entity (a) organized under the laws of the United States, the District of Columbia or Canada or any state or political subdivision of any thereof, (b) all or substantially all of whose assets and business operations are located or conducted within the United States or Canada and ( c) of which at least a majority of the outstanding voting stock is at the time directly or indirectly owned or controlled by such Person or by one or more of such Person’s wholly-owned Subsidiaries.

 

Subtenant Leases.   Subtenant Leases shall collectively mean the Subleases and the Equipment Leases.

 

$25 Million Letter Agreement.   $25 Million Letter Agreement means that certain Letter Agreement among International House of Pancakes, Inc., IHOP Corp., and Continental Bank, N.A. dated June 30, 1993, as amended by that certain First Amendment to Letter Agreement dated December 31, 1994 among International House of Pancakes, Inc., IHOP Corp. and Bank of America Illinois, and further amended by that certain Second Amendment to Letter Agreement dated March 11, 1996 among International House of Pancakes, Inc., IHOP Corp. and Bank of America Illinois, and further amended by that certain Third Amendment to Letter Agreement dated September 3, 1996 among International House of Pancakes, Inc., IHOP Corp. and Bank of America Illinois, and further amended by that certain Fourth Amendment to Letter Agreement dated November 1, 1996 among International House of Pancakes, Inc., IHOP Corp. and Bank of America Illinois, and further amended by that certain Letter dated June 25, 1997 from Yvonne C. Dennis of Bank of America to IHOP Corp., and further amended by that certain Fifth Amendment to Letter Agreement dated June 30, 1998 among International House of Pancakes, Inc., IHOP Corp. and Bank of America National Trust and Savings Association, and further amended by that certain Sixth Amendment to Letter Agreement dated June 30, 1999 among International House of Pancakes, Inc., IHOP Corp. and Bank of America National Trust and Savings Association, and as further amended by that certain Seventh Amendment to Letter Agreement dated December 15, 2000, among International House of Pancakes, Inc., IHOP Corp. and Bank of America, N.A.

 

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                2.   LOANS.   Bank hereby agrees to make a loan to Borrower in the principal face amount of $12,018,206.00. The obligation to repay the loans is evidenced by a promissory note or notes dated of even date herewith (the promissory note or notes together with any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the “Note”) having a maturity date, repayment terms and interest rate as set forth in the Note.

 

                3.   SECURITY INTEREST IN COLLATERAL.   As security for the payment of the Note and all Obligations whatsoever of Borrower to Bank, Borrower hereby grants to Bank a continuing, general first lien upon and security interest and title in and to the following (hereafter known as the “Collateral”):

 

(a)                                  all Equipment of Borrower relating to the Collateral Locations;

 

(b)                                 Borrower’s interest in real property, improvements and fixtures located at the Collateral Locations and Borrower’s leasehold estate created by the Ground Leases and Borrower shall execute a Multi-State Security Instrument conveying such interest to Bank;

 

(c)                                  Borrower’s interest in the Subleases and the right to payments from the Subtenants and Borrower shall execute a Assignment of Lessor’s Interest in Leases relating to such Subleases; and

 

(d)                                 all Collateral hereafter pledged by Borrower;

 

AND Guarantors hereby grant to Bank a continuing, general first lien upon and security interest and title in and to all Collateral hereafter specifically pledged by such Guarantors to Bank in connection with the Loan;

 

AND Restaurants hereby grants to Bank a continuing, general first lien upon and security interest and title in and to:

 

(e)                                  all Equipment of Restaurants relating to the Collateral Locations; and

 

(f)                                    Restaurants’ interest in the Equipment Leases and the right to payments from the Subtenants and Restaurants shall execute a Assignment of Lessor’s Interest in Leases relating to such Equipment Leases.

 

Borrower and Restaurants agree to do all things as may reasonably be required by Bank to perfect and protect the lien of Bank in such Collateral.

 

The Loan shall be cross-defaulted with any and all loans now or hereafter made by Bank to Borrower or Related Borrower. For clarification purposes, by execution of this Agreement, Bank expressly acknowledges that the Loan described herein is not cross-collateralized with the $25 Million Letter Agreement, but rather only cross-defaulted with the $25 Million Letter Agreement and all other loans to Borrower and Related Borrower.

 

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                4. REPRESENTATIONS AND WARRANTIES. Borrower and the Guarantors hereby represent and warrant to Bank as follows:

 

                A.   Good Standing. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of California and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business. Each of the Guarantors is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority to own its property and to carry on its business in each jurisdiction in which Guarantor does business.

 

                B.   Authority and Compliance of Borrower. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject.

 

                C.   Authority and Compliance of Guarantor. Each of the Guarantors has full power and authority to execute and deliver the Limited Guaranty and this Agreement and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of the respective Guarantor. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document executed by any of the Guarantors, and Guarantors are in compliance with all laws and regulatory requirements to which it is subject.

 

                D.   Binding Agreement. This Agreement and the other Loan Documents executed by Borrower and Guarantors constitute valid and legally binding obligations of Borrower and Guarantors, enforceable in accordance with their terms.

 

                E.   Litigation. There is no proceeding involving Borrower or any of the Guarantors pending or, to their knowledge, threatened before any court or governmental authority, agency or arbitration authority which would have a Material Adverse Effect on Borrower or any of the Guarantors.

 

                F.   No Conflicting Agreements. There is no charter, bylaw, stock provision or other document pertaining to the organization, power or authority of Borrower or any of the Guarantors and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents.

 

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                G.   Ownership of Assets. Borrower has good title to the Collateral free and clear of liens, except those granted to Bank and as disclosed to Bank in writing prior to the date of this Agreement. Borrower and/or Restaurants, own all of the Equipment located at the Collateral Locations which is leased to the Subtenants and such Equipment is free and clear of all liens.

 

                H.   Taxes. All real and personal taxes and assessments payable by Borrower or any of the Guarantors have been paid before they become delinquent or are being contested in good faith by appropriate proceedings and the Borrower and each of the Guarantors have filed all tax returns which it is required to file.

 

                I.   Financial Statements. The financial statements of IHOP Corp (which includes Borrower and Guarantors) on a consolidated basis heretofore delivered to Bank have been prepared in accordance with GAAP (except as noted therein) applied on a consistent basis throughout the period involved and fairly present IHOP Corp.’s, the Borrower’s and other Guarantors’ financial condition as of the date or dates thereof, and there has been no change in IHOP Corp.’s, the Borrower’s and other Guarantors’ financial condition or operations since September 30, 2000 which would have a Material Adverse Effect. All factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading.

 

                J.   Place of Business. Borrower’s and each of the Guarantors’ principal place of business is located at 450 North Brand Boulevard, 7th Floor, Glendale, CA 91203-2306.

 

                K.   Environmental. The conduct of Borrower’s business operations and, based solely on environmental reports obtained for each of the Collateral Locations prior to executing the Ground Lease for each such location, the condition of the Collateral Locations, do not violate any federal, local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials.

 

                L.   Maintenance. Borrower and Restaurants shall maintain all of its Equipment located at the Collateral Locations in good condition and repair and shall make (for Collateral Locations which are not subject to Subleases) and require all Subtenants (for Collateral Locations which are subject to Subleases) to make all necessary replacements thereof, and preserve and maintain all material licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business at the Collateral Locations.

 

 

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                M.   Continuation of Representations and Warranties. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any advance under any Loan.

 

                N.   Conduct of Business. Except as otherwise set forth herein, Borrower shall preserve and maintain its corporate existence, rights, franchises, and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its IHOP Restaurants at the Collateral Locations.

 

                O.   Absence of Defaults. Neither Borrower nor any of the Guarantors are in default under its articles of incorporation or its bylaws and no event has occurred, which has not been remedied, cured or waived:

 

(i)                                     which constitutes a Default or an Event of Default (as herein defined); or

 

(ii)                                  which constitutes, or which with the passage of time, the giving of notice, a determination of materiality, the satisfaction of any condition, or any combination of the foregoing, would constitute, a default or event of default (“Default Condition”)

 

by the Borrower or any of the Guarantors under any agreement or judgment, decree or order to which the Borrower or any of the Guarantors is a party or by which the Borrower or any of the Guarantors or any of their properties may be bound where such default would, individually or in the aggregate, have a Material Adverse Effect on the Borrower. Further, no Default, Event of Default or Default Condition exists in connection with the $25 Million Letter Agreement.

 

                5.   AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower and Guarantors will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document):

 

                A.   Financial Condition. Maintain Borrower’s financial condition as follows, determined in accordance with GAAP applied on a consistent basis throughout the period involved except to the extent modified by the following definitions, and calculated on a rolling four (4) quarter basis:

 

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i.                                          Maintain Fixed Charge Coverage Ratio: The Borrower and Guarantors, on a consolidated basis, will not permit the ratio of net income after tax plus non-cash charges (such as depreciation and amortization) plus Operating Rent Expense plus total interest expense less distributions, cash dividends, and advances divided by scheduled payments of long term debt and capitalized leases (due in the next twelve months) plus total interest expense plus Operating Rent Expense to be less than 1.35. This Ratio shall be calculated using the form attached as Exhibit F.

 

ii.                                       Maintain Funded Debt to EBITDA Ratio: The Borrower and Guarantors, on a consolidated basis, will not permit the ratio of total Funded Debt divided by EBITDA to be greater than 3.00. This Ratio shall be calculated using the form attached as Exhibit F.

 

                B. Financial Statements and Other Information. Maintain a system of accounting in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank’s officers or authorized representatives to visit and inspect Borrower’s books of account and other records after giving reasonable notice to Borrower at such reasonable times during normal business hours and as often as Bank may desire, and after a Default or an Event of Default which shall be continuing, pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower’s books and records will be located at Borrower’s principal place of business set forth above.

 

                In addition, Borrower will comply with the following “Financial Covenants” and agrees to:

 

                1.             Borrower and Guarantors will furnish to Bank in duplicate:

 

(A)                              as soon as available and in any event within 45 days after the end of each of the first three quarterly accounting periods in each fiscal year of Borrower and Guarantors (“quarterly accounting period”),

 

(1) either (a) copies of IHOP Parent’s Quarterly Report on Fonn 10-Q for the quarterly accounting period then ended, as filed with the SEC or (b) if IHOP Parent is not subject to Section 13 or 15(d) of the Exchange Act, copies of the consolidated balance sheet of Borrower or Guarantors as of the end of the quarterly accounting period and of the related consolidated statements of operations, shareholders’ equity and cash flows for such accounting period, all in reasonable detail and stating in comparative form the consolidated figures as of the end of and for the corresponding date and period in the previous fiscal year, all Certified by a President, Vice President, Chief Executive Officer, Chief Financial Officer, Treasurer or Controller (“Appropriate Officer”) of IHOP Parent; and

 

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(2) a written statement in the form of Exhibit E hereto executed by Appropriate Officers of IHOP Parent and Borrower setting forth computations or other pertinent information in reasonable detail showing as at the end of such quarterly accounting period whether or not the financial covenants set forth herein have been met which statement shall be accompanied by actual calculations set forth in the form of Exhibit F (“Quarterly Compliance Statement”);

 

(B)                                as soon as available and in any event within 90 days after the end of each fiscal year of IHOP Parent,

 

(1) either (a) copies of IHOP Parent Annual Report on Form 10-K and Annual Report to Shareholders, in each case, for the year then ended and as filed with the SEC together with copies of the consolidating balance sheets of Borrower and Guarantors as of the end of such fiscal year and the related consolidating statements of operations, or (b) if IHOP Parent is not subject to Section 13 or 15( d) of the Exchange Act, copies of the consolidated and consolidating balance sheets of Borrower and Guarantors as of the end of such fiscal year, and of the related consolidated and consolidating statements of operations and the related consolidated statements of shareholders’ equity and cash flows, together with the notes to such consolidated statements, which consolidated statements state in comparative form the respective consolidated figures as of the end of and for the previous fiscal year, and in the case of such consolidated financial statements referred to in subclauses (a) or (b), accompanied by a report thereon of PricewaterhouseCoopers or other independent public accountants of recognized national standing selected by IHOP Parent (the “Accountants”), which report shall be unqualified as to going concern and scope of audit and shall state that such consolidated financial statements present fairly the consolidated financial position of Borrower and Guarantors as at the end of such fiscal year and the consolidated results of operations and cash flow for such fiscal year in conformity with GAAP, and that the examination by the Accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards.

 

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Together with each delivery of financial statements or Annual Reports required by this subparagraph (1), the Accountants shall deliver to Bank their report stating that, in making the audit necessary to the certification of such financial statements, they have obtained no knowledge of any Default or Event of Default or, if any such Default or Event of Default has occurred, specifying the nature and period of existence thereof, and

 

(2)                                  a Quarterly Compliance Statement.

 

 

(C)                                concurrently with the financial statements or reports furnished pursuant to Subsections A and B immediately above, a certificate of respective Appropriate Officer of the Borrower and Guarantors in the form of Exhibit E, stating that, based upon such examination or investigation and review of this Agreement as in the opinion of the signer is necessary to enable the signer to express an informed opinion with respect thereto, no Default or Event of Default by Borrower or Guarantors in the fulfillment of any of the terms, covenants, provisions or conditions of this Agreement exists or has existed during such period or, if such a Default or Event of Default shall exist or have existed, the nature and period of existence thereof and what action the Borrower or any of the Guarantors, as the case may be, has taken, is taking or proposes to take with respect thereto;

 

(D)                               promptly after the same are available and in any event within 15 days thereof, copies of all such proxy statements, financial statements, notices and reports as Borrower or Guarantors shall send or make available generally to any of their security holders, and copies of all regular and periodic reports and of all registration statements which Borrower or Guarantors may file with the SEC or with any securities exchange;

 

(E)                                 promptly (and in any event within 5 days) after becoming aware of (1) the existence of any Default or Event of Default, a certificate of Appropriate Officers of Borrower and/or Guarantors specifying the nature and period of existence thereof and what action the Borrower and/or Guarantors is taking or proposes to take with respect thereto; or (2) any Debt of Borrower or Guarantors being declared due and payable before its expressed maturity, or any holder of such Debt having the right to declare such

 

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Debt due and payable before its expressed maturity, because of the occurrence of any default (or any event which, with notice and/or the lapse of time shall constitute any such default) under such Debt or the agreement pursuant to which such Debt was issued, a certificate of an Appropriate Officer describing the nature and status of such Default or Event of Default and what action Borrower or any of the Guarantors is taking or proposes to take with respect thereto; provided, however, that any Default or Event of Default which is deemed to have arisen upon Borrower’s or Guarantors’ failure to promptly notify the Bank of another Default or Event of Default in accordance with this Section shall be deemed to be waived so long as (i) such underlying Default or Event of Default as to which notice is required to be given (the “Underlying Default”) has been completely cured; (ii) the Underlying Default, if it had not been completely cured, would not have had a Material Adverse Effect and (iii) notice of the Underlying Default is delivered within 30 days of its occurrence;

 

(F)                                 promptly and in any event within 10 days after Borrower or Guarantors knows or, in the case of a Pension Plan has reason to know, that a Reportable Event with respect to any Pension Plan has occurred, that any Pension Plan or Multiemployer Plan is or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, or that Borrower or any of the Guarantors or ERISA Affiliates will or may incur any material liability to or on account of a Pension Plan or Multiemployer Plan under Title IV of ERISA or any other material liability under ERISA has been asserted against Borrower or any of the Guarantors or ERISA Affiliates, a certificate of an Appropriate Officer of IHOP Parent setting forth information as to such occurrence and what action, if any, Borrower or any of the Guarantors or ERISA Affiliate is required or proposes to take with respect thereto, together with any notices concerning such occurrences which are (a) required to be filed by Borrower or any of the Guarantors or ERISA Affiliate or the plan administrator of any such Pension Plan controlled by Borrower or any of the Guarantors or ERISA Affiliate with the Internal Revenue Service or the PBGC, or (b) received by Borrower or any of the Guarantors or ERISA Affiliate from any plan administrator of a Pension Plan not under their control or from a Multiemployer Plan;

 

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(G)                                promptly after the Borrower or any of the Guarantors becomes aware of any Material Adverse Effect with respect to which notice is not otherwise required to be given pursuant to this Section, a certificate of an Appropriate Officer setting forth the details of such Material Adverse Effect and stating what action Borrower or any of the Guarantors has taken or proposes to take with respect thereto;

 

(H)                               promptly (and in any event within 15 days) after the Borrower or any of the Guarantors knows of (a) the institution of, or threat of, any action, suit, proceeding, governmental investigation or arbitration against or affecting Borrower or any of the Guarantors or any Property of any of them, or (b) any material development in any such action, suit, proceeding, governmental investigation or arbitration, which, in either case, is likely to have a Material Adverse Effect, a certificate of an Appropriate Officer describing the nature and status of such matter in reasonable detail;

 

(I)                                    in the event that Borrower is no longer a consolidated Subsidiary of IHOP Parent, financial statements of the IHOP Parties at such times and in such form (together with such certifications) as are required to be delivered pursuant to Sections (A), (B) and (C) above;

 

(J)                                   not later than 90 days following the end of each fiscal year of IHOP Parent, a copy of the consolidated budget of Borrower and the Guarantors prepared by IHOP Parent for the next succeeding fiscal year, and

 

(K)                               any other information, including financial statements and computations, relating to the performance of obligations arising under this Agreement and/or the affairs of Borrower and Guarantors that the Bank may from time to time reasonably request and which is capable of being obtained, produced or generated by Borrower or any of the Guarantors or of which any of them has knowledge, including, without limitation, a brief statement describing any significant events relating to Borrower or any of the Guarantors for any fiscal period.

 

                B. $25 Million Letter Agreement. Borrower and Guarantors to the extent applicable to each of them agree to comply with all covenants set forth in the $25 Million Letter Agreement while the debt set forth in such $25 Million Letter Agreement remains outstanding.

 

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                C. Insurance. Maintain (for the Collateral Locations which are not subleased to Subtenants) and/or cause Subtenants to maintain (for the Collateral Locations which are subject to Subleases) insurance for each of the Collateral Locations as required in the respective Ground Leases. Satisfactory evidence of such insurance will be supplied to Bank prior to funding under the Loan(s) and 10 days prior to each policy renewal.

 

                D. Existence and Compliance. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, laws relating to environmental matters, OSHA, ERISA and Pension Guaranty Board, applicable to it or to any of its property, business operations and transactions.

 

                E. Taxes and Other Obligations. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, before they become delinquent or are being contested in good faith by appropriate proceedings in a diligent manner.

 

                F. Maintenance. Maintain all of its Equipment located at the Collateral Locations in good condition and repair and shall make (for Collateral Locations not subject to Subleases) and require all subtenants (for Collateral Locations which are subject to Subleases) to make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business.

 

                6. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower and Guarantors will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents):

 

                6.1. Restrictions on Liens. Borrower hereby covenants that Borrower will not permit any Liens with respect to the Collateral except for those listed in the marked Title Commitments delivered of even date herewith by Stewart Title Guaranty Company in favor of Bank or liens created pursuant to the Ground Leases or Subtenant Leases. Further, the IHOP Parties covenant that they will not, nor will they permit any Subsidiary to, directly or indirectly, create, assume or suffer to exist any Lien upon any of their respective property or asset, whether real, personal or mixed, tangible or intangible or assets whether now owned or hereafter acquired (“Property” or “Properties”) , except for:

 

                                (A) Liens for taxes, assessments or governmental charges or claims the payment of which is not at the time required by this Agreement;

 

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                                (B) Statutory Liens of landlords, and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being diligently contested in good faith, so long as a reserve or other appropriate provision, if any, shall have been made therefor;

 

                                (C) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with obligations not due or delinquent with respect to workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

 

                                (D) Any attachment or judgment Lien (including judgment or appeal bonds) which shall, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or which shall have been discharged within 30 days after the expiration of any such stay, or which is being diligently contested in good faith so long as a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor;

 

                                (E) Easements, rights-of-way, restrictions and other similar rights in land which do not, individually or in the aggregate, materially detract from the value of such Property and do not interfere with the ordinary conduct of the business of IHOP Parent, the Borrower or any of their Subsidiaries;

 

                                (F) Liens securing Debt of a Subsidiary to the Borrower or IHOP Parent;

 

                                (G) Liens (other than Liens created pursuant to Capitalized Leases) existing on the date hereof securing Debt not exceeding $1,500,000 in the aggregate in principal amount;

 

                                (H) Liens pursuant to Capitalized Leases existing on the date hereof and Liens created hereafter pursuant to Capitalized Leases so long as, with respect to Liens pursuant to Capitalized Leases created following the date hereof, the Funded Debt represented by such Capitalized Leases is permitted pursuant to Section 5 (A)(ii) above; and

 

                                (1) Liens including Liens arising out of purchase money financing securing Debt (without duplication) of IHOP Parent, the Borrower or any Subsidiary of IHOP Parent or the Borrower, provided that the sum of (i) the principal amount of such Debt plus (ii) unsecured Debt of Subsidiaries of IHOP Parent (other than the Borrower) and Subsidiaries of the Borrower not otherwise permitted under this Section does not exceed at any time 15% of Consolidated Tangible Net Worth.

 

The Liens referred to in Section 6.1 are herein collectively referred to as “Permitted Liens,” individually, a “Permitted Lien.”

 

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                6.2. Limitation on Funded Debt. IHOP Parent, the Borrower and Guarantors shall not, and shall not permit any Subsidiary to, incur Funded Debt other than:

 

                                (A) the Note, the Guarantee of the Guarantors and all Funded Debt of IHOP Parent, the Borrower and their Subsidiaries existing as of the date hereof, which have been disclosed in writing to Bank;

 

                                (B) any replacement, refinancing or extension of any Funded Debt, provided that the aggregate principal amount of such Funded Debt (or, if such Funded Debt is issued with an original issue discount, the original issue price of such Funded Debt) does not exceed the then outstanding principal amount of the Funded Debt so replaced, refinanced or extended (or, if the Funded Debt being replaced, refinanced or extended was issued with an original issue discount, the original issue price plus the amortized portion of the original issue discount to the date that such Funded Debt is replaced, refinanced or extended); and

 

                                (C) additional Funded Debt of the IHOP Parties, provided that after giving effect to such incurrence (including payment of interest and principal following such incurrence) and to the application of any proceeds thereof the IHOP Parties are still in compliance with the financial ratios set forth in Section 5 (A) (i) and (ii) above, measured in each case on a pro forma basis as of the most recently ended fiscal quarter as if such incurrence had occurred on the last day of such fiscal quarter.

 

                6.3. Limitation on Debt of Subsidiaries. The IHOP Parties shall not permit any of their Subsidiaries to incur any Debt other than:

 

                                (A) Debt owed to IHOP Parent or the Borrower or to a wholly-owned Subsidiary of IHOP Parent or the Borrower in each case by a direct or indirect wholly-owned Subsidiary of the creditor thereunder; and

 

                                (B) additional Debt, provided that the sum of the aggregate principal amount of such Debt plus the aggregate principal amount of all other Debt (without duplication) of IHOP Parent, the Borrower and any of their Subsidiaries which is secured by Liens not permitted by Sections 6.1 does not exceed 15% of Consolidated Tangible Net Worth.

 

                6.4. Sale of Assets. Except in connection with a Release Parcel (as defined in the Multi-State Security Instrument executed of even date herewith), Borrower shall not permit a Disposition of the Collateral. Except in connection with a Release Parcel (as defined in the Multi-State Security Instrument executed of even date herewith), Restaurants shall not permit a Disposition of the Equipment pledged by Restaurants. The IHOP Parties shall not, and shall not permit any of their Subsidiaries to, effect a Disposition of any assets (other than the Collateral) unless (i) no Default or Event of Default has occurred and is continuing, and (ii) one of the following applies:

 

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                                (a) such Disposition is in the ordinary course of business, including, without limitation, (i) sales and leases of operating restaurants and (ii) financings in connection with asset securitization programs, each in accordance with the Borrower’s ordinary course franchising or financing operations and made pursuant to the reasonable business judgment of the Borrower in accordance with past practice;

 

                                (b:) in each fiscal year, IHOP Parent, the Borrower and their respective Subsidiaries may effect Dispositions (other than Qualifying Dispositions of Excepted Properties as such terms are defined and permitted under the $25 Million Letter Agreement) of assets for Fair Market Value and which (A) have an aggregate Book Value, together with all other assets disposed of in that fiscal year (other than Dispositions permitted by clause (a), (c) or (d) of this Section), of less than 10% of Gross Assets on a consolidated basis determined as at the date of such sale; (B) generate, together with all other assets disposed of in that fiscal year (other than Dispositions permitted by clause (a), (c) or (d) of this Section), net income, which is less than 10% of the Consolidated Net Income (in each case, determined as of the end of the immediately preceding fiscal year); and (C) together with all assets previously disposed of since September 30, 2000 (other than Dispositions permitted by clause (a), (c) or (d) of this Section), have an aggregate Book Value of less than 25% of Gross Assets on a consolidated basis determined as at the date of such sale;

 

                                (c) such Dispositions are made for Fair Market Value and the proceeds of such Disposition are used (i) within six months following such Disposition, to purchase assets (“Business Asset Acquisition”) used in the operations of the Borrower or (ii) to repay Debt of IHOP Parent or its Subsidiaries which is not junior in right of payment to the Note; or

 

                                (d) the assets disposed of were disposed of for Fair Market Value (taking into consideration the rental rate to be paid by the Borrower in connection with the Disposition and leaseback of the assets so disposed of) and were constructed or acquired following September 30, 2000 and are immediately leased back from the purchaser thereof by IHOP Parent or any of its Subsidiaries; provided that no assets may be sold and leased back pursuant to this clause (d) following the third anniversary of the acquisition or construction of such assets by IHOP Parent, the Borrower or any of their Subsidiaries.

 

                6.5. Consolidation or Merger. IHOP Parent and the Borrower covenant that neither of them will, nor will they permit any of their respective Subsidiaries to, enter into any transaction of merger or consolidation, whether in one transaction or a series of related or unrelated transactions and whether at the same time or over a period of time,

provided that:

 

                                6.5.1 (i) the Borrower may merge with IHOP Parent or any of IHOP Parent’s other Subsidiaries, (ii) IHOP Parent may merge with the Borrower or any of IHOP Parent’s other Subsidiaries and (iii) any Subsidiary may merge with IHOP Parent, the Borrower or any other Subsidiary, so long as, with respect to any mergers of IHOP

 

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Parent, the Borrower or any Guarantor in which such party is not the surviving Person, (a) the surviving Person of such transaction shall be a solvent U.S. or Canadian corporation, and such surviving Person shall have assumed in writing all of the obligations of the Borrower, IHOP Parent or Guarantors, as the case may be, under this Agreement, the Note and the Guarantees, as the case may be, and all documents necessary to reflect such merger with respect to the Collateral shall be executed and recorded as necessary in the public records of the counties and states as required for each of the Collateral Locations, and (b) at the time of, and immediately after giving effect to, any such consolidation or merger, no Default or Event of Default shall have occurred and be continuing, and

 

                                6.5.2 Borrower, IHOP Parent or any of IHOP Parent’s other Subsidiaries may merge with any other Person so long as (i) the surviving Person of such transaction shall be a solvent U.S. or Canadian corporation, and such surviving Person shall have assumed in writing all of the obligations of the Borrower, IHOP Parent or Guarantors, as the case may be, under this Agreement, the Note and the Guarantees, as the case may be, and all documents necessary to reflect such merger with respect to the Collateral shall be executed and recorded as necessary in the public records of the counties and states as required for each of the Collateral Locations, and (b) at the time of, and immediately after giving effect to, any such consolidation or merger, no Default or Event of Default shall have occurred and be continuing.

 

                6.6. Transactions with Affiliates. Each of IHOP Parties covenants that it will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any Property or the rendering of any service), with any Affiliate, unless (i) after giving affect to such transaction, the IHOP Parties will remain in compliance with the financial ratios set forth in Section 5 (A)(i) and (ii) above, and (ii) the transactions is not on terms that are less favorable to IHOP Parent, the Borrower or such Subsidiary, as the case may be, than those that would be obtainable at the time in an arm’s length transaction with any Person who is not such an Affiliate; provided, however, that this Section shall not prohibit the payment of compensation and benefits to directors and officers of IHOP Parent, the Borrower and their Subsidiaries in the ordinary course of business and consistent with past practices.

 

                6.7. Acquisition of Margin Securities. Each of the IHOP Parties covenants that it will not, and will not permit any of its Subsidiaries to, own, purchase or acquire (or enter into any contract to purchase or acquire) any “margin stock” as defined by any regulation of the Board of Governors of the United States Federal Reserve System as now in effect or as the same may hereafter be in effect unless, prior to any such purchase or acquisition or entering into any such contract, Bank shall have received an opinion of counsel satisfactory to Bank to the effect that such purchase or acquisition will not cause this Agreement or the Note to be in violation of Regulation G or any other regulation of such Board then in effect.

 

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                6.8. Conduct of Business. Each of the IHOP Parties covenants that it will not, and will not permit any of its Subsidiaries to, engage in any business activity if, such business activity would result in a substantial change in the general nature of the business of IHOP Parent and its Subsidiaries, taken as a whole, from the business activities currently conducted by the IHOP Parties.

 

                6.9. Ownership of Borrower. The IHOP Parties agree that so long as any of the Obligations set forth herein remain outstanding, International House of Pancakes, Inc. will continue to own of record and beneficially all of the issued and outstanding capital stock of Borrower and IHOP Parent will continue to own of record and beneficially all of the issued and outstanding capital stock of International House of Pancakes, Inc.

 

                7. DEFAULT. Borrower shall be in default under this Agreement and under each of the other Loan Documents if it shall default in the payment of any amounts due and owing under the Loan or should it fail to timely and properly observe, keep or perform any term, covenant, agreement or condition in this Loan Agreement, any other Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, deed to secure debt, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of Bank of America Corporation. An event of default under any of documents given in connection with any Related Loans, including the $25 Million Letter Agreement, shall also be an Event of Default hereunder. Borrower and Guarantors also acknowledge that a default under the $25 Million Letter Agreement shall also be a default hereunder.

 

                8. REMEDIES UPON DEFAULT. If an Default or Event of Default shall occur, Bank shall have all rights, powers and remedies available under each of the Loan Documents and the $25 Million Letter Agreement as well as all rights and remedies available at law or in equity. Upon the occurrence of any Default Condition or Event of Default, Bank’s obligation to disburse any undisbursed portion of the Loan shall immediately cease. Upon the occurrence or existence of any Event of Default, or at any time thereafter, without prejudice to the rights of Bank to enforce its claims against Borrower for damages for failure by Borrower to fulfill any of its obligations hereunder, subject only to prior receipt by Bank of payment in full of all Obligations then outstanding in a form acceptable to Bank, Bank shall have all of the rights and remedies described hereunder, and it may exercise any one, more, or all of such remedies, in its sole discretion, without thereby waiving any of the others.

 

                                8.1 Notice and Right to Cure. In the event of any Default or Event of Default of Borrower or any of the IHOP Parties (except as otherwise stated below), Lender shall not accelerate the Obligations, make any payments for which Borrower is primarily liable or foreclose upon or attach any Collateral of Borrower or Restaurants unless Lender first gives written notice of such Default or Event of Default to Borrower pursuant to the notice provision set forth in Section 9 below and such Default or Event of Default is not fully cured by Borrower or any of the other IHOP Parties within the following periods:

 

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                                (a) ten (10) days after such notice is deemed given in the event of any failure to make a monetary payment to any person;

 

                                (b) thirty (30) days after such notice is deemed given in the event of non-monetary defaults not subject to other provisions of this paragraph, provided (i) within ten (10) days after given the notice of default Borrower and/or any of the IHOP Parties commences its cure and submits to Lender in writing its plan to cure, and (ii) said cure is continuously pursued by Borrower and/or any of the IHOP Parties with due diligence. If said Default or Event of Default is not reasonably capable of being cured within thirty (30) days, Borrower and/or any of the IHOP Parties (as applicable) shall have such additional time as is reasonably necessary to complete the cure, but in no event for more than ninety (90) days after the notice of default is deemed given, all provided (x) said default is in Lender’s reasonable judgment curable within said period, (y) Borrower and/or one of the other IHOP Parties provides Lender with written, detailed progress reports at least every thirty (30) days until is cure is complete, and (z) Borrower continuously and diligently pursues said cure; or

 

                                (c) sixty (60) days after the filing of any involuntary petition in bankruptcy against or for the appointment of a receiver for Borrower or any of the IHOP Parties (except for petitions for receivership filed by Lender), with the dismissal of such petitions by the court within such period being deemed to cure such default.

 

                                Notwithstanding the above provisions, the cure period provided for in this paragraph shall not apply in the following circumstances:

 

                                                I. if Borrower transfers or encumbers all or any portion of its interest in the Collateral without the required consent of Lender unless permitted as a Release Parcel under the Multi-State Security Instrument or if Restaurants transfers or encumbers all or any portion of its interest in the Equipment pledged by Restaurants to Bank without the required consent of Lender unless permitted as a Release Parcel under the Multi-State Security Instrument; or

 

                                                II. in any circumstance when a delay in effecting a cure is, in the reasonable judgment of Lender, likely to result in any security being damaged, becoming uninsured or rendered unavailable to Lender or the value thereof being materially and adversely affected; or

                                                III. any monetary Default which is repeated for four (4) consecutive months;

 

                                                IV. any failure to proceed with the construction or repair of improvements to the Collateral Locations as required by the Multi-State Security Instrument; or

 

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                                                V. any filing of a voluntary petition in bankruptcy by Borrower or Guarantors, or for the appointment of a receiver or trustee of all or a portion of Borrower’s or any of the Guarantors’ Property; or

                                                VI. any assignment for the benefit of creditors, fraudulent conveyance, or other plan or action instituted by Borrower, in any attempt to avoid the satisfaction of any lawful indebtedness; or any waste committed to the Collateral Locations, or any demolition or removal of any improvements on the Collateral Locations which is not provided for under the Multi-State Security Instrument and which is without Lender’s consent (other than the exercise by any proper authority of the right of eminent domain); or

                                                VII. any nonmonetary default which Lender reasonably determines is not capable of being cured within the requisite period.

 

                                The provisions of this paragraph shall apply to defaults under all Loan Documents executed in connection with the Loan, and unless expressly stated to the contrary in such documents any cure period referred to therein shall be deemed to incorporate said provisions. If any Loan Documents are inconsistent with this paragraph the latter shall be controlling. Where additional notice or cure periods are provided in this or any other Loan Documents or are required by any other contract or by law, said periods and those contained in this paragraph shall run concurrently. Nothing in this paragraph shall be construed as extending the term of the Loan or the date upon which a Default occurs, and no decision to forego any remedy for any given Default shall be deemed a waiver on the part of Lender of any right relating to any other Default. This paragraph shall be strictly construed, and shall not impair the exercise of any remedy not referred to above immediately upon Default, including, without limitation, the seeking of any mandatory or prohibitive injunction or restraining order.

 

                9. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address:

 

 

 

 

Borrower:

 

IHOP PROPERTIES, INC.
450 North Brand Boulevard
7th Floor
Glendale, CA 91203-2306
Attn: Legal Department

 

 

 

Bank:

 

BANK OF AMERICA, N.A.
Commercial Loan Service Center
Bank of America Office Park
P.O. Box 45247
Jacksonville, Florida 32256-0771

 

 

 

 

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                or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows:

 

                A. Deposited in the United States mail, registered or certified, return receipt requested, postage prepaid;

 

                B. delivered by an overnight private mail service which provides delivery confirmation such as without limitation Federal Express, Airborne or UPS; or

 

                C. Personally delivered at such address. All communication delivered as set forth herein shall be deemed received by the addressee on the delivery date or the delivery refusal date shown on the return receipt of the delivery confirmation.

 

                10. COSTS, EXPENSES AND ATTORNEYS’ FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of Bank’s in-house counsel if permitted by applicable law), incurred by Bank in connection with (a) negotiation and preparation of this Agreement and each of the Loan Documents, and (b) all other costs and attorneys’ fees incurred by Bank for which Borrower is obligated to reimburse Bank in accordance with the terms of the Loan Documents.

 

                11. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document:

 

                A. Cumulative Rights and No Waiver. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances.

 

                B. Applicable Law. This Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Georgia and applicable United States federal law.

 

                C. Amendment. No modification, consent, amendment or waiver of any provision of this Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an

 

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officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower’s rights or obligations hereunder shall be made or be effective without Bank’s prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Loan Agreement.

 

                D. Documents. All documents, certificates and other items required under this Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel.

 

                E. Partial Invalidity. The unenforceability or invalidity of any provision of this Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances.

 

                F. Survivability. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of the Bank to make any advances under the Loan shall not have expired.

 

                12. ARBITRATION. (a) This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, whether arising in contract, tort or by statute, including but not limited to controversies or claims that arise out of or relate to: (i) this Agreement (including any renewals, extensions or modifications); or (ii) any document related to this Agreement; (collectively a “Claim”).

 

(b) At the request of the Borrower or the Bank, any Claim shall be resolved by arbitration in accordance with the Federal Arbitration Act (Title 9, U. S. Code) (the “Act”). The Act will apply even though this Agreement provides that it is governed by the law of a specified state.

 

(c) Arbitration proceedings will be determined in accordance with the Act, the rules and procedures for the arbitration of financial services disputes of J.A.M.S./Endispute or any successor thereof “J.A.M.S.”), and the terms of this paragraph. In the event of any inconsistency, the terms of this paragraph shall control.

 

(d) The arbitration shall be administered by J.A.M.S. and conducted in any U.S. state where real or tangible personal property collateral for this credit is located. All Claims shall be determined by one arbitrator; however, if Claims exceed Five Million Dollars ($5,000,000), upon the request of any party, the Claims shall be decided by three arbitrators. All arbitration hearings shall commence within 90 days of the demand for

 

25



 

arbitration and close within 90 days of commencement and the award of the arbitrator(s) shall be issued within 30 days of the close of the hearing. However, the arbitrator(s), upon a showing of good cause, may extend the commencement of the hearing for up to an additional 60 days. The arbitrator(s) shall provide a concise written statement of reasons for the award. The arbitration award may be submitted to any court having jurisdiction to be confirmed and enforced.

 

(e) The arbitrator(s) will have the authority to decide whether any Claim is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. For purposes of the application of the statute of limitations, the service on J.A.M.S. under applicable J.A.M.S. rules of a notice of Claim is the equivalent of the filing of a lawsuit. Any dispute concerning this arbitration provision or whether a Claim is arbitrable shall be determined by the arbitrator(s). The arbitrator(s) shall have the power to award legal fees pursuant to the terms of this Agreement.

 

(f) This paragraph does not limit the right of the Borrowers or the Bank to: (i) exercise self-help remedies, such as but not limited to, setoff; (ii) initiate judicial or nonjudicial foreclosure against any real or personal property collateral; (iii) exercise any judicial or power of sale rights, or (iv) act in a court of law to obtain an interim remedy, such as but not limited to, injunctive relief, writ of possession or appointment of a receiver, or additional or supplementary remedies.

 

                13. NOTICE OF FINAL AGREEMENT. BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT (A) THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, (B) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE WRITTEN LOAN AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OR UNDERSTANDINGS OF THE PARTIES.

 

26



 

                IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written.

 

 

 

BORROWER:

 

 

 

 

 

 

 

 

IHOP PROPERTIES, INC.

 

 

 

 

 

 

 

 

By:

/s/ Richard K. Herzer

 

 

Name:

Richard. K. Herzer

 

 

Title:

President

 

 

 

 

 

 

 

(CORPORATE SEAL)

 

 

 

 

 

 

GUARANTOR:

 

GUARANTOR:

 

 

 

 

 

 

IHOP RESTAURANTS, INC.

 

IHOP CORP.

 

 

 

 

 

 

By:

/s/  Richard K. Herzer

 

By:

/s/  Richard K. Herzer

Name:

Richard K. Herzer

 

Name:

Richard K. Herzer

Title:

President

 

Title:

President

 

 

 

 

 

 

 

 

 

 

(CORPORATE SEAL)

 

(CORPORATE SEAL)

 

 

 

 

 

 

GUARANTOR:

 

GUARANTOR:

 

 

 

 

 

 

IHOP REALTY CORP.

 

INTERNATIONAL HOUSE OF
PANCAKES, INC.

 

 

 

 

 

By:

/s/  Richard K. Herzer

 

BY:

/s/  Richard K. Herzer

Name:

Richard K. Herzer

 

Name:

Richard K. Herzer

Title:

President

 

Title:

President

 

 

 

 

 

 

 

 

 

 

(CORPORATE SEAL)

 

(CORPORATE SEAL)

 

 

 

 

 

 

 

 

 

 

 

 

 

BANK/LENDER:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27



 

LIST OF EXHIBITS

 

Exhibit A

-

List of Collateral Locations

Exhibit B

-

Description of Ground Leases

Exhibit C

-

Description of Subleases

Exhibit D

 

Description of Equipment Leases

Exhibit E

 

Compliance Certificate

Exhibit F

 

Calculations for Compliance Certificate

 

28



 

Exhibit A                -               List of Collateral Locations

 

 

 

Store ID

 

Street Address

 

City

 

State

 

Zip

 

0582

 

2990 Donnell Drive

 

Forestville

 

MD

 

20747-3256

 

0583

 

9680 Baltimore Avenue

 

College Park

 

MD

 

20740-1324

 

0943

 

2575 Highland Avenue

 

Highland

 

CA

 

92346-2003

 

1723

 

7951 NE Vancouver Plaza Drive

 

Vancouver

 

WA

 

98662-6625

 

1724

 

32010 Dyer Street

 

Union City

 

CA

 

94587-1700

 

1726

 

3525 Bradshaw Road

 

Sacramento

 

CA

 

95827-3304

 

1824

 

7733 W Long Drive

 

Littleton

 

CO

 

80123-1245

 

4452

 

6125 Peachtree Parkway

 

Norcross

 

GA

 

30092-3304

 

4460

 

35 Riverbend Drive SW

 

Rome

 

GA

 

30161-6065

 

4767

 

95 Main Street

 

Tewksbury

 

MA

 

01846-1708

 

5320

 

3505 N Rock Road

 

Wichita

 

KS

 

67226-1320

 

5321

 

15410 W 119th Street

 

Olathe

 

KS

 

66062-5606

 

5322

 

2187 S Telegraph Road

 

Bloomfield Hills

 

MI

 

48302-0250

 

 

 

 

 

 

 

 

 

 

 

 

29



 

Exhibit B                -               Description of Ground Leases

 

 

 

 

UNIT NO.

 

DESCRlPllON OF LEASE

 

Memorandum or Short Form

 

0582

 

Ground Lease between dated February 8, 1999, between IHOP Properties, Inc., as Tenant and Penn Mar Associates, LLC, as Landlord.

 

Short Form Lease dated February 8, 1999, between IHOP Properties, Inc., as Tenant and Penn Mar Associates, LLC, as Landlord.

 

 

 

 

 

 

 

0583

 

Ground Lease dated March 26, 1997 between IHOP Properties, Inc., as Tenant and Mirza Hussain Ali Baig and Amina J. Baig, as Landlord, as amended by that certain Addendum to Ground Lease dated March 16, 1999, between IHOP Properties, Inc., as Tenant and Mirza Hussain Ali Baig and Amina J. Baig, as Landlord.

 

Short Form of Ground Lease dated September 28,1998, between IHOP Properties, Inc., as Tenant and Mirza Hussain Ali Baig and Amina J. Baig, as Landlord.

 

 

 

 

 

 

 

0943

 

Ground Lease dated May 1, 1998, between IHOP Properties, Inc., as Tenant and Delbert M. Shofner and Carol S. Shofner, Trustees of the Shofner Family Trust U/D/T dated March 24, 1997; James C. Seley and Charlene R. Seley, Trustees under the Seley Family Trust U/D/T dated February 16, 1977; and James C. Seley and Charlene R. Seley, Trustees of the Seley Children’s Trust U/D/T dated September 8, 1987, as Landlord, as amended by that certain First Amendment to Ground Lease between IHOP Properties, Inc., as Tenant and Delbert M. Shofner and Carol S. Shofner, Trustees of the Shofner Family Trust U/D/T dated March 24, 1997; James C. Seley and Charlene R. Seley, Trustees under the Seley Family Trust U/D/T dated February 16, 1977; and James C. Seley and Charlene R. Seley, Trustees of the Seley Children’s Trust U/D/T dated September 8, 1987, as Landlord and further amended by that certain Second Amendment to Ground Lease between IHOP Properties, Inc., as Tenant and Delbert M. Shofner and Carol S. Shofner, Trustees of the Shofner Family Trust U/D/T dated March 24, 1997; James C. Seley and Charlene R. Seley, Trustees under the Seley Family Trust U/D/T dated February 16, 1977; and James C. Seley and Charlene R. Seley, Trustees of the Seley Children’s Trust U/D/T dated September 8, 1987, as Landlord.

 

Short Form Lease dated May 18, 1998, between IHOP Properties, Inc., as Tenant and Delbert M. Shofner and Carol S. Shofner, Trustees of the Shofner Family Trust U/D/T dated March 24, 1997; James C. Seley and Charlene R. Seley, Trustees under the Seley Family Trust U/D/T dated February 16, 1977; and James C. Seley and Charlene R. Seley, Trustees of the Seley Children’s Trust U/D/T dated September 8, 1987, as Landlord, recorded on July 6, 1998, at Instrument No. 98-259891 of the official records of San Bernardino County, California.

 

 

30



 

1723

 

Ground Lease dated June 24, 1998 between The Cafaro Northwest Partnership, an Ohio general partnership, as Landlord and IHOP Properties, Inc., as Tenant, as amended by that certain First Amendment to Ground Lease dated December 1, 1998 between The Cafaro Northwest Partnership, an Ohio general partnership, as Landlord and IHOP Properties, Inc., as Tenant, and further amended by that certain Second Amendment to Ground Lease dated March 17, 1999 between The Cafaro Northwest Partnership, an Ohio general partnership, as Landlord and IHOP Properties, Inc., as Tenant, as further amended by that certain Third Amendment to Ground Lease dated May 17, 1999 between The Cafaro Northwest Partnership, an Ohio general partnership, as Landlord and IHOP Properties, Inc., as Tenant, and further amended by that certain Fourth Amendment to Ground Lease dated October 18, 1999 between The Cafaro Northwest Partnership, an Ohio general partnership, as Landlord and IHOP Properties, Inc., as Tenant.

 

Short Form of Ground Lease dated June 24, 1998, between The Cafaro Northwest Partnership, an Ohio general partnership, as Landlord and IHOP Properties, Inc., as Tenant, recorded on May 21, 1999, at Recording Number 3108864.

 

 

 

 

 

 

 

1724

 

Ground Lease dated April 28, 1999 between Dyer Triangle, LLC, as Landlord and IHOP Properties, Inc., as Tenant, as amended by that certain Addendum to Ground Lease dated October 11, 1999 between Dyer Triangle, LLC, as Landlord and IHOP Properties, Inc., as Tenant.

 

Short Form Ground Lease dated April 28, 1999, between Dyer Triangle, LLC, as Landlord and IHOP Properties, Inc., as Tenant, recorded May 17, 1999, at Document Number 99-187826.

 

 

 

 

 

 

 

1726

 

Ground Lease dated June 21, 1999 between First Rancho Plaza, L.P., as Landlord and IHOP Properties, Inc., as Tenant, as amended by First Amendment to Lease dated December 2, 1999 between First Rancho Plaza, L.P., as Landlord and IHOP Properties, Inc., as Tenant and evidenced of public record by that certain Short Form of Ground Lease dated June 21, 1999 between First Rancho Plaza, L.P., as Landlord and IHOP Properties, Inc., as Tenant, recorded June 24, 1999, in Book 990624, Page 602, official records of Sacramento County, California.

 

Short Form of Ground Lease dated June 21, 1999 between First Rancho Plaza, L.P., as Landlord and IHOP Properties, Inc., as Tenant, recorded June 24, 1999, in Book 990624, Page 602, official records of Sacramento County, California.

 

 

 

 

 

 

 

1824

 

Ground Lease dated June 12, 1998 between The Section 14 Development Co., as Landlord and IHOP Properties, Inc., as Tenant, as amended by that certain First Amendment to Ground Lease dated September 28, 1998 between The Section 14 Development Co., as Landlord and IHOP Properties, Inc., as Tenant, and further amended by that certain Second Amendment Ground Lease dated March 16, 1999 between The Section 14 Development Co., as Landlord and IHOP Properties, Inc., as Tenant.

 

Short Form Ground Lease dated June 30, 1998 between The Section 14 Development Co., as Landlord and IHOP Properties, Inc., as Tenant, recorded at Reception no. FO693231 in Jefferson County, Colorado.

 

 

 

 

 

 

 

4452

 

Ground Lease dated September 3, 1998, between IRT Property Company, as Landlord and IHOP Properties, Inc., as Tenant as amended by that certain Addendum to Ground Lease dated February 18, 2000, between IRT Property Company, as Landlord and IHOP Properties, Inc., as Tenant.

 

Short Form of Ground Lease dated September 3, 1998, between IRT Property Company, as Landlord and IHOP Properties, Inc., as Tenant

 

 

31



 

4460

 

Ground Sublease dated April 23, 1999 between IHOP Properties, Inc., as Tenant and Larry C. Martin as Landlord, as amended by that certain First Amendment to Ground Sublease dated December 6, 1999 between IHOP Properties, Inc., as Tenant and Larry C. Martin as Landlord.

 

Short Form of Ground Sublease dated April 23, 1999 between IHOP Properties, Inc., as Tenant and Larry C. Martin as Landlord, recorded at Book 1536, Page 651, public records of Floyd County, Georgia.

 

 

 

 

 

 

 

4767

 

Ground Lease dated August 19, 1998, between Motel 6 Multipurpose, Inc., as Landlord and IHOP Properties, Inc., as Tenant as amended by that certain Addendum to Ground Lease dated April 16, 1999, between Motel 6 Multipurpose, Inc., as Landlord and IHOP Properties, Inc., as Tenant and further amended by that certain First Amendment to Ground Lease dated September 27, 2000 between Motel 6 Multipurpose, Inc., as Landlord and IHOP Properties. Inc., as Tenant.

 

Short Form of Ground Lease dated August 25, 1998 between Motel 6 Multipurpose, Inc., as Landlord and IHOP Properties, Inc., as Tenant, recorded at Book 9587, Page 2, public records of Middlesex County (Northern District) Registry of Deeds, Massachusetts.

 

 

 

 

 

 

 

5320

 

Ground Lease dated February 19, 1999 between IHOP Properties, Inc., as Tenant and Northbrooke Development Company, Inc., as Landlord, as amended by that certain Addendum to Ground Lease dated July 9, 1999, between IHOP Properties, Inc., as Tenant and Northbrooke Development Company, Inc., as Landlord.

 

Short Form of Lease dated February 19, 1999, between IHOP Properties, Inc., as Tenant and Northbrooke Development Company, Inc., as Landlord, recorded at Film 1893, Page 2545, public records of Sedwick County, Kansas.

 

 

 

 

 

 

 

5321

 

Ground Lease between IHOP Properties, Inc., as Tenant and Glo-Rae Investment Co. and D & S Investors, L.L.C., as Landlord dated October 30, 1998 as amended by that certain Addendum to Ground Lease between IHOP Properties, Inc., as Tenant and Glo-Rae Investment Co. and D & S Investors, L.L.C., as Landlord dated December 28, 1999.

 

Short Form of Lease dated October 30, 1998 between IHOP Properties, Inc., as Tenant and Glo-Rae Investment Co. and D & S Investors, L.L.C., as Landlord, recorded at Book 6067, Page 937, public records of Johnson County, Kansas.

 

 

 

 

 

 

 

5322

 

Ground Lease between RD Bloomfield Limited Partnership, as Landlord and IHOP Properties, Inc., as Tenant dated January 15, 1999, as amended by First Amendment to Ground Lease between RD Bloomfield Limited Partnership, as Landlord and IHOP Properties, Inc., as Tenant dated February 25, 1999, and further amended by that certain Addendum to Ground Lease between RD Bloomfield Limited Partnership, as Landlord and IHOP Properties, Inc., as Tenant dated October I, 1999.

 

Short Form Lease dated January 22, 1999 between RD Bloomfield Limited Partnership and IHOP Properties, Inc., recorded at Liber 20328, Page 597, Oakland County, Michigan records.

 

 

 

 

 

 

 

 

32



 

Exhibit C                -               Description of Subleases

 

 

 

 

UNIT NO.

 

Discription of Sublease

 

0582

 

Sublease dated March 30, 2000 by and between Robert Sharp as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

0583

 

Sublease dated March 25, 1999, by and between Hospitality Management of College Park, Inc., as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

0943

 

Sublease dated November 2, 2000, by and between Nazimuddin Hashim, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

1723

 

Sublease dated September 9, 1999, by and between Steven L. Graham as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

1724

 

Sublease dated August 25, 1999, by and between Alice A. Knudsen, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

1726

 

Sublease dated September 29, 1999, by and between Mohammad Tariq Munir, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

1824

 

Sublease dated February 12, 1999, by and between 1824, INC., as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

4452

 

Sublease dated June 25,1999, by and between Elaine M. Ambrose-Ghoniem, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

4460

 

Sublease dated September 30, 1999, by and between ISSAM HAMIDEH, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

4767

 

Sublease dated July 1, 1999, by and between Roderick Macpherson, Jr., as Subtenant and IHOP Properties, Inc., as Sublandlord, as amended by that certain First Amendment to Sublease dated October 16, 2000.

 

 

 

5320

 

Sublease dated July 24, 1995, between Bassam S. Salameh, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

5321

 

Sublease dated August 5, 1999, by and between Houssni Al Abed, as Subtenant and IHOP Properties, Inc., as Sublandlord.

 

 

 

5322

 

N/A

 

33



 

Exhibit D                -               Description of Equipment Leases

 

 

UNIT NO.

 

Description of Equipment Lease

 

 

0582

 

Equipment Lease dated March 30, 2000 between IHOP Restaurants, Inc., as Lessor and Robert Sharp, as Lessee

 

 

 

 

 

0583

 

Equipment Lease dated March 25, 1999 between IHOP Restaurants, Inc., as Lessor and Hospitality Management of College Park, Inc., as Lessee; as amended by that certain Amendment to Equipment Lease dated June 24,  1999

 

 

 

 

 

0943

 

Equipment Lease dated November 2, 2000 between IHOP Restaurants, Inc., as Lessor and Nazimuddin Hashim as Lessee

 

 

 

 

 

1723

 

Equipment Lease dated September 9, 1999 between IHOP Restaurants, Inc., as Lessor and Steven L. Graham, as Lessee

 

 

 

 

 

1724

 

Equipment Lease dated August 25, 1999, between IHOP Restaurants, Inc., as Lessor and Alice A. Knudson, as Lessee

 

 

 

 

 

1726

 

Equipment Lease dated September 26, 1999 between IHOP Restaurants, Inc., as Lessor and Mohammad Tariq Munir, as Lessee

 

 

 

 

 

1824

 

Equipment Lease dated February 12, 1999 between IHOP Restaurants, Inc., as Lessor and 1824, Inc., as Lessee

 

 

 

 

 

4452

 

Equipment Lease dated June 25, 1999 between IHOP Restaurants, Inc., as Lessor and Elaine M. Ambrose-Ghoniem as Lessee

 

 

 

 

 

4460

 

Equipment Lease dated September 30, 1999 between IHOP Restaurants, Inc., as Lessor and Issam Hamideh, as Lessee

 

 

 

 

 

4767

 

Equipment Lease dated July 1, 1999 between IHOP Restaurants, Inc., as Lessor and Roderick MacPherson, Jr. as Lessee

 

 

 

 

 

5320

 

Equipment Lease dated July 24, 1999 between IHOP Restaurants, Inc., as Lessor and Bassam S. Salameh, as Lessee

 

 

 

 

 

5321

 

Equipment Lease dated August 5, 1999 between IHOP Restaurants, Inc., as Lessor and Houssni Al Abed, as Lessee

 

 

 

 

 

5322

 

N/A

 

 

34



 

Exhibit E                 Compliance Certificate

 

COMPLIANCE CERTIFICATE

 

                This Compliance Certificate is delivered pursuant to the Loan Agreement dated as of February         ,2001 (together with all amendments and modifications, if any, from time to time made thereto, the “Loan Agreement”) between BANK OF AMERICA, N.A., a national banking association (“Bank” or “Lender”), IHOP PROPERTIES, INC., a California corporation (“Borrower”), and International House of Pancakes, Inc., a Delaware corporation, IHOP Corp., a Delaware corporation (“IHOP Parent”), IHOP Realty Corp., a Delaware corporation, and IHOP Restaurants, Inc., a Delaware corporation (collectively, the “Guarantors”).

 

                Unless otherwise defined, terms used herein (including the attachments hereto) have the meanings provided in the Loan Agreement.

 

                The undersigned, being the duly elected, qualified and acting Appropriate Officer, on behalf of the IHOP Parties and solely in his or her capacity as an officer of the Borrower, hereby certifies and warrants that:

 

                1.             He or she is holds the following offices for the IHOP Parties: