10-Q 1 a10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-8360 ------------------------ IHOP CORP. (Exact name of registrant as specified in its charter) DELAWARE 95-3038279 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
525 NORTH BRAND BOULEVARD, GLENDALE, CALIFORNIA 91203-1903 (Address of principal executive offices) (Zip Code) (818) 240-6055 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF JUNE 30, 2000 ----- ------------------------------- Common Stock, $.01 par value 20,000,342
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IHOP CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents................................. $ 164 $ 4,176 Receivables............................................... 30,974 35,335 Reacquired franchises and equipment held for sale, net.... 2,869 2,842 Inventories............................................... 790 1,223 Prepaid expenses.......................................... 4,340 4,309 -------- -------- Total current assets.................................... 39,137 47,885 -------- -------- Long-term receivables....................................... 269,071 265,983 Property and equipment, net................................. 197,517 177,743 Reacquired franchises and equipment held for sale, net...... 16,260 16,102 Excess of costs over net assets acquired, net............... 11,411 11,625 Other assets................................................ 1,026 1,064 -------- -------- Total assets............................................ $534,422 $520,402 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt...................... $ 8,956 $ 8,956 Accounts payable.......................................... 16,400 18,016 Accrued employee compensation and benefits................ 5,842 7,804 Other accrued expenses.................................... 8,231 5,896 Deferred income taxes..................................... 3,609 3,833 Capital lease obligations................................. 1,812 1,682 -------- -------- Total current liabilities............................... 44,850 46,187 -------- -------- Long-term debt.............................................. 40,935 41,218 Deferred income taxes....................................... 42,365 39,768 Capital lease obligations and other......................... 166,667 166,749 Shareholders' equity Preferred stock, $1 par value, 10,000,000 shares authorized; none issued................................. -- -- Common stock, $.01 par value, 40,000,000 shares authorized (June 30, 2000, 20,167,314 shares issued and 20,000,342 shares outstanding; December 31, 1999, 20,117,314 shares issued and 20,117,314 shares outstanding)........ 201 201 Additional paid-in capital................................ 67,407 66,485 Retained earnings......................................... 173,817 158,294 Treasury stock, at cost (June 30, 2000, 166,972 shares; December 31, 1999, none).............................. (2,580) -- Contribution to ESOP........................................ 760 1,500 -------- -------- Total shareholders' equity.............................. 239,605 226,480 -------- -------- Total liabilities and shareholders' equity.............. $534,422 $520,402 ======== ========
See the accompanying notes to the consolidated financial statements. 1 IHOP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues Franchise operations Rent.............................................. $12,697 $11,390 $ 24,418 $ 22,442 Service fees and other............................ 32,525 28,877 65,461 57,429 ------- ------- -------- -------- 45,222 40,267 89,879 79,871 Sale of franchises and equipment.................... 8,425 9,227 14,402 14,938 Company operations.................................. 16,657 18,020 34,429 34,027 ------- ------- -------- -------- Total revenues.................................. 70,304 67,514 138,710 128,836 ------- ------- -------- -------- Costs and Expenses Franchise operations Rent.............................................. 6,814 5,922 13,105 11,594 Other direct costs................................ 10,945 10,230 22,366 20,650 ------- ------- -------- -------- 17,759 16,152 35,471 32,244 Cost of sales of franchises and equipment........... 5,459 5,343 9,741 9,088 Company operations.................................. 15,938 17,024 32,858 32,207 Field, corporate and administrative................. 9,546 8,855 17,809 17,162 Depreciation and amortization....................... 3,338 3,076 6,652 6,092 Interest............................................ 5,221 4,389 10,821 8,846 Other (income) and expense, net..................... (443) (93) 117 (278) ------- ------- -------- -------- Total costs and expenses........................ 56,818 54,746 113,469 105,361 ------- ------- -------- -------- Income before income taxes............................ 13,486 12,768 25,241 23,475 Provision for income taxes............................ 5,192 4,916 9,718 9,038 ------- ------- -------- -------- Net income...................................... $ 8,294 $ 7,852 $ 15,523 $ 14,437 ======= ======= ======== ======== Net Income Per Share Basic............................................... $ 0.41 $ 0.39 $ 0.78 $ 0.73 ======= ======= ======== ======== Diluted............................................. $ 0.41 $ 0.39 $ 0.77 $ 0.71 ======= ======= ======== ======== Weighted Average Shares Outstanding Basic............................................... 19,988 19,935 20,026 19,876 ======= ======= ======== ======== Diluted............................................. 20,202 20,385 20,223 20,297 ======= ======= ======== ========
See the accompanying notes to the consolidated financial statements. 2 IHOP CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------- 2000 1999 -------- -------- Cash flows from operating activities Net income................................................ $ 15,523 $ 14,437 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization............................. 6,652 6,092 Deferred taxes............................................ 2,373 1,821 Contribution to ESOP...................................... 760 667 Change in current assets and liabilities Accounts receivable..................................... 4,095 3,766 Inventories............................................. 433 (6) Prepaid expenses........................................ (31) (150) Accounts payable........................................ (1,616) (4,203) Accrued employee compensation and benefits.............. (1,962) (136) Other accrued expenses.................................. 2,335 33 Other, net................................................ 778 (184) -------- -------- Cash provided by operating activities................. 29,340 22,075 -------- -------- Cash flows from investing activities Additions to property and equipment....................... (37,473) (38,367) Additions to notes........................................ (4,344) (5,377) Principal receipts from notes and equipment contracts receivable.............................................. 6,172 5,584 Additions to reacquired franchises held for sale.......... (698) (850) -------- -------- Cash used by investing activities....................... (36,343) (39,010) -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt, including revolving line of credit................................ 4,700 3,372 Proceeds from sale and lease back arrangements............ 7,056 12,482 Repayment of long-term debt, including revolving line of credit.................................................. (4,983) (3,151) Principal payments on capital lease obligations........... (624) (543) Treasury stock transactions............................... (4,041) 154 Exercise of stock options................................. 883 2,327 -------- -------- Cash provided by financing activities................... 2,991 14,641 -------- -------- Net change in cash and cash equivalents..................... (4,012) (2,294) Cash and cash equivalents at beginning of period............ 4,176 2,294 -------- -------- Cash and cash equivalents at end of period.............. $ 164 $ 62 ======== ======== Supplemental disclosures Interest paid, net of capitalized amounts................. $ 10,711 $ 8,740 Income taxes paid......................................... 7,052 5,785 Capital lease obligations incurred........................ 461 21,945
See the accompanying notes to the consolidated financial statements. 3 IHOP CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL--The accompanying, unaudited, consolidated financial statements for the three months and six months ended June 30, 2000 and 1999, have been prepared in accordance with generally accepted accounting principles ("GAAP"). These financial statements have not been audited by independent public accountants but include all adjustments, consisting of normal, recurring accruals, which in the opinion of management of IHOP Corp. and Subsidiaries ("IHOP") are necessary for a fair statement of the financial position and the results of operations for the periods presented. The accompanying consolidated balance sheet as of December 31, 1999, has been derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months and six months ended June 30, 2000, are not necessarily indicative of the results to be expected for the full year ending December 31, 2000. 2. Certain reclassifications have been made to prior year information to conform to the current year presentation. 3. SEGMENTS--IHOP identifies its operating segments based on the organizational units used by management to monitor performance and make operating decisions. The Franchise Operations segment includes restaurants operated by franchisees and area licensees in the United States, Canada and Japan. The Company Operations segment includes company-operated restaurants in the United States. We measure segment profit as operating income, which is defined as income before field, corporate and administrative expense, interest expense, and income taxes. Information on segments and a reconciliation to income before income taxes are as follows:
SALES OF CONSOLIDATING FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL ---------- ---------- ------------- ------------- ------------ (IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED JUNE 30, 2000 Revenues from external customers... $ 45,222 $16,657 $ 8,425 $ -- $ 70,304 Intercompany real estate charges (revenues)....................... 1,662 144 -- (1,806) -- Depreciation and amortization...... 1,059 965 -- 1,314 3,338 Operating income (loss)............ 20,564 (948) 2,966 5,671 28,253 Field, corporate and administrative................... 9,546 Interest expense................... 5,221 Income before income taxes......... 13,486 Additions to long-lived assets..... 12,433 3,381 215 5,886 21,915 Total assets....................... 393,427 47,221 19,129 74,645 534,422 THREE MONTHS ENDED JUNE 30, 1999 Revenues from external customers... $ 40,267 $18,020 $ 9,227 $ -- $ 67,514 Intercompany real estate charges (revenues)....................... 1,393 144 -- (1,537) -- Depreciation and amortization...... 932 1,013 -- 1,131 3,076 Operating income (loss)............ 18,524 (667) 3,884 4,271 26,012 Field, corporate and administrative................... 8,855 Interest expense................... 4,389 Income before income taxes......... 12,768 Additions to long-lived assets..... 20,181 1,002 195 4,709 26,087 Total assets....................... 341,313 45,250 18,191 63,716 468,470
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SALES OF CONSOLIDATING FRANCHISE COMPANY FRANCHISES ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS AND EQUIPMENT AND OTHER TOTAL ---------- ---------- ------------- ------------- ------------ (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2000 Revenues from external customers... $ 89,879 $34,429 $14,402 $ -- $138,710 Intercompany real estate charges (revenues)....................... 3,157 315 -- (3,472) -- Depreciation and amortization...... 2,067 2,022 -- 2,563 6,652 Operating income (loss)............ 40,588 (1,901) 4,661 10,523 53,871 Field, corporate and administrative................... 17,809 Interest expense................... 10,821 Income before income taxes......... 25,241 Additions to long-lived assets..... 25,488 4,500 698 7,485 38,171 Total assets....................... 393,427 47,221 19,129 74,645 534,422 SIX MONTHS ENDED JUNE 30, 1999 Revenues from external customers... $ 79,871 $34,027 $14,938 $ -- $128,836 Intercompany real estate charges (revenues)....................... 2,818 255 -- (3,073) -- Depreciation and amortization...... 1,891 1,929 -- 2,272 6,092 Operating income (loss)............ 36,393 (1,348) 5,850 8,588 49,483 Field, corporate and administrative................... 17,162 Interest expense................... 8,846 Income before income taxes......... 23,475 Additions to long-lived assets..... 26,691 2,282 850 9,394 39,217 Total assets....................... 341,313 45,250 18,191 63,716 468,470
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 or capital lease obligations. The accounting adjustments required to bring lease revenues and expenses into conformance with GAAP are included in the Consolidating Adjustments and Other. All of IHOP's owned land and restaurant buildings are included in total assets in Consolidating Adjustments and Other. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain operating data for IHOP restaurants:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS) (UNAUDITED) Restaurant Data Effective restaurants(a) Franchise................................ 690 625 684 622 Company.................................. 71 75 74 72 Area license............................. 150 146 149 145 -------- -------- -------- -------- Total.................................. 911 846 907 839 ======== ======== ======== ======== System-wide Sales(b)................................... $308,663 $278,463 $607,485 $548,096 Percent increase......................... 10.8 % 11.2 % 10.8 % 10.1 % Average sales per effective restaurant..... $ 339 $ 329 $ 670 $ 653 Percent increase......................... 3.0 % 4.4 % 2.6 % 3.5 % Comparable average sales per restaurant(c)............................ $ 355 $ 344 $ 699 $ 679 Percent increase......................... 0.6 % 1.7 % 0.2 % 0.8 % Franchise Sales...................................... $255,459 $227,277 $499,556 $447,073 Percent increase......................... 12.4 % 14.4 % 11.7 % 13.7 % Average sales per effective restaurant..... $ 370 $ 364 $ 730 $ 719 Percent increase......................... 1.6 % 4.9 % 1.5 % 4.1 % Comparable average sales per restaurant(c)............................ $ 367 $ 356 $ 724 $ 701 Percent increase......................... 0.8 % 1.7 % 0.5 % 0.8 % Company Sales...................................... $ 16,657 $ 18,020 $ 34,429 $ 34,027 Percent change........................... (7.6)% (1.8)% 1.2 % (5.6)% Average sales per effective restaurant..... $ 235 $ 240 $ 465 $ 473 Percent change........................... (2.1)% (0.4)% (1.7)% (1.5)% Area License Sales...................................... $ 36,547 $ 33,166 $ 73,500 $ 66,996 Percent change........................... 10.2 % (0.4)% 9.7 % (2.2)% Average sales per effective restaurant....... $ 244 $ 227 $ 493 $ 462 Percent change........................... 7.5 % (0.4)% 6.7 % (2.1)%
------------------------ (a) "Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open only a portion of the period. (b) "System-wide sales" are retail sales of franchisees, area licensees and company-operated restaurants as reported to IHOP. (c) "Comparable average sales" reflects sales for restaurants that are operated for the entire fiscal period in which they are being compared. The restaurants included in the calculations typically will be different from period to period. Comparable average sales do not include data on restaurants located in Florida and Japan. 6 The following table summarizes IHOP's restaurant development and franchising activity:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (UNAUDITED) RESTAURANT DEVELOPMENT ACTIVITY IHOP--beginning of period................................... 909 844 903 835 New openings IHOP-developed.......................................... 15 17 22 27 Investor and conversion programs........................ 2 2 3 4 Area license............................................ 4 3 4 3 --- --- --- --- Total new openings.................................... 21 22 29 34 Closings Company and franchise................................. (7) (2) (8) (5) Area license.......................................... -- -- (1) -- --- --- --- --- IHOP--end of period......................................... 923 864 923 864 === === === === Summary--end of period Franchise................................................. 697 640 697 640 Company................................................... 74 76 74 76 Area license.............................................. 152 148 152 148 --- --- --- --- Total IHOP.............................................. 923 864 923 864 === === === === RESTAURANT FRANCHISING ACTIVITY IHOP-developed.............................................. 12 15 20 24 Investor and conversion programs............................ 2 2 3 4 Rehabilitated and refranchised.............................. 2 1 5 1 --- --- --- --- Total restaurants franchised.............................. 16 18 28 29 Reacquired by IHOP.......................................... (3) (2) (6) (8) Closed...................................................... (2) (2) (3) (5) --- --- --- --- Net addition.............................................. 11 14 19 16 === === === ===
GENERAL The following discussion and analysis provides information we believe is relevant to an assessment and understanding of IHOP's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in IHOP's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Certain forward-looking statements are contained in this quarterly report. They use such words as "may," "will," "expect," "believe," "plan," or other similar terminology. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to: availability of suitable locations and terms of the sites designated for development; legislation and government regulation including the ability to obtain satisfactory regulatory approvals; conditions beyond IHOP's control such as weather or natural disasters; availability and cost of materials and labor; cost and availability of capital; competition; continuing acceptance of the International House of Pancakes brand and concept by guests and franchisees; IHOP's overall marketing, operational and financial performance; economic and political conditions; adoption of new, or changes in, accounting policies and practices; and other factors discussed 7 from time to time in our filings with the Securities and Exchange Commission. Forward-looking information is provided by us pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. In addition, we disclaim any intent or obligation to update these forward-looking statements. Our quarterly results are subject to seasonal fluctuation. The mix and number of restaurants franchised affect revenues from sales of franchises and equipment and their associated costs of sales. We franchise four kinds of restaurants: restaurants newly developed by IHOP, restaurants developed by franchisees, restaurants developed by area licensees and restaurants that have been previously reacquired from franchisees. Franchise rights for restaurants newly developed by IHOP normally sell for a franchise fee of $200,000 to $350,000, and have little if any associated cost of sales. Equipment for newly developed IHOP restaurants generally sells for approximately $300,000 and has 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 occasionally 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 $350,000, include an equipment sale, and may have substantial costs of sales associated with both the franchise and the equipment. The timing of sales of franchises is affected by the timing of new restaurant openings, the condition of reacquired franchise locations and the availability of qualified franchisees. The timing of new restaurant openings is affected by a variety of real estate construction issues including obtaining regulatory approvals and weather conditions. As a consequence of the foregoing factors, the results of operations for the six months ended June 30, 2000, are not necessarily indicative of the results to be expected for the full year ending December 31, 2000. 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 $30,200,000 or 10.8% in the second quarter of 2000 and $59,389,000 or 10.8% in the first six months of 2000. Growth in the number of effective restaurants and increases in average sales per effective unit caused the growth in system-wide sales. "Effective restaurants" are the number of restaurants in operation in a given fiscal period adjusted to account for restaurants in operation for only a portion of the period. Effective restaurants grew by 65 or 7.7% in the second quarter of 2000 and by 68 or 8.1% in the first six months of 2000 due to new restaurant development. Newly developed restaurants generally have seating and sales above the system-wide averages. System-wide average sales per effective restaurant grew 3.0% in the second quarter of 2000 and 2.6% in the first six months of 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. FRANCHISE OPERATIONS Franchise operations revenues are the revenues received by IHOP from its franchisees and include rent, royalties, sales of proprietary products, advertising fees and interest. Franchise operations revenues were 64.3% of total revenues in the second quarter of 2000 and 64.8% of total revenues in the first six months of 2000. Franchise operations revenues grew $4,955,000 or 12.3% in the second quarter of 2000 and $10,008,000 or 12.5% in the first six months of 2000. An increase in the number of effective franchise restaurants coupled with higher average sales per franchise restaurant caused the growth in franchise operations revenues. Effective franchise restaurants grew 65 or 10.4% in the second quarter of 2000 and 62 or 10.0% in the first six months of 2000. Average sales per effective franchise restaurant grew 1.6% in the second quarter of 2000 and 1.5% in the first six months of 2000. Franchise operations costs and expenses include rent, advertising, the cost of sales of proprietary products and other direct costs associated with franchise operations. Franchise operations costs and 8 expenses increased $1,607,000 or 9.9% in the second quarter of 2000 and $3,227,000 or 10.0% in the first six months of 2000. Increases in franchise operations costs were generally in line with the growth in franchise operations revenue. Franchise operations margin is equal to franchise operations revenues less franchise operations costs and expenses. Franchise operations margin increased $3,348,000 to $27,463,000 in the second quarter of 2000 and $6,781,000 to $54,408,000 in the first six months of 2000. Franchise operations margin was 60.7% and 60.5% of franchise operations revenues in the second quarter and first six months of 2000, respectively, compared with 59.9% and 59.6% in the same periods in the prior year. Increased royalty income and increased interest income associated with IHOP's financing of sales of franchises and equipment to its franchisees were primarily responsible for the improvement in franchise operations margin in 2000. SALES OF FRANCHISES AND EQUIPMENT Sales of franchises and equipment were 12.0% of total revenues in the second quarter of 2000 and 10.4% of total revenues in the first six months of 2000. Sales of franchises and equipment decreased $802,000 or 8.7% in the second quarter of 2000 and $536,000 or 3.6% in the first six months of 2000. A decrease in the number of restaurants franchised was the primary cause of the decrease in sales of franchises and equipment. IHOP franchised 16 and 28 restaurants in the second quarter and first six months of 2000, respectively, compared with 18 and 29 in the same periods in the prior year. Cost of sales of franchises and equipment increased $116,000 or 2.2% in the second quarter of 2000 and $653,000 or 7.2% in the first six months of 2000. The increase was primarily due to the sale of more rehabilitated and refranchised restaurants in the second quarter and the first six months of 2000 compared with the same periods in the prior year. Margin on sales of franchises and equipment is equal to sales of franchises and equipment less the cost of sales of franchises and equipment. Margin on sales of franchises and equipment decreased $918,000 to $2,966,000 in the second quarter of 2000 and decreased $1,189,000 to $4,661,000 in the first six months of 2000. Margin on sales of franchises and equipment was 35.2% and 32.4% in the second quarter and first six months of 2000, respectively, compared with 42.1% and 39.2% in the same periods in the prior year. COMPANY OPERATIONS Company operations revenues are sales to customers at restaurants operated by IHOP. Company operations revenues were 23.7% of total revenues in the second quarter of 2000 and 24.8% of total revenues in the first six months of 2000. Company operations revenues decreased $1,363,000 or 7.6% in the second quarter of 2000 and increased $402,000 or 1.2% in the first six months of 2000. Changes in the number of effective IHOP-operated restaurants in each period were primarily responsible for the changes in revenues. Effective IHOP-operated restaurants decreased by four or 5.3% in the second quarter of 2000 and increased by two or 2.8% in the first six months of 2000. Average sales per effective IHOP-operated restaurant decreased 2.1% in the second quarter of 2000 and 1.7% in the first six months of 2000. Company operations costs and expenses include food, labor and benefits, utilities and occupancy costs. Company operations costs decreased $1,086,000 or 6.4% in the second quarter of 2000 and increased $651,000 or 2.0% in the first six months of 2000. As certain costs are variable in nature, the decrease or increase in company operations costs were generally in line with the decrease or increase in company operations revenues. Company operations margin is equal to company operations revenues less company operations costs and expenses. Company operations margin declined $277,000 to $719,000 in the second quarter of 2000 and $249,000 to $1,571,000 in the first six months of 2000. Company operations margin was 4.3% and 4.6% of company operations revenues in the second quarter and first six months of 2000, respectively, compared with 5.5% and 5.3% in the same periods in the prior year. Decreasing average sales per restaurant 9 combined with the existence of certain fixed costs resulted in the decrease in margins of company operations. OTHER COSTS AND EXPENSES Field, corporate and administrative costs and expenses increased $691,000 or 7.8% and $647,000 or 3.8% in the second quarter and first six months of 2000, respectively, compared with the same periods in the prior year. The increase was primarily caused by higher compensation expenses in the second quarter and first six months of 2000 compared with the same periods in the prior year. Field, corporate and administrative costs were 3.1% and 2.9% of system-wide sales in the second quarter and first six months of 2000, respectively, compared with 3.2% and 3.1% in the same periods in the prior year. Depreciation and amortization expense increased $262,000 or 8.5% and $560,000 or 9.2% in the second quarter and first six months of 2000, respectively. The increases were caused primarily by the addition of new restaurants to the IHOP chain from our ongoing restaurant development program. Interest expense increased $832,000 or 19.0% and $1,975,000 or 22.3% in the second quarter and first six months of 2000, respectively. The increases were due to interest associated with new capital leases that were partially offset by reductions in interest on our senior notes due 2002 as the principal balance is paid down. BALANCE SHEET ACCOUNTS Balances of property and equipment, net at June 30, 2000, increased $19,774,000 or 11.1% from December 31, 1999 primarily due to new restaurant development. LIQUIDITY AND CAPITAL RESOURCES We invest in our business primarily through the development of additional restaurants and, to a lesser extent, through the remodeling of older company-operated restaurants. Also, the company began repurchasing shares of its common stock in 2000. In 2000 IHOP and its franchisees and area licensees forecast developing and opening approximately 75 to 85 restaurants. Included in that number are the development of 65 to 70 new restaurants by us and the development of 10 to 15 restaurants by our franchisees and area licensees. Capital expenditure projections for 2000, which include our portion of the above development program, are approximately $80 to $90 million. In November 2000 the fifth annual installment of $4.6 million in principal becomes due on our senior notes due 2002 and the first annual installment of $3.8 million in principal becomes due on our senior notes due 2008. We expect that funds from operations, sale and leaseback arrangements (estimated to be about $30 to $35 million) and our $20 million revolving line of credit will be sufficient to cover our operating requirements, our budgeted capital expenditures, our principal repayment on our senior notes and any further stock repurchases in 2000. At June 30, 2000, $20 million was available to be borrowed under our unsecured bank revolving credit agreement. 10 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual meeting of shareholders (the "Meeting") was held on May 16, 2000. Shareholders voted in person or by proxy for the following purposes. (a) Shareholders voted to elect three Class II directors, each to serve for a term of three years, as follows:
NOMINEE VOTES FOR VOTES WITHHELD ------- ---------- -------------- H. Frederick Christie.............................. 18,489,713 64,600 Richard K. Herzer.................................. 18,491,717 62,596 Patrick W. Rose.................................... 18,490,843 63,470
There were no abstentions or broker non-votes. Directors whose terms of office continued after the meeting were Frank Edelstein, Michael S. Gordon, Neven C. Hulsey, Larry Alan Kay, Dennis M. Leifheit, and Caroline W. Nahas. (b) Shareholders voted to approve and ratify the appointment of PricewaterhouseCoopers L.L.P as the Company's independent accountants for the year ending December 31, 2000. 18,529,896 shares were voted for this proposal, 18,787 were voted against, there were 5,540 abstentions and no broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3.1 Certificate of Incorporation of IHOP Corp. (Exhibit 3.1 to IHOP Corp.'s Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K") is hereby incorporated by reference). 3.2 Bylaws of IHOP Corp. (Exhibit 3.2 to IHOP Corp.'s 1997 Form 10-K is hereby incorporated by reference). 10.1 Employment agreement between IHOP Corp. and Robin L. Elledge effective April 1, 2000. 11.0 Statement Regarding Computation of Per Share Earnings. 27.0 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended June 30, 2000. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IHOP CORP. (Registrant) July 27, 2000 BY: /s/ RICHARD K. HERZER ------------ --------------------------------------- (Date) CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) July 27, 2000 BY: /s/ ALAN S. UNGER ------------ --------------------------------------- (Date) V.P.--FINANCE, TREASURER AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)
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