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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, 2002   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

        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 ý    No o

        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. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2). Yes ý No o

        State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2002: $605 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, 2003
Common Stock, $.01 par value   21,279,500

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on Tuesday, May 20, 2003 (the "2003 Proxy Statement") are incorporated by reference into Part III.





PART I

Item 1. Business.

a.    General Development of Business

        IHOP Corp. (referred to herein as "IHOP" or the "Company") was incorporated under the laws of the State of Delaware in 1976. In July 1991, IHOP completed an initial public offering of common stock. There were no significant changes to our corporate structure during 2002.

        IHOP Corp.'s principal executive offices are located at 450 North Brand Boulevard, Glendale, California and our telephone number is (818) 240-6055. Our website is located at www.ihop.com. We make all of our filings with the Securities and Exchange Commission available free of charge on our website as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. The information contained on our website is not incorporated into this Annual Report on Form 10-K.

        This Annual Report on Form 10-K should be read in conjunction with the cautionary statements on page 12.

b.    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.

c.    Narrative Description of Business

        On January 13, 2003 the Company announced significant changes in the way we conduct our business. These include a transition from Company-financed restaurant development to a more traditional franchise development model, in which franchisees finance and develop their new restaurants.

        IHOP Corp. and its subsidiaries develop, operate and franchise International House of Pancakes restaurants, one of America's best-known, national, family restaurant chains. At December 31, 2002, there were 1,103 IHOP restaurants. Franchisees operated 902 of these restaurants, area licensees operated 125 restaurants, and IHOP operated 76 restaurants. Franchisees and area licensees are independent third parties who operate their restaurants under legal agreements with IHOP. IHOP restaurants are located in 45 states and Canada.

        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.

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        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.

        Prior to the January 13, 2003 announcement mentioned in Recent Developments above, IHOP financed and developed the large majority of new IHOP restaurants prior to franchising them (the "Old Model"). Under the Old Model, when the restaurant was ultimately franchised, we became the franchisee's landlord. Our new business model (the "New Model") relies on franchisees to finance and develop their own IHOP restaurants. Under the New Model, IHOP will approve the franchisees' proposed sites but will not contribute capital or become the franchisee's landlord.

        The Company views 2003 as a transition year as we implement our New Model. The Company expects to finance, develop and franchise approximately 55 to 60 IHOP restaurants under the Old Model in 2003. The New Model contemplates that franchisees will finance and develop approximately 20 to 25 IHOP restaurants in 2003 and we expect that substantially all new IHOP restaurants will be financed and developed by franchisees or area licensees in 2004 and thereafter. In 2002, we developed 86 new restaurants, and our franchisees and area licensees developed an additional 15 new restaurants. Currently area licensees located in Florida and British Columbia, Canada operate 12% of IHOP restaurants.

        Regardless of the business model, new IHOP restaurants are developed after a stringent site selection process supervised by our senior management. We expect to add restaurants to the IHOP system 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. We also look to strategically add restaurants in 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.

        The development process 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 either our own capital or capital furnished by the franchisee, as applicable. 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 2002, we primarily built two types of new free-standing 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 134 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 2002, restaurant conversions averaged 128 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. At times we acquire existing restaurants and convert them to IHOP restaurants. Of the 86 new IHOP restaurants we developed in 2002, 14 were the larger format building, 65 were the smaller format building, and 7 were restaurant conversions or leased space 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.

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        The table below sets forth our average development cost per restaurant in 2002. 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   $ 634,000
Building     824,000
Equipment     353,000
Site improvements and other costs     198,000
   
  Total   $ 2,009,000
   

        New IHOP restaurants that opened in 2001 realized average sales of approximately $1,586,000 per restaurant in their first twelve full months of operations.

        As discussed above, the Company views 2003 as a year of transition from the Old Model to the New Model. Accordingly, our franchising activities will include both models in 2003. For clarity of presentation, the discussion is separated between those activities specific to the Old Model and those which apply to the New Model.

        Under the Old Model, 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 select and train the franchisee and supervisory personnel who will operate 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 charge a 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 obligations in the development, franchising and start-up operations of the new restaurants.

        Under the Old Model, the new restaurants are often 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 74% of franchise sales transactions.

        An initial franchise fee of approximately $200,000 to $375,000 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 collected by IHOP and then paid to a local advertising cooperative; and (5) a national advertising fee equal to 1% of the restaurant's sales.

        Under the New Model, IHOP's approach to franchising will be similar to that of most of our franchising competitors in the foodservice industry. Franchisees can undertake individual store development or multi-store development. Under the single store development program, the franchisee will be required to pay a non-refundable location fee of $15,000. If the proposed site is approved for development, the location fee of $15,000 will be credited against an initial franchise fee of $50,000. The

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franchisee will then use his or her own capital and financial resources to acquire a site, build and equip the business and to fund working capital needs.

        In addition to offering franchises for individual restaurants, the Company intends to enter into multi-store development agreements with qualified franchisees. These multi-store development agreements will provide franchisees with an exclusive right to develop new IHOP restaurants in designated geographic territories for a specified period of time. Multi-store developers will be required to develop and operate a specified number of restaurants according to an agreed upon development schedule. Multi-store developers will be required to pay a development fee of $20,000 for each restaurant to be developed under a multi-store development agreement. Additionally, for each store which is actually developed, there will be an initial franchise fee of $40,000 against which the development fee of $20,000 will be credited. The number of stores and the schedule of stores to be developed under multi-store development agreements will be negotiated on an agreement by agreement basis. Therefore, the total development and initial franchise fees will be subject to the outcome of those negotiations. With respect to restaurants developed under the New Model, the Company will receive continuing revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) revenue from the sale of certain proprietary products, primarily pancake mixes; (3) a local advertising fee equal to about 2% of the restaurant's sales, which is usually paid to a local advertising cooperative; and (4) a national advertising fee equal to 1% of the restaurant's sales.

        It is the Company's expectation that under the New Model a larger proportion of restaurants will be franchised to people who are new to the IHOP system. While there is no specific profile for franchise candidates, the Company expects to market franchises to existing multi-unit operators who currently own and operate restaurants in other non-competing segments of the restaurant business, e.g. quick service restaurants or casual dining.

        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. As of December 31, 2002, the area licensee for the state of Florida and certain counties in Georgia operated or sub-franchised a total of 125 IHOP restaurants and the area licensee for the province of British Columbia, Canada operated or sub-franchised a total of 12 IHOP restaurants. The area license agreements provide for royalties ranging from 0.5% to 2% of sales, and advertising fees of 0.25% of sales and give the area licensees the right to develop new IHOP restaurants in their territories. We also derive revenue from the sale of proprietary products to these area licensees and their sub-franchisees. We treat the revenues from our area licensees as franchise operations revenues for financial reporting purposes.

        The table below sets forth information regarding the distribution of single-unit and multi-unit franchisees in the IHOP system. It does not include information concerning our area licensees or their sub-franchisees.

Number of Units
Held by Franchisee

  Franchises
  Percent
of Total

 
One   208   57.5 %
Two to Five   124   34.2 %
Six to Ten   17   4.7 %
Eleven to Fifteen   5   1.4 %
Sixteen and over   8   2.2 %
   
 
 
Total Number of Franchisees   362   100 %
   
 
 

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        It is our goal to make every dining experience at an IHOP restaurant a satisfying one. Our franchisees and managers of company-operated restaurants always strive to exceed guests' expectations. We hold firm to the belief that a satisfied customer will be a repeat 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. A prospective franchisee is 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 most new IHOP restaurants.

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

        Most IHOP franchisees and company-operated restaurants contribute about 2% of sales to local advertising cooperatives. The Company also provides advertising funds to these cooperatives. The advertising co-ops use these funds to purchase television advertising time, radio 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. Prior to 2003, nearly all television advertising was purchased on a market by market basis. The Company intends to devote a substantial portion of its advertising budget in 2003 to national television advertising, in recognition of the national scope of the chain and the economies of scale available to national advertisers. In 2003, local advertising co-ops plan to expend additional sums for television advertising in their respective markets.

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        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 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. At the end of 2002, the Company operated a total of 76 IHOP restaurants.

        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 72 restaurants from franchisees and subsequently closed 14 of those restaurants. In those same years, a total of 50 restaurants were refranchised.

        We also require most of our franchisees, and strongly encourage all of our franchisees, to periodically remodel their restaurants. In most instances, we require that our restaurants be remodeled at least every 5 years.

        IHOP has entered into supply contracts for pancake mixes and pricing agreements for various other products, including 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.

        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, 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 2002 by The Nations Restaurant News ranked IHOP 27th out of the top 100 foodservice chains based on estimated fiscal 2002 system-wide sales in the United States. The same publication included 10 family restaurant chains in its top 100 chains, and IHOP ranked third in this segment. During December 2002, based on a nationwide sample of IHOP company-operated and

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franchised restaurants, the approximate guest check average per IHOP customer was $7.36. The guest check average for the year 2001 was $7.00.

        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 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 2003 to 2012. We routinely apply to renew our active trademarks prior to their expiration.

        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.

        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. Environmental requirements have not had a material effect on the operations of our Company-operated restaurants or the restaurants of our franchisees.

        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. 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.

        At December 31, 2002, we employed 4,392 persons, of whom 291 were full-time, non-restaurant, corporate personnel.

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Item 2. Properties.

        The table below shows the location and status of the 1,103 IHOP restaurants as of December 31, 2002:

Location

  Franchise
  Company-
Operated

  Area
License

  Total
United States                
Alabama   13   4   0   17
Alaska   1   0   0   1
Arizona   26   0   0   26
Arkansas   9   0   0   9
California   208   4   0   212
Colorado   26   3   0   29
Connecticut   8   0   0   8
Delaware   2   0   0   2
Florida   0   0   124   124
Georgia   43   2   1   46
Hawaii   1   0   0   1
Idaho   5   1   0   6
Illinois   36   5   0   41
Indiana   8   2   0   10
Iowa   6   2   0   8
Kansas   9   0   0   9
Louisiana   13   0   0   13
Maine   1   0   0   1
Maryland   22   5   0   27
Massachusetts   13   0   0   13
Michigan   7   9   0   16
Minnesota   1   1   0   2
Mississippi   8   0   0   8
Missouri   18   2   0   20
Nebraska   4   1   0   5
Nevada   18   0   0   18
New Hampshire   2   0   0   2
New Jersey   29   4   0   33
New Mexico   8   0   0   8
New York   36   3   0   39
North Carolina   26   2   0   28
Ohio   5   0   0   5
Oklahoma   15   0   0   15
Oregon   7   7   0   14
Pennsylvania   12   3   0   15
Rhode Island   1   0   0   1
South Carolina   16   0   0   16
Tennessee   21   3   0   24
Texas   133   0   0   133
Utah   12   0   0   12
Virginia   38   1   0   39
Washington   14   12   0   26
West Virginia   1   0   0   1
Wisconsin   7   0   0   7
Wyoming   1   0   0   1
International                
Canada(1)   12   0   0   12
   
 
 
 
Totals   902   76   125   1,103
   
 
 
 

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

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        As of December 31, 2002, 6 of the 76 company-operated restaurants were located on sites owned by IHOP and 70 were located on sites leased by IHOP from third parties; of the 902 franchisee-operated restaurants, 49 were located on sites owned by IHOP, 704 were located on sites leased by IHOP from third parties and 149 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 our business or the financial condition, results of operations, or cash flows of the 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.

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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". As of January 31, 2003, there were approximately 5,895 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 2002 and 2001 as reported by the NYSE.

Quarter Ended

  High
  Low
  Quarter Ended
  High
  Low
March 31, 2002   $ 33.92   $ 27.40   March 31, 2001   $ 24.00   $ 18.90
June 30, 2002     36.46     28.42   June 30, 2001     27.40     19.10
September 30, 2002     29.50     23.38   September 30, 2001     29.15     21.03
December 31, 2002     25.44     21.08   December 31, 2001     31.03     24.40

        On March 20, 2003 the board of directors declared a quarterly dividend of $.25 per share, payable May 19, 2003 to shareholders of record on May 1, 2003. Prior to this declaration, the Company had not declared or paid any dividends on its common stock in the last five years. The board of directors indicated its intention to declare recurring quarterly dividends in the future, however, any future dividend declarations will be made at the discretion of the board of directors and will be based on the Company's earnings, financial condition, cash requirements, future prospects and other factors deemed relevant at the time. The purchase agreements governing our 5.20% senior notes, our 5.88% 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, 2002, approximately $128 million of retained earnings were potentially free of restriction as to distribution of dividends.

        In October 2002, IHOP completed a private placement of $100 million of non-collateralized senior notes due October 2012. The notes have a fixed interest rate of 5.234% with annual principal payments of $13.6 million commencing October 2006. Proceeds from the sale of the senior notes will be used, in part, to fund capital expenditures for new restaurants and for general corporate purposes.

        Additional information regarding this item is presented under the caption "Securities Authorized for Issuance Under Equity Compensation Plans" in the proxy statement for our 2003 meeting of shareholders and is incorporated herein by reference.

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Item 6. Selected Financial Data.

Five-Year Financial Summary

 
  Year Ended December 31,
 
  2002(a)
  2001(a)
  2000(a)
  1999(a)
  1998(a)
 
  (In thousands, except per share amounts)

Income Statement Data                              
  Revenues                              
    Franchise operations   $ 238,422   $ 208,630   $ 183,361   $ 163,486   $ 145,955
    Sales of franchises and equipment     53,019     46,996     47,065     39,545     40,347
    Company operations     74,433     68,810     72,818     70,204     69,906
   
 
 
 
 
      Total revenues     365,874     324,436     303,244     273,235     256,208
   
 
 
 
 
  Costs and expenses                              
    Franchise operations     105,701     86,136     72,394     64,189     58,539
    Cost of sales of franchises and equipment     35,294     31,086     30,944     23,958     26,628
    Company operations     72,275     66,330     70,085     66,016     65,711
    Field, corporate and administrative     48,253     40,621     36,481     34,531     32,381
    Depreciation and amortization     15,967     14,818     13,562     12,310     11,271
    Interest     21,575     21,107     21,751     19,391     17,417
    Other (income) expense, net     1,452     (123 )   567     604     1,456
   
 
 
 
 
      Total costs and expenses     300,517     259,975     245,784     220,999     213,403
   
 
 
 
 
  Income before income taxes     65,357     64,461     57,460     52,236     42,805
  Provision for income taxes     24,509     24,173     22,122     20,111     16,694
   
 
 
 
 
  Net income   $ 40,848   $ 40,288   $ 35,338   $ 32,125   $ 26,111
   
 
 
 
 
  Net income per share(b)                              
    Basic   $ 1.95   $ 1.98   $ 1.77   $ 1.61   $ 1.33
   
 
 
 
 
    Diluted   $ 1.92   $ 1.94   $ 1.74   $ 1.58   $ 1.30
   
 
 
 
 
  Weighted average shares outstanding(b)                              
    Basic     20,946     20,398     20,017     19,983     19,659
   
 
 
 
 
    Diluted     21,269     20,762     20,263     20,358     20,033
   
 
 
 
 
Balance Sheet Data (end of period)                              
  Cash and cash equivalents   $ 98,739   $ 6,252   $ 7,208   $ 4,176   $ 2,294
  Property and equipment, net     286,226     238,026     193,624     177,743     161,689
  Total assets     819,800     641,429     562,212     520,402     443,032
  Long-term debt     145,768     50,209     36,363     41,218     49,765
  Capital lease obligations     171,170     168,105     167,594     165,557     129,861
  Stockholders' equity(c)     364,389     312,430     259,995     226,480     187,868

(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.

(c)
On March 20, 2003 the board of directors declared a quarterly dividend of $.25 per share, payable May 19, 2003 to shareholders of record on May 1, 2003. Prior to this declaration, the Company had not declared or paid any dividends on its common stock in the last five years. The board of directors indicated its intention to declare recurring quarterly dividends in the future, however, any future dividend declarations will be made at the discretion of the board of directors and will be

11



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: risks associated with the implementation of the Company's new strategic growth plan; 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.

Recent Developments

        On January 13, 2003 the Company announced significant changes in the way we conduct our business. These include a transition from Company-financed restaurant development to a more traditional franchise development model, in which franchisees are called upon to finance and develop their new restaurants. The anticipated impact of the change in our Business Model is discussed more fully under the "Outlook" section of Item 7.

General

        In 2002 and 2001, IHOP Corp. operated solely under its Company-Financed development model, the "Old Model." IHOP's revenues for 2002 and 2001 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

12



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. 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 are reported under field, corporate and administrative, depreciation and amortization, and interest related 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 Company-operated 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 income on the portion of such fee financed by us, and recurring payments from franchisees as described above and recorded under franchise operations revenues.

13



Results of Operations

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

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (Dollars in Thousands)

 
Restaurant Data                    
  Effective restaurants(a)(d)                    
    Franchise     843     767     696  
    Company     76     72     76  
    Area license     123     131     150  
   
 
 
 
      Total     1,042     970     922  
   
 
 
 
System-wide                    
  Sales(b)(d)   $ 1,478,567   $ 1,345,757   $ 1,246,177  
    Percent increase     9.9 %   8.0 %   10.6 %
  Average sales per effective restaurant(d)   $ 1,419   $ 1,387   $ 1,352  
    Percent increase     2.3 %   2.6 %   3.0 %
  Comparable average sales percent increase(c)     0.7 %   0.8 %   0.8 %
Franchise                    
  Sales   $ 1,278,103   $ 1,146,124   $ 1,026,783  
    Percent increase     11.5 %   11.6 %   11.5 %
  Average sales per effective restaurant   $ 1,516   $ 1,494   $ 1,475  
    Percent increase     1.5 %   1.3 %   2.1 %
  Comparable average sales percent increase(c)     0.7 %   0.9 %   1.1 %
Company                    
  Sales   $ 74,433   $ 68,810   $ 72,818  
    Percent increase (decrease)     8.2 %   (5.5 %)   3.7 %
  Average sales per effective restaurant   $ 979   $ 956   $ 958  
    Percent increase (decrease)     2.4 %   (0.2 %)   0.9 %
Area License                    
  Sales(d)   $ 126,031   $ 130,823   $ 146,576  
    Percent increase (decrease)     (3.7 %)   (10.7 %)   8.2 %
  Average sales per effective restaurant(d)   $ 1,025   $ 999   $ 977  
    Percent increase     2.6 %   2.3 %   6.0 %

(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 and area licensees, as reported to IHOP, and sales by Company-operated restaurants.

(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)
During 2001, the Company's area licensee in Japan negotiated an early termination of its area license agreement. As part of this early termination, the area licensee discontinued operations of its 32 IHOP restaurants. Sales in 2001 include sales in Japan until the closing of the restaurants. Excluding the units in Japan, in 2002 system-wide sales increased 10.6%; effective restaurants grew by 8.5%; and average sales per effective restaurant increased by 1.9%, in each case over the same

14


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

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
  1999
  1998
 
Restaurant Development Activity                      
IHOP—beginning of year   1,017   968   903   835   787  
  New openings                      
    IHOP-developed   86   76   70   65   56  
    Franchisee-developed   10   12   10   7   13  
    Area license   5   5   4   4   4  
   
 
 
 
 
 
  Total new openings   101   93   84   76   73  
  Closings                      
    Company and franchise   (13 ) (11 ) (16 ) (8 ) (21 )
    Area license   (2 ) (33 ) (3 )   (4 )
   
 
 
 
 
 
IHOP—end of year   1,103   1,017   968   903   835  
   
 
 
 
 
 
Summary—end of year                      
  Franchise   902   823   747   678   624  
  Company   76   72   71   76   66  
  Area license   125   122   150   149   145  
   
 
 
 
 
 
Total IHOP   1,103   1,017   968   903   835  
   
 
 
 
 
 

Restaurant Franchising Activity

 

 

 

 

 

 

 

 

 

 

 
IHOP-developed   80   74   70   61   60  
Franchisee-developed   10   12   10   7   13  
Rehabilitated and refranchised   10   9   15   6   10  
   
 
 
 
 
 
  Total restaurants franchised   100   95   95   74   83  
Reacquired by IHOP   (10 ) (12 ) (19 ) (14 ) (17 )
Closed   (11 ) (7 ) (7 ) (6 ) (13 )
   
 
 
 
 
 
  Net addition   79   76   69   54   53  
   
 
 
 
 
 

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

        The fiscal years ended December 31, 2002 and 2001 were comprised of 52 weeks (364 days).

System-Wide Retail Sales

        System-wide retail sales include the sales from all IHOP restaurants as reported to IHOP by its franchisees, area licensees, and Company-operated restaurants. System-wide retail sales grew by 9.9% to $1.48 billion in 2002 over the same period in 2001. Growth in the number of effective restaurants from 970 to 1,042 and increases in average sales per effective restaurant from $1,387,000 to $1,419,000 primarily caused the growth in system-wide retail 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 7.4% in 2002 over the same period in 2001 due to new restaurant development. Average sales per effective restaurant increased by 2.3% in 2002 over the prior year period. Newly developed restaurants generally have seating capacities and sales greater than the system-wide averages. Management continues to pursue growth in sales through new

15



restaurant development, marketing efforts, new products, improvements in 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 income. Franchise operations revenues grew by 14.3% to $238.4 million in 2002 over the same period in 2001. Franchise operations revenues grew primarily due to an increase in retail sales in franchise restaurants of 11.5% in 2002 over the same period in 2001. Retail sales in franchised restaurants grew primarily due to a 9.9% increase from 767 to 843 in the number of effective franchise restaurants and a 1.5% increase from $1,494,000 to $1,516,000 in average sales per effective restaurant in 2002 over the same period in 2001, respectively.

        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 22.7% to $105.7 million in 2002 from $86.1 million in 2001. The increase in franchise operating costs was primarily a result of the increases in rent expense, due to the increase in the number of effective restaurants.

        Sublease transactions with franchisees are structured with little or no margin at inception of the sublease, but with margin improvement anticipated over the life of the lease as retail sales increase (primarily because excess rent provisions in the subleases are tied to retail sales). New unit development will therefore have a negative effect on rent margin percentages. Rent margin percentages decreased from 42.4% in 2001 to 38.3% in 2002.

        Franchise operations margin was $132.7 million or 55.7% of franchise operations revenues in 2002, compared with $122.5 million or 58.7% in 2001. The decrease in the margin percentage was primarily due to the increased rent expense mentioned above.

Sales of Franchises and Equipment

        Sales of franchises and equipment increased by 12.8% to $53.0 million in 2002 from $47.0 million in 2001. The increase in sales was primarily due to an 8.1% increase in the sale of IHOP-developed restaurants from 74 in 2001 to 80 in 2002.

        Cost of sales of franchises and equipment increased by 13.5% to $35.3 million in 2002 from $31.1 million in 2001. The increase in cost of sales of franchises and equipment was primarily due to changes in the number of restaurants franchised in 2002, compared to the same period in 2001. IHOP franchised 100 restaurants in 2002 as compared to 95 in 2001.

        Margin on sales of franchises and equipment was $17.7 million or 33.4% of revenues from sales of franchises and equipment in 2002, compared with $15.9 million or 33.9% in 2001, respectively. The decrease in margin percentage primarily resulted from the mix of units franchised as well as higher preopening costs.

Company Operations

        Company operations revenues are retail sales to customers at restaurants operated by IHOP. Company operations revenues increased by 8.2% to $74.4 million in 2002 from $68.8 million in the prior year. Increases in the number of effective IHOP-operated restaurants coupled with the increase in the average sales per IHOP-operated restaurant caused the revenue increase. Effective IHOP-operated restaurants increased from 72 to 76 or 5.6% in 2002 from 2001. Average sales per effective IHOP-operated restaurant increased from approximately $.96 million in 2001 to $.98 million in 2002 or 2.4%.

16



        Company operations costs and expenses include food, labor and benefits, utilities, rent and other real estate related costs. Company operations costs increased by 9.0% to $72.3 million in 2002 from $66.3 million in 2001. Company operations costs increased primarily as a result of the above changes in revenues. However, Company operations costs and expenses were also impacted by higher labor costs primarily due to the hiring of Assistant General Managers in our Company-operated restaurants in 2002.

        Company operations margin is Company operations revenues less Company operations costs and expenses. Company operations margin was $2.2 million in 2002, compared to $2.5 million in 2001. Company operations margin percentage was 2.9% of Company operations revenues in 2002, compared with 3.6% in the same period in 2001. Company operations margin was lower in 2002 compared to the same period of 2001 primarily due to higher labor costs.

        In assessing the performance of its Company operations, management considers various other costs and expenses not included in Company operations margin. IHOP owns some of the real property of the Company-operated restaurants and internally charges those restaurants market rents. These rent expenses are eliminated in consolidation. The buildings, leasehold improvements and equipment employed in these restaurants are depreciated or amortized in accordance with our policies, and this expense is reflected in the statement of operations as depreciation and amortization. Interest expense related to capital leases on real property of certain Company-operated restaurant leases is also viewed by management as expense related to the Company-operated restaurants, but is included as interest expense in the statement of operations. In addition, employee benefit expenses related to IHOP's employee stock ownership plan are included in Company operations margin, but are excluded from management's assessment of the performance of Company-operated restaurants.

        Intercompany real estate charges were $1.5 million in 2002 and $0.9 million in 2001. Depreciation and amortization expense was $4.5 million in 2002 and $4.2 million in 2001. Interest expense was $2.1 million in 2002 and $2.4 million in 2001. ESOP related costs were $0.5 million in 2002 and $0.5 million in 2001. After reflecting these other costs and expenses (i.e. rent, depreciation and interest) as part of Company operations and excluding ESOP related costs, the loss before income taxes from Company operations was $5.0 million in 2002 compared to $4.4 million in 2001.

Other Costs and Expenses

        Field, corporate and administrative costs and expenses increased by 18.8% to $48.3 million in 2002 from $40.6 million in 2001. The rise in expenses was primarily due to higher consulting, consumer research and compensation expenses. Field, corporate and administrative expenses were 3.3% of system-wide sales in 2002, compared to 3.0% in 2001.

        During 2002, the Company engaged consulting firms to assist in evaluating its current business, conducting consumer research, and developing a new long-term strategy. Approximately $2.4 million of costs related to this project were incurred in 2002. Excluding these costs, field, corporate and administrative expenses were 3.1% of system-wide sales in 2002.

        IHOP believes that field, corporate and administrative costs and expenses will continue to grow at a rate which exceeds the rate of growth in revenues for at least the next 12 months. The growth in costs and expenses will be aimed at enhancing future earnings and same-store sales growth. After 2003, we expect that the rate of growth in field, corporate and administrative costs and expenses will be less than the growth in revenue.

        Depreciation and amortization expense increased by 7.8% to $16.0 million in 2002 from $14.8 million in 2001. The increases were caused primarily by the addition of new restaurants to the IHOP chain from our restaurant development program.

17



Income Tax Provision

        The Company's effective tax rate was 37.5% for both 2002 and 2001.

Balance Sheet Accounts

        The balance of cash and cash equivalents at December 31, 2002 increased to $98.7 million from $6.3 million at December 31, 2001, primarily due to the funds provided by our $100 million private placement in November 2002.

        The balance of property and equipment, net at December 31, 2002, increased 20.2% to $286.2 million from $238.0 million at December 31, 2001, primarily due to new restaurant development.

        The balance of long-term receivables at December 31, 2002 increased 8.1% to $332.8 million from $307.9 million in 2001 primarily due to IHOP's financing activities associated with the sales of franchises and equipment. Given our new operating model, we expect our long-term receivables to increase at a lower rate in 2003, and begin to decline in 2004 and thereafter.

        The balance of long-term debt increased by 190.3% in 2002 primarily due to the $100 million private placement in November 2002.

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 $99.6 million or 8.0% in 2001 over 2000. Growth in the number of effective restaurants from 922 to 970 and increases in average sales per effective restaurant from $1,352,000 to $1,387,000 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 2000. 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 over 2000. Management continued 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.

        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 compared to 2000; effective restaurants grew by 8.0% for the year ended December 31, 2001 compared to 2000; and average sales per effective restaurants increased 2.0% for the year ended December 31, 2001 over 2000.

18


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 income. Franchise operations revenues grew by 13.8% to $208.6 million in 2001 compared to $183.4 million in 2000. Franchise operations revenues grew primarily due to an increase in retail sales for franchise restaurants of 11.6% from $1.03 billion in 2000 to $1.15 billion in 2001. Retail sales for franchised restaurants grew primarily due to a 10.2% increase in effective franchise restaurants from 696 to 767 and a 1.3% increase in average sales from $1.48 million to $1.49 million per effective franchise restaurant in 2001 over 2000, respectively.

        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% to $86.1 million in 2001 from $72.4 million in 2000. 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. 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 an increase in rent expense.

Sales of Franchises and Equipment

        Sales of franchises and equipment decreased by 0.1% in 2001 to $47.0 million from $47.1 million in 2000. 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 to $31.1 million from $30.9 million in 2000. 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 margin primarily resulted from the mix of units franchised with lower average franchise sale prices, and an increase in preopening and site related costs.

Company Operations

        Company operations revenues are retail sales to customers at restaurants operated by IHOP. Company operation revenues decreased 5.5% in 2001 to $68.8 from $72.8 million in 2000. A decrease in the number of effective IHOP-operated restaurants from 76 to 72 coupled with a decrease in the average sales per IHOP-operated restaurant from $958,000 to $956,000 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 to $66.3 million from $70.1 million in 2000. Company operations costs were primarily affected by a decrease 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.

19



Other Costs and Expenses

        Field, corporate and administrative costs and expenses increased by 11.3% in 2001 to $40.6 million from $36.5 million in 2000. The rise in expenses was primarily due to higher compensation and rent expenses. The primary cause of the increase 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% to $14.8 million from $13.6 million in 2000. 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 to $21.1 million from $21.8 million in 2000. Although the Company's long term debt increased by approximately $14 million since December 31, 2000, it has benefited from lower interest rates in 2001 compared to 2000.

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 lower state taxes.

Balance Sheet Accounts

        The balance of property and equipment, net at December 31, 2001, increased 22.9% to $238.0 million from $193.6 million at December 31, 2000, 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 the sales of franchises and equipment.

        The balance of long-term debt increased by 38.1% in 2001 primarily due to the $11.6 million 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 an $8.5 million repayment of our senior notes.

Liquidity and Capital Resources

        In 2003, the Company will still invest in the development of additional restaurants and, to a lesser extent, in the remodeling of older Company-operated restaurants. 2003 will be a transition year to the Company's new business model with a reduced level of development-related investments in 2003 and little or no investment in development thereafter.

        In 2002, IHOP and its franchisees and area licensees developed and opened 101 IHOP restaurants. Of these, the Company developed and opened 86 restaurants, and franchisees and area licensees developed and opened 15 restaurants. Capital expenditures in 2002, which included our portion of the above development program, were $141.7 million. Funds for investment were primarily sourced from cash generated from operations of $78.1 million, a private placement of $100.0 million of non-collateralized senior notes, and proceeds from sale and leaseback arrangements of restaurant land and buildings of $58.5 million. IHOP also executed a term loan of $17.2 million.

        In 2003, IHOP and its franchisees and area licensees plan to develop and open approximately 75 to 85 restaurants. Included in that number is the development of 55 to 60 new restaurants by the Company and the development of 20 to 25 restaurants by our franchisees and area licensees. Capital expenditure projections for 2003, which include our portion of the above development program, are estimated to be approximately $95 million to $100 million. In November 2003, the fourth installment of $3.9 million in principal is due on our senior notes due 2008. We expect that funds from operations

20



and proceeds from the recent private placement of senior notes, proceeds from leasehold mortgage term debt, proceeds from sale and leaseback arrangements, and our $25 million revolving line of credit will be sufficient to cover our operating requirements, our budgeted capital expenditures, our principal repayments on our senior notes and dividend payments through 2003. At December 2002, the Company had cash and cash equivalents of $98.7 million, and $25 million was available to be borrowed under our noncollateralized bank revolving line of credit agreement.

        The Company began repurchasing shares of its common stock in 2000. As of December 31, 2002, the Company had cumulatively repurchased 389,168 shares of its common stock, of which 241,381 were contributed to the Employee Stock Ownership Plan.

        The following are significant contractual obligations and payments as of December 31, 2002 (in thousands):

 
  Less than
1 Year

  1-3 Years
  4-5 Years
  Thereafter
  Total
Debt excluding capital leases   $ 5,949   $ 11,962   $ 39,273   $ 94,533   $ 151,717
Operating leases     55,866     110,153     109,130     864,220     1,139,369
Capital leases     21,372     43,738     44,205     299,182     408,497
   
 
 
 
 
Contractual obligations   $ 83,187   $ 165,853   $ 192,608   $ 1,257,935   $ 1,699,583
   
 
 
 
 

Outlook

        In January 2003, the Company adopted a new operating model, moving from company-developed and financed restaurant growth to franchisee-financed development. 2003 will be characterized by the continued execution of our old operating model at a lower level than in 2002 with a migration to the new model.

        Discussion of IHOP Corp.'s old and new business model is contained in Item 1, Business, of this Annual Report on Form 10-K.

        The Company believes that in 2003 the continuation of the old business model will result in the development and financing of approximately 55-60 new restaurants. We expect all other revenue factors to be consistent with past practice. We believe that franchise royalties will continue to be 4.5% of franchise restaurant sales, and there will continue to be margin on the sale of proprietary products. We will also continue to charge our franchisees for national and cooperative advertising at a combined rate of 3% of restaurant sales. In addition, interest charges related to the financing of franchise and equipment notes will also be the same as past practices.

        We project our 2003 results will be as follows:

        As we move to 2004 and beyond, we expect to internally finance very few or no new IHOP restaurants and we expect the number of franchisee-developed restaurants to increase from historical levels. We do not expect to reach our ongoing franchisee development level until 2005. In 2005 and beyond, we expect that our franchisees will develop 65 to 85 restaurants per year.

        In 2004 and thereafter, other economic terms should remain consistent with past practices. However, we will no longer receive new or additional streams of revenue from leasing and financing

21



activities. We will continue to receive revenues from pre-existing leases and notes entered into in 2003 and earlier.

        We expect to return to positive net income per share growth in 2004; and beginning in 2005 to generate $46 to $60 million in free cash flow. The increases in cash flow will be primarily due to the significant reduction of development related capital expenditures coupled with increases in the number of franchisee-developed IHOP restaurants.

Critical Accounting Policies

        Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

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 adopted the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of. The statement also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements.

        The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted future cash flows of the individual stores and consolidated undiscounted future cash flows for long-lived assets not identifiable to individual stores compared to the related 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 which is measured as the difference between the carrying amount and fair value of the related asset.

New Accounting Pronouncements

        In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30 are met. This Statement also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 provisions are generally effective for fiscal years beginning after May 15, 2002. Management is currently evaluating the impact the adoption of this Statement will have on its consolidated financial statements.

22



        In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This statement addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit or disposal activities, and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Costs addressed by SFAS No. 146 include costs to terminate a contract that is not a capital lease, costs of involuntary employee termination benefits pursuant to a one-time benefit arrangement, costs to consolidate facilities, and costs to relocate employees. This statement will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its consolidated financial position, results of operations or cash flows.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to Statement 123 regarding disclosure are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial statements for the year ended December 31, 2002 and will adopt the interim disclosure provisions for its financial statements for the quarter ended March 31, 2003. As the adoption of this standard involves the disclosures only requirements, the Company does not expect a material impact on its results of operations, financial position or cash flows.

        In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that has issued and requires that they be recorded at fair value. The initial recognition and measurement provisions of this interpretation are to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002, which is the fiscal year beginning January 1, 2003 for IHOP. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.


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 line of credit agreement and its $12 million mortgage term loan with its banks. Borrowings under the revolving line of 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 no balance outstanding under this agreement at December 31, 2002 and the largest amount outstanding under the agreement during 2002 was $12.8 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

23



mitigate price fluctuations by entering into forward purchase agreements on all our major products, 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. 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 either IHOP's financial condition, results of operations or cash flows.

24



Item 8. Financial Statements and Supplementary Data.


Index to Consolidated Financial Statements

 
  Page
Reference

Consolidated Balance Sheets as of December 31, 2002 and 2001   26
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002   27
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2002   28
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002   29
Notes to the Consolidated Financial Statements   30
Report of Independent Accountants   47

25



IHOP Corp. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share amounts)

 
  December 31,
 
 
  2002
  2001
 
Assets              
Current assets              
  Cash and cash equivalents   $ 98,739   $ 6,252  
  Receivables, net     54,714     47,451  
  Reacquired franchises and equipment held for sale, net     2,619     3,234  
  Inventories     889     837  
  Prepaid expenses     2,140     1,386  
   
 
 
    Total current assets     159,101     59,160  
   
 
 
Long-term receivables     332,792     307,859  
Property and equipment, net     286,226     238,026  
Reacquired franchises and equipment held for sale, net     14,842     18,327  
Excess of costs over net assets acquired     10,767     10,767  
Other assets     16,072     7,290  
   
 
 
    Total assets   $ 819,800   $ 641,429  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities              
  Current maturities of long-term debt   $ 5,949   $ 9,711  
  Accounts payable     24,079     16,666  
  Accrued employee compensation and benefits     7,625     7,621  
  Other accrued expenses     11,936     7,238  
  Deferred income taxes     1,370     1,129  
  Capital lease obligations     2,605     2,164  
   
 
 
    Total current liabilities     53,564     44,529  
   
 
 
Long-term debt     145,768     50,209  
Deferred income taxes     69,606     59,084  
Capital lease obligations     171,170     168,105  
Other liabilities     15,303     7,072  

Commitments and contingencies (Notes 6 and 11)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 
  Preferred stock, $1 par value, 10,000,000 shares authorized; no shares issued and Outstanding          
  Common stock, $.01 par value, 40,000,000 shares authorized; 2002: 21,427,287 shares issued and 21,279,500 shares outstanding; 2001: 20,918,283 shares issued and 20,711,201 shares outstanding     214     209  
  Additional paid-in-capital     90,770     79,837  
  Retained earnings     274,768     233,920  
  Deferred compensation     (434 )    
  Accumulated other comprehensive loss     (680 )    
  Treasury stock, at cost (2002: 147,787 shares; 2001: 207,082 shares)     (2,247 )   (3,386 )
  Contribution to ESOP     1,998     1,850  
   
 
 
    Total stockholders' equity     364,389     312,430  
   
 
 
    Total liabilities and stockholders' equity   $ 819,800   $ 641,429  
   
 
 

See the accompanying notes to the consolidated financial statements.

26



IHOP Corp. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

 
  Year Ended December 31,
 
  2002
  2001
  2000
Revenues                  
  Franchise operations                  
    Rent   $ 82,007   $ 65,780   $ 51,135
    Service fees and other     156,415     142,850     132,226
   
 
 
      238,422     208,630     183,361
 
Sales of franchises and equipment

 

 

53,019

 

 

46,996

 

 

47,065
  Company operations     74,433     68,810     72,818
   
 
 
    Total revenues     365,874     324,436     303,244
   
 
 

Costs and Expenses

 

 

 

 

 

 

 

 

 
  Franchise operations                  
    Rent     50,562     37,867     27,695
    Other direct costs     55,139     48,269     44,699
   
 
 
      105,701     86,136     72,394
  Cost of sales of franchises and equipment     35,294     31,086     30,944
  Company operations     72,275     66,330     70,085
  Field, corporate and administrative     48,253     40,621     36,481
  Depreciation and amortization     15,967     14,818     13,562
  Interest     21,575     21,107     21,751
  Other (income) expense, net     1,452     (123 )   567
   
 
 
    Total costs and expenses     300,517     259,975     245,784
   
 
 

Income before income taxes

 

 

65,357

 

 

64,461

 

 

57,460
Provision for income taxes     24,509     24,173     22,122
   
 
 

Net Income

 

$

40,848

 

$

40,288

 

$

35,338
   
 
 
Net Income Per Share                  
  Basic   $ 1.95   $ 1.98   $ 1.77
   
 
 
  Diluted   $ 1.92   $ 1.94   $ 1.74
   
 
 
Weighted Average Shares Outstanding                  
  Basic     20,946     20,398     20,017
   
 
 
  Diluted     21,269     20,762     20,263
   
 
 

See the accompanying notes to the consolidated financial statements.

27



IHOP Corp. and Subsidiaries

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

 
  Common Stock
   
   
   
  Accumulated
Other
Comprehensive
Loss

   
   
   
 
 
  Additional
Paid-In
Capital

  Retained
Earnings

  Deferred
Compensation

  Treasury
Stock

  Contribution
To ESOP

   
 
 
  Shares
  Amount
  Total
 
  Balance, December 31, 1999   20,117,314   $ 201   $ 66,485   $ 158,294   $   $   $   $ 1,500   $ 226,480  
   
 
 
 
 
 
 
 
 
 
Net income               35,338                     35,338  
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  
   
 
 
 
 
 
 
 
 
 
  Balance, December 31, 2000   20,299,091     203     69,655     193,632             (5,170 )   1,675     259,995  
   
 
 
 
 
 
 
 
 
 
Net income               40,288                     40,288  
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  
   
 
 
 
 
 
 
 
 
 
  Balance, December 31, 2001   20,918,283     209     79,837     233,920             (3,386 )   1,850     312,430  
   
 
 
 
 
 
 
 
 
 
Comprehensive income:                                                      
  Net income               40,848                     40,848  
  Other comprehensive loss                       (680 )           (680 )
                                                 
 
Comprehensive income                                                   40,168  
Reissuance of treasury shares to ESOP           711                 1,139     (1,850 )    
Issuance of shares pursuant to stock plans   509,004     5     7,556                         7,561  
Tax benefit from stock options exercised           2,000                         2,000  
Deferred compensation resulting from grant of options           666         (666 )                
Amortization of deferred compensation                   232                 232  
Contribution to ESOP                               1,998     1,998  
   
 
 
 
 
 
 
 
 
 
  Balance, December 31, 2002   21,427,287   $ 214   $ 90,770   $ 274,768   $ (434 ) $ (680 ) $ (2,247 ) $ 1,998   $ 364,389  
   
 
 
 
 
 
 
 
 
 

See the accompanying notes to the consolidated financial statements.

28



IHOP Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
Cash flows from operating activities                    
  Net income   $ 40,848   $ 40,288   $ 35,338  
  Adjustments to reconcile net income to cash flows provided by operating activities                    
    Depreciation and amortization     15,967     14,818     13,562  
    Deferred income taxes     10,763     9,671     6,941  
    Contribution to ESOP     1,998     1,850     1,675  
    Tax benefit from stock options exercised     2,000     3,191     536  
    Changes in operating assets and liabilities                    
      Accounts receivable     (5,486 )   (7,852 )   (2,200 )
      Inventories     (52 )   (146 )   532  
      Prepaid expenses     (754 )   (955 )   3,878  
      Accounts payable     7,413     (3,922 )   2,572  
      Accrued employee compensation and benefits     4     845     (1,028 )
      Other accrued expenses     4,698     (597 )   1,939  
    Other, net     713     (1,488 )   4,310  
   
 
 
 
      Cash flows provided by operating activities     78,112     55,703     68,055  
   
 
 
 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 
  Additions to property and equipment     (141,740 )   (119,797 )   (99,378 )
  Additions to notes     (16,533 )   (14,993 )   (13,916 )
  Principal receipts from notes and equipment contracts receivable     17,344     14,668     12,594  
  Additions to reacquired franchises held for sale     (641 )   (2,320 )   (2,570 )
   
 
 
 
      Cash flows used in investing activities     (141,570 )   (122,442 )   (103,270 )
   
 
 
 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 
  Proceeds from issuance of long-term debt     117,203     26,532     12,703  
  Proceeds from sale and leaseback arrangements     58,542     45,652     48,274  
  Repayment of long-term debt     (25,406 )   (11,915 )   (17,575 )
  Principal payments on capital lease obligations     (1,955 )   (1,592 )   (1,121 )
  Treasury stock transactions         (23 )   (6,631 )
  Proceeds from stock options exercised     7,561     7,129     2,597  
   
 
 
 
      Cash flows provided by financing activities     155,945     65,783     38,247  
   
 
 
 
Net change in cash and cash equivalents     92,487     (956 )   3,032  
Cash and cash equivalents at beginning of period     6,252     7,208     4,176  
   
 
 
 
      Cash and cash equivalents at end of period   $ 98,739   $ 6,252   $ 7,208  
   
 
 
 

Supplemental disclosures

 

 

 

 

 

 

 

 

 

 
  Interest paid, net of amounts capitalized   $ 20,196   $ 21,238   $ 21,752  
  Income taxes paid     14,286     15,257     15,974  
  Capital lease obligations incurred     5,534     2,388     4,153  

See the accompanying notes to the consolidated financial statements.

29



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, 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.

30



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, 2002, 2001 and 2000.

Accounting for Long-Lived Assets

        The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of. The statement also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements.

        The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted future cash flows of the individual stores and consolidated undiscounted future cash flows for long-lived assets not identifiable to individual stores compared to the related 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 which is measured as the difference between the carrying amount and fair value of the related asset.

Excess of Costs Over Net Assets Acquired

        In June 2001, 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. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. As a result, the Company's amortization of

31



goodwill in the amount of $107,000 ($67,000 net of income taxes) per quarter ceased effective January 1, 2002. Upon adoption of SFAS No. 142, the Company was required to reassess the useful lives of its other intangible assets as well as perform a transitional impairment test of indefinite-lived intangible assets. Since the Company does not have any intangible assets other than goodwill, the adoption of the provisions of the statement affecting other intangible assets had no impact on the Company's financial position, results of operations or cash flows.

        Also, in connection with the adoption of SFAS No. 142, the Company is required to carry out a transitional goodwill impairment evaluation, which requires an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Initially, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities (excluding goodwill) to those reporting units as of the date of adoption. All existing goodwill at the date that SFAS No. 142 is adopted is assigned to one or more reporting units in a reasonable and supportable manner as prescribed by the standard.

        During the second quarter of 2002, the Company completed its transitional goodwill impairment evaluation, and determined that none of the recorded goodwill was impaired. In accordance with SFAS No. 142, goodwill will be tested for impairment at least annually and more frequently if circumstances indicate that it may be impaired.

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 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 costs for the years ended December 31, 2002, 2001 and 2000 were $41,354,000, $36,617,000 and $32,678,000, respectively.

Income Taxes

        Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. Deferred tax expense is the result of changes in the deferred tax asset or liability. If necessary, valuation allowances are established to reduce deferred tax assets to their expected realizable values.

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

32



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. In 2002, the Company had other comprehensive losses of $680,000 due to an interest rate swap that the Company entered into during 2002. For each of the two years in the period 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 and 2000.

Stock Options

        IHOP has a Stock Incentive Plan, which is described more fully in Note 7. IHOP has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company continues 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 is recognized for options granted at fair value at the date of grant. During 2002, the Company granted 234,000 shares with an exercise price below fair market value. Such difference will be recognized as additional compensation expense on a straight-line basis over the vesting period of the underlying options.

        Had compensation cost for IHOP's stock option plans been determined based on the fair value at the grant date for awards during each of the three years in the period ended December 31, 2002, 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:

 
  2002
  2001
  2000
 
 
  (In thousands, except
per share amounts)

 
Net income, as reported   $ 40,848   $ 40,288   $ 35,338  

Add stock-based compensation expense included in
reported net income, net of tax

 

 

144

 

 


 

 


 

Less stock-based compensation expense determined
under the the fair-value accounting method, net of tax

 

 

(1,532

)

 

(960

)

 

(996

)
   
 
 
 

Net income, pro forma

 

$

39,460

 

$

39,328

 

$

34,342

 
   
 
 
 

Net income per share—diluted, as reported

 

$

1.92

 

$

1.94

 

$

1.74

 
Net income per share—diluted, pro forma   $ 1.86   $ 1.89   $ 1.69  

33


Derivative and Financial Instruments

        On January 1, 2001, IHOP adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. During 2001, IHOP purchased natural gas contracts equal to 25% of estimated requirements through December 2002 to limit exposure to market increases in natural gas prices for IHOP-operated restaurants. These 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 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, 2002 and 2001, 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, 2002 and 2001 were $145,768,000 and $50,209,000, respectively, and the fair values at those dates were $154,162,000 and $52,957,000, respectively.

Reclassification

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

New Accounting Pronouncements

        In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30 are met. This Statement also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 provisions are generally effective for fiscal years beginning after May 15, 2002. Management is currently evaluating the impact the adoption of this Statement will have on its consolidated financial statements.

        In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This statement addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit or disposal activities, and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Costs addressed by SFAS No. 146 include costs to terminate a contract that is not a capital lease, costs of involuntary employee termination benefits pursuant to a one-time benefit arrangement, costs to consolidate facilities, and costs to relocate employees. This Statement will be effective for exit or

34



disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its consolidated financial position, results of operations or cash flows.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to Statement 123 regarding disclosure are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial statements for the year ended December 31, 2002 and will adopt the interim disclosure provisions for its financial statements for the quarter ended March 31, 2003. As the adoption of this standard involves the disclosures only requirements, the Company does not expect a material impact on its results of operations, financial position or cash flows.

        In November 2002, the FASB issued FASB Interpretation No. 45—"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and requires that they be recorded at fair value. The initial recognition and measurement provisions of this interpretation are to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002, which is the fiscal year beginning January 1, 2003 for IHOP. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.

2.    Receivables

 
  2002
  2001
 
 
  (In thousands)

 
Accounts receivable   $ 39,630   $ 34,005  
Notes receivable     57,522     52,901  
Equipment contracts receivable     158,221     134,851  
Direct financing leases receivable     133,804     135,085  
   
 
 
      389,177     356,842  
Less allowance for doubtful accounts     (1,671 )   (1,532 )
   
 
 
      387,506     355,310  
Less current portion     (54,714 )   (47,451 )
   
 
 

Long-term receivables

 

$

332,792

 

$

307,859

 
   
 
 

35


        Notes receivable include franchise fee notes due in five to eight years in the amount of $55,571,000 and $50,158,000 at December 31, 2002 and 2001, respectively. Franchise fee notes are due in equal weekly installments, primarily bear interest at 12.0% per annum, 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

 
  2002
  2001
 
 
  (In thousands)

 
Land   $ 25,857   $ 25,283  
Buildings and improvements     46,225     42,760  
Leaseholds and improvements     189,870     159,536  
Equipment and fixtures     18,506     14,668  
Construction in progress     29,983     14,693  
Properties under capital lease obligations     43,784     37,516  
   
 
 
      354,225     294,456  

Less accumulated depreciation and amortization

 

 

(67,999

)

 

(56,430

)
   
 
 

Property and equipment, net

 

$

286,226

 

$

238,026

 
   
 
 

        Accumulated depreciation and amortization includes accumulated amortization for properties under capital lease obligations in the amount of $7,837,000 and $5,982,000 at December 31, 2002 and 2001, respectively.

36


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 evaluated each year.

 
  2002
  2001
 
 
  (In thousands)

 
Franchises   $ 11,370   $ 12,960  
Equipment     14,272     15,485  
   
 
 
      25,642     28,445  

Less amortization

 

 

(8,181

)

 

(6,884

)
   
 
 
      17,461     21,561  
Less current portion     (2,619 )   (3,234 )
   
 
 

Long-term reacquired franchises and equipment held for sale, net

 

$

14,842

 

$

18,327

 
   
 
 

5.    Debt

        Debt consists of the following components:

 
  2002
  2001
 
 
  (In thousands)

 
Senior Notes due November 2008, payable in equal annual installments commencing November 2000, at a fixed interest rate of 7.42%   $ 23,333   $ 27,222  
Senior Notes due November 2002, payable in equal annual installments commencing November 1996, at a fixed interest rate of 7.79%         4,571  
Senior Notes Series A due October 2012, at a fixed interest rate of 5.88%     5,000      
Senior Notes Series B due October 2012, at a fixed interest rate of 5.20%     95,000      
Leasehold mortgage term loans     27,496     11,609  
Revolving line of credit         15,000  
Other     888     1,518  
   
 
 

Total debt

 

 

151,717

 

 

59,920

 

Less current maturities

 

 

(5,949

)

 

(9,711

)
   
 
 

Long-term debt

 

$

145,768

 

$

50,209

 
   
 
 

        The Senior Notes due November 2002 and 2008 are noncollateralized.

37



        In October 2002, IHOP completed a private placement of $100 million of non-collateralized senior notes in two tranches ($5 million and $95 million, respectively) due October 2012. The notes have an average fixed interest rate of 5.234% with annual principal payments of $13.6 million commencing October 2006. Proceeds from the sale of the senior notes will be used, in part, to fund capital expenditures for new restaurants and for general corporate purposes.

        Included in leasehold mortgage term loans is a loan amount totaling $10.9 million and $11.6 million as of December 31, 2002 and 2001, respectively, due May 2013. The loan 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 as defined under the loan agreement. This rate was 3.17% and 3.68% at December 31, 2002 and 2001, respectively.

        On March 13, 2002, IHOP entered into a $17.2 million variable rate term loan also included in leasehold mortgage term loan. This loan, which accrues interest at one-month LIBOR, will amortize over twelve years with a maturity date of April 1, 2014. The outstanding balance as of December 31, 2002, was $16.5 million. The interest rate was 3.13% at December 31, 2002. The lending institution required IHOP to enter into an interest rate swap agreement for 50% or $8.6 million of the loan as a means of reducing IHOP's interest rate exposures. This strategy will effectively use an interest rate swap to convert $8.6 million in variable rate borrowings into fixed rate liabilities. The interest rate swap agreement is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this variable rate loan. As a result, the interest rate swap agreement is reflected at fair value and the related net loss of $680,000 on this agreement as of December 31, 2002 is deferred in stockholder's equity as a component of comprehensive income (loss).

        IHOP has a noncollateralized revolving credit agreement with a bank in the amount of $25 million 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. The largest amount outstanding under the agreement during 2002 was $15 million and the balance was zero at December 31, 2002. The outstanding balance at December 31, 2001 was $15 million.

        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, 2002, approximately $128 million of retained earnings were free of restriction as to distribution as dividends.

        The prime rate was 4.25% at December 31, 2002 and 4.75% at December 31, 2001.

        IHOP's long-term debt maturities are as follows: 2003—$5,949,000; 2004—$6,023,000; 2005—$5,939,000; 2006—$19,550,000; 2007—$19,723,000 and thereafter—$94,533,000.

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.

38



        The following is the Company's net investment in direct financing lease receivables:

 
  2002
  2001
 
 
  (In thousands)

 
Total minimum rents receivable   $ 372,893   $ 395,492  
Less unearned income     (239,089 )   (260,407 )
   
 
 

Net investment in direct financing lease receivables

 

 

133,804

 

 

135,085

 
Less current portion     (1,202 )   (985 )
   
 
 

Long-term direct financing lease receivables

 

$

132,602

 

$

134,100

 
   
 
 

        Contingent rental income for the years ended December 31, 2002, 2001 and 2000 was $23,393,000, $21,899,000 and $21,238,000, respectively.

        The following are minimum future lease payments on the Company's noncancelable leases as lessee at December 31, 2002:

 
  Capital
Leases

  Operating
Leases

 
  (In thousands)

2003   $ 21,372   $ 55,866
2004     21,689     55,274
2005     22,049     54,879
2006     22,082     54,355
2007     22,123     54,775
Thereafter     299,182     864,220
   
 

Total minimum lease payments

 

 

408,497

 

$

1,139,369
         
Less interest     (234,722 )    
   
     

Capital lease obligations

 

 

173,775

 

 

 
Less current portion     (2,605 )    
   
     

Long-term capital lease obligations

 

$

171,170

 

 

 
   
     

39


        The minimum future lease payments shown above have not been reduced by the following future minimum rents to be received on noncancelable subleases and leases of owned property at December 31, 2002:

 
  Direct
Financing
Leases

  Operating
Leases

 
  (In thousands)

2003   $ 18,613   $ 70,124
2004     18,815     70,642
2005     19,037     71,427
2006     19,113     72,052
2007     19,306     73,227
Thereafter     278,009     1,348,271
   
 

Total minimum rents receivable

 

$

372,893

 

$

1,705,743
   
 

        IHOP has noncancelable leases, expiring at various dates through 2032, 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 the lease obligation at rents that include IHOP's 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, 2002, 2001 and 2000 was $2,713,000, $2,902,000 and $3,317,000, respectively. Minimum rent expense for all noncancelable operating leases for the years ended December 31, 2002, 2001 and 2000 was $50,988,000, $40,312,000 and $30,084,000, 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, 2002, become exercisable one-third after one year, two-thirds 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 one-third after one year, two-thirds after two years and 100% after three years. Options for the purchase of shares are granted

40



to each non-employee Director under the Directors Plan as follows: (1) 15,000 on February 23, 1995, or on the 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.

        During 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, 2002, 389,168 shares were repurchased by IHOP under this plan, of which 241,381 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, 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
Granted   354,000     28.66
Exercised   (509,004 )   14.93
Terminated   (48,165 )   25.31
   
     

Outstanding at December 31, 2002

 

1,385,201

 

$

21.12
   
 

Exercisable at December 31, 2002

 

791,056

 

$

17.88
   
 

41


        Information regarding options outstanding and exercisable at December 31, 2002 is as follows:

Range of Exercise Prices

  Number
Outstanding
as of
12/31/2002

  Weighted
Average
Remaining
Contractual
Life

  Weighted
Average
Exercise
Price

  Number
Exercisable as of
12/31/2002

  Weighted
Average
Exercise
Price

$13.50 - $14.94   386,399   4.16   $ 14.23   330,901   $ 14.13
$16.37 - $20.16   302,466   6.89   $ 18.83   195,818   $ 18.36
$20.31 - $25.95   299,336   7.11   $ 22.05   214,337   $ 21.01
$27.33 - $35.25   397,000   9.10   $ 28.88   50,000   $ 27.33
   
           
     
$13.50 - $35.25   1,385,201   6.81   $ 21.12   791,056   $ 17.88
   
           
     

        The fair value of each option grant issued during each of the three years in the period ended December 31, 2002, reflecting the basis for the proforma disclosure in Note 1, is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 
  2002
  2001
  2000
 
Risk free interest rate     3.50 %   5.75 %   5.875 %
Expected volatility     37.0 %   37.0 %   37.0 %
Dividend yield              
Weighted average expected life     5 years     5 years     3 years  
Weighted average fair value of options granted   $ 30.25   $ 24.18   $ 15.22  

8.    Income Taxes

        The provision for income taxes is as follows:

 
  Year Ended December 31,
 
  2002
  2001
  2000
 
  (In thousands)

Provision for income taxes:                  
Current                  
  Federal   $ 11,714   $ 13,008   $ 13,160
  State and foreign     2,032     1,494     2,021
   
 
 
      13,746     14,502     15,181
   
 
 

Deferred

 

 

 

 

 

 

 

 

 
  Federal     9,798     8,224     5,623
  State     965     1,447     1,318
   
 
 
      10,763     9,671     6,941
   
 
 

Provision for income taxes

 

$

24,509

 

$

24,173

 

$

22,122
   
 
 

42


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

 
  2002
  2001
  2000
 
Statutory federal income tax rate   35.0 % 35.0 % 35.0 %
State and other taxes, net of federal tax benefit   2.5   2.5   3.5  
   
 
 
 

Effective tax rate

 

37.5

%

37.5

%

38.5

%
   
 
 
 

        Deferred tax assets consist of the following components:

 
  2002
  2001
 
  (In thousands)

Differences in capitalization and depreciation and amortization of reacquired franchises and equipment   $ 9,137   $ 9,298
Differences in capitalization and depreciation and application of cash receipts and disbursements of direct financing leases and capital lease obligations     15,817     13,922
Other     510     3,670
   
 
    $ 25,464   $ 26,890
   
 

        Deferred tax liabilities consist of the following components:

 
  2002
  2001
 
  (In thousands)

Differences between financial and tax accounting in the recognition of franchise and equipment sales   $ 84,597   $ 72,615
Differences between book and tax basis of property and equipment     6,821     10,129
Deferred dividends     5,022     4,359
   
 
    $ 96,440   $ 87,103
   
 

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, 2002, 2001 and 2000 were $1,998,000, $1,850,000 and $1,675,000, respectively. The contribution for the year ended December 31, 2002 will be made in shares of IHOP Corp. common stock.

43



        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 401(k) plan. Employees whose terms of service are covered by a collective bargaining agreement are not eligible. Employees may contribute up to 15 percent of their pre-tax covered compensation subject to limitations of the tax code. IHOP Corp. common stock is not an investment option for employees in the 401(k) plan. The administrative cost of the 401(k) plan is borne by IHOP. The Company does not contribute towards the plan.

10.    Related Party Transactions

        On December 26, 2001, the Company loaned $1.2 million to its President and Chief Executive Officer. A portion of the loan ($600,000) is a personal loan. Pursuant to the employment agreement signed by the President and Chief Executive Officer in December 2001, this loan is interest free and forgiven in annual increments of $100,000. As of December 31, 2002 and 2001 the outstanding balance of this loan was $500,000 and $600,000, respectively. The other portion of the loan ($600,000) was an interest free bridge loan to be used as a portion of the down payment on a new home. In early 2002, $490,000 of this loan was repaid and $110,000, which represents the decline in value of her Kansas City, MO residence, was forgiven by the compensation committee of the Board of Directors. As of December 31, 2002 and 2001, the remaining balance of this loan was zero and $600,000, respectively.

11.    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 our financial condition, results of operations, or cash flows.

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 and Canada. 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

44



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

  Corporate
And Other

  Adjustments
& Eliminations

  Consolidated
Total

 
  (In thousands)

  Year Ended December 31, 2002                                    
Revenues from external customers   $ 238,422   $ 74,433   $ 53,019   $   $   $ 365,874
Intercompany real estate charges (revenues)     6,043     1,547         (7,590 )      
Capital lease real estate charges     16,591     2,093             (18,684 )  
Field, corporate and administrative                 48,253         48,253
Depreciation & amortization     6,659     4,490         4,818         15,967
Interest expense                 2,891     18,684     21,575
Income (loss) before income taxes     99,541     (5,036 )   21,993     (51,141 )       65,357
Additions to long lived assets     81,206     17,772     641     42,762         142,381
Total assets     581,492     41,860     17,461     178,987         819,800
 
Year Ended December 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 208,630   $ 68,810   $ 46,996   $   $   $ 324,436
Intercompany real estate charges (revenues)     6,083     901         (6,984 )      
Capital lease real estate charges     16,311     2,437             (18,748 )  
Field, corporate and administrative                 40,621         40,621
Depreciation & amortization     5,703     4,157         4,958         14,818
Interest expense                 2,359     18,748     21,107
Income (loss) before income taxes     91,630     (4,447 )   19,271     (41,993 )       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 )      
Capital lease real estate charges     16,103     2,594             (18,697 )  
Field, corporate and administrative                 36,481         36,481
Depreciation & amortization     4,228     4,221         5,113         13,562
Interest expense                 3,054     18,697     21,751
Income (loss) before income taxes     83,503     (4,450 )   18,811     (40,404 )       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

        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, which totals $20,677,000, $18,165,000 and $15,573,000 for the years ended December 31, 2002, 2001 and 2000, 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 Eliminations column. These adjustments include interest income from direct financing leases of restaurant buildings and total $17,588,000, $18,257,000 and $18,779,000 for the years ended

45



December 31, 2002, 2001 and 2000, respectively. All of IHOP's owned land and restaurant buildings are included in the total assets of the Consolidated Adjustments and Eliminations column 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)

2002                              
1st Quarter   $ 81,540   $ 31,273   $ 9,756   $ .47   $ .46
2nd Quarter     84,859     32,512     9,300     .44     .44
3rd Quarter     92,083     33,810     9,838     .47     .46
4th Quarter     107,392     37,590     11,954     .57     .56

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

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

46



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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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 audits 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 14, 2003

47



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 2003 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 2003 Proxy Statement is incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

        Information appearing under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance under Equity Compensation Plans" contained in the 2003 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 2003 Proxy Statement is incorporated herein by reference.


Item 14. Controls and Procedures.

        (a)  Evaluation of Disclosure Controls and Procedures. The President and Chief Executive Officer, and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the President and Chief Executive Officer of the Company, and the Chief Financial Officer of the Company, as appropriate to ensure timely decisions regarding required disclosure.

        (b)  Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

48




PART IV


Item 15. 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.

(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. (originally filed as Exhibit 3.1 to the 1997 Form 10-K) is filed herewith.

3.2

 

Bylaws of IHOP Corp. (originally filed as Exhibit 3.2 to the 1997 Form 10-K) is filed herewith.

3.3

 

Amendment to the bylaws of IHOP Corp. dated November 14, 2000 (Exhibit 3.3 to IHOP Corp.'s Form 10-Q for the quarterly period ended March 31, 2001) is incorporated herein 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. (previously filed as Exhibit 4.1 to the 1997 Form 10-K) is filed herewith.

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. (originally filed as Exhibit 4.8 to the 1996 Form 10-K) is filed herewith.

4.3

 

First Amendment to Senior Note Purchase Agreement, dated as of October 28, 2002, among IHOP Inc., IHOP Corp., and Jackson National Life Insurance Company and other purchasers is filed herewith.

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. (Exhibit 4.4 to the 2001 Form 10-K) is hereby incorporated by reference.

 

 

 

49



4.5

 

First Amendment to Credit Agreement, dated as of May 31, 2002, among International House of Pancakes, Inc., a Delaware Corporation and Wells Fargo Bank, National Association (Exhibit 4.7 to IHOP Corp.'s Form 10-Q for the quarterly period ended June 30, 2002) is hereby incorporated by reference.

4.6

 

Loan Agreement dated as of April 27, 2001, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.5 to the 2001 Form 10-K) is hereby incorporated by reference.

4.7

 

First Addendum to loan agreement, dated as of March 13, 2002, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.6 to IHOP Corp.'s Form 10-Q for the quarterly period ended March 31, 2002) is hereby incorporated by reference.

4.8

 

Second Addendum to loan agreement, dated as of October 28, 2002, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. is filed herewith.

4.9

 

Note Purchase Agreement, dated as of October 28, 2002, among IHOP Corp., International House of Pancakes, Inc. and AIG Annuity Insurance Company and other purchasers. (Exhibit 4.1 to IHOP Corp.'s Form 10-Q for the quarterly period ended September 30, 2002) is incorporated herein by reference.

4.10

 

Amended and restated Intercreditor Agreement, dated as of October 28, 2002, among Wells Fargo Bank, N.A., MONY Life Insurance Company and other noteholders, is filed herewith.

*10.1

 

Employment Agreement between IHOP Corp. and Gregg Nettleton dated July 15, 2002 is filed herewith.

*10.2

 

Employment Agreement between IHOP Corp. and Anna G. Ulvan. (originally filed as Exhibit 10.12 to the 1996 Form 10-K) is filed herewith.

*10.3

 

Employment Agreement between IHOP Corp. and Mark D. Weisberger. (originally filed as Exhibit 10.13 to the 1996 Form 10-K) is filed herewith.

*10.4

 

Employment Agreement between IHOP Corp. and Richard C. Celio. (originally filed as Exhibit 10 to IHOP Corp.'s Form 10-Q for the quarterly period ended March 31, 1997) is filed herewith.

*10.5

 

Agreement between IHOP Corp. and Tom Conforti dated March 25, 2003 is filed herewith.

*10.6

 

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, 2001) is hereby incorporated by reference.

*10.7

 

Employment Agreement between IHOP Corp. and Julia A. Stewart. (Exhibit 10.10 to the 2001 Form 10-K) is hereby incorporated by reference.

10.8

 

Area Franchise Agreement, effective as of May 5, 1988, by and between IHOP, Inc. and FMS Management Systems, Inc. (originally filed as Exhibit 10.14 to the 1997 Form 10-K) is filed herewith.

*10.9

 

International House of Pancakes Employee Stock Ownership Plan as Amended and Restated as of January 1, 2001 ("the ESOP") (originally filed as Exhibit 10.12 to the 2001 Form 10-K) is hereby incorporated by reference.

*10.10

 

Third Amendment to the International House of Pancakes Employee Stock Ownership Plan, dated as of December 30, 2002 is filed herewith.

 

 

 

50



*10.11

 

IHOP Corp. 1994 Stock Option Plan for Non-Employee Directors as Amended and Restated February 23, 2000. (Annex "A" to the IHOP Corp. Proxy Statement for Annual Meeting of Stockholders held on Tuesday, May 11, 2000) is hereby incorporated by reference.

*10.12

 

IHOP Corp. 2002 Stock Incentive Plan (the "2002 Plan") as Amended and Restated on March 1, 2002. (Appendix "B" to the IHOP Corp. Proxy Statement for the Annual Meeting of Stockholders held on May 15, 2002) is hereby incorporated by reference.

*10.13

 

International House of Pancakes 401(k) Plan. (Exhibit 10.15 to the 2001 Form 10-K) is hereby incorporated by reference.

*10.14

 

IHOP Corp. Executive Incentive Plan effective January 1, 2002 and supersedes all previously implemented plans (Exhibit 10.17 to IHOP Corp.'s Form 10-Q for the quarterly period ended March 31, 2002) is hereby incorporated by reference.

11.0

 

Statement Regarding Computation of Per Share Earnings.

21.0

 

Subsidiaries of IHOP Corp. is filed herewith.

23.0

 

Consent of PricewaterhouseCoopers LLP.

99.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)
Reports on Form 8-K:

        None.

51



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 28th day of March, 2002.

    IHOP CORP.

 

 

By:

/s/  
JULIA A. STEWART      
Julia A. Stewart
President 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 28th day of March, 2002.

Name
  Title

 

 

 
/s/  JULIA A. STEWART      
Julia A. Stewart
  President, Chief Executive Officer and Director

/s/  
THOMAS CONFORTI      
Thomas Conforti

 

Chief Financial Officer (Principal Financial Officer)

/s/  
A. ALLEN ARROYO      
A. Allen Arroyo

 

Controller and Assistant Treasurer (Principal Accounting Officer)

/s/  
LARRY ALAN KAY      
Larry Alan Kay

 

Chairman of the Board

/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/  
CAROLINE W. NAHAS      
Caroline W. Nahas

 

Director

/s/  
PATRICK W. ROSE      
Patrick W. Rose

 

Director

52



CERTIFICATIONS

I, Julia A. Stewart, President and Chief Executive Officer of IHOP Corp., certify that:

1.
I have reviewed this Annual Report on Form 10-K of IHOP Corp.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.



 

 
Date: March 28, 2003   /s/  JULIA A. STEWART      
Julia A. Stewart
President and Chief Executive Officer

53



CERTIFICATIONS

I, Thomas Conforti, Vice President and Chief Financial Officer of IHOP Corp., certify that:

1.
I have reviewed this Annual Report on Form 10-K of IHOP Corp.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.



 

 
Date: March 28, 2003   /s/  THOMAS CONFORTI      
Thomas Conforti
Chief Financial Officer

54




QuickLinks

PART I
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data.
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
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions.
Item 14. Controls and Procedures.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
SIGNATURES
CERTIFICATIONS
CERTIFICATIONS

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Exhibit 3.1

RESTATED CERTIFICATE OF INCORPORATION

OF

IHOP CORP

        IHOP CORP., a Delaware corporation organized under that name on May 7, 1976, hereby amends and restates its Certificate of Incorporation to read in its entirety as set forth below:

        FIRST: The name of the Corporation is IHOP Corp. (hereinafter the "Corporation").

        SECOND: The address of the registered office of the Corporation in the State of Delaware is 32 Loockerman Square, Suite L-1OO, in the City of Dover, County of Kent. The name of its registered agent at that address is The Prentice-Hall Corporation System, Inc.

        THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware code (the "DGCL").

        FOURTH: The total number of shares which the Corporation shall have authority to issue is 50,000,000 shares, consisting of (a) 40,000,000 shares of common stock, par value $.01 per share (The "Common Stock"), and (b) 10,000,000 shares of preferred stock, par value $1.00 per share (the "Preferred Stock").

        The Board of Directors of the Corporation (the "Board of Directors") is expressly authorized, at any time and from time to time, to fix, by resolution or resolutions, the following provisions for shares of any class or classes of Preferred Stock of the Corporation or any series of any class of Preferred Stock:

        (a)  the designation of such class or series, the number of shares to constitute such class or series and the stated value thereof if different from the par value thereof;

        (b)  whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may (i) be general or limited, (ii) subject to applicable law or regulation, including without limitation the rules of any securities exchange on which securities of any class of the Corporation may be listed, permit more than one vote per share, or (iii) vary among stockholders of the same class based upon such factors as the Board of Directors may determine including, without limitation, the size of a stockholder's position and/or the length of time with respect to which such position has been held:

        (c)  the dividends, if any, payable on such class or series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other series of the same class;

        (d)  whether the shares of such class or series shall be subject to redemption by the Corporation, and, if so, the times, prices and other conditions of such redemption;

        (e)  the amount or amounts payable upon shares of such series upon, and the rights of the holders of such class or series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation;

        (f)    whether the shares of such class or series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such class or series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof;

        (g)  whether the shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of the same class or any other securities (including



Common Stock) and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same and any other terms and conditions of conversion or exchange;

        (h)  the limitations and restrictions, if any, to be effective while any shares of such class or series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of the same class;

        (i)    the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such class or series or of any other series of the same class or of any other class;

        (j)    the ranking (be it pari passu, junior or senior) of each class or series vis-a-vis any other class or series of any class of Preferred Stock as to the payment of dividends, the distribution of assets and all other matters; and

        (k)  any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof, insofar as they are not inconsistent with the provisions of this Restated Certificate of Incorporation, to the full extent permitted in accordance with the laws of the State of Delaware.

        The powers, preferences and relative, participating, optional and other special rights of each class or series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.

        FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:

        (a)  The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

        (b)  The directors shall have concurrent power with the stockholders to make, alter, amend, change, add to or repeal the By-Laws of the Corporation.

        (c)  The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three nor more than 13 directors, the exact number of directors to be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors then in office. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire board of directors. Immediately following the adoption by the Corporation of this Restated Certificate of Incorporation, a majority of the Board of Directors shall elect Class I directors for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each annual meeting of stockholders beginning in 1992, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, provided that a quorum if present, and any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of

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directors in such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor.

        Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation, if any, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms.

        (d)  Directors of the Corporation may be removed by stockholders of the Corporation only for cause.

        (e)  No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article FIFTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.

        (f)    In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the DGCL, this Restated Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted.

        SIXTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of the DGCL or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of the DGCL, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing seventy-five percent (75%) in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation.

        SEVENTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, if there be one, the President or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time

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any such resolution is presented to the Board of Directors for adoption). Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting.

        EIGHTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation or in the By-laws of the Corporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation, provided, however, that subject to the powers and rights provided for herein with respect to Preferred Stock issued by the Corporation, if any, but notwithstanding anything else contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least eighty percent (80%) of the combined voting power of all of the then outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, rescind or repeal (i) Article FOURTH, Article FIFTH, Article SIXTH, Article SEVENTH or this Article EIGHTH of this Restated Certificate of Incorporation or to adopt any provision inconsistent therewith or (ii) Section 3 or 8 of Article II, Section 1, 2, 3 or 4 of Article III, Article VIII or Article IX of the By-Laws of the Corporation or to adopt any provision inconsistent therewith.

        The foregoing Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 245 of the DGCL. The foregoing Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation.

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        IN WITNESS WHEREOF, IHOP Corp. has caused this Restated Certificate of Incorporation to be duly executed in its corporate name this 30th day of July, 1992.

    IHOP CORP.

 

 

 

 

 
    By: /s/  RICHARD K. HERZER      
      Name: Richard K. Herzer
      Title: President

 

 

 

 

 
    ATTEST:

 

 

 

 

 
    By: /s/  LARRY ALAN KAY      
      Name: Larry Alan Kay
      Title: Secretary

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RESTATED CERTIFICATE OF INCORPORATION OF IHOP CORP

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Exhibit 3.2

BYLAWS

OF

IHOP CORP.

(hereinafter called the "Corporation")


ARTICLE I

OFFICES

        Section 1.    Registered Office.    The registered office of the Corporation shall be in the City of Dover, County of Kent, State of Delaware.

        Section 2.    Other Offices.    The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine.


ARTICLE II

MEETINGS OF STOCKHOLDERS

        Section 1.    Place of Meetings.    Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof.

        Section 2.    Annual Meetings.    The Annual Meetings of Stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect, in accordance with Section 1 and Section 2 of Article III of these Bylaws, by a plurality vote those Directors belonging to the class or classes of directors to be elected at such meeting, and transact such other business as may properly be brought before the meeting. Written notice of the Annual Meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.

        Section 3.    Special Meetings.    Unless otherwise prescribed by law or by the Restated Certificate of Incorporation, Special Meetings of Stockholders may be called only by the Chairman of the Board, if there be one, the President or the Board of Directors pursuant to a resolution adopted by a majority of the entire board of directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). Written notice of a Special Meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. Business transacted at all special meetings shall be confined to the purposes stated in the call.

        Section 4.    Quorum.    Except as otherwise provided by law or by the Restated Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned



meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting.

        Section 5.    Voting.    Unless otherwise required by law, the Restated Certificate of Incorporation or these By-Laws, (i) any question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat and (ii) each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot.

        Section 6.    List of Stockholders Entitled to Vote.    The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present.

        Section 7.    Stock Ledger.    The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 6 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.

        Section 8.    Notice of Business.    No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 8 of this Article II and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 8 of this Article II.

        In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

        To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs.

        To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the

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business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting.

        No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 8 of this Article II, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 8 of this Article II shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.


ARTICLE III

DIRECTORS

        Section 1.    Number and Election of Directors.    The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three nor more than 13 directors, the exact number of directors to be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors then in office. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Immediately following the adoption by the Corporation of the Restated Certificate of Incorporation, a majority of the Board of Directors shall elect Class I directors for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each annual meeting of stockholders beginning in 1992, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.

        Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation, if any, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 1 of this Article III unless expressly provided by such terms.

        Section 2.    Nomination of Directors.    Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Restated Certificate of Incorporation of the Corporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the

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purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2 of this Article III and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 2 of this Article III.

        In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

        To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs.

        To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

        No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2 of this Article III. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

        Section 3.    Removal of Directors.    Directors of the Corporation may be removed by stockholders of the Corporation only for cause.

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        Section 4.    Vacancies.    Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors in such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor.

        Section 5.    Duties and Powers.    The business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Restated Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders.

        Section 6.    Meetings.    The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, the President or any two directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone, electronic facsimile or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.

        Section 7.    Quorum.    Except as may be otherwise specifically provided by law, the Restated Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

        Section 8.    Actions of Board.    Unless otherwise provided by the Restated Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee.

        Section 9.    Meetings by Means of Conference Telephone.    Unless otherwise provided by the Restated Certificate of Incorporation or these By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 of this Article III shall constitute presence in person at such meeting.

        Section 10.    Committees.    The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of

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the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required.

        Section 11.    Compensation.    The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

        Section 12.    Interested Directors.    No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.


ARTICLE IV

OFFICERS

        Section 1.    General.    The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. The President or any Vice-President may appoint Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Restated Certificate of Incorporation or these By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation.

        Section 2.    Election.    The Board of Directors at its first meeting held after each Annual Meeting of Stockholders shall elect the officers of the Corporation, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors.

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        Section 3.    Voting Securities Owned by the Corporation.    Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.

        Section 4.    Chairman of the Board of Directors.    The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. He shall be the Chief Executive Officer of the Corporation, and except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors.

        Section 5.    President.    The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. If there be no Chairman of the Board of Directors, the President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors.

        Section 6.    Vice Presidents.    At the request of the President or in his absence or in the event of his inability or refusal to act (and if there be no Chairman of the Board of Directors), the Executive Vice President or the Executive Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Executive Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Executive Vice President, the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors, no Executive Vice President and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.

        Section 7.    Secretary.    The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The

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Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.

        Section 8.    Treasurer.    The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.

        Section 9.    Assistant Secretaries.    Except as may be otherwise provided in these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.

        Section 10.    Assistant Treasurers.    Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.

        Section 11.    Other Officers.    Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

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ARTICLE V

STOCK

        Section 1.    Form of Certificates.    Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation.

        Section 2.    Signatures.    Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

        Section 3.    Lost Certificates.    The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

        Section 4.    Transfers.    Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued.

        Section 5.    Record Date.    In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

        Section 6.    Beneficial Owners.    The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.


ARTICLE VI

NOTICES

        Section 1.    Notices.    Whenever written notice is required by law, the Restated Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder,

9


such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by electronic facsimile, telegram, telex or cable.

        Section 2.    Waivers of Notice.    Whenever any notice is required by law, the Restated Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.


ARTICLE VII

GENERAL PROVISIONS

        Section 1.    Dividends.    Dividends upon the capital stock of the Corporation, subject to the provisions of the Restated Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.

        Section 2.    Disbursements.    All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

        Section 3.    Fiscal Year.    The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

        Section 4.    Corporate Seal.    The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.


ARTICLE VIII

INDEMNIFICATION

        Section 1.    Power to Indemnify in Actions, Suits or Proceedings other Than Those by or in the Right of the Corporation.    Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

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        Section 2.    Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation.    Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.

        Section 3.    Authorization of Indemnification.    Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case.

        Section 4.    Good Faith Defined.    For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 of this Article VIII shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 of this Article VIII shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be.

        Section 5.    Indemnification by a Court.    Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the

11



applicable standards of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 of this Article VIII shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

        Section 6.    Expenses Payable in Advance.    Expenses incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VIII.

        Section 7.    Nonexclusivity of Indemnification and Advancement of Expenses.    The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification or advancement of expenses of any person who is not specified in Section 1 or Section 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify or advance expenses under the provisions of the General Corporation Law of the State of Delaware, or otherwise.

        Section 8.    Insurance.    The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VIII.

        Section 9.    Certain Definitions.    For purposes of this Article VIII, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors and officers, so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director or officer of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be

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deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VIII.

        Section 10.    Survival of Indemnification and Advancement of Expenses.    The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person.

        Section 11.    Limitation on Indemnification.    Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 of this Article VIII), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

        Section 12.    Indemnification of Employees and Agents.    The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.


ARTICLE IX

AMENDMENTS

        Section 1.    Except as otherwise provided in the Restated Certificate of Incorporation, these By-Laws may be altered, amended or repealed, in whole or in part, or new By-Laws may be adopted by the stockholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-Laws be contained in the notice of such meeting of stockholders or Board of Directors, as the case may be. Except as otherwise provided in the Restated Certificate of Incorporation, all such amendments must be approved by either the holders of at least eighty percent (80%) of the combined voting power of all of the then outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class, or by a majority of the entire Board of Directors then in office.

        Section 2.    Entire Board of Directors.    As used in this Article IX and in these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies.

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QuickLinks

BYLAWS OF IHOP CORP. (hereinafter called the "Corporation")
ARTICLE I OFFICES
ARTICLE II MEETINGS OF STOCKHOLDERS
ARTICLE III DIRECTORS
ARTICLE IV OFFICERS
ARTICLE V STOCK
ARTICLE VI NOTICES
ARTICLE VII GENERAL PROVISIONS
ARTICLE VIII INDEMNIFICATION
ARTICLE IX AMENDMENTS

EXHIBIT 4.1

 

IHOP CORP.

 

INTERNATIONAL HOUSE OF PANCAKES, INC.

 

SENIOR NOTE PURCHASE AGREEMENT

 

$32,000,000 7.79% SENIOR NOTES DUE 2002

 

Dated as of November 19, 1992

 



 

TABLE OF CONTENTS

(Not Part of Agreement)

 

Section

 

Heading

1.

 

Authorization and Issue of Notes

 

 

 

 

2.

 

Purchase and Sale of Notes

 

 

 

 

3.

 

Payments of Notes

 

 

 

 

 

 

3.1.

Mandatory Payments of Principal

 

 

3.2.

Optional Prepayments of the Notes

 

 

3.3.

Notice of Prepayment of the Notes

 

 

3.4.

Allocation of Payments

 

 

3.5.

Surrender of Notes; Notation Thereon

 

 

3.6.

Purchase of Notes

 

 

 

 

4.

 

Representations and Warranties

 

 

 

 

 

 

4.1.

Corporate Existence and Power

 

 

4.2.

Corporate Authority

 

 

4.3.

Binding Effect

 

 

4.4.

Capital Stock

 

 

4.5.

Business Operations and Other Information; Financial Condition

 

 

4.6.

Subsidiaries

 

 

4.7.

Litigation; No Violation of Governmental Orders or Laws

 

 

4.8.

Outstanding Debt

 

 

4.9.

Consents, Etc

 

 

4.10.

Title to Properties

 

 

4.11.

Taxes

 

 

4.12.

No Conflicts with Agreements, Etc

 

 

4.13.

Disclosure

 

 

4.14.

Offering of Securities

 

 

4.15.

Broker’s or Finder’s Commissions

 

 

4.16.

Labor Matters

 

 

4.17.

Environmental Matters

 

 

4.18.

Margin Regulations

 

 

4.19.

Compliance with ERISA

 

 

4.20.

Material Contracts

 

 

4.21.

Insurance

 

 

4.22.

Status Under Certain Laws

 

 

4.23.

Legality

 

 

4.24.

Possession of Franchises, Licenses, Etc

 

i



 

Section

 

Heading

 

 

4.25.

Franchises

 

 

4.26.

Use of Proceeds

 

 

4.27.

Patents and Tradernarks

 

 

4.28.

Compliance with Laws

 

 

4.29.

Franchisees

 

 

4.30.

Other Agreements

 

 

4.31.

Solvency

 

 

4.32.

Foreign Assets Control Regulations

 

 

 

 

5.

 

Representations of Purchasers

 

 

 

 

 

 

5.1.

Authority

 

 

5.2.

Investment Intent

 

 

5.3.

Source of Funds

 

 

5.4.

Investor Status

 

 

 

 

6.

 

Conditions to Obligation of Purchasers

 

 

 

 

 

 

6.1.

Proceedings Satisfactory

 

 

6.2.

Opinion of Purchasers’ Special Counsel

 

 

6.3.

Opinion of Counsel to the Borrower and Holdings

 

 

6.4.

Representations and Warranties True, Etc.; Certificates

 

 

6.5.

Absence of Material Adverse Change, Etc.

 

 

6.6.

Consents and Approvals

 

 

6.7.

Absence of Litigation, Orders, Etc

 

 

6.8.

Other Purchasers

 

 

6.9.

Legal Investment

 

 

6.10.

Rating

 

 

6.11.

Fees

 

 

6.12.

PPN Number

 

 

6.13.

Subsidiary Guarantee

 

 

6.14.

Corporate Status and Documentation

 

 

6.15.

Amended Bank Agreement

 

 

6.16.

Use of Proceeds

 

 

 

 

7.

 

Condition to Obligations of Borrower

 

 

 

 

 

 

7.1.

Representations and Warranties True, Etc

 

 

7.2.

Absence of Litigation, Orders, Etc

 

 

7.3.

Other Purchasers

 

 

 

 

8.

 

Financial Statements and Information

 

 

 

 

9.

 

Inspection of Properties and Books

 

ii



 

Section

 

Heading

10.

 

Affirmative Covenants

 

 

10.1.

Payment of Principal, Prepayment Charge and Interest; Etc

 

 

10.2.

Payment of Taxes and Claims

 

 

10.3.

Maintenance of Properties and Corporate Existence

 

 

10.4.

Insurance

 

 

 

 

11.

 

Negative and Maintenance Covenants

 

 

 

 

 

 

11.1.

Restrictions on Liens

 

 

11.2.

Limitation on Funded Debt

 

 

11.3.

Consolidated Tangible Net worth

 

 

11.4.

Limitation on Debt of Subsidiaries

 

 

11.5.

Restricted Payments; Restricted Investments

 

 

11.6.

Sale of Assets

 

 

11.7.

Consolidation or Merger

 

 

11.8

Maintenance of Fixed Charge Coverage

 

 

11.9.

Transactions with Affiliates

 

 

11.10

Acquisition of Margin Securities

 

 

11.11

Conduct of Business

 

 

 

 

12.

 

Definitions

 

 

 

 

13.

 

Events of Default

 

 

 

 

 

 

13.1.

Events of Default; Remedies

 

 

13.2.

Acceleration of Notes

 

 

13.3.

Rescission of Acceleration

 

 

13.4.

Suits for Enforcement

 

 

13.5.

Remedies Cumulative

 

 

13.6.

Remedies Not Waived

 

 

 

 

14.

 

Registration, Exchange, and Transfer of Notes

 

 

 

 

15.

 

Lost, Stolen, Damaged and Destroyed Notes

 

 

 

 

16.

 

Miscellaneous

 

 

 

 

 

 

16.1.

Home Office Payment

 

 

16.2.

Amendment and Waiver

 

 

16.3.

Expenses

 

 

16.4.

Survival of Representations and Warranties

 

iii



 

Section

 

Heading

 

 

16.5.

Successors and Assigns

 

 

16.6.

Notices

 

 

16.7.

Governing Law

 

 

16.8.

Submission to Jurisdiction; Waiver of Service and Venue

 

 

16.9.

Indemnification

 

 

16.10.

Integration and Severability

 

 

16.11.

Payments Due on Days not Business Days

 

 

16.12.

Further Assurances

 

 

16.13.

Counterparts

 

 

16.14.

Guarantee of Holdings

 

 

16.15.

Waiver of Right to Trial by Jury

 

 

 

 

Signatures

 

 

 

 

iv



 

Schedules

 

 

 

Schedule I

Purchaser Information and Payment Instructions

 

 

 

Schedule 4.5

Interim Changes

 

 

 

Schedule 4.6

Subsidiaries

 

 

 

Schedule 4.7

Litigation

 

 

 

Schedule 4.8

Existing Current and Funded Debt and Liens

 

 

 

Schedule 4.9

Consents and Approvals

 

 

 

Schedule 4.11

Taxes

 

 

 

Schedule 4.16

Labor Matters

 

 

 

Schedule 4.17

Environmental Matters

 

 

 

Schedule 4.19

Compliance with ERISA

 

 

 

Schedule 4.25

Non-Conforming Franchising Arrangements

 

 

 

Schedule 6.16

Surviving Obligations

 

 

 

Schedule 12

Existing Investments

 

 

 

Exhibits

 

 

 

Exhibit A

Form of Note

 

 

 

Exhibit B

Form of Opinion of Counsel for the Purchaser

 

 

 

Exhibit C

Form of Opinion of Counsel for the Borrower

 

 

 

Exhibit D

Form of Subsidiary Guarantee

 

 

 

Exhibit E

Form of IHOP Realty Lease

 

 

 

Exhibit F–1

Form of Quarterly Compliance Statement

 

 

 

Exhibit F–2

Form of Compliance Certificate

 

v



 

IHOP CORP.

 

INTERNATIONAL HOUSE OF PANCAKES, INC.

 

SENIOR NOTE PURCHASE AGREEMENT

 

November 19, 1992

 

To The Purchaser Whose Name

Appears in the Acceptance

Form at the End Hereof

 

Ladies and Gentlemen:

 

The undersigned, International House of Pancakes, Inc., a Delaware corporation (the “Borrower”), and IHOP Corp., a Delaware corporation of which the Borrower is a wholly owned Subsidiary (“Holdings”), hereby agree with you as follows:

 

Section 1. Authorization and Issue of Notes. The Borrower has duly authorized the issue, sale and delivery of its 7.79% Senior Notes Due 2002 in the aggregate principal amount of $32,000,000, to be dated the date of issue thereof, to bear interest on the outstanding principal thereof (computed on the basis of a 360-day year of twelve 30-day months) from such date, payable in arrears in cash semi-annually on the 19th day of May and November in each year (commencing May 19, 1993) and at maturity, at the rate of 7.79% per annum, and to bear interest at a rate equal to the greater of 9.79% or the rate of interest announced publicly from time to time by Citibank, N.A. in New York, New York as its “prime rate” on any overdue principal and prepayment charge and, to the extent permitted by applicable law, on any overdue interest (determined as of the date such principal, payment charge or interest first becomes overdue), until the same shall be paid in full, to mature on November 19, 2002, and to be substantially in the form of Exhibit A hereto attached (all such Notes originally issued pursuant to this Agreement or the Other Agreements, or delivered in substitution or exchange for any thereof, being collectively called the “Notes” and individually a “Note”).

 

You, together with the other purchasers named in Schedule I to this Agreement, are herein sometimes referred to collectively as the “Purchasers” and individually as a “Purchaser”.

 



 

Section 2. Purchase and Sale of Notes. Subject to the terms and conditions herein set forth, the Borrower hereby agrees to sell to you and you agree to purchase from the Borrower, Notes in the respective aggregate principal amounts set forth opposite your name in Schedule I hereto, at a purchase price of 100% of the principal amount thereof.

 

The purchase and delivery of the Notes to be purchased by you shall take place at the offices of Sonnenschein Nath & Rosenthal, 900 Third Avenue, New York, New York 10022 at 10:00 a.m., New York time on November 19, 1992 (or such other time and place as the parties shall agree provided however, that in no event shall funding be provided after 3:00 p.m., New York time) (herein called the “Closing Date”). On the Closing Date, the Borrower will deliver to you Notes registered in your name or in the name of your nominee, each such Note to be duly executed and dated the Closing Date, each to be in the respective aggregate principal amounts to be purchased by you as specified above, in such denominations (multiples of $1,000) as you may specify by timely notice to the Borrower (or, in the absence of such notice, one Note registered in your name in a principal amount equal to the aggregate principal amount of Notes to be purchased by you), against your delivery to the Borrower of immediately available funds in the amount of the aggregate purchase price therefor.

 

Section 3. Payments of Notes.

 

3.1. Mandatory Payments of Principal. The principal amount of the Notes shall be prepaid by the Borrower in installments, payable on each of the dates set forth below in the respective aggregate amounts set forth opposite such dates:

 

Payment Date

 

Principal Amount

 

November 19, 1996

 

$

4,571,428.00

 

November 19, 1997

 

4,571,428.00

 

November 19, 1998

 

4,571,428.00

 

November 19, 1999

 

4,571,428.00

 

November 19, 2000

 

4,571,428.00

 

November 19, 2001

 

4,571,428.00

;

 

provided, however, that if Notes aggregating less than $32,000,000 in principal amount are issued and sold pursuant to this Agreement and the Other Agreements, each of the prepayment amounts set forth above shall be reduced to an amount which is equal to the product achieved by multiplying each amount set forth above by a fraction, the numerator of which shall be the aggregate principal amount of all Notes issued and sold pursuant to this Agreement and the Other Agreements and the denominator of which shall be $32,000,000.

 

2



 

The entire remaining principal amount of the Notes shall become due and payable on November 19, 2002. Each payment of Notes made pursuant to this Section 3.1 shall be allocated as provided in Section 3.4.

 

3.2. Optional Prepayments of the Notes. The Borrower, at its option, upon notice given as provided in Section 3.3, may, on any Interest Payment Date, prepay all or any part of the principal amount of outstanding Notes (in the minimum amount of $100,000 and additional increments of integral multiples of $100,000), at a price equal to the sum of (i) the greater of the principal amount of the Notes being so prepaid or the Present Value Amount of the Notes being so prepaid, plus (ii) all accrued but unpaid interest on the outstanding principal amount of the Notes being prepaid through the date of such prepayment.

 

Each prepayment made pursuant to this Section 3.2 shall be allocated as provided in Section 3.4. All principal amounts prepaid pursuant to this Section 3.2 shall be applied to reduce the amounts of the mandatory payments of principal thereafter due pursuant to Section 3.1 in the inverse order of maturity of those mandatory payments.

 

3.3. Notice of Prepayment of the Notes. The Borrower shall call Notes for prepayment pursuant to Section 3.2 by giving written notice thereof to each holder of Notes, which notice shall be given not less than 30 nor more than 60 days prior to the date fixed for such prepayment in such notice and shall specify the principal amount so to be prepaid, the accrued interest applicable to such prepayment and the date fixed for such prepayment. Notice of prepayment having been so given, the aggregate amount to be paid as specified in such notice (together with the prepayment charge, if any) shall become due and payable on the specified prepayment date. At least three Business Days prior to the date of any such prepayment, the Borrower shall furnish to each holder of Notes, via telecopy (with delivery of the original by overnight courier on the next Business Day), an Officer’s Certificate of the Borrower setting forth computations in reasonable detail showing an estimate of the prepayment charge, if any, required to be paid in connection with such prepayment, and the manner of calculation of the prepayment charge and attaching a copy of the source of market data by reference to which the Treasury Yield was determined in connection with such computations. No later than noon eastern time one Business Day prior to the date of any such prepayment, the Borrower shall furnish to each holder of Notes, via telecopy (with delivery of the original by overnight courier on the next Business Day), a certificate of an Appropriate Officer of the Borrower setting forth computations in reasonable detail showing the manner of

 

3



 

calculation of the actual prepayment charge, if any, required to be paid in connection with such prepayment and attaching a copy of the source of market data by reference to which the Treasury Yield was determined in connection with such computations. Prior to 2:00 p.m. eastern time on the Business Day referred to in the immediately preceeding sentence, the Borrower shall call each Purchaser to confirm receipt of such certificate.

 

3.4. Allocation of Payments. In the event of any payment or prepayment of less than all of the outstanding Notes pursuant to Section 3.1 or Section 3.2, the Borrower shall allocate the principal amount so to be paid or prepaid by it (but only in units of $1,000) and the interest and prepayment charge, if any, among the Notes in proportion, as nearly as may be practicable, to the respective unpaid principal amounts thereof.

 

3.5. Surrender of Notes; Notation Thereon. Subject to the provisions of Section 16.1, the Borrower shall not, as a condition of payment of all or any part of the principal of, prepayment charge (if any) and interest on, any Note, require the holder to present such Note for notation of such payment or require the surrender thereof. Upon receipt of payment in full of the principal of, prepayment charge (if any) and interest on, any Note, such Note shall be deemed to be automatically cancelled, without any further action on the part of the Borrower or the Noteholder. However, each Noteholder shall make reasonable efforts to promptly return all cancelled Notes.

 

3.6. Purchase of Notes. Except as set forth in Sections 3.1, 3.2 or the next following sentence of this Section 3.6, neither the Borrower nor Holdings will, nor will either of them permit any of its Subsidiaries or Affiliates to, acquire directly or indirectly by purchase or prepayment or otherwise any of the outstanding Notes except by way of payment or prepayment in accordance with the provisions of this Agreement. The Borrower may repurchase the Note or Notes of any holder provided that, prior to any such repurchase, the Borrower offers, in a written notice, to repurchase a Pro Rata Portion of each holder’s Notes on the same terms, and, at such time, the Borrower shall have sufficient funds then available to it to repurchase such Notes. Each holder of Notes shall have ten (10) Business Days after receipt of such written notice to accept or reject the Borrower’s offer set forth in such notice. Failure of any holder of Notes to respond to any such notice within ten (10) Business Days after its receipt thereof shall be deemed to be a rejection of the offer therein. In the event that the Borrower has purchased less than the entire outstanding principal balance of the Notes, the amount of the principal balance so purchased shall be

 

4



 

multiplied by a fraction, the numerator of which is 1 and the denominator of which is the number of scheduled principal payments pursuant to Section 3.1 (including the payment scheduled to be made on November 19, 2002) which have not yet been made as of the date of the purchase of the Notes and such product shall be deducted from each of the payments otherwise due following the date of the purchase of the Notes. The remaining payments due after giving effect to this deduction shall be allocated in accordance with Section 3.4.

 

Section 4. Representations and Warranties. The Borrower and Holdings, jointly and severally, represent and warrant to the Purchasers that:

 

4.1. Corporate Existence and Power. Each of the Borrower, Holdings, and each of their respective Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly qualified to do business in each additional jurisdiction where the failure to so qualify would have a Material Adverse Effect. Each of the Borrower, Holdings and each of their respective Subsidiaries has all requisite corporate power to own its Properties and to carry on its business as now being conducted and as proposed to be conducted, and in the case of the Borrower and Holdings to execute, deliver and perform its obligations under this Agreement and the Other Agreements, in the case of the Borrower to execute, issue, sell, deliver and perform its obligations under the Notes, in the case of IHOP Realty to execute, deliver and perform its obligations under the Subsidiary Guarantee, and in the case of each such Person to engage in the respective transactions contemplated by this Agreement and the Other Agreements.

 

4.2. Corporate Authority. The execution, delivery and performance (a) by the Borrower of this Agreement, the Other Agreements and the Notes, (b) by Holdings of this Agreement and the Other Agreements, and (c) by IHOP Realty of the Subsidiary Guarantee, are within the respective corporate powers of such Persons and have been duly authorized by all necessary corporate action on the part of the respective Boards of Directors and stockholders of each of them.

 

4.3. Binding Effect. This Agreement and the Other Agreements are the legal, valid and binding obligations of the Borrower and Holdings, and the Notes when issued and delivered against payment therefor as herein provided will be the legal, valid and binding obligations of the Borrower; and the Subsidiary Guarantee will, when executed and delivered by IHOP Realty on the Closing Date be the legal, valid and binding obligation of IHOP Realty; in each case enforceable against

 

5



 

such respective parties in accordance with their respective terms, except, in each case, as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other laws relative to or affecting the enforcement of creditors’ rights generally in effect from time to time and by general principles of equity.

 

4.4. Capital Stock. (a) On the Closing Date, the authorized capital stock of the Borrower will consist of 1,000 shares of common stock, no par value, and all of the capital stock of the Borrower is validly issued, fully paid and non- assessable and owned, of record and beneficially, free and clear of any Liens, by Holdings. On the Closing Date, the Borrower will not have outstanding any securities convertible into or exchangeable for any of its capital stock, nor will it have outstanding any rights to subscribe for or to purchase, or any options or warrants for the purchase of, or any agreements (contingent or otherwise) providing for the issuance of, or any calls, commitments or claims of any character relating to, any of its capital stock or any securities convertible into or exchangeable for any of its capital stock. The Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of its capital stock, or to any obligation (contingent or otherwise) evidencing the right of the holder thereof to purchase any of its capital stock.

 

(b) On the Closing Date, the authorized capital stock of Holdings will consist of 40,000,000 shares of common stock and 10,000,000 shares of preferred stock. On the Closing Date, Holdings will not have outstanding any securities convertible into or exchangeable for any of its capital stock, nor will it have outstanding any rights to subscribe for or to purchase, or any options or warrants for the purchase of, or any agreements (contingent or otherwise) providing for the issuance of, or any calls, commitments or claims of any character relating to, any of its capital stock or any securities convertible into or exchangeable for any of its capital stock, except for options and other securities issued pursuant to the IHOP Corp. 1991 Stock Incentive Plan. Holdings is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of its capital stock, or to any obligation (contingent or otherwise) evidencing the right of the holder thereof to purchase any of its capital stock.

 

4.5. Business Operations and Other Information; Financial Condition.

 

(a) The Borrower (or Continental Bank N.A., on behalf of the Borrower) has delivered to you (or, in the case of clause (iv) below, made available and delivered to the extent

 

6



 

requested) true and complete copies of (i) the Confidential Private Placement Memorandum dated September 1992 prepared by the Borrower and Continental Bank N.A. in connection with the offering of the Notes to be purchased by you hereunder (together with the Exhibits thereto, the “Confidential Memorandum”), (ii) the audited consolidated balance sheets of Holdings and its Subsidiaries as at December 31 for 1989, 1990 and 1991, and the related audited consolidated statements of operations, shareholders’ equity and cash flows for the fiscal years ended December 31, 1989, 1990 and 1991, together with the notes thereto and the reports thereon of Coopers & Lybrand (the “Audited Financial Statements”), (iii) (A) the unaudited consolidating balance sheets of Holdings and its Subsidiaries as at December 31, 1991 and the related consolidating statements of operations for the fiscal year then ended and (B) the unaudited consolidated balance sheet of Holdings and its Subsidiaries as at June 30, 1992, and the related consolidated statements of operations, shareholders’ equity and cash flows for the fiscal quarter then ended (the “Unaudited Financial Statements”; the Audited Financial Statements and the Unaudited Financial Statements are sometimes hereinafter collectively referred to as the “Financial Statements”), (iv) the Financial Projections of Holdings and its Subsidiaries for 1992 through 1995 (the “Projections”), and (v) the SEC Reports. The Confidential Memorandum and the SEC Reports correctly describe in all material respects the businesses, operations and principal Properties of Holdings, the Borrower and their Subsidiaries. The Financial Statements have been prepared in accordance with GAAP (except as noted thereon) consistently applied throughout the periods involved, and fairly present the consolidated and consolidating financial position of Holdings and its Subsidiaries as at each of the dates and for each of the periods covered thereby, subject to, in the case of the Unaudited Financial Statements, year-end audit adjustments and the notes required by GAAP and, with respect to the consolidating statements, the failure to prepare statements of cash flows and stockholders’ equity and the failure to include notes thereon as required by GAAP. As of the date of each of the balance sheets included in the Financial Statements, neither Holdings, the Borrower nor any of their Subsidiaries had any material Debt or liability, absolute or contingent, liquidated or unliquidated, except Debt and liabilities reflected or reserved against on the Financial Statements or described in the notes thereto. Neither Holdings nor any of its Subsidiaries has made any filing with the SEC on Form 8-K since December 31, 1991. The Projections were prepared by the Borrower on the basis of assumptions which the Borrower reasonably believes are fair and reasonable in light of the historical financial performance of Holdings and its Subsidiaries and of current and reasonably foreseeable business conditions.

 

7



 

(b) Except as contemplated herein, or as disclosed in the Confidential Memorandum or the SEC Reports or on Schedule 4.5 hereto, or reflected in the Financial Statements, since December 31, 1991, neither Holdings, the Borrower nor any of their Subsidiaries has:

 

(1) incurred or assumed any Debt (other than draws of revolving Debt pursuant to the Existing Agreement (as defined in Section 6.15) and the documents pursuant to which the Debt owing to HomeFed (as defined in Section 6.16) was incurred which, when reduced by repayment of such Debt, during such period do not increase the total amount of revolving Debt outstanding under each of such facilities as reflected on the financial statements included in the quarterly report on Form l0-Q as filed by Holdings with the SEC for the quarterly period ended September 30, 1992 (the “September 30, 1992 10-Q”)), obligations or liabilities which are, individually or in the aggregate, material (absolute, accrued, or contingent and whether due or to become due), except current liabilities incurred in the ordinary course of business, except as set forth in Schedule 4.8 attached hereto and except for Capitalized Leases not required to be disclosed on Schedule 4.8;

 

(2) paid any Debt (other than reductions of outstanding revolving Debt made during such period pursuant to the Existing Agreement (as defined in Section 6.15) and the documents pursuant to which the Debt owing to HomeFed (as defined in Section 6.16) was incurred), obligations or liabilities which are, individually or in the aggregate, material, other than current liabilities in the ordinary course of business, or discharged any Liens which are, individually or in the aggregate, material, other than Liens securing current liabilities discharged in the ordinary course of business;

 

(3) declared or paid any dividend or distribution to its shareholders, or purchased or redeemed any of its shares, or incurred or paid any management fee or similar charge, or obligated itself to do so;

 

(4) subjected any of its Property to any Lien other than Permitted Liens;

 

(5) sold, disposed, transferred, licensed or released any of its Property except in the ordinary course of business;

 

(6) suffered any physical damage, destruction, or loss (whether or not covered by insurance) which had or could reasonably be expected to have a Material Adverse Effect;

 

8



 

(7) entered into any material transaction other than in the ordinary course of business;

 

(8) encountered any strike, work stoppage or other adverse collective labor action or any labor union organizing activities;

 

(9) issued or sold any shares or other securities or granted any material options or similar rights with respect thereto, except for the issuance or sale of shares or other securities pursuant to the 1991 IHOP Corp. Stock Incentive Plan;

 

(10) made any change in accounting methods, practices or principles;

 

(11) waived, released, granted or transferred any rights having, individually or in the aggregate, material value, or modified or changed in any material respect any existing franchise, license, lease, contract or other document, other than in the ordinary course of business; or

 

(12) agreed to do any of the foregoing.

 

4.6. Subsidiaries. Holdings has no direct equity interest in any Person other than the Borrower, and no indirect equity interest in any Person other than the Subsidiaries of the Borrower. Set forth on Schedule 4.6 attached hereto is a true and complete list of all Subsidiaries of the Borrower (the “Subsidiaries List”), setting forth as to each such Subsidiary its jurisdiction of incorporation and the percentage of capital stock of each such Subsidiary owned by the Borrower or a Subsidiary of the Borrower. On the Closing Date, (i) except as disclosed in the Financial Statements, the Borrower will have no direct or indirect equity interest in any Person other than the Subsidiaries listed on the Subsidiaries List, the Borrower will have good title to all of the shares it owns of each of its Subsidiaries, free and clear in each case of any Lien, (ii) all such shares of each such Subsidiary will have been duly and validly issued, and will be fully paid and non-assessable and owned of record or beneficially by the Borrower and/or one or more of such Subsidiaries, and (iii) there will be no securities outstanding that are convertible into or exchangeable for any shares of the Borrower’s Subsidiaries, nor will there be outstanding any rights to subscribe for or purchase, or any options or warrants for the purchase of, or any agreements (contingent or otherwise) providing for the issuance of, or any calls, commitments or claims of any character relating to, any shares of the Borrower’s Subsidiaries or any securities convertible into or exchangeable for any such shares.

 

9



 

4.7. Litigation; No Violation of Governmental Orders or Laws. Except as set forth on Schedule 4.7:

 

(a) There are no actions, suits or proceedings pending, or, to the knowledge of Holdings or the Borrower after due inquiry, threatened against or affecting Holdings or any of its Subsidiaries or any Properties or rights of any of them which, if adversely determined, individually or in the aggregate would have a Material Adverse Effect.

 

(b) There are no actions, suits or proceedings pending, or, to the knowledge of Holdings or the Borrower after due inquiry, threatened against or affecting Holdings or any of its Subsidiaries which seek to enjoin, or otherwise prevent the consummation of, the transactions contemplated herein or to recover any damages or obtain any relief as a result of any of the transactions contemplated herein in any court or before any arbitrator of any kind or before or by any Governmental Body.

 

(c) Neither Holdings nor any of its Subsidiaries is or will be, after or as a result of giving effect to the transactions contemplated herein, in default under or in violation of any Order of any court, arbitrator or Governmental Body or of any statute or law or of any rule or regulation of any Governmental Body, which default or violation has or could reasonably be expected to have a Material Adverse Effect; and none of them is subject to or a party to any Order of any court or Governmental Body arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters.

 

(d) All cash payments required to be paid pursuant to that certain Settlement Agreement entered into on November 7, 1973, together with all amendments thereto, approved by an order dated November 29, 1973 of the United States District Court for the Western District of Missouri, with respect to In re: IHOP Franchise Litigation, M.D.L. Docket No. 77 have been paid, all litigation regarding such Settlement Agreement has been settled or dismissed and all payments required to be paid pursuant thereto have been paid, and all of the Borrower’s current documents evidencing its franchising arrangements with its franchisees are in a form permitted by such Settlement Agreement.

 

4.8. Outstanding Debt. Schedule 4.8 sets forth a correct and complete list and description of all Debt of Holdings and its Subsidiaries (after giving effect to the use of proceeds from the sale and issuance of the Notes) other than Capitalized Leases which (i) on any consolidated balance sheet of Holdings and its Subsidiaries would have a capitalized value of less

 

10



 

than $2.5 million and (ii) cover Property on which a restaurant unit operated by the Borrower or a franchisee in the ordinary course is located and all Liens on Property of Holdings or its Subsidiaries securing such Debt outstanding or existing on the Closing Date (excluding any Debt evidenced by the Notes or any Guaranty thereof), and there exists no breach or default or event of default in the terms and provisions of any instrument, agreement or contract pertaining to any such Debt.

 

4.9. Consents, Etc. No consent, approval or authorization of or declaration, registration or filing with any Governmental Body or any nongovernmental Person, including, without limitation, any creditor or shareholder of Holdings or any of its Subsidiaries, is required in connection with the execution or delivery of this Agreement, the Notes or the Subsidiary Guarantee, or the performance by the Borrower, its Subsidiaries and Holdings of their respective obligations hereunder and thereunder, or as a condition to the legality, validity or enforceability of this Agreement or the Notes or the Subsidiary Guarantee, except for any thereof as are set forth on Schedule 4.9, all of which have been made or obtained and are in full force and effect and except for declarations, registrations or filings with Governmental Bodies which, in accordance with law, are to be made following the Closing Date.

 

4.10. Title to Properties. Holdings and each of its Subsidiaries (after giving effect to the use of proceeds from the sale and issuance of the Notes) have (i) good and marketable fee simple title to their respective real Properties (other than real Properties which are leased from others), subject to no Lien of any kind except Permitted Liens, and (ii) good title to all of their other respective Properties and assets (other than Properties and assets leased from others), subject to no Lien of any kind except Permitted Liens. Holdings and each of its Subsidiaries have possession, not subject to encumbrances which materially affect the rights of the lessee thereunder, under all leases under which they are lessees (subject to the rights of sublessees, in their capacities as sublessees under subleases entered into in the ordinary course of the Borrower’s business), whether of realty or personalty, to which they respectively are parties, none of which contains any unusually burdensome provisions, and all such leases are the legal, valid and binding obligations of those of Holdings, the Borrower and their Subsidiaries which are parties thereto and, to the knowledge of Holdings and the Borrower, the other parties thereto and each is subsisting and in full force and effect. Neither Holdings nor any of its Subsidiaries is in material breach or violation of the terms of any such lease, and neither Holdings nor the Borrower knows of any material breach or violation of any of such lease by any third party.

 

11



 

Each of the leases under which Holdings or any of its Subsidiaries is a lessee is in substantially the form of Exhibit E hereto, if IHOP Realty is the lessor. Each such lease is the legal, valid and binding obligation of Holdings or of the Subsidiary of Holdings which is the lessee thereunder and IHOP Realty. Neither Holdings nor the Borrower is aware of the existence of a material breach or default under any such lease, and each such lease is in full force and effect on the Closing Date.

 

Each lease or sublease under which Holdings or any of its Subsidiaries is lessor or sublessor is free of unusually burdensome provisions and all such leases and subleases are the legal, valid and binding obligations of those of Holdings, the Borrower and their Subsidiaries which are parties thereto and, to the knowledge of Holdings and the Borrower, the other parties thereto and each is, to the knowledge of Holdings and the Borrower, subsisting and in full force and effect. Neither Holdings nor any of its Subsidiaries is in material breach or violation of the terms of any such lease, and neither Holdings nor the Borrower knows of any breach or violation of any such lease by any third party, which breach or violation could be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.11. Taxes. Holdings and each of its Subsidiaries has filed (or has had filed on its behalf), all federal, state and local tax returns, which are required to have been filed by any of them, and there have been paid all taxes shown to be due and payable on such returns and all other material taxes and assessments payable by any of them, to the extent the same have become due and payable and before they have become delinquent. Except as set forth in Schedule 4.11, no material tax assessment against Holdings or any of its Subsidiaries has been proposed and all of their respective tax liabilities are adequately provided for or reserved against on their respective books and financial statements in accordance with GAAP. Neither Holdings nor any of its Subsidiaries have taken any reporting position for which it does not have a reasonable basis. The tax returns of Holdings and its Subsidiaries are currently being audited as set forth in Schedule 4.11. Schedule 4.11 sets forth consents to the waiver or extension of relevant statutes of limitations.

 

4.12. No Conflicts with Agreements, Etc. Neither the execution and delivery of this Agreement, the Other Agreements, the Subsidiary Guarantee or the Notes, nor the offering, issuance or sale of the Notes nor the fulfillment of or compliance with the terms and provisions hereof or thereof, will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or

 

12



 

result in the creation of any Lien on any Properties or assets of Holdings or any of its Subsidiaries, or cause Holdings or any of its Subsidiaries to be unable to pay any of its Debt when due, or result in any violation of, or require for its validity any authorization, consent, approval, exemption or other action by, or notice to any Governmental Body or any of the stockholders of Holdings or any of its Subsidiaries, pursuant to the charter or by-laws of any of them, or pursuant to any award of any arbitrator, or pursuant to any material contract, agreement, mortgage, indenture, lease, instrument, Order, statute, law, rule or regulation to which any of them or any of their respective assets is subject. Neither Holdings nor any of its Subsidiaries is in violation of, or in default under, any (i) Order, law or administrative regulation binding upon it or any of its Properties, or (ii) contract, mortgage, indenture, lease, instrument or agreement binding upon it or any of its Properties, which breach, conflict, violation or default could reasonably be expected to have a Material Adverse Effect.

 

4.13. Disclosure. Neither this Agreement, the Subsidiary Guarantee nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Borrower, Holdings or any of their Subsidiaries in connection herewith, including the Confidential Memorandum and the SEC Reports, contained (when taken together, to the extent that any later document supersedes or supplements an earlier document), as of its respective date, or now contains, any untrue statement of a material fact or as of any such date omitted, or now omits, to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to the Borrower or Holdings which now has or in the future could reasonably be expected to have (so far as the Borrower or Holdings can reasonably foresee) a Material Adverse Effect other than (i) facts with respect to economic conditions, generally and (ii) facts that have been disclosed to the Purchasers in writing in connection with this transaction.

 

4.14. Offering of Securities. None of Holdings, the Borrower, any of their Subsidiaries or any of their representatives has, directly or indirectly, offered any of the Notes or any security similar to any of them for sale to, or solicited any offers to buy any of the Notes, the Subsidiary Guarantee or any security similar to any of them from, or otherwise approached or negotiated with respect thereto with, more than 44 Persons including you, and none of Holdings, the Borrower, any of their Subsidiaries or any such representative has taken or will take any action which would subject the issuance or sale of any of the Notes to the registration requirements of Section 5 of the Securities Act or violate the

 

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provisions of any securities or Blue Sky laws of any applicable jurisdiction.

 

4.15. Broker’s or Finder’s Commissions. Neither the Borrower, Holdings nor any of their Subsidiaries has engaged any broker or finder other than Continental Bank N.A. with respect to the issuance and sale of the Notes. The Borrower and Holdings agree, jointly and severally, to indemnify you and hold you harmless against any loss, cost, claim or liability (including, without limitation, reasonable attorneys’ fees and disbursements for the investigation and defense of claims) arising out of or relating to any claim for a fee or commission by any such actual or alleged broker or finder.

 

4.16. Labor Matters. Except as set forth in the Confidential Memorandum, during the past five years there has been no strike, work stoppage, slowdown or other labor dispute or grievance involving Holdings or any of its Subsidiaries, or employees of any of such Persons, which has had or could reasonably be expected to have a Material Adverse Effect, nor to the knowledge of Holdings or the Borrower after due inquiry is any such action, dispute or grievance currently pending or threatened against Holdings or its Subsidiaries. Except as set forth in the Confidential Memorandum or on Schedule 4.16, none of Holdings or any of its Subsidiaries is a party to any collective bargaining agreement and none of them has any knowledge after due inquiry of any pending or threatened effort to organize any employees of Holdings or any of its Subsidiaries. Except as set forth in the Confidential Memorandum, there are currently no pending retaliatory or wrongful discharge claims or federal, state or local employment discrimination charges or complaints or administrative or judicial complaints arising therefrom pending against Holdings or any of its Subsidiaries, or any employees of any of such Persons, which has had or could reasonably be expected to have a Material Adverse Effect, nor to the knowledge of the Borrower or Holdings after due inquiry are any such charges or complaints threatened against Holdings or any of its Subsidiaries. The Borrower and its Subsidiaries are in compliance with all applicable federal, state and local statutes, laws, rules, ordinances, regulations, codes, licenses and orders relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, bonuses, collective bargaining agreements, equal pay, occupational safety and health, equal employment opportunity and wrongful or retaliatory termination of employment, except where non-compliance could not reasonably be expected to have a Material Adverse Effect.

 

4.17. Environmental Matters. Except as disclosed in the SEC Reports or on Schedule 4.17,

 

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(a) there is no Environmental Matter relating to Holdings or any of its Subsidiaries or any Properties of any of such Persons, which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and Holdings and the Borrower are aware of no facts that could reasonably be expected to result in any such Environmental Matter. Neither Holdings nor any of its Subsidiaries has agreed to assume by contract with any Person or consent order or other written agreement with a Governmental Body any liability of any other Person for cleanup, compliance, or required capital expenditures in connection with any Environmental Matter arising prior to the date hereof and, to the best knowledge of Holdings and the Borrower, no such liability has arisen by operation of law;

 

(b) the Properties presently and, to the best knowledge of Holdings and the Borrower, previously used, owned, leased, operated, managed or controlled by Holdings or any of its Subsidiaries are free of contamination from Hazardous Materials, including, without limitation, any contamination of the associated air, soil, groundwater or surface waters, except for such instances of contamination as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

 

(c) Holdings and its Subsidiaries are currently in compliance in all material respects with all applicable Environmental Laws, are not currently in receipt of any notice of violation, are not currently in receipt of any notice of any potential liability for cleanup of Hazardous Materials and are not now subject to any investigation known to Holdings or the Borrower, or information request by a Governmental Body concerning Hazardous Materials or any Environmental Laws. Holdings and its Subsidiaries hold and are in compliance in all material respects with all governmental permits, licenses, and authorizations necessary to operate their businesses that relate to siting, wetlands, coastal zone management, air emissions, discharges to surface or ground water, discharges to any sewer or septic system, noise emissions, solid waste disposal or the generation, use, transportation or other management of Hazardous Materials. Neither Holdings nor any of its Subsidiaries has generated, manufactured, refined, recycled, discharged, emitted, released, buried, processed, produced, reclaimed, stored, treated, transported, or disposed of any Hazardous Materials except in compliance with all applicable laws and regulations, including permit requirements (except for such instances of non-compliance as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect);

 

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(d) no Properties of Holdings or any of its Subsidiaries are subject to any material Lien or claim for material Lien in favor of any Person as a result of any Environmental Matter or response thereto;

 

(e) no Hazardous Materials, including leachate and effluents, generated, disposed of, transported, managed or released by Holdings or any of its Subsidiaries have caused or are reasonably likely to cause in whole or in part any contamination or injury to any Person, Property or the environment, except for such contamination or injury as could not reasonably be expected to have, individually, or in the aggregate, a Material Adverse Effect. Neither Holdings nor any of its Subsidiaries has handled, transported, disposed of or managed any Hazardous Material in any manner that may reasonably be expected to form the basis for any present or future claim, demand or action seeking cleanup of any site, location, or body of water, surface or subsurface, except for such claims, demands or actions as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and none of them has any material liabilities, absolute or contingent, on the date hereof with respect thereto; and

 

(f) to the best knowledge of Holdings and the Borrower, all facilities where any Person has treated, stored, disposed of, reclaimed, or recycled any Hazardous Material on behalf of Holdings or any of its Subsidiaries are in compliance in all material respects with all applicable Environmental Laws.

 

4.18. Margin Regulations. None of Holdings or any of its Subsidiaries owns or now intends to acquire any “margin stock” as defined in Regulation G of the Board of Governors of the Federal Reserve System of the United States (12 CFR 207). No part of the proceeds from the sale of the Notes will be used, and no part of the proceeds of any loans repaid with the proceeds from the sale of the Notes was used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System of the United States (12 CFR 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve any of Holdings or any Subsidiary in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Neither Holdings, any of its Subsidiaries nor any agent acting on behalf of Holdings or any such Subsidiary has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, Regulation X, Regulation T or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act.

 

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in each case as in effect now or as the same may hereafter be in effect. As used in this Section, the term “purpose of buying or carrying” has the meaning assigned thereto in the aforesaid Regulation G.

 

4.19. Compliance with ERISA.

 

(a) No Pension Plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA or Section 412 of the Code had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of such Pension Plan heretofore ended;

 

(b) no liability to the PBGC (other than required insurance premiums, all of which have been paid) has been incurred and is outstanding with respect to any Pension Plan, and there has not been any Reportable Event, or any other event or condition, which presents a material risk of involuntary termination of any Pension Plan by the PBGC;

 

(c) neither any Multiemployer Plan or Plan nor any trust created thereunder, nor any trustee or administrator thereof, has, to the knowledge of Holdings or the Borrower, engaged in a prohibited transaction (as such term is defined in Section 4975 of the Code or Section 406 of ERISA) that could subject Holdings or any of its Subsidiaries or ERISA Affiliates to any material tax or penalty on prohibited transactions imposed under said Section 4975;

 

(d) no material liability has been incurred and is outstanding with respect to any Multiemployer Plan as a result of the complete or partial withdrawal by Holdings or any of its Subsidiaries or ERISA Affiliates from such Multiemployer Plan under Title IV of ERISA, nor has Holdings or any of its Subsidiaries or ERISA Affiliates been notified by any Multiemployer Plan that such Multiemployer Plan is currently in reorganization or insolvency under and within the meaning of Section 4241 or 4245 of ERISA or that such Multiemployer Plan intends to terminate or has been terminated under Section 4041A of ERISA;

 

(e) Holdings and its Subsidiaries and ERISA Affiliates are in compliance in all material respects with all applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder with respect to all Plans and Multiemployer Plans;

 

(f) as of the Closing Date, the actuarial present value of all benefit liabilities (as defined in Section 4001(a)(16) of ERISA) under all Pension Plans that are subject

 

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to Title IV of ERISA did not exceed the fair market value of the assets allocable to such liabilities, determined as if all such Plans were terminated as of the Closing Date, and by using the Plan’s actuarial assumptions as set forth in the most recent actuarial report pertaining to each Plan;

 

(g) as of the Closing Date, none of Holdings, the Borrower or any of their Subsidiaries or ERISA Affiliates is a party to a “multiple employer plan” (as defined in 29 CFR 2530.210(c)(3)) or, except as set forth on Schedule 4.19, a Multiemployer Plan. With respect to the Multiemployer Plan listed on Schedule 4.19, as of the Closing Date, such Multiemployer Plan has no unfunded vested benefits within the meaning of Section 4213(c) of ERISA for which Holdings, the Borrower or any of their Subsidiaries or ERISA Affiliates is or could become liable;

 

(h) no event has occurred with respect to any Plan or with respect to any other employee benefit pension plan (as defined in Section 3(2) of ERISA) established or maintained at any time during the five-year period immediately preceding the Closing Date for the benefit of employees of Holdings or any of its Subsidiaries or ERISA Affiliates which presents a risk of material liability of Holdings or any of its Subsidiaries or ERISA Affiliates under Section 4069 of ERISA;

 

(i) there are no material liabilities under the Plans that are employee welfare benefit plans (as defined in Section 3(1) of ERISA) providing for medical, health, life or other welfare benefits that are not insured by fully paid non-assessable insurance policies, and no such Plan provides for continued medical, health, life or other welfare benefits for employees after they leave the employment of Holdings or any of its Subsidiaries or ERISA Affiliates (other than any such welfare benefits required to be provided under the Consolidated Omnibus Budget Reconciliation Act or other similar law); and

 

(j) Schedule 4.19 contains a complete and accurate list of each of the employee benefit plans (as defined in Section 3(3) of ERISA) with respect to which the Borrower or Holdings or any of their respective Subsidiaries or ERISA Affiliates is a “party in interest” as defined in Section 3 of ERISA or a “disqualified person” as defined in Section 4975 of the Code.

 

4.20. Material Contracts. Each of the Material Contracts is valid, subsisting and in full force and effect, and neither Holdings nor any of its Subsidiaries is in breach or violation of the terms, conditions or provisions of any of the Material Contracts to which it is a party which is reasonably likely to

 

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have a Material Adverse Effect. On the Closing Date, neither Holdings nor any of its Subsidiaries will be a party to any Material Contract or be subject to any restriction contained in the charter or by-laws of any of them which has or is reasonably likely to have a Material Adverse Effect.

 

4.21. Insurance. All policies of workers compensation, general liability, fire, property, casualty, marine, business interruption, errors and omissions, flood and other insurance carried by Holdings and its Subsidiaries are in full force and effect on the date hereof, and neither Holdings nor any of its Subsidiaries has received notice of cancellation with respect to any such policy.

 

4.22. Status under Certain Laws. None of Holdings or any Subsidiary of Holdings is an “investment company” or a “person directly or indirectly controlled by or acting on behalf of an investment company” within the meaning of the Investment Company Act of 1940, as amended, or a “holding company”, or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company”, within the meaning of the Public Utility Holding Company Act of 1935, as amended.

 

4.23. Legality. The Borrower, upon giving effect to the issuance of the Notes will be, a “solvent institution”, as such term is used in Section 1405(c) of the New York Insurance Law, whose “obligations are not in default as to principal or interest”, as such terms are used in Section 1405(c).

 

4.24. Possession of Franchises, Licenses, Etc. Holdings and its Subsidiaries possess all franchises, certificates, licenses, permits, registrations, and other authorizations from national, state and local governmental or regulatory authorities, free from unusually burdensome restrictions, that are necessary for the ownership, maintenance and operation of their respective Properties and assets, and for the conduct of their respective businesses as now conducted and as described in the Confidential Memorandum, and none of Holdings or any of its Subsidiaries is in violation of any thereof in any material respect.

 

4.25. Franchises. Except as set forth on Schedule 4.25, each of the Borrower’s franchisees has entered into documents evidencing its franchising arrangement with the Borrower (including the sublease, if any, from the Borrower of the franchised premises) which, with respect to such arrangements initially entered into prior to 1979 (or renewed, on substantially similar terms and conditions since that date) were entered into (or renewed, as the case may be) in accordance with all then applicable laws and regulations

 

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including, without limitation, all applicable disclosure periods and waiting requirements and, with respect to such arrangements entered into since 1979, are substantially in the forms of the exhibits to the Franchise Offering Circular for Prospective Franchisees Required by the Federal Trade Commission as in effect on the date such arrangements were entered into (the “Offering Circular”) and such documents have been entered into in accordance with all applicable laws and regulations, including, without limitation, all applicable disclosure requirements and waiting periods. All such franchising documents are in full force and effect and neither Holdings nor the Borrower is aware of any breaches of any such documents by the franchisees thereunder which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.26. Use of Proceeds. The proceeds from the sale and issuance of the Notes will be used (i) to repay substantially all of the existing Debt of the Borrower’s Subsidiary, IHOP Realty Corp., a Delaware corporation, (ii) to refinance existing Debt of the Borrower, and (iii) for general corporate purposes.

 

4.27. Patents and Trademarks. Holdings and each Subsidiary own or possess all the patents, trademarks, trade names, service marks, copyright, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of their respective businesses, without any known conflict with the rights of others.

 

4.28. Compliance with Laws. Neither Holdings nor any of its Subsidiaries is in violation of any federal, state or local law, statute, regulation, ordinance or rule which violation could reasonably be expected to have a Material Adverse Effect.

 

4.29. Franchisees. Except as disclosed in the SEC Reports, during the fiscal year ended December 31, 1991, no franchisee accounted for more than 10% of Holdings’ consolidated revenues from sales of products or services.

 

4.30. Other Agreements. Simultaneously with the execution and delivery of this Agreement, the Borrower and Holdings are entering into the Other Agreements, which are identical in all respects with this Agreement (except for the respective principal amounts of Notes to be purchased) with the other Purchasers named in Schedule I hereto. The purchases by you and said other Purchasers are to be separate and several transactions.

 

4.31. Solvency. On the Closing Date, and after the payment of all estimated legal, investment banking, accounting

 

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and other fees related hereto, Holdings and each of its Subsidiaries will be Solvent.

 

4.32. Foreign Assets Control Regulations. Neither the sale of the Notes by the Borrower hereunder nor the use of the proceeds thereof as contemplated hereby will violate the Foreign Assets Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Regulations, the Iranian Transactions Regulations, the Iranian Assets Control Regulations, the Libyan Sanctions Regulations, the Iraqi Sanctions Regulations, or the Haitian Transaction Regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended), or the restrictions on transactions with Yugoslavia contained in Executive Orders 12808 and 12810, dated May 30, 1992 and June 5, 1992, respectively.

 

Section 5. Representations of Purchasers. You represent, and in making this sale to you it is specifically understood and agreed, that:

 

5.1. Authority. You are authorized to enter into this Agreement and to perform your obligations hereunder and to consummate the transactions contemplated hereby.

 

5.2. Investment Intent. You are purchasing the Notes being purchased hereunder for your own account and with no intention of distributing or reselling such Notes or any part thereof in any transaction which would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to your rights at all times to sell or otherwise dispose of all or any part of said Notes pursuant to an effective registration statement under the Securities Act and other applicable state securities laws, or under an exemption therefrom, and subject, nevertheless, to the disposition of your property being at all times within your control.

 

Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the Notes shall bear a legend in substantially the following form:

 

THIS NOTE HAS NOT BEEN REGISTERED

UNDER THE SECURITIES ACT OF 1933, AS AMENDED,

AND MAY NOT BE SOLD OR OTHERWISE

TRANSFERRED IN THE ABSENCE OF SUCH

REGISTRATION OR AN EXEMPTION THEREFROM.

 

5.3. Source of Funds. No part of the funds to be used to purchase the Notes being purchased by you hereunder constitutes assets of any employee benefit plan such that the use of such

 

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assets constitutes a non-exempt prohibited transaction under ERISA. This representation is made in reliance upon Schedule 4.19 and is based upon your determination that a statutory or administrative exemption is applicable or that the Borrower or Holdings are not parties in interest or disqualified persons with respect to such employee benefit plan. As used in this paragraph, the terms “employee benefit plan” and “party in interest” shall have the meanings assigned to such terms in Section 3 of ERISA, and the term “disqualified person” shall have the meaning assigned to such term in Section 4975 of the Code.

 

5.4. Investor Status. You are an “accredited investor” within the meaning of Rule 501 under the Securities Act.

 

Section 6. Conditions to Obligations of the Purchasers. Your obligation to purchase and pay for the Notes to be purchased by you hereunder on the Closing Date shall be subject to the satisfaction, on or before the Closing Date, of the following conditions:

 

6.1. Proceedings Satisfactory. All corporate and other proceedings taken or to be taken by Holdings and its Subsidiaries in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request.

 

6.2. Opinion of Purchasers’ Special Counsel. You shall have received from Sonnenschein Nath & Rosenthal, who are acting as special counsel for you in connection with this transaction, an opinion addressed to you and dated the Closing Date, substantially in the form of Exhibit B. Such opinion shall also cover such other matters incident to the matters herein contemplated as you may reasonably request.

 

6.3. Opinion of Counsel to the Borrower and Holdings. You shall have received from Skadden, Arps, Slate, Meagher & Flom, special counsel to the Borrower and Holdings, and Larry Alan Kay, general counsel to the Borrower and Holdings, legal opinions addressed to you and dated the Closing Date. Such opinions shall cover the matters set forth in the form of legal opinion attached hereto as Exhibit C, and shall also cover such other matters incident to the matters herein contemplated as you may reasonably request.

 

6.4. Representations and Warranties True, Etc.; Certificates. The representations and warranties contained in Section 4 of this Agreement shall be true on and as of the

 

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Closing Date with the same effect as if such representations and warranties had been made on and as of the Closing Date. The Borrower shall have performed all agreements on its part required to be performed under this Agreement prior to the Closing Date; there shall exist on the Closing Date no Default or Event of Default; the Borrower and Holdings shall have delivered to you an Officer’s Certificate, dated the Closing Date, to the effect of the foregoing clauses of this Section 6.4, and Sections 6.5, 6.6 and 6.7, and certifying that, on the Closing Date, giving effect to the transactions contemplated by this Agreement and the Other Agreements, the Borrower and its Subsidiaries could incur $1.00 of additional Debt pursuant to Section 11.2(c); and you shall have received such certificates or other evidence as you may request to establish that the proceeds of the sale of the Notes on the Closing Date will be applied as contemplated by

Section 4.26.

 

6.5. Absence of Material Adverse Change, Etc. Since December 31, 1991, no change or changes shall have occurred to the business, operations, Properties, assets, income, prospects or condition, financial or otherwise, of Holdings and its Subsidiaries, taken as a whole, which you reasonably believe in good faith to constitute a Material Adverse Effect.

 

6.6. Consents and Approvals. All necessary consents, approvals and authorizations of, and declarations, registrations and filings with, Governmental Bodies and nongovernmental Persons required in order to consummate the transactions contemplated herein shall have been obtained or made and shall be in full force and effect except for declarations, registrations or filings with Governmental Bodies which, in accordance with law, are to be made following the Closing Date.

 

6.7. Absence of Litigation, Orders, Etc. Except as disclosed on Schedule

 

4.7 attached hereto, there shall not be pending or, to the knowledge of Holdings or the Borrower after due inquiry, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting any of Holdings or its Subsidiaries or their respective assets or Property (and, as to any action, suit, proceeding, governmental investigation or arbitration so disclosed, there shall not have occurred since the date of this Agreement any development) which seeks to enjoin or restrain any of the transactions contemplated herein or which you reasonably believe in good faith could have a Material Adverse Effect. No Order of any court, arbitrator or Governmental Body shall be effect which purports to enjoin or restrain any of the transactions contemplated herein or which you reasonably believe in good faith to constitute a Material Adverse Effect.

 

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6.8. Other Purchasers. The other Purchasers referred to in Section 1 shall have purchased and made payment for the Notes to be purchased by them pursuant to the Other Agreements referred to in said Section.

 

6.9. Legal Investment. Your purchase of and payment for the Notes to be purchased by you hereunder on the Closing Date shall be permitted by the laws and regulations of the jurisdictions to which you are subject, including without limitation all applicable laws and regulations regulating investments for life insurance companies (without reference to any “basket” or “leeway” provision which permits the making of an investment without restriction as to the character of the particular investment being made); and you shall have received such certificates or other evidence as you may request to establish compliance with this condition.

 

6.10. Rating. The investment represented by the Notes shall have received a preliminary designation of “2” or better from the National Association of Insurance Commissioners and neither Holdings nor the Borrower has received an indication from the National Association of Insurance Commissioners that such designation has been, or is expected to be, rescinded.

 

6.11. Fees. The fees and out-of-pocket expenses and disbursements incurred by Sonnenschein Nath & Rosenthal in connection with the preparation of this Agreement and the transactions contemplated hereby shall be paid in full on the Closing Date.

 

6.12. PPN Number. You shall have been supplied with a private placement number for the Notes from Standard and Poor’s Corporation.

 

6.13. Subsidiary Guarantee. IHOP Realty shall have executed and delivered the Subsidiary Guarantee.

 

6.14. Corporate Status and Documentation.

 

(a) CERTIFICATES OF INCORPORATION. You shall have received true and correct copies of the Certificates of Incorporation of Holdings, the Borrower and IHOP Realty, together with all amendments thereto, certified as of a recent date by the Secretary of State of the jurisdiction of incorporation of each such Person.

 

(b) SECRETARY’S CERTIFICATE. You shall have received certificates dated the Closing Date of the Secretary or an Assistant Secretary of each of Holdings, the Borrower and IHOP Realty, duly certifying that:

 

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(i) attached thereto is a true, complete and correct copy of the by-laws of such Person, which have been in full force and effect since the date specified in such certificate and to which no amendments or modifications have been made since such date;

 

(ii) attached thereto is an incumbency certificate, in a format satisfactory to the Purchasers, duly executed by the Secretary or an Assistant Secretary and those other officers of such Person who have executed documents and agreements in connection with the transactions hereby contemplated; and

 

(iii) attached thereto are true and correct copies of the resolutions, in form and substance satisfactory to the Purchasers, adopted by the Board of Directors or authorized Executive Committee of such Person (with evidence of such authorization), evidencing, with respect to such Person, approval of the transactions contemplated by this Agreement, the Other Agreements, the Notes, the Subsidiary Guarantee and the other documents and instruments executed and delivered in connection therewith or pursuant thereto, and authorizing the appropriate officers of such Person to negotiate the form of, and to execute and deliver, this Agreement, the Other Agreements, the Notes, the Subsidiary Guarantee and such other documents and instruments (in each case to the extent such Person is a party thereto), with such modifications as such authorized officers shall approve.

 

(c) GOOD STANDING CERTIFICATES. You shall have received a certificate of recent date of the Secretary of State or other appropriate official of the jurisdiction of incorporation of Holdings, the Borrower and IHOP Realty certifying that each such Person is in good standing in its jurisdiction of incorporation. You shall also have received certificates of recent date of the appropriate governmental officials in each other jurisdiction in which Holdings, the Borrower or IHOP Realty conducts business as a foreign corporation or owns assets certifying that the Borrower, Holdings or IHOP Realty, as the case may be, is in good standing as a foreign corporation in such jurisdiction, except where the failure to so qualify would not have a Material Adverse Effect.

 

(d) BRING-DOWN AND OTHER CERTIFICATES. Each of the Borrower, Holdings and IHOP Realty shall have delivered to the Purchasers certifications, each dated the Closing Date and duly executed by an Appropriate Officer of such Person, to the effect that no amendments to or changes in its Certificate of Incorporation have been made since the date certified by the Secretary of State of the jurisdiction of its incorporation and that no dissolution proceedings with respect to it have been commenced or are contemplated.

 

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6.15. New Credit Agreement. The Borrower and Holdings shall have entered into a Credit Agreement with Continental Bank N.A. (the “Bank”) (the “Credit Agreement”), which will replace in its entirety the existing loan agreement dated April 7, 1992 with Bank of America National Trust and Savings Association (“B of A”) (the “Existing Agreement”) and IHOP Realty shall have executed a subsidiary guarantee in respect of the Credit Agreement. Such Credit Agreement will be substantially in the form of the draft of such Credit Agreement dated November 16, 1992, except that such Credit Agreement shall not prohibit (i) amendments or modifications to this Agreement, the Other Agreements, the Notes or the Subsidiary Guarantee (except those which prohibit advancing any payment due pursuant to Section 3.1 to a date sooner than January 31, 1994) or (ii) the payment of principal of or interest or prepayment charges on the Notes in accordance with the terms thereof and the terms of this Agreement and the Other Agreements (except that optional prepayments may be prohibited prior to January 31, 1994), and you shall have received an Officer’s Certificate of the Borrower stating that the Existing Agreement has been terminated (together with the Exhibits and Schedules thereto) and that the Credit Agreement (together with the Exhibits and Schedules thereto) is in full force and effect, binding on the Borrower and Holdings and to the best of their knowledge, on the Bank, in accordance with its terms and you shall have received evidence satisfactory to you that the Existing Agreement shall have been terminated in its entirety (except as set forth in Schedule 6.16) and none of Holdings, the Borrower or any of their Subsidiaries shall have any further obligations thereunder and all Liens in favor of B of A have been released or terminated.

 

6.16. Use of Proceeds. You and your special counsel shall have received evidence satisfactory to you that the proceeds of the issuance of the Notes are being used substantially simultaneously with the closing of this transaction, for the repayment in full of (i) the 12 1/4% Senior Subordinated Notes due 1997 issued by the Borrower, (ii) the Debt of the Borrower and IHOP Realty to HomeFed Savings Bank, Federal Savings Bank, its successors and assigns (“HomeFed”) and (iii) the Debt of the Borrower to B of A and, in each case (except as set forth on Schedule 6.16) there are no further obligations of Holdings or any of its Subsidiaries thereunder and all commitments to lend in connection therewith shall have been terminated and all Liens in favor of HomeFed or B of A on any Property of Holdings or any of its Subsidiaries have been or substantially contemporaneously herewith shall be released or terminated.

 

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Section 7. Conditions to Obligations of the Borrower. The Borrower’s obligation to issue and sell the Notes to be sold by it hereunder on the Closing Date shall be subject to the satisfaction, on or before the Closing Date, of the following conditions:

 

7.1. Representations and Warranties True, Etc. The representations and warranties contained in Section 5 of this Agreement shall be true on and as of the Closing Date with the same effect as if such representations and warranties had been made on and as of the Closing Date.

 

7.2. Absence of Litigation, Orders, Etc. There shall not be pending or, to the knowledge of Holdings or the Borrower after due inquiry, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting any of Holdings or its Subsidiaries or their respective assets or Property which seeks to enjoin or restrain any of the transactions contemplated herein. No Order of any court, arbitrator or Governmental Body shall be in effect which purports to enjoin or restrain any of the transactions contemplated herein.

 

7.3. Other Purchasers. Notes representing no less than $29 million of initial principal amount shall have been purchased by the Purchaser and Purchasers purchasing Notes pursuant to the Other Agreements on the Closing Date.

 

Section 8. Financial Statements and Information. The Borrower and Holdings will furnish to you and to any of your Purchaser Affiliates, so long as you or such Purchaser Affiliate shall be obligated to purchase or shall hold any Notes, and to each other institutional holder of any Notes (such a holder in any such case being hereinafter called an “Eligible Holder”), 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 Holdings (“quarterly accounting period”),

 

(1) either (a) copies of Holdings’ Quarterly Report on Form l0-Q for the quarterly accounting period then ended, as filed with the Securities and Exchange Commission or (b) if Holdings is not subject to Section 13 or 15(d) of the Exchange Act, copies of the consolidated balance sheet of Holdings and its Subsidiaries 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

 

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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 an Appropriate Officer of Holdings; and

 

(2) a written statement in the form of Exhibit F-1 hereto executed by Appropriate Officers of Holdings and the Borrower setting forth computations or other pertinent information in reasonable detail showing as at the end of such quarterly accounting period (a) whether or not the financial covenants set forth in Sections 11.2 through 11.8 hereof, inclusive, have been met, accompanied by calculations setting forth the maximum amount of Funded Debt that could have been incurred pursuant to Sections 11.2(B) and 11.2(C) hereof, and the maximum amount of dividends or distributions that could have been declared or paid pursuant to Section 11.5 hereof, and (b) whether or not Liens on Property or assets of Holdings or its Subsidiaries or securing Debt of Holdings or its Subsidiaries, as the case may be, exceed the threshold set forth in Section 11.1(I) hereof, accompanied by calculations setting forth the maximum amount of additional Funded Debt secured by Liens that could have been incurred under Section 11.1(I) hereof (a “Quarterly Compliance Statement”);

 

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

 

(1) either (a) copies of Holdings’ Annual Report on Form 10-K and Annual Report to Shareholders, in each case, for the year then ended and as filed with the Securities and Exchange Commission together with copies of the consolidating balance sheets of Holdings and its Subsidiaries as of the end of such fiscal year and the related consolidating statements of operations, or (b) if Holdings is not subject to Section 13 or 15(d) of the Exchange Act, copies of the consolidated and consolidating balance sheets of Holdings and its Subsidiaries 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 Coopers & Lybrand or other independent public accountants of recognized national standing selected by

 

28



 

Holdings (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 Holdings and its Subsidiaries 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. Together with each delivery of financial statements or Annual Reports required by this subparagraph (1), the Accountants shall deliver to Holdings or the Borrower (which recipient shall deliver the same to each Purchaser, Purchaser Affiliate and Eligible Holder) their report (on which the Purchasers, Purchaser Affiliates and Eligible Holders shall be entitled to rely) 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 of this Section 8, a certificate of Appropriate Officers of the Borrower and Holdings in the form of Exhibit F-2, 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 Holdings, the Borrower or any of their Subsidiaries 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 Holdings, the Borrower or such Subsidiary, 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 Holdings or any of its Subsidiaries shall send or make available generally to any of their securityholders, and copies of all regular and periodic reports and of all registration statements which Holdings or any of its Subsidiaries may file with the SEC or with any securities exchange;

 

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(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 Holdings and the Borrower specifying the nature and period of existence thereof and what action the Borrower or Holdings is taking or proposes to take with respect thereto; or (2) any Debt of Holdings, the Borrower or any Subsidiary being declared due and payable before its expressed maturity, or any holder of such Debt having the right to declare such 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 matters and what action Holdings or such Subsidiary 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 Holdings’ or the Borrower’s failure to promptly notify the Purchasers of another Default or Event of Default in accordance with this Section 8(E) 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 Holdings or the Borrower 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 Holdings or any of its Subsidiaries 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 Holdings or any of its Subsidiaries or ERISA Affiliates, a certificate of an Appropriate Officer of Holdings setting forth information as to such occurrence and what action, if any, Holdings or such Subsidiary 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 Holdings or such Subsidiary or ERISA Affiliate or the plan administrator of any such Pension Plan controlled by Holdings or such Subsidiary or ERISA Affiliate with the Internal Revenue Service or the PBGC, or (b) received by Holdings or such Subsidiary 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 Holdings becomes aware of any Material Adverse Effect with respect to which notice is not otherwise required to be given pursuant to this Section 8, a certificate of an Appropriate Officer setting forth the details of such Material Adverse Effect and stating what action Holdings, the Borrower or any of their respective Subsidiaries has taken or proposes to take with respect thereto;

 

(H) promptly (and in any event within 15 days) after the Borrower or Holdings knows of (a) the institution of, or threat of, any action, suit, proceeding, governmental investigation or arbitration against or affecting Holdings or any of its Subsidiaries 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 Holdings, financial statements of Borrower and its consolidated Subsidiaries at such times and in such form (together with such certifications) as are required to be delivered pursuant to Sections 8(A), (B) and (C); and

 

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

 

It is further understood and agreed that, for the purpose of effecting compliance with Rule 144A promulgated by the SEC in connection with any resales of Notes that may hereafter be effected pursuant to the provisions of such Rule, if Holdings is not subject to Section 13 or 15(d) of the Exchange Act, each prospective purchaser of Notes designated by a holder thereof shall have the right to obtain from Holdings and the Borrower, upon the written request of such holder, the information required pursuant to Rule 144A(d)(4) under the Securities Act.

 

Each of Holdings and the Borrower will keep at its principal executive office a true copy of this Agreement, and cause the same to be available for inspection at said offices

 

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during normal business hours by any holder of any of the Notes or any prospective purchaser of any thereof designated by the holder thereof.

 

Section 9. Inspection of Properties and Books. Each of the Borrower and Holdings agrees that you or any Qualified Holder who agrees to abide by the confidentiality requirement set forth below in this Section may, so long as you or such Qualified Holder owns any Notes, after giving reasonable notice to Holdings and the Borrower, visit at your or its own expense the offices and Properties of Holdings, the Borrower or any of their Subsidiaries, and may examine and make copies of the relevant books and records, and discuss the affairs, finances and accounts of such companies with their officers and public accountants (and by this provision the Borrower and each Subsidiary hereby authorizes said accountants to discuss with you or such Qualified Holder its affairs, finances and accounts) all at reasonable times during normal business hours as often as you or it may reasonably desire. At any time when a Default or an Event of Default shall have occurred and be continuing, the Borrower shall be required to pay or reimburse you or any such Qualified Holder for expenses which you or such Qualified Holder may reasonably incur in connection with any such visitation or inspection. You and any other Qualified Holder shall use such information only for your own purposes, shall keep it confidential and shall not disclose it to any third person (other than a Purchaser Affiliate or an affiliate of a Qualified Holder or accountants engaged by you or such Qualified Holder), except for disclosures to: (i) such Qualified Holder’s or Purchaser Affiliate’s directors, trustees, partners, officers, employees, agents and professional consultants, (ii) any other Noteholder, (iii) any Person to which such Qualified Holder offers to sell such Note or any part thereof, (iv) any Person to which such Qualified Holder sells or offers to sell a participation in all or any part of such Note, (v) any Person from which such Qualified Holder offers to purchase any security of the Borrower, (vi) any federal, state or Canadian provincial regulatory authority having jurisdiction over such Qualified Holder, (vii) the National Association of Insurance Commissioners or any similar organization, (viii) any nationally recognized financial rating service that is rating or reviewing the rating of the Notes or (ix) any other Person to which such delivery or disclosure may be necessary or appropriate (a) in compliance with any law, rule, regulation or order applicable to such Qualified Holder, (b) in response to any subpoena or other legal process or informal investigative demand, (c) in connection with any litigation to which such Qualified Holder is a party, or (d) to protect such Qualified Holder’s investment in the Notes; provided, however, that, (1) prior

 

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to any disclosure of any such information to any Person described in clause (iii), (iv) or (v) above, such Person agrees to keep any non-public information so delivered to it confidential or (2) if you (or such Qualified Holder) is required to disclose any such information in connection with judicial or governmental proceedings, you (or such Qualified Holder) shall provide the Borrower and Holdings with prompt prior notice of such requirement. Any bona fide transferee of any Note (or any participant in your interest in the Notes), by its acceptance thereof, shall be bound by the provisions of this Section 9 to the same extent as you are bound.

 

Section l0. Affirmative Covenants. The Borrower and Holdings covenant and agree that so long as any of the Notes shall be outstanding:

 

10.1. Payment of Principal, Prepayment Charge and Interest; Etc. The Borrower will duly and punctually pay the principal of, prepayment charge (if any) and interest on the Notes in accordance with the terms of such Notes and this Agreement. The Borrower and Holdings will comply with all of the covenants, agreements and conditions contained in this Agreement.

 

10.2. Payment of Taxes and Claims. Holdings and the Borrower will, and will cause each of their respective Subsidiaries to, pay before they become delinquent:

 

(A) all taxes (including excise taxes), assessments and governmental charges or levies imposed upon it or its income or profits or upon its Property, real, personal or mixed, or upon any part thereof;

 

(B) all claims for labor, materials and supplies which, if unpaid, might result in the creation of a Lien upon its Property; and

 

(C) all claims, assessments, or levies required to be paid by any of them pursuant to any agreement, contract, law, ordinance or governmental rule or regulation governing any pension, retirement, profit-sharing or any similar plan; provided, that the taxes, assessments, charges and levies described in this Section 10.2 need not be paid while being diligently contested in good faith and by appropriate proceedings so long as adequate book reserves have been established with respect thereto in accordance with GAAP. The Borrower and Holdings will timely file, and will cause their Subsidiaries to file, all tax returns required to be filed in

 

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connection with the payment of taxes required by this Section 10.2.

 

10.3. Maintenance of Properties and Corporate Existence. Holdings and the Borrower will, and will cause each of their respective Subsidiaries to:

 

(A) maintain its Property in good condition and make all renewals, repairs, replacements, additions, betterments, and improvements thereto as are necessary in the reasonable opinion of management;

 

(B) keep books, records and accounts in accordance with GAAP;

 

(C) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and powers and franchises including, without limitation thereof, any necessary qualification or licensing in any foreign jurisdiction; and

 

(D) comply with all applicable statutes, regulations, franchises, and Orders of, and all applicable restrictions imposed by, any Governmental Body (all as now or at any time hereafter may be in effect), in respect of the conduct of its business and the ownership of its Properties (including, without limitation, applicable statutes, rules, ordinances, regulations and Orders relating to Environmental Laws), except where non-compliance could not reasonably be expected to have a Material Adverse Effect.

 

10.4. Insurance. Holdings and the Borrower will maintain, and will cause to be maintained on behalf of each Subsidiary, insurance coverage by financially sound and reputable insurers, against such casualties and contingencies, of such types (including without limitation public liability, workmens’ compensation, larceny and embezzlement or other criminal misappropriation insurance) and in such amounts as are prudent, and in any event in such amounts as are adequate to cover foreseeable losses to the business of Holdings, the Borrower and their Subsidiaries. The Borrower or Holdings shall furnish to the Purchasers on or prior to the Closing Date a summary of insurance presently in force in a separate letter.

 

Section 11. Negative and Maintenance Covenants. The provisions of this Section 11 shall remain in effect so long as any Notes shall remain outstanding.

 

11.1. Restrictions on Liens. Holdings and the Borrower covenant that they will not, nor will they permit any

 

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Subsidiary to, 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 10.2;

 

(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 Holdings, the Borrower or any of their Subsidiaries;

 

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

 

(G) Liens (other than Liens created pursuant to Capitalized Leases) existing on the date hereof and described in Schedule 4.8 attached hereto, securing Debt

 

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not exceeding $1,000,000 in the aggregate in principal amount;

 

(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 Funded Debt represented by such Capitalized Leases is permitted pursuant to Section 11.2(C); and

 

(I) Liens including Liens arising out of purchase money financing not otherwise permitted by the foregoing clauses of this Section 11.1 securing Debt (without duplication) of Holdings, the Borrower or any Subsidiary of Holdings or the Borrower, provided that the sum of (i) the principal amount of such Debt plus (ii) unsecured Debt of Subsidiaries of Holdings (other than the Borrower) and Subsidiaries of the Borrower not otherwise permitted under Section 11.4(A) does not exceed at any time 15% of Consolidated Tangible Net Worth.

 

The Liens referred to in Section 11.1(A) through (I) are herein collectively referred to as “Permitted Liens,” individually, a “Permitted Lien.”

 

11.2. Limitation on Funded Debt Holdings and the Borrower shall not, and shall not permit (except to the extent permitted in Section 11.4) any Subsidiary to, incur Funded Debt other than:

 

(A) the Notes, the Guarantee of Holdings as set forth herein and the Subsidiary Guarantee and all Funded Debt of Holdings, the Borrower and their Subsidiaries existing as of the Closing Date, as set forth on Schedule 4.8 attached hereto;

 

(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

 

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(C) Additional Funded Debt of Holdings, the Borrower and their Subsidiaries, 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 (i) the ratio of Consolidated Income Available for Fixed Charges to Fixed Charges would be not less than that ratio required to be maintained pursuant to Section 11.8 and (ii) the aggregate consolidated Funded Debt (without duplication) of Holdings, the Borrower and their Subsidiaries would not exceed 50% of Total Capitalization, 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.

 

11.3. Consolidated Tangible Net Worth. Holdings and its Subsidiaries shall not permit Consolidated Tangible Net Worth at any time to be less than the sum of $40,000,000 plus 50% of Consolidated Net Income on a cumulative basis from September 30, 1992, to and including any date of determination hereunder.

 

11.4. Limitation on Debt of Subsidiaries. Holdings and the Borrower shall not permit any of their Subsidiaries (other than the Borrower) to incur any Debt other than:

 

(A) Debt owed to Holdings or the Borrower or to a wholly-owned Subsidiary of Holdings 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 Holdings, the Borrower and any of their Subsidiaries which is secured by Liens not permitted by Sections 11.1(A) through (H) does not exceed 15% of Consolidated Tangible Net Worth.

 

11.5. Restricted Payments; Restricted Investments. Holdings will not, directly or indirectly, through any Subsidiary or otherwise, (a) pay or declare any dividend on any class of its capital stock (but 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

 

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which the consideration paid by Holdings or such Subsidiary consists solely of shares of capital stock of Holdings); 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 Holdings 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 Holdings 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 Holdings which are not mandatorily redeemable or otherwise subject to repurchase, retirement, call, put or other reacquisition prior to or on the maturity date of the Notes (and not subject to acceleration or redemption repurchase, retirement, call, put or other reacquisition prior to the maturity date of the 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, (a) no Default or Event of Default shall have occurred and be continuing, and (b) Holdings, the Borrower and their Subsidiaries shall be able to incur, pursuant to Section l1.2(C)(ii) above, at least $1 of additional Funded Debt. So long as no Default or Event of Default has occurred or would be continuing after giving effect thereto, this Section 11.5 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 Holdings out of the proceeds of the substantially concurrent sale (other than to a Subsidiary of Holdings) of, shares of capital stock of Holdings, 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 Holdings and its Subsidiaries to make future Restricted Payments.

 

11.6. Sale of Assets. Holdings and the Borrower shall not, and shall not permit any of their Subsidiaries to, effect a Disposition of any assets unless

(i) no Default or Event of Default has occurred (except in the case of subclause (a) below) and is continuing, and (ii) one of the following applies:

 

(a) such Disposition is in the ordinary course of business, including, without limitation, sales and leases of

 

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operating restaurants in accordance with the Borrower’s ordinary course franchising operations and is made pursuant to the reasonable business judgment of the Borrower in accordance with past practice;

 

(b) in each fiscal year, Holdings, the Borrower and their respective Subsidiaries may effect Dispositions 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 11.6), 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 11.6), 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, 1992 (other than Dispositions permitted by clause (a), (c) or (d) of this Section 11.6), 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), Holdings, the Borrower or any of their Subsidiaries could incur at least $1 of additional Funded Debt without being in default of their obligations under Section 11.2(C)(ii);

 

(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 Holdings or its Subsidiaries which is not junior in right of payment to the Notes; 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, 1992 and are immediately leased back from the purchaser thereof by Holdings 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 Holdings, the Borrower or any of their Subsidiaries.

 

11.7. Consolidation or Merger. Holdings 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

 

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of related or unrelated transactions and whether at the same time or over a period of time, provided that:

 

(A) (i) the Borrower may merge with Holdings or any of Holdings’ other Subsidiaries, (ii) Holdings may merge with the Borrower or any of Holdings’ other Subsidiaries and (iii) any Subsidiary may merge with Holdings, the Borrower or any other Subsidiary, so long as, with respect to any mergers of Holdings, the Borrower or IHOP Realty 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, Holdings or IHOP Realty, as the case may be, under this Agreement, the Notes and the Subsidiary Guarantee, as the case may be, a copy of which writing shall be provided to you and each holder of Notes not less than 10 Business Days prior to any such transaction and which shall be acceptable in form and substance to the Majority Holders, (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 Funded Debt pursuant to Section 1l.2(C)(ii) hereof; and

 

(B) Holdings or the Borrower 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 under the Notes and this Agreement or of Holdings under this Agreement, as the case may be, a copy of which writing shall be provided to you and each holder of Notes not less than 10 Business Days prior to any such transaction and which shall be acceptable in form and substance to the Majority Holders, (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 Funded Debt pursuant to Section 11.2(C)(ii) hereof.

 

11.8. Maintenance of Fixed Charge Coverage. Holdings and the Borrower covenant that on the last day of any quarterly accounting period of Holdings and its Subsidiaries, the ratio of Consolidated Income Available for Fixed Charges to Fixed Charges for the period consisting of any four of the immediately preceding five quarterly accounting periods shall not be less than:

 

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Ratio

 

Fiscal Quarter Ending in the Period

 

 

 

1.40:1.00

 

from Closing Date through September 29, 1993; and

 

 

 

1.50:1.00

 

from September 30, 1993 and thereafter.

 

11.9. Transactions with Affiliates. Each of Holdings and the Borrower 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 on terms that are less favorable to Holdings, the 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 Holdings, the Borrower and their Subsidiaries in the ordinary course of business and consistent with past practices.

 

11.10. Acquisition of Margin Securities. Each of Holdings and the Borrower 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 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, the holders of the Notes shall have received an opinion of counsel satisfactory to the holders of the Notes to the effect that such purchase or acquisition will not cause this Agreement or the Notes to be in violation of Regulation G or any other regulation of such Board then in effect.

 

11.11. Conduct of Business. Each of Holdings and the Borrower 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 Holdings and its Subsidiaries, taken as a whole, from that described in the Confidential Memorandum.

 

Section 12. Definitions.

 

(A) For the purposes of this Agreement, the following terms shall have the following respective meanings:

 

“Acceleration Price” is defined in Section 13.2(A) hereof.

 

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“Accountants” has the meaning specified in Section 8.

 

“Affiliate” shall mean any Person (other than a Subsidiary) (i) which directly or indirectly controls, or is controlled by, or is under common control with, Holdings, (ii) which beneficially owns or holds 10% or more of any class of the Voting Stock of Holdings, (iii) 10% or more of the Voting Stock of which is be