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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

(Mark One)  

ý

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

For the quarterly period ended June 30, 2004

OR

o

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

For the transition period from                             to                              

Commission File Number 0-8360


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

Delaware
(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)

 

91203-1903
(Zip Code)

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


        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý No  o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes  ý No  o

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

Class

Outstanding as of July 30, 2004
Common Stock, $.01 par value 20,209,269




IHOP CORP. AND SUBSIDIARIES
INDEX

 
   
  Page
PART I.   FINANCIAL INFORMATION    

 

 

Item 1—Financial Statements

 

 

 

 

    Consolidated Balance Sheets—June 30, 2004 and December 31, 2003

 

3

 

 

    Consolidated Statements of Income—Three and Six Months Ended June 30, 2004
    and 2003

 

4

 

 

    Consolidated Statements of Cash Flows—Six Months Ended June 30, 2004
    and 2003

 

5

 

 

    Notes to Consolidated Financial Statements

 

6

 

 

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

 

9

 

 

Item 3—Quantitative and Qualitative Disclosures about Market Risk

 

19

 

 

Item 4—Controls and Procedures

 

19

PART II.

 

OTHER INFORMATION

 

 

 

 

Item 1—Legal Proceedings

 

21

 

 

Item 2—Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

 

21

 

 

Item 3—Defaults Upon Senior Securities

 

21

 

 

Item 4—Submission of Matters to a Vote of Security Holders

 

21

 

 

Item 5—Other Information

 

22

 

 

Item 6—Exhibits and Reports on Form 8-K

 

22

 

 

    (a) Exhibits

 

22

 

 

    (b) Reports on Form 8-K

 

22

 

 

Signatures

 

23

2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

 
  June 30,
2004

  December 31,
2003

 
 
  (Unaudited)

   
 
Assets              
Current assets              
  Cash and cash equivalents   $ 14,929   $ 27,996  
  Marketable securities     35,907     45,537  
  Receivables, net     44,059     47,116  
  Reacquired franchises and equipment held for sale, net     1,165     1,597  
  Inventories     397     556  
  Prepaid expenses     1,474     4,279  
   
 
 
    Total current assets     97,931     127,081  
   
 
 
Long-term receivables     346,068     354,036  
Property and equipment, net     302,930     314,221  
Reacquired franchises and equipment held for sale, net     6,602     9,153  
Excess of costs over net assets acquired     10,767     10,767  
Other assets     34,028     27,746  
   
 
 
    Total assets   $ 798,326   $ 843,004  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities              
  Accounts payable   $ 9,179   $ 13,840  
  Accrued employee compensation and benefits     8,872     11,962  
  Other accrued expenses     10,761     8,924  
  Deferred income taxes     2,020     1,760  
  Current maturities of long-term debt     5,775     5,731  
  Current maturities of capital lease obligations     3,454     3,156  
   
 
 
    Total current liabilities     40,061     45,373  
   
 
 
Long-term debt, less current maturities     138,653     139,615  
Capital lease obligations, less current maturities     175,841     177,664  
Deferred income taxes     68,866     72,225  
Other liabilities     30,366     25,767  
Commitments and contingencies              
Stockholders' equity              
  Preferred stock, $1 par value, 10,000,000 shares authorized; none issued and outstanding          
  Common stock, $.01 par value, 40,000,000 shares authorized; June 30, 2004: 22,105,037 shares issued and 20,284,442 shares outstanding; December 31, 2003: 21,994,068 shares issued and 21,389,939 shares outstanding     221     220  
  Additional paid-in capital     108,649     104,661  
  Retained earnings     300,028     295,448  
  Deferred compensation     (103 )   (191 )
  Accumulated other comprehensive loss     (348 )   (545 )
  Treasury stock, at cost (1,820,595 and 604,129 shares at June 30, 2004 and December 31, 2003, respectively)     (64,458 )   (19,443 )
  Contribution to ESOP     550     2,210  
   
 
 
    Total stockholders' equity     344,539     382,360  
   
 
 
    Total liabilities and stockholders' equity   $ 798,326   $ 843,004  
   
 
 

See the accompanying Notes to Consolidated Financial Statements.

3


IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2004
  2003
  2004
  2003
Revenues                        
  Franchise revenues   $ 37,209   $ 34,722   $ 76,338   $ 68,508
  Rental income     32,405     28,993     64,797     57,307
  Company restaurant sales     8,314     21,335     18,869     41,009
  Financing revenues     8,216     18,234     18,024     30,451
   
 
 
 
    Total revenues     86,144     103,284     178,028     197,275
   
 
 
 
Costs and Expenses                        
  Franchise expenses     18,297     15,961     36,595     31,362
  Rental expenses     23,705     21,320     47,125     42,139
  Company restaurant expenses     8,942     22,493     20,898     43,401
  Financing expenses     3,701     9,868     8,914     16,701
  General and administrative expenses     14,045     13,562     27,680     25,829
  Other expense, net     1,583     1,146     2,318     2,309
  Impairment and closure charges     8,888     567     10,059     917
  Reorganization charges         811         7,520
   
 
 
 
    Total costs and expenses     79,161     85,728     153,589     170,178
   
 
 
 
Income before provision for income taxes     6,983     17,556     24,439     27,097
Provision for income taxes     2,617     6,584     9,163     10,162
   
 
 
 
Net income   $ 4,366   $ 10,972   $ 15,276   $ 16,935
   
 
 
 
Net Income Per Share                        
  Basic   $ 0.21   $ 0.51   $ 0.72   $ 0.79
   
 
 
 
  Diluted   $ 0.21   $ 0.51   $ 0.71   $ 0.78
   
 
 
 
Weighted Average Shares Outstanding                        
  Basic     20,958     21,520     21,182     21,417
   
 
 
 
  Diluted     21,134     21,705     21,373     21,574
   
 
 
 
Dividends Declared Per Share   $ 0.25   $   $ 0.50   $ 0.25
   
 
 
 
Dividends Paid Per Share   $ 0.25   $ 0.25   $ 0.50   $ 0.25
   
 
 
 

See the accompanying Notes to Consolidated Financial Statements.

4


IHOP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
  Six Months Ended
June 30,

 
 
  2004
  2003
 
Cash flows from operating activities              
  Net income   $ 15,276   $ 16,935  
    Adjustments to reconcile net income to cash flows provided by operating activities              
      Depreciation and amortization     9,332     9,011  
      Impairment and closure charges     10,059     917  
      Reorganization charges         5,534  
      Deferred income taxes     (3,099 )   (50 )
      Contribution to ESOP     565     1,113  
      Tax benefit from stock options exercised     784     1,544  
      Changes in current assets and liabilities              
        Receivables     1,889     3,922  
        Inventories     159     (1 )
        Prepaid expenses     2,805     5,226  
        Accounts payable     (4,661 )   (13,490 )
        Accrued employee compensation and benefits     (3,090 )   2,291  
        Other accrued expenses     1,837     (682 )
        Other     752     (88 )
   
 
 
          Cash flows provided by operating activities     32,608     32,182  
   
 
 
Cash flows from investing activities              
  Additions to property and equipment     (8,978 )   (49,634 )
  Additions to long-term receivables     (354 )   (6,483 )
  Redemption and purchase of marketable securities, net     9,630     (33,367 )
  Proceeds from sale of land and building     1,472      
  Principal receipts from long-term receivables     10,424     7,436  
  Additions to reacquired franchises held for sale     (697 )   (1,285 )
   
 
 
          Cash flows provided by (used in) investing activities     11,497     (83,333 )
   
 
 
Cash flows from financing activities              
  Proceeds from sale and leaseback arrangements         12,618  
  Repayment of long-term debt, including revolving line of credit     (917 )   (1,019 )
  Principal payments on capital lease obligations     (1,524 )   (1,237 )
  Dividends paid     (10,696 )   (5,383 )
  Purchase of treasury stock     (46,333 )   (5,041 )
  Proceeds from stock options exercised     2,298     6,159  
   
 
 
          Cash flows (used in) provided by financing activities     (57,172 )   6,097  
   
 
 
  Net decrease in cash and cash equivalents     (13,067 )   (45,054 )
  Cash and cash equivalents at beginning of period     27,996     98,739  
   
 
 
  Cash and cash equivalents at end of period   $ 14,929   $ 53,685  
   
 
 
Supplemental disclosures              
  Interest paid, net of amounts capitalized   $ 13,849   $ 13,370  
  Income taxes paid     3,582     4,958  
  Capital lease obligations incurred         10,277  

See the accompanying Notes to Consolidated Financial Statements.

5



IHOP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        1.     General:    The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

        The consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

        For further information, refer to the consolidated financial statements and footnotes thereto included in IHOP's annual report on Form 10-K for the year ended December 31, 2003.

        2.     Reclassifications:    Certain reclassifications have been made to prior period information to conform to the current period presentation.

        3.     Presentation:    IHOP's fiscal quarter ends on the Sunday closest to the last day of each quarter. For convenience, we report all fiscal quarter endings on March 31, June 30, September 30 and December 31.

        4.     Segments:    In January 2003, we announced significant changes in the way the Company conducts 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. As a result of the change in IHOP's business model, the Company has also changed the presentation of its segment information. 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 Franchise Operations segment consists primarily of royalty revenues, sales of proprietary products, advertising fees and franchise fees. The Rental Operations segment consists of rental income and expense and direct financing lease interest income and capital lease interest expense on restaurants operated by franchisees. The Company Restaurant Operations segment includes Company-operated restaurants in the United States. The Financing Operations segment

6



consists of sales of franchises and equipment as well as interest income from the financing of franchise fee and equipment contract notes.

 
  Franchise
Operations

  Rental
Operations

  Company
Restaurant
Operations

  Financing
Operations

  General and
Administrative
and Other

  Consolidated
Total

 
  (In thousands)

Three Months Ended June 30, 2004                                    
Revenues from external customers   $ 37,209   $ 32,405   $ 8,314   $ 8,216   $   $ 86,144
Intercompany real estate charges         4,985     112         (5,097 )  
Depreciation and amortization         1,408     384         2,825     4,617
Interest expense         4,594     233     1,994         6,821
Impairment and closure charges             8,888             8,888
Income (loss) before provision for income taxes     18,912     4,862     (731 )   4,515     (20,575 )   6,983
Provision for income taxes                     2,617     2,617

Three Months Ended June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 34,722   $ 28,993   $ 21,335   $ 18,234   $   $ 103,284
Intercompany real estate charges         3,731     485         (4,216 )  
Depreciation and amortization         1,194     1,046         2,358     4,598
Interest expense         4,438     435     1,825         6,698
Impairment and closure charges             567             567
Reorganization charges                     811     811
Income (loss) before provision for income taxes     18,761     4,815     (1,504 )   8,366     (12,882 )   17,556
Provision for income taxes                     6,584     6,584

Six Months Ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 76,338   $ 64,797   $ 18,869   $ 18,024   $   $ 178,028
Intercompany real estate charges         9,897     295         (10,192 )  
Depreciation and amortization         2,784     880         5,668     9,332
Interest expense         9,223     506     3,973         13,702
Impairment and closure charges             10,059             10,059
Income (loss) before provision for income taxes     39,743     10,046     (2,297 )   9,110     (32,163 )   24,439
Provision for income taxes                     9,163     9,163

Six Months Ended June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 68,508   $ 57,307   $ 41,009   $ 30,451   $   $ 197,275
Intercompany real estate charges         7,203     981         (8,184 )  
Depreciation and amortization         2,354     2,152         4,505     9,011
Interest expense         8,836     864     3,495         13,195
Impairment and closure charges             917             917
Reorganization charges                     7,520     7,520
Income (loss) before provision for income taxes     37,146     9,672     (3,095 )   13,750     (30,376 )   27,097
Provision for income taxes                     10,162     10,162

        5.     Stock Based Employee Compensation:    In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," we have elected to account for our stock-based employee compensation plans under the intrinsic value method which requires compensation expense to be recorded only if, on the date of grant, the current market price of the Company's common stock exceeds the exercise price the employee must pay for the stock. The Company's policy is to grant stock

7



options at the fair market value of the underlying stock at the date of grant. Had compensation expense for our stock option plans been determined based on the fair value at the grant date for awards through June 30, 2004 consistent with the provisions of SFAS No. 123, our after-tax net income and after-tax net income per share would have been reduced to the pro forma amounts indicated below (in thousands, except net income per share data):

 
  Three Months
Ended
June 30

  Six Months
Ended
June 30

 
 
  2004
  2003
  2004
  2003
 
Net income, as reported   $ 4,366   $ 10,972   $ 15,276   $ 16,935  
Add stock-based compensation expense included in reported net income, net of tax     26     25     54     59  
Less stock-based compensation expense determined under the fair-value accounting method, net of tax     (435 )   (452 )   (863 )   (699 )
   
 
 
 
 
Net income, pro forma   $ 3,957   $ 10,545   $ 14,467   $ 16,295  
   
 
 
 
 
Net income per share—diluted, as reported   $ 0.21   $ 0.51   $ 0.71   $ 0.78  
Net income per share—diluted, pro forma   $ 0.19   $ 0.49   $ 0.68   $ 0.76  

        6.     Income Taxes:    The Internal Revenue Service ("IRS") has proposed adjustments in connection with its examination of the Company's 2000 and 2001 federal income tax returns. The proposed adjustments would accelerate the tax years in which the Company reports initial franchise fee income for federal income tax purposes. If the IRS is successful, the Company would be required to report additional income for its 2000 tax year of approximately $45.2 million and additional income for its 2001 tax year of approximately $4.8 million. The Company's federal income tax liability with respect to the proposed adjustments, exclusive of interest, penalties and any related state tax liability would be approximately $15.8 million for 2000 and $1.7 million for 2001. The Company is currently contesting the proposed adjustments through IRS administrative proceedings. In addition, if the IRS is successful, the Company would report additional income for its 2002 and 2003 tax years. The Company estimates that its federal income tax liability with respect to such additional income, exclusive of interest, penalties and related state tax liability would be approximately $2.0 million for each of 2002 and 2003.

        For the tax years under audit, and potentially for subsequent tax years, such proposed adjustments could result in material cash payments by the Company. The Company had previously recorded in its consolidated financial statements the expected federal and state deferred income tax liability. The proposed adjustments relate only to the timing of when the taxes are paid. Although the Company cannot determine at this time the resolution of this matter, we do not believe that the proposed adjustments, if upheld, will have a material adverse effect on our financial condition or results of operations.

        7.     Impairment and Closure Charges:    During the second quarter of 2004, IHOP recorded an $8.9 million charge for long-lived asset impairments on 14 restaurants. The Company will close 8 of these restaurants in the third quarter of 2004. The decision to close the restaurants was a result of a comprehensive analysis that examined restaurants not meeting minimum return on investment thresholds and certain other operating performance criteria. The assets for these restaurants were written down to their estimated fair value in the second quarter. During the third quarter of 2004, IHOP expects to record an additional charge of approximately $4 to $5 million, primarily related to existing lease obligations associated with several of the restaurants to be closed. These lease charges will be recorded primarily during the third quarter in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires lease obligations to be recorded when a restaurant ceases operation.

8


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

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

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
 
  (Dollars in thousands)
(Unaudited)

 
Restaurant Data                          
  Effective restaurants(a)                          
    Franchise(b)     987     907     983     899  
    Company     32     79     37     77  
    Area license(b)     145     137     145     137  
   
 
 
 
 
      Total     1,164     1,123     1,165     1,113  
   
 
 
 
 

System-wide

 

 

 

 

 

 

 

 

 

 

 

 

 
  Sales(c)   $ 461,074   $ 425,533   $ 926,389   $ 839,358  
    Percent change     8.4 %   16.1 %   10.4 %   14.6 %
  Average sales per effective restaurant   $ 396   $ 379   $ 795   $ 754  
    Percent change     4.5 %   6.8 %   5.4 %   5.5 %
  Same-store sales percentage change(d)     4.2 %   5.1 %   5.6 %   4.1 %

Franchise(b)

 

 

 

 

 

 

 

 

 

 

 

 

 
  Sales   $ 409,421   $ 366,940   $ 820,979   $ 722,663  
    Percent change     11.6 %   16.6 %   13.6 %   15.2 %
  Average sales per effective restaurant   $ 415   $ 405   $ 835   $ 804  
    Percent change     2.5 %   6.0 %   3.9 %   5.0 %
  Same-store sales percentage change(d)     4.0 %   4.9 %   5.5 %   4.0 %

Company

 

 

 

 

 

 

 

 

 

 

 

 

 
  Sales   $ 8,314   $ 21,335   $ 18,869   $ 41,009  
    Percent change     (61.0 %)   18.6 %   (54.0 %)   14.6 %
  Average sales per effective restaurant   $ 260   $ 270   $ 510   $ 533  
    Percent change     (3.7 %)   12.5 %   (4.3 %)   10.4 %

Area License(b)

 

 

 

 

 

 

 

 

 

 

 

 

 
  Sales   $ 43,339   $ 37,258   $ 86,541   $ 75,686  
    Percent change     16.3 %   10.0 %   14.3 %   9.3 %
  Average sales per effective restaurant   $ 299   $ 272   $ 597   $ 552  
    Percent change     9.9 %   7.5 %   8.2 %   5.1 %

9


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

 
  Three Months
Ended
June 30,

  Six Months
Ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
 
  (Unaudited)

  (Unaudited)

 
RESTAURANT DEVELOPMENT ACTIVITY                  
IHOP-beginning of period   1,164   1,118   1,165   1,103  
  New openings                  
    IHOP-developed   2   16   3   33  
    Franchisee-developed(a)   5   3   7   6  
    Area license       3    
   
 
 
 
 
      Total new openings   7   19   13   39  
  Closings                  
    Company and franchise   (4 ) (1 ) (11 ) (6 )
    Area License          
   
 
 
 
 
IHOP-end of period   1,167   1,136   1,167   1,136  
   
 
 
 
 

Summary-end of period

 

 

 

 

 

 

 

 

 
  Franchise(a)   990   920   990   920  
  Company   32   79   32   79  
  Area license(a)   145   137   145   137  
   
 
 
 
 
      Total IHOP   1,167   1,136   1,167   1,136  
   
 
 
 
 

RESTAURANT FRANCHISING ACTIVITY

 

 

 

 

 

 

 

 

 
IHOP-developed   2   19   4   30  
Franchisee-developed(a)   5   3   7   6  
Rehabilitated and refranchised   2   1   11   2  
   
 
 
 
 
      Total restaurants franchised   9   23   22   38  
Reacquired by IHOP   (3 ) (4 ) (3 ) (6 )
Closed   (4 )   (8 ) (2 )
   
 
 
 
 
  Net addition   2   19   11   30  
   
 
 
 
 


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 strategic growth plan; the ability to continue to attract qualified franchisees; availability of suitable locations and terms for the sites

10



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.

        This information should be read in conjunction with consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

General

        In January 2003, we announced significant changes in the way we conduct our business. These changes included a transition from Company-financed restaurant development (the "Old Model") to a more traditional franchise development model, in which franchisees finance and develop new restaurants (the "New Model"). It was the Company's intention to complete the transition from Company development to franchisee development by the end of 2003. Due to construction delays, we expect to complete the development and franchising of the final restaurant under the Old Model in the third quarter of 2004.

Franchising

        Our franchising activities in each of the quarters and six months ended June 30, 2004 and 2003 included both Company financed and franchisee financed development. For clarity of presentation, the discussion below is separated between those activities specific to the Old Model and those which apply to the New Model.

Old Model

        Under the Old Model, when we developed a restaurant we identified the site for the new restaurant, purchased the site or leased it from a third party, and built the restaurant and equipped it with all required equipment. We selected and trained the franchisee and supervisory personnel who would operate the restaurant. In addition, we typically financed approximately 80% of the franchise fee, and leased the restaurant and equipment to the franchisee. In accordance with GAAP, the equipment lease between the Company and the franchisee was treated as a sale in our financial statements.

        Our involvement in the development of new restaurants allowed IHOP to charge a core franchise fee and development and financing fees totaling $200,000 to $550,000. In addition, we derive income from the financing of the core franchise fee and development and financing fees, and the leasing of property and equipment to franchisees. However, we also incurred obligations in the development, franchising and start-up operations of the new restaurants.

        The franchisee typically paid approximately 20% of the initial franchise fee in cash, and we financed the remaining amount over five to eight years. We also continue to receive 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 property and related equipment; (3) revenue from the sale of certain proprietary

11



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. In some cases, we have agreed to accept reduced royalties for a period of time from franchisees in order to assist them in establishing their businesses, where business conditions justify it.

New Model

        Under the New Model, IHOP's approach to franchising is similar to that of most franchising systems in the foodservice industry. Franchisees can undertake individual store development or multi-store development. Under the single store development program, the franchisee is 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 is credited against an initial franchise fee of $50,000. The franchisee then uses his or her own capital and financial resources to acquire the site, build and equip the business and fund working capital needs.

        In addition to offering franchises for individual restaurants, the Company offers multi-store development agreements for certain qualified franchisees. These multi-store development agreements provide franchisees with an exclusive right to develop new IHOP restaurants in designated geographic territories for a specified period of time. Multi-store developers are required to develop and operate a specified number of restaurants according to an agreed upon development schedule. Multi-store developers are 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, the franchise developer must pay an initial franchise fee of $40,000 against which the development fee of $20,000 is credited. The number of stores and the schedule of stores to be developed under multi-store development agreements is negotiated on an agreement by agreement basis. With respect to restaurants developed under the New Model, the Company receives 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.

        The following table represents our development commitments as of June 30, 2004.

 
   
  Scheduled Opening of Restaurants
 
  Number of Signed
Agreements

  Remainder of
2004

  2005
  2006
  2007 and
thereafter

  Total
Single-store development agreements   31   16   15       31
Multi-store development agreements   34   23   33   30   114   200
   
 
 
 
 
 
    65   39   48   30   114   231
   
 
 
 
 
 

Comparison of the second quarter and six months ended June 30, 2004 and 2003

        IHOP's fiscal second quarter ends on the Sunday nearest to June 30 of each year. For convenience, we report the fiscal second quarters as ending on June 30. Each of the quarters ended June 30, 2004 and 2003 was comprised of 13 weeks (91 days). Each of the six month periods ended June 30, 2004 and 2003 was comprised of 26 weeks (182 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. In the second quarter of 2004, system-wide retail sales grew by 8.4% or $35.5 million to $461.1 million from $425.5 million in the

12



same period in 2003. System-wide retail sales for the first six months of 2004 grew by 10.4% or $87.0 million to $926.4 million from $839.4 million in the same period in 2003. The growth in system-wide retail sales was primarily due to an increase in same-store sales and an increase in the number of effective restaurants. Same-store sales increased by 4.2% for the second quarter of 2004 and by 5.6% for the first six months of 2004 compared to the same periods in 2003. The increase in same-store sales was primarily attributable to limited time promotions and improved operations of our restaurants. Due to new restaurant development, effective restaurants grew by 3.7% from 1,123 to 1,164 for the second quarter of 2004, and by 4.7% from 1,113 to 1,165 for the first six months of 2004. "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.

        For the twelve months ending December 31, 2004, we expect system-wide retail sales to be in the range of $1.8 billion to $1.9 billion. System-wide retail sales growth is expected to be driven by the annualized effect of new restaurant openings in 2003, expected new restaurant openings in 2004 and expected improvement in same-store sales. In addition, the anticipated increase in system-wide retail sales will be due in part to the benefit of a 53rd week in fiscal 2004. We utilize a weekly fiscal calendar to close our books. In order to align our fiscal quarter end to the calendar quarter, we utilize a 53-week fiscal calendar approximately every six years to account for this required adjustment. As such, we will record an additional week of retail sales in fiscal 2004.

Franchise Operations

        Franchise revenues are the revenues received by IHOP from its franchisees and area licensees and include royalties, sales of proprietary products, advertising fees and core franchise fees (core franchise fees are the portion of total franchise fees allocable to the license to franchisees to use the Company's intellectual property). Franchise revenues grew by 7.2% from $34.7 million in the second quarter 2003 to $37.2 million in the same period in 2004. Franchise revenues for the first six months of 2004 grew by 11.4% to $76.3 million from $68.5 million in the same period of 2003. Franchise revenues grew primarily due to an increase in franchise restaurant retail sales. Franchise retail sales increased by 11.6% to $409.4 million from $366.9 million in the second quarter of 2004 and by 13.6% to $821.0 million from $722.7 million for the first six months of 2004 compared to the same periods in 2003. The increase in franchise restaurant retail sales was primarily due to an increase in the number of effective franchise restaurants and an increase in same-store sales. Effective franchise restaurants grew by 8.8% from 907 to 987 for the second quarter of 2004, and by 9.3% from 899 to 983 for the first six months of 2004, in each case, compared to the same period in 2003. Same-store sales increased by 4.0% in the second quarter of 2004 and increased by 5.5% in the first six months of 2004.

        The growth in franchise revenues in the second quarter and first six months of 2004 was negatively impacted by fewer transactions for which we received core franchise fees. In the second quarter of 2004, we franchised 2 restaurants as compared with 19 restaurants in the same period in 2003 and in the first six months of 2004 we franchised 4 restaurants as compared with 30 restaurants in the first six months of 2003.

        Franchise expenses consist primarily of advertising and the cost of proprietary products, which are primarily variable in nature and are expected to fluctuate with franchise revenues. Franchise expenses increased by 14.6% to $18.3 million in the second quarter of 2004 from $16.0 million in the second quarter of 2003, and by 16.7% to $36.6 million in the first six months of 2004 from $31.4 million in the first six months of 2003. The increase in franchise expenses was primarily a result of the increase in franchise revenues mentioned above. Franchise expenses for both the second quarter and six months ended June 30, 2004 were also impacted by point of sale equipment subsidies paid to our franchisees in the amount of $0.6 million.

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        Franchise operations profit increased by 0.8% from $18.8 million in the second quarter of 2003 to $18.9 million in the same period in 2004. Franchise operations profit increased by 7.0% from $37.1 million in the first six months of 2003 to $39.7 million in the same period in 2004. For the twelve months ending December 31, 2004, franchise operations segment profit is expected to increase. The increase will be due to increased sales expected at franchise restaurants from annualized restaurant growth in 2003 and new development in 2004. Franchise operations margin is expected to decline slightly in 2004 primarily due to lower royalty rates from recently refranchised restaurants and lower core franchise fees due to a decrease in the number of restaurants that we expect to franchise.

Rental Operations

        Rental revenue includes rental income from operating leases and interest income from direct financing leases. Rental revenues increased by 11.8% to $32.4 million in the second quarter of 2004 from $29.0 million and by 13.1% to $64.8 million in the first six months of 2004 from $57.3 million compared to the same periods in 2003. The increase in rental income is associated with an increase in the number of operating leases associated with new and refranchised restaurants. In addition, rental income under most leases is tied to retail sales of the restaurants, and accordingly the increase is also partially due to improved same-store sales.

        Rental expenses consist primarily of rental expense associated with operating leases and interest expense on direct financing leases. Rental expenses increased by 11.2% to $23.7 million in the second quarter of 2004 from $21.3 million in the second quarter of 2003, and by 11.8% to $47.1 million in the first six months of 2004 from $42.1 million in the same period in 2003. The increase in rental costs is associated with an increase in the number of operating leases associated with new and refranchised restaurants.

        Rental operations profit increased by 13.4% from $7.7 million in the second quarter of 2003 to $8.7 million in the same period in 2004. Rental operations profit increased by 16.5% from $15.2 million in the first six months of 2003 to $17.7 million in the same period of 2004. For the twelve months ended December 31, 2004, rental operations segment profit is expected to increase primarily due to the anticipated increase in the number of operating leases associated with the refranchising of Company-operated restaurants and the effect of restaurant openings in 2003.

Company Restaurant Operations

        Company restaurant operations revenues are retail sales to guests at restaurants operated by IHOP. Company restaurant operations revenues decreased by 61.0% to $8.3 million in the second quarter of 2004 from $21.3 million in the same period of 2003 and decreased by 54.0% to $18.9 million in the first six months of 2004 from $41.0 million in the same period of 2003. The decrease in revenue is primarily due to a decrease in the number of IHOP-operated effective restaurants in the second quarter and first six months of 2004. The number of IHOP-operated effective restaurants decreased by 59.5% from 79 in the second quarter of 2003 to 32 in the second quarter of 2004 and decreased by 51.9% from 77 in the first six months of 2003 to 37 in the first six months of 2004. "Effective" restaurants are the number of restaurants open in a given fiscal period, adjusted to account for restaurants open for only a portion of the period.

        Company restaurant expenses include primarily food, labor and benefits, incentives, utilities, rent and other real estate related costs. Company restaurant expenses decreased by 60.2% to $8.9 million in the second quarter of 2004 from $22.5 million in the second quarter of 2003, and decreased by 51.8% to $20.9 million in the first six months of 2004 from $43.4 million in the same period of 2003. The decrease in Company restaurant expenses was primarily attributable to the decrease in the number of IHOP-operated restaurants as mentioned above.

14



        Company restaurant operations loss was $0.6 million in the second quarter of 2004, or 45.8% lower than the loss of $1.2 million in the same period in 2003. For the first six months of 2004, Company restaurant operations loss was $2.0 million, or 15.2% lower than the loss of $2.4 million in the same period in 2003. For the twelve months ending December 31, 2004, the loss on Company operations is expected to be substantially reduced due to the decrease in the number of IHOP-operated restaurants as a result of our strategic repositioning of Company-operated restaurants.

        On July 22, 2004, the Company announced the immediate closing of five restaurants and the anticipated franchising of substantially all of its remaining Company-operated restaurants by the end of the year. This strategic repositioning will allow our Company operations management team to focus on the new Company-operated restaurant market the Company is building in Cincinnati, Ohio. We expect this market to be a significant source of "best practices" and great marketing, operations, training and product ideas for all of our franchisees.

Financing Operations

        Financing operations revenues consist of the portion of franchise fees not allocated to the Company's intellectual property, revenues from the sale of restaurant equipment and interest income from the financing of franchise fee and equipment leases. Financing operations revenues decreased by 54.9% to $8.2 million in the second quarter of 2004 from $18.2 million in the same period in 2003. For the first six months of 2004, financing operations revenues decreased by 40.8% to $18.0 million compared to $30.5 million in the same period in 2003. The decrease in revenues was primarily due to a decrease in the number of transactions for which we received development and financing fees. The decrease in the number of transactions was primarily due to the Company's transition from the Old Model to the New Model. In the second quarter of 2004, we franchised 2 restaurants as compared with 19 restaurants in the same period in 2003 and in the first six months of 2004 we franchised 4 restaurants as compared with 30 restaurants in the first six months of 2003. This decrease was partially offset by an increase in interest income from franchise and equipment notes associated with restaurants franchised in 2003.

        Financing operations costs and expenses are primarily the cost of restaurant equipment and interest expense not associated with capital leases. Financing operations costs and expenses decreased by 62.5% to $3.7 million in the second quarter of 2004 from $9.9 million in the second quarter of 2003 and decreased by 46.6% to $8.9 million in the first six months of 2004 from $16.7 million in the same period of 2003. The decrease in financing operations costs and expenses was primarily due to a decrease in the costs associated with the number of transactions for which received development and financing fees as mentioned above.

        Financing operations profit decreased by 46.0% to $4.5 million in the second quarter of 2004 from $8.4 million in the second quarter of 2003. In the first six months of 2004, financing operations profit decreased by 33.7% to $9.1 million from $13.8 million in the same period in 2003. For the twelve months ending December 31, 2004, financing operations profit is expected to decrease significantly due to the planned reduction in the number of units for which we will receive development and financing fees. The decrease in the number of transactions was primarily due to the Company's transition from the Old Model to the New Model. In 2003, the Company developed and franchised 56 restaurants for which it received development and franchising fees. It is expected that in 2004, the number of transactions for which such fees will be received will decline to four. The reduction of development and financing fees will lead to a profit decline in this segment. This will be partially offset by increased interest income from restaurants developed in 2003.

15



General and Administrative Expenses

        General and administrative expenses increased by $0.5 million, or 3.6%, from $13.6 million in the second quarter of 2003 to $14.1 million in the same period of 2004. In the first six months of 2004, general and administrative expenses increased by $1.9 million, or 7.2%, to $27.7 million from $25.8 million in the same period in 2003. The increase in general and administrative expenses was primarily due to normal increases in salaries and wages.

        For the twelve months ending December 31, 2004, we expect that general and administrative expenses will be between $53 million and $58 million.

Other Expense, Net

        Other expense, net increased by $0.4 million or 38.1% from $1.2 million in the second quarter of 2003 to $1.6 million in the same period in 2004. Other expense, net was $2.3 million for the first six months of 2003 and 2004.

Impairment and Closure Charges

        During the second quarter of 2004, IHOP recorded an $8.9 million charge for long-lived asset impairments on 14 restaurants. The Company will close 8 of these restaurants in the third quarter of 2004. The decision to close the restaurants was a result of a comprehensive analysis that examined restaurants not meeting minimum return on investment thresholds and certain other operating performance criteria. The assets for these restaurants were written down to their estimated fair value in the second quarter. During the third quarter of 2004, IHOP expects to record an additional charge of approximately $4 to $5 million, primarily related to existing lease obligations associated with several of the restaurants to be closed. These lease charges will be recorded primarily during the third quarter in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires lease obligations to be recorded when a restaurant ceases operation.

Reorganization Charges

        In January 2003, the Company adopted a new operating model, moving from Company-developed and financed restaurant growth to franchisee-financed development. As a result, financial results for the first six months of 2003 were impacted by certain transition and reorganization charges. In the first six months of 2003, we incurred $7.5 million in reorganization charges. Of these expenses, $5.5 million were related to the write-off of development costs associated with potential sites that we are no longer going to develop as a result of the adoption of our new business model. In addition, we incurred $2.0 million in management consulting, legal fees, severance costs and other expenses. There were no reorganization charges in the first six months of 2004.

Provision for Income Taxes

        The Company's effective tax rate was 37.5% for both the second quarter and first six months of 2004 and 2003.

Liquidity and Capital Resources

        In the first six months of 2004, cash and cash equivalents decreased by $13.1 million or 46.7% from $28.0 million as of December 31, 2003 to $14.9 million as of June 30, 2004. Marketable securities decreased by $9.6 million or 21.1% from $45.5 million as of December 31, 2003 to $35.9 million as of June 30, 2004. The decrease in cash and cash equivalents and marketable securities was primarily due to the repurchase of stock as discussed below.

16



        Cash provided by operating activities in the first six months of 2004 totaled $32.6 million and resulted primarily from net income of $15.3 million, non-cash impairment charges of $10.1 million, and depreciation and amortization of $9.3 million.

        In the first six months of 2004, we opened 3 IHOP-developed restaurants. We funded total capital additions of $9.0 million, which included the cost of the newly-opened restaurants, support of our new remodel program, remodels of existing restaurants, restaurants under construction, and information technology investments. This amount is significantly lower than the $49.6 million invested for these purposes in the first six months of 2003.

        In 2004, capital expenditures are expected to be approximately $13 million to $16 million. These capital expenditures include costs associated with the development of four restaurants under the "Old Model," the development of new IHOP-operated restaurants in Cincinnati, Ohio and continued investment in information technology.

        In January 2003, our Board of Directors approved an increase in our stock repurchase program that permits the purchase of up to 2.6 million shares. During the first six months of 2004, we repurchased approximately 1.3 million shares of common stock under our stock repurchase program at an aggregate cost of $46.3 million. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice.

        The Internal Revenue Service ("IRS") has proposed adjustments in connection with its routine examination of the Company's 2000 and 2001 federal income tax returns. The proposed adjustments would accelerate the tax years in which the Company reports initial franchise fee income for federal income tax purposes. If the IRS is successful, the Company would be required to report additional income for its 2000 tax year of approximately $45.2 million and additional income for its 2001 tax year of approximately $4.8 million. The Company's federal income tax liability with respect to the proposed adjustments, exclusive of interest, penalties and any related state tax liability would be approximately $15.8 million for 2000 and $1.7 million for 2001. The Company is currently contesting the proposed adjustments through IRS administrative proceedings. In addition, if the IRS is successful, the Company would report additional income for its 2002 and 2003 tax years. The Company estimates that its federal income tax liability with respect to such additional income, exclusive of interest, penalties and related state tax liability would be approximately $2.0 million for each of 2002 and 2003.

        For the tax years under audit, and potentially for subsequent tax years, such proposed adjustments could result in material cash payments by the Company. The Company had previously recorded in its consolidated financial statements the expected federal and state deferred income tax liability. The proposed adjustments relate only to the timing of when the taxes are paid. Although the Company cannot determine at this time the resolution of this matter, we do not believe that the proposed adjustments, if upheld, will have a material adverse effect on our financial condition or results of operations.

        We expect to fund our liquidity needs, including operating expenses, capital expenditures, the repayment of long-term debt and capital lease obligations, stock repurchases and required income tax payments, from a combination of existing cash balances, liquid investments, cash flows from operating activities and principal receipts from notes and equipment contracts receivable. In 2004, we expect cash flows provided by operating activities of $55 million to $65 million, and principal receipts from notes and equipment contracts receivable of $17 million to $22 million.

        As an additional source of liquidity, we have a $25 million line of credit which expires in May 2005. 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 June 30, 2004 nor were there any borrowings under the agreement during the quarter.

17



Critical Accounting Policies

        We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires senior management to make estimates, assumptions and subjective or complex judgments that are inherently uncertain and may significantly impact the reported amounts of assets, liabilities, revenue and expenses during the reporting period. Changes in the estimates, assumptions and judgments affecting the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.

        We regularly evaluate our long-lived assets for impairment at the individual restaurant level. Restaurant assets are evaluated for impairment on a quarterly basis or whenever events or circumstances indicate that the carrying value of a restaurant may not be recoverable. We consider factors such as the number of years the restaurant has been operated by the Company, sales trends, cash flow trends, remaining lease life, and other factors which may apply on a case by case basis. These impairment evaluations require an estimation of cash flows over the remaining useful life of the asset.

        Recoverability of a restaurant's assets is measured by comparing the carrying value of the assets to the undiscounted future cash flows expected to be generated over the remaining useful life of the asset. If the total expected undiscounted future cash flows are less than the carrying amount of the asset, the carrying amount is written down to the estimated fair value, and a loss resulting from impairment is recognized by a charge to earnings. The fair value is determined by discounting the future cash flows based on our cost of capital.

        From time to time, the Company may elect to close certain Company-operated restaurants. Typically such decisions are based on operating performance or strategic considerations. In these instances, we reserve, or write-off, the full carrying value of these restaurants as impaired.

        Periodically, the Company will reacquire a previously franchised restaurant. At the time of reacquisition, the franchise will be recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable value. The estimated net realizable value of a reacquired franchise is based on the Company's average five-year historical franchise resale value. If the sum of the franchise receivables and costs of reacquisition exceeds the historical franchise resale value, an impairment loss will be recognized equal to the amount of the excess. The historical franchise resale value used for each restaurant in the six months of 2004 was $220,000.

        Judgments and estimates made by the Company related to long-lived assets are affected by factors such as economic conditions, changes in franchise historical resale values, and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying value of its long-lived assets, these factors could cause the Company to realize impairment charges.

        We are self-insured for a significant portion of our employee health and workers' compensation obligations. The Company maintains stop-loss coverage with third party insurers to limit its total exposure. The accrued liability associated with these programs is based on our estimate of the ultimate costs to be incurred to settle known claims and claims incurred but not reported as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions. If actual trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

18


        IHOP's revenues and expenses are recorded in four categories: franchise operations, rental operations, Company restaurant operations and financing operations.

        The Franchise Operations segment consists primarily of royalty revenues, advertising fees, sales of proprietary products (primarily pancake mix) and the portion of the franchise fees allocated to the Company's intellectual property. Rental revenue includes revenue from operating leases and interest income from direct financing leases. Company restaurant sales are retail sales at IHOP-operated restaurants. The Financing Operations segment consists of the portion of the franchise fees not allocated to the Company's intellectual property, sales of equipment, as well as interest income from the financing of franchise fees and equipment leases.

        Royalty revenues and advertising fees, which are based on franchisee retail sales, are recorded when earned in accordance with franchise agreements. Revenues from the sales of proprietary products (primarily pancake mix) are recorded when shipped. Fees from development agreements are deferred until restaurants under the agreement are open. Upon restaurant opening, fees received from development agreements are reflected as franchise fee revenue. The portion of franchise fees allocated to the Company's intellectual property is also recorded as revenue upon restaurant opening. Rental revenue from operating leases is recognized on the straight-line basis over the terms of the leases. Interest income from direct financing leases is recognized as revenue when earned. The portion of franchise fees not allocated to the Company's intellectual property and revenue from the sales of equipment is recognized upon restaurant opening. Interest income from the financing of franchise fees and equipment leases is recognized when earned. Revenue from retail sales by Company-operated restaurants is recognized on a cash basis.

        Revenue recognition involves uncertainties and other factors, which may cause future results to be materially different. These factors include, but are not limited to: risks associated with the implementation of the Company's new strategic growth plan; the ability to continue to attract qualified franchisees; the terms of the sites designated for development; competition; continuing acceptance of the International House of Pancakes brand and concepts 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.

        We estimate certain components of our provision for income taxes. These estimates include, but are not limited to, effective state and local income tax rates, allowable tax credits for items such as work opportunity tax credits, FICA taxes paid on reported tip income, and estimates related to depreciation expense allowable for tax purposes. Our estimates are made based on the best available information at the time that we prepare the provision. All tax returns are subject to audit within the statute of limitations by the federal and state governments, and could be subject to differing interpretations of the tax laws.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

        There were no material changes from the information contained in the Annual Report on Form 10-K as of December 31, 2003.

Item 4. Controls and Procedures

19


20



Part II. OTHER INFORMATION

Item 1. Legal Proceedings

        The Company is a party to certain litigation arising in the ordinary course of business which, in the opinion of management, should not have a material adverse effect upon either the Company's consolidated financial position or results of operations.

        In February 2004, Darden Corporation and GMRI, Inc., the owners and operators of the chain of Olive Garden restaurants, filed a civil action for trademark infringement and unfair competition against IHOP Corp. and its subsidiary International House of Pancakes, Inc. in U.S. District Court, Middle District of Florida, Orlando Division. The plaintiffs claim rights to the advertising phrase "Never Ending Pasta Bowl," and assert that IHOP's use of "Never Ending Pancakes" and "Never Ending Popcorn Shrimp" violates their rights. Discovery has recently been initiated and IHOP intends to vigorously contest the claims.


Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

Period

  Total Number of
Shares Purchased

  Average Price
Paid per Share

  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)

  Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs(2)

April 1, 2004—April 30, 2004           1,914,310
May 1, 2004—May 31, 2004   398,100   $ 36.72   398,100   1,516,210
June 1, 2004—June 30, 2004   765,000   $ 36.00   765,000   751,210
   
 
 
 
  Total   1,163,100   $ 36.25   1,163,100   751,210
   
 
 
 


Item 3. Defaults Upon Senior Securities

        None


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

        The Annual Meeting of Stockholders (the "Meeting") was held on May 25, 2004. Stockholders voted in person or by proxy for the following purposes:

 
  Votes For
  Votes Withheld
Caroline W. Nahas   19,049,409   803,318
Frank Edelstein   19,686,440   166,287
Richard J. Dahl   19,718,292   134,435

        Directors whose terms of office continued after the meeting were H. Frederick Christie, Patrick W. Rose, Michael S. Gordon, Larry Alan Kay, and Julia A. Stewart.

21



Item 5. Other Information.

        None


Item 6. Exhibits and Reports on Form 8-K.


3.1   Restated Certificate of Incorporation of IHOP Corp. (Exhibit 3.1 to IHOP Corp.'s Form 10-K for the fiscal year ended December 31, 2002 is incorporated herein by reference).

3.2

 

Bylaws of IHOP Corp. (Exhibit 3.2 to IHOP Corp.'s Form 10-K for the fiscal year ended December 31, 2002 is incorporated herein by reference).

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).

*10.1

 

Performance Shares Award Agreement.

*10.2

 

Schedule 1 to the Performance Shares Award Agreement.

*10.3

 

Terms and Conditions of Performance Share Awards.

11.0

 

Statement Re Computation of Per Share Earnings.

31.1

 

Certification of CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

 

Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

 

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

32.2

 

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

22


SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    IHOP Corp.
    (Registrant)

 

 

 

 

 
August 5, 2004
(Date)
  BY:   /s/  JULIA A. STEWART      
President and Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 
August 5, 2004
(Date)
      /s/  THOMAS CONFORTI      
Chief Financial Officer
(Principal Financial Officer)

23




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PART I. FINANCIAL INFORMATION
IHOP CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part II. OTHER INFORMATION

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Exhibit 10.1


IHOP CORP.
PERFORMANCE SHARES AWARD AGREEMENT

        THIS PERFORMANCE SHARES AWARD AGREEMENT (the "Agreement") is entered into as of [insert date], between IHOP CORP., a Delaware corporation (the "Company"), and [insert Grantee name] (the "Grantee").

R E C I T A L S:

        The Compensation Committee (the "Committee") of the Board of Directors of the Company has granted to the Grantee on [insert grant date], a performance award payable in the form of the common stock of the Company, par value $.01 per share ("Common Stock") and cash, pursuant to the Company's 2001 Stock Incentive Plan (the "Plan") and the Performance Share Awards Terms and Conditions (the "Terms and Conditions"). Any capitalized terms not defined herein shall have the meaning set forth in the Terms and Conditions.

A G R E E M E N T:

        In consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows:

        1.    NUMBER OF SHARES. Subject to the attainment of the performance goals set forth on Schedule 1, the Grantee is entitled to that number of shares of Common Stock equal to the product of            shares of Common Stock and the applicable multiplier set forth on Schedule 1 pursuant to the terms and conditions of this Agreement (the "Target Award"). At the end of the three-year performance cycle, the Administrator shall determine the total number of shares payable pursuant to the Target Award in accordance with the Performance Share Matrix set forth on Schedule 1 hereto and the Committee's determination of the performance levels (the "Earned Award").

        2.    VESTING. Subject to Section 5, the Target Award shall vest on [insert date]. The period during which the Target Award is subject to vesting is referred to herein as the "Restricted Period".

        3.    RIGHTS OF GRANTEE IN STOCK. The Grantee shall not be entitled to any of the rights or privileges of a stockholder of the Company with respect to the shares of Common Stock subject to the Target Award unless and until the Restricted Period has lapsed and any dividends declared during the Restricted Period with respect to the shares covered by Target Award shall be deemed to be reinvested in additional shares of Common Stock, which shares shall be included in the number of shares of Common Stock payable as the Earned Award.

        4.    ISSUANCE OF SHARES AND CASH. Upon expiration of the Restricted Period, the Company shall (i) issue or cause to be issued, and delivered as promptly as possible to the Grantee, certificates representing fifty (50%) of the Earned Award (rounded down to the nearest whole share), which certificates shall be registered in the name of the Grantee and (ii) remit to Grantee a cash payment with respect to the remaining fifty percent (50%) of the Earned Award in accordance with Section 8 of the Terms and Conditions.

        5.    CESSATION OF EMPLOYMENT; TERMINATION OF AGREEMENT. If the Grantee's employment status with the Company is terminated for any reason other than as a result of Grantee's, death, Disability or Retirement, then this Agreement shall terminate and all rights of the Grantee hereunder shall cease. In the event of Grantee's death, Disability or Retirement, Grantee shall be immediately vested in a pro-rata portion of the Earned Award based on the time employed during the Performance Cycle, rounded to the nearest complete month. Payment of pro-rata Earned Awards shall be governed by all other applicable provisions of this Agreement and the Terms and Conditions. Any shares subject to the Target Award that have not vested at that time and any and all accrued but unpaid dividends thereon shall be forfeited to the Company without payment of any consideration by



the Company, and neither the Grantee nor any of his successors, heirs, assigns, or personal representatives shall thereafter have any further rights or interests in such shares or Target Award or accrued but unpaid dividends.

        6.    REQUIREMENTS OF LAW AND OF STOCK EXCHANGES. Notwithstanding anything in this Agreement to the contrary, no certificate or certificates for Shares shall be issued and delivered prior to the admission of such Shares to listing on notice of issuance on any stock exchange on which shares of that class are then listed, nor unless or until, in the opinion of counsel for the Company, such securities may be issued and delivered without causing the Company to be in violation of or incur any liability under any federal, state or other securities law, any requirement of any securities exchange listing agreement to which the Company may be a party, or any other requirement of law or of any regulatory body having jurisdiction over the Company.

        7.    ADJUSTMENT IN STOCK. In the event of any merger, reorganization, consolidation, recapitalization, Common Stock dividend, extraordinary cash dividend or other change in the corporate structure affecting the Common Stock, a substitution or adjustment shall be made in the number shares subject to the Target Award that has not vested or been settled in cash, as may be determined by the Committee, in its sole discretion. Such other substitutions or adjustments shall be made as the Committee in its sole discretion may deem appropriate.

        8.    NONTRANSFERABILITY OF TARGET AWARD. The Target Award shall not be transferable by the Grantee otherwise than by will or the laws of descent and distribution.

        9.    NOTICES. Any notice to be given to the Company shall be personally delivered to or addressed to the Secretary of the Company at its principal office, and any notice to be given to the Grantee shall be addressed to him or her at the address given beneath his or her signature hereto, or at such other address as the Grantee may hereafter designate in writing to the Company. Any notice to the Company is deemed given when received by the Company. Any notice to Grantee is deemed given upon the earlier of the date it is received by the Grantee or five (5) days following the date it is enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited, postage and registration or certification fee prepaid, in a post office or branch post office regularly maintained by the United States.

        10.    FAILURE TO ENFORCE NOT A WAIVER. The failure of the Company to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

        11.    WITHHOLDING. The Company (and, where applicable, any Subsidiary) may make such provisions as it may deem appropriate for the withholding of any taxes which the Company (or Subsidiary) determines it is required to withhold in connection with this Agreement and the transactions contemplated thereby, which may include requiring Grantee or his or her legal representative to pay the amount of such taxes to the Company on the date or dates of exercise.

        12.    INCORPORATION OF PLAN AND TERMS AND CONDITIONS. The Plan and the Terms and Conditions are hereby incorporated by reference and made a part hereof, and the Target Award and this Agreement are subject to all terms and conditions of the Plan and Terms and Conditions.

        13.    EMPLOYMENT. Nothing in the Terms and Conditions or in this Agreement shall confer upon Grantee any right to continue in the employment of, or to be retained by, the Company or any of its Subsidiaries or affect any right the Company or any of its Subsidiaries may have to terminate the employment or consulting relationship with, the Grantee.

        14.    AMENDMENT AND TERMINATION. The Administrator may amend or terminate the Plan at any time; provided, however, that the amendment or termination of the Plan shall not, without

2



the consent of the Grantee or his or her legal representative affect his or her rights under this Agreement.

        15.    LAWS APPLICABLE TO CONSTRUCTION. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without giving effect to the choice of law principles thereof.

        16.    COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.


 

 

IHOP CORP.

 

 

 

 
    By:  
[Insert Name]
[Insert Title]

        The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Agreement and to all of the terms and provisions of the IHOP Corp. 2001 Stock Incentive Plan and the Terms and Conditions herein incorporated by reference.


 

 

 
     
[Insert Name of Employee]

 

 

 
     
 

3




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IHOP CORP. PERFORMANCE SHARES AWARD AGREEMENT

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Exhibit 10.2

Based upon the recommended plan features, IHOP's PSP
will operate as follows:

ILLUSTRATION: RECOMMENDED PSP

Step 1
Year 0 Award
1,500 target
Performance
Shares

      

Step 2
3-year Performance

IHOP's
3-year TSR

  Value Line Restaurant
Index Percentile 3-year TSR

11% > 65th %ile = 12%
50th %ile = 10%
35th %ile = 7%
Aggregate 3-yr Cash Flow from Ops = $167M
Target Cash Flow from Ops = $160-170M

       

Target Award Adjusted based on Dividends
(Dividend payment reinvested)

 
  Year 0
  Year 1
  Year 2
  Year 3
# of Target Performance Shares   1,500   1,500   1,535   1,567

Stock Price

 

$39.00

 

$42.90

 

$47.19

 

$51.91

Dividend per Share

 

$0.00

 

$1.00

 

$1.00

 

$1.00

$ to Reinvest

 

$0

 

$1,500

 

$1,535

 

$1,567

# of Shares from Reinvested Dividends

 

0

 

35

 

33

 

30
   
 
 
 

"Account Balance"

 

1,500

 

1,535

 

1,567

 

1,598

 

 

 

 

 

 

 

 

 

       


Step 3
3-year Award Calculation

Relative Total Shareholder Return


 

Performance Share Matrix
Multiplier on "Account Balance"(1)


 

 

 

 

 

Superior Performance
(65th Percentile)

0.75x
Account Balance

1.0x
Account Balance

1.25x
Account Balance

1.5x
Account Balance

Target Performance
(50th Percentile)

0.5x
Account Balance

0.75x
Account Balance

1.0x
Account Balance

1.25x
Account Balance

Threshold Performance
(35th Percentile)

0.25x
Account Balance

0.5x
Account Balance

0.75x
Account Balance

1.0x
Account Balance

Below Threshold
Performance
(<35th Percentile)

0.0x
Account Balance

0.25x
Account Balance

0.5x
Account Balance

0.75x
Account Balance

 

Below Threshold
Performance

Threshold Performance
($140 million)

Target Performance
($160-170 million)

Superior Performance
($190 million)

 

 

 

 

 

Aggregate Net Cash Flow from Operations


(1)
Actual dividends will be reinvested as they are paid (e.g., quarterly)

Multiplier = 1.125x

Step 4
3-year Award

Acct. Balance = 1,598 perf. shares
x 1.125
x $51.91/share

= $93,321

Payment = 899 shares &
$46,660 cash

Mercer Human Resource Consulting


FACER TO PAGE 30

Relative Total Shareholder Return

 
Performance Share Matrix
Multiplier on "Account Balance"(1)

Superior Performance
(65th Percentile)
0.75x
Account Balance
1.0x
Account Balance
1.25x
Account Balance
1.5x
Account Balance

Target Performance
(50th Percentile)

0.5x
Account Balance

0.75x
Account Balance

1.0x
Account Balance

1.25x
Account Balance

Threshold Performance
(35th Percentile)

0.25x
Account Balance

0.5x
Account Balance

0.75x
Account Balance

1.0x
Account Balance

Below Threshold Performance
(<35th Percentile)

0.0x
Account Balance

0.25x
Account Balance

0.5x
Account Balance

0.75x
Account Balance

 

Below Threshold
Performance

Threshold Performance
($140 million)

Target Performance
($160-170 million)

Superior Performance
($190 million)

 

 

 

 

 

Aggregate Net Cash Flow from Operations(2)(3)(4)


(1)
Interpolate for performance between discrete points

(2)
To be adjusted for changes in interest charges on outstanding notes to franchisees over the performance period

(3)
Before cash disbursement for PSP

(4)
Subject to budget discussions on 12/15/2003



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Exhibit 10.2

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Exhibit 10.3


TERMS AND CONDITIONS OF
PERFORMANCE SHARE AWARDS ISSUED PURSUANT TO DEFERRED STOCK PROVISIONS OF
THE IHOP CORP. 2001 STOCK INCENTIVE PLAN

1.    ESTABLISHMENT OF THE TERMS AND CONDITIONS OF PERFORMANCE SHARE AWARDS ISSUED PURSUANT TO DEFERRED STOCK PROVISIONS OF THE IHOP CORP. 2001 STOCK INCENTIVE PLAN AND DEFINITIONS.


2.    ADMINISTRATION OF THE TERMS AND CONDITIONS.

3.    PERFORMANCE SHARES SUBJECT TO THESE TERMS AND CONDITIONS.

4.    PERFORMANCE CYCLES.

        A new Performance Cycle begins at the start of each Company fiscal year and continues until the end of the third consecutive fiscal year.

5.    TARGET AWARD.

        Each Participant will be granted a Target Award at the beginning of each Performance Cycle. The size of the Target Award (i.e., the number of Performance Shares granted) will be based on position level, desired pay positioning, other long-term incentive grants, and any other considerations deemed pertinent by the Committee. Participants may earn from zero times to one and one-half times the Target Award based on IHOP Corp.'s performance, as described in Section 6. At the Committee's direction, the Company's Director of Compensation, Benefits and HRIS will prepare a "Performance Shares Award Agreement" evidencing the amount and terms of such Participant's Target Award.

2



6.    PERFORMANCE MEASUREMENT AND EARNING OF AWARDS

        Performance Shares are earned based on both Net Cash Flow From Operating Activities and the Company's Total Shareholder Return relative to the Peer Restaurants during the respective Performance Cycle, stated as a percentile ranking where 100% represents the best performing Peer and 0% represents the worst performing Peer. At the beginning of each Performance Cycle, the Committee shall establish the specific performance measure or measures to be used and the schedule for calculating the number of Performance Shares (as a multiple of the Target Award) actually earned. Participants will earn Performance Shares only upon the attainment of the performance goals established by the Committee.

7.    EXTRAORDINARY EVENTS

        If extraordinary events occur during a Performance Cycle which alter the basis upon which the performance measurement(s) is calculated, such calculation may be adjusted, with the Committee's approval, to exclude the effect of these events. Events warranting such action may include, but are not limited to, major acquisitions or divestitures, significant changes in accounting practices, or a recapitalization of the Company. Notwithstanding the foregoing, the Committee shall not have the discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the goals.

8.    VALUE AND PAYMENT OF EARNED AWARDS.

        The value payable to a Participant shall equal the Earned Award and will paid as follows:

9.    TERMINATION OF EMPLOYMENT

        Termination of employment with the Company or its Subsidiaries prior to the end of the Performance Cycle for any reason (whether voluntary or involuntary) shall result in forfeiture of all opportunity to receive an Earned Award under these Terms and Conditions, subject to the following exceptions. In the event of termination by reason of death, Disability, or Retirement, the Participant (or the Participant's beneficiary or estate in the event of death) will be eligible to receive a pro-rata Earned Award based on the time employed during the Performance Cycle, rounded to the nearest complete month. Payment of pro-rata Earned Awards shall be governed by all other applicable provisions of these Terms and Conditions.

        Notwithstanding these or any other provisions of these Terms and Conditions, the Committee may, in its sole discretion, authorize continued participation, pro-ration, or early distribution (or a combination thereof) of Earned Awards which would otherwise be forfeited.

3




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Exhibit 11.0

IHOP CORP. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2004
  2003
  2004
  2003
NET INCOME PER COMMON SHARE BASIC                        
  Weighted average shares outstanding     20,958     21,520     21,182     21,417
 
Net income available to common shareholders

 

$

4,366

 

$

10,972

 

$

15,276

 

$

16,935
 
Net income per share—basic

 

$

0.21

 

$

0.51

 

$

0.72

 

$

0.79

NET INCOME PER COMMON SHARE DILUTED

 

 

 

 

 

 

 

 

 

 

 

 
  Weighted average shares outstanding     20,958     21,520     21,182     21,417

Net effect of dilutive stock options based on the treasury stock method using the average market price

 

 

176

 

 

185

 

 

191

 

 

157
   
 
 
 

Total

 

 

21,134

 

 

21,705

 

 

21,373

 

 

21,574
   
 
 
 
 
Net income available to common shareholders

 

$

4,366

 

$

10,972

 

$

15,276

 

$

16,935
 
Net income per share—diluted

 

$

0.21

 

$

0.51

 

$

0.71

 

$

0.78



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Exhibit 31.1


Certification Pursuant to
Rule 13a-14(a) of the
Securities Exchange Act of 1934, As Amended

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

1.
I have reviewed this Quarterly Report on Form 10-Q of IHOP Corp.;

2.
Based on my knowledge, this 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 report;

3.
Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 5, 2004

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



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Exhibit 31.2


Certification Pursuant to
Rule 13a-14(a) of the
Securities Exchange Act of 1934, As Amended

        I, Thomas Conforti, Vice President, Chief Financial Officer, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of IHOP Corp.;

2.
Based on my knowledge, this 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 report;

3.
Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(d)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(e)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 5, 2004

    /s/  THOMAS CONFORTI      
Thomas Conforti
Chief Financial Officer (Principal Financial Officer)



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Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Amended

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Exhibit 32.1


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

In connection with the Quarterly Report on Form 10-Q of IHOP Corp. (the "Company") for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on August 5, 2004, (the "Report"), Julia A. Stewart, as President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of her knowledge:

        (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 5, 2004   /s/ Julia A. Stewart
Julia A. Stewart
President and Chief Executive Officer

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.




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Exhibit 32.2


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

In connection with the Quarterly Report on Form 10-Q of IHOP Corp. (the "Company") for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on August 5, 2004, (the "Report"), Thomas Conforti, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

        (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 5, 2004   /s/ Thomas Conforti
Thomas Conforti
Chief Financial Officer (Principal Financial Officer)

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.




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