House of Pancakes Wants to Serve Up a Public Offering : Restaurants: Glendale-based IHOP Corp. seeks the revenue to keep bolstering sales, cut debt from a 1987 buyout and overhaul operations.

Four years ago, IHOP Corp. in Glendale was bought out by management and investors affiliated with Kelso & Co., a New York investment banking firm founded by the late Louis Kelso, the pioneer of employee stock ownership plans.

IHOP, which owns, operates and franchises the flapjack-flipping International House of Pancakes restaurants, was unprofitable at the time. But since the buyout, management has funneled money into opening new, larger restaurants and redoing old ones, and its efforts have paid off in steady if not spectacular growth.

IHOP now has 490 restaurants in its system, and revenues and earnings have increased each year since the buyout. Last year IHOP’s net income climbed 29% to $3.1 million on revenue of $97.3 million, and first-quarter 1991 earnings were ahead of a year earlier despite the recession and the Persian Gulf War.

Despite the profit turnaround since the buyout, however, IHOP’s average sales per restaurant--a key barometer of a chain’s health--remains half that of some of its biggest competitors such as Bakers Square and Shoney’s.

So to keep bolstering sales while also reducing debt left from the buyout, IHOP wants to keep overhauling its operations, and to help pay for the changes the company is now looking to the public for additional cash. IHOP last week registered with the Securities and Exchange Commission to raise up to about $43 million with an initial public offering of 3.1 million shares at an expected price of $12 to $14 per share.

So far, management has proved that it can keep IHOP growing at a slow, steady pace, said Chris Stetkiewicz, managing editor of the New York-based newsletter Going Public: The IPO Reporter.

“The question is, can they improve on that with the money they get from the IPO?” he said.

IHOP is the 39th largest company in the $250-billion U.S. restaurant business, according to New York-based Nation’s Restaurant News, a trade publication. It’s also the sixth largest family-style restaurant chain in terms of systemwide sales and number of restaurants, the publication reports.

The company’s systemwide sales, including sales from franchised outlets, totaled $385 million last year. IHOP owns 64 of the restaurants in the chain; the rest are franchised.

International House of Pancakes restaurants are located in 36 states, Canada and Japan. Besides sales at its own restaurants, the company’s revenues come from royalties, rents and fees paid by its franchisees. It also sells equipment to the franchisees and finances franchise sales.

The company said it plans to use the proceeds from the offering to add new restaurants, revamp older ones and cut its $44.9 million in long-term debt to $15.8 million--which would slash its annual interest payments by $3.1 million.

“We are at a position where we’d like to continue growing at a faster rate,” said Richard K. Herzer, IHOP’s chairman, president and chief executive.

IHOP said in documents filed with the SEC that it hopes to boost business by building new, sleeker-looking restaurants without the trademark chalet-style roof that limits seating capacity. It also plans to continue remodeling existing restaurants, adding new windows, doors, table tops, upholstery, carpets, brass-and-glass booth dividers, lighting fixtures and plants.

IHOP is also scrutinizing its menu, which has long been known for its dozens of pancake variations and several flavors of syrup. Though hardly known for health-conscious fare, a recent entry--a grain and nut pancake--has been well received, said Richard Martin, West Coast bureau chief at Nation’s Restaurant News. IHOP has also been promoting chicken, steak and sandwich plates in an effort to increase lunch and dinner business.

Analysts said IHOP probably picked a good time to go public.

Bob Mescal, research analyst for the New Issues newsletter in Ft. Lauderdale, Fla., said investor interest in new issues is running high and most initial public offerings in the past month have met or exceeded their expected price range.

Also, many restaurant company stocks have performed well this year, reflecting better-than-expected sales and earnings, said analyst Steven A. Rockwell at the investment firm Alex. Brown & Sons in Baltimore.

Martin added that family restaurants--including IHOP and rivals such as Denny’s, Bakers Square and Shoney’s--”have fared better than other segments of the restaurant industry” because they offer recession-conscious consumers sit-down dining at fast-food prices.

Besides providing cash for the company, the public offering also stands to make a handsome profit for the company’s current shareholders. The insiders are offering to sell 3.1 million additional shares of their IHOP common stock, and they will continue to own about 30% of the 8.82 million shares outstanding after the offering is completed.

According to SEC documents, existing shareholders bought their stock for an average of $1.57 a share. If IHOP’s shares sell for an average of $13 each, those shareholders will net $11.43 a share. For various Kelso-sponsored partnerships, that means a profit of nearly $28 million on the 2.4 million shares they are offering. Herzer’s profit, however, will only be on paper for the time being: He isn’t selling any of his 770,000 shares in the offering.

Herzer, 59, heads a management team that has been at the company since 1982. Last year he earned nearly $500,000 in salary, stock and dividends, the SEC documents show. Under a new three-year employment agreement, he will be paid $308,000 a year.

IHOP was founded by Al Lapin Jr., who opened his first pancake restaurant in Toluca Lake in 1958. Lapin then started franchising the concept, and also acquired several other businesses, ranging from apparel to ice cream.

The company, then called International Industries, went public in 1965. But it ran into financial troubles and was acquired by Friedrich Jahn, an Austrian restaurateur who scaled the company back and introduced the Swiss-style outfits that waitresses still wear.

But Jahn didn’t have much success either, and in 1983 he was forced to surrender the company to a Swiss holding company made up of a group of creditor banks. It was that company, Svido-Abwicklungsgesellschaft, that agreed to sell IHOP to the management-led group in 1987 for an undisclosed price.

Naturally, the SEC filing states that IHOP’s new stock carries several risks, including that the restaurant business is highly competitive and many of IHOP’s rivals have greater financial and other resources. It also cautions that IHOP’s growth is dependent on the company finding sites for new restaurants and generating enough funds to keep expanding.

IHOP Corp. at a Glance

IHOP Corp. owns, operates and franchises International House of Pancakes restaurants. The Glendale-based company, which was bought by management in 1987, now plans to go public in a stock offering that could raise up to $43 million. IHOP plans to use the cash for repaying debt and for expanding and upgrading its 490-restaurant chain.

For fiscal years ended Dec. 31; In millions