SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 6, 1997 Commission File No. 1-9390
------------ ------
FOODMAKER, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2698708
- -------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
9330 BALBOA AVENUE, SAN DIEGO, CA 92123
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 571-2121
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $.01 par value, outstanding
as of the close of business August 11, 1997 - 39,060,332
-1-
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 6, September 29,
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 89,856 $ 41,983
Receivables . . . . . . . . . . . . . . . . . 8,674 12,482
Inventories . . . . . . . . . . . . . . . . . 18,725 20,850
Prepaid expenses. . . . . . . . . . . . . . . 38,566 21,161
-------- --------
Total current assets . . . . . . . . . . . 155,821 96,476
-------- --------
Property at cost. . . . . . . . . . . . . . . . 628,683 610,756
Accumulated depreciation and amortization . . (195,862) (177,817)
-------- --------
432,821 432,939
-------- --------
Trading area rights . . . . . . . . . . . . . . 66,574 67,663
-------- --------
Lease acquisition costs . . . . . . . . . . . . 19,303 22,299
-------- --------
Other assets. . . . . . . . . . . . . . . . . . 35,085 34,261
-------- --------
TOTAL. . . . . . . . . . . . . . . . . . . $709,604 $653,638
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt. . . . . $ 1,446 $ 1,812
Accounts payable. . . . . . . . . . . . . . . 37,639 29,293
Accrued expenses. . . . . . . . . . . . . . . 139,485 115,958
-------- --------
Total current liabilities. . . . . . . . . 178,570 147,063
-------- --------
Long-term debt, net of current maturities . . . 395,972 396,340
-------- --------
Other long-term liabilities . . . . . . . . . . 53,042 51,561
-------- --------
Deferred income taxes . . . . . . . . . . . . . 3,990 7,290
-------- --------
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . . 404 403
Capital in excess of par value. . . . . . . . 282,003 281,075
Accumulated deficit . . . . . . . . . . . . . (189,914) (215,631)
Treasury stock. . . . . . . . . . . . . . . . (14,463) (14,463)
-------- --------
Total stockholders' equity . . . . . . . . 78,030 51,384
-------- --------
TOTAL. . . . . . . . . . . . . . . . . . . $709,604 $653,638
======== ========
See accompanying notes to financial statements.
-2-
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Twelve Weeks Ended Forty Weeks Ended
----------------- -----------------
July 6, July 7, July 6, July 7,
1997 1996 1997 1996
------- ------- ------- -------
Revenues:
Restaurant sales. . . . . . . . . . . $234,828 $209,043 $749,860 $677,391
Distribution sales. . . . . . . . . . 7,129 25,297 41,989 117,219
Franchise rents and royalties . . . . 8,461 7,927 27,166 25,926
Other . . . . . . . . . . . . . . . . 1,263 880 3,142 3,216
------- ------- ------- -------
251,681 243,147 822,157 823,752
------- ------- ------- -------
Costs and expenses:
Costs of revenues:
Restaurant costs of sales. . . . . 77,285 67,401 250,078 221,225
Restaurant operating costs . . . . 119,494 110,049 385,238 362,527
Costs of distribution sales. . . . 6,956 24,849 41,606 115,179
Franchised restaurant costs. . . . 6,175 4,704 18,194 15,746
Selling, general and administrative . 19,652 18,146 62,682 54,408
Interest expense. . . . . . . . . . . 9,324 10,983 31,342 36,649
------- ------- ------- -------
238,886 236,132 789,140 805,734
------- ------- ------- -------
Earnings before income taxes. . . . . . 12,795 7,015 33,017 18,018
Income taxes. . . . . . . . . . . . . . 2,800 1,500 7,300 3,800
------- ------- ------- -------
Net earnings. . . . . . . . . . . . . . 9,995 5,515 25,717 14,218
======= ======= ======= =======
Net earnings per share - primary
and fully diluted. . . . . . . . . $ .25 $ .14 $ .65 $ .36
======= ======= ======= =======
Weighted average shares outstanding . . 39,871 39,358 39,633 39,260
See accompanying notes to financial statements.
-3-
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Forty Weeks Ended
-----------------------
July 6, July 7,
1997 1996
------ ------
Cash flows from operations:
Net earnings. . . . . . . . . . . . . . . . . $ 25,717 $ 14,218
Non-cash items included above:
Depreciation and amortization. . . . . . . 30,501 30,101
Deferred income taxes. . . . . . . . . . . (3,300) (1,635)
Decrease in receivables . . . . . . . . . . . 3,808 11,776
Decrease in inventories . . . . . . . . . . . 2,125 226
Increase in prepaid expenses. . . . . . . . . (17,405) (2,926)
Increase (decrease) in accounts payable . . . 8,346 (9,813)
Increase in accrued expenses. . . . . . . . . 25,008 20,614
------ ------
Cash flows provided by operations. . . . . 74,800 62,561
------ ------
Cash flows from investing activities:
Additions to property and equipment . . . . . (26,017) (20,622)
Dispositions of property and equipment. . . . 2,814 2,909
Decrease (increase) in trading area rights. . (1,424) 122
Increase in other assets. . . . . . . . . . . (2,206) (2,136)
------ ------
Cash flows used in investing activities. . (26,833) (19,727)
------ ------
Cash flows from financing activities:
Principal payments on long-term debt,
including current maturities . . . . . . . (1,023) (44,391)
Proceeds from issuance of common stock. . . . 929 46
------ ------
Cash flows used in financing activities. . (94) (44,345)
------ ------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . $ 47,873 $ (1,511)
====== ======
See accompanying notes to financial statements.
-4-
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements of Foodmaker, Inc. (the
"Company") 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 only of normal
recurring adjustments considered necessary for a fair presentation of
financial condition and results of operations for the interim periods, have
been included. Operating results for any interim period are not necessarily
indicative of the results for any other interim period or for the full year.
The Company reports results quarterly with the first quarter having 16 weeks
and each remaining quarter having 12 weeks. Certain financial statement
reclassifications have been made in the prior year to conform to the current
year presentation. These financial statements should be read in conjunction
with the 1996 financial statements.
2. The Company adopted Statement of Financial Accounting Standards ("SFAS")
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, in 1997. SFAS 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
statement also addresses the accounting for long-lived assets that are held
for disposal. The adoption of SFAS 121 did not result in a material impact
on the financial position or results of operations of the Company.
3. In March 1997, the Financial Accounting Standards Board issued SFAS 128,
Earnings per Share, effective for fiscal years ending after December 15,
1997. SFAS 128 requires the presentation of "basic" earnings per share which
excludes the dilutive effect of all common stock equivalents. Presentation
of "diluted" earnings per share, which reflects the dilutive effects of all
common stock equivalents, will also be required. The diluted presentation is
similar to the current presentation of fully diluted earnings per share, but
uses the average market price of the stock during the period. The Company is
currently evaluating the impact of implementation of SFAS 128.
4. The tax provision reflects the expected annual tax rate of 22% of earnings
before income taxes in 1997 and the effective annual tax rate of 21% of
pretax earnings in 1996. The low effective income tax rates in each year
result from the Company's ability to realize previously unrecognized tax
benefits. The Company cannot determine the actual annual effective tax
until the end of the fiscal year, thus the rate could differ from
expectations.
-5-
5. Contingent Liabilities
Various claims and legal proceedings are pending against the Company in
federal and state courts in the state of Washington, seeking monetary
damages for personal injuries relating to food-borne illness (the
"Outbreak") attributed to hamburgers served at Jack in the Box restaurants.
The Company, in consultation with its insurance carriers and attorneys,
does not anticipate that the total liability on all such lawsuits and
claims will exceed the coverage available under its applicable insurance
policies.
The Company is engaged in litigation with the Vons Companies, Inc. ("Vons")
and various suppliers seeking reimbursement for all damages, costs and
expenses incurred in connection with the Outbreak. The initial litigation
was filed by the Company on February 4, 1993. Vons has filed
cross-complaints against the Company and others alleging certain
contractual, indemnification and tort liabilities; seeking damages in
unspecified amounts and a declaration of the rights and obligations of the
parties. The claims of the parties arise out of two separate lawsuits
which have been consolidated and are now set for trial in the Los Angeles
Superior Court, Los Angeles, California in October 1997.
On February 2, 1995, an action by Concetta Jorgensen was filed against the
Company in the U.S. District Court in San Francisco, California alleging
that restrooms at a Jack in the Box restaurant failed to comply with laws
regarding disabled persons and seeking damages in unspecified amounts,
punitive damages, injunctive relief, attorney fees and prejudgment interest.
In an amended complaint damages are also sought on behalf of all physically
disabled persons who were allegedly denied access to restrooms at the
restaurant. In February 1997, the court ordered that the action for
injunctive relief proceed as a nationwide class action on behalf of all
persons in the United States with mobility disabilities. The Company has
reached tentative agreement on settlement terms both as to the individual
plaintiff Concetta Jorgensen and the claims for injunctive relief, but a
settlement agreement has not yet been signed or presented to the U.S.
District Court for approval. During the course of settlement discussions,
Foodmaker was notified by attorneys for plaintiffs that claims may be made
against Jack in the Box franchisees and Foodmaker relating to locations that
franchisees lease from Foodmaker which may not be in compliance with the
Americans With Disabilities Act.
On December 10, 1996, a suit was filed by the Company's Mexican licensee,
Foodmex, Inc., in the United States District Court in San Diego, California
against the Company and its international franchising subsidiary. Foodmex
formerly operated several Jack in the Box franchise restaurants in Mexico,
but its licenses were terminated by the Company for, among other reasons,
chronic insolvency and failure to meet operational standards. Foodmex's
suit alleges wrongful termination of its master license, breach of contract
and unfair competition and seeks an injunction to prohibit termination of
its license as well as unspecified monetary damages. In January, 1997
Foodmex amended its complaint to name several individual defendents and to
allege additional causes of action. The Company and its subsidiary
counterclaimed and sought a preliminary injunction against Foodmex. On
March 28, 1997 the court granted the Company's request for an injunction,
held that the Company was likely to prevail in its suit, and ordered Foodmex
to immediately cease using the Jack in the Box marks and proprietary
operating systems. On June 30, 1997 the court held Foodmex and its
president in contempt of court for failing to comply with the March 28,
1997 order.
-6-
On May 23, 1997 an action by Ralston Purina Company was filed against the
Company in the U.S. District court for the Eastern District of Missouri in
St. Louis, Missouri alleging the Company's breach of a tax sharing agreement
and unjust enrichment and seeking an accounting and damages in an amount not
less than $11,000,000 and attorneys' fees and costs. The Company believes
it has meritorious defenses and intends to vigorously resist the lawsuit.
The Company is also subject to normal and routine litigation. None of the
foregoing is expected to have a material adverse effect on results of
operations and liquidity of the Company.
-7-
FOODMAKER, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
RESULTS OF OPERATIONS
- ---------------------
All comparisons under this heading between 1997 and 1996, refer to the
12-week and 40-week periods ended July 6, 1997 and July 7, 1996, respectively,
unless otherwise indicated.
Restaurant sales increased $25.8 million and $72.5 million, respectively, to
$234.8 million and $749.9 million in 1997 from $209.0 million and $677.4 million
in 1996, as both per store average sales and the number of Company-operated
restaurants increased from a year ago. Per store average ("PSA") sales for
comparable restaurants, which are calculated for only those restaurants open for
the full fiscal years being compared, increased 7.7% and 7.2%, respectively, in
1997 compared to the same periods in 1996. The PSA sales improvement reflects
increases of 5.5% and 6.2% in the average number of transactions, and increases
of 2.2% and 1.0% in average transaction amounts. Sales continued to improve
under the Company's two-tier marketing strategy featuring premium sandwiches,
such as the Sourdough Jack sandwich, and value-priced alternatives from "Jack's
Value Menu". Sales were further strengthened by the "New and Improved" campaign
which began in August 1996. Since January 1996, the Company has increased
prices on certain products to offset commodity cost and minimum wage increases.
The average number of Company-operated restaurants increased to 891 in 1997 from
867 in 1996 through the addition of new units and the acquisition of restaurants
from franchisees.
Distribution sales of food and supplies declined $18.2 million and $75.2
million, respectively, to $7.1 million and $42.0 million in 1997 from $25.3
million and $117.2 million in 1996. Distribution sales to franchisees declined
$7.9 million and $58.5 million, respectively, in 1997 compared to the same
periods in 1996 as the franchisees have transitioned to their own purchasing
cooperative, which contracts with another supplier for distribution services.
Most franchisees have elected to participate in the cooperative, which has
resulted in a substantial decline in distribution sales. Distribution sales to
Chi-Chi's, Inc. have also declined $10.2 million and $16.7 million,
respectively, in 1997 compared to the same periods in 1996. The Company's
distribution agreement with Chi-Chi's was not renewed when the contract expired
in April 1997. Ongoing distribution sales, which relate only to franchisees who
continue to use Foodmaker distribution services, are expected to be
approximately $2 million per quarter. Because distribution is a low-margin
business, the loss of distribution revenues is not expected to have a material
impact on the financial condition of the Company.
Franchise rents and royalties increased to $8.5 million and $27.2 million,
respectively, in 1997 from $7.9 million and $25.9 million in 1996, reflecting
an increase in sales at franchise-operated restaurants to $82.3 million and
$271.8 million in 1997 from $78.0 million and $256.2 million, respectively, in
1996. The Company receives rents and royalties averaging approximately 10% of
sales at franchise-operated restaurants.
-8-
Other revenues increased in the 12-week period to $1.3 million in 1997 from
$.9 million in 1996, principally due to increased interest income from higher
levels of investments. In the 40-week period other revenues declined slightly
to $3.1 million in 1997 from $3.2 million in 1996.
Total revenues increased $8.6 million in the 12-week period to $251.7
million in 1997 from $243.1 million in 1996 as restaurant sales increases
outpaced distribution sales declines. In the 40-week period total revenues
declined slightly to $822.2 million in 1997 from $823.8 million in 1996,
reflecting the decline in distribution sales.
Restaurant costs of sales, which include food and packaging costs, increased
with restaurant sales growth to $77.3 million and $250.1 million, respectively,
in 1997 from $67.4 million and $221.2 million in 1996. Restaurant costs of
sales increased as a percent of sales to 32.9% and 33.3%, respectively, in 1997
from 32.2% and 32.7% in 1996, principally due to higher food costs of certain
discount promotions, the cost of improved french fries and commodity cost
increases, primarily pork and dairy.
Restaurant operating costs increased with sales growth and the addition of
Company-operated restaurants to $119.5 million and $385.2 million, respectively,
in 1997 from $110.0 million and $362.5 million in 1996. Restaurant operating
costs declined to 50.9% and 51.4% of sales in 1997 from 52.6% and 53.5% of
sales, respectively, in 1996 principally due to labor efficiencies and lower
percentages of occupancy and other operating costs, as sales have increased at
a greater rate than these costs.
Costs of distribution sales decreased to $7.0 million and $41.6 million,
respectively, in 1997 from $24.8 million and $115.2 million in 1996 reflecting
the decline in distribution sales. Costs of distribution sales have increased
slightly as a percent of sales to 99.1% in 1997 from 98.3% in 1996 due to
expenses of $.4 million related to the closure of a distribution center which
had been used primarily to distribute to Chi-Chi's restaurants.
Franchised restaurant costs, which include rents and depreciation on
properties leased to franchisees and other miscellaneous costs, increased to
$6.2 million and $18.2 million, respectively, in 1997 from $4.7 million and
$15.7 million in 1996. The higher costs reflect increases in franchise-related
legal expense.
Selling, general and administrative expenses increased $1.6 million and $8.3
million to $19.7 million and $62.7 million, respectively, in 1997 from $18.1
million and $54.4 million in 1996. Advertising and promotion costs, which were
approximately 5.3% of sales in both years, increased with the higher restaurant
sales. General, administrative and other expenses increased $.3 million and
$4.3 million, respectively, in 1997 compared to 1996. Expenses for the 40-week
period reflect higher legal expenses, other general increases and approximately
$1.2 million in expenses and write-offs related to the test of dual brand
concepts (two brands operating in the same restaurant facility).
Interest expense declined $1.7 million and $5.3 million, respectively, to
$9.3 million and $31.3 million in 1997 from $11.0 million and $36.6 million in
1996 principally due to a reduction in total debt outstanding. Total debt at
July 6, 1997 was $397.4 million, a decline of $44.6 million since the beginning
of fiscal year 1996 reflecting the early retirement in May 1996 of $42.8 million
of the Company's 14 1/4% senior subordinated notes.
-9-
The tax provision reflects the expected annual tax rate of 22% of earnings
before income taxes in 1997 and the effective annual tax rate of 21% of pretax
earnings in 1996. The low effective income tax rates in each year result from
the Company's ability to realize previously unrecognized tax benefits. The
Company cannot determine the actual annual effective tax until the end of the
fiscal year, thus the rate could differ from expectations.
Net earnings for the 12-week period improved $4.5 million to $10.0 million,
or $.25 per share, in 1997 from $5.5 million, or $.14 per share, in 1996. Net
earnings for the 40-week period improved $11.5 million to $25.7 million, or $.65
per share, in 1997 from $14.2 million, or $.36 per share, in 1996 reflecting
sales growth and cost management.
FINANCIAL CONDITION
- -------------------
Cash and cash equivalents increased $47.9 million to $89.9 million at
July 6, 1997 from $42.0 million at the beginning of the fiscal year. The cash
increase in 1997 reflects, among other things, cash flows from operations of
$74.8 million and capital expenditures of $26.0 million.
The Company's working capital deficit decreased $27.9 million to $22.7
million at July 6, 1997 from $50.6 million at September 29, 1996, principally
due to the increase in cash. The Company and the restaurant industry, in
general, maintain relatively low levels of receivables and inventories and
vendors grant trade credit for purchases such as food and supplies. The Company
also continually invests in its business through the addition of new units and
refurbishment of existing units, which are reflected as long-term assets and not
as part of working capital.
Total debt outstanding declined to $397.4 million at July 6, 1997 from
$398.2 million at the beginning of the fiscal year and $442.1 million at the
beginning of fiscal year 1996. On May 15, 1996, the Company used $43.5 million
of available cash to prepay the 14 1/4% senior subordinated notes due in May
1998.
In September 1997, the Company expects to use available cash to prepay $50
million of its 9 1/4% Senior Notes due March 1, 1999, thereby reducing total
debt to approximately $347 million.
The Company's revolving bank credit agreement, which expires December 31,
1998, provides for a credit facility of up to $60 million, including letters of
credit of up to $25 million. At July 6, 1997, the Company had no borrowings and
approximately $53.3 million of unused credit under the agreement. The Company
is subject to a number of covenants under its various credit agreements
including limitations on additional borrowings, capital expenditures, lease
commitments and dividend payments, and requirements to maintain certain
financial ratios, cash flows and net worth. Substantially all of the Company's
real estate and machinery and equipment is pledged to its lenders under the
credit agreement and other secured notes.
The Company's primary sources of liquidity are expected to be cash flows
from operations, the revolving bank credit facility, and the sale and leaseback
of restaurant properties. An additional potential source of liquidity is the
conversion of Company-operated restaurants to franchised restaurants. The
Company requires capital principally to grow the business through new restaurant
construction, as well as to maintain, improve and refurbish existing
restaurants, and for general operating purposes.
-10-
Based upon current levels of operations and anticipated growth, the Company
expects that sufficient cash flows will be generated from operations so that,
combined with other financing alternatives available, including utilization of
cash on hand, bank credit facilities, the sale and leaseback of restaurants and
refinancing opportunities, the Company will be able to meet all of its debt
service, capital expenditure and working capital requirements.
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS
- ----------------------------------------------------------
This Quarterly Report on Form 10-Q contains forward looking statements
including, but not limited to, the Company's expectations regarding its
effective tax rate, its continuing investment in new restaurants and
refurbishment of existing facilities and sources of liquidity. Forward looking
statements are subject to known and unknown risks and uncertainties which may
cause actual results to differ materially from expectations. The following is
a discussion of some of those factors. The Company's tax provision is highly
sensitive to expected earnings. As earnings expectations change, the Company's
income tax provision may vary more significantly from quarter to quarter and
year to year than companies which have been continuously profitable. However,
the Company's effective tax rates are expected to increase in the future.
There can be no assurances that growth objectives in the regional domestic
markets in which the Company operates will be met or that capital will be
available for refurbishment of existing facilities. Additional risk factors
associated with the Company's business are detailed in the Company's most
recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
PART II - OTHER INFORMATION
There is no information required to be reported for any items under Part II,
except as follows:
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
------ -----------
10 Second Amendment dated as of July 11, 1997 to the Amended
and Restated Revolving Credit Agreement dated as of
March 15, 1996, as amended as of April 5, 1996 by the
Agreement to Add Banks, among Foodmaker, Inc. and the
Banks named therein
27 Financial Data Schedule (included only with electronic
filing)
(b) Reports on Form 8-K - None
-11-
SIGNATURE
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 and in the capacities indicated.
FOODMAKER, INC.
By: DARWIN J. WEEKS
----------------------------
Darwin J. Weeks
Vice President, Controller
and Chief Accounting Officer
(Duly Authorized Signatory)
Date: August 18, 1997