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 the quarterly period ended July 4, 1999
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Commission file no. 1-9390
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FOODMAKER,INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2698708
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(State of Incorporation) (I.R.S. Employer Identification No.)
9330 BALBOA AVENUE, SAN DIEGO, CA 92123
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (619) 571-2121
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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
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Number of shares of common stock, $.01 par value, outstanding as of the close
of business August 9, 1999 - 38,267,479
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1
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 4, September 27,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents...................... $ 5,230 $ 9,952
Receivables.................................... 10,336 13,705
Inventories.................................... 20,502 17,939
Prepaid expenses............................... 48,340 40,826
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Total current assets......................... 84,408 82,422
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Trading area rights.............................. 71,916 72,993
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Lease acquisition costs.......................... 15,800 17,157
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Other assets..................................... 40,027 39,309
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Property at cost................................. 824,080 759,680
Accumulated depreciation and amortization...... (250,653) (227,973)
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573,427 531,707
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TOTAL........................................ $ 785,578 $ 743,588
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........... $ 1,850 $ 1,685
Accounts payable............................... 34,702 52,086
Accrued expenses............................... 162,959 171,974
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Total current liabilities.................... 199,511 225,745
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Deferred income taxes........................... 4,147 2,347
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Long-term debt, net of current maturities....... 310,762 320,050
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Other long-term liabilities..................... 73,656 58,466
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Stockholders' equity:
Common stock.................................. 411 408
Capital in excess of par value................ 288,344 285,940
Accumulated deficit........................... (56,790) (114,905)
Treasury stock................................ (34,463) (34,463)
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Total stockholders' equity.................. 197,502 136,980
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TOTAL....................................... $ 785,578 $ 743,588
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See accompanying notes to financial statements.
2
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Twelve Weeks Ended Forty Weeks Ended
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July 4, July 5, July 4, July 5,
1999 1998 1999 1998
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Revenues:
Restaurant sales......... $ 323,727 $ 263,668 $ 1,011,833 $ 838,506
Distribution and other
sales.................. 9,175 6,634 28,365 18,985
Franchise rents and
royalities............. 9,086 8,285 29,686 27,248
Other.................... 460 1,979 1,671 49,510
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342,448 280,566 1,071,555 934,249
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Costs and expenses:
Costs of revenues:
Restaurant costs of sales 100,133 83,085 320,906 267,661
Restaurant operating
costs.................. 156,779 129,779 473,372 412,406
Costs of distribution and
other sales............ 9,038 6,460 27,919 18,517
Franchised restaurant
costs.................. 5,003 5,365 17,943 17,820
Selling, general and
administrative......... 37,574 29,544 117,385 104,685
Interest expense......... 6,344 7,707 21,815 26,913
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314,871 261,940 979,340 848,002
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Earnings before income
taxes.................... 27,577 18,626 92,215 86,247
Income taxes............... 10,200 6,000 34,100 27,600
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Earnings before
extraordinary item....... 17,377 12,626 58,115 58,647
Extraordinary item - loss
on early extinguishment
of debt, net of taxes.... - (4,378) - (4,378)
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Net earnings............... $ 17,377 $ 8,248 $ 58,115 $ 54,269
========= ========= ========= =========
Earnings per share - basic:
Earnings before
extraordinary item... $ .45 $ .32 $ 1.53 $ 1.49
Extraordinary item..... - .11 - .11
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Net earnings per share. $ .45 $ .21 $ 1.53 $ 1.38
========= ======== ========= =========
Earnings per share - diluted:
Earnings before
extraordinary item... $ .44 $ .31 $ 1.48 $ 1.46
Extraordinary item..... - .11 - .11
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Net earnings per share $ .44 $ .20 $ 1.48 $ 1.35
======== ======== ========= =========
Weighted average shares
outstanding:
Basic............... 38,209 39,300 38,104 39,214
Diluted............. 39,446 40,348 39,229 40,281
See accompanying notes to financial statements.
3
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Forty Weeks Ended
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July 4, July 5,
1999 1998
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Cash flows from operations:
Net earnings...................................... $ 58,115 $ 58,647
Non-cash items included above:
Depreciation and amortization................... 35,491 32,312
Deferred income taxes........................... 1,800 4,000
Decrease (increase) in receivables................ 3,369 (830)
Decrease (increase) in inventories................ (2,563) 22
Increase in prepaid expenses...................... (7,514) (3,608)
Decrease in accounts payable...................... (17,384) (14,378)
Increase in other liabilities..................... 12,728 9,850
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Cash flows provided by operations............... 84,042 86,015
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Cash flows from investing activities:
Additions to property and equipment............... (81,939) (61,203)
Dispositions of property and equipment............ 4,776 4,099
Increase in trading area rights................... (1,910) (6,719)
Increase in other assets.......................... (2,665) (7,081)
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Cash flows used in investing activities......... (81,738) (70,904)
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Cash flows from financing activities:
Borrowings under revolving bank loans............. 256,500 118,000
Principal repayments under revolving bank
loans........................................... (267,000) (32,000)
Proceeds from issuance of long-term debt.......... 3,375 126,690
Principal payments on long-term debt,
including current maturities.................... (2,308) (251,166)
Extraordinary loss on retirement of debt,
net of tax...................................... - (4,378)
Proceeds from issuance of common stock............ 2,407 1,487
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Cash flows used in financing activities......... (7,026) (41,367)
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Net decrease in cash and cash equivalents........... $ (4,722) $ (26,256)
========= =========
See accompanying notes to financial statements.
4
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements of
Foodmaker,Inc.(the "Company") and its subsidiaries 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 1998 financial
statements.
2. The income tax provisions reflect the expected annual tax rate of 37% of
earnings before income taxes in 1999 and the actual tax rate of 32% of
pretax earnings in 1998. The favorable income tax rates result from the
Company's ability to realize previously unrecognized tax benefits. The
Company cannot determine with certainty the 1999 annual tax rate until the
end of the fiscal year; thus the rate could differ from expectations.
3. Contingent Liabilities
On November 6, 1996, an action was filed by the National JIB Franchisee
Association, Inc. (the "Franchisee Association") and several of the
Company's franchisees in the Superior Court of California, County of San
Diego in San Diego, California against the Company and others. The lawsuit
alleged that certain Company policies are unfair business practices and
violate sections of the California Corporations Code regarding material
modifications of franchise agreements and interfere with franchisees' right
of association. It sought injunctive relief, a declaration of the rights and
duties of the parties,unspecified damages and rescission of alleged material
modifications of plaintiffs' franchise agreements. The complaint contained
allegations of fraud, breach of fiduciary duty and breach of a third-party
beneficiary contract in connection with certain payments that the Company
received from suppliers and sought unspecified damages, interest, punitive
damages and an accounting. However, on August 31, 1998, the Court granted
the Company's request for summary judgment on all claims regarding an
accounting, conversion, fraud, breach of fiduciary duty and breach of
third-party beneficiary contracts. On March 10,1999, the court granted
motions by the Company, ruling, in essence, that the franchisees would be
unable to prove their remaining claims. On April 22, 1999,the Court entered
an order granting the Company's motion to enforce a settlement with the
Franchisee Association covering various aspects of the franchise
relationship, but involving no cash payments by the Company. In accordance
with that order, the Franchise Association's claims were dismissed with
prejudice. On June 10, a final judgment was entered, in favor of Foodmaker,
and against those plaintiffs with whom Foodmaker did not settle. The
Franchise Assciation and certain individual plaintiffs filed an appeal on
August 13, 1999. Management intends to vigorously defend the appeal.
5
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, attorneys' fees and prejudgment
interest. In an amended complaint, damages were 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 agreement on settlement terms both as to the individual
plaintiff Concetta Jorgensen and the claims for injunctive relief, and the
settlement agreement has been approved by the U.S. District Court. The
settlement requires the Company to make access improvements at
Company-operated restaurants to comply with the standards set forth in
the Americans with Disabilities Act Access Guidelines. The settlement
requires compliance at 85% of the Company-operated restaurants by April
2001 and for the balance of Company-operated restaurants by October 2005.
The Company has agreed to make modifications to its restaurants to improve
accessibility and anticipates investing an estimated $19 million in capital
improvements in connection with these modifications, including amounts
previously spent. Similar claims have been made against Jack in the Box
franchisees and Foodmaker relating to franchised locations which may not
be in compliance with the Americans with Disabilities Act (ADA). The relief
sought is injunctive relief to bring these additional restaurants into
compliance with the ADA and attorneys' fees.
On April 6, 1996, an action was filed by one of the Company's international
franchisees, Wolsey, Ltd., a Hong Kong corporation, in the U.S. District
Court in San Diego, California against the Company and its directors, its
international franchising subsidiary, and certain current and former
officers of the Company. The complaint alleged certain contractual, tort,
and law violations, and sought $38.5 million in damages, injunctive relief,
attorneys' fees and costs. The Company filed a counterclaim seeking, among
other things, declaratory relief, and attorneys' fees and costs. Prior to
the trial, the Court dismissed portions of the plaintiff's claim, including
the single claim alleging wrongdoing by the Company's non-management
directors, and the claims against its current officers. The case proceeded
to trial on January 5, 1999. Prior to the conclusion of the trial, on
January 29, 1999, the parties reached agreement on a settlement, which
provided for a mutual exchange of non-cash consideration, including
execution of a new agreement between the Company and the plaintiff for
development of Jack in the Box restaurants in Asia. The settlement was
formally approved, aqnd judgment was entered on February 2, 1999.
On December 10, 1996, the Company's Mexican licensee, Foodmex, Inc.
("Foodmex") filed a suit, in the U.S. 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.
The Foodmex suit alleged wrongful termination of its master license, breach
of contract and unfair competition and sought an injunction to prohibit
termination of its license as well as unspecified monetary damages. The
Company and its subsidiary counterclaimed and sought a preliminary
injunction against Foodmex. On February 24, 1998, the Court issued an order
dismissing Foodmex's complaint without prejudice. In March 1998, Foodmex
filed a Second Amended Complaint in the U.S. District Court in San Diego,
California alleging contractual, tort and law violations arising out of the
same business relationship and seeking damages in excess of $10 million,
attorneys' fees and costs. On June 25, 1999 the court granted Foodmaker's
6
motion for summary judgement on the plaintiff's second amended complaint,
resulting in the complete dismissal of Foodmex's claim against Foodmaker.
On the same day, the court granted Foodmaker's motion for partial summary
judgement on its breach of contract, trademark infringement, unfair
competition and related claims, including the Company's claim for a
permanent injunction. The court ordered Foodmex to cease using any of
the Company's proprietary marks, and ordered it to cause its Mexican
sublicensees to cease using any of Foodmaker's proprietary marks.
Issues of Foodmex's liability to Foodmaker on the Company's breach
of promissory note claim, and issues of damages owed to Foodmaker by
Foodmex remain to be decided. No trial date has been set.
The Company is also subject to normal and routine litigation. The amount of
liability from the claims and actions against the Company cannot be
determined with certainty, but in the opinion of management, the ultimate
liability from all pending legal proceedings, asserted legal claims and
known potential legal claims which are probable of assertion should not
materially affect the results of operations and liquidity of the Company.
Other than as described in this quarterly report, there have been no
material changes to the litigation matters set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended September 27, 1998.
The U.S. Internal Revenue Service ("IRS") examination of the Company's
federal income tax return for fiscal year 1996 resulted in the issuance of a
proposed adjustment to tax liability of $7.3 million (exclusive of
interest). The Company has filed a protest with the Regional Office of
Appeals of the IRS to contest the proposed assessment. Management believes
that an adequate provision for income taxes has been made.
7
FOODMAKER, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
All comparisons under this heading between 1999 and 1998 refer to the
12-week and 40-week periods ended July 4, 1999 and July 5, 1998,
respectively, unless otherwise indicated.
Restaurant sales increased $60.0 million, and $173.3 million, respectively,
to $323.7 million and $1,011.8 million in 1999 from $263.7 million and $838.5
million in 1998, reflecting increases in the number of Company-operated
restaurants and in per store average ("PSA") sales. The average number of
Company-operated restaurants for the 40-week period increased to 1,106 in 1999
from 986 restaurants in 1998. PSA sales for comparable Company-operated
restaurants, those open more than one year, grew 9.8% and 8.4% in the 12-week
and 40-week periods of 1999 compared with the same periods in 1998. Sales
growth resulted from increases in the average number of transactions of 6.4% and
5.0% in the respective 1999 periods and the balance of the increases from higher
average transaction amounts. Management believes that the sales growth is
attributable to effective advertising and strategic initiatives, especially the
Assemble-To-Order ("ATO") program in which sandwiches are made when customers
order them. New menu boards that showcase the combo meals are helping to
increase average check amounts. In addition, a new drive-thru order confirmation
system is helping to improve order accuracy while alerting customers to the
amount of their purchase.
Distribution and other sales increased $2.6 million and $9.4 million,
respectively, to $9.2 million and $28.4 million in 1999 from $6.6 million and
$19.0 million in 1998, primarily due to an increase in the number of franchise
restaurants serviced by the Company's distribution division, sales growth at
franchise restaurants and an increase in other sales.
Franchise rents and royalties increased $.8 million and $2.5 million to
$9.1 million and $29.7 million, respectively, in 1999 from $8.3 million and
$27.2 million in 1998, and were slightly more than 10% of sales at franchise
restaurants in both years. Franchise restaurant sales increased to $88.3 million
and $286.2 million, respectively, in 1999 from $79.2 million and $263.3 million
in 1998. Sales at domestic franchise restaurants were also strengthened by
implementing the Company's strategic initiatives.
Other revenues, typically interest income from investments and notes
receivable, also included in the second quarter in 1998 income from the
settlement of litigation with meat suppliers (the "Litigation
Settlement") of approximately $45.8 million after litigation costs.
Other revenues declined to $.5 million and $1.7 million, respectively,
in 1999 from $2.0 million and $3.7 million excluding this unusual item in 1998,
reflecting lower cash investments after repaying debt.
Restaurant costs of sales and operating costs increased with sales growth
and the addition of Company-operated restaurants. Restaurant costs of sales,
which include food and packaging costs, increased to $100.1 million and
$320.9 million in 1999 from $83.1 million and $267.7 million in 1998. As a
percent of restaurant sales, costs of sales declined to 30.9% and 31.7% of
sales, respectively, in 1999, from 31.5% and 31.9% in 1998, primarily due
to lower ingredient costs, especially beef and pork.
8
In the second quarter in 1999, the Company reduced accrued liabilities and
restaurant operating costs by $18.0 million, primarily due to a change in
estimates resulting from improvements to its loss prevention and risk management
programs, which have been more successful than anticipated. Restaurant
operating costs increased to $156.8 million and $491.4 million, excluding this
unusual adjustment, in 1999 from $129.8 million and $412.4 million,
respectively, in 1998. As a percent of restaurant sales, operating costs
excluding the unusual adjustment decreased to 48.4% and 48.6%, respectively, in
1999 from 49.2% in both periods of 1998. The improvements in 1999 reflect
improved percentages of labor-related costs and occupancy expenses, which tend
to be less variable, increasing at a lesser rate than PSA sales growth.
Costs of distribution and other sales increased to $9.0 million and $27.9
million, respectively, in 1999 from $6.5 million and $18.5 million in 1998,
reflecting an increase in the related sales. As a percent of distribution and
other sales, these costs increased to 98.5% and 98.4%, respectively, in 1999
from 97.4% and 97.5% in 1998, primarily due to the lower margin realized from
other sales.
Franchised restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
decreased slightly to $5.0 million and increased slightly to $17.9 million,
respectively, in 1999 from $5.4 million and $17.8 million in 1998. The decline
in the most recent quarter is principally due to lower franchise-related legal
expenses.
Selling, general and administrative costs increased to $37.6 million and
$117.4 million in 1999 from $29.5 million and $104.7 million in 1998.
Advertising and promotion costs increased to $16.6 million and $52.0 million,
respectively, in 1999 from $13.9 million and $44.5 million in 1998, slightly
over 5% of restaurant sales in all periods. Regional administrative and
training expenses are reflected in general and administrative costs in 1999.
The 1998 amounts, which had previously been included with restaurant
operating costs, have been reclassified to conform with the 1999
presentation. In 1998 general, administrative and other costs included a
non-cash charge of approximately $8 million primarily related to facilities
and customer service improvement projects. In 1999 general, administrative
and other costs were 6.1% of revenues in both periods and, in 1998,
excluding the non-cash charge, such costs were 5.6% and 5.9% of revenues
excluding the Litigation Settlement.
Interest expense declined $1.4 million and $5.1 million, respectively, to
$6.3 million and $21.8 million in 1999 from $7.7 million and $26.9 million in
1998, principally due to a reduction in debt and lower interest rates. In 1998
the Company completed the refinancing plan described in "Liquidity and Capital
Resources." As a result of the plan, since the beginning of 1998 debt has been
reduced by approximately $35 million and effective interest rates are lower.
The income tax provisions reflect the expected annual tax rate of 37% of
earnings before income taxes in 1999 and the actual tax rate of 32% of pretax
earnings in 1998. The favorable income tax rates result from the Company's
ability to realize previously unrecognized tax benefits. The Company cannot
determine with certainty the 1999 annual tax rate until the end of the fiscal
year; thus the rate could differ from expectations.
In 1998 the Company incurred an extraordinary loss of $7.0 million, less
income tax benefits of $2.6 million, on the early extinguishment of $125
million each of its 9 1/4% senior notes and its 9 3/4% senior subordinated
notes.
9
Net earnings in the 12-week period increased 38% to $17.4 million, or $.44
per diluted share, in 1999 from $12.6 million, or $.31 per diluted share,
before an extraordinary item in 1998. Net earnings in the 40-week period
were $58.1 million, or $1.48 per diluted share, in 1999 and $58.6 million, or
$1.46 per diluted share, before an extraordinary item in 1998. Net earnings in
both 1999 and 1998 include unusual items, which increased the Company's net
income. In the second quarter of 1999, the Company reduced restaurant operating
costs by $11.3 million or $.29 per diluted share, net of income taxes, primarily
due to a change in estimates as described above. Earnings in 1998 included
income from the Litigation Settlement and a non-cash charge as described in
general and administrative costs, which combined were approximately $25.6
million, or $.64 per diluted share, net of income taxes. Excluding these
unusual items in both years, net earnings increased 42% in the 40-week period to
$46.8 million, or $1.19 per diluted share, in 1999 from $33.0 million, or $.82
per diluted share, before an extraordinary item in 1998. The earnings increases
in 1999 compared to the same periods in 1998 reflect the impact of sales growth
and lower interest expense, offset in part by the higher effective income tax
rate in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $4.8 million to $5.2 million at July 4,
1999 from $10.0 million at the beginning of the fiscal year. The Company
expects to maintain low levels of cash and cash equivalents and plans to
reinvest available cash flows from operations to develop new, enhance existing
restaurants and to reduce borrowings under the revolving credit agreement.
The Company's working capital deficit decreased $28.2 million to $115.1
millionat July 4, 1999 from $143.3 million at September 27, 1998, principally
due to a decline in current liabilities. The Company and the restaurant industry
ingeneral maintain relatively low levels of accounts receivable 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.
On April 1, 1998, the Company entered into a new revolving bank credit
agreement, which provides for a credit facility expiring in 2003 of up to $175
million, including letters of credit of up to $25 million. At July 4, 1999, the
Company had borrowings of $87.0 million and approximately $81.0 million of
availability under the agreement.
Beginning in September 1997, the Company initiated a refinancing plan to
reduce and restructure its debt. At that time, the Company prepaid $50 million
of its 9 1/4% senior notes due 1999 using available cash. In 1998 the Company
repaid the remaining $125 million of its 9 1/4% senior notes and all $125
million of its 9 3/4% senior subordinated notes due 2002.
In order to fund these repayments, on April 14, 1998 the Company completed
a private offering of $125 million of 8 3/8% senior subordinated notes due 2008,
redeemable beginning 2003. Additional funding sources included available cash,
as well as bank borrowings under the new bank credit facility. The Company
expects that annual interest expense will be reduced by over $10 million from
1997 levels due to the reduction in debt and lower interest rates on the new
debt. Total debt outstanding decreased to $312.6 million at July 4, 1999 from
$347.7 million at the beginning of fiscal year 1998.
The Company is subject to a number of covenants under its various debt
instruments including limitations on additional borrowings, capital
expenditures, lease commitments and dividend payments, and requirements to
maintain certain financial ratios, cash flows and net worth. The bank credit
facility is secured by a first priority security interest in certain assets and
properties of the Company. In addition, certain of the Company's real estate and
equipment secure other indebtedness.
10
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. 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. Additional
potential sources of liquidity include financing opportunities and the
conversion of Company-operated restaurants to franchised restaurants. Based upon
current levels of operations and anticipated growth, the Company expects that
cash flows from operations, combined with other financing alternatives
available, will be sufficient to meet debt service, capital expenditure and
working capital requirements.
Although the amount of liability from claims and actions against the
Company cannot be determined with certainty, management believes the ultimate
liability of such claims and actions should not materially affect the results
of operations and liquidity of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure relating to financial instruments is to
changes in interest rates. The Company uses interest rate swap agreements to
reduce exposure to interest rate fluctuations. At July 4, 1999, the Company
had a $25 million notional amount interest rate swap agreement expiring in
June 2001. This agreement effectively converts a portion of the Company's
variable rate bank debt to fixed rate debt and has a pay rate of 6.63%.
At July 4, 1999, a hypothetical one percentage point increase in short-term
interest rates would result in a reduction of $.6 million in annual pre-tax
earnings. The estimated reduction is based on holding the unhedged portion of
bank debt at its July 4, 1999 level.
At July 4, 1999, the Company had no other material financial instruments
subject to significant market exposure.
YEAR 2000 COMPLIANCE
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data using
only two digits of the year. Most computer programs, computers, and embedded
microprocessors controlling equipment were programmed to assume that all two
digit dates were preceded by "19," causing "00" to be interpreted as the year
1900. This formerly common practice now could result in a computer system or
embedded microprocessor which fails to recognize properly a year that begins
with "20," rather than "19." This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by
date-sensitive microprocessors, and is generally referred to as the "Year 2000"
issue.
The Company's State of Year 2000 Readiness. In 1995 the Company began to
formulate a plan to address its Year 2000 issues. The Company's Year 2000 plan
now involves five phases: 1) Awareness, 2) Assessment, 3) Remediation, 4)
Testing and 5) Implementation.
Awareness involves helping employees who deal with the Company's computer
assets, and managers, executives and directors to understand the nature of the
Year 2000 problem. Assessment involves the identification and inventory of the
Company's information technology ("IT") systems and embedded microprocessor
technology ("ET") and the determination as to whether such technology will
properly recognize a year that begins with "20," rather than "19." IT/ET
systems that, among other things, properly recognize a year beginning with "20"
are said to be "Year 2000 ready." Remediation involves the repair or
replacement of IT/ET systems that are not Year 2000 ready. Testing involves the
testing of repaired or replaced IT/ET systems. Implementation is the
installation and integration of remediated and tested IT/ET systems.
11
The phases overlap substantially. The Company has made substantial progress
in the Awareness, Assessment, Remediation and Testing phases and has completed
implementation of a number of systems.
Awareness and Assessment. The Company has established an ad hoc Committee
of the Board of Directors and multiple management teams, which are responsible
for the Company's activities in addressing the Year 2000 issue. The Company has
also sent letters to approximately 2,700 of its vendors of goods and services
to bring the Year 2000 issue to their attention and to assess their readiness.
The Company has advised its franchisees (who operate approximately 22% of the
Jack in the Box restaurants) that they are required to be Year 2000 ready by
December 31, 1999 and has provided video information and regional presentations
regarding Year 2000 issues. The Company's franchisees are represented on a Year
2000 team. While the Awareness and Assessment phases will continue into the Year
2000, they are substantially complete at this time.
Remediation, Testing and Implementation. Although Remediation, Testing and
Implementation will be substantially completed during 1999, some systems
identified as non-critical may not be addressed until after January 2000. The
following table describes by category and status, major IT applications that
have been identified.
Remediation Status
Category Ready In Process
- --------------------------------------------------------------------------------
Mainframe
Third party developed software 100% 0%
Internally developed software 90% 10%
Hardware (Peripherals) 100% 0%
Desktop
Third party developed software 79% 21%
Internally developed software 40% 60%
Corporate hardware 70% 30%
Restaurant hardware 94% 6%
Client-Server
Third party developed software 60% 40%
Internally developed software 100% 0%
Hardware 66% 34%
Embedded Technology. The Company has identified categories of critical
restaurant equipment in which ET may be found, has sent letters to the majority
of the vendors of such equipment and is in the process of identifying the
remaining vendors. About 97% of restaurant equipment vendors who have received
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letters have responded. The Company is reviewing the responses. To date, the
Company has identified only one type of equipment with date sensitive ET that
the Company believes should be replaced. Replacement components have been
implemented in 63% of the Company restaurants with the remainder to be
implemented during 1999. Franchisees have been informed and offered the
opportunity to participate in the Company's replacement program. The Company
continues to evaluate information in letter responses and other materials
received from vendors, on web sites, and from other sources, in identifying date
sensitive ET.
Vendors of Important Goods and Services. The Company has identified and
sent letters to approximately 2,700 key vendors in an attempt to gain assurance
of vendors' Year 2000 readiness. As of July 1999, the Company had received
responses concerning Year 2000 readiness from approximately 63% of those vendors
and is pursuing responses from the remainder. The Company expects to continue
discussions with those it identifies as critical vendors of goods and services
throughout 1999 to attempt to ensure the uninterrupted supply of goods and
services and to develop contingency plans in the event of the failure of any of
such vendors to become and remain Year 2000 ready.
The Company's Franchisees. At July 4, 1999, 327 restaurants were operated
by franchisees. The Company has completed an assessment of the Year 2000
readiness of the personal computers it has leased to approximately 80% of
franchised restaurant, together with software it has licensed them to use. Such
computers and software were determined not to be Year 2000 ready and are being
replaced with compliant computers and remediated software at franchisees'
expense during 1999. The Company has advised its franchisees, both domestic and
international, that they are required to be Year 2000 ready by December 31,
1999.
The Costs to Address the Company's Year 2000 Issues. The Company estimates
that it has incurred costs of approximately $11 million to date for the
Awareness, Assessment, Remediation, Testing and Implementation phases of its
Year 2000 plan. These amounts have come principally from the general operating
and capital budgets of the Company's Management Information Systems department.
The Company currently estimates the total costs of completing its Year 2000
plan, including costs incurred to date, to be approximately $13 million, with
approximately 25% relating to new systems which have been or will be
capitalized. Some planned system replacements, which are anticipated to provide
significant future benefits, were accelerated due to Year 2000 concerns and have
resulted in increased IT spending. This estimate is based on currently available
information and will be updated as the Company continues its assessment of third
party relationships, proceeds with its testing and implementation, and designs
contingency plans.
The Risks of the Company's Year 2000 Issues. If any IT or ET systems
critical to the Company's operations have been overlooked in the Assessment,
Remediation, Testing or Implementation phases, if any of the Company's
remediated internal computer systems are not successfully remediated, or if
a significant number of the Company's franchisees do not become Year 2000 ready
in a timely manner, there could be a material adverse effect on the Company's
results of operations, liquidity and financial condition of a magnitude which
the Company has not yet fully analyzed.
In addition, the Company has not yet been assured that (1) the computer
systems of all of its key vendors will be Year 2000 ready in a timely manner
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or that (2) the computer systems of third parties with which the Company's
computer systems exchange data will be Year 2000 ready both in a timely
manner and in a manner compatible with continued data exchange with the
Company's computer systems.
If the vendors of the Company's most important goods and services or the
suppliers of the Company's necessary energy, telecommunications and
transportation needs fail to provide the Company with (1) the materials and
services which are necessary to produce, distribute and sell its products, (2)
the electrical power and other utilities necessary to sustain its operations, or
(3) reliable means of transporting supplies to its restaurants and franchisees,
such failure could have a material adverse effect on the results of operations,
liquidity and financial condition of the Company.
The Company's Contingency Plan. The Company is developing a business
contingency plan to address both unavoided and unavoidable Year 2000 risks.
Although the Company expects to have the plan substantially complete by late
summer, enhancements and revisions will be continuously considered and
implemented, as appropriate, throughout the remainder of the year and into
the Year 2000.
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, Year 2000 compliance and sources of
liquidity. Forward-looking statements are generally identifiable by the use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" and
similar expressions. 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 and as
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. The Company has urged certain vendors to develop and implement Year
2000 compliance plans. However, any failure by vendors to ensure compliance with
Year 2000 requirements could have a material, adverse effect on the financial
condition and results of operations of the Company after January 1, 2000.
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.
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NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS 130,
requiring only additional informational disclosures, is effective for the
Company's fiscal year ending October 3, 1999.
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. This Statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is required to be restated. SFAS 131, requiring only
additional informational disclosures, is effective for the Company's fiscal year
ending October 3, 1999.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement is effective for all fiscal years beginning after June 15, 2000.
SFAS 133 is effective for the Company's fiscal year ending September 30, 2001
and is not expected to have a material effect on the Company's financial
position or results of operations.
In March 1998, the AICPA issued a Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires that certain costs related to the development
or purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software. The SOP also requires that costs related
to the preliminary project stage and the post-implementation/operations stage
of an internal-use computer software development project be expensed as
incurred. This Statement is effective for fiscal years beginning after December
15, 1998 and requires that costs incurred prior to the initial application of
the SOP not be adjusted to the amounts that would have been capitalized had the
SOP been in effect when those costs were incurred. SOP 98-1 is effective for
the Company's fiscal year ending October 1, 2000, and is not expected to have
a material effect on the Company's financial position or results of operations.
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PART II - OTHER INFORMATION
There is no information required to be reported for any items under Part II,
except as follows:
Item 1. Legal Proceedings - See Note 3 to the Unaudited Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
------ -----------
27 Financial Data Schedule (included only with
electronic filing)
(b) Reports on Form 8-K.
A form 8-K was filed on July 20, 1999, reporting under Item 5 thereof,
a change in the name of the Company to Jack in the Box Inc. effective
October 4, 1999.
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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, 1999
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