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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 5, 1998 Commission File No. 1-9390
------------ ------
FOODMAKER, INC.
(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
--- ---
Number of shares of common stock, $.01 par value, outstanding as of the
close of business August 10, 1998 - 39,136,614
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 5, September 28,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 2,271 $ 28,527
Receivables . . . . . . . . . . . . . . . . . . 11,312 10,482
Inventories . . . . . . . . . . . . . . . . . . 18,278 18,300
Prepaid expenses. . . . . . . . . . . . . . . . 45,588 42,853
--------- ---------
Total current assets . . . . . . . . . . . . 77,449 100,162
--------- ---------
Property at cost. . . . . . . . . . . . . . . . . 713,656 660,076
Accumulated depreciation and amortization . . . (222,666) (201,289)
--------- ---------
490,990 458,787
--------- ---------
Trading area rights . . . . . . . . . . . . . . . 73,835 69,921
--------- ---------
Lease acquisition costs . . . . . . . . . . . . . 17,129 18,788
--------- ---------
Other assets. . . . . . . . . . . . . . . . . . . 39,116 34,100
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 698,519 $ 681,758
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt. . . . . . $ 1,584 $ 1,470
Accounts payable. . . . . . . . . . . . . . . . 25,197 39,575
Accrued expenses. . . . . . . . . . . . . . . . 144,084 134,960
Income tax liabilities. . . . . . . . . . . . . 13,473 17,208
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Total current liabilities . . . . . . . . . . 184,338 193,213
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Long-term debt, net of current maturities . . . . 307,892 346,191
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Other long-term liabilities . . . . . . . . . . . 58,272 54,093
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Deferred income taxes . . . . . . . . . . . . . . 4,382 382
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Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . . . 407 405
Capital in excess of par value. . . . . . . . . 285,002 283,517
Accumulated deficit . . . . . . . . . . . . . . (127,311) (181,580)
Treasury stock. . . . . . . . . . . . . . . . . (14,463) (14,463)
--------- ---------
Total stockholders' equity. . . . . . . . . . 143,635 87,879
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . $ 698,519 $ 681,758
========= =========
See accompanying notes to financial statements.
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Twelve Weeks Ended Forty Weeks Ended
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July 5, July 6, July 5, July 6,
1998 1997 1998 1997
------- ------- ------- -------
Revenues:
Restaurant sales. . . . . . . $263,668 $234,828 $838,506 $749,860
Distribution and other sales. 6,666 7,129 18,985 41,989
Franchise rents and royalties 8,285 8,461 27,248 27,166
Other . . . . . . . . . . . . 1,947 1,263 49,510 3,142
-------- -------- -------- --------
280,566 251,681 934,249 822,157
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Costs and expenses:
Costs of revenues:
Restaurant costs of sales . 84,345 77,285 271,610 250,078
Restaurant operating costs. 138,991 119,494 441,384 385,238
Costs of distribution and
other sales . . . . . . . 6,491 6,956 18,431 41,606
Franchised restaurant costs 5,365 6,175 17,820 18,194
Selling, general and
administrative 19,041 19,652 71,844 62,682
Interest expense. . . . . . . 7,707 9,324 26,913 31,342
-------- -------- -------- --------
261,940 238,886 848,002 789,140
-------- -------- -------- --------
Earnings before income taxes. . 18,626 12,795 86,247 33,017
Income taxes. . . . . . . . . . 6,000 2,800 27,600 7,300
-------- -------- -------- --------
Earnings before extraordinary
item. . . . . . . . . . . . . 12,626 9,995 58,647 25,717
Extraordinary item - loss on
early extinguishment of debt,
net of taxes. . . . . . . . . (4,378) - (4,378) -
-------- -------- -------- --------
Net earnings. . . . . . . . . . $ 8,248 $ 9,995 $ 54,269 $ 25,717
======== ======== ======== ========
Earnings per share - basic:
Earnings before extraordinary
item . . . . . . . . . . . . $ .32 $ .26 $ 1.49 $ .66
Extraordinary item. . . . . . .11 - .11 -
-------- -------- -------- --------
Net earnings per share. . . . $ .21 $ .26 $ 1.38 $ .66
======== ======== ======== ========
Earnings per share - diluted:
Earnings before extraordinary
item . . . . . . . . . . . . $ .31 $ .25 $ 1.46 $ .65
Extraordinary item. . . . . . .11 - .11 -
-------- -------- -------- --------
Net earnings per share. . . . $ .20 $ .25 $ 1.35 $ .65
======== ======== ======== ========
Weighted average shares
outstanding:
Basic . . . . . . . . . . . . 39,300 38,983 39,214 38,896
Diluted . . . . . . . . . . . 40,348 39,871 40,281 39,633
See accompanying notes to financial statements.
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Forty Weeks Ended
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July 5, July 6,
1998 1997
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Cash flows from operations:
Earnings before extraordinary item. . . . . . . . . . $ 58,647 $ 25,717
Non-cash items included above:
Depreciation and amortization . . . . . . . . . . . 32,312 30,501
Deferred income taxes . . . . . . . . . . . . . . . 4,000 (3,300)
Decrease (increase) in receivables. . . . . . . . . . (830) 3,808
Decrease in inventories . . . . . . . . . . . . . . . 22 2,125
Increase in prepaid expenses. . . . . . . . . . . . . (3,608) (17,405)
Increase (decrease) in accounts payable . . . . . . . (14,378) 8,346
Increase in other accrued liabilities . . . . . . . . 9,850 25,008
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Cash flows provided by operations . . . . . . . . . 86,015 74,800
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Cash flows from investing activities:
Additions to property and equipment . . . . . . . . . (61,203) (26,017)
Dispositions of property and equipment. . . . . . . . 4,099 2,814
Increase in trading area rights . . . . . . . . . . . (6,719) (1,424)
Increase in other assets. . . . . . . . . . . . . . . (7,081) (2,206)
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Cash flows used in investing activities . . . . . . (70,904) (26,833)
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Cash flows from financing activities:
Borrowings under revolving bank loans . . . . . . . . 118,000 -
Principal repayments under revolving bank loans . . . (32,000) -
Proceeds from issuance of long-term debt. . . . . . . 126,690 -
Principal payments on long-term debt,
including current maturities . . . . . . . . . . . (251,166) (1,023)
Extraordinary loss on retirement of debt, net of tax. (4,378) -
Proceeds from issuance of common stock. . . . . . . . 1,487 929
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Cash flows used in financing activities . . . . . . (41,367) (94)
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Net increase (decrease) in cash and cash equivalents. . $ (26,256) $ 47,873
========= =========
See accompanying notes to financial statements.
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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 1997 financial statements.
2. In 1998, the Company adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), Earnings per Share. SFAS 128 requires the presentation of
basic earnings per share, computed using the weighted average number of
shares outstanding during the period, and diluted earnings per share,
computed using the additional dilutive effect of all common stock
equivalents. The dilutive impact of stock options and warrants account for
the additional weighted average shares of common stock outstanding for the
Company's diluted earnings per share computation. All prior periods have
been restated to conform with the provisions of SFAS 128.
3. The income tax provisions reflect the expected annual tax rate of 32% of
pretax earnings in 1998 and the actual tax rate of 22% in 1997. 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 1998 annual effective tax rate until the end of the fiscal year,
thus the rate could differ from expectations.
4. Legal Proceedings
During last quarter, the Company settled the litigation it filed against the
Vons Companies, Inc. ("Vons") and various suppliers seeking reimbursement
for all damages, costs and expenses incurred in connection with food-borne
illness attributed to hamburgers served at Jack in the Box restaurants in
1993. The initial litigation was filed by the Company on February 4, 1993.
Vons 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 were settled on February 24, 1998.
Foodmaker received in its second quarter approximately $58.5 million in the
settlement, of which a net of approximately $45.8 million was realized after
litigation costs and before income taxes (the "Litigation Settlement").
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
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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 $11 million in capital improvements in connection
with these modifications over the next several years. Foodmaker has been
notified by attorneys for plaintiffs that claims may be made against certain
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 April 6, 1996 an action was filed by one of the Company's international
franchisees, Wolsey, Ltd., in the United States District Court in San Diego,
California against the Company and its directors, its international
franchising subsidiary, and certain officers of the Company and others. The
complaint alleges certain contractual, tort and law violations related to
the franchisees' development rights in the Far East and seeks damages in
excess of $38.5 million, injunctive relief, attorneys fees and costs. The
Company has successfully dismissed portions of the complaint, including the
single claim alleging wrongdoing by the Company's outside directors, and the
claims against its current officers. Management believes the remaining
allegations are without foundation and intends to vigorously defend the
action. A trial date of January 5, 1999 has been set by the court.
On November 5, 1996 an action was filed by the National JIB Franchisee
Association, Inc. 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 alleges 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 seeks injunctive
relief, a declaration of the rights and duties of the parties, unspecified
damages and recision of alleged material modifications of plaintiffs'
franchise agreements. The complaint also alleges fraud, breach of a
fiduciary duty and breach of a third party beneficiary contract in
connection with certain payments that the Company received from suppliers
and seeks unspecified damages, interest, punitive damages and an accounting.
Management believes that its policies are lawful and that it has satisfied
any obligation to its franchisees in regard to such supplier payments. The
trial is set for October 5, 1998.
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. The Foodmex
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. The Company and its
subsidiary counterclaimed and sought a preliminary injunction against
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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. 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 United States 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. The Company believes such allegations are without
merit and will defend the action vigorously.
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, damages, interest,
attorneys' fees and costs. In August 1998 this action was settled with no
material impact on the operations or financial condition of the Company.
The Company is also subject to normal and routine litigation. The amount of
liability from the claims and actions described above 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.
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FOODMAKER, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
RESULTS OF OPERATIONS
- ---------------------
All comparisons under this heading between 1998 and 1997 refer to the
12-week and 40-week periods ended July 5, 1998 and July 6, 1997, respectively,
unless otherwise indicated.
Restaurant sales increased $28.9 million and $88.6 million, respectively,
to $263.7 million and $838.5 million in 1998 from $234.8 million and $749.9
million in 1997, as both the number of Company-operated restaurants and per
store average sales increased from a year ago. The average number of Company-
operated restaurants for the 40-week period increased to 986 in 1998 from 891 in
1997, through the addition of new units and the acquisition of restaurants from
franchisees. Per store average ("PSA") sales for comparable restaurants, which
are calculated for only those restaurants open for all periods being compared,
increased 2.0% and 2.3%, respectively, in 1998 compared to the same periods in
1997. PSA sales improved due to increases in both the number of transactions
and the average transaction amounts. Restaurant sales improvements are
attributed to the Company's two-tier marketing strategy featuring both premium
sandwiches and value-priced alternatives, as well as to a popular brand-building
advertising campaign that features the Company's fictional founder, "Jack".
Distribution and other sales of food and supplies declined $.4 million and
$23.0 million, respectively, to $6.7 million and $19.0 million in 1998 from $7.1
million and $42.0 million in 1997. A distribution contract with Chi-Chi's, Inc.
("Chi-Chi's") was not renewed when it expired in May 1997; sales to Chi-Chi's
restaurants were $5.2 million and $35.3 million, respectively, in 1997. Because
distribution is a low-margin business, the loss of distribution revenues did not
have a material impact on the results of operations or financial condition of
the Company. Sales to franchisees and others increased $4.8 million and $12.3
million, respectively, to $6.7 million and $19.0 million in 1998 from $1.9
million and $6.7 million in 1997.
Franchise rents and royalties decreased slightly in the 12-week period to
$8.3 million in 1998 from $8.5 million in 1997. Franchise rents and royalties
were $27.2 million in the 40-week periods of both years. Rents and royalties
were approximately 10% of franchisees' sales.
In 1998, other revenues, typically interest income from investments and
notes receivable, also include the net Litigation Settlement of $45.8 million as
described in Note 4. Excluding this unusual item, other revenues increased
slightly to $1.9 million and $3.7 million in 1998 from $1.3 million and $3.1
million in 1997.
Restaurant costs of sales, which include food and packaging costs,
increased with restaurant sales growth and the addition of Company-operated
restaurants to $84.3 million and $271.6 million, respectively, in 1998 from
$77.3 million and $250.1 million in 1997. As a percent of restaurant sales,
restaurant costs of sales declined to 32.0% and 32.4%, respectively, in 1998
from 32.9% and 33.3% in 1997 primarily due to favorable ingredient costs,
principally beef, pork and beverages, offset partially by increased produce
costs.
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Restaurant operating costs increased principally with restaurant sales
growth and the addition of Company-operated restaurants to $139.0 million and
$441.4 million, respectively, in 1998 from $119.5 million and $385.2 million in
1997. As a percent of restaurant sales, such costs increased to 52.7% and
52.6%, respectively, in 1998 from 50.9% and 51.4% in 1997 primarily reflecting
higher labor costs due to increases in the minimum wage, initial training for
operational improvements and other operations administrative costs.
Costs of distribution and other sales decreased to $6.5 million and $18.4
million, respectively, in 1998 from $7.0 million and $41.6 million in 1997
reflecting the decline in distribution sales. Costs of distribution and other
sales decreased as a percent of sales to 97.3% and 97.1%, respectively, in 1998
from 97.6% and 99.1% in 1997, primarily due to the loss of the lower margin
Chi-Chi's distribution business. In 1997 costs of distribution and other sales
include $.4 million in expenses related to the closure of a distribution center
which had been used primarily to distribute to Chi-Chi's.
Franchised restaurant costs, which include rents and depreciation on
properties leased to franchisees and other miscellaneous costs, decreased to
$5.4 million and $17.8 million, respectively, in 1998 from $6.2 million and
$18.2 million in 1997 reflecting lower international franchise-related legal
expense.
Selling, general and administrative expenses decreased in the 12-week
period to $19.0 million in 1998 from $19.7 million in 1997 and increased in the
40-week period to $71.8 million in 1998 from $62.7 million in 1997. The
increase in the 40-week period was primarily caused by a non-cash charge of
approximately $8 million last quarter principally resulting from the write-down
of underperforming restaurants and asset write-offs associated with customer
service enhancements. Advertising and local promotion costs, which were
maintained at approximately 5.3% of sales in the 1998 and 1997 periods,
increased with the higher restaurant sales. The Company received from suppliers
cooperative advertising funds of approximately .5% of restaurant sales in each
period. General, administrative and other expenses, excluding last quarter's
unusual write-offs, declined to 2.4% and 2.8% of revenues, excluding the
Litigation Settlement, in 1998 from 3.4% and 3.2%, respectively, in 1997
primarily due to a decrease in legal costs and fewer normal write-offs.
Interest expense declined $1.6 million and $4.4 million, respectively, to
$7.7 million and $26.9 million in 1998 from $9.3 million and $31.3 million in
1997, principally due to a reduction in total debt outstanding. In September
1997, the Company repaid $50 million of its 9 1/4% senior notes due 1999. During
the 12-week period of 1998, the Company completed a refinancing plan, thereby
reducing total debt, including current maturities, by approximately $38 million
to $309.5 million at July 5, 1998. (See "Liquidity and Capital Resources.")
The tax provisions reflect the expected annual tax rate of 32% of pretax
earnings in 1998 and the actual tax rate of 22% in 1997. 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
1998 annual effective tax rate until the end of the fiscal year, thus the rate
could differ from expectations.
The Company incurred an extraordinary loss of $7.0 million, less income tax
benefits of $2.6 million, on the early retirement of debt.
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Net earnings in the 40-week period of 1998 improved $28.6 million to $54.3
million, or $1.35 per share diluted compared to a year ago. These results
include an unusual increase of $25.6 million, or $.63 per share diluted, net of
income taxes, resulting from the Litigation Settlement income offset by the
aforementioned write-offs, and the extraordinary loss of $4.4 million or $.11
per share. Excluding these unusual and extraordinary items, earnings in 1998
were $33.0 million, or $.83 per share compared to $25.7 million, or $.65 per
share, in 1997. This increase in earnings reflects the impact of sales growth
and lower interest expense, offset partially by the higher effective tax rate
in 1998.
LIQUIDITY AND CAPITAL RESOURCES
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Cash and cash equivalents decreased $26.2 million to $2.3 million at
July 5, 1998 from $28.5 million at the beginning of the fiscal year. This
decrease reflects, among other things, cash flows from operations of $86.0
million including the net Litigation Settlement less capital expenditures and
other investing activities of $70.9 million. A significant portion of this cash
was used to reduce long-term debt in the refinancing plan described hereafter.
The Company's working capital deficit increased $13.8 million to $106.9
million at July 5, 1998 from $93.1 million at September 28, 1997, primarily due
to the decline in cash and cash equivalents which was partially offset by a
decline in current liabilities. 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.
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 5, 1998, the
Company had borrowings of $86 million and approximately $81.4 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 the 9 1/4% senior notes due 1999 using available cash. By July 5, 1998, the
Company had 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, the Company completed on April 14, 1998,
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
incurred an extraordinary loss of $7.0 million, less income tax benefits of $2.6
million, relating to the early retirement of the debt. 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 $309.5 million at July 5, 1998 from $347.7 million at
the beginning of the fiscal year and $397.4 million at this time last year.
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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.
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. An
additional potential source of liquidity is the conversion of Company-operated
restaurants to franchised restaurants.
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
financing opportunities, the Company will be able to meet debt service, capital
expenditure and working capital requirements.
YEAR 2000
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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 preceeded 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"
problem.
The Company's State of Year 2000 Readiness. In 1995, the Company began to
formulate a plan to address its Year 2000 issues. To date, the Company's
primary focus has been on its own internal computer systems. The Company has
advised its franchisees they are required to be Year 2000 ready by December 31,
1999.
The Company has completed an assessment of major portions of its internal
computer systems and is modifying existing internal software, as well as
purchasing new software, to attempt to achieve Year 2000 readiness in this area
and has made substantial progress in making such modifications and replacements.
The Company has begun an assessment of the potential for Year 2000 problems
with embedded microprocessors in its equipment, restaurants, warehouse and
distribution facilities, and corporate offices.
The Company has received some preliminary information concerning the Year
2000 readiness of some of its vendors of goods and services, and expects to
engage in discussions with its most important vendors during the balance of 1998
and 1999 in an attempt to determine the extent to which the Company is
vulnerable to those vendors' possible failure to become Year 2000 ready.
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<PAGE>
The Company currently plans to have addressed all computer systems which
are critical to its operations by mid 1999. Some non-critical systems may not
be addressed, however, until after January 2000.
The Costs to Address the Company's Year 2000 Issues. It is estimated that
the Company will have incurred approximately $7.5 million in costs by the end of
this fiscal year to remediate or replace portions of the Company's internal
computer systems. This amount has been funded from the general operating and
capital budgets of the Company's Management Information Systems and other
departments. The Company currently estimates the total cost of implementing its
Year 2000 plan, including replacement of embedded microprocessors and testing,
will not exceed $13 million. This estimate, based on currently available
information, will be updated as the Company continues its assessment and
proceeds with implementation and testing, and may need to be increased upon
receipt of more information from vendors of material goods and services and upon
the design and implementation of the Company's contingency plan.
The Risks of the Company's Year 2000 Issues. If some or all of the
Company's remediated or replaced internal computer systems fail the testing
phase, or if any software applications or embedded microprocessors critical to
the Company's operations are overlooked in the assessment or implementation
phases, or if 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 been assured that the computer systems of
its vendors of material goods and services will be Year 2000 ready in a timely
manner or that 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 the materials and
services which are necessary to produce, distribute and sell its products, the
electrical power and other utilities necessary to sustain its operations, or
reliable means of obtaining and 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 has not yet established a
contingency plan to address unavoided or unavoidable Year 2000 risks, but it
expects to create such a plan during the balance of 1998 and 1999.
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. The words
"anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends"
and similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company, with respect to future events and are subject to
certain risks, uncertainties and assumptions, including the following risk
-12-
<PAGE>
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. In addition, among the other factors that could cause the Company's
results to differ materially are: the effectiveness and cost of advertising and
promotional efforts; the degree of success of the Company's product offerings;
weather conditions; difficulties in obtaining ingredients and variations in
ingredient costs; the Company's ability to control operating, general and
administrative costs and to raise prices sufficiently to offset cost increases;
competitive products and pricing and promotions; the impact of any wide-spread
negative publicity; the impact on consumer eating habits of new scientific
information regarding diet, nutrition and health; competition for labor; general
economic conditions; changes in consumer tastes and in travel and dining-out
habits; the impact on operations and the costs to comply with laws and
regulations and other activities of governing entities; the costs and other
effects of legal claims by franchisees, customers, vendors and others, including
settlement of those claims; the effect of a failure of the Company, its
franchisees, or its important suppliers of goods and services to achieve timely
Year 2000 readiness; the ability of the Company to continue to exchange
electronic data with others without causing damage to the Company's databases;
the effect of delays or disruptions in the supply of the materials and services
necessary for the Company to produce, distribute and sell its products; the
effect of Year 2000-related interruptions of energy, telecommunications or
transportation services; and the effectiveness of management strategies and
decisions. 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.
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purposes financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. This statement, requiring only additional informational disclosures,
is effective for the Company's fiscal year ending October 3, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement established 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 shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement,
requiring only additional informational disclosures, is effective for the
Company's fiscal year ending October 3, 1999.
-13-
<PAGE>
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets and climinates certain disclosures. Restatment of disclosures for
earlier periods is required. The Company will adopt this Statement in its
financial statements for the year ending October 3, 1999.
-14-
<PAGE>
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 4 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 July 28, 1998, reporting under Item 5 thereof,
a common stock repurchase program.
-15-
<PAGE>
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 19, 1998
-16-
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<ARTICLE> 5
<LEGEND>
FISCAL YEAR THRU THIRD QUARTER CONTAINS 40 WEEKS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUL-05-1998
<CASH> 2,271
<SECURITIES> 0
<RECEIVABLES> 9,065
<ALLOWANCES> 2,974
<INVENTORY> 18,278
<CURRENT-ASSETS> 77,449
<PP&E> 713,656
<DEPRECIATION> 222,666
<TOTAL-ASSETS> 698,519
<CURRENT-LIABILITIES> 184,338
<BONDS> 307,892
<COMMON> 407
0
0
<OTHER-SE> 143,228
<TOTAL-LIABILITY-AND-EQUITY> 698,519
<SALES> 857,491
<TOTAL-REVENUES> 934,249
<CGS> 290,041
<TOTAL-COSTS> 749,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,913
<INCOME-PRETAX> 86,247
<INCOME-TAX> 27,600
<INCOME-CONTINUING> 58,647
<DISCONTINUED> 0
<EXTRAORDINARY> (4,378)
<CHANGES> 0
<NET-INCOME> 54,269
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.35
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