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 April 11, 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 May 14, 1999 - 41,035,108.
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 11, September 27,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . $ 5,712 $ 9,952
Receivables. . . . . . . . . . . . . . . . 18,106 13,705
Inventories. . . . . . . . . . . . . . . . 21,903 17,939
Prepaid expenses . . . . . . . . . . . . . 42,620 40,826
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Total current assets . . . . . . . . . . 88,341 82,422
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Trading area rights. . . . . . . . . . . . . 72,449 72,993
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Lease acquisition costs. . . . . . . . . . . 16,236 17,157
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Other assets . . . . . . . . . . . . . . . . 39,664 39,309
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Property at cost . . . . . . . . . . . . . . 811,213 759,680
Accumulated depreciation and amortization. (244,223) (227,973)
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566,990 531,707
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TOTAL. . . . . . . . . . . . . . . . . . $ 783,680 $ 743,588
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt . . . $ 1,759 $ 1,685
Accounts payable . . . . . . . . . . . . . 43,036 52,086
Accrued expenses . . . . . . . . . . . . . 163,723 171,974
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Total current liabilities. . . . . . . . 208,518 225,745
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Deferred income taxes. . . . . . . . . . . . 3,147 2,347
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Long-term debt, net of current maturities. . 320,197 320,050
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Other long-term liabilities. . . . . . . . . 72,344 58,466
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Stockholders' equity:
Common stock . . . . . . . . . . . . . . . 410 408
Capital in excess of par value . . . . . . 287,694 285,940
Accumulated deficit. . . . . . . . . . . . (74,167) (114,905)
Treasury stock . . . . . . . . . . . . . . (34,463) (34,463)
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Total stockholders' equity . . . . . . . 179,474 136,980
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TOTAL. . . . . . . . . . . . . . . . . . $ 783,680 $ 743,588
========= =========
See accompanying notes to financial statements.
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Twelve Weeks Ended Twenty-Eight Weeks Ended
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April 11, April 12, April 11, April 12,
1999 1998 1999 1998
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Revenues:
Restaurant sales. . . . . . $ 303,666 $ 249,505 $ 688,106 $ 574,838
Distribution
and other sales . . . . . 8,893 5,578 19,190 12,351
Franchise rents
and royalties . . . . . . 8,899 8,029 20,600 18,963
Other . . . . . . . . . . . 515 46,797 1,211 47,531
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321,973 309,909 729,107 653,683
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Costs and expenses:
Costs of revenues:
Restaurant costs of sales 97,177 79,504 220,773 184,576
Restaurant operating costs 129,252 123,480 316,593 282,627
Costs of distribution and
other sales . . . . . . 8,711 5,432 18,881 12,057
Franchised restaurant costs 5,786 5,480 12,940 12,455
Selling, general and
administrative. . . . . . 34,906 37,406 79,811 75,141
Interest expense. . . . . . 6,454 8,160 15,471 19,206
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282,286 259,462 664,469 586,062
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Earnings before income taxes. 39,687 50,447 64,638 67,621
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Income taxes. . . . . . . . . 14,700 16,100 23,900 21,600
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Net earnings. . . . . . . . . $ 24,987 $ 34,347 $ 40,738 $ 46,021
========= ========= ========= =========
Net earnings per share:
Basic . . . . . . . . . . . $ .66 $ .88 $ 1.07 $ 1.17
Diluted . . . . . . . . . . $ .64 $ .85 $ 1.04 $ 1.14
Weighted average shares
outstanding:
Basic . . . . . . . . . . . 38,138 39,226 38,059 39,178
Diluted . . . . . . . . . . 39,329 40,327 39,136 40,252
See accompanying notes to financial statements.
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Twenty-Eight Weeks Ended
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April 11, April 12,
1999 1998
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Cash flows from operations:
Net earnings. . . . . . . . . . . . . . . . . . $ 40,738 $ 46,021
Non-cash items included above:
Depreciation and amortization . . . . . . . . 24,131 22,686
Deferred income taxes . . . . . . . . . . . . 800 3,400
Increase in receivables . . . . . . . . . . . . (4,401) (3,319)
Increase in inventories . . . . . . . . . . . . (3,964) (674)
Increase in prepaid expenses. . . . . . . . . . (1,794) (850)
Decrease in accounts payable. . . . . . . . . . (9,050) (6,314)
Increase in other accrued liabilities . . . . . 5,828 24,222
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Cash flows provided by operations . . . . . . 52,288 85,172
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Cash flows from investing activities:
Additions to property and equipment . . . . . . (57,139) (28,953)
Dispositions of property and equipment. . . . . 2,137 3,397
Increase in trading area rights . . . . . . . . (1,510) (5,114)
Increase in other assets. . . . . . . . . . . . (1,776) (2,813)
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Cash flows used in investing activities . . . (58,288) (33,483)
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Cash flows from financing activities:
Borrowings under revolving bank loans . . . . . 193,000 -
Principal repayments under revolving bank
loans . . . . . . . . . . . . . . . . . . . . (194,000) -
Proceeds from issuance of long-term debt. . . . 1,925 1,000
Principal payments on long-term debt,
including current maturities. . . . . . . . . (921) (793)
Proceeds from issuance of common stock. . . . . 1,756 1,167
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Cash flows provided by financing activities . 1,760 1,374
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Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . $ (4,240) $ 53,063
======== ========
See accompanying notes to financial statements.
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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. Under that order, the
Association's claims are to be dismissed with prejudice. Those three rulings,
collectively, resolved all claims in the case, and the Company expects the
Court will soon enter a final judgement, in favor of Foodmaker, and against
those plaintiffs with whom Foodmaker did not settle. However, the Association
and several other plaintiffs may appeal the final judgement. Management
believes an appeal would be without merit, and intends to vigorously defend
any appeal.
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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 $11 million in capital improvements in connection with
these modifications. 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, and judgment was
entered on February 2, 1999.
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 will file 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.
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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 28-week periods ended April 11, 1999 and April 12, 1998, respectively,
unless otherwise indicated.
Restaurant sales increased $54.2 million, and $113.3 million, respectively,
to $303.7 million and $688.1 million in 1999 from $249.5 million and $574.8
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 28-week period increased to 1,092 in 1999
from 975 restaurants in 1998. PSA sales for comparable Company-operated
restaurants, those open more than one year, grew 9.1% and 7.7% in the 12-week
and 28-week periods of 1999 compared with the same periods in 1998. Sales growth
resulted from increases in the average number of transactions of 5.5% and 4.4%
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 $3.3 million and $6.8 million,
respectively, to $8.9 million and $19.2 million in 1999 from $5.6 million and
$12.4 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 $.9 million and $1.6 million to
$8.9 million and $20.6 million, respectively, in 1999 from $8.0 million and
$19.0 million in 1998, and were slightly more than 10% of sales at franchise
restaurants in both years. Franchise restaurant sales increased to $85.3 million
and $197.9 million, respectively, in 1999 from $78.1 million and $184.2 million
in 1998. Sales at domestic franchise restaurants were also strengthened by
implementing the Company's strategic initiatives.
In 1998, other revenues, typically interest income from investments and
notes receivable, also included income from the settlement of litigation with
meat suppliers (the "Litigation Settlement"), approximately $45.8 million after
litigation costs. Excluding this unusual item, other revenues declined to $.5
million and $1.2 million, respectively, in 1999 from $1.0 million and $1.7
million in 1998, reflecting lower cash investments after repaying debt in 1998.
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 $97.2 million and $220.8
million in 1999 from $79.5 million and $184.6 million in 1998. As a percent of
restaurant sales, costs of sales were 32.0% and 32.1% of sales, respectively, in
1999, about the same as 1998.
In the 12-week period in 1999, the Company reduced accrued liabilities and
restaurant operating costs by $18.0 million, primarily due to a change in
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estimates resulting from improvements to its loss prevention and risk management
programs, which have been more successful than anticipated. Excluding this
unusual adjustment, restaurant operating costs increased to $147.3 million and
$334.6 million, respectively, in 1999 from $123.5 million and $282.6 million in
1998. As a percent of restaurant sales, operating costs excluding the unusual
adjustment decreased to 48.5% and 48.6%, respectively, in 1999 from 49.5% and
49.2% in 1998. The improvements in 1999 were principally due to occupancy and
certain other restaurant operating expenses, which tend to be less variable,
increasing at a lesser rate than PSA sales growth. Labor related costs
percentages also improved slightly in the 12-week period of 1999.
Costs of distribution and other sales increased to $8.7 million and $18.9
million, respectively, in 1999 from $5.4 million and $12.1 million in 1998,
reflecting an increase in the related sales. As a percent of distribution and
other sales, these costs increased to 98.0% and 98.4%, respectively, in 1999
from 97.4% and 97.6% 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,
increased slightly to $5.8 million and $12.9 million, respectively, in 1999 from
$5.5 million and $12.5 million in 1998, principally due to higher franchise-
related legal expenses.
Selling, general and administrative costs in the 12-week period declined to
$34.9 million in 1999 from $37.4 million in 1998. In the 28-week period, such
costs increased to $79.8 million in 1999 from $75.1 million in 1998. Advertising
and promotion costs increased to $15.6 million and $35.4 million, respectively,
in 1999 from $13.3 million and $30.6 million in 1998, slightly over 5% of
restaurant sales in all periods. Regional administrative and training expenses
have been reclassified to general and administrative costs in 1999. The 1998
amounts, which had previously been included with restaurant operating costs,
have been restated 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. Excluding the non-cash charge, general, administrative and other costs
were 6.0% and 6.1% of revenues, respectively, in 1999 compared to 6.0% of
revenues excluding the Litigation Settlement in both periods of 1998.
Interest expense declined $1.7 million and $3.7 million, respectively, to
$6.5 million and $15.5 million in 1999 from $8.2 million and $19.2 million in
1998, principally due to a reduction in debt and lower interest rates. In 1998
the Company completed a refinancing plan, reducing debt by approximately $26
million from a year ago and improving effective interest rates. See "Liquidity
and Capital Resources."
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 1999 net earnings were $25.0 million, or $.64 per diluted share, in the
12-week period and $40.7 million, or $1.04 per diluted share, in the 28-week
period. In 1998 net earnings were $34.3 million, or $.85 per diluted share, in
the 12-week period and $46.0 million, or $1.14 per diluted share, in the 28-week
period. Excluding the unusual adjustment to restaurant operating costs in 1999,
net earnings were $13.6 million, or $.35 per diluted share, in the 12-week
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period and $29.4 million, or $.75 per diluted share, in the 28-week period.
Excluding the Litigation Settlement and the $8 million non-cash charge to other
expenses in 1998, net earnings were $8.7 million, or $.22 per diluted share, in
the 12-week period and $20.4 million, or $.51 per diluted share, in the 28-week
period. Excluding the unusual items in both years, net earnings increased
approximately 56% and 44%, respectively, in 1999 compared to the same periods in
1998 reflecting 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 $4.3 million to $5.7 million at April
11, 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 and enhance
existing restaurants and to reduce borrowings under the revolving credit
agreement.
The Company's working capital deficit decreased $23.1 million to $120.2
million at April 11, 1999 from $143.3 million at September 27, 1998, principally
due to a decline in accrued liabilities. The Company and the restaurant industry
in general 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 April 11, 1999,
the Company had borrowings of $96.5 million and approximately $71.8 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 $322.0 million at April 11, 1999 from
$348.1 million at April 12, 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.
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
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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 April 11, 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 6.88%.
At April 11, 1999, a hypothetical one percentage point increase in short-
term interest rates would result in a reduction of $.7 million in annual pre-tax
earnings. The estimated reduction is based on holding the unhedged portion of
bank debt at its April 11, 1999 level.
At April 11, 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.
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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 23% 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 Remaining
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Mainframe
Third party developed software 100% 0% 0%
Internally developed software 89% 8% 3%
Hardware (Peripherals) 100% 0% 0%
Desktop
Third party developed software 79% 21% 0%
Internally developed software 38% 62% 0%
Corporate hardware 32% 68% 0%
Restaurant hardware 89% 11% 0%
Client-Server
Third party developed software 38% 62% 0%
Internally developed software 20% 80% 0%
Hardware 58% 42% 0%
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
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 are currently
being tested and are expected to be implemented in Company restaurants 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.
11
<PAGE>
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 May 1999, the Company had received
responses concerning Year 2000 readiness from approximately 42% 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 April 11, 1999, 333 restaurants were operated
by franchisees in the United States. Seven restaurants were operated by
franchisees outside the United States. The Company has completed an assessment
of the Year 2000 readiness of the personal computers it has leased to
approximately 80% of franchised restaurants in the United States, 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 $10 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 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
12
<PAGE>
(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 1999, 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.
13
<PAGE>
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-purposes 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, 1999.
SFAS 133 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.
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 3 to the Unaudited Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
The results of the Company's annual meeting, held February 12, 1999, were
reported in the Quarterly report on Form 10-Q for the quarter ended
January 17, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
------ -----------
10.1 Second Amendment to the Revolving Credit Agreement dated as
of February 27, 1999 by and between Foodmaker, Inc. and the
Banks and Agents named therein.
27 Financial Data Schedule (included only with electronic
filing)
(b) Reports on Form 8-K.
A form 8-K was filed April 2, 1999, reporting under Item 5 thereof, a
transcript of a video that was sent concurrently to approximately 330
fund managers advising them of certain information about the Company.
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: May 26, 1999
16
Exhibit 10.1
SECOND AMENDMENT
Dated as of February 27, 1999
This SECOND AMENDMENT (this "Amendment") is among FOODMAKER, INC., a
Delaware corporation (the "Borrower"), the financial institutions and other
entities party to the Credit Agreement referred to below (the "Lenders"), and
NATIONSBANK, N.A. (successor to NationsBank of Texas, N.A.), as L/C Bank (as
defined in the Credit Agreement) and as agent (the "Agent") for the Lenders and
the Issuing Banks thereunder.
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Arranger, the Documentation Agent
and the Agent have entered into a Credit Agreement dated as of April 1, 1998, as
amended by the First Amendment dated as of August 24, 1998 (as so amended, the
"Credit Agreement"; capitalized terms used and not otherwise defined herein have
the meanings assigned to such terms in the Credit Agreement).
2. The Borrower has requested that the Lenders amend the definition
of "Capital Expenditures" set forth in the Credit Agreement to exclude certain
expenditures therefrom to the extent such capital expenditures are reimbursed by
third party suppliers of the Borrower.
3. The Required Lenders are, on the terms and conditions stated
below, willing to grant the request of the Borrower.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. Amendments to Credit Agreement. Effective as of the date
hereof and subject to satisfaction of the conditions precedent set forth in
Section 2 hereof, the Credit Agreement is hereby amended as follows:
Section 1.01 of the Credit Agreement is hereby amended by adding
thereto, in appropriate alphabetical order, the following defined term:
"CapEx Reimbursements" means amounts received in cash from suppliers
(net of any refunds of such amounts to such suppliers) to the Borrower and
its Subsidiaries (but only to the extent such suppliers are not Affiliates
of the Borrower or any of its Subsidiaries) in reimbursement of capital
expenditures made or to be made by the Borrower and its Subsidiaries."
The definition of "Capital Expenditures" contained in Section 1.01 of
the Credit Agreement is hereby amended and restated in its entirety to read as
follows:
"Capital Expenditures' means, for any period, the aggregate of all
expenditures (whether paid in cash or accrued as liabilities and including
that portion of Capitalized Leases which is capitalized on a Consolidated
<PAGE>
balance sheet of the Borrower and its Subsidiaries) that in conformity with
GAAP would otherwise be classified as capital expenditures; provided,
however, that Capital Expenditures shall not include expenditures (i) in
connection with any Permitted Sale-Leaseback Repurchase, or (ii) to the
extent of any CapEx Reimbursement in respect thereof actually received by
the Borrower or any of its Subsidiaries (it being understood that any CapEx
Reimbursement deducted in any period and refunded by the Borrower or any of
its Subsidiaries in a subsequent period shall constitute Capital
Expenditures in such subsequent period to the extent such refund is not
deducted in the calculation of the amount of CapEx Reimbursement for such
subsequent period)."
The definition of "EBITDA" contained in Section 1.01 of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:
"EBITDA" means, for any period, (i) net income (or net loss) minus
any non-recurring or extraordinary gains plus (ii) to the extent deducted
in determining such net income (or net loss), the sum of (a) interest
expense, (b) income tax expense, (c) depreciation expense, (d) amortization
expense, and (e) non-recurring or extraordinary losses, in each case
determined in accordance with GAAP for such period minus (iii) to the
extent included in determining such net income (or net loss), the amount of
any CapEx Reimbursements received in such period.
SECTION 2. Conditions to Effectiveness. This Amendment shall not be
effective until each of the following conditions precedent shall have been
satisfied:
(a) the Agent shall have executed this Amendment and shall have
received counterparts of this Amendment executed by the Borrower and the
Required Lenders and counterparts of the Consent appended hereto (the "Consent")
executed by each of the Guarantors and Grantors (as defined in the Security
Agreement) listed therein (such Guarantors and Grantors, together with the
Borrower, each a "Loan Party" and, collectively, the "Loan Parties"); and
(b) each of the representations and warranties in Section 3 below
shall be true and correct.
SECTION 3. Representations and Warranties. The Borrower represents
and warrants as follows:
(a) Authority. The Borrower and each other Loan Party has the
requisite corporate power and authority to execute and deliver this Amendment
and the Consent, as applicable, and to perform its obligations hereunder and
under the Loan Documents (as modified hereby) to which it is a party. The
execution, delivery and performance by the Borrower of this Amendment and by
each other Loan Party of the Consent, and the performance by each Loan Party of
each Loan Document (as modified hereby) to which it is a party have been duly
approved by all necessary corporate action of such Loan Party and no other
corporate proceedings on the part of such Loan Party are necessary to consummate
such transactions.
2
<PAGE>
(b) Enforceability. This Amendment has been duly executed and
delivered by the Borrower. The Consent has been duly executed and delivered by
each Guarantor and each Grantor. This Amendment and each Loan Document (as
modified hereby) is the legal, valid and binding obligation of each Loan Party
party hereto and thereto, enforceable against such Loan Party in accordance with
its terms, and is in full force and effect.
(c) Representations and Warranties. The representations and
warranties contained in each Loan Document (other than any such representations
and warranties that, by their terms, are specifically made as of a date other
than the date hereof) are true and correct on and as of the date hereof as
though made on and as of the date hereof.
(d) No Default. No event has occurred and is continuing that
constitutes a Default or Event of Default.
SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon
and after the effectiveness of this Amendment, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof" or words of like import
referring to the Credit Agreement, and each reference in the other Loan
Documents to "the Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Credit Agreement as modified hereby.
(b) Except as specifically modified above, the Credit Agreement and
the other Loan Documents are and shall continue to be in full force and effect
and are hereby in all respects ratified and confirmed. Without limiting the
generality of the foregoing, the Collateral Documents and all of the Collateral
described therein do and shall continue to secure the payment of all Secured
Obligations under and as defined therein, in each case as amended hereby.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender, any Issuing Bank, the Arranger, the Documentation
Agent or the Agent under any of the Loan Documents, nor constitute a waiver or
amendment of any provision of any of the Loan Documents.
SECTION 5. Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Amendment or the
Consent by telefacsimile shall be effective as delivery of a manually executed
counterpart of this Amendment or such Consent.
SECTION 6. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of California.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first written above.
FOODMAKER, INC.,
a Delaware corporation
By: HAROLD SACHS
------------
Name: Harold Sachs
Title: Treasurer
NATIONSBANK, N.A. (successor to NationsBank
of Texas, N.A.),
as Agent
By: RICHARD G. PARKHURST, JR.
-------------------------
Name: Richard G. Parkhurst, Jr.
Title: Senior Vice President
S-4
<PAGE>
Lenders
-------
NATIONSBANK, N.A. (successor to NationsBank
of Texas, N.A.)
By: RICHARD G. PARKHURST, JR.
-------------------------
Name: Richard G. Parkhurst, Jr.
Title: Senior Vice President
CREDIT LYONNAIS LOS ANGELES BRANCH
By: DIANNE M. SCOTT
---------------
Name: Dianne M. Scott
Title: First Vice President and Branch Manager
ROYAL BANK OF CANADA
By: JOHN CRAWFORD
-------------
Name: John Crawford
Title: Senior Manager
UNION BANK OF CALIFORNIA, N.A.
By: LINDA WELKER
------------
Name: Linda Welker
Title: Vice President
BANK ONE, TEXAS, N.A.
By: THOMAS R. FREAS
---------------
Name: Thomas R. Freas
Title: Managing Director, Authorized Office
S-5
<PAGE>
CIBC OPPENHEIMER CORP., AS AGENT FOR CIBC INC.
By: GERALD GIRARDI
--------------
Name: Gerald Girardi
Title: Executive Director
SANWA BANK CALIFORNIA
By: L.D. HART
---------
Name: L.D. Hart
Title: Vice President
NATEXIS BANQUE - BFCE
By: DANIEL TOUFFU
-------------
Name: Daniel Touffu
Title: Senior VP and Regional Manager
By: PEYMAN PARHAMI
--------------
Name: Peyman Parhami
Title: Assistant Treasurer
S-6
<PAGE>
CONSENT
Dated as of February 27, 1999
The undersigned, as Guarantors under the "Guaranty" and as
Grantors under the "Security Agreement" (as such terms are defined in and under
the Credit Agreement referred to in the foregoing Second Amendment), each hereby
consents and agrees to the foregoing Second Amendment and hereby confirms and
agrees that (i) the Guaranty and the Security Agreement are, and shall continue
to be, in full force and effect and are hereby ratified and confirmed in all
respects except that, upon the effectiveness of, and on and after the date of,
said Second Amendment, each reference in the Guaranty and the Security Agreement
to the "Credit Agreement", "thereunder", "thereof" and words of like import
referring to the Credit Agreement, shall mean and be a reference to the Credit
Agreement as amended by said Second Amendment, and (ii) the Security Agreement
and all of the Collateral described therein do, and shall continue to, secure
the payment of all of the Secured Obligations as defined in the Security
Agreement.
CP DISTRIBUTION CO., a Delaware corporation,
CP WHOLESALE CO., a Delaware corporation, and
JACK IN THE BOX, INC., a New Jersey corporation
By: LAWRENCE E. SCHAUF
------------------
Name: Lawrence E. Schauf
Title: Executive Vice President and Secretary
FOODMAKER INTERNATIONAL
FRANCHISING, INC.,
a Delaware corporation
By: HAROLD L. SACHS
---------------
Harold L. Sachs
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FISCAL YEAR THRU SECOND QUARTER CONTAINS 28 WEEKS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-03-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> APR-11-1999
<CASH> 5,712
<SECURITIES> 0
<RECEIVABLES> 19,194
<ALLOWANCES> 2,599
<INVENTORY> 21,903
<CURRENT-ASSETS> 88,341
<PP&E> 811,213
<DEPRECIATION> (244,223)
<TOTAL-ASSETS> 783,680
<CURRENT-LIABILITIES> 208,518
<BONDS> 320,197
<COMMON> 410
0
0
<OTHER-SE> 179,064
<TOTAL-LIABILITY-AND-EQUITY> 783,680
<SALES> 707,296
<TOTAL-REVENUES> 729,107
<CGS> 239,654
<TOTAL-COSTS> 569,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,471
<INCOME-PRETAX> 64,638
<INCOME-TAX> 23,900
<INCOME-CONTINUING> 40,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,738
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.04
</TABLE>
