UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997
------------------27, 1998
COMMISSION FILE NUMBER 1-9390
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FOODMAKER, INC.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) (IRSIncorporation) (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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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliatesnonaffiliates of
the registrant as of November 14, 1997,16, 1998, computed by reference to the closing
price reported in the New York Stock Exchange - Composite Transactions, was
approximately $624$652 million.
Number of shares of common stock, $.10$.01 par value, outstanding as of the
close of business November 14, 199716, 1998 - 39,143,76737,987,678
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the 19981999 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
ITEM 1. BUSINESS
The Company
Overview. Foodmaker, Inc. (the "Company") owns, operates and franchises the
Jack in the Box restaurants, a fast-food chain located principally
inquick-service hamburger restaurant chain. As of September 27,
1998, the western and southwestern United States. Jack in the Box is a leading
regional competitor in the fast-food segment of the restaurant industry with
systemwide sales of $1.34 billion in fiscal 1997. At September 28, 1997,
there were 1,323 Jack in the Boxsystem included 1,414 restaurants, of which 9631,069 were
operated byCompany-operated and 345 were franchised. In fiscal 1998, the Company and 360 were franchised.
Menu and marketing strategies forgenerated
revenues of $1.2 billion. Jack in the Box restaurants are principally directed toward adult fast-food customers.located primarily in
the western United States with a leading market presence in each of the major
markets they serve. Based on the number of units, Jack in the Box is known forthe third
largest quick-service hamburger chain in each of California, Texas, Arizona and
Washington, its major markets.
Jack in the Box restaurants offer a broad selection of distinctive,
innovative products targeted at the adult fast-food consumer. Jack in the Box
seeks to differentiate its restaurants by focusing on product quality and
innovation. The Jack in the Box menu features a variety of hamburgers, specialty
sandwiches, salads, Mexican food, finger foods and side items. The core of the
Jack in the Box menu is its hamburger products, which represent approximately
25% of sales, including its signature products,hamburgers, the Jumbo Jack, Ultimate
Cheeseburger and Sourdough Jack
hamburgers. TheJack. In addition, the Company alsohas been a leader in
new product innovation and offers a wider menu selection than most of its
major competitors featuring foods that are not commonly offered in the
fast-food hamburger segment, such unique products as the Teriyaki Chicken Teriyaki
Bowl and Chicken Fajita Pita. Jack in the Box restaurants also offer value
priced product alternatives, known as "Jack's Value Menu," to compete against
price oriented competitors. The Company believes that its distinctive menu has
been instrumental in developing brand loyalty and appealing to customers with a
broader range of food preferences.
Jack in the Box was the first restaurant chain to develop and expand the
concept of drive-thru only restaurants. Today most restaurants, in addition to
drive-thru windows, have seating capacities ranging from 20 to 100 persons and
drive-thruare open 18-24 hours a day. Drive-thru sales currently account for approximately
64% of the sales at Company-operated restaurants.
Most restaurants are located in freestanding buildings with seating
capacities ranging from 24 to 85 persons and are open approximately 18 hours
a day.
History. The first Jack in the Box restaurant, which offered only drive-thrudrive-
thru service, opened in 1950, and the Jack in the Box chain expanded its
operations to approximately 300 restaurants in 1968. After Ralston Purina
Company purchased the Company in 1968, Jack in the Box underwent a major
expansion program in an effort to penetrate the eastern and midwestern markets,
and by 1979 the business grew to over 1,000 units by 1979.units. In 1979 the Company's
management decided to concentrate its efforts and resources in the western and
southwestern markets, which it believed offered the greatest growth and profit
potential. Accordingly, the Company sold 232 restaurants in the eastern and
midwestern markets and redeployed the salesales proceeds in its western and
southwestern markets where the Company had a well-established market position
and better growth prospects. In 1985 the Company was acquired by a group of
private investors and, in 1987, completed a public offering of common stock. In
1988 the outstanding publicly-held shares were acquired by private investors
through a tender offer. In 1992 the Company completed a recapitalization that
included a public offering of common stock and indebtedness.
Operating Strategy. The Jack in the BoxCompany's operating strategy is to:includes: (i) increase per store average sales throughoffering
quality innovative products with high perceived value, (ii) providing fast and
friendly customer service, (iii) maintaining a strong brand image, and (iv)
targeting an attractive demographic segment. Beginning in 1994, the Company
began a series of operating initiatives to improve food quality and guest
service. These initiatives include product qualityinnovations and reformulations,
improvements in food preparation and marketing initiatives; (ii) enhance guest service throughmethods and improved selection, training and
retention of guest serviceemployees. In addition, the Company launched its award-winning,
irreverent advertising campaign featuring its fictional founder "Jack" which has
been instrumental in delivering the message of product innovation, quality and
management personnel;value to customers. The Company believes its menu and (iii)
increasemarketing campaign appeal
to a broad segment of the numberpopulation, particularly its primary target market of
Jackmen aged 18-34, the demographic group with the highest incidence of fast-food
consumption. The Company operates approximately 75% of its restaurants, one of
the highest percentages in the Box restaurants throughquick-service restaurant industry, which the
addition of
Company-operatedCompany believes enables it to implement its operating strategy and franchise-developed restaurants in it's existing and
contiguous markets.introduce
product innovations consistently across the entire system better than other
quick-service restaurant chains.
1
Menu Strategy. The menu strategy for Jack in the Box restaurants is to
provide high quality products that represent good value and appeal to the
preferences of its customers. The menu features traditional hamburgers and side
items in addition to specialty sandwiches, salads, Mexican foods, finger foods,
breakfast foods, unique side items and desserts.
Jack in the Box recognizes the advantages of improving existing products
through ingredient specifications and changes in preparation and cooking
procedures. Such major improvements are communicated to the public through
point of purchase and television media, with messages such as "Juicier"Juicer Burgers,
Crispier Fries, and Real Ice Cream Shakes".
Hamburgers represent the largest segment of the fast-foodquick-service industry;
accordingly, Jack in the Box continues to offer hamburgers as principal menu
items. Hamburgers, including the Jumbo Jack, Sourdough Jack and the Ultimate
Cheeseburger, accounted for approximately one quarter of the Company's
restaurant sales in fiscal 1997.1998. However, management believes that, as a result
of its diverse menu, Jack in the Box restaurants are less dependent on the
commercial success of one or a few products than other fast-food chains, and the
Jack in the Box menu appeals to guests with a broad range of food preferences.
-1-
Growth Strategy. The Company's goalbusiness strategy is to achieve targeted levels of
media coverage in it's existing major markets(i) increase same
store sales and profitability through the constructioncontinued implementation of its
successful operating strategy and (ii) capitalize on its strong brand name and
proven operating strategy by developing new Jackrestaurants.
The Company believes that its strategy of focusing on food quality and
product innovation has allowed it to differentiate itself from competitors and
increase its restaurant level margins to among the highest in the Box restaurants primarily byindustry.
The Company intends to continue to increase same store sales and profitability
through improvements in food quality and guest service, product innovations and
creative marketing. For example, the Company recently began remodeling its
restaurant kitchens to allow for more efficient operations and to improve food
quality and has recently introduced new and reformulated products, such as its
successful improved french fries and real ice cream shakes. The Company has
also begun to implement improved food preparation techniques, such as its
assemble-to-order sandwich initiative, and to improve guest service with its
new menu boards. The Company's new drive-thru menu boards feature an electronic
order confirmation system that allows customers to read their order on an
electronic screen, which the Company believes will reduce errors and increase
customer satisfaction.
The Company intends to capitalize on its strong brand name and proven
operating strategy and achieve attractive returns on investment by developing
new Company-operated restaurants and, to a lesser extent, by franchisees.franchised
restaurants. The Company currentlyopened 102 new Company-operated restaurants in fiscal
1998 and intends to open approximately 400-500and operate slightly increased levels of new
restaurants overin each of the next fiveseveral years. Approximately 15% of the new
development is expectedNewly-opened restaurants
typically have sales levels similar to be on non-traditional sites, such as the two
recently opened restaurants which share sites with a gas station, convenience
store and car wash in one location.existing restaurants. The Company
has historically acquiredbelieves that its brand is underpenetrated in many of its existing markets and
will continueintends to considerleverage media and food delivery costs by increasing its market
penetration. In addition, the acquisition of existing restaurants for
conversion toCompany believes that it can further leverage the
Jack in the Box restaurants.brand name by expanding to contiguous and selected high growth
new markets. The following table sets forth the growth in Company-operatedCompany has also begun opening a limited number of restaurants
on nontraditional sites, such as adjacent to convenience stores and franchised Jack in the Box restaurants since the beginninggas
stations, and intends to continue to add nontraditional sites to increase its
penetration of fiscal year 1993:
Fiscal year
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1997 1996 1995 1994 1993
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Company-operated restaurants:
Opened. . . . . . . . . . . 75 26 21 54 10
Sold to franchisees . . . . (8) -- (6) (4) (11)
Closed. . . . . . . . . . . (6) (15) (4) (9) (4)
Acquired from franchisees . 23 5 42 44 10
Ending number . . . . . . . 963 879 863 810 725
Franchised restaurants:
Opened. . . . . . . . . . . 5 10 12 8 13
Acquired from Company . . . 8 -- 6 4 11
Closed. . . . . . . . . . . (21) (3) (1) (1) (2)
Sold to Company . . . . . . (23) (5) (42) (44) (10)
Ending number . . . . . . . 360 391 389 414 447
System total. . . . . . . . . 1,323 1,270 1,252 1,224 1,172
The following table summarizes the geographical locations of
Jack in the Box restaurants at September 28, 1997:
Company- Company-
operated Franchised operated Franchised
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Arizona. . . . . . 64 46 Nevada . . . . 18 10
California . . . . 398 250 New Mexico . . -- 2
Hawaii . . . . . . 26 1 Oregon . . . . 2 2
Idaho. . . . . . . 14 -- Texas. . . . . 317 35
Illinois . . . . . 12 -- Washington . . 74 --
Louisiana. . . . . -- 5 Hong Kong. . . -- 6
Missouri . . . . . 38 3 --- ---
Total. . . . . 963 360
=== ===existing markets.
Site selections for all new Jack in the Box restaurants are made after an
extensive review of demographic data and other information relating to
population density, restaurant visibility and access, available parking,
surrounding businesses and opportunities for market concentration.
Jack in the Box restaurants developed by franchisees are built to Company
specifications on sites which have been approved by the Company.
The Company currently uses several configurations in building new
Jack in the Box restaurants. The largest restaurants seat 90 customers and
require a larger customer base to justify the required investmentdevelopment cost of approximately
$1.3 million, including land. The Company seeks to use lease financing and other
means to lower its cash investment in a typical leased restaurant to
approximately $300,000. The smallest restaurants seat 44 customers, require less
land, and cost slightly less to build and equip than do the largest restaurants.
Management believes that the flexibility provided by the alternative
configurations enables the Company to match the restaurant configuration with
specific demographic, economic and geographic characteristics of the site.
-2-2
The following table sets forth the growth in Company-operated and
franchised Jack in the Box restaurants since the beginning of fiscal 1994:
Fiscal Year
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1994 1995 1996 1997 1998
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Company-operated restaurants:
Opened . . . . . . . . . . . 54 21 26 75 102
Sold to franchisees. . . . . (4) (6) 0 (8) (2)
Closed . . . . . . . . . . . (9) (4) (15) (6) (8)
Acquired from franchisees. . 44 42 5 23 14
End of period total. . . . . 810 863 879 963 1,069
Franchised restaurants:
Opened . . . . . . . . . . . 8 12 10 5 2
Acquired from Company. . . . 4 6 0 8 2
Closed . . . . . . . . . . . (1) (1) (3) (21) (5)
Sold to Company. . . . . . . (44) (42) (5) (23) (14)
End of period total. . . . . 414 389 391 360 345
System end of period total. . . . 1,224 1,252 1,270 1,323 1,414
The following table summarizes the geographical locations of
Jack in the Box restaurants at September 27, 1998:
Company-
operated Franchised Total
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Arizona. . . . . . . . . . . . . 70 45 115
California . . . . . . . . . . . 442 243 685
Hawaii . . . . . . . . . . . . . 26 1 27
Idaho. . . . . . . . . . . . . . 16 - 16
Illinois . . . . . . . . . . . . 12 - 12
Missouri . . . . . . . . . . . . 40 3 43
Nevada . . . . . . . . . . . . . 27 10 37
New Mexico . . . . . . . . . . . - 2 2
Oregon . . . . . . . . . . . . . 9 2 11
Texas. . . . . . . . . . . . . . 348 32 380
Washington . . . . . . . . . . . 79 - 79
Hong Kong. . . . . . . . . . . . - 7 7
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Total. . . . . . . . . . . . . 1,069 345 1,414
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Restaurant Operations. Significant resources are devoted to ensure that all
Jack in the Box restaurants offer the highest quality food and service.
Emphasis is placed on ensuring that quality ingredients are delivered to the
restaurants, restaurant food production systems are continuously developed and
improved, and all employees are dedicated to delivering consistently high
quality food and service. Through its network of corporate quality assurance,
facilities services and restaurant management personnel, including regional
vice presidents, area managers and restaurant managers, the Company standardizes
specifications for the preparation and service of its food, the conduct and
appearance of its employees, and the maintenance and repair of its premises.
Operating specifications and procedures are documented in a series of manuals
and video presentations. Most restaurants, including franchised units, receive
approximately 4four full inspections and 26 mystery guest reviews each year.
Each Jack in the Box restaurant is operated by a Company-employed
manager or franchisee who normally receives a minimum of eight weeks of
management training. Foodmaker's management training program involves a
combination of classroom instruction and on-the-job training in specially
designated training restaurants. Restaurant managers and supervisory personnel
train other restaurant employees in accordance with detailed procedures and
guidelines prescribed by Foodmaker, utilizing training aids including video
equipment available at each location. The restaurant managers are directly
responsible for the operation of the restaurants, including product quality,
food handling safety, cleanliness, service, inventory, cash control and the
conduct and appearance of employees.
3
Restaurant managers are supervised by approximately 5060 area managers, each
of whom is responsible for an average ofapproximately 20 restaurants. The area managers are
under the supervision of seven regional vice presidents who are supervised in
turn by a vice president of operations. Under the Company's performance system,
area and restaurant managers are eligible for quarterly bonuses based on a
percentage of location operating profit and regional vice presidents are
eligible for bonuses based on profit improvement and achievement of established
goals and objectives.
The Company's "farm-to-fork" food safety and quality assurance program is
designed to maintain high standards for the food and materials and food
preparation procedures used by Company-operated and franchised restaurants.
Foodmaker maintains product specifications and approves sources for obtaining
such products. The Company has developed a comprehensive, restaurant-based
Hazard Analysis & Critical Control Points ("HACCP") system for managing food
safety and quality. HACCP combines employee training, testing by suppliers, and
detailed attention to product quality at every stage of the food preparation
cycle. The Company's HACCP program has been recognized as a leader in the
industry by the USDA, FDA and the Center for Science in the Public Interest.
Foodmaker provides purchasing, warehouse and distribution services for both
Company-operated and some franchised restaurants. Prior to 1996, most
Jack in the Box franchisees used these services to the full extent available
even though they were permitted to purchase products directly from any approved
source. In 1996, Jack in the Box franchisees formed a purchasing cooperative and
contracted with another supplier for distribution services. This transition by
most franchisees resulted in a substantial decline in distribution sales.sales, but
had only a minor impact on profitability since distribution is a low margin
business. Some products, primarily dairy and bakery items, are delivered
directly by approved suppliers to both Company-operated and franchised
restaurants.
The primary commodities purchased by Jack in the Box restaurants are beef,
poultry, cheese and produce. The Company monitors the current and future prices
and availability of the primary commodities purchased by the Company in order to
minimize the impact of fluctuations in price and availability, and makes advance
purchases of commodities when considered to be advantageous. However, the
Company remains subject to price fluctuations in certain commodities. All
essential food and beverage products are available, or upon short notice can be
made available, from alternative qualified suppliers.
Foodmaker maintains centralized financial and accounting controls for
Company-operated Jack in the Box restaurants which it believes are important in
analyzing profit margins. Jack in the Box uses a specially designed computerized
reporting and cash register system. The system provides point-of-sale
transaction data and accumulates marketing information. Sales data is collected
and analyzed on a weekly basis by management.
-3-
Franchising Program. The Jack in the Box franchising strategy is directed
toward franchisee development of restaurants in existing non-primary markets and
selected primary markets. The Company offers development agreements for
construction of one or more new restaurants over a defined period of time and in
a defined geographic area. Developers are required to prepay one-half of the
franchise fees for restaurants to be opened in the future and may forfeit such
fees and lose their rights to future developments if they do not maintain the
required schedule of openings.
The current Jack in the Box franchise agreement provides for an initial
franchise fee of $50,000 (formerly $25,000) per restaurant. This agreement generally provides for
royalties of 5% of gross sales (4% for agreements executed prior to
February 23, 1996), a marketing fee of 5% of gross sales (although someapproximately
half of the existing agreements provide for a 4% rate) and approximately a 20-year20-
year term. In connection with the conversion of a Company-operated restaurant,
the restaurant equipment and the right to do business at that location, known as
"Trading Area Rights," are sold to the franchisee, in most cases for cash. The
aggregate price is equal to the negotiated fair market value of the restaurant
as a going concern, which depends on various factors including the history of
the facility,restaurant, its location and its cash flow potential. In addition, the land
and building are leased or subleased to the franchisee at a negotiated rent,
generally equal to the greater of a minimum base rent or a percentage of gross
sales (typically 8 1/2%). The franchisee is required to pay property taxes,
insurance and maintenance costs. The Company's franchise agreement also provides
the Company a right of first refusal on each proposed sale of a franchised
restaurant, which it exercises from time to time, when the proposed sale price
and terms are acceptable to the Company.
4
The Company views its non-franchised Jack in the Box units as a potential
resource which, on a selected basis, can be sold to a franchisee to generate
additional immediate cash flow and revenues while still maintaining future cash
flows and earnings through franchise rents and royalties. Although franchised
units totaled 360345 of the 1,3231,414 Jack in the Box restaurants at September 28, 1997,27,
1998, the ratio of franchised to Company-operated restaurants is low relative to
the Company's major competitors.
Advertising and Promotion. Jack in the Box engages in substantial marketing
programs and activities. Advertising costs are paid from a fund comprised of
(i) an amount contributed each year by the Company equal to at least 5% of the
gross sales of its Company-operated Jack in the Box restaurants and (ii) the
marketing fees paid by domestic franchisees. The Company's use of advertising
media is limited to regional and local campaigns both on television and radio
spots and in print media. Jack in the Box does not advertise nationally.
Jack in the Box spent approximately $66$73.1 million on advertising and promotions
in fiscal 1997,1998, including franchisee contributions of $15.5$15.4 million. The current
advertising campaign relies on a series of television and radio spot
advertisements to promote individual products and develop the Jack in the Box
brand. The Company also spent $1.1$.6 million in fiscal 19971998 for local marketing
purposes. Franchisees are encouraged to, and generally do, spend funds in
addition to those expended by the Company for local marketing programs.
Employees. At September 28, 1997,27, 1998, the Company had approximately 29,00032,600
employees, of whom approximately 27,00030,700 were restaurant employees, 450500 were
corporate personnel, 250 were distribution employees and 1,3001,150 were field
management and administrative personnel. Employees are paid on an hourly basis,
except restaurant managers, corporate and field management, and administrative
personnel. A majority of the Company's restaurant employees are employed on a
part-time, hourly basis to provide services necessary during peak periods of
restaurant operations. Jack in the BoxThe Company has not experienced any significant work
stoppages and believes its labor relations are good. Jack in the BoxThe Company competes in the
job market for qualified employees and believes its wage rates are comparable to
those of its competitors.
Trademarks and Service Marks
The Jack in the Box name is of material importance to the Company and is a
registered trademark and service mark in the United States and in certain
foreign countries. In addition, the Company has registered numerous service
marks and trademarkstrade names for use in its business, including the Jack in the Box
logo and various product names and designs.
-4-
Competition and Markets
In general, the restaurant business is highly competitive and is affected
by competitive changes in a geographic area, changes in the public's eating
habits and preferences, local and national economic conditions affecting
consumer spending habits, population trends, and traffic patterns. Key elements
of competition in the industry are the quality and value of the food products
offered, quality and speed of service, advertising, name identification,
restaurant location, and attractiveness of facilities.
Each Jack in the Box restaurant competes directly and indirectly with a
large number of national and regional restaurant chains as well as with locally-owned fast-foodlocally-
owned quick-service restaurants and coffee shops. In selling franchises, Jack in the
BoxCompany competes with many other restaurant franchisors,franchisers, and some of its
competitors have substantially greater financial resources and higher total
sales volume.
Regulation
Each Company-operated and franchisedJack in the Box restaurant is subject to regulation by federal
agencies and to licensing and regulation by state and local health, sanitation,
safety, fire and other departments. Difficulties or failures in obtaining any
required licensing or approval could result in delays or cancellations in the
opening of new restaurants.
The Company is also subject to federal and a substantial number of state
laws regulating the offer and sale of franchises. Such laws impose registration
and disclosure requirements on franchisorsfranchisers in the offer and sale of franchises
and may also apply substantive standards to the relationship between franchisorfranchiser
and franchisee, including limitations on the ability of franchisorsfranchisers to terminate
franchisees and alter franchise arrangements. The Company believes it is
operating in substantial compliance with applicable laws and regulations
governing its operations.
5
The Company is subject to the Fair Labor Standards Act and various state
laws governing such matters as minimum wages, overtime and other working
conditions. A significant number of the Company's food service personnel are
paid at rates related to the federal and state minimum wage, and accordingly,
increases in the minimum wage increase the Company's labor costs.
In addition, various proposals which would require employers to provide
health insurance for all of their employees are being considered from time-to-timetime-to-
time in Congress and various states. The imposition of any requirement that the
Company provide health insurance to all employees would have a material adverse
impact on the consolidated operations and financial condition of the Company and
the restaurant industry.
The Company is subject to certain guidelines under the Americans with
Disabilities Act of 1990 and various state codes and regulations which require
restaurants to provide full and equal access to persons with physical
disabilities. To comply with such laws and regulations, the cost of remodeling
and developing restaurants has increased, principally due to the need to provide
certain older restaurants with ramps, wider doors, enlargedlarger restrooms and other
conveniences. See "Item 3 Legal Proceedings".
The Company is also subject to various federal, state and local laws
regulating the discharge of materials into the environment. The cost of
developing restaurants has increased as a result of the Company's compliance
with such laws. Such costs relate primarily to the necessity of obtaining more
land, landscaping and below surface storm drainage and the cost of more
expensive equipment necessary to decrease the amount of effluent emitted into
the air and ground.
Forward-Looking Statements The Company wishes to caution readersand Risk Factors
This Form 10-K contains "forward-looking statements" within the meaning of
the securities laws. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, and have based these expectations on
our beliefs as well as assumptions we have made, by or on behalf of the Company, are subjectsuch expectations may prove to
be materially incorrect due to known and unknown risks and uncertainties which may causeuncertainties.
These forward-looking statements are principally contained in the sections
captioned "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Business." Statements regarding the Company's actual resultsfuture
financial performance, including growth in net sales, earnings, cash flows from
operations and sources of liquidity; expectations regarding effective tax rates;
continuing investment in new restaurants and refurbishment of existing
facilities and Year 2000 compliance are forward-looking statements. In addition,
in those and other portions of this Form 10-K, the words "anticipates,"
"believes," "estimates," "seeks," "expects," "plans," "intends" and similar
expressions as they relate to be
materially different from future results expressedthe Company or implied by anyits management are intended to
identify forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides
the following cautionary statements which identify
important factors that could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements. No inference should be drawn
that the factors referred to below are the only factors which could give rise
to such differences.
-5-
In addition to other factors
discussed in this Form 10-K, 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; the Company's ability to recognize value
from any current or future co-branding efforts; 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-outdining 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; and the
effectiveness of management strategies and decisions.
Risks Related to the Food Service Industry. Food service businesses are
often affected by changes in consumer tastes, national, regional and local
economic conditions and demographic trends. The performance of individual
restaurants may be adversely affected by factors such as traffic patterns,
demographics and the type, number and location of competing restaurants.
6
Multi-unit food service businesses such as Jack in the Box can also be
materially and adversely affected by publicity resulting from poor food quality,
illness, injury or other health concerns with respect to the nutritional value
of certain food.
In early 1993 the Company's business was severely disrupted as a result of
an outbreak of food-borne illness bacteria attributed to hamburgers served in
Jack in the Box restaurants, principally in the state of Washington. To minimize
the risk of any such occurrence in the future, the Company has implemented a
Hazard Analysis & Critical Control Points ("HACCP") system for managing food
safety and quality. Nevertheless, the risk of food-borne illness cannot be
completely eliminated. Any outbreak of such illness attributed to
Jack in the Box restaurants or within the food service industry could have a
material adverse effect on the financial condition and results of operations of
the Company.
Dependence on frequent deliveries of fresh produce and groceries subjects
food service businesses, such as the Company's, to the risk that shortages or
interruptions in supply, caused by adverse weather or other conditions, could
adversely affect the availability, quality and cost of ingredients. In addition,
unfavorable trends or developments concerning factors such as inflation,
increased food, labor and employee benefit costs (including increases in hourly
wage and unemployment tax rates), increases in the number and locations of
competing restaurants, regional weather conditions and the availability of
experienced management and hourly employees may also adversely affect the food
service industry in general and the Company's financial condition and results of
operations in particular. Changes in economic conditions affecting the Company's
customers could reduce traffic in some or all of the Company's restaurants or
impose practical limits on pricing, either of which could have a material
adverse effect on the Company's financial condition and results of operations.
The continued success of the Company will depend in part on the ability of the
Company's management to anticipate, identify and respond to changing conditions.
Risks Associated with Development. The Company intends to grow primarily
by developing additional Company-owned restaurants. Development involves
substantial risks, including the risk of (i) development costs exceeding
budgeted or contracted amounts, (ii) delays in completion of construction,
(iii) failing to obtain all necessary zoning and construction permits, (iv) the
inability to identify or the unavailability of suitable sites, both traditional
and nontraditional, on acceptable leasing or purchase terms, (v) developed
properties not achieving desired revenue or cash flow levels once opened,
(vi) competition for suitable development sites from competitors (some of which
have greater financial resources than the Company), (vii) incurring substantial
unrecoverable costs in the event a development project is abandoned prior to
completion, (viii) changes in governmental rules, regulations, and
interpretations (including interpretations of the requirements of the Americans
with Disabilities Act) and (ix) general economic and business conditions.
Although the Company intends to manage its development to reduce such
risks, there can be no assurance that present or future developments will
perform in accordance with the Company's expectations. There can be no
assurance that the Company or its franchisees will achieve growth objectivescomplete the development and construction of the
facilities or that newany such developments will be completed in a timely manner or
within budget or that such restaurants will be profitable.generate the Company's expected
returns on investment. The openingCompany's inability to expand in accordance with its
plans or to manage its growth could have a material adverse effect on its
results of operations and profitability of restaurants are subject to various risk factors
including the identification, availability and lease or purchase terms of
suitable sites, both traditional and non-traditional; the ability of the
Company and its franchisees to finance new restaurant development and to hire
and adequately train sufficient staff; the ability to meet construction
schedules, permitting and regulatory compliance; and the sales and cost
performance of the individual new restaurants.financial condition.
The growth of Jack in the Box restaurants outside the United States is
subject to a number of additional risk factors. The Company has limited
experience with international franchise development. The growth and
profitability of international restaurants are subject to the financial,
development and operational capabilities of franchisees, the franchisees'
ability to develop a support structure and adequately support subfranchisees,
the franchisees' adherence to the Company's operational standards, as well as
currency regulations and fluctuations. See "Item 3 Legal3-Legal Proceedings".
Risks Associated with Growth. The Company's development plans will require
the implementation of enhanced operational and financial systems and will
require additional management, operation, and financial resources. For example,
the Company will be required to recruit and train managers and other personnel
for each new Company-owned restaurant as well as additional development and
accounting personnel. There can be no assurance that the Company will be able to
manage its expanding operations effectively. The failure to implement such
systems and add such resources on a cost-effective basis could have a material
adverse effect on the Company's results of operations and financial condition.
7
Reliance on Certain Markets. Because the Company's business is regional,
with approximately 75% of its
Company-operated and franchisedJack in the Box restaurants located in the states of
California and Texas, the economic conditions, state and local government
regulations and weather conditions affecting those states may have a material
impact upon the Company's results.
Competition. The restaurant industry is highly competitive with respect to
price, service, location and food quality, and there are many well-established
competitors. Certain of the Company's competitors have engaged in substantial
price discounting in recent years and may continue to do so in the future. In
addition, factors such as increased food, labor and benefits costs and the
availability of experienced management and hourly employees may adversely affect
the restaurant industry in general and the Company's restaurants in particular.
Each Jack in the Box restaurant competes directly and indirectly with a large
number of national and regional restaurant chains as well as with locally-owned
fast-food restaurants and coffee shops. Some of its competitors have
substantially greater financial resources and higher total sales volume. Any
changes in these factors could adversely affect the profitability of the
Company.
Exposure to Commodity Pricing. Although the Company may take hedging
positions in certain commodities from time to time and opportunistically
contract for some of these items in advance of a specific need, there can be no
assurances that the Company will not be subject to the risk of substantial and
sudden price increases, shortages or interruptions in supply of such items,
which could have a material adverse effect on the Company.
Risks Related to Increased Labor Costs. The Company has a substantial
number of employees who are paid wage rates at/at or slightly above the
minimum wage. As federal and/orand state minimum wage rates increase, the Company may
need to increase not only the wages of its minimum wage employees but also the
wages paid to the employees at wage rates which are above minimum wage. If
competitive pressures or other factors prevent the Company from offsetting the
increased costs by increases in prices, the Company's profitability may decline.
In addition, various proposals which would require employers to provide health
insurance for all of their employees are being considered from time to time in
Congress and various states. The imposition of any requirement that the Company
provide health insurance to all employees would have a material adverse impact
on the operations and financial condition of the Company and the restaurant
industry.
Taxes. The Company has been required, under SFAS 109, because of operating losses incurred
in past years, to establish valuation allowances against deferred tax assets
recorded for loss and tax credit carryforwardscarry forwards and various other items. Until
there is sufficient available evidence that the Company will be able to realize
such deferred tax assets through future taxable earnings, the Company's tax
provision will be highly sensitive to the expected level of annual earnings, the
impact of the alternative minimum tax under the Internal Revenue Code and the
limited current recognition of the deferred tax assets. As a result of changing
expectations, the relationship of the Company's income tax provision to pre-tax
earnings will vary more significantly from quarter to quarter and year to year
than companies that have been continuously profitable. However, the Company's
effective tax rates are likely to increase in the future.
Leverage. The Company is highly leveraged. Its substantial indebtedness
may limit the Company's ability to respond to changing business and economic
conditions. The contracts under which the Company acquired its debt impose
significant operating and financial restrictions which limit the Company's
ability to borrow money, sell assets or make capital expenditures or investments
without the approval of certain lenders. In addition to cash flows generated by
operations, other financing alternatives may be required in order to repay the
Company's substantial debt as it comes due. There can be no assurance that the
Company will be able to refinance its debt or obtain additional financing or
that any such financing will be on terms favorable to the Company.
-6-
In early 1993Risks Related to Franchise Operations. At September 27, 1998, the Company's business was severely disrupted as a result of
an outbreak of food-borne illness attributed to hamburgers served inCompany
had 345 franchised Jack in the Box restaurants. The opening and success of
franchised restaurants principallydepends on various factors, including the availability of
suitable sites, the negotiation of acceptable lease or purchase terms for new
locations, permitting and regulatory compliance, the ability to meet
construction schedules and the financial and other capabilities of the Company's
franchisees and developers. There can be no assurance that developers
planning the opening of franchised restaurants will have the business abilities
or sufficient access to financial resources necessary to open the restaurants
required by their agreements. There can also be no assurances that franchisees
will successfully operate their restaurants in a manner consistent with the
Company's concept and standards.
8
In addition, certain federal and state laws govern the Company's
relationships with its franchisees. See "Risks Related to Government
Regulations" below. In November 1996, an action was filed by the National JIB
Franchisee Association, Inc. and several of Washington.the franchisees against the Company
and others. See "Item 3 Legal Proceedings". To minimize3-Legal Proceedings."
Dependence on Key Personnel. The Company believes that its success will
depend in part on the riskcontinuing services of its key executives, including
Robert J. Nugent, President and Chief Executive Officer, Charles W. Duddles,
Executive Vice President, Chief Financial Officer and Chief Administrative
Officer and Kenneth R. Williams, Executive Vice President, Marketing and
Operations, none of whom are employed pursuant to an employment agreement. The
loss of the services of any such occurrence
in the future, the Company has implemented a HACCP based food safety program.
The risk of food-borne illness cannot be completely eliminated. Any outbreak
of such illness attributed to Jack in the Box restaurants or within the food
service industryexecutives could have a material adverse
effect on the financial
conditionCompany's business, and resultsthere can be no assurance that qualified
replacements would be available. The Company's continued growth will also depend
in part on its ability to attract and retain additional skilled management
personnel.
Risks Related to Government Regulations. The restaurant industry is
subject to extensive federal, state and local governmental regulations,
including those relating to the preparation and sale of food and those relating
to building and zoning requirements. The Company and its franchisees are also
subject to laws governing their relationships with employees, including minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements. See "-Risks Related to Increased Labor Costs" above. The Company
is also subject to federal regulation and certain state laws which govern the
offer and sale of franchises. Many state franchise laws impose substantive
requirements on franchise agreements, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some states require that certain materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
licenses or approvals to sell franchises could adversely affect the Company and
its franchisees. Changes in government regulations could have a material adverse
effect on the Company.
Environmental Risks and Regulations. As is the case with any owner or
operator of real property, the Company is subject to a variety of federal,
state and local governmental regulations relating to the use, storage,
discharge, emission and disposal of hazardous materials. Failure to comply
with environmental laws could result in the imposition of severe penalties or
restrictions on operations by governmental agencies or courts of law which could
adversely affect operations. The Company does not have environmental liability
insurance, nor does it maintain a reserve, to cover such events. The Company has
engaged and may engage in real estate development projects and owns or leases
several parcels of real estate on which its restaurants are located. The Company
is unaware of any significant environmental hazards on properties it owns or has
owned, or operates or has operated. In the event of the Company.determination of
contamination on such properties, the Company, as owner or operator, can be held
liable for severe penalties and costs of remediation. The Company also operates
motor vehicles and warehouses and handles various petroleum substances and
hazardous substances, but is not aware of any current material liability related
thereto.
Risks Associated With Year 2000 Compliance. The Company has made
substantial progress to ensure that all hardware and software serving critical
internal functions in Company-operated restaurants and in the Company's
corporate offices will accurately handle data involving the transition of dates
from 1999 to 2000. The Company has advised its franchisees that they are
required to ensure that all computer hardware and software used in connection
with franchised Jack in the Box restaurants will be "Year 2000 compliant"ready" by
December 31, 1999. The Companycompany has urged vendors who supply significant amounts
of vital supplies and services to the Company, to develop and implement year
2000 compliance plans. However, any failure on the part of the Company, its
franchisees, or the Company's vendors to ensure compliance with year 2000
requirements could have a material, adverse effect on the Company's financial
condition and results of operations of the
Company after January 1, 2000.
9
ITEM 2. PROPERTIES
At September 28, 1997,27, 1998, Foodmaker owned 562583 Jack in the Box restaurant
buildings, including 329355 located on land covered by ground leases.leased land. In addition, it leased 666743
restaurants where both the land and building are leased, including 153148
restaurants operated by franchisees. The remaining lease terms of ground leases
range from approximately one year to 4948 years, including optional renewal option
periods. The remaining lease terms of Foodmaker's other leases range from
approximately one year to 4039 years, including optional renewal option periods. In
addition, at September 28, 1997,27, 1998, franchisees directly owned or leased 9588
restaurants.
Number of restaurants
----------------------------
Company- Franchise-Franchise Total
operated operated
Total
----------- ----------- ------------ -----------------------------------------------------------------------
Company-owned restaurant buildings:
On Company-owned land. . . . . . . . . 168 60 228
On leased land . . . . . . . . . . 172 61 233
On ground-leased land . . . . . . . . . . 278 51 329
--- --- ---306 49 355
----- ----- -----
Subtotal . . . . . . . . . . . . . . . . 450 112 562474 109 583
Company-leased restaurant buildings
on leased land . . . . . . . . . . . . . 513 153 666595 148 743
Franchise directly-owned or directly-leased restaurant buildings . . -- 95 95
--- --- ---
Totaldirectly-
leased restaurant buildings. . . . . . - 88 88
----- ----- -----
Total restaurant buildings . . 963 360 1,323
=== ===. . . . . 1,069 345 1,414
===== -7-
===== =====
The Company's leases generally provide for fixed rental payments (with
cost-of-living index adjustments) plus real estate taxes, insurance and other
expenses; in addition, many of the leases provide for contingent rental payments
of between 2% and 10% of the restaurant's gross sales. The Company has generally
been able to renew its restaurant leases as they expire at then current market
rates. At September 28, 1997,27, 1998, the leases had initial terms expiring as follows:
Number of restaurants
------------------------------------------------
Years initial Ground Land and
lease term Ground building
expires leases building leases
--------- ------ --------
1998-2002.- ------------------------------------------------------------------------------
1999-2003 . . . . . . . . . . . . . . . . . . . 114 121
2003-2007.93 86
2004-2008 . . . . . . . . . . . . . . . . . . . 125 206
2008-2012.132 269
2009-2013 . . . . . . . . . . . . . . . . . . . 68 245
201364 197
2014 and laterlater. . . . . . . . . . . . . . . . . . 22 94
--- ---
329 666
=== ===66 191
In addition, the Company owns its principal executive offices in San Diego,
California, consisting of approximately 150,000 square feet. The Company owns
one warehouse and leases an additional five with remaining terms ranging from
one yeartwo to 20 years, including optional renewal option periods. Substantially all the
Company's real and personal property are pledged as collateral for various
components of the Company's long-term debt.
ITEM 3. LEGAL PROCEEDINGS
The legal proceedings that were pending againstIn 1998 the Company in federal
and state courts insettled the state of Washington, relating to food-borne illness
(the "Outbreak") attributed to hamburgers served at Jack in the Box restaurants
in 1993, have been concluded, with the exception of one case of immaterial
financial impact, which is currently on appeal. The total liability on all
such lawsuits and claims did not exceed the coverage available under the
Company's applicable insurance policies.
The Company is engaged in litigation withit 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 Outbreak.Box restaurants in 1993. The
initial litigation was filed by the Company on February 4, 1993. Vons has filed
cross-complaints against the Company and others alleging certain contractual,
indemnification and tort liabilities; seeking damages in unspecified amounts and
a declaration of the rights and obligations of the parties. The claims of the
parties arise out of two separate lawsuits which have been
consolidated and are now set for trialwere settled on February 24, 1998. The Company received in its second
fiscal quarter approximately $58.5 million in the Los Angeles Superiorsettlement, of which a net of
approximately $45.8 million was realized after litigation costs and before
income taxes (the "Litigation Settlement").
10
On February 2, 1995, an action by Concetta Jorgensen was filed against the
Company in the U.S. District Court Los
Angeles,in San Francisco, California alleging that
restrooms at a Jack in January 1998.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. Foodmaker has been notified by attorneys
for plaintiffs that claims may be made against Jack in the Box franchisees and
Foodmaker relating to certain 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 StatesU.S. 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, attorneysattorneys' fees and costs. The Companycourt has successfully dismissed portions of the
complaint, including the single claim alleging wrongdoing by the Company's
outside
directors.non-management directors, and the claims against its current officers.
Management believes the remaining allegations are without foundation and
intends to vigorously defend the action. -8-
A trial date of January 5, 1999 has
been set by the court.
On November 5, 1996, an action was filed by the "NationalNational 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 recisionrescission of
alleged material modifications of plaintiffs' franchise agreements. The
complaint also allegescontained allegations of 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 seekssought 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 contract. The remaining claims of unfair business practices,
violation of the California Corporations Code and interference with
franchisees' right of association are set for trial in March 1999. Management
believes that its policies are lawful and that it has satisfied any obligation
to its franchisees in
regard to such supplier payments.franchisees.
On December 10, 1996, a suit was filed by the Company's Mexican licensee,
Foodmex, Inc., in the United StatesU.S. District Court in San Diego, California against the
Company and its international franchising subsidiary. Foodmex formerly operated
several Jack in the Box franchise restaurants in Mexico, but its licenses were
terminated by the Company for, among other reasons, chronic insolvency and
failure to meet operational standards. The Foodmex suit alleges wrongful
termination of its master license, breach of contract and unfair competition and
seeks an injunction to prohibit termination of its license as well as
unspecified monetary damages. In January 1997 Foodmex amended its
complaint to name several individual defendants and to allege additional
causes of action. The Company and its subsidiary counterclaimed and
sought a preliminary injunction against Foodmex. On March 28, 1997, the court
granted the Company's request for an injunction, held that the Company was
likely to prevail in its suit, and ordered Foodmex to immediately cease using
the Jack in the Box marks and proprietary operating systems. On June 30, 1997,
the court held Foodmex and its president in contempt of court for failing to
comply with the March 28, 1997 order. On February 2, 1995,24, 1998, the Court issued an
action by Concetta Jorgensen wasorder dismissing Foodmex's complaint without prejudice. In March 1998, Foodmex
filed against
the Companya Second Amended Complaint in the U.S. District Court in San Francisco,Diego,
California alleging that restrooms at a Jack incontractual, tort and law violations arising out of the Box restaurant failed to comply with laws
regarding disabled personssame
business relationship and seeking damages in unspecified amounts,
punitive damages, injunctive relief,excess of $10 million, 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 tentative agreement on settlement terms both as to the individual
plaintiff Concetta Jorgensen and the claims for injunctive relief, but a
settlement agreement has not yet been signed or presented to the U.S.
District Court for approval. During the course of settlement discussions,
Foodmaker was notified by attorneys for plaintiffs that claims may be made
against Jack in the Box franchisees and Foodmaker relating to locations that
franchisees lease from Foodmaker which may not be in compliance with the
Americans With Disabilities Act.
On May 23, 1997, an action by Ralston Purina Company was filed against the
Company in the U.S. District court for the Eastern District of Missouri in
St. Louis, Missouri alleging the Company's breach of a tax sharing agreement
and unjust enrichment and seeking an accounting and damages in an amount not
less than $11 million and attorneys'
fees and costs. The Company believes it
has meritorious defensessuch allegations are without merit and intends to vigorously resistwill
defend the lawsuit.action vigorously.
11
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.
-9-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
fiscal quarter ended September 28, 1997.27, 1998.
ITEM 5. MARKET FOR REGISTRANT'SRESIGTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low closing sales prices for
the Company's common stock during the quarters indicated, as reported on the New
York Stock Exchange-Composite Transactions:
16 weeks ended 12 weeks ended
----------------------------------------------------------- --------------------------------
Jan. 21, 199619, Apr. 14, 199613, July 7, 19966, Sept. 29, 1996
------------- ------------- ------------ --------------
High28,
1997 1997 1997 1997
- --------------------------------------------------------------------------
High. . . . . . 6 1/8 7 3/4 8 7/8 10 1/8
Low.. . . . $ 10.88 $ 12.25 $ 16.44 $ 20.69
Low . . . . . 5 5 7/8 6 7/8 6 3/4. . . . . 8.00 9.13 10.38 15.44
16 weeks ended 12 weeks ended
----------------------------------------------------------- --------------------------------
Jan. 19, 199718, Apr. 13, 199712, July 6, 19975, Sept. 28, 1997
------------- ------------- ------------ --------------
High27,
1998 1998 1998 1998
- --------------------------------------------------------------------------
High. . . . . . 10 7/8 12 1/4 16 7/16 20 11/16
Low.. . . . $ 20.25 $ 20.63 $ 20.94 $ 17.63
Low . . . . . 8 9 1/8 10 3/8 15 7/16. . . . . 14.75 15.25 16.25 13.00
Foodmaker has not paid any cash or other dividends (other than the issuance
of the Rights, as described in Note 98 to the consolidated financial
statements)Consolidated Financial Statements)
during its last two fiscal years and does not anticipate paying dividends in the
foreseeable future. The Company's credit agreements prohibit and its public debt
instruments restrict the Company's right to declare or pay dividends or make
other distributions with respect to shares of its capital stock.
As of September 28, 1997,27, 1998, there were approximately 600 stockholders of
record.
-10-12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented in the following table summarizes certain
consolidated financial information concerningof the Company and isfor each of the five
52-week periods ended September 27, 1998 are extracted or derived from financial
statements which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants.auditors. Results of operations for Chi-
Chi's,Chi-Chi's, Inc. ("Chi-Chi's") are included
through January 27, 1994, when Chi-Chi's was sold. The Company's fiscal year is
52 or 53 weeks, ending the Sunday closest to September 30.
52 weeks ended 53 weeks
------------------------------------------------------- endedFiscal Year
-------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Statement of Operations Data: 9/28/97 9/26/95 10/1/95 10/2/94 10/3/93
- ----------------------------- ------- ------- ------- ------- -------
Revenues:
Restaurant sales. . . . . . . . . . . . . . $1,112,005 $ 986,583 $ 892,029 $ 804,084 $ 843,038
$1,088,269
Distribution and other sales. . . . . . . . .26,407 45,233 132,421 179,689 171,711 108,546
Franchise rents and royalties . . . . . . . 35,904 35,426 34,048 32,530 33,740
35,232
Other revenues (1). . . . . . . . . . . . . 49,740 4,500 4,324 2,413 4,837
---------- ---------- ---------- ---------- ----------
Total revenues. . . . . . . . . . . 4,500 4,324 2,413 4,837 8,680. . . 1,224,056 1,071,742 1,062,822 1,018,716 1,053,326
---------- ---------- ---------- ---------- ----------
TotalCosts of revenues . . . . . . . . . . 1,071,742 1,062,822 1,018,716 1,053,326 1,240,727
---------- ---------- ---------- ---------- ----------
Costs of revenues (1) . . . . . . . .994,962 905,742 919,211 903,479 950,952 1,147,157
Equity in loss of FRI (2) . . . . . . -- --. . . . - - - 57,188 2,108 --
Selling, general and administrative
expenses (3). . . . . . . . . . . . . . . . 91,583 80,438 72,134 78,044 78,323 102,183
Interest expense. . . . . . . . . . . . . . . 33,058 40,359 46,126 48,463 55,201 57,586
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes (benefit),and
extraordinary item, and
cumulative effect of changes in
accounting principles. . . . . . . 45,203 25,351 (68,458) (33,258) (66,199)
Income taxes (benefit). . . . . . . . 9,900 5,300 500 3,010 (22,071)
---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary
item and cumulative effect of
changes in accounting principles . 35,303 20,051 (68,958) (36,268) (44,128)
Extraordinary item - loss on early
extinguishment of debt, net of
income taxesitem. . . . . . . . . . . . (1,252) -- -- (3,302) --
Cumulative effect on prior years of
adopting SFAS 106 and SFAS 109 . . -- -- -- -- (53,980)
---------- ---------- ---------- ---------- ----------
Net earnings (loss)104,453 45,203 25,351 (68,458) (33,258)
Income taxes. . . . . . . . . . $ 34,051 $ 20,051 $ (68,958) $ (39,570) $ (98,108)
========== ========== ========== ========== ==========. . . . . . . 33,400 9,900 5,300 500 3,010
---------- ---------- ---------- ---------- ----------
Earnings (loss) per share before
extraordinary item and cumulative
effect of changes in accounting
principlesitem. . . . . . . . . . . . . $ .8971,053 $ .5135,303 $ (1.77)20,051 $ (.94)(68,958) $ (1.15)
Net earnings(36,268)
========== ========== ========== ========== ==========
Earnings (loss) per share before
extraordinary item (4):
Basic . . . . $ .86 $ .51 $ (1.77) $ (1.03) $ (2.55)
Balance Sheet Data (at end of period):
- ---------------------------------------
Current assets.. . . . . . . . . . . . . . $ 100,1621.82 $ 96,476.91 $ 97,889.52 $ 107,486(1.78) $ 93,534
Current liabilities(.94)
Diluted . . . . . . . . . 193,213 147,063 132,017 140,238 202,194. . . . . . . . 1.77 .89 .51 (1.78) (.94)
Balance Sheet Data (at end of period):
Total assets. . . . . . . . . . . . . . . . . $ 743,588 $ 681,758 $ 653,638 $ 662,674 $ 740,285 897,280
Long-term debt. . . . . . . . . . . . . . . . 320,050 346,191 396,340 440,219 447,822 500,460
Stockholders' equity. . . . . . . . . . . . . 136,980 87,879 51,384 31,253 100,051
139,132
- ---------------------------------------__________
ReflectsIncludes the recognition of a provision of $44.5$45.8 million for the year ended October 3, 1993
to cover franchisee settlements and associated costs relatedLitigation Settlement in
1998 as described in Note 10 to the OutbreakConsolidated Financial Statements of
food-borne illness.the Company.
Reflects the complete write-off of the Company's $57.2 million
investment in Family Restaurants, Inc. ("FRI") for the year ended October 1,in 1995.
See Note 2 to the consolidated financial statements for information concerning
the Company's prior ownership of Chi-Chi's and investment in FRI.
Includes the recognition of an $8$8.0 million stockholders' lawsuit
settlement forin 1995.
Restated to conform with the year ended October 1, 1995.provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, issued by the
Financial Accounting Standards Board ("FASB") and adopted by the Company
beginning in 1998.
-11-13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
All comparisons under this heading between 1998, 1997 1996 and 19951996 refer to the
52-week periods ended September 27, 1998, September 28, 1997 and September 29,
1996, and October 1,
1995, respectively, unless otherwise indicated.
Revenues
Company-operated restaurant sales were $1,112.0 million, $986.6 million and
$892.0 million in 1998, 1997 and $804.1 million in 1997, 1996, and 1995, respectively. TheRestaurant sales improvementsimproved
from the prior year ofby $125.4 million, or 12.7%, in 1998 and $94.6 million, or
10.6%, in 1997, and
$87.9 million, or 10.9%, in 1996 reflectreflecting increases in both the average number of Company-
operated restaurants and in per store average ("PSA") sales and in thesales. The average
number of Company-operated restaurants.restaurants grew to 998 in 1998 from 900 in 1997 and
868 in 1996 as the pace of new restaurant openings increased to 102 in 1998 from
75 in 1997 and 26 in 1996. PSA sales for comparable restaurants increased 2.8%
in 1998 and 6.5% in 1997 and 7.2% in 1996 compared to the respective prior year. Sales also improved as a resultyear, due to increases
in both the number of the increase intransactions and the average number of Company-operated restaurants which grewtransaction amounts.
Restaurant sales improvements are attributed to 900 in 1997 from 868 in 1996 and 839 in 1995. Sales continued to improve
under the Company's two-tier marketing
strategy featuring both premium sandwiches,
such as the Sourdough Jack and Spicy Crispy Chicken sandwiches and value-priced product alternatives, from "Jack's Value Menu." The strategy
recognizes that value pricing is an ongoing part of the quick-serve
industry's competitive environment. At the same time, the Company continuesas
well as to build its brand through a popular brand-building advertising campaign that features itsthe
Company's fictional founder, "Jack".
The Company believes this brand-building effort
will continue to attract customers to Jack in the Box restaurants for its
distinctive food.
Distribution and other sales of food and supplies were $26.4 million, $45.2
million and $132.4 million in 1998, 1997 and $179.7 million in 1997, 1996, and 1995, respectively. The decline in
distribution sales is a result of two factors. InA 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 $35.3 million in 1997 and $65.1 million in
1996. Also, in 1996 Jack in the Box franchisees formed a purchasing cooperative
and contracted with another supplier for distribution services. Most franchisees
elected to participate in the cooperative, resulting in salescooperative. Sales to franchisees declining to $9.8and others were
$26.4 million in 1998, $9.9 million in 1997 fromand $67.3 million in 1996,
and $98.6 millionreflecting in 1995. In
addition,1998 an increase in the number of restaurants serviced by the
Company's distribution contract with Chi-Chi's was not renewed when it
expired in May 1997. Distribution sales to Chi-Chi's and others declined to
$35.4 million in 1997 from $65.1 million in 1996 and $81.1 million in 1995.
Ongoing distribution sales, which relate principally to franchisees who
continue to use Foodmaker distribution services, are expected to be
approximately $4 million per quarter.division. Because distribution is a low-margin business,
the net loss of distribution revenues since 1996 did not have a material impact
on the results of operations or financial condition of the Company.
Franchise rents and royalties were $35.9 million, $35.4 million and $34.0
million in 1998, 1997 and $32.5 million in 1997, 1996, and 1995, respectively, slightly more than 10% of sales at
franchise-operated restaurants in each of those years. Franchise restaurant
sales increased towere $345.9 million in 1998, $352.2 million in 1997 fromand $337.0 million in
1996 and $319.6 million1996. The percentage of sales in 1995. Franchise restaurant sales growth1998 was primarily attributedfractionally higher due to PSA sales increases
in percentage rents at domestic franchise-operated
restaurants, which were impacted by marketing initiatives that favorably
influenced sales systemwide.
Othercertain franchised restaurants.
In 1998, other revenues, which includetypically interest income onfrom investments and
notes as well as franchise development fees, werereceivable, also included the net Litigation Settlement of $45.8 million
described in Note 10 to the Consolidated Financial Statements. Excluding this
unusual item, other revenues declined slightly to $4.0 million in 1998 from $4.5 million, $4.3 million and
$2.4
million in 1997 1996 and 1995, respectively. Other revenues were
greater$4.3 million in 1997 and 1996 principally due to increased interest income from
investments.1996.
Costs and Expenses
Restaurant costs of sales, which include food and packaging costs,
wereincreased with sales growth and the addition of Company-operated restaurants to
$358.6 million in 1998 from $327.2 million, $291.0 million and $258.6 million in 1997 1996 and 1995,
respectively.$291.0 million in 1996.
As a percent of restaurant sales, costcosts of sales were 32.2% in 1998, 33.2% in
1997 and 32.6% in 1996 and 32.2% in 1995.1996. The restaurant costs of sales percentage decreased in
1998 compared to 1997 primarily due to favorable ingredient costs, principally
beef, pork and beverages, offset partially by increased produce and cheese
costs. The percentage increase in 1997 compared to 1996 was principally due to
the cost of improved french fries, higher food costs of certain discount
promotions and commodity cost increases, primarily pork and dairy.
The restaurant costs of
sales percentage increased in 1996 compared to 1995 principally due to higher
packaging costs.
-12-
Restaurant operating costs were $587.6 million, $510.2 million and $478.0
million in 1998, 1997 and $447.2
million in 1997, 1996, and 1995, respectively. As a percent of restaurant sales,
operating costs were 52.8% in 1998, 51.7% in 1997 and 53.6% in 19961996. Restaurant
operating costs percentage increased in 1998 compared to 1997 primarily
reflecting higher labor costs due to increases in minimum wage, initial training
for operational improvements and 55.6%industry-wide labor shortages. Additionally,
new restaurant preopening costs increased approximately .2% of sales,
principally due to an increase in 1995,
declining each yearnew restaurants. Operating costs percentage
declined in 1997 compared to 1996 primarily due to labor efficiencies and lower
14
percentages of occupancy and other operating expenses. While occupancy and other
operating expenses increase with the addition of each new restaurant, such
expenses for existing restaurants have increased at a slower rate than the
increase in PSA restaurant sales.
Costs of distribution and other sales were $25.7 million in 1998, $44.8
million in 1997 and $130.2 million in 1996, and $175.7 million in 1995, reflecting the changesdeclines in distribution
sales. Costs of distribution and other sales have increaseddeclined as a percent of distributionsuch
sales to 97.4% in 1998 from 99.0% in 1997 fromand 98.4% in 1996 and 97.8% in 1995.
The decline in distribution margins are due primarily to the effect of the
loss of franchise and Chi-Chi's distribution sales.1996. In 1997 such costs
include
expenses ofincluded $.4 million or .9% of distribution sales,in expenses related to the closure of a distribution center
which had been used principally to distribute to Chi-Chi's restaurants.
Excluding this charge in 1997, costs were 98.1% of sales. The 1998 distribution
margin improved primarily due to the loss of the lower margin Chi-Chi's
distribution business.
Franchised restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
were $23.0 million, $23.6 million and $20.0 million in 1998, 1997 and $21.9 million in 1997, 1996, and
1995,
respectively. The increaseincreases in suchfranchised restaurant costs reflectin 1998 and 1997 from
1996 are primarily due to higher international franchise-related legal expense.expenses.
Selling, general and administrative expenses were $91.6 million, $80.4
million and $72.1 million in 1998, 1997 and $78.0 million in 1997, 1996, and 1995, respectively. Advertising and
promotion costs representedwere $58.3 million in 1998, $51.9 million, $47.2 million and $44.9 million in 1997 and $47.2
million in 1996, and 1995, respectively. As a percentrepresenting approximately 5.3% of restaurant
sales advertising and promotion costs were 5.3% in 1997 and 1996, declining
from 5.6% in 1995, as the Company reduced its extra contributions to the
marketing fund and its use of local promotions.each year. The
Company received from suppliers cooperative advertising funds of $5.2 million and $4.8 million,
respectively, in 1997 and 1996, or 0.5%approximately
.5% of restaurant sales which formerly
had been contributed directly to the marketing fund.in each year. In 19951998 general, administrative and other
costs include an $8.0included a non-cash charge of approximately $8 million litigation settlement
with stockholdersprimarily related
to facilities and a $1.9 million gain on the curtailment of
postretirement benefits, a net increase to such expenses of $6.1 million, or
0.6% of revenues.customer service improvement projects. Excluding the
above items,non-cash charge and cooperative advertising funds, general, administrative and
other costs as a percentwere approximately 2.7% of revenues were approximatelyin 1998, exclusive of the
Litigation Settlement income, 3.1% of revenues in 1997 and 2.8% of revenues in 1996 and 1995.1996. General and
administrative expenses in 1997 reflect higher legal costs, expenses and
write-offs related to tests of dual brandnew concepts (two brands operating in the same restaurant
facility) and other general increases, offset
in part by a reduction in bad debt expense related to decreased accounts and
notes receivable.
Interest expense was $40.4 million, $46.1 million and $48.5declined to $33.1 million in 1997, 1996 and 1995, respectively. Interest expense declined1998 from the prior
year by $5.7$40.4 million in
1997 and $2.4$46.1 million in 1996, principally due to a reduction in total debt
outstanding and lower other financing costs. Total
debt at September 28, 1997 was $347.7 million compared to $449.2 million at
the beginning of fiscal year 1995. Interest expense in 1997 and 1996
reflects interest savings associated with the early retirement inrates. In May 1996, ofthe Company retired $42.8
million of the Company'sits 14 1/4% senior subordinated notes. In September 1997, the Company
repaid $50 million of its 9 1/4% senior notes due 1999. In 1998 the Company
completed a refinancing plan, thereby reducing total debt, including current
maturities, by $26 million during the fiscal year. See "Liquidity and Capital
Resources."
The tax provision reflects theprovisions reflect effective annual tax raterates of 32%, 22% and 21%
of pretaxpre-tax earnings in 1998, 1997 and 1996, respectively. The low effective
annual
income tax rates in each year result from the Company's ability to realize
previously unrecognized tax benefits as the Company's profitability has
improved.
AlthoughIn 1998 the Company incurred aan extraordinary loss in 1995,of $7.0 million, less
income taxestax benefits of $.5$2.6 million, were
provided due to required minimum taxeson the early extinguishment of $125 million
each of its 9 1/4% senior notes and the Company's inability to recognize
the benefit from the carryover of losses to future years under Statement of
Financial Accounting Standards ("SFAS") 109, Accounting for Income Taxes.its 9 3/4% senior subordinated notes. In
1997 the Company incurred ana similar extraordinary loss of $1.6 million, less
income tax benefits of $.3 million, on the early retirementrepayment of $50 million of the
9 1/4% senior notes.
-13-Net earnings were $66.7 million, or $1.66 per diluted share, in 1998,
$34.1 million, or $.86 per diluted share, in 1997 and $20.1 million, or $.51 per
diluted share in 1996. In 1998 net earnings included an unusual increase of
$25.6 million, or $.64 per diluted share, net of taxes, resulting from the
Litigation Settlement income offset by the aforementioned non-cash charge, and
the extraordinary loss of $4.4 million, or $.11 per share. Excluding these
unusual and extraordinary items, earnings in 1998 were $45.4 million, or $1.13
per diluted share, a 29% increase from $35.3 million, or $.89 per diluted share,
before an extraordinary item, in 1997, which had increased 75% from 1996.
15
Liquidity and Capital Resources
Cash and cash equivalents decreased $13.5$18.6 million to $28.5approximately $9.9
million at September 28, 199727, 1998 from $42.0$28.5 million at the beginning of the fiscal
year. The cash decrease reflects, among other things,items, cash flowflows from operations of
$99.5$150.5 million in 1997, net principal payments on debt of $50.9 million andincluding the Litigation Settlement, less capital expenditures
and other investing activities of $59.7$120.8 million. Cash was also used to reduce
long-term debt in the refinancing plan and to repurchase common stock as
described below.
The Company's working capital deficit increased $42.5$50.2 million to $143.3
million at September 27, 1998 from $93.1 million at September 28, 1997,
from $50.6 million at the end of 1996,
principally due to the decrease in cash and cash equivalents and increases in
accounts payablespayable and 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.
Total debt outstanding declined $50.5On 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 $347.7$25 million. At September 27,
1998, the Company had borrowings of $97.5 million at
September 28, 1997 from $398.2and approximately $71.9
million at September 29, 1996. Inof 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 March 1,
1999. On May 15, 1996,1999 using available cash. In 1998 the Company
used $43.5repaid the remaining $125 million of available cash to
prepay the remaining 14its 9 1/4% senior notes and all $125
million of its 9 3/4% senior subordinated notes due in May 1998.
The Company's revolving2002.
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 agreement, which was amendedfacility. The Company
expects that annual interest expense will be reduced by over $10 million from
1997 levels due to the reduction in debt and restated March 15, 1996, expires December 31,lower interest rates on the new
debt. Total debt outstanding decreased to $321.7 million at September 27, 1998
from $347.7 million at the beginning of the fiscal year and provides for a credit
facility of up to $60$398.2 million including letters of credit of up to $25
million. Atat
September 28, 1997, the Company had no borrowings and
approximately $52.8 million of unused credit under the agreement.29, 1996.
The Company is subject to a number of covenants under its various credit
agreementsdebt
instruments including limitslimitations on additional borrowings, capital
expenditures, lease commitments and dividend payments, and requirements to
maintain certain financial ratios, cash flows and net worth. MostThe 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
machineryequipment secure other indebtedness.
The Company requires capital principally to grow the business through new
restaurant construction, as well as to maintain, improve and equipment is pledged to
its lenders under the credit agreementrefurbish existing
restaurants, and other secured notes.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. The
Company requires capital principally to expand the business through new
restaurant construction, as well as to maintain, improve and refurbish existing
restaurants, and for general operating purposes.
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
refinancingfinancing opportunities, the Company will be able to meet all of its debt service, capital
expenditure and working capital requirements.
Although the amount of liability from claims and actions described in Note
1110 of the consolidated financial statementsConsolidated Financial Statements 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.
On August 7, 1992,July 23, 1998, the Company's Board of Directors of the Company authorized the purchase of up to 2 million shares
of the Company's outstanding common stock in the open market for an aggregate
amount not to exceed $20 million. At September 28, 1997,27, 1998, the Company had
acquired 1,412,6541,416,320 shares for an aggregate cost of $14.5 million, none of which were acquired in the past
three years.$20 million.
16
Seasonality
The Company's restaurant sales and profitability are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel and improved weather conditions
which affect the public's dining habits.
-14-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.
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 more than 2,600 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 25% of system
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 has invited franchisees to participate 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 noncritical may not be addressed until after January 2000. The
following table describes by category and status, major identified IT
applications.
17
Remediation Status
Category Ready In Process Remaining (1)
- --------------------------------------------------------------------------------
Mainframe(2)
Third party developed software. . . . 67% 33% -
Internally developed software . . . . 69% 28% 3%
Hardware. . . . . . . . . . . . . . . - 100% -
Desktop(3)
Third party developed software. . . . 73% 25% 2%
Internally developed software . . . . 29% 66% 5%
Corporate hardware. . . . . . . . . . - 100% -
Restaurant hardware . . . . . . . . . - 100% -
Distribution Systems(4)
Third party developed software. . . . - 100% -
Internally developed software . . . . - 100% -
Hardware. . . . . . . . . . . . . . . - 100% -
__________
(1) Critical systems will be repaired or replaced during 1999.
(2) The Company expects to have completed Remediation, Testing and
Implementation for both internal and third party mainframe hardware
and software by Fall 1999.
(3) A substantial portion of the computer hardware in the corporate
offices is being replaced and the remainder is being otherwise
remediated. The Company will replace personal computers and install
remediated software in Company restaurants on an established
schedule during 1999; nearly all are expected to be completed by
August.
(4) IT systems in the Company's six distribution centers will be
replaced on an established schedule during 1999.
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. Although many have not responded, the responses the Company
has received to date have 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. The Company continues to evaluate information
in letter responses and other materials received from vendors, on web sites,
and from other sources, in identifying date sensitive ET.
Vendors of Important Goods and Services. The Company has identified and sent
letters to approximately 2,700 key vendors in an attempt to gain assurance of
vendors' Year 2000 readiness. As of November 9, 1998, the Company has received
responses concerning Year 2000 readiness from about one third of those vendors.
The Company is in the process of identifying which of those vendors it considers
to be critical to its business. The Company expects to continue discussions with
the 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.
18
The Company's Franchisees. At September 27, 1998, 338 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 will be 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 $8 million to date for the
Awareness, Assessment, Remediation, Testing and Implementation phases of its
Year 2000 plan. Approximately $5 million was spent during fiscal 1998. 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,
approximately 25% relating to new systems which have been or will be
capitalized. Some planned system replacements, which will provide significant
future benefits, were accelerated due to the Year 2000 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 (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 in the initial stages of
developing a business contingency plan to address both unavoided and
unavoidable Year 2000 risks. Although the Company expects to have the plan well
developed 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.
19
New Accounting Standards
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
This Statement specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common
stock or potential common stock. This Statement shall be effective for
fiscal years ending after December 15, 1997. Earlier application is not
permitted. At this time the Company does not believe that this Statement
will have a significant impact on the financial position or results of
operations for the year ending September 27, 1998.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." This Statement shall be effective for
fiscal years ending after December 15, 1997. This statement, requiring only
additional informational disclosures, is effective for the Company's fiscal
year ending September 27, 1998.
In June 1997, the FASB issued SFAS No. 130, "ReportingReporting Comprehensive Income."
This Statement establishedestablishes 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 bestatements and is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. This statement,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 No. 131, "DisclosuresDisclosures about Segments of an
Enterprise and Related Information." This Statement established 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 shall beis 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. This statement,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.
ITEM 7A. 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 September 27, 1998, 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 September 27, 1998, 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 September 27, 1998 level.
At September 27, 1998, the Company had no other material financial
instruments subject to significant market exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial information
required to be filed are indexed on page F-1 and are incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-15-20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information aboutsets forth the name, age (as of January 1, 1999)
and position of each person who is a director or executive officer of the
Company's current directors and executive officers.Company.
Name Age(8) Position with the Company(7)Age Positions
- ----------------------- ------ ---------------------------------------- --- ---------
Robert J. Nugent(1)(4) 56Nugent(3)(6) 57 President, Chief Executive Officer and
Director
Charles W. Duddles(1) 57Duddles 58 Executive Vice President, Chief
Financial Officer, Chief Administrative
Officer and Director
Kenneth R. Williams 5556 Executive Vice President,
Marketing and Operations
Lawrence E. Schauf 5253 Executive Vice President and
Secretary
Donald C. Blough 4950 Vice President, ManagementChief Information
SystemsOfficer
Bruce N. Bowers 5152 Vice President, Logistics
Carlo E. Cetti 5354 Vice President, Human Resources and
Strategic Planning
Bradford R. Haley 3940 Vice President, Marketing
Communications
William F. Motts 5455 Vice President, Restaurant Development
Paul L. Schultz 4344 Vice President, Operations and
Domestic Franchising
David M. Theno, Ph.D. 4748 Vice President, Quality Assurance,
Research and Development and Product
Safety
Linda A. Vaughan 3940 Vice President, New Products, Promotions
and Consumer Research
Charles E. Watson 4243 Vice President, Real Estate and
Construction
Darwin J. Weeks 5152 Vice President, Controller and
Chief Accounting Officer
Jack W. Goodall(1)Goodall(3)(4)(5)(6) 59 60 Chairman of the Board
Michael E. Alpert(6) 55Alpert(4)(5) 56 Director
Jay W. Brown(2)(3) 52(6) 53 Director
Paul T. Carter(2)(3)(5) 75Carter(1)(2)(6) 76 Director
Edward Gibbons(3)Gibbons(1)(4)(6) 61 62 Director
Murray H. Hutchison(1)(2)(5) 60 Director
L. Robert Payne(2)(5) 64Payne(1)(4) 65 Director
- -----------------------------__________
(1) Member of the AdministrativeAudit Committee.
(2) Member of the AuditCompensation Committee.
(3) Member of the CompensationExecutive Committee.
(4) Member of the ExecutiveFinance Committee.
(5) Member of the FinanceNominating and Governance Committee.
(6) Member of the NominatingYear 2000 Ad Hoc Committee.
(7) Directors and officers are elected annually. Each director and officer
holds his office until his successor has been elected and qualified or
until he resigns or is removed.
(8) Age as of January 1, 1998.
-16-21
Mr. Nugent has been President and Chief Executive Officer of the Company
since April 1996. He was Executive Vice President of the Company from February
1985 to April 1996 and President and Chief Operating Officer of the
Jack in the Box Division of the Company
from May 1988 to April 1996. He has been a director since February 1988.
Mr. Nugent has 1819 years of experience with the Company in various executive and
operations positions.
Mr. Duddles has been Executive Vice President and Chief Administrative
Officer of the Company since May 1988. He has been Chief Financial Officer of
the Company since October 1985 and was Senior Vice President from October 1985
to May 1988. He has been a director since February 1988. Mr. Duddles has 1819
years of experience with the Company in various finance positions.
Mr. Williams has been Executive Vice President of the Company since May
1996. He was Senior Vice President of the Company from January 1993 to May 1996
and Executive Vice President of Marketing and Operations of Jack in the Box
Division from
November 1994 to May 1996. He was Executive Vice President of Operations for
Jack in the Box Division from May 1988 until November 1994. Mr. Williams has 3233 years of
experience with the Company in various operations positions.
Mr. Schauf has been Executive Vice President and Secretary of the Company
since August 1996. Prior to joining Foodmaker he was Senior Vice President,
General Counsel and Secretary of Wendy's International, Inc. from February 1991
to August 1996. He was previously Vice President, General Counsel and Secretary
of Wendy's International, Inc. from September 1987 to February 1991.
Mr. Blough has been Vice President, Chief Information Officer (formerly
Vice President, Management Information SystemsSystems) of the Company since August 1993
and was previously Division Vice President, Systems Development from June 1990
to August 19931993. Mr. Blough has 1920 years of experience with the Company in
various management information systems positions.
Mr. Bowers has been Vice President, Logistics (formerly Purchasing and
Distribution) of the Company, since April 1982. Mr. Bowers has 2829 years of
experience with the Company in various manufacturing, purchasing and
distribution positions.
Mr. Cetti has been Vice President, Human Resources and Strategic Planning
of the Company since March 1994. He was previously Vice President, Training and
Risk Management, from December 1992 to March 1994. Mr. Cetti has 1718 years of
experience with the Company in various human resources and training positions.
Mr. Haley has been Vice President of the Company and Vice President of
Marketing Communications of
Jack in the Box DivisionCompany since February 1995. He was previously Division Vice President,
Marketing Communications from October 1992 until February 1995. Prior to
joining Foodmaker,the Company, he was a marketing consultant, principally on the
development of new retail food products, from November 1991 to October 1992.
Mr. Motts has been Vice President of the Company and Vice President of
Restaurant Development of Jack in the Box DivisionCompany
since September 1988. Mr. Motts has 1516 years of experience with the Company in
various restaurant development positions.
Mr. Schultz has been Vice President of the Company since May 1988 and Vice
President of Operations and Domestic Franchising for Jack in the Box Division since
November 1994. He was Vice President of Domestic Franchising for Jack in the Box Division
from October 1993 until November 1994. He was previously Vice President of
Jack in the Box Operations-Division I from May 1988 to October 1993. Mr. Schultz
has 2625 years of experience with the Company in various operations positions.
Dr. Theno has been Vice President, Quality Assurance, Research and
Development and Product Safety of the Company since April 1994. He was Vice
President, Quality Assurance and Product Safety from March 1993 to April 1994.
Prior to joining Foodmaker, he was previously Managing Director and
Chief Executive Officer of Theno & Associates, Inc., an agribusiness consulting
firm, from January 1990 to March 1993 and Director of Technical Services for
Foster Farms from March 1982 to December 1989.
-17-22
Ms. Vaughan has been Vice President, New Products, Promotions and Consumer
Research of the Company since February 1996. She was Division Vice President,
New Products and Promotions from November 1994 until February 1996. Previously,
she was Manager, Product Marketing from October 1993 until November 1994 and
Manager Franchise Analysis from November 1992 to October 1993. She was Senior
Financial Analyst, Franchise Analysis, from October 1991 until November 1992.Ms. Vaughan has
11 years of experience with the Company in various operations and finance
positions.
Mr. Watson has been Vice President, Real Estate and Construction of the
Company since April 1997. From July 1995 to March 1997, he was Vice President,
Real Estate and Construction of Boston Chicken, Inc. He was Division Vice
President, Real Estate and Construction of the Company from November 1991
through June 1995. Mr. Watson has 1213 years of experience with the Company in
various real estate and construction positions.
Mr. Weeks has been Vice President, Controller and Chief Accounting Officer
of the Company since August 1995 and was previously Division Vice President and
Assistant Controller forof the Company from April 1982 through July 1995. Mr. Weeks
has been employed by the Company in various finance positions for 2122 years.
Mr. Goodall has been Chairman of the Board since October 1985. For more
than five years prior to his retirement in April 1996, he was President and
Chief Executive Officer of the Company. Mr. Goodall is a director of Ralcorp
Holdings, Inc.
Mr. Alpert has been a director of the Company since August 1992. Mr. Alpert
was a partner in the San Diego Officeoffice of the law firm of Gibson, Dunn & Crutcher
LLP for more than 5 years prior to his retirement onin August 1, 1992. He is
currently Advisory Counsel to Gibson, Dunn & Crutcher LLP. Gibson, Dunn &
Crutcher LLP provides legal services to the Company from time to time.
Mr. Brown has been a director of the Company since February 1996. Since
1995,He is
currently a principal with Westgate Group, LLC. From April 1996 to September
1998, Mr. Brown has beenwas President and CEO of Protein Technologies International,
Inc., the world's leading supplier of soy-based proteins to the food and paper
processing industries. He was Chairman and CEO of Continental Baking Company
from October 1984 to July 1995 and President of Van Camp Seafood Company from
August 1983 to October 1984. From July 1981 through July 1983, he served as Vice
President of Marketing for Jack in the Box.
Mr. Carter has been a director of the Company since June 1991. Mr. Carter
has been an insurance consultant for the Government Division of Corroon & Black
Corporation since February 1987. From February 1987 until December 1990, he was
also a consultant to the San Diego Unified School District on insurance matters.
He retired in February 1987 as Chairman and Chief Executive Officer of Corroon &
Black Corporation, Southwestern Region and as Director and Senior Vice President
of Corroon & Black Corporation, New York. Mr. Carter is a director of Borrego
Springs National Bank.
Mr. Gibbons has been a director of the Company since October 1985 and has
been a general partner of Gibbons, Goodwin, van Amerongen, ("GGvA"), an investment banking
firm for more than five years preceding the date hereof. Mr. Gibbons is also a
director of Robert Half International, Inc., Menlo Park, California, and Summer
Winds Garden Centers, Inc., Boise, Idaho.
Mr. Hutchison has been a director of the Company since May 1998. He served
18 years as Chief Executive Officer and Chairman of International Technology
Corp., one of the largest publicly traded environmental engineering firms in the
U.S., until his retirement in 1994. Mr. Hutchison is a director of Sunrise
Medical, Inc., Cadiz Land Company Inc., Epic Solutions, and the Huntington Hotel
Corp.
Mr. Payne has been a director of the Company since August 1986. He has been
President and Chief Executive Officer of Multi-Ventures, Inc. since February
1976 and was Chairman of the Board of Grossmont Bank, a wholly-owned subsidiary
of Bancomer, S.A., from February 1974 until October 1995. Multi-Ventures,Multi Ventures, Inc.
is a real estate development and investment company that is also the managing
partner of the San Diego Mission Valley Hilton and the Hanalei Hotel. He was a
principal in the Company prior to its acquisition by its former parent, Ralston
Purina Company, in 1968.
That portion of Foodmaker's definitive Proxy Statement appearing under
the captions "Information About the Board of Directors and Committees of the
Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" to be
filed with the Commission pursuant to Regulation 14A within 120 days after
September 28, 1997 and to be used in connection with its 1998 Annual Meeting
of Stockholders is hereby incorporated by reference.
-18-23
ITEM 11. EXECUTIVE COMPENSATION
That portion of Foodmaker's definitive Proxy Statement appearing under
the captioncaptions "Executive Compensation" to be filed with the Commission pursuant
to Regulation 14A within 120 days after September 28, 199727, 1998 and to be used in
connection with its 19981999 Annual Meeting of Stockholders is hereby incorporated
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That portion of Foodmaker's definitive Proxy Statement appearing under
the caption "Security Ownership of Certain Beneficial Owners and Management" to
be filed with the Commission pursuant to Regulation 14A within 120 days after
September 28, 199727, 1998 and to be used in connection with its 19981999 Annual Meeting of
Stockholders is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of Foodmaker's definitive Proxy Statement appearing under
the caption "Certain Transactions" to be filed with the Commission pursuant to
Regulation 14A within 120 days after September 28, 199727, 1998 and to be used in
connection with its 19981999 Annual Meeting of Stockholders is hereby incorporated
by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a)(1) Financial Statements. See the index to consolidated financial
statements on page F-1 of this report.
ITEM 14(a)(2) Financial Statement Schedules. Not applicable.
-19-24
ITEM 14(a)(3) Exhibits.
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation(8)Incorporation(5)
3.2 Restated Bylaws(7)
4.2Bylaws(4)
4.1 Indenture for the 9 1/4% Senior Notes due 1999(3)
4.3 Indenture for the 98 3/4%8% Senior Subordinated Notes
due 2002(3)2008(7)
(Instruments with respect to the registrant's long-term debt not in
excess of 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis have been omitted. The registrant
agrees to furnish supplementally a copy of any such instrument to the
Commission upon request.)
10.1 Amended and Restated10.1.1 Revolving Credit Agreement dated as of March 15, 1996, as amended as of April 5, 19961,
1998 by the
Agreement to Add Banks, amongand between Foodmaker, Inc. and the Banks named therein(6)
10.1.1therein(7)
10.1.2 First Amendment dated as of November 26, 1996August 24, 1998 to the
Amended and Restated Revolving Credit
Agreement dated as of March 15, 1996, as amended as of April 5, 19961, 1998 by the
Agreement to Add Banks, amongand between Foodmaker, Inc. and
the Banks named therein(8)
10.1.2 Second Amendment dated as of July 11, 1997 to the Amended
and Restated Revolving Credit Agreement dated as of
March 15, 1996, as amended as of April 5, 1996 by the
Agreement to Add Banks, among Foodmaker, Inc. and the Banks
named therein(10)therein
10.2 Purchase Agreements dated as of January 22, 1987 between Foodmaker,
Inc. and FFCA/IIP 1985 Property Company and FFCA/IIP1986IIP 1986 Property
Company(1)
10.3 Land Purchase Agreements dated as of February 18, 1987, by and
between Foodmaker, Inc. and FFCA/IPI 1984 Property Company and FFCA/IPI
1985 Property Company and Letter Agreement relating thereto(1)
10.4 Amended and Restated 1992 Employee Stock Incentive Plan(9)Plan(6)
10.5 Capital Accumulation Plan for Executives(2)
10.6 Supplemental Executive Retirement Plan(2)
10.7 Performance Bonus Plan(4)Plan
10.8 Deferred Compensation Plan for Non-Management Directors(5)Directors(3)
10.9 Non-Employee Director Stock Option Plan(5)Plan(3)
10.10 Form of Compensation and Benefits Assurance Agreement for
Executives(8)Executives(5)
23.1 Consents of KPMG Peat Marwick LLP
27 Financial Data Schedule (included only with electronic filing)
- ---------------------------__________
(1) Previously filed and incorporated herein by reference from registrant's
Registration Statement on Form S-1 (No. 33-10763) filed February 24, 1987.
(2) Previously filed and incorporated herein by reference from registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 1990.
(3) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 12, 1992.
(4) Previously filed and incorporated herein by reference from registrant's
Annual Report on form 10-K for the fiscal year ended September 27, 1992.
(5) Previously filed and incorporated herein by reference from registrant's
Definitive Proxy Statement dated January 17, 1995 for the Annual Meeting of
Stockholders on February 17, 1995.
(6) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 14, 1996.
(7)(4) Previously filed and incorporated herein by reference from registrant's
Current Report on Form 8-K as of July 26, 1996.
(8)(5) Previously filed and incorporated herein by reference from registrant's
Annual Report on Form 10-K for the fiscal year ended September 29, 1996.
(9)(6) Previously filed and incorporated herein by reference from registrant's
Definitive Proxy Statement dated January 12, 1996 for the Annual Meeting
of Stockholders on February 14, 1997.
(10)(7) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended July 6, 1997.
-20-
April 12, 1998.
ITEM 14(b) The Company did not file any reports on Form 8-K with the Securities
and Exchange Commission during the fourth quarter ended September 28, 1997.27,
1998.
ITEM 14(c) All required exhibits are filed herein or incorporated by reference
as described in Item 14(a)(3).
ITEM 14(d) All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statementsConsolidated Financial
Statements or notes thereto.
-21-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FOODMAKER, INC.
By: CHARLES W. DUDDLES
------------------------------------------
Charles W. Duddles Executive Vice
President, Chief Financial Officer, Chief
Administrative Officer and Director
Date: November 19, 199725, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ---------------- --------------------- -----------------
JACK W. GOODALL Chairman of the Board November 19, 1997
- --------------------25, 1998
------------
Jack W. Goodall
ROBERT J. NUGENT President, Chief Executive Officer, President November 19, 1997
- --------------------25, 1998
---------------- and Director (Principal Executive
Robert J. Nugent (Principal Executive Officer)
CHARLES W. DUDDLES Executive Vice President, Chief November 19, 1997
- ------------------- Chief25, 1998
------------------ Financial Officer, Chief
Charles W. Duddles Administrative Officer and
Director (Principal Financial
Officer)
DARWIN J. WEEKS Vice President, Controller and November 19, 1997
- -------------------25, 1998
--------------- Chief Accounting Officer
Darwin J. Weeks (Principal Accounting Officer)
MICHAEL E. ALPERT Director November 19, 1997
- -------------------25, 1998
-----------------
Michael E. Alpert
JAY W. BROWN Director November 19, 1997
- -------------------25, 1998
------------
Jay W. Brown
-22-
PAUL T. CARTER Director November 19, 1997
- -------------------25, 1998
--------------
Paul T. Carter
MURRAY H. HUTCHISON Director November 25, 1998
-------------------
Murray H. Hutchison
EDWARD GIBBONS Director November 19, 1997
- -------------------25, 1998
--------------
Edward Gibbons
L. ROBERT PAYNE Director November 19, 1997
- -------------------25, 1998
---------------
L. Robert Payne
-23-26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foodmaker, Inc. and Subsidiaries Consolidated Financial Statements for the
52-week periods ended September 28, 1997, September 29, 1996 and October 1,
1995.
Page
----
Independent Auditors' ReportReport. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets.Sheets . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations.Earnings . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows.Flows . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity.Equity . . . . . . . . . F-6
Notes to Consolidated Financial StatementsStatements. . . . . . . . . . . . F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Foodmaker, Inc.:
We have audited the accompanying consolidated balance sheets of Foodmaker, Inc.
and subsidiaries as of September 28, 199727, 1998 and September 29, 1996,28, 1997, and the
related consolidated statements of operations,earnings, cash flows and stockholders' equity
for the fifty-two weeks ended September 27, 1998, September 28, 1997 and
September 29, 1996 and October 1, 1995.1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foodmaker, Inc. and
subsidiaries as of September 28, 199727, 1998 and September 29,
1996,28, 1997, and the results of
their operations and their cash flows for the fifty-
twofifty-two weeks ended
September 27, 1998, September 28, 1997 and September 29, 1996 and October 1, 1995 in conformity with
generally accepted accounting principles.
San Diego, California KPMG PEAT MARWICK LLP
November 3, 1997San Diego, California
October 30, 1998
F-2
FOODMAKER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETSSeptember 27, September 28,
September 29,1998 1997
1996
-------- --------- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalentsequivalents. . . . . . . . . . . $ 9,952 $ 28,527
Accounts receivable, net . . . . . . . . . . . . . $ 28,527 $ 41,983
Accounts receivable, net. . . . . . . . . . . . . .13,705 10,482
12,482
InventoriesInventories. . . . . . . . . . . . . . . . . . . . .17,939 18,300
20,850
Prepaid expenses.expenses . . . . . . . . . . . . . . . . .40,826 42,853
21,161
-------- ----------------- ---------
Total current assetsassets. . . . . . . . . . . . . . .82,422 100,162
96,476
-------- ----------------- ---------
Property and equipment:
Land.Land . . . . . . . . . . . . . . . . . . . . . . .90,159 91,317
90,890
BuildingsBuildings. . . . . . . . . . . . . . . . . . . 332,840 302,125
Restaurant and other equipment . . . 302,125 293,690
Restaurant and other equipment.. . . . . 269,135 231,736
Construction in progress . . . . . . . . . . 231,736 213,159
Construction in progress.. 67,546 34,898
--------- ---------
759,680 660,076
Less accumulated depreciation
and amortization . . . . . . . . . . . . . 34,898 13,017
-------- --------
660,076 610,756
Less accumulated depreciation and amortization.. 227,973 201,289
--------- ---------
531,707 458,787
--------- ---------
Other assets, net. . . 201,289 177,817
-------- --------
458,787 432,939
-------- --------. . . . . . . . . . . . . 129,459 122,809
--------- ---------
$ 743,588 $ 681,758
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt . . . . . $ 1,685 $ 1,470
Accounts payable . . . . . . . . . . . . . . . 52,086 39,575
Accrued liabilities. . . . . . . . . . . . . . 171,974 152,168
--------- ---------
Total current liabilities . . . . . . . . . 225,745 193,213
--------- ---------
Long-term debt, net of current maturities. . . . 320,050 346,191
Other assets, netlong-term liabilities. . . . . . . . . . . 58,466 54,093
Deferred income taxes. . . . . . . . . . . . . . 2,347 382
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . - -
Common stock $.01 par value, 75,000,000
authorized, 40,756,899 and 40,509,469
issued, respectively . . . . . . . . . . . . 408 405
Capital in excess of par value . . . . . . . . 285,940 283,517
Accumulated deficit. . . . . . . . . . . . . . (114,905) (181,580)
Treasury stock, at cost, 2,828,974 and
1,412,654 shares, respectively . . . . . . . (34,463) (14,463)
--------- ---------
Total stockholders' equity . . . . . . . . 136,980 87,879
--------- ---------
$ 743,588 $ 681,758
========= =========
See accompanying notes to consolidated financial statements.
F-3
FOODMAKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Fiscal year
------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Restaurant sales. . . . . . . . . . . . $1,112,005 $ 986,583 $ 892,029
Distribution and other sales. . . . . . 26,407 45,233 132,421
Franchise rents and royalties . . . . . 35,904 35,426 34,048
Other . . . . . . . . . . . . . . . . . 49,740 4,500 4,324
---------- ---------- ----------
1,224,056 1,071,742 1,062,822
---------- ---------- ----------
Costs and expenses:
Costs of revenues:
Restaurant costs of sales . 122,809 124,223
-------- --------
$681,758 $653,638
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities. . . . . 358,612 327,188 290,955
Restaurant operating costs. . . . . . 587,580 510,176 477,976
Costs of long-term debt.distribution and other sales 25,727 44,759 130,241
Franchised restaurant costs . . . . . 23,043 23,619 20,039
Selling, general and administrative . . 91,583 80,438 72,134
Interest expense. . . . . . . . . . . . 33,058 40,359 46,126
---------- ---------- ----------
1,119,603 1,026,539 1,037,471
---------- ---------- ----------
Earnings before income taxes
and extraordinary item. . . . . . . . . 104,453 45,203 25,351
Income taxes. . . . . . . . . . . . . . . 33,400 9,900 5,300
---------- ---------- ----------
Earnings before extraordinary item. . . . 71,053 35,303 20,051
Extraordinary item - loss on early
extinguishment of debt, net of taxes. . (4,378) (1,252) -
---------- ---------- ----------
Net earnings. . . . . . . . . . . . . . . $ 1,47066,675 $ 1,812
Accounts payable34,051 $ 20,051
========== ========== ==========
Earnings per share - basic:
Earnings before extraordinary item. . . $ 1.82 $ .91 $ .52
Extraordinary item. . . . . . . . . . . (.11) (.03) -
---------- ---------- ----------
Net earnings per share. . . . . . . . . $ 1.71 $ .88 $ .52
========== ========== ==========
Earnings per share - diluted:
Earnings before extraordinary item. . . $ 1.77 $ .89 $ .51
Extraordinary item. . . . . . . . . . . (.11) (.03) -
---------- ---------- ----------
Net earnings per share. . . . . . . . . $ 1.66 $ .86 $ .51
========== ========== ==========
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . 39,575 29,293
Accrued liabilities39,092 38,933 38,818
Diluted. . . . . . . . . . . . . . . . . 152,168 115,958
-------- --------
Total current liabilities. . . . . . . . . . . . 193,213 147,063
-------- --------
Long-term debt, net of current maturities . . . . . . 346,191 396,340
Other long-term liabilities . . . . . . . . . . . . . 54,093 51,561
Deferred income taxes . . . . . . . . . . . . . . . . 382 7,290
Stockholders' equity:
Preferred stock . . . . . . . . . . . . . . . . . . -- --
Common stock, $.01 par value, 75,000,000 authorized,
40,509,469 and 40,253,179 issued, respectively . 405 403
Capital in excess of par value. . . . . . . . . . . 283,517 281,075
Accumulated deficit . . . . . . . . . . . . . . . . (181,580) (215,631)
Treasury stock, at cost, 1,412,654 shares . . . . . (14,463) (14,463)
-------- --------
Total stockholders' equity . . . . . . . . . . . 87,879 51,384
-------- --------
$681,758 $653,638
======== ========
See accompanying notes to consolidated financial statements.
F-3
FOODMAKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
September 28, September 29, October 1,
1997 1996 1995
--------- --------- ---------
Revenues:
Restaurant sales . . . . . . . . . . . . $ 986,583 $ 892,029 $ 804,084
Distribution sales . . . . . . . . . . . 45,233 132,421 179,689
Franchise rents and royalties. . . . . . 35,426 34,048 32,530
Other. . . . . . . . . . . . . . . . . . 4,500 4,324 2,413
--------- --------- ---------
1,071,742 1,062,822 1,018,716
--------- --------- ---------
Costs and expenses:
Costs of revenues:
Restaurant costs of sales . . . . . . 327,188 290,955 258,627
Restaurant operating costs. . . . . . 510,176 477,976 447,235
Distribution costs of sales . . . . . 44,759 130,241 175,688
Franchised restaurants costs. . . . . 23,619 20,039 21,929
Selling, general and administrative. . . 80,438 72,134 78,044
Equity in loss of FRI. . . . . . . . . . -- -- 57,188
Interest expense . . . . . . . . . . . . 40,359 46,126 48,463
--------- --------- ---------
1,026,539 1,037,471 1,087,174
--------- --------- ---------
Earnings (loss) before income taxes and
extraordinary item . . . . . . . . . . . 45,203 25,351 (68,458)
Income taxes . . . . . . . . . . . . . . . 9,900 5,300 500
--------- --------- ---------
Earnings (loss) before extraordinary item. 35,303 20,051 (68,958)
Extraordinary item - loss on early
extinguishment of debt, net of taxes . . (1,252) -- --
--------- --------- ---------
Net earnings (loss). . . . . . . . . . . . $ 34,051 $ 20,051 $ (68,958)
========= ========= =========
Earnings (loss) per share -
primary and fully diluted:
Earnings (loss) before
extraordinary item. . . . . . . . . . . $ .89 $ .51 $ (1.77)
Extraordinary item . . . . . . . . . . . (.03) -- --
--------- --------- ---------
Net earnings (loss) per share. . . . . . $ .86 $ .51 $ (1.77)
========= ========= =========
Weighted average shares outstanding. . . .40,113 39,776 39,301 38,915
See accompanying notes to consolidated financial statements.
F-4
FOODMAKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
September 28, September 29, October 1,thousands)
Fiscal year
---------------------------------
1998 1997 1996
1995
------- ------- -------- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) before extraordinary item. . . . . . . . . . .$ 71,053 $ 35,303 $ 20,051 $ (68,958)
Non-cash items included in operations:
Depreciation and amortization . . . . . 40,201 37,922 36,491 35,837
Deferred finance cost amortization. . . 1,913 2,036 2,499 2,467
Deferred income taxes . . . . . . . . . 585 (7,017) (2,296)
4,524
Equity in loss of FRI . . . . . . . . -- -- 57,188
Decrease (increase) in receivables. . . . . . . . .(3,223) 2,000 12,790
5,895
Decrease in inventories. . . . . . . . . 2,550 1,535 2,934
Increase in prepaid expenses . . . . . . (22,818) (7,421) (985)
Increase (decrease) in accounts payable. 10,282 (2,722) (4,900)
Increase (decrease) in other
accrued liabilitiesinventories . . . . . . . . . 361 2,550 1,535
Decrease (increase) in prepaid expenses . 1,153 (22,818) (7,421)
Increase (decrease) in accounts payable . 12,511 10,282 (2,722)
Increase in other accrued liabilities . . 25,925 39,218 20,121
(953)
------- ------- ---------------- --------- ---------
Cash flows provided by operating
activities . . . . . . . . . . . . . . 150,479 99,476 81,048
33,049
------- ------- ---------------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment.equipment . . . (111,098) (59,660) (33,232)
(27,033)
DispositionDispositions of property and equipment. . 5,431 3,357 4,597 4,416
Increase in trading area rights.rights . . . . . (6,763) (5,553) (1,086)
(9,745)
Other.Other . . . . . . . . . . . . . . . . . . (8,358) (1,401) (1,012)
6,538
------- ------- ---------------- --------- ---------
Cash flows used in investing activities . . . . . . . .(120,788) (63,257) (30,733)
(25,824)
------- ------- ---------------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt, . .
including current maturitiesmaturities. . . . . . (251,504) (51,817) (44,677) (8,385)
Proceeds from issuance of long-term debtdebt. 127,690 950 400 900
Borrowings under revolving bank loans.loans . -- -- 29,000. 224,500 - -
Principal repayments under revolving bank
loans.loans . . . . . . . . . . . . . . -- -- (29,000). . . (127,000) - -
Extraordinary loss on retirement of debt,
net of taxes. . . . . . . . . . . . . . (4,378) (1,252) -- --
Proceeds from issuance-
Repurchase of common stock . 2,444 80 160
------- ------- -------
Cash flows used in
financing activitiesstock. . . . . . . . (20,000) - -
Proceeds from issuance of common stock. . 2,426 2,444 80
--------- --------- ---------
Cash flows used in financing activities (48,266) (49,675) (44,197)
(7,325)
------- ------- ---------------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.equivalents . . . . . . . . . . . . . . . $ (18,575) $ (13,456) $ 6,118
$ (100)
======= ======= ================ ========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest, net of amounts capitalized.capitalized . . $ 30,551 $ 38,759 $ 46,712
$ 46,491
Income tax paymentspayments. . . . . . . . . . . 28,519 7,179 9,013 493
See accompanying notes to consolidated financial statements.
F-5
FOODMAKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Capital
Common stock
-------------------------- Capital in excess
Number of excess of par Accumulated Treasury
Shares Amount par value deficit stock Total
---------- ------ -------- --------- -------- --------- --------------------------------------------------------------------------------------------------------------------
Balance at October 2, 19941, 1995. . . . . 40,080,85440,214,849 $ 401 $280,837 $(166,724)402 $280,996 $(235,682) $(14,463) $100,051$31,253
Exercise of stock options
and warrants. . . . . . . . . . . 133,99538,330 1 159 -- -- 16079 - - 80
Net loss of the Company. . . . . . -- -- -- (68,958) -- (68,958)
---------- ----- -------- --------- -------- --------
Balance at October 1, 1995 . . . . 40,214,849 402 280,996 (235,682) (14,463) 31,253
Exercise of stock options
and warrantsearnings. . . . . . . . . . . 38,330 1 79 -- -- 80
Net earnings of the Company. . . . -- -- --- - - 20,051 --- 20,051
---------- ----- -------- --------- -------- --------
Balance at September 29, 1996.1996 . . 40,253,179 403 281,075 (215,631) (14,463) 51,384
Exercise of stock options
and warrants .warrants. . . . . . . . . . 256,290 2 1,711 -- --- - 1,713
Tax benefit associated with
exercise of stock options.options . . . -- --- - 731 -- --- - 731
Net earnings of the Company.earnings. . . . -- -- --. . . . . . . - - - 34,051 --- 34,051
---------- ----- -------- --------- -------- --------
Balance at September 28, 1997.1997 . . 40,509,469 405 283,517 (181,580) (14,463) 87,879
Exercise of stock options
and warrants. . . . . . . . . . 247,430 3 1,701 - - 1,704
Tax benefit associated with
exercise of stock options . . . - - 722 - - 722
Purchases of treasury stock . . . - - - - (20,000) (20,000)
Net earnings. . . . . . . . . . . - - - 66,675 - 66,675
---------- ----- -------- --------- -------- --------
Balance at September 27, 1998 . . 40,756,899 $ 405 $283,517 $(181,580) $(14,463) $ 87,879408 $285,940 $(114,905) $(34,463) $136,980
========== ===== ======== ========= ======== ========
See accompanying notes to consolidated financial statements.
F-6
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations - Foodmaker, Inc. (the "Company" or "Foodmaker")
operates and franchises Jack in the Box quick-serve restaurants with
operations principally in the western and southwestern United States.
Basis of presentation and fiscal year - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions are eliminated. Certain prior year
amounts in the consolidated financial statements have been reclassified to
conform with the 19971998 presentation. The Company's fiscal year is 52 or 53
weeks ending the Sunday closest to September 30. Fair valueThe financial statements
include the accounts of financialthe Company for and as of the 52 weeks ended
September 27, 1998, September 28, 1997 and September 29, 1996.
Financial instruments - The Company invests cash in excess
of operating requirements in short term, highly liquid investments with
original maturities of three months or less, which are considered as cash
equivalents. The fair value of these financial instrumentsthe Company's cash equivalents,
accounts receivable and accounts payable approximate the carrying amounts due
to their short duration.maturities. The fair values of each of the Company's long-term
debt instruments are based on quoted market values, where available, or on
the amount of future cash flows associated with each instrument discounted
using the Company's current borrowing rate for similar debt instruments of
comparable maturity. The carrying values
and the estimated fair values of the Company's long-term
debt at September 28, 199727, 1998 and September 29, 199628, 1997 approximate carrying
values.
The Company uses commodities hedging instruments, to reduce the risk of price
fluctuations related to future raw materials requirements for commodities
such as beef and pork. The terms of such instruments generally do not exceed
twelve months, and depend on the commodity and other market factors. Gains
and losses are deferred and subsequently recorded as cost of products sold
in the statement of earnings in the same period as the hedged transactions.
The Company uses interest rate swap agreements in the management of interest
rate exposure. The interest rate differential to be paid or received is
normally accrued as interest rates change, and is recognized as a component
of interest expense over the life of the agreements. At September 27, 1998,
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 September 27, 1998, the Company had no other material financial
instruments subject to significant market exposure.
Cash and cash equivalents - The Company invests cash in excess of operating
requirements in short term, highly liquid investments with original
maturities of three months or less, which are considered as cash equivalents.
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Preopening costs are those typically associated with the opening of a
new restaurant and consist primarily of labor and food costs relating to
preopeningemployee training activities.costs. Preopening
costs included in prepaid
expenses, are amortized over a one-year period commencing on the date a
restaurant opens.expensed as incurred.
Property and equipment at cost - Expenditures for new facilities and those
that substantially increase the useful lives of the property are capitalized.
Facilities leased under capital leases are stated at the present value of
minimum lease payments at the beginning of the lease term, not to exceed
fair value. Maintenance, repairs, and minor renewals are expensed as
incurred. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts and gains or
losses on the dispositions are reflected in results of operations.
F-7
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Buildings, equipment and leasehold improvements are depreciated using the
straight-line method based on the estimated useful lives of the assets or
over the lease term for certain capital leases (buildings 15 to 33 years and
equipment 3 to 30 years).
Other assets primarily include trading area rights, lease acquisition costs,
deferred franchise contract costs, deferred finance costs and goodwill.
Trading area rights represent the amount allocated under purchase accounting
to reflect the value of operating existing restaurants within their specific
trading area. These rights are amortized on a straight-
linestraight-line basis over the
period of control of the property, not exceeding 40 years, and are retired
when a restaurant is franchised or sold.
Lease acquisition costs represent the acquired values of existing lease
contracts having lower contractual rents than fair market rents and are
amortized over the remaining lease term.
F-7
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DollarsAlso included in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Otherother assets primarily includeare deferred franchise contract costs deferred
finance costs and goodwill. Deferred franchise contract costswhich
represent the acquired value of franchise contracts which were in existence at the time
the Company was acquired in 1988 and are amortized over the term of the
franchise agreement, usually 20 years. Deferredyears; deferred finance costs which are
amortized on the interest method over the terms of the respective loan
agreements, from 4 to 10 years. Goodwillyears; and goodwill which represents the excess of
purchase price over the fair value of net assets acquired and is amortized
on a straight-line basis over 40 years. The Company assesses the
recoverability of intangible assets by determining whether the
amortization of the balance over its remaining life can be recovered
through projected undiscounted future cash flows. Based on these
calculations, the Company has determined that these intangible assets were
not impaired and no reduction in the related estimated useful lives are
warranted.
Impairment of Long-Lived Assets - The Company adopted Statement of Financial
Accounting Standards ("SFAS") 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1997.
SFAS 121 requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. The statement also addresses the accounting for
long-lived assets that are held for disposal.
The adoption
of SFAS 121 did not result in a material impact on the financial position
or results of operations of the Company.
Franchise operations - Franchise arrangements generally provide for initial
license fees of approximately $50 (formerly $25) per restaurant and continuing payments to
the Company based on a percentage of sales. Among other things, the
franchisee may be provided the use of land and building, generally for a
period of 20 years, and is required to pay negotiated rent, property taxes,
insurance and maintenance. Franchise fees are recorded as revenue when the
Company has substantially performed all of its contractual obligations.
Expenses associated with the issuance of the franchise are expensed as
incurred. Franchise rents and royalties are recorded as income on an accrual
basis. Gains on sales of restaurant businesses to franchisees, which have not
been material, are recorded as other revenues when the sales are consummated
and certain other criteria are met.
Income taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and tax loss and credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Net earnings (loss) per share for each year is- The Company adopted SFAS 128, Earnings per Share, in
1998. SFAS 128 requires the presentation of basic earnings per share,
computed based onusing the weighted average number of shares outstanding during the
period, and diluted earnings per share, computed using the additional
dilutive effect of all common and common equivalent shares
outstanding. Whenstock equivalents. The Company's diluted
earnings per share computation includes the dilutive impact of stock options
and warrants are included as
share equivalents usingwarrants. All prior periods have been restated to conform with the
treasury stock method. For all years
presented, primary and fully diluted earnings (loss)provisions of SFAS 128.
F-8
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share are not
materially different.data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock options - The Company accounts for stock options under the intrinsic
value based method, as prescribed by Accounting Principles Board ("APB")
Opinion No. 25, whereby compensation expense is recognized for the excess, if
any, of the quoted market price of the Company stock at the date of grant
over the option price. The Company's policy is to grant stock options at fair
value at the date of grant. The Company has included pro forma information in
Note 8 to the consolidated financial statements,7, as permitted by SFAS 123, Accounting for Stock-Based Compensation.
F-8
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising costs - The Company maintains a marketing fund consisting of
funds contributed by the Company equal to at least 5% of gross sales of all
Company-operated Jack in the Box restaurants and contractual marketing fees
paid monthly by franchisees for restaurants operated in the United States.
Production costs of commercials, programming and other marketing activities
are expensed to the marketing fund when the advertising is first used and the
costs of advertising are charged to operations as incurred. The Company's
contributions to the marketing fund and other marketing expenses, which are
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations,earnings, were $58,256, $51,870 and $47,183 in
1998, 1997 and $44,871 in 1997, 1996, and 1995, respectively.
Estimations - ManagementIn preparing the consolidated financial statements in
conformity with generally accepted accounting principles, management is
required to make certain assumptions and estimates in conformity with generally accepted accounting principles that affect reported
amounts of assets, liabilities, revenues, expenses and the disclosure of
contingencies, revenues and expenses.contingencies. Actual amounts could differ from these estimates.
2. FAMILY RESTAURANTS, INC.
On January 27, 1994, Foodmaker, Apollo FRI Partners, L.P. ("Apollo") and
Green Equity Investors, L.P. acquired Restaurant Enterprises Group, Inc.
("REGI"), a company that owned, operated and franchised various restaurant
chains including El Torito, Carrows and Coco's. Contemporaneously, REGI
changed its name to Family Restaurants, Inc. ("FRI"). Concurrently,
Foodmaker contributed its entire Chi-Chi's Mexican restaurant chain to FRI
in exchange for a 39% equity interest in FRI, cash and other
considerations. Subsequently, as a result of substantial sales declines,
FRI wrote off the goodwill attributable to Chi-Chi's in its quarter ended
December 25, 1994. The Company then wrote off its remaining investment in
FRI in its fiscal year 1995.
Because of FRI's continuing substantial losses and resulting increased
borrowing requirements, the major FRI stockholders were required to
purchase a participation in any additional advances by the banks to FRI.
Rather than become liable for these advances, the Company, by an agreement
dated November 20, 1995, transferred all of its stock and warrants to
Apollo. Since the Company's investment in FRI was previously written off
in fiscal 1995, the consummation of this agreement had no further effect
on the consolidated financial condition or results of operations of the
Company.
The Company provided distribution services to a portion of FRI's Mexican
restaurants, principally those operated under the Chi-Chi's name, through
May 1997. Distribution sales to those restaurants during the period the
Company held an investment in FRI was $10,453 and $78,195 in 1996 and
1995, respectively.
F-9
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
3. LONG-TERM DEBT
September 28, September 29,1998 1997
1996
------------ ------------------------------------------------------------------------------------------
The detail of long-term debt at each year end follows:
Senior notes, 9 1/4%Bank loans, variable interest due March 1, 1999,
redeemable beginning March 1, 1997. . . . . . . . . . . . . . . . $125,000 $175,000
Senior subordinated notes, 9 3/4% interest, due June 1, 2002,
redeemable beginning June 1, 1997rate based on established
market indicators which approximate the prime rate or
less. . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,500 $ -
Senior subordinated notes, 8 3/8% interest, net of
discount of $200 reflecting an 8.4% effective
interest rate due April 15, 2008, redeemable
beginning April 15, 2003. . . . . . . . . . . . . . . . 124,800 -
Senior notes, 9 1/4% interest, due March 1, 1999,
repaid in 1998. . . . . . . . . . . . . . . . . . . . . - 125,000
Senior subordinated notes, 9 3/4% interest, due
June 1, 2002, repaid in 1998. . . . . . . . . . . . . . - 125,000
Financing lease obligations, net of discounts of
$2,172$1,794 and $2,548$2,172 reflecting a 10.3% effective
interest rate, semi-annual payments of $3,413
and $747 to cover interest and sinking fund
requirements and due in equal installments
January 1, 2003 and November 1, 2003, respectively. . . . . . . . . . . . . . . . . .68,206 67,828 67,452
Secured notes, 11 1/2% interest, due in monthly
installments through May 1, 2005. . . . . . . . . . . . . . . . .8,171 8,684 9,356
Secured notes, 9 1/2% interest, due in monthly
installments through August 1, 2017 . . . . . . . . . . . . . . .7,931 8,320 8,456
Capitalized lease obligations, 11% average
interest rate . . . . . . . . . . . . . . . . . . . . . 13,529 11,519 11,043
Other notes, principally unsecured, 10% average
interest rate.rate . . . . . . . . . . . . . . . . . . . . . 1,598 1,310 1,845
-------- --------
321,735 347,661 398,152
Less current portion. . . . . . . . . . . . . . . . . . . . . .1,685 1,470 1,812
-------- --------
$320,050 $346,191 $396,340
======== ========
In September 1997,F-9
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
2. LONG-TERM DEBT (continued)
On April 1, 1998, the Company repaid $50 million of its 9 1/4% senior
notes. The retirement of these notes resulted in an extraordinary loss of
$1,602, net of income tax benefits of $350 on the early extinguishment of
the debt.
The Company'sentered into a new revolving bank credit
agreement, which was amended and
restatedexpires March 15, 1996, expires December 31, 1998,2003 and provides for a credit facility of
up to $60$175 million, including letters of credit of up to $25 million. The
credit agreement requires the payment of an annual commitment fee of
either 1/2% or 3/8%approximately .2% of the unused credit line dependingline. At September 27, 1998, the
Company had borrowings of $97.5 million and approximately $71.9 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. The
retirement of these notes resulted in an extraordinary loss of $1,602, less
income tax benefits of $350, on the Company's leverage ratio. Theearly extinguishment of the debt. In 1998
the Company had norepaid 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, and
incurred an extraordinary loss of $6,978, less income tax benefits of $2,600,
relating to the early extinguishment of the debt.
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 agreement at the end of fiscal years 1997 or 1996.new bank credit
facility. The Company is subject to a number of covenants under its various
credit agreements including limitations on additional borrowings, capital
expenditures, lease commitments and dividend payments, and requirements to
maintain certain financial ratios, cash flows and net worth. The secured
notes and bank loans are secured by substantially all the Company's real and
personal property. F-10
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
3. LONG-TERM DEBT (continued)In addition, certain of the Company's real estate and
equipment secure other indebtedness.
In early January 1994, the Company entered into financing lease arrangements
with two limited partnerships (the "Partnerships"), in which an interestinterests in 76
restaurants for a specified period of time were sold. The acquisition of the
properties, including costs and expenses, was funded through the issuance by
a special purpose corporation acting as agent for the Partnerships of $70
million senior secured notes. On January 1, 2003 and November 1, 2003, the
Company must make offers to reacquire 50% of the properties at each date at a
price which is sufficient, in conjunction with previous sinking fund
deposits, to retire the notes. If the Partnerships reject the offers, the
Company may purchase the properties at less than fair market value or cause
the Partnerships to fund the remaining principal payments on the notes and,
at the Company's option, cause the Partnerships to acquire the Company's
residual interest in the properties. If the Partnerships are allowed to
retain their interests, the Company has available options to extend the
leases for total terms of up to 35 years, at which time the ownership of the
property will revert to the Company. The transactions are reflected as
financings with the properties remaining in the Company's consolidated
financial statements.
Aggregate maturities and sinking fund requirements on all long-term debt are
$128,087, $3,249, $3,433$3,346, $3,534, $3,763 and $128,656$101,494 for the years 19992000 through 2002,2003,
respectively.
Interest capitalized during the construction period of restaurants was
$1,203, $683 and $200 in 1998, 1997 and $161 in 1997, 1996, and 1995, respectively.
4.F-10
3. LEASES
As Lessee - The Company leases restaurant and other facilities under leases
having terms expiring at various dates through 2046. The leases generally
have renewal clauses of 5 to 20 years exercisable at the option of the
Company and in some instances have provisions for contingent rentals based
upon a percentage of defined revenues. Total rent expense for all operating
leases was $94,275, $84,964 $81,006 and $75,680,$81,006, including contingent rentals of
$4,561, $4,513 and $3,903 in 1998, 1997 and $2,843 in 1997, 1996, and 1995, respectively.
Future minimum lease payments under capital and operating leases are as
follows:
Fiscal Capital Operating
yearYear leases leases
------ ------- --------
1998. . . . .---------------------------------------------------------------------
1999. . . . . . . . . . . . . . . . . . . $ 1,7531,979 $ 74,456
1999. . . . . . . . . . . . . . . . . . . . . . . 1,728 71,91683,473
2000. . . . . . . . . . . . . . . . . . . . . . . 1,706 66,2491,961 79,618
2001. . . . . . . . . . . . . . . . . . . . . . . 1,690 62,2151,959 75,463
2002. . . . . . . . . . . . . . . . . . . . . . . 1,688 59,373
Thereafter.1,959 71,892
2003. . . . . . . . . . . . . . . . . . . . 15,650 388,064
------- --------
Total minimum lease payments . . . . . . . . . . . 24,215 $722,273
Less amount representing interest. . . . . . . . . 12,696 ========
-------
Present value of obligations under capital leases. 11,519
Less current portion1,959 69,192
Thereafter. . . . . . . . . . . . . . . . 456
-------
Long-term18,183 466,675
-------- ---------
Total minimum lease payments. . . . . . . 28,000 $ 846,313
=========
Less amount representing interest . . . . 14,471
--------
Present value of obligations under
capital lease obligations.leases. . . . . . . . $11,063
=======
F-11
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
4. LEASES (continued). . . . . 13,529
Less current portion. . . . . . . . . . . 554
--------
Long-term capital lease obligations . . . $ 12,975
========
Building assets recorded under capital leases were $10,403$12,301 and $9,642,$10,403, net
of accumulated depreciation of $4,228$4,790 and $3,639,$4,228, as of September 28, 199727, 1998
and September 29, 1996,28, 1997, respectively.
As Lessor - The Company leases or subleases restaurants to certain
franchisees and others under agreements which generally provide for the
payment of percentage rentals in excess of stipulated minimum rentals,
usually for a period of 20 years. Total rental revenue was $22,747, $22,624
$21,497 and $21,309,$21,497, including contingent rentals of $6,976, $6,744 and $5,469 in
1998, 1997 and $4,763 in 1997, 1996, and 1995, respectively.
The minimum rents receivable under these non-cancelable leases are as
follows:
Fiscal Sales-type Operating
yearYear leases leases
------ ------- --------
1998. . . .----------------------------------------------------------------------
1999. . . . . . . . . . . . . . . . . . . . $ 44 $ 16,911
1999. . . .16,663
2000. . . . . . . . . . . . . . . . . . . . 44 16,325
2000. . . .16,177
2001. . . . . . . . . . . . . . . . . . . . 44 15,842
2001. . . .15,475
2002. . . . . . . . . . . . . . . . . . . . 44 15,487
2002. . . .14,684
2003. . . . . . . . . . . . . . . . . . . . 45 14,78913,630
Thereafter. . . . . . . . . . . . . . . . . . . . 174 78,526129 64,269
----- --------
Total minimum future rentals. . . . . . . . . . . 395 $157,880350 $140,898
========
Less amount representing interest . . . . . . . . 144113
-----
Net investment (included in other assets) . . . . $ 251237
=====
Land and building assets held for lease were $58,288$55,285 and $65,156,$58,288, net of
accumulated depreciation of $18,508$20,157 and $17,038,$18,508, as of September 28,199727, 1998 and
September 29, 1996,28, 1997, respectively.
5. INCOME TAXES
The fiscal year income taxes consist of the following:
1997 1996 1995
--------- --------- ---------
Federal - current . . . . . . . . . . . . $ 12,222 $ 7,179 $ (388)
- deferred. . . . . . . . . . . . (6,248) (2,680) 345
State - current . . . . . . . . . . . . 4,345 737 256
- deferred. . . . . . . . . . . . (769) 64 287
-------- ------- -------
Subtotal. . . . . . . . . . . . . . . . . 9,550 5,300 500
Income tax benefit of extraordinary item. 350 -- --
-------- ------- -------
Income taxes. . . . . . . . . . . . . . . $ 9,900 $ 5,300 $ 500
======== ======= =======
F-12F-11
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
5.4. INCOME TAXES
(continued)The fiscal year income taxes consist of the following:
1998 1997 1996
------------------------------------------------------------------------------
Federal- current. . . . . . . . . . . . . . $ 24,618 $ 12,222 $ 7,179
- deferred . . . . . . . . . . . . . 3,707 (6,248) (2,680)
State - current. . . . . . . . . . . . . . 5,597 4,345 737
- deferred . . . . . . . . . . . . . (3,122) (769) 64
-------- -------- --------
Subtotal 30,800 9,550 5,300
Income tax benefit of extraordinary item. . 2,600 350 -
-------- -------- --------
Income taxes. . . . . . . . . . . . . . . . $ 33,400 $ 9,900 $ 5,300
======== ======== ========
A reconciliation of fiscal year income taxes with the amounts computed at
the statutory federal rate of 35% follows:
1997 1996 1995
--------- --------- ---------
Computed at federal statutory rate. . . . $ 15,821 $ 8,874 $(23,960)
State income taxes, net of federal effect 2,324 521 353
Jobs tax credit wages . . . . . . . . . . (180) -- (733)
Addition (reduction) to
valuation allowance. . . . . . . . . . . (10,816) (4,295) 26,280
Adjustment of tax loss, contribution and
tax credit carryforwards . . . . . . . . 1,986 -- --
Benefit of reattributed net operating
loss carryback . . . . . . . . . . . . . -- -- (1,420)
Other, net. . . . . . . . . . . . . . . . 765 200 (20)
-------- ------- -------
$ 9,900 $ 5,300 $ 500
1998 1997 1996
---------------------------------------------------------------------------------
Computed at federal statutory rate. . . . . . $ 36,559 $ 15,821 $ 8,874
State income taxes, net of federal effect . . 1,609 2,324 521
Jobs tax credit wages . . . . . . . . . . . . (861) (180) -
Reduction to valuation allowance. . . . . . . (4,581) (10,816) (4,295)
Adjustment of tax loss, contribution and
tax credit carryforwards. . . . . . . . . . 584 1,986 -
Other, net. . . . . . . . . . . . . . . . . . 90 765 200
-------- -------- -------
$ 33,400 $ 9,900 $ 5,300
======== ======== =======
=======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at each year
end are presented below:
September 28, September 29,
1997 1996
1998 1997
------------------------------------------------------------------------------
Deferred tax assets:
Tax loss and tax credit carryforwards. . . . . . . . . $ 36,867 $ 50,261
Accrued insurance. . . . . . . . . . . . . . . . . . . 18,610 18,938
Accrued pension and postretirement benefits. . . . . . 12,756 9,759
Accrued vacation pay expense . . . . . . . . . . . . . 7,019 6,446
Other reserves and allowances. . . . . . . . . . . . . 7,586 5,671
Deferred income. . . . . . . . . . . . . . . . . . . . 4,282 3,763
Other, net . . . . . . . . . . . . . . . . . . . . . . 5,842 4,335
-------- --------
Total gross deferred tax assets. . . . . . . . . . . . 92,962 99,173
Less valuation allowance . . . . . . . . . . . . . . . 29,815 34,396
-------- --------
Net deferred tax assets. . . . . . . . . . . . . . . . 63,147 64,777
-------- --------
Deferred tax assets:
Tax loss, contribution and tax credit
carryforwards . . . . . . . . . . . . . . . . $ 50,261 $ 57,698
Insurance reserves . . . . . . . . . . . . . . 18,938 16,569
Accrued pension and postretirement benefits. . 9,759 8,775
Accrued vacation pay expense . . . . . . . . . 6,446 6,257
Other reserves and allowances. . . . . . . . . 5,671 5,049
Deferred income. . . . . . . . . . . . . . . . 3,763 3,840
Other, net . . . . . . . . . . . . . . . . . . 4,335 3,352
------- -------
Total gross deferred tax assets. . . . . . . . 99,173 101,540
Less valuation allowance . . . . . . . . . . . 34,396 45,212
------- -------
Net deferred tax assets. . . . . . . . . . . . 64,777 56,328
------- -------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation. . . . . . . . . . . . . 53,203 50,405
Intangible assets. . . . . . . . . . . . . . . . . . . 12,291 14,435
Other, net . . . . . . . . . . . . . . . . . . . . . . - 319
-------- --------
Total gross deferred tax liabilities . . . . . . . . . 65,494 65,159
-------- --------
Net deferred tax liability . . . . . . . . . . . . . . $ 2,347 $ 382
======== ========
F-12
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in depreciation . . . . . . . . . 50,405 47,707
Intangible assets . . . . . . . . . . . . . . 14,435 15,592
Other, net . . . . . . . . . . . . . . . . . . 319 319
------- -------
Total gross deferred tax liabilities . . . . . 65,159 63,618
------- -------
Net deferred tax liability . . . . . . . . . . $ 382 $ 7,290
======= =======thousands, except per share data)
(continued)
4. INCOME TAXES (continued)
The valuation allowance of $29,815 as of September 27, 1998 and $34,396
as of September 28, 1997 and $45,212
as of September 29, 1996 represents deferred tax assets that may not be
realized by the reversal of future taxable differences. The net change in
the valuation allowance was a decrease of $4,581 for fiscal year 1998 and a
decrease of $10,816 for fiscal year 1997 and
a decrease of $4,295 for fiscal year 1996.1997. These decreases related to the
expected future use of tax loss and tax credit and charitable contribution carryforwards. Management
believes it is more likely than not that the net deferred tax assets will
be realized through future taxable income or alternative tax strategies.
F-13
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
5. INCOME TAXES (continued)
At September 28, 1997,27, 1998, the Company had tax loss carryforwards and
general
business credit carryforwards which expire in 2000 through 2012. The
Company has alternative minimum tax credit carryforwards which have no
expiration date; however, they may only be utilizedused to reduce
any regular tax liability the Company may havefederal income taxes. These carryforwards begin to expire in the future.2000.
From time to time the Company may take positions for filing its tax
returns which may differ from the treatment of the same item for financial
reporting purposes. The ultimate outcome of these items will not be known
until such time as the Internal Revenue Service has completed its examination
or until the statute of limitationlimitations has passed. Theexpired. As of September 27, 1998,
the Internal Revenue Service hashad completed its examinations of the Company's
federal income tax returns through fiscal year 1993.
6.1994.
5. RETIREMENT, SAVINGS AND BONUS PLANS
The Company has non-contributory defined benefit pension plans covering
substantially all salaried and hourly employees meeting certain eligibility
requirements. These plans are subject to modification at any time. The plans
provide retirement benefits based on years of service and compensation. It is
the Company's practice to fund retirement costs as necessary.
The components of the fiscal year net defined benefit pension expense are as
follows:
1998 1997 1996
1995
--------- --------- --------------------------------------------------------------------------------------
Present value of benefits earned during
the year. . . . . . . . . . . . . . . $ 3,116 $ 3,069 $ 2,634 $ 2,303
Interest cost on projected benefit
obligations.obligations . . . . . . . . . . . . . .4,047 4,337 3,659 3,355
Actual return on plan assets. . . . . . .1,771 (7,993) (3,630) (3,300)
Net amortization. . . . . . . . . . . . .(6,255) 4,913 978
1,431
-------- ------- --------------- -------
Net pension expense for the period. . . .$ 2,679 $ 4,326 $ 3,641
$ 3,789
======== ======= ========
The funded status of the plans is as follows:
September 28, 1997 September 29, 1996
------------------------- -------------------------
Qualified Non-qualified Qualified Non-qualified
plans plan plans plan
-------- ------- -------- -------
Actuarial present value of benefit obligations:
Vested benefits. . . . . . . . . . . . . . . . $(38,264) $(7,448) $(29,021) $(5,204)
Nonvested benefits . . . . . . . . . . . . . . (3,668) (1,398) (6,859) (715)
------- ------- -------- -------
Accumulated benefit obligation . . . . . . . . (41,932) (8,846) (35,880) (5,919)
Effect of future salary increases. . . . . . . (10,796) (3,984) (8,374) (2,780)
------- ------- -------- -------
Projected benefit obligation. . . . . . . . . . (52,728) (12,830) (44,254) (8,699)
Plan assets at fair value . . . . . . . . . . . 50,916 -- 39,677 --
------- ------- -------- -------
Projected benefit obligations in
excess of plan assets. . . . . . . . . . . . . (1,812) (12,830) (4,577) (8,699)
Unrecognized prior service cost . . . . . . . . (208) 5,366 (243) 2,774
Unrecognized net transition obligation. . . . . 37 112 47 139
Unrecognized net (gain) loss. . . . . . . . . . 2,180 254 4,046 (534)
------- ------- -------- -------
Pension liability . . . . . . . . . . . . . . . $ 197 $(7,098) $ (727) $(6,320)
======= ======= ======== =======
F-14=======
F-13
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
6.5. RETIREMENT, SAVINGS AND BONUS PLANS (continued)
The funded status of the plans at each year end is as follows:
1998 1997
---------------------- -----------------------
Non- Non-
Qualified qualified Qualified qualified
plans plan plans plan
-------------------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested benefits. . . . . . $(50,679) $ (9,912) $(38,264) $ (7,448)
Nonvested benefits . . . . (3,903) (1,852) (3,668) (1,398)
-------- -------- -------- --------
Accumulated benefit
obligation . . . . . . . (54,582) (11,764) (41,932) (8,846)
Effect of future salary
increases. . . . . . . . (10,787) (4,530) (10,796) (3,984)
-------- -------- -------- --------
Projected benefit obligation (65,369) (16,294) (52,728) (12,830)
Plan assets at fair value. . . 55,454 - 50,916 -
-------- -------- -------- --------
Projected benefit obligations
in excess of plan assets . . (9,915) (16,294) (1,812) (12,830)
Unrecognized prior service
cost . . . . . . . . . . . . (173) 4,898 (208) 5,366
Unrecognized net transition
obligation . . . . . . . . . 28 85 37 112
Unrecognized net loss. . . . . 9,628 2,795 2,180 254
-------- -------- -------- --------
Pension liability. . . . . . . $ (432) $ (8,516) $ 197 $ (7,098)
======== ======== ======== ========
In determining the present values of benefit obligations, the Company's
actuaries assumed discount rates of 7.00% and 7.75% at each year end,
a 7.75% discount ratethe measurement dates
of June 30, 1998 and a 5%September 28, 1997, respectively. The assumed rate of
increase in compensation levels were assumed.was 4% in 1998 and 5% in 1997. The long-term
rate of return on assets was 8.5% in both years. Assets of the qualified
plans consist primarily of listed stocks and bonds.
The Company maintains a savings plan pursuant to Section 401(k) of the
Internal Revenue Code, which allows administrative and clerical employees who
have satisfied the service requirements and reached age 21, to defer from 2%
to 12% of their pay on a pre-tax basis. The Company contributes an
amount equal to 50% of the first 4% of compensation that is deferred by the
participant. The Company's contributions under this plan were $1,141, $1,138
and $1,067 in 1998, 1997 and $498 in 1997, 1996, and 1995, respectively. The Company also maintains
an unfunded, non-qualified deferred compensation plan, which was created in
1990 for key executives and other members of management who were then
excluded from participation in the qualified savings plan. This plan allows
participants to defer up to 15% of their salary on a pre-tax basis. The
Company contributes an amount equal to 100% of the first 3% contributed by
the employee. The Company's contributions under the non-
qualifiednon-qualified deferred
compensation plan were $372, $324 and $233 in 1998, 1997 and $212 in 1997,
1996, and 1995,
respectively. In each plan, a participant's right to Company contributions
vests at a rate of 25% per year of service.
The Company maintains a bonus plan that allows certain officers and
employeesmanagement of the Company to earn annual cash bonuses based upon achievement
of certain financial and performance goals approved by the compensation
committee of the Company's Board of Directors. Under this plan, $3,834,
$3,493 $3,172 and $710$3,172 was expensed in 1998, 1997 and 1996, and 1995,
respectively.
F-14
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
5. RETIREMENT, SAVINGS AND BONUS PLANS (continued)
The Company adoptedmaintains a deferred compensation plan for non-management
directors in the second quarter of 1995.directors. Under the plan's equity option, those who are eligible to receive
directors' fees or retainers may choose to defer receipt of their
compensation. The amounts deferred are converted into stock equivalents at
the then current market price of the Company's common stock. The Company
provides a credit equal to 25% of the compensation initially deferred. Under
this plan, a total of $262, $835 $186
and $116$186 was expensed in 1998, 1997 1996 and
1995,1996, respectively, for both the deferment credit and the stock appreciation
on the deferred compensation.
7.6. POSTRETIREMENT BENEFIT PLAN
The Company sponsors a health care plan that provides postretirement medical
benefits for employees who meet minimum age and service requirements. The
plan is contributory, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and coinsurance.
The Company's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management.
The normal net periodic postretirement benefit cost was $1,323, $1,201 and
$1,440 in 1997, 1996 and 1995, respectively. The plan was amended to
eliminate retiree medical benefits coverage for those under age 45 at
September 30, 1995, resulting in a curtailment gain of $1,900.
F-15
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
7. POSTRETIREMENT BENEFIT PLAN (continued)
The components of the fiscal year net periodic postretirement benefit cost
are as follows:
1998 1997 1996
1995
--------- --------- -------------------------------------------------------------------------------------
Service cost. . . . . . . . . . . . . . . $ 517 $ 530 $ 505 $ 675
Interest cost . . . . . . . . . . . . . . 1,021 913 816 854
Net amortization and deferral . . . . . . (88) (120) (120)
(89)
Curtailment gain. . . . . . . . . . . . . -- -- (1,900)
------- ------- -------- -------
Net periodic postretirement benefit cost (gain). . . . . . . . . . . . . . .cost. $ 1,450 $ 1,323 $ 1,201
$ (460)
======= ======= ======== =======
The plan's funded status reconciled with amounts recognized in the Company's
consolidated balance sheets at each year end is as follows:
September 28, September 29,1998 1997
1996
-------- ------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
RetireesRetirees. . . . . . . . . . . . . . . . . . . . . $ (1,577)(1,916) $ (1,343)(1,577)
Fully eligible active plan participants. . . . (3,183) (2,777)
Other active plan participants . . . . . (3,930) (3,183)
Other active plan participants. . . . . . . . . . (10,424) (8,441) (7,684)
-------- --------
(16,270) (13,201) (11,804)
Plan assets at fair valuevalue. . . . . . . . . . . . -- --. - -
-------- --------
Accumulated postretirement benefit obligation
in excess of plan assets . . . . . . . . . . . . (16,270) (13,201) (11,804)
Unrecognized prior service costcost. . . . . . . . . -- --. - -
Unrecognized net gaingain. . . . . . . . . . . . . . . (352) (1,939) (2,062)
-------- --------
Accrued postretirement benefit cost included
in other long-term liabilities.liabilities . . . . . . . . . $(16,622) $(15,140) $(13,866)
======== ========
In determining the above information, the Company's actuaries assumed a
discount rate of 7.00% and 7.75% asat the measurement dates of June 30, 1998
and September 28, 1997, and September 29, 1996.respectively.
F-15
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
6. POSTRETIREMENT BENEFIT PLAN (continued)
For measurement purposes, a 9.0%an 8.5% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed for
19971999 for plan participants under age 65; the rate was assumed to decrease 1/2%.5%
per year to 4.5%5.0% by the year 2006 and remain at that level thereafter. For
plan participants age 65 years or older, a 7.0%6.5% annual health care cost
trend rate was assumed for 1997;1999; the rate was assumed to decrease 1/2%.5% per
year to 3.5%4.0% by the year 2004. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
September 28, 199727, 1998 by $2,758,$3,399, or 21%, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the year ended September 28, 19971998
by $336$450 or 25%29%.
F-16
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
8. STOCK OPTIONS
The Company offers stock option plans to attract, retain and motivate key
officers, non-employee directors and employees by providing for or increasing
the proprietary interests of such persons to work toward the future financial
success of the Company.
In January 1992, the Company adopted the 1992 Employee Stock Incentive Plan
(the "1992 Plan") and, as part of a merger, assumed outstanding options to
employees under its predecessor's 1990 Stock Option Plan and assumed
contractually the options to purchase 42,750 shares of common stock granted
to two non-employee directors of the Company. Under the 1992 Plan, employees
are eligible to receive stock options, restricted stock and other various
stock-based awards. Subject to certain adjustments, up to a maximum of
3,775,000 shares of common stock may be sold or issued under the 1992 Plan.
No awards shall be granted after January 16, 2002, although stock may be
issued thereafter pursuant to awards granted prior to such date.
In August 1993, the Company adopted the 1993 Stock Option Plan (the "1993
Plan"). Under the 1993 Plan, employees who do not participate in the 1992
Plan are eligible to receive annually stock options with an aggregate
exercise price equivalent to a maximum of 10%percentage of their eligible earnings.
Subject to certain adjustments, up to a maximum of 3,000,000 shares of common
stock may be sold or issued under the 1993 Plan. No awards shall be granted
after December 11, 2003, although common stock may be issued thereafter
pursuant to awards granted prior to such date.
In February 1995, the Company adopted the Non-Employee Director Stock Option
Plan (the "Director Plan"). Under the Director Plan, any eligible director
of the Company who is not an employee of the Company or a subsidiary of the
Company is granted annually an option to purchase 10,000 shares of common
stock at fair market value. Subject to certain adjustments, up to a maximum
of 250,000 shares of common stock may be sold or issued under the Director
Plan. Unless sooner terminated, no awards shall be granted after February 17,
2005, although common stock may be issued thereafter pursuant to awards
granted prior to such date. The terms and conditions of the stock-based
awards under the plans are determined by a committee of the Board of
Directors on each award date and may include provisions for the exercise
price, expirations, vesting, restriction on sales and forfeiture, as
applicable. Options granted under the plans have terms not exceeding 11 years
and provide for an option exercise price noof not less than 100% of the fair
market value of the common stock at the date of grant.
F-17F-16
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
8.7. STOCK OPTIONS (continued)
The following is a summary of stock option activity for the three fiscal
years ended September 28, 1997:
Option exercise price
per share
--------------------
Weighted
Shares Range average
--------- -------------- --------
Balance at October 2, 199427, 1998:
Option exercise price per share
-------------------------------
Weighted
Shares Range average
--------------------------------------------------------------------------------
Balance at October 2, 1995. . . . . 2,311,971 $.96-12.25 $6.37
Granted . . . . . . . . . . . . 540,891 6.75-9.13 7.22
Exercised . . . . . . . . . . . (10,880) 1.13-6.50 4.73
Canceled. . . . . . . . . . . . (129,395) 1.13-11.00 8.07
---------
Balance at September 29, 1996 . . . 2,712,587 .96-12.25 6.52
Granted . . . . . . . . . . . . 807,165 10.13-12.63 12.35
Exercised . . . . . . . . . . . (251,640) .96-12.25 6.76
Canceled. . . . . . . . . . . . (111,078) 5.75-12.63 8.77
---------
Balance at September 28, 1997 . . . 1,810,591 $ .96-12.25 $ 6.72
Granted . . . . . . . . . . . . 812,098 4.18-6.50 6.04
Exercised . . . . . . . . . . . (42,900) .96-1.13 1.09
Cancelled . . . . . . . . . . . (267,818) 1.13-12.25 8.37
---------
Balance at October 1, 1995 . . . 2,311,971 .96-12.25 6.37
Granted . . . . . . . . . . . . 540,891 6.75-9.13 7.22
Exercised . . . . . . . . . . . (10,880) 1.13-6.50 4.73
Cancelled . . . . . . . . . . . (129,395) 1.13-11.00 8.07
---------
Balance at September 29, 1996. . 2,712,587 .96-12.25 6.52
Granted . . . . . . . . . . . . 807,165 10.13-12.63 12.35
Exercised . . . . . . . . . . . (251,640) .96-12.25 6.76
Cancelled . . . . . . . . . . . (111,078) 5.75-12.63 8.77
---------
Balance at September 28, 1997. . 3,157,034 .96-12.63 7.90
Granted . . . . . . . . . . . . 761,046 17.44-19.06 18.93
Exercised . . . . . . . . . . . (198,200) 1.13-12.63 8.27
Canceled. . . . . . . . . . . . (108,759) 5.75-19.06 11.37
---------
Balance at September 27, 1998 . . . 3,611,121 .96-19.06 10.10
=========
The following is a summary of stock options outstanding at September 28,
1997:27,
1998:
Options outstanding Options exercisable
-------------------------------------------------- --------------------------------------------------------------------- -------------------------
Weighted
average Weighted Weighted
Range of Number remaining average average
exercise Number averagecontractual exercise Number exercise
prices outstanding contractual life exercise price exercisable exercise price
----------------- ------------ ---------------- -------------- ----------- --------------
------------------------------------------------------------------------------
$ .96-4.19 548,170 3.88 $1.28 548,170 $1.28
5.00-7.13 885,229 8.03 6.26 540,795 6.20
7.50-11.00 930,393 6.79 9.57 671,876.96-5.75 709,687 3.81 $ 2.23 647,408 $ 1.97
5.88-10.00 1,226,242 6.33 7.79 1,028,648 7.93
10.13-12.63 930,092 8.30 12.03 501,253 11.73
17.44-19.06 745,100 10.09 12.13-12.63 793,242 10.00 12.35 74,500 12.2518.93 62,621 17.49
--------- ---------
.96-12.63 3,157,034 7.44 7.90 1,835,341 6.40.96-19.06 3,611,121 7.12 10.10 2,239,930 7.32
========= =========
At September 27, 1998, September 28, 1997 and September 29, 1996, and October 1, 1995, the number
of options exercisable were 2,239,930, 1,835,341 1,732,899 and 1,513,330,1,732,899, respectively
and the weighted average exercise price of those options were $7.32, $6.40
$6.12 and $6.05,$6.12, respectively. Effective fiscal year 1997, the Company adopted the
disclosure requirements of SFAS 123. As permitted under this Statement, the
Company will continue to measure stock-based compensation cost using its
current "intrinsic value" accounting method.
F-18F-17
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
8.7. STOCK OPTIONS (continued)
For purposes of the following pro forma disclosures required by SFAS 123, the
fair value of each option granted after fiscal 1995 has been estimated on the
date of grant using the Black-Scholes option-pricing model. Such models
require the input of highly subjective assumptions, including the expected
volatility of the stock price. Therefore, in management's opinion, the
existing models do not provide a reliable single measure of the value of
employee stock options. The following weighted average assumptions were used
for grants: risk free interest rates of 5.73%, 6.38% in
1997 and 6.17% in 1996;1998, 1997
and 1996, respectively; expected volatility of 34%, 35% in 1997 and 37% in
1996;,
respectively; and in both 1997 and 1996 an expected life of 6 years.years in each year. The company has
not paid any cash or other dividends and does not anticipate paying dividends
in the foreseeable future, therefore the expected dividend yield is zero.
The weighted average fair value of options granted was $8.32 in 1998, $5.80
in 1997 and $3.45 in 1996. Had compensation expense been recognized for
stock-based compensation plans in accordance with provisions of SFAS 123, the
Company would have recorded net earnings of $65,011, or $1.66 per basic share
and $1.62 per diluted share, in 1998; $33,211, or $0.83$.85 per basic share and
$.83 per diluted share, in 19971997; and $19,854, or $0.51$.51 per both basic and
diluted share, in 1996.
For the pro forma disclosures, the options' estimated fair values were
amortized over their vesting periods. The pro forma disclosures do not
include a full five years of grants since SFAS 123 does not apply to grants
before 1995. Therefore, these pro forma amounts are not indicative of
anticipated future disclosures.
9.8. STOCKHOLDERS' EQUITY
The Company has 15,000,000 shares of preferred stock authorized for issuance
at a par value of $.01 per share. No shares have been issued.
On July 26, 1996, the Board of Directors declared a dividend of one preferred
stock purchase right (a "Right") for each outstanding share of the Company's
common stock, which Rights expire on July 26, 2006. Each Right entitles a
stockholder to purchase for an exercise price of $40, subject to adjustment,
one one-hundredth of a share of Series A Junior Participating Cumulative
Preferred Stock of the Company, or, under certain circumstances, shares of
common stock of the Company or a successor company with a market value equal
to two times the exercise price. The Rights would only become exercisable for
all other persons when any person has acquired or commences to acquire a
beneficial interest of at least 20% of the Company's outstanding common
stock. The Rights have no voting privileges and may be redeemed by the Board
of Directors at a price of $.001 per Right at any time prior to or shortly
after the acquisition of a beneficial ownership of 20% of the outstanding
common shares. There are 390,968379,279 shares of Series A Junior Participating
Cumulative Preferred Stock reserved for issuance upon exercise of the Rights.
In conjunction with the December 1988 acquisition of the Company, warrants
for the purchase of 1,584,573 shares of common stock were issued and are
exercisable at $.93 per share, as adjusted. As of September 29, 1997,27, 1998,
warrants for 1,482,7261,531,956 shares had been exercised.
At September 28, 1997,27, 1998, the Company had 6,542,0076,396,424 shares of common stock
reserved for issuance upon the exercise of stock options and 101,84752,617 shares
reserved for issuance upon exercise of warrants.
F-19F-18
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
10.9. AVERAGE SHARES OUTSTANDING
Fiscal year net earnings (loss) per share is based on the weighted average number of
shares outstanding during the year, determined as follows:
1997 1996 1995
---------- ---------- ----------
1998 1997 1996
-------------------------------------------------------------------------------
Shares outstanding, beginning of
fiscal year. . . . . . . 38,840,525 38,802,195 38,668,200
Effect of common stock issued. . . . . 92,081 16,071 29,566
Assumed additional shares issued upon
exercise of stock options and
warrants, net of shares reacquired at
the average market price. . . . . . . 843,638 482,510 216,874
---------- ---------- ----------
Weighted average shares outstanding. . . . . . . . . . . . . 39,096,815 38,840,525 38,802,195
Effect of common stock issued. . . . . 144,739 92,081 16,071
Effect of common stock reacquired. . . (150,047) - -
---------- ---------- ----------
Weighted average shares
outstanding - basic. . . . . . . . . 39,091,507 38,932,606 38,818,266
Assumed additional shares issued upon
exercise of stock options and
warrants, net of shares reacquired
at the average market price. . . . . 1,021,378 843,638 482,510
---------- ---------- ----------
Weighted average shares
outstanding - diluted. . . . . . . . 40,112,885 39,776,244 39,300,776 38,914,640
========== ========== ==========
11.
The diluted weighted average shares outstanding computation excludes
290,042, 306,302 and 1,047,220 antidilutive shares in 1998, 1997 and 1996,
respectively.
10. CONTINGENT LIABILITIES
The legal proceedings that were pending againstIn 1998 the Company in federal
and state courts insettled the state of Washington, relating to food-borne
illness (the "Outbreak") attributed to hamburgers served at
Jack in the Box restaurants in 1993, have been concluded, with the
exception of one case of immaterial financial impact, which is currently
on appeal. The total liability on all such lawsuits and claims did not
exceed the coverage available under the Company's applicable insurance
policies.
The Company is engaged in litigation withit 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 Outbreak.Box restaurants in 1993. The
initial litigation was filed by the Company on February 4, 1993. Vons
has filed
cross-complaints against the Company and others alleging certain contractual,
indemnification and tort liabilities; seeking damages in unspecified amounts
and a declaration of the rights and obligations of the parties. The claims of
the parties arise out of two
separate lawsuits which have been consolidated and are now set for trialwere settled on February 24, 1998. The Company received in its
second quarter approximately $58.5 million in the Los Angeles Superiorsettlement, 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 Los Angeles,in San Francisco, California alleging that
restrooms at a Jack in January
1998.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. Foodmaker has been notified by attorneys for plaintiffs
that claims may be made against Jack in the Box franchisees and Foodmaker
relating to certain locations that franchisees lease from Foodmaker which may
not be in compliance with the Americans with Disabilities Act.
F-19
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
10. CONTINGENT LIABILITIES (continued)
On April 6, 1996, an action was filed by one of the Company's international
franchisees, Wolsey, Ltd., in the United StatesU.S. 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, attorneysattorneys' fees and costs. The Companycourt has successfully
dismissed portions of the complaint, including the single claim alleging
wrongdoing by the Company's outside directors.non-management 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 "NationalNational 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
recisionrescission of alleged material modifications of plaintiffs' franchise
agreements. The complaint also allegescontained allegations of 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 seekssought
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 contract. The remaining
claims of unfair business practices, violation of the California Corporations
Code and interference with franchisees' right of association are set for
trial in March 1999. Management believes that its policies are lawful and
that it has satisfied any obligation to its franchisees in regard to such supplier payments.
F-20
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
11. CONTINGENT LIABILITIES (Continued)franchisees.
On December 10, 1996, a suit was filed by the Company's Mexican licensee,
Foodmex, Inc., in the United StatesU.S. District Court in San Diego, California against
the Company and its international franchising subsidiary. Foodmex formerly
operated several Jack in the Box franchise restaurants in Mexico, but its
licenses were terminated by the Company for, among other reasons, chronic
insolvency and failure to meet operational standards. The Foodmex suit
alleges wrongful termination of its master license, breach of contract and
unfair competition and seeks an injunction to prohibit termination of its
license as well as unspecified monetary damages. In January 1997 Foodmex amended its
complaint to name several individual defendants and to allege additional
causes of action. The Company and its
subsidiary counterclaimed and sought a preliminary injunction against
Foodmex. On March 28, 1997, the court granted the Company's request for an
injunction, held that the Company was likely to prevail in its suit, and
ordered Foodmex to immediately cease using the Jack in the Box marks and
proprietary operating systems. On June 30, 1997, the court held Foodmex and
its president in contempt of court for failing to comply with the March 28,
1997 order. On February 2, 1995,24, 1998, the Court issued an action by Concetta Jorgensen wasorder dismissing
Foodmex's complaint without prejudice. In March 1998, Foodmex filed against
the Companya Second
Amended Complaint in the U.S. District Court in San Francisco,Diego, California
alleging that restrooms at a Jack incontractual, tort and law violations arising out of the Box restaurant failed to comply
with laws regarding disabled personssame
business relationship and seeking damages in unspecified
amounts, punitive damages, injunctive relief,excess of $10 million, 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 tentative agreement on settlement
terms both as to the individual plaintiff Concetta Jorgensen and the
claims for injunctive relief, but a settlement agreement has not yet
been signed or presented to the U.S. District Court for approval.
During the course of settlement discussions, Foodmaker was notified by
attorneys for plaintiffs that claims may be made against Jack in the Box
franchisees and Foodmaker relating to locations that franchisees lease
from Foodmaker which may not be in compliance with the Americans With
Disabilities Act.
On May 23, 1997, an action by Ralston Purina Company was filed against
the Company in the U.S. District court for the Eastern District of
Missouri in St. Louis, Missouri alleging the Company's breach of a tax
sharing agreement and unjust enrichment and seeking an accounting and
damages in an amount not less than $11 million and attorneys'
fees and costs. The Company believes it has meritorious defensessuch allegations are without merit and
intends to
vigorously resistwill defend the lawsuit.action vigorously.
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.
F-21F-20
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
12.10. CONTINGENT LIABILITIES (continued)
The Company has eight wholly-owned subsidiaries, consisting of CP
Distribution Co., CP Wholesale Co., Jack in the Box , Inc., Foodmaker
International Franchising Inc. (collectively, the "Subsidiary Guarantors")
and four other non-guarantor subsidiaries (collectively, the "Non-Guarantor
Subsidiaries"). The Subsidiary Guarantors comprise all of the direct and
indirect subsidiaries of the Company (other than the Non-Guarantor
Subsidiaries which conduct no material operations, have no significant assets
on a consolidated basis and account for only an insignificant share of the
Company's consolidated revenues). Each of the Subsidiary Guarantors'
guarantees of the Company's $125 million senior subordinated notes is full,
unconditional and joint and several. The Subsidiary Guarantors have no
significant operations or any significant assets or liabilities on a
consolidated basis, other than guarantees of indebtedness of the Company, and
therefore no separate financial statements of the Subsidiary Guarantors are
presented because management has determined that they are not material to
investors.
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
September 27, September 28,
September 29,1998 1997
1996
-------- ------------------------------------------------------------------------------------
Accounts receivable:
Trade. . . . . . . . . . . . . . . . . . . . .$ 6,987 $ 4,349 $ 7,489
Notes. . . . . . . . . . . . . . . . . . . . .908 1,444 2,010
Other. . . . . . . . . . . . . . . . . . . . .8,395 7,714
6,476
AllowanceAllowances for doubtful accounts.accounts . . . . . . .(2,585) (3,025)
(3,493)
-------- ----------------- ---------
$ 13,705 $ 10,482
$ 12,482
======== ================= =========
Other Assets:
Trading area rights, net of amortization
of $25,313 and $21,880, and $18,669, respectively. . . .respectively . . . $ 69,92172,993 $ 67,66369,921
Lease acquisition costs, net of
amortization of $23,613 and $21,469,
and $20,896, respectively.respectively . . . . . . . . . . . . . . . 17,157 18,788
22,299
Other, assets, net of amortization of $18,503$12,932 and
$18,259,$18,503, respectively. . . . . . . . . . . 39,309 34,100
34,261
-------- --------
$122,809 $124,223
======== ========--------- ---------
$ 129,459 $ 122,809
========= =========
Accrued liabilities:
Payroll and related taxes. . . . . . . . . . $ 38,201 $ 32,948
Sales and property taxes . . . . . . . . . . . $32,948 $ 29,889
Sales and property taxes.12,723 11,413
Insurance. . . . . . . . . . . . 11,413 10,125
Advertising. . . . . . 47,502 45,343
Advertising. . . . . . . . . . . . . . . . . 14,027 11,801
Capital improvements . . . . . . . . . . . . 17,432 11,549
Interest . . . . . . . . . . . . . . . . . . 11,801 12,294
Insurance7,510 6,916
Income tax liabilities . . . . . . . . . . . 14,463 17,208
Other. . . . . . . . . . . . . . . . . . . . 45,343 41,494
Interest. . . . . . . . . . . . . . . . . . . . 6,916 7,352
Income tax liabilities. . . . . . . . . . . . . 17,208 347
Other . . . . . . . . . . . . . . . . . . . . . 26,539 14,457
-------- --------
$152,168 $115,958
======== ========
F-2220,116 14,990
--------- ---------
$ 171,974 $ 152,168
========= =========
F-21
FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
13.12. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
16 weeks ended 12 weeks ended
----------------------------------------------------
Jan. 21, 1996 Apr. 14, 1996 July 7, 1996 Sept. 29, 1996
------------- ------------- ------------ --------------
Revenues . . . . . . . . . . . . $330,630 $249,975 $243,147 $239,070
Gross profit . . . . . . . . . . 43,047 29,870 36,134 34,560
Net earnings . . . . . . . . . . 4,690 4,013 5,515 5,833
Net earnings per share . . . . . .12 .10 .14 .15
16 weeks ended 12 weeks ended
----------------------------------------------------
Jan. 19, 1997 Apr. 13, 1997 July 6, 1997 Sept. 28, 1997
------------- ------------- ------------ --------------
Revenues . . . . . . . . . . . . $323,483 $246,993 $251,681 $249,585
Gross profit . . . . . . . . . . 48,219 37,051 41,771 38,959
Earnings before
extraordinary item. . . . . . . 9,027 6,695 9,995 9,586
Net earnings . . . . . . . . . . 9,027 6,695 9,995 8,334
Earnings per share before
extraordinary item. . . . . . . .23 .17 .25 .24
Net earnings per share . . . . . .23 .17 .25 .21
F-23
16 weeks ended 12 weeks ended
-------------- -------------------------------
Jan. 19, Apr. 13, July 6, Sept. 28,
1997 1997 1997 1997
----------------------------------------------------------------------------
Revenues. . . . . . . . . . $323,483 $246,993 $251,681 $249,585
Gross profit. . . . . . . . 48,127 37,143 41,771 38,959
Earnings before
extraordinary item. . . . 9,027 6,695 9,995 9,586
Net earnings. . . . . . . . 9,027 6,695 9,995 8,334
Earnings per share before
extraordinary item:
Basic. . . . . . . . . . .23 .17 .26 .24
Diluted. . . . . . . . . .23 .17 .25 .24
16 weeks ended 12 weeks ended
-------------- -------------------------------
Jan. 18, Apr. 12, July 5, Sept. 27,
1998 1998 1998 1998
----------------------------------------------------------------------------
Revenues. . . . . . . . . . $343,774 $309,909 $280,566 $289,809
Gross profit. . . . . . . . 53,592 86,038 45,374 44,090
Earnings before
extraordinary item. . . . 11,674 34,347 12,626 12,406
Net earnings. . . . . . . . 11,674 34,347 8,248 12,406
Earnings per share before
extraordinary item:
Basic. . . . . . . . . . .30 .88 .32 .32
Diluted. . . . . . . . . .29 .85 .31 .31
F-22