SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended January 18,April 12, 1998 Commission File No. 1-9390
---------------- --------------------- ------
FOODMAKER, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2698708
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(State of Incorporation) (I.R.S. Employer
Identification No.)
9330 BALBOA AVENUE, SAN DIEGO, CA 92123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 571-2121
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
----- -------- ---
Number of shares of common stock, $.01 par value, outstanding as of the
close of business February 20,May 15, 1998 - 39,198,88839,310,195
-1-
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 18,April 12, September 28,
1998 1997
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 26,03681,590 $ 28,527
Receivables 10,964. . . . . . . . . . . . . . . . . . 13,801 10,482
Inventories 18,780. . . . . . . . . . . . . . . . . . 18,974 18,300
Prepaid expenses 43,377expenses. . . . . . . . . . . . . . . . 42,830 42,853
-------- ----------------- ---------
Total current assets 99,157. . . . . . . . . . . . $ 157,195 $ 100,162
-------- --------
Trading area rights 71,012 69,921
-------- --------
Lease acquisition costs 18,115 18,788
-------- --------
Other assets 34,483 34,100
-------- ----------------- ---------
Property at cost 669,371cost. . . . . . . . . . . . . . . . . 683,293 660,076
Accumulated depreciation and amortization (209,770). . . (216,286) (201,289)
-------- --------
459,601--------- ---------
467,007 458,787
-------- --------
TOTAL $682,368 $681,758
======== ========--------- ---------
Trading area rights . . . . . . . . . . . . . . . 73,092 69,921
--------- ---------
Lease acquisition costs . . . . . . . . . . . . . 17,621 18,788
--------- ---------
Other assets. . . . . . . . . . . . . . . . . . . 35,556 34,100
--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . $ 750,471 $ 681,758
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debtdebt. . . . . . $ 1,5031,547 $ 1,470
Accounts payable 28,319payable. . . . . . . . . . . . . . . . 33,261 39,575
Accrued expenses 133,935expenses. . . . . . . . . . . . . . . . 147,504 134,960
Income tax liabilities 16,738liabilities. . . . . . . . . . . . . 26,298 17,208
-------- ----------------- ---------
Total current liabilities 180,495liabilities. . . . . . . . . . 208,610 193,213
-------- --------
Deferred income taxes 1,242 382
-------- ----------------- ---------
Long-term debt, net of current maturities 345,830. . . . 346,524 346,191
-------- ----------------- ---------
Other long-term liabilities 54,751. . . . . . . . . . . 56,488 54,093
-------- ----------------- ---------
Deferred income taxes . . . . . . . . . . . . . . 3,782 382
--------- ---------
Stockholders' equity:
Common stock 406stock. . . . . . . . . . . . . . . . . . 407 405
Capital in excess of par value 284,013value. . . . . . . . . 284,682 283,517
Accumulated deficit (169,906). . . . . . . . . . . . . . (135,559) (181,580)
Treasury stockstock. . . . . . . . . . . . . . . . . (14,463) (14,463)
-------- ----------------- ---------
Total stockholders' equity 100,050. . . . . . . . . 135,067 87,879
-------- --------
TOTAL $682,368 $681,758
======== ========--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . $ 750,471 $ 681,758
========= =========
See accompanying notes to financial statements.
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FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
SixteenTwelve Weeks Ended ------------------------------
January 18, September 28,Twenty-eight Weeks Ended
---------------------- ------------------------
April 12, April 13, April 12, April 13,
1998 1997 ----------- -------------1998 1997
--------- --------- --------- ---------
Revenues:
Restaurant sales $325,333 $291,212sales. . . . . . $ 249,505 $ 223,820 $ 574,838 $ 515,032
Distribution sales 6,773 20,575sales. . . . . 5,546 14,285 12,319 34,860
Franchise rents and royalties 10,934 10,6708,029 8,035 18,963 18,705
Other 734 1,026
-------- --------
343,774 323,483
-------- --------. . . . . . . . . . . 46,829 853 47,563 1,879
--------- --------- --------- ---------
309,909 246,993 653,683 570,476
--------- --------- --------- ---------
Costs and expenses:
Costs of revenues:
Restaurant costs of sales 106,673 98,19780,592 74,596 187,265 172,793
Restaurant operating costs 169,962 150,329132,431 115,415 302,393 265,744
Costs of distribution sales 6,572 20,3515,368 14,299 11,940 34,650
Franchised restaurant costs 6,975 6,4795,480 5,540 12,455 12,019
Selling, general and
administrative 25,372 23,894. . . . . . 27,431 19,136 52,803 43,030
Interest expense 11,046 12,606
-------- --------
326,600 311,856
-------- --------expense. . . . . . 8,160 9,412 19,206 22,018
--------- --------- --------- ---------
259,462 238,398 586,062 550,254
--------- --------- --------- ---------
Earnings before income taxes 17,174 11,62750,447 8,595 67,621 20,222
Income taxes 5,500 2,600
-------- --------taxes. . . . . . . . . 16,100 1,900 21,600 4,500
--------- --------- --------- ---------
Net earningsearnings. . . . . . . . . $ 11,67434,347 $ 9,027
======== ========6,695 $ 46,021 $ 15,722
========= ========= ========= =========
Net earnings per share:
Basic . . . . . . . . . . . $ 0.30.88 $ 0.23.17 $ 1.17 $ .40
Diluted . . . . . . . . . . $ 0.29.85 $ 0.23.17 $ 1.14 $ .40
Weighted average shares
outstanding:
Basic 39,142 38,846. . . . . . . . . . . 39,226 38,877 39,178 38,859
Diluted 40,197 39,494. . . . . . . . . . 40,327 39,580 40,252 39,531
See accompanying notes to financial statements.
-3-
FOODMAKER, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SixteenTwenty-eight Weeks Ended
------------------------------
January 18, September 28,------------------------
April 12, April 13,
1998 1997
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Cash flows from operations:
Net earnings $ 11,674 $ 9,027earnings. . . . . . . . . . . . . . . . . . . $46,021 $15,722
Non-cash items included above:
Depreciation and amortization 13,085 12,168amortization. . . . . . . . . 22,686 21,274
Deferred income taxes 860 (1,150)
(Increase) decreasetaxes. . . . . . . . . . . . . 3,400 (2,000)
Increase in receivables (482) 1,493
Increase. . . . . . . . . . . . . (3,319) (427)
Decrease (increase) in inventories (480) (1,544)inventories. . . . . . . . (674) 99
Increase in prepaid expenses (1,211) (2,960)expenses. . . . . . . . . . . (850) (6,556)
Increase (decrease) in accounts payable (11,256) 3,597
Decrease. . . . . (6,314) 5,772
Increase in other accrued liabilities (724) (1,048)
-------- --------. . . . . . 24,222 10,990
------- -------
Cash flows provided by operations 11,466 19,583
-------- --------operations. . . . . . . 85,172 44,874
------- -------
Cash flows from investing activities:
Additions to property and equipment (11,392) (6,549). . . . . . . (28,953) (15,629)
Dispositions of property and equipment 735 542equipment. . . . . . 3,397 1,442
Increase in trading area rights (2,193) --. . . . . . . . . (5,114) (1,510)
Increase in other assets (1,160) (1,004)
-------- --------assets. . . . . . . . . . . . . (2,813) (868)
------- -------
Cash flows used in investing activities (14,010) (7,011)
-------- --------activities. . . . (33,483) (16,565)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt. . . . . 1,000 -
Principal payments on long-term debt,
including current maturities (444) (833). . . . . . . . . (793) (1,174)
Proceeds from issuance of common stock 497 17
-------- --------stock. . . . . . 1,167 372
------- -------
Cash flows provided by (used in)
financing activities 53 (816)
-------- --------. . . . . . . . . . . . 1,374 (802)
------- -------
Net increase (decrease) in cash and cash equivalents $ (2,491) $ 11,756
======== ========. . . . . $53,063 $27,507
======= =======
See accompanying notes to financial statements.
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FOODMAKER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements of Foodmaker, Inc. (the
"Company") do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of
financial condition and results of operations for the interim periods have
been included. Operating results for any interim period are not necessarily
indicative of the results for any other interim period or for the full year.
The Company reports results quarterly with the first quarter having 16 weeks
and each remaining quarter having 12 weeks. Certain financial statement
reclassifications have been made in the prior year to conform to the current
year presentation. These financial statements should be read in conjunction
with the 1997 financial statements.
2. In 1998, the Company adopted Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 requires the
presentation of basic earnings per share, computed using the weighted
average number of shares outstanding during the period, and diluted earnings
per share, computed using the additional dilutive effect of all common stock
equivalents. The dilutive impact of stock options and warrants account for
the additional weighted average shares of common stock outstanding for the
Company's diluted earnings per share computation. All prior periods have
been restated to conform with the provisions of SFAS 128.
3. The 1998income tax provision reflectsprovisions reflect the expected annual tax rate of 32% of
pretax earnings before income taxes. The incomein 1998 and the actual tax provision for 1997 wasrate of 22% of
earnings before income taxes.in 1997. The low
effective income tax rates in each year result from the Company's ability to
realize previously unrecognized tax benefits. The Company cannot determine
the actual 1998 annual effective tax rate until the end of the fiscal year,
thus the rate could differ from expectations.
4. Contingent Liabilities
TheLegal Proceedings
During the quarter, the Company has settled the litigation it filed against the
Vons Companies, Inc. ("Vons") and various suppliers seeking reimbursement
for all damages, costs and expenses incurred in connection with food-borne
illness attributed to hamburgers served at Jack in the Box restaurants in
1993. The initial litigation was filed by the Company on February 4, 1993.
Vons filed cross-complaints against the Company and others alleging certain
contractual, indemnification and tort liabilities; seeking damages in
unspecified amounts and a declaration of the rights and obligations of the
parties. The claims of the parties were settled on February 24, 1998.
Foodmaker received in its second quarter approximately $58.5 million in the
settlement. Of the total settlement, amount, the Company is expected to realizeof which a net of slightly over $30approximately $45.8 million was realized after
litigation costs and before income taxes and litigation costs. The impact of such settlement
will be reflected(the "Litigation Settlement").
On February 2, 1995, an action by Concetta Jorgensen was filed against the
Company in the Company's financial statementsU.S. District Court in San Francisco, California alleging
that restrooms at a Jack in the Box restaurant failed to comply with laws
regarding disabled persons and seeking damages in unspecified amounts,
punitive damages, injunctive relief, attorneys fees and prejudgment
-5-
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 quarter
ended April 12, 1998.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 over the next
seven years. Foodmaker has been 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 April 6, 1996 an action was filed by one of the Company's international
franchisees, Wolsey, Ltd., in the United States District Court in San Diego,
California against the Company and its directors, its international
franchising subsidiary, and certain officers of the Company and others. The
complaint alleges certain contractual, tort and law violations related to
the franchisees' development rights in the Far East and seeks damages in
excess of $43$38.5 million, injunctive relief, attorneys fees and costs. The
Company has successfully dismissed portions of the complaint, including the
claimssingle claim alleging wrongdoing by the Company's officersoutside directors, and outside directors.the
claims against its current officers. Management believes the remaining
allegations are without foundation and intends to vigorously defend the
action.
-5-
On November 5, 1996 an action was filed by the National JIB Franchisee
Association, Inc. and several of the Company's franchisees in the Superior
Court of California, County of San Diego in San Diego, California, against
the Company and others. The lawsuit alleges that certain Company policies
are unfair business practices and violate sections of the California
Corporations Code regarding material modifications of franchise agreements
and interfere with franchisees' right of association. It seeks injunctive
relief, a declaration of the rights and duties of the parties, unspecified
damages and recision of alleged material modifications of plaintiffs'
franchise agreements. The complaint also alleges fraud, breach of a
fiduciary duty and breach of a third party beneficiary contract in
connection with certain payments that the Company received from suppliers
and seeks unspecified damages, interest, punitive damages and an accounting.
Management believes that its policies are lawful and that it has satisfied
any obligation to its franchisees in regard to such supplier payments.
On December 10, 1996, a suit was filed by the Company's Mexican licensee,
Foodmex, Inc., in the United States District Court in San Diego, California
against the Company and its international franchising subsidiary. Foodmex
formerly operated several Jack in the Box franchise restaurants in Mexico,
but its licenses were terminated by the Company for, among other reasons,
chronic insolvency and failure to meet operational standards. The Foodmex
suit alleges wrongful termination of its master license, breach of contract
and unfair competition and seeks an injunction to prohibit termination of
its license as well as unspecified monetary damages. The Company and its
subsidiary counterclaimed and sought a preliminary injunction against
Foodmex. On March 28, 1997 the court granted the Company's request for an
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injunction, held that the Company was likely to prevail in its suit, and
ordered Foodmex to immediately cease using the Jack in the Box marks and
proprietary operating systems. On June 30, 1997, the court held Foodmex and
its president in contempt of court for failing to comply with the March 28,
1997 order. On February 24, 1998, the Court issued an order granting
Foodmaker's motion to dismissdismissing
Foodmex's complaint.complaint without prejudice. In March 1998, Foodmex filed a Second
Amended Complaint in the United States District Court in San Diego,
California alleging contractual, tort and law violations arising out of the
same business relationship and seeking damages in excess of $10 million,
attorneys fees and costs. The Company believes such allegations are without
merit and will defend the action vigorously.
On February 2, 1995,May 23, 1997, an action by Concetta JorgensenRalston Purina Company was filed against the
Company in the U.S. District Court for the Eastern District of Missouri in
San Francisco, CaliforniaSt. Louis, Missouri alleging that restrooms atthe Company's breach of a Jack in the Box restaurant failed to comply with laws
regarding disabled personstax sharing agreement
and unjust enrichment and seeking an accounting and damages in unspecified amounts,
punitive damages, injunctive relief, attorneysan amount
not less than $11 million plus interest and 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.costs. The
Company believes it has reached agreement on settlement terms both asmeritorious defenses and intends to vigorously
defend 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 Disability Act Access Guidelines. The settlement requires compliance
at 85% of 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 approximately $11 million in capital improvements over
the next seven years. Foodmaker has been 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.lawsuit.
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.
For
additional information on contingent liabilities, see the Company's most
recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
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FOODMAKER, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
RESULTS OF OPERATIONS
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All comparisons under this heading between 1998 and 1997 refer to the
16-week12-week and 28-week periods ended January 18,April 12, 1998 and January 19,April 13, 1997,
respectively, unless otherwise indicated.
Restaurant sales increased $34.1$25.7 million or 11.7%,and $59.8 million, respectively, to
$325.3$249.5 million and $574.8 million in 1998 from $291.2$223.8 million and $515.0 million
in 1997, as both the number of Company-operated restaurants and per store
average sales increased from a year ago. The average number of Company-operated
restaurants for the 28-week period increased to 970975 in 1998 from 883886 in 1997,
through the addition of new units and the acquisition of restaurants from
franchisees. Per store average ("PSA") sales for comparable restaurants, which
are calculated for only those restaurants open for all periods being compared,
increased 2.7%2.0% and 2.4%, respectively, in 1998 compared to the same periods in
1997. PSA sales improved principally due to an increaseincreases in both the number of transactions
asand the average transaction amounts were
essentially flat.amounts. Restaurant sales improvements are
attributed to the Company's two-tier marketing strategy featuring both premium
sandwiches and value-priced alternatives, as well as to a popular brand-building
advertising campaign that features the Company's fictional founder, "Jack".
Distribution sales of food and supplies declined $13.8$8.8 million and $22.6
million, respectively, to $6.8$5.5 million and $12.3 million in 1998 from $20.6$14.3
million and $34.9 million in 1997. TheA 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 $17.6$12.5 million and $30.1 million, respectively, in 1997. Because
distribution is a low-margin business, the loss of Chi-Chi's distribution revenues did not
have a material impact on the results of operations or financial condition of
the Company. Distribution sales to franchisees and others increased $3.8$3.7
million and $7.5 million, respectively, to $6.8$5.5 million and $12.3 million in
1998 from $3.0$1.8 million and $4.8 million in 1997.
Franchise rents and royalties increased slightlywere consistent with a year ago at $8.0
million in the 12-week period. There was a slight increase in the 28-week
period to $10.9$19.0 million in 1998 from $10.7$18.7 million in 1997. The Company
receives rents and royalties averaging approximately 10% of sales at franchise-operatedfranchise-
operated restaurants.
OtherIn 1998, other revenues, declined to $0.7typically interest income from investments and
notes receivable, also include the net Litigation Settlement of $45.8 million as
described in Note 4. Excluding this unusual item, other revenues in 1998 fromwere
$1.0 million in the 12-week period and $1.8 million in the 28-week period and
varied only slightly from the $.9 million and $1.9 million in the comparable
1997 primarily due to decreased interest income from lower levels of investments.periods.
Restaurant costs of sales, which include food and packaging costs, increased
with restaurant sales growth and the addition of Company-operated restaurants to
$106.7$80.6 million and $187.3 million, respectively, in 1998 from $98.2$74.6 million and
$172.8 million in 1997. As a percent of restaurant sales, restaurant costs of
sales declined to 32.8%32.3% and 32.6%, respectively, in 1998 from 33.7%33.3% and 33.5% in
1997 primarily due to favorable ingredient costs, principally beef, pork and
cheese, offset partially by increased produce costs.
-7--8-
Restaurant operating costs increased principally with restaurant sales
growth and the addition of Company-operated restaurants to $170.0$132.4 million and
$302.4 million, respectively, in 1998 from $150.3$115.4 million and $265.7 million in
1997. As a percent of restaurant sales, such costs increased to 52.2%53.1% and
52.6%, respectively, in 1998 from 51.6% in both periods in 1997 primarily
reflecting higher labor costs due to increases in the minimum wage rates in 1997.and other
operations administrative costs.
Costs of distribution sales decreased to $6.6$5.4 million and $11.9 million,
respectively, in 1998 from $20.4$14.3 million and $34.7 million in 1997 reflecting
the decline in distribution sales. Costs of distribution sales for the 28-week
period decreased slightly as a percent of sales to 97.0%96.9% in 1998 from 98.9%99.4% in 1997,
primarily due to the loss of the lower margin Chi-Chi's distribution business.
In 1997 costs of distribution sales include $.4 million in expenses related to
the closure of a distribution center which had been used primarily to distribute
to Chi-Chi's.
Franchised restaurant costs, which include rents and depreciation on
properties leased to franchisees and other miscellaneous costs, were flat year
to year at $5.5 million in the 12-week periods in 1998 and 1997. Costs
increased slightly in the 28-week period to $7.0$12.5 million in 1998 from $6.5$12.0
million in 1997. The increase in such costs
reflect1997 reflecting higher international franchise-related legal expense.
Selling, general and administrative expenses increased $1.5$8.3 million and $9.8
million, respectively, to $25.4$27.4 million and $52.8 million in 1998 from $23.9$19.1
million and $43.0 million in 1997. The increases were primarily caused by a
non-cash charge of approximately $8 million principally resulting from the
write-down of underperforming restaurants and asset write-offs associated with
customer service enhancements. Advertising and local promotion costs, which
were maintained at slightly over 5% of sales5.3% and 5.4% in both years,the 1998 and 1997 periods, respectively,
increased with the higher restaurant sales. The Company received from suppliers
cooperative advertising funds of approximately .5% of restaurant sales in each
period. General, administrative and other expenses, excluding the write-offs,
declined slightly to 2.4%2.7% and 2.8% of revenues, principallyexcluding the Litigation Settlement, in
1998 from 3.3% and 3.1%, respectively, in 1997 primarily due to ana decrease in
legal costs and the increase in cooperative advertising funds from suppliers.revenues.
Interest expense declined $1.6$1.2 million and $2.8 million, respectively, to
$11.0$8.2 million and $19.2 million in 1998 from $12.6$9.4 million and $22.0 million in
1997, principally due to a reduction in total debt outstanding. In September
1997, the Company repaid $50 million of its 9-1/4% senior notes due
March 1999.
The 1998 tax provision reflects the expected annual tax rate of 32% of
earnings before income taxes. The income tax provision for 1997 was 22% of
pretax earnings. The low effective income tax rates in each year result from
the Company's ability to realize previously unrecognized tax benefits. The
Company cannot determine the actual 1998 annual effective tax rate until the end
of the fiscal year, thus the rate could differ from expectations.
Net earnings improved $2.7in the 12-week period increased $27.6 million or 29%, to $11.7 million, or $.29$.68 per share
on a diluted basis, to $34.3 million, or $.85 per share, from $6.7 million, or
$.17 per share. Net earnings in the 28-week period improved $30.3 million to
$46.0 million, or $1.14 million per share, in 1998 from $9.0$15.7 million, or $.23$.40
per share, in 1997. These increases include approximately $25.6 million, after
income taxes, of unusual net earnings resulting from the Litigation Settlement
offset by the aforementioned write-offs. Excluding these unusual items,
earnings in 1998 were $8.7 million, or $.22 per share on a diluted basis, and
$20.4 million, or $.51 per share, respectively. The increases in these earnings
compared to similar periods in 1997 reflectingreflect the impact of sales growth and improved operating margins,lower
interest expense, offset by the higher effective tax rate in 1998.
FINANCIAL CONDITION
- --------------------9-
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $2.5increased $53.1 million to $26.0$81.6 million at
January 18,April 12, 1998 from $28.5 million at the beginning of the fiscal year. The cash
decreaseincrease reflects, among other things, cash flows from operations of $11.5$85.2
million including the $45.8 million net Litigation Settlement received in 1998
andless capital expenditures and other investing activities of $14.0$33.5 million. A
significant portion of this cash will be used to reduce long-term debt in the
refinancing plan described hereafter.
The Company's working capital deficit decreased $11.8$41.7 million to $81.3$51.4
million at January 18,April 12, 1998 from $93.1 million at September 28, 1997, primarily
due to a declinethe increase in accounts payable.cash and cash equivalents which was partially offset by
an increase in current liabilities. The Company and the restaurant industry in
general maintain relatively low levels of receivables and inventories and
vendors grant trade credit for purchases such as food and supplies. The Company
also continually invests in its business through the addition of new units and
refurbishment of existing units, which are reflected as long-term assets and not
as part of working capital.
-8-
Total debt outstanding declined slightly to $347.3 million at January 18,
1998 from $347.7 million at the beginning of the fiscal year and declined from
$397.4 million on January 19, 1997 reflecting the repayment in September 1997 of
$50 million of the 9-1/4% senior notes.
The Company's revolving bank credit agreement, which was amended and
restated March 15, 1996, expires December 31, 1998 and provides for a credit
facility of up to $60 million, including letters of credit of up to $25 million.
At January 18,On April 1, 1998, the Company had no borrowings and approximately $54.3
million of unused credit under the agreement. The Company has negotiated a
commitment forentered into a new revolving bank credit
agreement, which will provideprovides for a credit facility expiring in 2003 of up to $175
million, including letters of credit of up to $25 million. On March 2,At April 12, 1998,
the Company notified the trusteehad no borrowings and approximately $168.5 million of unused credit
under the indenture governingagreement.
Total debt outstanding increased slightly to $348.1 million at April 12,
1998 from $347.7 million at the beginning of the fiscal year and declined from
$397.2 million at this time last year.
Beginning in September 1997, the Company initiated a refinancing plan to
reduce and restructure its debt. In September 1997, the Company prepaid $50
million of the 9-1/4% senior notes due 1999 ofusing available cash. By early June
1998, the Company's intention to redeem $75Company expects it will have redeemed at various dates the remaining
$125 million of such9-1/4% senior notes and all $125 million of its 9-3/4% senior
subordinated notes due 2002.
In order to fund these repayments, the Company completed on April 15, 1998.
Payment is expected to be made principally with14, 1998,
a private offering of $125 million of 8-3/8% senior subordinated notes due 2008,
redeemable beginning 2003. Additional funding sources include available cash, on hand,
as well as through minimal bank borrowings.borrowings under the new bank credit facility, as necessary.
Upon completion of the refinancing plan, the Company will incur an extraordinary
pretax charge of approximately $7 million relating to the debt prepaid in the
plan. However, annual interest expense will be reduced by over $10 million from
1997 levels due principally to the $50 million debt repayment in September 1997
coupled with the expected additional net reduction in debt subsequent to
April 12, 1998 of approximately $45 million and the lower interest rates on the
new debt.
The Company is subject to a number of covenants under its various debt
instruments including limitations on additional borrowings, capital
expenditures, lease commitments and dividend payments, and requirements to
maintain certain financial ratios, cash flows and net worth. Substantially allThe 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.
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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 grow 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
refinancing opportunities, the Company will be able to meet all of its debt
service, capital expenditure and working capital requirements.
YEAR 2000 COMPLIANCE
- --------------------
The Company has performed an assessment of its major information technology
systems and expects that all necessary modifications and/or replacements will be
completed prior to December 1999. Based on current expenditures and estimates,
the costs of addressing this issue are not expected to have a material adverse
effect on the Company's financial position, results of operations or liquidity.
The potential impact of the Year 2000 issue onin regards to significant vendors
and suppliers cannot be reasonably estimated at this time. However, the Company
could be adversely impacted if its suppliers and franchisees do not ensure Year
2000 compliance in their own systems in a timely manner.
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
- ----------------------------------------------------------
This Quarterly Report on Form 10-Q contains forward lookingforward-looking statements
including, but not limited to, the Company's expectations regarding its
effective tax rate, its continuing investment in new restaurants and
refurbishment of existing facilities Year 2000 compliance and sources of liquidity. Forward lookingThe words
"anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends"
and similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company, with respect to future events and are subject to
knowncertain risks, uncertainties and unknown risks
and uncertainties which may cause actual results to differ materially from
expectations. Theassumptions, including the following is a discussion of some of thoserisk
factors. The Company's tax provision is highly sensitive to expected earnings.
As earnings and as expectations change, the Company's income tax provision may vary
more significantly from quarter to quarter and year to year than companies which
have been continuously profitable. However, the Company's effective tax rates
are expected to increase in the future. There can be no assurances that growth
objectives in the regional domestic markets in which the Company operates will
be met or that capital will be available for refurbishment of existing
facilities. The Company has urged certainIn addition, among the other factors that could cause the Company's
results to differ materially are: the effectiveness and cost of advertising and
promotional efforts; the degree of success of the Company's product offerings;
weather conditions; difficulties in obtaining ingredients and variations in
ingredient costs; the Company's ability to control operating, general and
administrative costs and to raise prices sufficiently to offset cost increases;
competitive products and pricing and promotions; the impact of any wide-spread
negative publicity; the impact on consumer eating habits of new scientific
information regarding diet, nutrition and health; competition for labor; general
economic conditions; changes in consumer tastes and in travel and dining-out
habits; the impact on operations and the costs to comply with laws and
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regulations and other activities of governing entities; the costs and other
effects of legal claims by franchisees, customers, vendors and others, including
settlement of those claims; the impact of a failure to develop and implementachieve Year 2000
compliance plans. However, any failure by vendors to ensure compliance
with Year 2000 requirements could have a material, adverse effect on the financial condition and results of operationspart of the Company, after January 1,
2000.its suppliers or its franchisees; and the
effectiveness of management strategies and decisions. Additional risk factors
associated with the Company's business are detailed in the Company's most recent
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
-9--12-
PART II - OTHER INFORMATION
There is no information required to be reported for any items under Part II,
except as follows:
Item 1. Legal Proceedings For information regarding legal proceedings required by this item, see- See Note 4 to the unaudited consolidated financial statements which is incorporated
herein by this reference.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders in the first quarter
ended January 18, 1998. The Company's annual meeting was held February 13, 1998
at which the following matters were voted as indicated:
For Withheld
---------- --------
1. Election of the following directors to
serve until the next annual meeting of
stockholders and until their successors
are elected and qualified.
Michael E. Alpert 33,345,026 626,369
Jay W. Brown 33,361,427 609,968
Paul T. Carter 33,550,961 420,434
Charles W. Duddles 33,519,316 452,079
Edward Gibbons 33,546,207 425,188
Jack W. Goodall 33,513,192 458,203
Robert J. Nugent 33,243,301 728,094
L. Robert Payne 33,150,510 820,885
For Against Abstain Not Voted
---------- ------- ------- ---------
2. Ratification of the appointment
of KPMG Peat Marwick LLP as
independent accountants 33,927,481 20,193 23,721 -0-Unaudited Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
------ -----------4.1 Indenture for the 8-3/8% Senior Subordinated Notes
due 2008.
10.1 Revolving Credit Agreement dated as of April 1, 1998
by and between Foodmaker, Inc. and the Banks and Agents
named therein.
27 Financial Data Schedule (included only with electronic
filing)
(b) Reports on Form 8-K
- None
-10-A Form 8-K was filed on February 24, 1998, reporting under Item 5
thereof, the settlement of certain legal claims.
A Form 8-K was filed on February 25, 1998, reporting under Item 5
thereof, a non-cash charge to earnings relating to write-offs of
certain assets.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated.
FOODMAKER, INC.
By: DARWIN J. WEEKS
---------------
Darwin J. Weeks
Vice President, Controller
and Chief Accounting Officer
(Duly Authorized Signatory)
Date: March 3,May 21, 1998
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