-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KyHs0QaVEm9ML4+wAqxDbGUwViM3N7sikq5H6L7k+p91uhnVaCZUwigKKyrxBgvu wHlrFsn/XFTxqA+GXWleyw== 0000807882-99-000005.txt : 19990624 0000807882-99-000005.hdr.sgml : 19990624 ACCESSION NUMBER: 0000807882-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990411 FILED AS OF DATE: 19990526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOODMAKER INC /DE/ CENTRAL INDEX KEY: 0000807882 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 952698708 STATE OF INCORPORATION: DE FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09390 FILM NUMBER: 99635224 BUSINESS ADDRESS: STREET 1: 9330 BALBOA AVE CITY: SAN DIEGO STATE: CA ZIP: 92123-1516 BUSINESS PHONE: 6195712121 MAIL ADDRESS: STREET 1: PO BOX 783 CITY: SAN DIEGO STATE: CA ZIP: 92112-4126 10-Q 1 FORM 10Q FOR SECOND QUARTER ENDED APRIL 11, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 11, 1999 -------------- Commission file no. 1-9390 ------ FOODMAKER, INC. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 95-2698708 - --------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 9330 BALBOA AVENUE, SAN DIEGO, CA 92123 - --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (619) 571-2121 -------------- 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 May 14, 1999 - 41,035,108. ---------- 1 FOODMAKER, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (In thousands) April 11, September 27, 1999 1998 - ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents. . . . . . . . . $ 5,712 $ 9,952 Receivables. . . . . . . . . . . . . . . . 18,106 13,705 Inventories. . . . . . . . . . . . . . . . 21,903 17,939 Prepaid expenses . . . . . . . . . . . . . 42,620 40,826 --------- --------- Total current assets . . . . . . . . . . 88,341 82,422 --------- --------- Trading area rights. . . . . . . . . . . . . 72,449 72,993 --------- --------- Lease acquisition costs. . . . . . . . . . . 16,236 17,157 --------- --------- Other assets . . . . . . . . . . . . . . . . 39,664 39,309 --------- --------- Property at cost . . . . . . . . . . . . . . 811,213 759,680 Accumulated depreciation and amortization. (244,223) (227,973) --------- --------- 566,990 531,707 --------- --------- TOTAL. . . . . . . . . . . . . . . . . . $ 783,680 $ 743,588 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt . . . $ 1,759 $ 1,685 Accounts payable . . . . . . . . . . . . . 43,036 52,086 Accrued expenses . . . . . . . . . . . . . 163,723 171,974 --------- --------- Total current liabilities. . . . . . . . 208,518 225,745 --------- --------- Deferred income taxes. . . . . . . . . . . . 3,147 2,347 --------- --------- Long-term debt, net of current maturities. . 320,197 320,050 --------- --------- Other long-term liabilities. . . . . . . . . 72,344 58,466 --------- --------- Stockholders' equity: Common stock . . . . . . . . . . . . . . . 410 408 Capital in excess of par value . . . . . . 287,694 285,940 Accumulated deficit. . . . . . . . . . . . (74,167) (114,905) Treasury stock . . . . . . . . . . . . . . (34,463) (34,463) --------- --------- Total stockholders' equity . . . . . . . 179,474 136,980 --------- --------- TOTAL. . . . . . . . . . . . . . . . . . $ 783,680 $ 743,588 ========= ========= See accompanying notes to financial statements. 2 FOODMAKER, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) Twelve Weeks Ended Twenty-Eight Weeks Ended ---------------------- ------------------------ April 11, April 12, April 11, April 12, 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Revenues: Restaurant sales. . . . . . $ 303,666 $ 249,505 $ 688,106 $ 574,838 Distribution and other sales . . . . . 8,893 5,578 19,190 12,351 Franchise rents and royalties . . . . . . 8,899 8,029 20,600 18,963 Other . . . . . . . . . . . 515 46,797 1,211 47,531 --------- --------- --------- --------- 321,973 309,909 729,107 653,683 --------- --------- --------- --------- Costs and expenses: Costs of revenues: Restaurant costs of sales 97,177 79,504 220,773 184,576 Restaurant operating costs 129,252 123,480 316,593 282,627 Costs of distribution and other sales . . . . . . 8,711 5,432 18,881 12,057 Franchised restaurant costs 5,786 5,480 12,940 12,455 Selling, general and administrative. . . . . . 34,906 37,406 79,811 75,141 Interest expense. . . . . . 6,454 8,160 15,471 19,206 --------- --------- --------- --------- 282,286 259,462 664,469 586,062 --------- --------- --------- --------- Earnings before income taxes. 39,687 50,447 64,638 67,621 --------- --------- --------- --------- Income taxes. . . . . . . . . 14,700 16,100 23,900 21,600 --------- --------- --------- --------- Net earnings. . . . . . . . . $ 24,987 $ 34,347 $ 40,738 $ 46,021 ========= ========= ========= ========= Net earnings per share: Basic . . . . . . . . . . . $ .66 $ .88 $ 1.07 $ 1.17 Diluted . . . . . . . . . . $ .64 $ .85 $ 1.04 $ 1.14 Weighted average shares outstanding: Basic . . . . . . . . . . . 38,138 39,226 38,059 39,178 Diluted . . . . . . . . . . 39,329 40,327 39,136 40,252 See accompanying notes to financial statements. 3 FOODMAKER, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Twenty-Eight Weeks Ended ------------------------ April 11, April 12, 1999 1998 - ----------------------------------------------------------------------------- Cash flows from operations: Net earnings. . . . . . . . . . . . . . . . . . $ 40,738 $ 46,021 Non-cash items included above: Depreciation and amortization . . . . . . . . 24,131 22,686 Deferred income taxes . . . . . . . . . . . . 800 3,400 Increase in receivables . . . . . . . . . . . . (4,401) (3,319) Increase in inventories . . . . . . . . . . . . (3,964) (674) Increase in prepaid expenses. . . . . . . . . . (1,794) (850) Decrease in accounts payable. . . . . . . . . . (9,050) (6,314) Increase in other accrued liabilities . . . . . 5,828 24,222 -------- -------- Cash flows provided by operations . . . . . . 52,288 85,172 -------- -------- Cash flows from investing activities: Additions to property and equipment . . . . . . (57,139) (28,953) Dispositions of property and equipment. . . . . 2,137 3,397 Increase in trading area rights . . . . . . . . (1,510) (5,114) Increase in other assets. . . . . . . . . . . . (1,776) (2,813) -------- -------- Cash flows used in investing activities . . . (58,288) (33,483) -------- -------- Cash flows from financing activities: Borrowings under revolving bank loans . . . . . 193,000 - Principal repayments under revolving bank loans . . . . . . . . . . . . . . . . . . . . (194,000) - Proceeds from issuance of long-term debt. . . . 1,925 1,000 Principal payments on long-term debt, including current maturities. . . . . . . . . (921) (793) Proceeds from issuance of common stock. . . . . 1,756 1,167 -------- -------- Cash flows provided by financing activities . 1,760 1,374 -------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . $ (4,240) $ 53,063 ======== ======== See accompanying notes to financial statements. 4 FOODMAKER, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements of Foodmaker, Inc. (the "Company") and its subsidiaries do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of financial condition and results of operations for the interim periods have been included. Operating results for any interim period are not necessarily indicative of the results for any other interim period or for the full year. The Company reports results quarterly with the first quarter having 16 weeks and each remaining quarter having 12 weeks. Certain financial statement reclassifications have been made in the prior year to conform to the current year presentation. These financial statements should be read in conjunction with the 1998 financial statements. 2. The income tax provisions reflect the expected annual tax rate of 37% of earnings before income taxes in 1999 and the actual tax rate of 32% of pretax earnings in 1998. The favorable income tax rates result from the Company's ability to realize previously unrecognized tax benefits. The Company cannot determine with certainty the 1999 annual tax rate until the end of the fiscal year; thus the rate could differ from expectations. 3. Contingent Liabilities On November 6, 1996, an action was filed by the National JIB Franchisee Association, Inc. (the "Franchisee Association") and several of the Company's franchisees in the Superior Court of California, County of San Diego in San Diego, California against the Company and others. The lawsuit alleged that certain Company policies are unfair business practices and violate sections of the California Corporations Code regarding material modifications of franchise agreements and interfere with franchisees' right of association. It sought injunctive relief, a declaration of the rights and duties of the parties, unspecified damages and rescission of alleged material modifications of plaintiffs' franchise agreements. The complaint contained allegations of fraud, breach of fiduciary duty and breach of a third-party beneficiary contract in connection with certain payments that the Company received from suppliers and sought unspecified damages, interest, punitive damages and an accounting. However, on August 31, 1998, the Court granted the Company's request for summary judgment on all claims regarding an accounting, conversion, fraud, breach of fiduciary duty and breach of third-party beneficiary contracts. On March 10, 1999, the court granted motions by the Company, ruling, in essence, that the franchisees would be unable to prove their remaining claims. On April 22, 1999, the Court entered an order granting the Company's motion to enforce a settlement with the Franchisee Association covering various aspects of the franchise relationship, but involving no cash payments by the Company. Under that order, the Association's claims are to be dismissed with prejudice. Those three rulings, collectively, resolved all claims in the case, and the Company expects the Court will soon enter a final judgement, in favor of Foodmaker, and against those plaintiffs with whom Foodmaker did not settle. However, the Association and several other plaintiffs may appeal the final judgement. Management believes an appeal would be without merit, and intends to vigorously defend any appeal. 5 On February 2, 1995, an action by Concetta Jorgensen was filed against the Company in the U.S. District Court in San Francisco, California alleging that restrooms at a Jack in the Box restaurant failed to comply with laws regarding disabled persons and seeking damages in unspecified amounts, punitive damages, injunctive relief, attorneys' fees and prejudgment interest. In an amended complaint, damages were also sought on behalf of all physically disabled persons who were allegedly denied access to restrooms at the restaurant. In February 1997, the court ordered that the action for injunctive relief proceed as a nationwide class action on behalf of all persons in the United States with mobility disabilities. The Company has reached agreement on settlement terms both as to the individual plaintiff Concetta Jorgensen and the claims for injunctive relief, and the settlement agreement has been approved by the U.S. District Court. The settlement requires the Company to make access improvements at Company-operated restaurants to comply with the standards set forth in the Americans with Disabilities Act Access Guidelines. The settlement requires compliance at 85% of the Company-operated restaurants by April 2001 and for the balance of Company-operated restaurants by October 2005. The Company has agreed to make modifications to its restaurants to improve accessibility and anticipates investing an estimated $11 million in capital improvements in connection with these modifications. Similar claims have been made against Jack in the Box franchisees and Foodmaker relating to franchised locations which may not be in compliance with the Americans with Disabilities Act (ADA). The relief sought is injunctive relief to bring these additional restaurants into compliance with the ADA and attorneys' fees. On April 6, 1996, an action was filed by one of the Company's international franchisees, Wolsey, Ltd., a Hong Kong corporation, in the U.S. District Court in San Diego, California against the Company and its directors, its international franchising subsidiary, and certain current and former officers of the Company. The complaint alleged certain contractual, tort, and law violations, and sought $38.5 million in damages, injunctive relief, attorneys' fees and costs. The Company filed a counterclaim seeking, among other things, declaratory relief, and attorneys' fees and costs. Prior to the trial, the Court dismissed portions of the plaintiff's claim, including the single claim alleging wrongdoing by the Company's non-management directors, and the claims against its current officers. The case proceeded to trial on January 5, 1999. Prior to the conclusion of the trial, on January 29, 1999, the parties reached agreement on a settlement which provided for a mutual exchange of non-cash consideration, including execution of a new agreement between the Company and the plaintiff for development of Jack in the Box restaurants in Asia. The settlement was formally approved, and judgment was entered on February 2, 1999. The Company is also subject to normal and routine litigation. The amount of liability from the claims and actions against the Company cannot be determined with certainty, but in the opinion of management, the ultimate liability from all pending legal proceedings, asserted legal claims and known potential legal claims which are probable of assertion should not materially affect the results of operations and liquidity of the Company. Other than as described in this quarterly report, there have been no material changes to the litigation matters set forth in the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1998. The U.S. Internal Revenue Service ("IRS") examination of the Company's federal income tax return for fiscal year 1996 resulted in the issuance of a proposed adjustment to tax liability of $7.3 million (exclusive of interest). The Company will file a protest with the Regional Office of Appeals of the IRS to contest the proposed assessment. Management believes that an adequate provision for income taxes has been made. 6 FOODMAKER, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS All comparisons under this heading between 1999 and 1998 refer to the 12- week and 28-week periods ended April 11, 1999 and April 12, 1998, respectively, unless otherwise indicated. Restaurant sales increased $54.2 million, and $113.3 million, respectively, to $303.7 million and $688.1 million in 1999 from $249.5 million and $574.8 million in 1998, reflecting increases in the number of Company-operated restaurants and in per store average ("PSA") sales. The average number of Company-operated restaurants for the 28-week period increased to 1,092 in 1999 from 975 restaurants in 1998. PSA sales for comparable Company-operated restaurants, those open more than one year, grew 9.1% and 7.7% in the 12-week and 28-week periods of 1999 compared with the same periods in 1998. Sales growth resulted from increases in the average number of transactions of 5.5% and 4.4% in the respective 1999 periods and the balance of the increases from higher average transaction amounts. Management believes that the sales growth is attributable to effective advertising and strategic initiatives, especially the Assemble-To-Order ("ATO") program in which sandwiches are made when customers order them. New menu boards that showcase the combo meals are helping to increase average check amounts. In addition, a new drive-thru order confirmation system is helping to improve order accuracy while alerting customers to the amount of their purchase. Distribution and other sales increased $3.3 million and $6.8 million, respectively, to $8.9 million and $19.2 million in 1999 from $5.6 million and $12.4 million in 1998, primarily due to an increase in the number of franchise restaurants serviced by the Company's distribution division, sales growth at franchise restaurants and an increase in other sales. Franchise rents and royalties increased $.9 million and $1.6 million to $8.9 million and $20.6 million, respectively, in 1999 from $8.0 million and $19.0 million in 1998, and were slightly more than 10% of sales at franchise restaurants in both years. Franchise restaurant sales increased to $85.3 million and $197.9 million, respectively, in 1999 from $78.1 million and $184.2 million in 1998. Sales at domestic franchise restaurants were also strengthened by implementing the Company's strategic initiatives. In 1998, other revenues, typically interest income from investments and notes receivable, also included income from the settlement of litigation with meat suppliers (the "Litigation Settlement"), approximately $45.8 million after litigation costs. Excluding this unusual item, other revenues declined to $.5 million and $1.2 million, respectively, in 1999 from $1.0 million and $1.7 million in 1998, reflecting lower cash investments after repaying debt in 1998. Restaurant costs of sales and operating costs increased with sales growth and the addition of Company-operated restaurants. Restaurant costs of sales, which include food and packaging costs, increased to $97.2 million and $220.8 million in 1999 from $79.5 million and $184.6 million in 1998. As a percent of restaurant sales, costs of sales were 32.0% and 32.1% of sales, respectively, in 1999, about the same as 1998. In the 12-week period in 1999, the Company reduced accrued liabilities and restaurant operating costs by $18.0 million, primarily due to a change in 7 estimates resulting from improvements to its loss prevention and risk management programs, which have been more successful than anticipated. Excluding this unusual adjustment, restaurant operating costs increased to $147.3 million and $334.6 million, respectively, in 1999 from $123.5 million and $282.6 million in 1998. As a percent of restaurant sales, operating costs excluding the unusual adjustment decreased to 48.5% and 48.6%, respectively, in 1999 from 49.5% and 49.2% in 1998. The improvements in 1999 were principally due to occupancy and certain other restaurant operating expenses, which tend to be less variable, increasing at a lesser rate than PSA sales growth. Labor related costs percentages also improved slightly in the 12-week period of 1999. Costs of distribution and other sales increased to $8.7 million and $18.9 million, respectively, in 1999 from $5.4 million and $12.1 million in 1998, reflecting an increase in the related sales. As a percent of distribution and other sales, these costs increased to 98.0% and 98.4%, respectively, in 1999 from 97.4% and 97.6% in 1998, primarily due to the lower margin realized from other sales. Franchised restaurant costs, which consist principally of rents and depreciation on properties leased to franchisees and other miscellaneous costs, increased slightly to $5.8 million and $12.9 million, respectively, in 1999 from $5.5 million and $12.5 million in 1998, principally due to higher franchise- related legal expenses. Selling, general and administrative costs in the 12-week period declined to $34.9 million in 1999 from $37.4 million in 1998. In the 28-week period, such costs increased to $79.8 million in 1999 from $75.1 million in 1998. Advertising and promotion costs increased to $15.6 million and $35.4 million, respectively, in 1999 from $13.3 million and $30.6 million in 1998, slightly over 5% of restaurant sales in all periods. Regional administrative and training expenses have been reclassified to general and administrative costs in 1999. The 1998 amounts, which had previously been included with restaurant operating costs, have been restated to conform with the 1999 presentation. In 1998 general, administrative and other costs included a non-cash charge of approximately $8 million primarily related to facilities and customer service improvement projects. Excluding the non-cash charge, general, administrative and other costs were 6.0% and 6.1% of revenues, respectively, in 1999 compared to 6.0% of revenues excluding the Litigation Settlement in both periods of 1998. Interest expense declined $1.7 million and $3.7 million, respectively, to $6.5 million and $15.5 million in 1999 from $8.2 million and $19.2 million in 1998, principally due to a reduction in debt and lower interest rates. In 1998 the Company completed a refinancing plan, reducing debt by approximately $26 million from a year ago and improving effective interest rates. See "Liquidity and Capital Resources." The income tax provisions reflect the expected annual tax rate of 37% of earnings before income taxes in 1999 and the actual tax rate of 32% of pretax earnings in 1998. The favorable income tax rates result from the Company's ability to realize previously unrecognized tax benefits. The Company cannot determine with certainty the 1999 annual tax rate until the end of the fiscal year; thus the rate could differ from expectations. In 1999 net earnings were $25.0 million, or $.64 per diluted share, in the 12-week period and $40.7 million, or $1.04 per diluted share, in the 28-week period. In 1998 net earnings were $34.3 million, or $.85 per diluted share, in the 12-week period and $46.0 million, or $1.14 per diluted share, in the 28-week period. Excluding the unusual adjustment to restaurant operating costs in 1999, net earnings were $13.6 million, or $.35 per diluted share, in the 12-week 8 period and $29.4 million, or $.75 per diluted share, in the 28-week period. Excluding the Litigation Settlement and the $8 million non-cash charge to other expenses in 1998, net earnings were $8.7 million, or $.22 per diluted share, in the 12-week period and $20.4 million, or $.51 per diluted share, in the 28-week period. Excluding the unusual items in both years, net earnings increased approximately 56% and 44%, respectively, in 1999 compared to the same periods in 1998 reflecting the impact of sales growth and lower interest expense, offset in part by the higher effective income tax rate in 1999. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $4.3 million to $5.7 million at April 11, 1999 from $10.0 million at the beginning of the fiscal year. The Company expects to maintain low levels of cash and cash equivalents and plans to reinvest available cash flows from operations to develop new and enhance existing restaurants and to reduce borrowings under the revolving credit agreement. The Company's working capital deficit decreased $23.1 million to $120.2 million at April 11, 1999 from $143.3 million at September 27, 1998, principally due to a decline in accrued liabilities. The Company and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories and vendors grant trade credit for purchases such as food and supplies. The Company also continually invests in its business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets and not as part of working capital. On April 1, 1998, the Company entered into a new revolving bank credit agreement, which provides for a credit facility expiring in 2003 of up to $175 million, including letters of credit of up to $25 million. At April 11, 1999, the Company had borrowings of $96.5 million and approximately $71.8 million of availability under the agreement. Beginning in September 1997, the Company initiated a refinancing plan to reduce and restructure its debt. At that time, the Company prepaid $50 million of its 9 1/4% senior notes due 1999 using available cash. In 1998 the Company repaid the remaining $125 million of its 9 1/4% senior notes and all $125 million of its 9 3/4% senior subordinated notes due 2002. In order to fund these repayments, on April 14, 1998 the Company completed a private offering of $125 million of 8 3/8% senior subordinated notes due 2008, redeemable beginning 2003. Additional funding sources included available cash, as well as bank borrowings under the new bank credit facility. The Company expects that annual interest expense will be reduced by over $10 million from 1997 levels due to the reduction in debt and lower interest rates on the new debt. Total debt outstanding decreased to $322.0 million at April 11, 1999 from $348.1 million at April 12, 1998. The Company is subject to a number of covenants under its various debt instruments including limitations on additional borrowings, capital expenditures, lease commitments and dividend payments, and requirements to maintain certain financial ratios, cash flows and net worth. The bank credit facility is secured by a first priority security interest in certain assets and properties of the Company. In addition, certain of the Company's real estate and equipment secure other indebtedness. The Company requires capital principally to grow the business through new restaurant construction, as well as to maintain, improve and refurbish existing restaurants, and for general operating purposes. The Company's primary sources 9 of liquidity are expected to be cash flows from operations, the revolving bank credit facility, and the sale and leaseback of restaurant properties. Additional potential sources of liquidity include financing opportunities and the conversion of Company-operated restaurants to franchised restaurants. Based upon current levels of operations and anticipated growth, the Company expects that cash flows from operations, combined with other financing alternatives available, will be sufficient to meet debt service, capital expenditure and working capital requirements. Although the amount of liability from claims and actions against the Company cannot be determined with certainty, management believes the ultimate liability of such claims and actions should not materially affect the results of operations and liquidity of the Company. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary exposure relating to financial instruments is to changes in interest rates. The Company uses interest rate swap agreements to reduce exposure to interest rate fluctuations. At April 11, 1999, the Company had a $25 million notional amount interest rate swap agreement expiring in June 2001. This agreement effectively converts a portion of the Company's variable rate bank debt to fixed rate debt and has a pay rate of 6.88%. At April 11, 1999, a hypothetical one percentage point increase in short- term interest rates would result in a reduction of $.7 million in annual pre-tax earnings. The estimated reduction is based on holding the unhedged portion of bank debt at its April 11, 1999 level. At April 11, 1999, the Company had no other material financial instruments subject to significant market exposure. YEAR 2000 COMPLIANCE Historically, most computer databases, as well as embedded microprocessors in computer systems and industrial equipment, were designed with date data using only two digits of the year. Most computer programs, computers, and embedded microprocessors controlling equipment were programmed to assume that all two digit dates were preceded by "19," causing "00" to be interpreted as the year 1900. This formerly common practice now could result in a computer system or embedded microprocessor which fails to recognize properly a year that begins with "20," rather than "19." This in turn could result in computer system miscalculations or failures, as well as failures of equipment controlled by date-sensitive microprocessors, and is generally referred to as the "Year 2000" issue. The Company's State of Year 2000 Readiness. In 1995 the Company began to formulate a plan to address its Year 2000 issues. The Company's Year 2000 plan now involves five phases: 1) Awareness, 2) Assessment, 3) Remediation, 4) Testing and 5) Implementation. Awareness involves helping employees who deal with the Company's computer assets, and managers, executives and directors to understand the nature of the Year 2000 problem. Assessment involves the identification and inventory of the Company's information technology ("IT") systems and embedded microprocessor technology ("ET") and the determination as to whether such technology will properly recognize a year that begins with "20," rather than "19." IT/ET systems that, among other things, properly recognize a year beginning with "20" are said to be "Year 2000 ready." Remediation involves the repair or replacement of IT/ET systems that are not Year 2000 ready. Testing involves the testing of repaired or replaced IT/ET systems. Implementation is the installation and integration of remediated and tested IT/ET systems. 10 The phases overlap substantially. The Company has made substantial progress in the Awareness, Assessment, Remediation and Testing phases and has completed implementation of a number of systems. Awareness and Assessment. The Company has established an ad hoc Committee of the Board of Directors and multiple management teams which are responsible for the Company's activities in addressing the Year 2000 issue. The Company has also sent letters to approximately 2,700 of its vendors of goods and services to bring the Year 2000 issue to their attention and to assess their readiness. The Company has advised its franchisees (who operate approximately 23% of the Jack in the Box restaurants) that they are required to be Year 2000 ready by December 31, 1999 and has provided video information and regional presentations regarding Year 2000 issues. The Company's franchisees are represented on a Year 2000 team. While the Awareness and Assessment phases will continue into the Year 2000, they are substantially complete at this time. Remediation, Testing and Implementation. Although Remediation, Testing and Implementation will be substantially completed during 1999, some systems identified as non-critical may not be addressed until after January 2000. The following table describes by category and status, major IT applications that have been identified. Remediation Status Category Ready In Process Remaining - ----------------------------------------------------------------------- Mainframe Third party developed software 100% 0% 0% Internally developed software 89% 8% 3% Hardware (Peripherals) 100% 0% 0% Desktop Third party developed software 79% 21% 0% Internally developed software 38% 62% 0% Corporate hardware 32% 68% 0% Restaurant hardware 89% 11% 0% Client-Server Third party developed software 38% 62% 0% Internally developed software 20% 80% 0% Hardware 58% 42% 0% Embedded Technology. The Company has identified categories of critical restaurant equipment in which ET may be found, has sent letters to the majority of the vendors of such equipment and is in the process of identifying the remaining vendors. About 97% of restaurant equipment vendors who have received letters have responded. The Company is reviewing the responses. To date, the Company has identified only one type of equipment with date sensitive ET that the Company believes should be replaced. Replacement components are currently being tested and are expected to be implemented in Company restaurants during 1999. Franchisees have been informed and offered the opportunity to participate in the Company's replacement program. The Company continues to evaluate information in letter responses and other materials received from vendors, on web sites, and from other sources, in identifying date sensitive ET. 11 Vendors of Important Goods and Services. The Company has identified and sent letters to approximately 2,700 key vendors in an attempt to gain assurance of vendors' Year 2000 readiness. As of May 1999, the Company had received responses concerning Year 2000 readiness from approximately 42% of those vendors and is pursuing responses from the remainder. The Company expects to continue discussions with those it identifies as critical vendors of goods and services throughout 1999 to attempt to ensure the uninterrupted supply of goods and services and to develop contingency plans in the event of the failure of any of such vendors to become and remain Year 2000 ready. The Company's Franchisees. At April 11, 1999, 333 restaurants were operated by franchisees in the United States. Seven restaurants were operated by franchisees outside the United States. The Company has completed an assessment of the Year 2000 readiness of the personal computers it has leased to approximately 80% of franchised restaurants in the United States, together with software it has licensed them to use. Such computers and software were determined not to be Year 2000 ready and are being replaced with compliant computers and remediated software at franchisees' expense during 1999. The Company has advised its franchisees, both domestic and international, that they are required to be Year 2000 ready by December 31, 1999. The Costs to Address the Company's Year 2000 Issues. The Company estimates that it has incurred costs of approximately $10 million to date for the Awareness, Assessment, Remediation, Testing and Implementation phases of its Year 2000 plan. These amounts have come principally from the general operating and capital budgets of the Company's Management Information Systems department. The Company currently estimates the total costs of completing its Year 2000 plan, including costs incurred to date, to be approximately $13 million, with approximately 25% relating to new systems which have been or will be capitalized. Some planned system replacements, which are anticipated to provide significant future benefits, were accelerated due to Year 2000 concerns and have resulted in increased IT spending. This estimate is based on currently available information and will be updated as the Company continues its assessment of third party relationships, proceeds with its testing and implementation, and designs contingency plans. The Risks of the Company's Year 2000 Issues. If any IT or ET systems critical to the Company's operations have been overlooked in the Assessment, Remediation, Testing or Implementation phases, if any of the Company's remediated internal computer systems are not successfully remediated, or if a significant number of the Company's franchisees do not become Year 2000 ready in a timely manner, there could be a material adverse effect on the Company's results of operations, liquidity and financial condition of a magnitude which the Company has not yet fully analyzed. In addition, the Company has not yet been assured that (1) the computer systems of all of its key vendors will be Year 2000 ready in a timely manner or that (2) the computer systems of third parties with which the Company's computer systems exchange data will be Year 2000 ready both in a timely manner and in a manner compatible with continued data exchange with the Company's computer systems. If the vendors of the Company's most important goods and services or the suppliers of the Company's necessary energy, telecommunications and transportation needs fail to provide the Company with (1) the materials and services which are necessary to produce, distribute and sell its products, (2) the electrical power and other utilities necessary to sustain its operations, or 12 (3) reliable means of transporting supplies to its restaurants and franchisees, such failure could have a material adverse effect on the results of operations, liquidity and financial condition of the Company. The Company's Contingency Plan. The Company is developing a business contingency plan to address both unavoided and unavoidable Year 2000 risks. Although the Company expects to have the plan substantially complete by late summer 1999, enhancements and revisions will be continuously considered and implemented, as appropriate, throughout the remainder of the year and into the Year 2000. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements including, but not limited to, the Company's expectations regarding its effective tax rate, its continuing investment in new restaurants and refurbishment of existing facilities, Year 2000 compliance and sources of liquidity. Forward-looking statements are generally identifiable by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" and similar expressions. Forward-looking statements are subject to known and unknown risks and uncertainties which may cause actual results to differ materially from expectations. The following is a discussion of some of those factors. The Company's tax provision is highly sensitive to expected earnings and as expectations change the Company's income tax provision may vary more significantly from quarter to quarter and year to year than companies which have been continuously profitable. However, the Company's effective tax rates are expected to increase in the future. There can be no assurances that growth objectives in the regional domestic markets in which the Company operates will be met or that capital will be available for refurbishment of existing facilities. The Company has urged certain vendors to develop and implement Year 2000 compliance plans. However, any failure by vendors to ensure compliance with Year 2000 requirements could have a material, adverse effect on the financial condition and results of operations of the Company after January 1, 2000. Additional risk factors associated with the Company's business are detailed in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. 13 NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income. This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purposes financial statements and is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. SFAS 130, requiring only additional informational disclosures, is effective for the Company's fiscal year ending October 3, 1999. In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to stockholders. This Statement is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is required to be restated. SFAS 131, requiring only additional informational disclosures, is effective for the Company's fiscal year ending October 3, 1999. In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal years beginning after June 15, 1999. SFAS 133 is effective for the Company's fiscal year ending October 1, 2000 and is not expected to have a material effect on the Company's financial position or results of operations. 14 PART II - OTHER INFORMATION There is no information required to be reported for any items under Part II, except as follows: Item 1. Legal Proceedings - See Note 3 to the Unaudited Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders. The results of the Company's annual meeting, held February 12, 1999, were reported in the Quarterly report on Form 10-Q for the quarter ended January 17, 1999. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Number Description ------ ----------- 10.1 Second Amendment to the Revolving Credit Agreement dated as of February 27, 1999 by and between Foodmaker, Inc. and the Banks and Agents named therein. 27 Financial Data Schedule (included only with electronic filing) (b) Reports on Form 8-K. A form 8-K was filed April 2, 1999, reporting under Item 5 thereof, a transcript of a video that was sent concurrently to approximately 330 fund managers advising them of certain information about the Company. 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated. FOODMAKER, INC. By: DARWIN J. WEEKS --------------- Darwin J. Weeks Vice President, Controller and Chief Accounting Officer (Duly Authorized Signatory) Date: May 26, 1999 16 EX-10.1 2 SECOND AMENDMENT TO THE REVOLVING CREDIT AGREEMENT Exhibit 10.1 SECOND AMENDMENT Dated as of February 27, 1999 This SECOND AMENDMENT (this "Amendment") is among FOODMAKER, INC., a Delaware corporation (the "Borrower"), the financial institutions and other entities party to the Credit Agreement referred to below (the "Lenders"), and NATIONSBANK, N.A. (successor to NationsBank of Texas, N.A.), as L/C Bank (as defined in the Credit Agreement) and as agent (the "Agent") for the Lenders and the Issuing Banks thereunder. PRELIMINARY STATEMENTS: 1. The Borrower, the Lenders, the Arranger, the Documentation Agent and the Agent have entered into a Credit Agreement dated as of April 1, 1998, as amended by the First Amendment dated as of August 24, 1998 (as so amended, the "Credit Agreement"; capitalized terms used and not otherwise defined herein have the meanings assigned to such terms in the Credit Agreement). 2. The Borrower has requested that the Lenders amend the definition of "Capital Expenditures" set forth in the Credit Agreement to exclude certain expenditures therefrom to the extent such capital expenditures are reimbursed by third party suppliers of the Borrower. 3. The Required Lenders are, on the terms and conditions stated below, willing to grant the request of the Borrower. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Amendments to Credit Agreement. Effective as of the date hereof and subject to satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement is hereby amended as follows: Section 1.01 of the Credit Agreement is hereby amended by adding thereto, in appropriate alphabetical order, the following defined term: "CapEx Reimbursements" means amounts received in cash from suppliers (net of any refunds of such amounts to such suppliers) to the Borrower and its Subsidiaries (but only to the extent such suppliers are not Affiliates of the Borrower or any of its Subsidiaries) in reimbursement of capital expenditures made or to be made by the Borrower and its Subsidiaries." The definition of "Capital Expenditures" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Capital Expenditures' means, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including that portion of Capitalized Leases which is capitalized on a Consolidated balance sheet of the Borrower and its Subsidiaries) that in conformity with GAAP would otherwise be classified as capital expenditures; provided, however, that Capital Expenditures shall not include expenditures (i) in connection with any Permitted Sale-Leaseback Repurchase, or (ii) to the extent of any CapEx Reimbursement in respect thereof actually received by the Borrower or any of its Subsidiaries (it being understood that any CapEx Reimbursement deducted in any period and refunded by the Borrower or any of its Subsidiaries in a subsequent period shall constitute Capital Expenditures in such subsequent period to the extent such refund is not deducted in the calculation of the amount of CapEx Reimbursement for such subsequent period)." The definition of "EBITDA" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "EBITDA" means, for any period, (i) net income (or net loss) minus any non-recurring or extraordinary gains plus (ii) to the extent deducted in determining such net income (or net loss), the sum of (a) interest expense, (b) income tax expense, (c) depreciation expense, (d) amortization expense, and (e) non-recurring or extraordinary losses, in each case determined in accordance with GAAP for such period minus (iii) to the extent included in determining such net income (or net loss), the amount of any CapEx Reimbursements received in such period. SECTION 2. Conditions to Effectiveness. This Amendment shall not be effective until each of the following conditions precedent shall have been satisfied: (a) the Agent shall have executed this Amendment and shall have received counterparts of this Amendment executed by the Borrower and the Required Lenders and counterparts of the Consent appended hereto (the "Consent") executed by each of the Guarantors and Grantors (as defined in the Security Agreement) listed therein (such Guarantors and Grantors, together with the Borrower, each a "Loan Party" and, collectively, the "Loan Parties"); and (b) each of the representations and warranties in Section 3 below shall be true and correct. SECTION 3. Representations and Warranties. The Borrower represents and warrants as follows: (a) Authority. The Borrower and each other Loan Party has the requisite corporate power and authority to execute and deliver this Amendment and the Consent, as applicable, and to perform its obligations hereunder and under the Loan Documents (as modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and by each other Loan Party of the Consent, and the performance by each Loan Party of each Loan Document (as modified hereby) to which it is a party have been duly approved by all necessary corporate action of such Loan Party and no other corporate proceedings on the part of such Loan Party are necessary to consummate such transactions. 2 (b) Enforceability. This Amendment has been duly executed and delivered by the Borrower. The Consent has been duly executed and delivered by each Guarantor and each Grantor. This Amendment and each Loan Document (as modified hereby) is the legal, valid and binding obligation of each Loan Party party hereto and thereto, enforceable against such Loan Party in accordance with its terms, and is in full force and effect. (c) Representations and Warranties. The representations and warranties contained in each Loan Document (other than any such representations and warranties that, by their terms, are specifically made as of a date other than the date hereof) are true and correct on and as of the date hereof as though made on and as of the date hereof. (d) No Default. No event has occurred and is continuing that constitutes a Default or Event of Default. SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified hereby. (b) Except as specifically modified above, the Credit Agreement and the other Loan Documents are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all Secured Obligations under and as defined therein, in each case as amended hereby. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender, any Issuing Bank, the Arranger, the Documentation Agent or the Agent under any of the Loan Documents, nor constitute a waiver or amendment of any provision of any of the Loan Documents. SECTION 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment or the Consent by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment or such Consent. SECTION 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of California. 3 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers thereunto duly authorized, as of the date first written above. FOODMAKER, INC., a Delaware corporation By: HAROLD SACHS ------------ Name: Harold Sachs Title: Treasurer NATIONSBANK, N.A. (successor to NationsBank of Texas, N.A.), as Agent By: RICHARD G. PARKHURST, JR. ------------------------- Name: Richard G. Parkhurst, Jr. Title: Senior Vice President S-4 Lenders ------- NATIONSBANK, N.A. (successor to NationsBank of Texas, N.A.) By: RICHARD G. PARKHURST, JR. ------------------------- Name: Richard G. Parkhurst, Jr. Title: Senior Vice President CREDIT LYONNAIS LOS ANGELES BRANCH By: DIANNE M. SCOTT --------------- Name: Dianne M. Scott Title: First Vice President and Branch Manager ROYAL BANK OF CANADA By: JOHN CRAWFORD ------------- Name: John Crawford Title: Senior Manager UNION BANK OF CALIFORNIA, N.A. By: LINDA WELKER ------------ Name: Linda Welker Title: Vice President BANK ONE, TEXAS, N.A. By: THOMAS R. FREAS --------------- Name: Thomas R. Freas Title: Managing Director, Authorized Office S-5 CIBC OPPENHEIMER CORP., AS AGENT FOR CIBC INC. By: GERALD GIRARDI -------------- Name: Gerald Girardi Title: Executive Director SANWA BANK CALIFORNIA By: L.D. HART --------- Name: L.D. Hart Title: Vice President NATEXIS BANQUE - BFCE By: DANIEL TOUFFU ------------- Name: Daniel Touffu Title: Senior VP and Regional Manager By: PEYMAN PARHAMI -------------- Name: Peyman Parhami Title: Assistant Treasurer S-6 CONSENT Dated as of February 27, 1999 The undersigned, as Guarantors under the "Guaranty" and as Grantors under the "Security Agreement" (as such terms are defined in and under the Credit Agreement referred to in the foregoing Second Amendment), each hereby consents and agrees to the foregoing Second Amendment and hereby confirms and agrees that (i) the Guaranty and the Security Agreement are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, said Second Amendment, each reference in the Guaranty and the Security Agreement to the "Credit Agreement", "thereunder", "thereof" and words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by said Second Amendment, and (ii) the Security Agreement and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Secured Obligations as defined in the Security Agreement. CP DISTRIBUTION CO., a Delaware corporation, CP WHOLESALE CO., a Delaware corporation, and JACK IN THE BOX, INC., a New Jersey corporation By: LAWRENCE E. SCHAUF ------------------ Name: Lawrence E. Schauf Title: Executive Vice President and Secretary FOODMAKER INTERNATIONAL FRANCHISING, INC., a Delaware corporation By: HAROLD L. SACHS --------------- Harold L. Sachs Treasurer EX-27 3 ARTICLE 5 FDS FOR FISCAL YEAR 1999 SECOND QUARTER 10-Q
5 FISCAL YEAR THRU SECOND QUARTER CONTAINS 28 WEEKS 1000 6-MOS OCT-03-1999 SEP-28-1998 APR-11-1999 5,712 0 19,194 2,599 21,903 88,341 811,213 (244,223) 783,680 208,518 320,197 410 0 0 179,064 783,680 707,296 729,107 239,654 569,187 0 0 15,471 64,638 23,900 40,738 0 0 0 40,738 1.07 1.04
-----END PRIVACY-ENHANCED MESSAGE-----