Business Context and Reporting Period
Company: Foodmaker, Inc. (d/b/a Jack In The Box)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended October 1, 1995 (52 weeks)
Business Overview: The Company owns, operates, and franchises Jack In The Box fast-food restaurants, primarily in the western and southwestern United States. As of October 1, 1995, the system comprised 1,252 restaurants (863 company-operated, 389 franchised). The Company previously owned Chi-Chi's but contributed it to Family Restaurants, Inc. (FRI) in January 1994 in exchange for a 39% equity interest. In November 1995, subsequent to the fiscal year-end, the Company transferred its entire equity interest in FRI to Apollo FRI Partners, L.P.
Key Financial Metrics
| Metric | Fiscal 1995 | Fiscal 1994 |
|---|---|---|
| Total Revenues | $1,018.7 million | $1,053.3 million |
| Net Loss | $(69.0) million | $(39.6) million |
| Loss Per Share | $(1.77) | $(1.03) |
| Operating Cash Flow | $33.5 million | $29.4 million |
| Total Assets | $662.7 million | $740.3 million |
| Total Debt | $442.1 million | $449.2 million |
| Stockholders' Equity | $31.3 million | $100.1 million |
| Working Capital | $(34.1) million deficit | $(32.8) million deficit |
Restaurant Sales: Company-operated restaurant sales increased 11.7% to $804.1 million, driven by an increase in the average number of restaurants and a 3.5% increase in per-store average sales.
Material Changes vs. Prior Period
- Investment Write-down: The Company recorded a $57.2 million loss in the first quarter of 1995 representing the complete write-down of its 39% equity investment in Family Restaurants, Inc. (FRI). This was due to FRI writing off goodwill attributable to the Chi-Chi's chain.
- Legal Settlements: An $8.0 million settlement related to a securities class action lawsuit was recorded in the first quarter of 1995.
- Revenue Composition: Total revenues decreased slightly year-over-year, but this masks a 9.6% increase in Jack In The Box revenues when excluding Chi-Chi's results which were only present in the first quarter of 1994.
- Equity Reduction: Stockholders' equity declined significantly from $100.1 million to $31.3 million, primarily due to the net loss and the FRI investment write-down.
- Debt Reduction: Total debt decreased by approximately $7.1 million, and interest expense declined by $6.7 million due to debt repayments following the sale of Chi-Chi's in the prior year.
Outlook, Risks, and Management Commentary
Expansion Strategy: Management plans to open approximately 250-300 new company-operated restaurants and 130 new franchise-operated restaurants (domestic and international) over the next five years. The strategy focuses on increasing per-store sales through new menu items and expanding in existing markets.
Liquidity: The Company maintains a working capital deficit, which is typical for the restaurant industry due to capital investment cycles. Liquidity is supported by cash flows from operations, a $52.5 million revolving credit facility (with $46.9 million unused as of Oct 1, 1995), and potential sale-leaseback transactions.
Legal Contingencies:
- Food-Borne Illness Outbreak: Pending lawsuits related to the 1993 E. coli outbreak. The Company settled most franchisee claims in 1993 ($44.5 million provision) and settled the remaining franchisee claim in early 1995 by acquiring 27 restaurants. The Company is pursuing reimbursement from suppliers (Vons) with a trial set for November 1996.
- FTC Investigation: The FTC is investigating a potential violation of the Hart-Scott-Rodino Act regarding the 1992 acquisition of Consul Restaurant Corporation. Management believes any potential penalty will not be material.
- Tax Disputes: The IRS has proposed adjustments for tax years 1986-1990. Management believes adequate provisions have been made.
Unusual Items: The $57.2 million FRI write-down and the $8.0 million securities settlement are non-recurring items that significantly impacted the 1995 net loss.
Investor Verification Checklist
- FRI Investment Status: Verify the final terms of the November 1995 agreement transferring the FRI equity interest to Apollo and confirm no residual liability remains.
- Legal Exposure: Monitor the outcome of the consolidated litigation against supplier Vons regarding the 1993 food-borne illness outbreak, as reimbursement is critical to offsetting prior settlement costs.
- Debt Covenants: Review the Company's ability to maintain financial ratios required by the revolving credit facility and long-term debt indentures, given the reduced equity base.
- Franchisee Relations: Assess the impact of franchisees forming a purchasing cooperative and contracting with alternative suppliers, which may affect distribution sales margins.
- Capital Expenditures: Evaluate the funding sources for the planned expansion of 250-300 new company-operated units, given the current working capital deficit.