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 13, 2003
--------------January 18, 2004
----------------
Commission file no. 1-9390
JACK IN THE BOX 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 (858) 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
--- -------- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- -------- -----
Number of shares of common stock, $.01 par value, outstanding as of the close of
business May 23, 2003February 27, 2004 - 36,005,907.
----------36,355,725.
1
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial InformationPART I
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets.................................Sheets........................... 3
Unaudited Consolidated Statements of Earnings...............Earnings................... 4
Unaudited Consolidated Statements of Cash Flows.............Flow.................. 5
Notes to Unaudited Consolidated Financial Statements........Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................... 12Operations........................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..Risk........ 17
Item 4. Controls and Procedures..................................... 18
Part II. Other Information
Item 1. Legal Proceedings........................................... 18Procedures........................................... 17
PART II
Item 4. Submission of Matters to a Vote of Security Holders.........Holders............... 18
Item 6. Exhibits and Reports on Form 8-K............................8-K.................................. 19
Signature...........................................................Signature......................................................... 21
Certifications...................................................... 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 13,January 18, September 29,28,
2004 2003 2002
- --------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .....................equivalents................... $ 8,24230,558 $ 5,62022,362
Accounts and notes receivable, net ...................... 30,748 26,176
Inventories ................................... 32,030 29,975net.......... 26,804 31,582
Inventories................................. 34,801 31,699
Prepaid expenses and other current assets ..... 15,847 38,108assets... 17,378 21,056
Assets held for sale and leaseback ............ 21,691 12,626
---------- ----------leaseback.......... 54,784 41,916
----------- -----------
Total current assets ........................ 108,558 112,505
---------- ----------assets...................... 164,325 148,615
----------- -----------
Property and equipment, at cost .................. 1,247,170 1,219,487
Accumulated depreciation and amortization ..... (401,129) (372,556)
---------- ----------
Property and equipment, net ................. 846,041 846,931
---------- ----------
Trading area rights, net ......................... - 64,628
Goodwill .........................................net.................... 865,137 866,960
Goodwill....................................... 90,218 1,98890,218
Intangible assets, net......................... 28,967 29,640
Other assets, net ................................ 67,849 37,392
---------- ----------
TOTAL ....................................... $1,112,666 $1,063,444
========== ==========net.............................. 41,418 40,517
----------- -----------
TOTAL..................................... $ 1,190,065 $ 1,175,950
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ..........debt........ $ 2,5199,536 $ 106,26512,334
Accounts payable .............................. 40,736 59,212payable............................ 43,103 49,491
Accrued expenses .............................. 174,392 167,900
---------- ----------expenses............................ 182,563 175,909
----------- -----------
Total current liabilities ................... 217,647 333,377
---------- ----------liabilities................. 235,202 237,734
----------- -----------
Deferred income taxes ............................ 37,193 25,861taxes.......................... 35,445 33,910
Long-term debt, net of current maturities ........ 298,989 143,364maturities...... 300,701 290,746
Other long-term liabilities ...................... 107,046 96,727liabilities.................... 132,339 143,238
Stockholders' equity:
Common stock ...................................stock................................ 433 432 429
Capital in excess of par value ................. 324,486 319,810value.............. 325,789 325,510
Retained earnings .............................. 264,543 227,064earnings........................... 316,289 300,682
Accumulated other comprehensive loss, net ...... (8,882) (8,882)net... (27,184) (27,184)
Unearned compensation .......................... (4,325) -compensation....................... (4,486) (4,655)
Treasury stock .................................stock.............................. (124,463) (74,306)
---------- ----------(124,463)
----------- -----------
Total stockholders' equity .................. 451,791 464,115
---------- ----------
TOTAL ....................................... $1,112,666 $1,063,444
========== ==========equity................ 486,378 470,322
----------- -----------
TOTAL..................................... $ 1,190,065 $ 1,175,950
=========== ===========
See accompanying notes to consolidated financial statements.
3
JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Twelve Weeks Ended Twenty-Eight Weeks Ended
----------------------------- ------------------------------
April 13, April 14, April 13, April 14,
2003 2002 2003 2002
- ------------------------------------------- ----------------------------- ------------------------------
Revenues:
Restaurant sales........................ $ 418,272 $ 418,118 $ 977,703 $ 970,666
Distribution and other sales............ 24,282 16,950 52,424 38,102
Franchise rents and royalties........... 10,496 8,247 27,997 24,886
Other................................... 10,298 4,315 18,559 8,156
---------- ---------- ----------- -----------
463,348 447,630 1,076,683 1,041,810
---------- ---------- ----------- -----------
Costs of revenues:
Restaurant costs of sales............... 125,551 127,579 296,821 297,697
Restaurant operating costs.............. 224,228 214,840 518,245 496,389
Costs of distribution and other sales... 23,789 16,454 51,281 37,139
Franchised restaurant costs............. 5,774 5,123 13,214 11,764
---------- ---------- ----------- -----------
379,342 363,996 879,561 842,989
---------- ---------- ----------- -----------
Gross profit............................... 84,006 83,634 197,122 198,821
Selling, general and administrative........ 51,884 49,804 122,612 115,680
---------- ---------- ----------- -----------
Earnings from operations................... 32,122 33,830 74,510 83,141
Interest expense........................... 5,802 5,190 14,061 12,495
---------- ---------- ----------- -----------
Earnings before income taxes............... 26,320 28,640 60,449 70,646
Income taxes............................... 10,001 10,454 22,970 25,786
---------- ---------- ----------- -----------
Net earnings............................... $ 16,319 $ 18,186 $ 37,479 $ 44,860
========== ========== =========== ===========
Net earnings per share:
Basic................................... $ .45 $ .46 $ 1.02 $ 1.14
Diluted................................. $ .44 $ .45 $ 1.00 $ 1.12
Weighted-average shares outstanding:
Basic................................... 36,399 39,436 36,866 39,342
Diluted................................. 36,846 40,299 37,306 40,125
Sixteen Weeks Ended
--------------------------------
January 18, January 19,
2004 2003
- --------------------------------------------------------------------------------
Revenues:
Restaurant sales............................ $ 597,712 $ 559,431
Distribution and other sales................ 43,670 28,142
Franchise rents and royalties............... 21,217 17,500
Other....................................... 7,321 8,261
----------- -----------
669,920 613,334
----------- -----------
Costs of revenues:
Restaurant costs of sales................... 188,449 171,227
Restaurant operating costs.................. 313,139 294,059
Costs of distribution and other sales....... 42,907 27,492
Franchised restaurant costs................. 8,941 7,440
----------- -----------
553,436 500,218
----------- -----------
Selling, general and administrative............ 75,412 70,729
----------- -----------
Earnings from operations....................... 41,072 42,387
Interest expense............................... 15,899 8,258
----------- -----------
Earnings before income taxes................... 25,173 34,129
Income taxes................................... 9,566 12,969
----------- -----------
Net earnings................................... $ 15,607 $ 21,160
=========== ===========
Earnings per share:
Basic....................................... $ .43 $ .57
Diluted..................................... $ .43 $ .56
Weighted-average shares outstanding:
Basic....................................... 36,050 37,216
Diluted..................................... 36,607 37,651
See accompanying notes to consolidated financial statements.
4
JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Twenty-EightSixteen Weeks Ended
-----------------------------
April 13, April 14,--------------------------
January 18, January 19,
2004 2003
2002
- -------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings..................................................................earnings......................................................... $ 37,47915,607 $ 44,86021,160
Non-cash items included in operations:
Depreciation and amortization.............................................. 37,217 37,253amortization...................................... 23,175 21,182
Amortization of unearned compensation ..................................... 234 -............................. 169 117
Deferred finance cost amortization......................................... 1,595 900amortization................................. 728 915
Deferred income taxes...................................................... 7,616 5,016
Tax benefit associated with exercisetaxes.............................................. 1,535 2,422
Loss on early retirement of stock options.........................debt................................... 9,177 - 2,700
Gains on the conversion of Company-operated restaurants....................... (16,595) (6,860)
Changescompany-operated restaurants.............. (5,112) (7,270)
Decrease (increase) in assets and liabilities, net of the effect of the Qdoba acquisition:
(Increase) decreasereceivables................................... (114) 4,488
Increase in receivables......................................... (5,100) 3,972
(Increase) decrease in inventories......................................... (1,904) 885inventories.............................................. (3,102) (2,132)
Decrease in prepaid expenses and other current assets...................... 6,069 2,661assets................ 3,678 10,003
Decrease in accounts payable............................................... (18,617) (17,473)payable......................................... (6,388) (15,671)
Increase in other liabilities.............................................. 15,287 3,416
--------- ---------liabilities........................................ 14,573 7,853
-------- --------
Cash flows provided by operating activities................................ 63,281 77,330
--------- ---------activities........................ 53,926 43,067
-------- --------
Cash flows from investing activities:
Additions to property and equipment........................................... (49,223) (53,539)
Purchase of Qdoba, net of cash acquired of $2,856............................. (42,606) -equipment.................................. (23,501) (22,371)
Dispositions of property and equipment........................................ 18,543 3,031equipment............................... 1,993 15,300
Proceeds from the conversion of Company-operated restaurants.................. 2,228 5,739company-operated restaurants......... 3,111 849
Increase in assets held for sale and leaseback................................ (9,065) (8,336)leaseback....................... (9,865) (4,676)
Collections on notes receivable............................................... 12,251 1,706
Other......................................................................... (2,643) (2,754)
--------- ---------receivable...................................... 10,020 4,302
Pension contributions................................................ (17,000) (4,400)
Other................................................................ (3,902) (1,584)
-------- --------
Cash flows used in investing activities.................................... (70,515) (54,153)
--------- ---------activities............................ (39,144) (12,580)
-------- --------
Cash flows from financing activities:
Borrowings under revolving bank loans......................................... 479,500 235,140loans................................ - 361,500
Principal repayments under revolving bank loans............................... (506,500) (261,140)loans...................... - (288,500)
Proceeds from issuance of long-term debt...................................... 150,000term loan.............................................. 275,000 -
Principal payments on long-term debt, including current maturities............ (55,521) (1,208)maturities... (275,230) (54,905)
Debt issuance and debt repayment costs........................................ (7,586) -costs............................... (6,636) (1,203)
Repurchase of common stock.................................................... (50,157)stock........................................... - (36,225)
Proceeds from issuance of common stock........................................ 120 3,841
--------- ---------stock............................... 280 110
-------- --------
Cash flows provided by (used in)used in financing activities...................... 9,856 (23,367)
--------- ---------activities............................ (6,586) (19,223)
-------- --------
Net increase (decrease) in cash and cash equivalents............................equivalents.............................. $ 2,6228,196 $ (190)
========= =========11,264
======== ========
See accompanying notes to consolidated financial statements.
5
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1. GENERAL
The accompanying unaudited consolidated financial statements of Jack in the
Box Inc. (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United
States of America and the rules and regulations of the Securities and
Exchange Commission ("SEC"). In our opinion, all 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. Our fiscal year is 52 or 53
weeks ending the Sunday closest to September 30. Fiscal year 2004 includes
53 weeks and fiscal year 2003 includes 52 weeks. We report results
quarterly with the first quarter having 16 weeks and each remaining quarter
having 12 weeks with the exception of the fourth quarter of fiscal year
2004 which will include 13 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 notes to the fiscal year
20022003 consolidated financial statements contained in our Annual Report on
Form 10-K filed with the SEC.
2. STOCK-BASED EMPLOYEE COMPENSATION
Stock awards are accounted for under APBAccounting Principles Board Opinion
25, Accounting for Stock Issued to Employees, using the intrinsic method,
whereby compensation expense is recognized for the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
exercise price. Our policy is to grant stock options at fair value at the
date of grant. Had compensation expense been recognized for our stock-based
compensation plans by applying the fair value recognition provisions of
SFASStatement of Financial Accounting Standards ("SFAS") 123, Accounting for
Stock-Based Compensation, we would have recorded net earnings as follows:
TwelveSixteen Weeks Ended
Twenty-Eight Weeks Ended
--------------------------- ---------------------------
April 13, April 14, April 13, April 14,--------------------------
January 18, January 19,
2004 2003
2002 2003 2002
---------------------------------------------- --------------------------- -------------------------------------------------------------------------------------------------------------------------
Net earnings, as reported..................reported............................................ $ 16,31915,607 $ 18,186 $ 37,479 $ 44,86021,160
Deduct: Total stock basedstock-based employee compensation expense determined
under fair value based method for all awards, net of taxes............................. 1,223 1,184 2,824 2,742
-------- --------taxes.......... 1,659 1,619
-------- --------
Pro forma net earnings.....................earnings............................................... $ 15,09613,948 $ 17,002 $ 34,655 $ 42,118
======== ========19,541
======== ========
Net earnings per share:
Basic-as reported........................ $ .45 $ .46 $ 1.02 $ 1.14
Basic-pro forma.......................... $ .41reported................................................... $ .43 $ .94.57
Basic-pro forma..................................................... $ 1.07.39 $ .53
Diluted-as reported......................reported................................................. $ .44.43 $ .45.56
Diluted-pro forma................................................... $ 1.00.38 $ 1.12
Diluted-pro forma........................ $ .41 $ .42 $ .93 $ 1.05.52
3. QDOBA ACQUISITION
On January 21,ACCOUNTING CHANGES
In December 2003, we acquired Qdoba Restaurant Corporationthe Financial Accounting Standards Board ("Qdoba"FASB"), operator
and franchiser issued
Interpretation 46 Revised, Consolidation of Qdoba Mexican Grill(R), for $45 million in cash. The purchase
was financed by borrowings under our credit facility. Qdoba operates inVariable Interest Entities - an
interpretation of Accounting Research Bulletin No. 51, which provides among
other things, the fast-casual segmentimmediate deferral of the restaurant industryapplication of Interpretation
46 for entities which did not originally qualify as special purpose
entities, and asprovided additional scope exceptions for joint ventures with
business operations and franchises. The adoption of the acquisition date,
operatedthis Interpretation did
not have a material impact on our results of operations or franchised 85 restaurants in 16 states. This acquisition is
consistent with the Company's long-term strategy to transition from a regional
quick-service restaurant chain to a national restaurant company.financial
position.
6
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
3. QDOBA ACQUISITION (continued)
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the acquisition date. We utilized a third party valuation
expert to assist us in valuing the intangible assets acquired.
Current assets................................................. $ 3,326
Property and equipment and other............................... 8,186
Intangible assets................................... .......... 18,000
Goodwill....................................................... 23,617
--------
Total assets acquired........................................ 53,129
Liabilities assumed............................................ 7,667
Net assets acquired.......................................... $ 45,462
========
Intangible assets include amortizable franchise contracts, which will be
amortized over a period of 26 years. None of the goodwill acquired is deductible
for tax purposes.
The results of Qdoba's operations have been included in the consolidated
financial statements since January 21, 2003. Had the acquisition been completed
as of the beginning of the periods indicated in the table below, the Company
would have reported pro forma revenues, net earnings and basic and diluted net
earnings per share amounts as follows:
Twelve Weeks
Ended Twenty-Eight Weeks Ended
------------ --------------------------
April 14, April 13, April 14,
2002 2003 2002
-------------------------------------- -------------------------------------------
Total revenues...................... $ 454,176 $1,084,251 $1,052,781
Net earnings........................ 17,931 37,377 44,009
Net earnings per share - Basic...... $ .45 $ 1.01 $ 1.12
Net earnings per share - Diluted.... $ .44 $ 1.00 $ 1.10
The pro forma results include interest expense on the Company's term loan, which
was used to finance the acquisition. The pro forma amounts are not indicative of
anticipated future results.
4. INTANGIBLE ASSETS
SFAS 141, Business Combinations, requires that all business combinations be
accounted for using the purchase method of accounting and specifies the criteria
to use in determining whether intangible assets identified in purchase
accounting must be recorded separately from goodwill. We determined that our
trading area rights ("TAR"), which represent the amounts allocated under
purchase accounting to reflect the value of operating existing restaurants
within each specific trading area, do not meet the separability criteria of SFAS
141. Therefore, effective September 30, 2002, our trading area rights have been
reclassified to goodwill.
Under SFAS 142, Goodwill and Other Intangible Assets, goodwill and intangible
assets with indefinite lives are no longer amortized but are tested at least
annually for impairment. Separable intangible assets with definite lives will
continue to be amortized over their estimated useful lives. In accordance with
the provisions of SFAS 142, we ceased amortizing goodwill effective September
30, 2002. We also performed the transitional impairment test for goodwill in the
first quarter, which indicated there was no impairment upon our adoption of SFAS
142.
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
4. INTANGIBLE ASSETS
(continued)
Intangible assets consistconsisted of the following as of April 13,January 18, 2004 and
September 28, 2003:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-----------------------------------------------------------------------------2004 2003
----------------------------------------------------------------------------
Amortized intangible assets.......assets:
Gross carrying amount................. $ 61,25560,676 $ 39,41461,069
Less accumulated amortization......... 40,509 40,229
----------- -----------
Net carrying amount................... $ 21,841
========20,167 $ 20,840
=========== ===========
Unamortized intangible assets:
Goodwill....................................................Goodwill.............................. $ 90,218 Trademark...................................................$ 90,218
Qdoba trademark....................... 8,800 --------8,800
----------- -----------
$ 99,018 ========$ 99,018
=========== ===========
Amortized intangible assets include lease acquisition costs and acquired
franchise contracts. Lease acquisition costs represent the fair values of
acquired lease contracts having contractual rents lower than fair market
rents and are amortized on a straight-line basis over the remaining lease
term. Acquired franchise contracts are amortized over the term of the
franchise agreements based on the projected royalty revenue stream. The
change inweighted-average life of the carrying amount of total goodwill during the twenty-eight
weeks ended April 13, 2003amortized intangible assets is approximately
28 years. Total amortization expense related to intangible assets was as follows:
Balance at September 29, 2002................................ $ 1,988
Reclassification of trading area rights$613
and other............ 64,613
Goodwill acquired............................................ 23,617
--------
Balance at April 13, 2003.................................... $ 90,218
========
Had the provisions of SFAS 142 been adopted prior to September 30, 2002, net
earnings$639 for the twelve weeksquarters ended April 14, 2002 would have increased $632, or
$.01 per basicJanuary 18, 2004 and diluted share, to $18,818, or $.47 per basic share and $.46
per diluted share. We reported net earnings for the quarter of $18,186, or $.46
per basic share and $.45 per diluted share. Net earnings for the twenty-eight
weeks ended April 14, 2002 would have increased $1,476, or $.04 per basic and
diluted share, to $46,336, or $1.18 per basic share and $1.16 per diluted share.
We reported net earnings year-to-date of $44,860, or $1.14 per basic share and
$1.12 per diluted share. Adjusted net earnings exclude goodwill and trading area
rights amortization expense, net of taxes.
Total intangibles amortization expense was $0.5 million and $1.2 million,
respectively, for the quarter and year-to-date periods ended April 13, 2003.January 19, 2003,
respectively. The estimated intangibles amortization expense for each fiscal year
through 2007 is
$2.3 million.
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)2008 ranges from approximately $1,400 to $1,800.
5. DEBT
Debt Extinguishment. In January 1994, we entered into financing lease
arrangements with two limited partnerships (the "Partnerships"), in which we
sold interests in 76 restaurants for a specified period of time. The acquisition
of the properties, including costs and expenses, was funded through the issuance
of $70 million in 10.3% senior secured notes by a special purpose corporation
acting as agent for the Partnerships. On August 29, 2002, we entered into an
agreement to repurchase the interests in the restaurant properties that had been
encumbered by the financing lease obligations for a consent fee of $1.3 million.
On January 2, 2003, we used borrowings under our credit facility and previous
sinking fund payments to reacquire the interests in the restaurant properties
and retire the high interest rate bearing financing lease obligations.INDEBTEDNESS
New Financing. On January 22, 2003,8, 2004, we secured a new senior credit facility
which provides borrowings in the aggregate amount of $350 million and is
comprised of: (i) a $200 million revolving credit facility maturing on January
22, 2006, and (ii) a $150 million term loan maturing on July 22, 2007. This new
credit facility replaces our prior $175 million credit facility, which was due
to expire March 31, 2003.
6. INCOME TAXES
The income tax provisions in 2003 and
2002 project annual tax rates of 38.0% and
36.5% of pretax earnings, respectively. The fiscal 2002 income tax provision was
subsequently adjusted to the effective annual rate of 33.9% of pretax earnings.
The favorable income tax rate in 2002 resulted from our ability to realize
previously unrecognized tax benefits. The final 2003 annual tax rate cannot be
determined until the end of the fiscal year; therefore, the actual rate could
differ from our current estimates.
7. STOCKHOLDERS' EQUITY
As part of the Company's long term incentive program, the Company awarded
217,600 shares of restricted stock to certain executives during the quarter
ended January 19, 2003. These restricted stock awards have been recognized as
unearned compensation in Stockholders' Equity based upon the fair value of the
Company's common stock on the award date. Unearned compensation is amortized to
compensation expense over the estimated vesting period.
Pursuant to our stock repurchase program, as authorized by our Board of
Directors, the Company repurchased 865,653 and 2,566,053 shares, respectively,
of our common stock for approximately $13.9 million and $50.1 million during the
quarter and year-to-date periods ended April 13, 2003. At the end of the quarter
we had no repurchase availability remaining.
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
8. AVERAGE SHARES OUTSTANDING
Net earnings per share for each period is based on the weighted-average number
of shares outstanding during the period, determined as follows:
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------------------------------------
April 13, April 14, April 13, April 14,
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
Shares outstanding, beginning of fiscal year ...... 38,558,036 39,248,168 38,558,036 39,248,168
Effect of common stock issued...................... 11,009 188,160 7,169 93,928
Effect of common stock reacquired.................. (2,170,007) - (1,699,516) -
---------- ---------- ---------- ----------
Weighted-average shares outstanding - basic........ 36,399,038 39,436,328 36,865,689 39,342,096
Assumed additional shares issued upon exercise
of stock options, net of shares reacquired at
the average market price......................... 229,440 862,506 266,898 783,191
Effect of restricted stock issued.................. 217,600 - 173,192 -
---------- ---------- ---------- ----------
Weighted-average shares outstanding - diluted...... 36,846,078 40,298,834 37,305,779 40,125,287
========== ========== ========== ==========
Diluted weighted-average shares outstanding exclude options to purchase
4,043,951 and 3,602,593 shares, respectively, of common stock during the quarter
and year-to-date periods ended April 13, 2003 and 40,000 and 832,806 shares,
respectively, of common stock during the quarter and year-to-date periods ended
April 14, 2002, because their exercise prices exceeded the average market price
of common stock for the period.
9. CONTINGENCIES AND LEGAL MATTERS
On April 18, 2001, an action was filed by Robert Bellmore and Jeffrey Fairbairn,
individually and on behalf of all others similarly situated, in the Superior
Court of the State of California, San Diego County, seeking class action status
in alleging violations of California wage and hour laws. The Company settled the
action in fiscal year 2002 for approximately $9.3 million without admission of
liability and the Court approved the settlement on February 10, 2003. Through
April 13, 2003 the Company has paid out approximately $7.9 million in connection
with this settlement.
The Company is also subject to normal and routine litigation. In the opinion of
management, based in part on the advice of legal counsel, the ultimate liability
from all other pending legal proceedings, asserted legal claims and known
potential legal claims should not materially affect our operating results and
liquidity.
10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
10. SEGMENT REPORTING
Prior to the acquisition of Qdoba, the Company operated its business in a single
segment. Subsequent to the Qdoba acquisition the Company has two operating
segments Qdoba and JACK IN THE BOX. Based upon certain quantitative thresholds,
only JACK IN THE BOX is considered a reportable segment. Summarized financial
information concerning our reportable segment is shown in the following table:
Twelve Weeks Ended Twenty-Eight Weeks Ended
----------------------- ------------------------
April 13, April 14, April 13, April 14,
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------
Revenues ................................ $ 457,258 $ 447,630 $1,070,593 $1,041,810
Earnings from operations................. 31,895 33,830 74,283 83,141
Interest expense and income taxes are not reported on an operating segment basis
based on the Company's method of internal reporting. A reconciliation of
reportable segment earnings from operations to consolidated earnings from
operations follows:
Twelve Weeks Ended Twenty-Eight Weeks Ended
----------------------- ------------------------
April 13, April 14, April 13, April 14,
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------
Earnings from operations................. $ 31,895 $ 33,830 $ 74,283 $ 83,141
Qdoba earnings from operations........... 227 - 227 -
--------- --------- ---------- ----------
Consolidated earnings from operations.... $ 32,122 $ 33,830 $ 74,510 $ 83,141
========= ========= ========== ==========
11. ACCOUNTING CHANGES
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123. This
Statement amends the disclosure requirements of SFAS 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Additionally, this Statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee consideration. We account for our stock-based employee compensation
under APB Opinion 25, Accounting for Stock Used to Employees.
In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities - an interpretation of Accounting Research Bulletin No. 51,
which requires that companies that control another entity through interests
other than voting interests should consolidate the controlled entity. If it is
reasonably possible that a company will have a significant variable interest
entity at the date the Interpretation becomes effective, the company must
disclose the nature, purpose, size and activities of the variable interest
entity and the consolidated enterprise's maximum exposure loss resulting from
its involvement with the variable interest entity in all financial statements
issued after January 31, 2003. This Interpretation applies immediately to
variable interest entities created after January 31, 2003. For variable interest
entities that existed prior to February 1, 2003, the requirements of this
Interpretation are effective for the first fiscal year or interim period
beginning after June 15, 2003. We are not involved with any variable interest
entities created after January 31, 2003. The Company is assessing the impact, if
any, that Interpretation 46 will have on its consolidated financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
JACK IN THE BOX INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
All comparisons under this heading between 2003 and 2002 refer to the
12-week ("quarter") and 28-week ("year-to-date") periods ended April 13, 2003
and April 14, 2002, respectively, unless otherwise indicated.
The Company completed its acquisition of Qdoba Restaurant Corporation
("Qdoba"), operator and franchiser of Qdoba Mexican Grill(R), on January 21,
2003. Qdoba's operations have been included since the date of acquisition
representing 12 weeks of operations.
Consolidated Company-operated restaurant sales were $418.3 million and
$977.7 million, respectively, in 2003 compared with $418.1 million and $970.7
million in 2002. JACK IN THE BOX Company-operated restaurant sales decreased
slightly in the quarter and increased year-to-date. The number of JACK IN THE
BOX Company-operated restaurants increased 3.5% to 1,527 at the end of the
quarter from 1,476 restaurants a year ago. Sales at JACK IN THE BOX
Company-operated restaurants open more than one fiscal year declined 4.3% and
3.3%, respectively, in 2003 compared with 2002, primarily due to continued
economic weakness in certain key markets, continued discounting by competitors,
poor weather and soft sales in markets near military installations and border
crossings, offset in part by modest selling price increases.
Distribution and other sales, representing distribution sales to JACK IN
THE BOX franchisees and sales from our fuel and convenience stores ("Quick
Stuff(R)"), increased $7.3 million and $14.3 million, respectively, to $24.3
million and $52.4 million in 2003. Distribution and other sales increased
principally as a result of sales increases at our QUICK STUFF locations
primarily due to fuel selling price increases consistent with overall industry
trends, and to a lesser extent an increase in the number of QUICK STUFF
locations to twelve at the end of the quarter from eleven a year ago. An
increase in distribution sales, which resulted from an increase in the number of
franchised restaurants using our distribution services, also contributed to the
growth in distribution and other sales.
Franchise rents and royalties increased $2.2 million and $3.1 million,
respectively, to $10.5 million and $28.0 million in 2003, primarily reflecting
an increase in the number of JACK IN THE BOX franchised restaurants to 370 at
the end of the quarter from 341 a year ago. As a percentage of franchise
restaurant sales, franchise rents and royalties grew to 9.3% and 11.3%,
respectively, in 2003 from 8.7% and 11.2% in 2002. The percentage increases in
2003 are attributable to increases in minimum rent from JACK IN THE BOX
franchisees which offset decreases in percentage rent related to per store
average ("PSA") sales declines at franchise-operated restaurants.
Other revenues, principally gains and fees from the conversion of JACK IN
THE BOX Company-operated restaurants to franchisees, as well as interest income
from notes receivable and investments, increased to $10.3 million and $18.6
million, respectively, in 2003 from $4.3 million and $8.2 million in 2002,
primarily due to our continued strategy of selectively converting Jack in the
Box Company-operated restaurants to franchises. Franchise gains increased to
$9.3 million and $16.6 million, respectively, in 2003 from $3.8 million and $6.9
million in 2002, due to an increase in the average selling price per restaurant
and an increase in the number of restaurants converted to 14 year-to-date from 9
a year ago.
Restaurant costs of sales, which include food and packaging costs,
decreased to $125.6 million and $296.8 million, respectively, in 2003 from
$127.6 million and $297.7 million in 2002. Restaurant costs of sales improved to
30.0% and 30.4 %, respectively, of restaurant sales in 2003 from 30.5% and 30.7%
in 2002, primarily due to decreased food cost percentages at JACK IN THE BOX
restaurants, which were favorably impacted by lower ingredient costs, certain
margin improvement initiatives and modest selling price increases in 2003.
12
Restaurant operating costs grew with the addition of Company-operated
restaurants to $224.2 million and $518.2 million, respectively, in 2003 from
$214.8 million and $496.4 million in 2002. As a percentage of restaurant sales,
operating costs increased to 53.6% and 53.0%, respectively, in 2003 from 51.4%
and 51.1% in 2002. The percentage increases in 2003 are primarily due to higher
insurance expenses and occupancy costs on newer stores whose sales have not yet
matured, increased costs related to our new point of sale system, and reduced
leverage on fixed costs due to a decline in PSA sales at Company-operated
restaurants. These cost increases were offset in part by decreases in utilities,
restaurant managed and intangibles amortization expense.
Costs of distribution and other sales increased to $23.8 million and $51.3
million, respectively, in 2003 from $16.5 million and $37.1 million in 2002,
primarily reflecting an increase in the related sales. As a percentage of
distribution and other sales, these costs increased to 98.0% in the quarter from
97.8% compared with a year ago primarily due to a change in our fuel pricing
strategy designed to achieve higher sales volumes at certain QUICK STUFF
locations. Year-to-date theses costs improved to 97.1% of the related sales in
2003 from 97.5% compared with a year ago, primarily due to reductions in QUICK
STUFF labor costs and other profit improvement initiatives.
Franchise restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
increased to $5.8 million and $13.2 million, respectively, in 2003 from $5.1
million and $11.8 million in 2002, primarily reflecting an increase in the
number of franchised restaurants. As a percentage of franchise restaurant sales,
franchise restaurant costs declined to 55.0% and 47.2%, respectively, in 2003
from 62.1% and 47.3% a year ago. The inclusion of Qdoba franchise operations
contributed to the favorable percentage decline in the quarter and resulted in
the percentage decline year-to-date. Year-to-date increases in fixed costs,
primarily rents, exceeded the overall sales growth at JACK IN THE BOX
franchise-operated restaurants.
Selling, general and administrative expenses increased to $51.9 million and
$122.6 million, respectively, or 11.2% and 11.4% of revenues, in 2003 from $49.8
million and $115.7 million, or 11.1% of revenues, for both periods in 2002,
primarily due to higher pension costs and the reduced leverage from softer JACK
IN THE BOX sales, which were offset in part by higher other revenues. Pension
costs have increased due to declines in discount rates and in the return on plan
assets.
Interest expense increased to $5.8 million and $14.1 million, respectively,
in 2003 from $5.2 million and $12.5 million in 2002, primarily due to costs
associated with the early retirement of our high interest rate financing lease
obligations and the amortization of debt issuance costs incurred in connection
with our new credit facility. Increased borrowings from the acquisition of Qdoba
and common stock repurchases in 2003 also contributed to the increase in
interest expense compared to a year ago.
The income tax provisions for 2003 and 2002 reflect projected annual tax
rates of 38.0% and 36.5% of pretax earnings, respectively. The fiscal 2002
income tax provision was subsequently adjusted to the effective annual rate of
33.9% of pretax earnings. The favorable income tax rate in 2002 resulted from
our ability to realize previously unrecognized tax benefits. The final 2003
annual tax rate cannot be determined until the end of the fiscal year;
therefore, the actual rate could differ from our current estimates.
Net earnings decreased in the quarter to $16.3 million, or $.44 per diluted
share, in 2003 from $18.2 million, or $.45 per diluted share, in 2002.
Year-to-date net earnings declined to $37.5 million, or $1.00 per diluted share,
in 2003 from $44.9 million, or $1.12 per diluted share, in 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General. Cash and cash equivalents increased $2.6 million to $8.2 million
at April 13, 2003 from $5.6 million at the beginning of the fiscal year. We
expect to maintain low levels of cash and cash equivalents, reinvesting
available cash flows from operations to develop new or enhance existing
restaurants, and to reduce borrowings under the revolving credit facility.
Financial Condition. Our working capital deficit decreased $111.8 million
to $109.1 million at April 13, 2003 from $220.9 million at September 29, 2002,
primarily due to the reclassification ofamended our revolving credit facility, each with extended maturities. Our
new financing is intended to long-term debt andprovide a more flexible capital structure,
facilitate the repaymentexecution of our financing lease obligations in January
2003. The Companystrategic plan, and decrease borrowing
costs by approximately $3,000 per year on average over the restaurant industry in general maintain relatively low
levelsterm of accounts receivable and inventories, and vendors grant trade credit
13
for purchases such as food and supplies. We also continually invest in our 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. At
the end of the quarter, our current ratio increased to .5 to 1 compared with .3
to 1 at the beginning of the year, primarily due to the credit facility
reclassification and financing lease obligations repayment discussed above.
On January 22, 2003, we replaced our existing revolving credit facility,
due to expire March 31, 2003, with borrowings under a new senior credit
facility.term loan.
Our new credit facility provides borrowings in the aggregate amount of $350 million$475,000
and is comprised of: (i) a $200 million$200,000 revolving credit facility maturing on
January 22, 20068, 2008 with an initiala rate of London Interbank Offered Rate ("LIBOR") plus
2.25% and (ii) a $150 million$275,000 term loan maturing on July 22,
2007January 8, 2011 with an initiala rate
of LIBOR plus 3.25%2.75%. This newThe credit facility requires the payment of an annual
commitment fee based on the unused portion of the credit facility. The
annual commitment rate and the credit facility's interest rates are based
on a financial leverage ratio, as defined in the credit agreement. To
secure our respective obligations under the new credit facility, the Company
and certain of its subsidiaries granted liens onin substantially all personal
property assets. Under certain circumstances, the Company and each of its
certain subsidiaries will be required to grant liens in certain real
property assets to secure their respective obligations under the new credit
facility. Additionally, certain of our real and personal property secure
other indebtedness of the Company. At April 13, 2003,January 18, 2004, we had no
borrowings of $7.0
millionunder our revolving credit facility and had letters of credit
outstanding of $27.3 million under our revolving
credit facility.approximately $32,600.
We are subject to a number of customary covenants under our various debt instruments,
including limitations on additional borrowings, acquisitions, loans to
franchisees, capital expenditures, lease commitments and dividend payments,
as well as requirements to maintain certain financial ratios, cash flows
and net worth. As of April 13, 2003,January 18, 2004, we were in compliance with all the
debt covenants.
Debt Extinguishment. We used the proceeds from the new term loan to
refinance our existing $150,000 term loan and redeem $125,000 of 8 3/8%
senior subordinated notes due April 15, 2008, which resulted in a pre-tax
charge to interest expense of $9,177, or $5,690 after tax.
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
6. INCOME TAXES
The income tax provisions in the quarter reflect the projected annual tax
rates for 2004 and 2003 of 38.0%. The fiscal 2003 income tax provision was
subsequently adjusted to the effective annual rate of 36.2% of pretax
earnings. The favorable income tax rate in 2003 resulted from the favorable
resolution of a long-standing tax matter. The final 2004 annual tax rate
cannot be determined until the end of the fiscal year; therefore, the
actual rate could differ from our current estimates.
7. AVERAGE SHARES OUTSTANDING
Net earnings per share for each quarter is based on the weighted-average
number of shares outstanding during the quarter, determined as follows (in
thousands):
Sixteen Weeks Ended
-------------------------
January 18, January 19,
2004 2003
-----------------------------------------------------------------------------------------------
Shares outstanding, beginning of period ............................... 36,034 38,558
Effect of common stock issued.......................................... 16 4
Effect of common stock reacquired...................................... - (1,346)
------ ------
Weighted-average shares outstanding - basic............................ 36,050 37,216
Assumed additional shares issued upon exercise of stock
options, net of shares reacquired at the average market price......... 305 295
Effect of restricted stock issued...................................... 252 140
------ ------
Weighted-average shares outstanding - diluted.......................... 36,607 37,651
====== ======
Diluted weighted-average shares outstanding exclude options to purchase
3,480,676 and 3,271,253 shares of common stock in 2004 and 2003,
respectively, because their exercise prices exceeded the average market
price of common stock for the period.
8. CONTINGENCIES AND LEGAL MATTERS
The Company is principally liable for lease obligations on various
properties sub-leased to third parties. We are also obligated under a lease
guarantee agreement associated with one Chi Chi's restaurant property. Due
to the bankruptcy of the Chi-Chi's restaurant chain, previously owned by
the Company, we are obligated to perform in accordance with the terms of
the guarantee agreement, as well as four other lease agreements which
expire at various dates in 2010 and 2011. During fiscal year 2003, we
established an accrual for these lease obligations and do not anticipate
incurring any additional charges related to the Chi Chi's bankruptcy in
future years.
Legal Proceedings - The Company is also subject to normal and routine
litigation. In the opinion of management, based in part on the advice of
legal counsel, the ultimate liability from all pending legal proceedings,
asserted legal claims and known potential legal claims should not
materially affect our operating results, financial position or liquidity.
9. SEGMENT REPORTING
Prior to the acquisition of Qdoba, the Company operated its business in a
single segment. Subsequent to the Qdoba acquisition the Company has two
operating segments, JACK IN THE BOX and Qdoba, based on the Company's
management structure and internal method of reporting. Based upon certain
quantitative thresholds, only JACK IN THE BOX is considered a reportable
segment.
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
9. SEGMENT REPORTING (continued)
Summarized financial information concerning our reportable segment is shown
in the following table:
Sixteen Weeks Ended
--------------------------------
January 18, January 19,
2004 2003
---------------------------------------------------------------------------
Revenues ................................. $ 660,240 $ 613,334
Earnings from operations.................. 41,410 42,387
Interest expense and income taxes are not reported on an operating segment
basis in accordance with the Company's method of internal reporting.
A reconciliation of reportable segment revenues to consolidated revenue
follows:
Sixteen Weeks Ended
--------------------------------
January 18, January 19,
2004 2003
---------------------------------------------------------------------------
Revenues................................. $ 660,240 $ 613,334
Other.................................... 9,680 -
----------- -----------
Consolidated revenues.................... $ 669,920 $ 613,334
=========== ===========
A reconciliation of reportable segment earnings from operations to
consolidated earnings from operations follows:
Sixteen Weeks Ended
--------------------------------
January 18, January 19,
2004 2003
---------------------------------------------------------------------------
Earnings from operations................. $ 41,410 $ 42,387
Other.................................... (338) -
----------- -----------
Consolidated earnings from operations.... $ 41,072 $ 42,387
=========== ===========
10. SUPPLEMENTAL CASH FLOW INFORMATION
The consolidated statements of cash flows exclude the following non-cash
transactions: (i) equipment capital lease obligations of $7,290 incurred in
2004; (ii) non-cash proceeds from the Company's financing of a portion of
the sale of company-operated restaurants to certain qualified franchisees
of $5,265 and $8,218 in 2004 and 2003, respectively, included in accounts
receivable; and (iii) the use of sinking fund payments to retire financing
lease obligations during 2003.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
All comparisons under this heading between 2004 and 2003 refer to the
16-week periods ended January 18, 2004 and January 19, 2003, respectively,
unless otherwise indicated.
The Company acquired Qdoba Restaurant Corporation ("Qdoba"), operator and
franchiser of Qdoba Mexican Grill(R), on January 21, 2003. Qdoba's results of
operations are not included in periods ending prior to the acquisition date, and
as such are not reflected in the results of operations for the first quarter of
fiscal year 2003.
Overview
Jack in the Box Inc. (the "Company") owns, operates and franchises JACK IN
THE BOX(R) quick-service hamburger restaurants and Qdoba Mexican Grill ("Qdoba")
fast-casual restaurants. As of January 18, 2004, the JACK IN THE BOX system
included 1,959 restaurants, of which 1,545 were company-operated and 414 were
franchise-operated. JACK IN THE BOX restaurants are located primarily in the
western and southern United States. As of January 18, 2004, the Qdoba Mexican
Grill system included 131 fast-casual restaurants.
The Company's primary source of revenue is from company-operated
restaurants. The Company also derives revenue from distribution sales to JACK IN
THE BOX and Qdoba franchises, retail sales from fuel and convenience stores
("QUICK STUFF(R)"), royalties from franchised restaurants, rents from real
estate leased to certain franchisees, initial franchise fees and development
fees, and the sale of company-operated restaurants to franchisees.
The quick-serve restaurant industry has become more complex and challenging
in recent years. Challenges presently facing the sector include changes in
consumer expectations, intense competition with respect to market share,
restaurant locations, labor, and menu and product development, the emergence of
a new fast-casual restaurant segment, changes in the economy and industry price
wars.
To address these challenges and others, and support our goal of
transitioning to a national restaurant company, management has undertaken a
brand re-invention operating strategy and developed a multifaceted growth
strategy. Brand re-invention initiatives include product innovation with a focus
on high-quality products, enhancements to the quality of service and renovation
to the restaurant facility. Our multifaceted growth strategy includes growing
our restaurant base, increasing our franchising activities, expanding our
proprietary QUICK STUFF convenience store concept and continuing to grow Qdoba.
We believe that brand re-invention will clearly differentiate us from our
competition and that our growth strategy will support us in our objective to
become a national restaurant company.
The following summarizes the most significant events occurring in the first
quarter of fiscal year 2004:
o Increase in Company-operated Restaurant Sales. New product
introductions and quality improvements to existing products have
resulted in increased sales trends in the quarter. This trend is
expected to continue, and we project a 4.0% to 4.5% increase in sales
at JACK IN THE BOX restaurants open more than one fiscal year
("same-store") in the second quarter and a 2.5% to 3.0% growth in
same-store sales for the full year.
o Increase in Restaurant Costs of Sales. In the quarter, restaurant
costs of sales were unfavorably impacted by higher commodity costs,
primarily beef. Beef costs were approximately 20% higher than a year
ago and are expected to continue to be higher than last year in our
second quarter and then moderate for the remainder of the year. For
the full fiscal year, we estimate beef costs will be approximately 5%
to 7% higher than last year.
o Refinancing Transaction. We secured new financing intended to provide
a more flexible capital structure, facilitate the execution of our
strategic plan, and decrease borrowing costs. In connection with the
refinancing, we recorded a charge to interest expense for the early
retirement of debt of $9.2 million, $5.7 million after tax or $.15 per
diluted share.
o Brand Re-Invention Progress. We are currently converting two
restaurants in San Diego that will serve as learning labs for our
brand re-invention initiative. These restaurants are expected to
reopen within the next 60 days and will feature an upgraded menu,
totally redesigned facility - inside and out - and a higher level of
guest service. The results of these two concept stores will be
evaluated and applied in two test markets before fiscal-year end. As
we have stated previously, brand reinvention is anticipated to be a
three- to five-year program which will roll out only after evaluation
of our market testing. We are also on course with our new Innovation
Center, which will unite research and development with product
marketing and other key support functions. The Innovation Center,
expected to open this spring, will help us research evolving consumer
preferences, develop new products and design new restaurant processes
and equipment.
10
The following table sets forth, unless otherwise indicated, the percentage
relationship to total revenues of certain items included in the Company's
statements of earnings.
STATEMENTS OF EARNINGS DATA
2004 2003
- -------------------------------------------------------------------------------
Revenues:
Restaurant sales............................. 89.2% 91.2%
Distribution and other sales................. 6.5 4.6
Franchise rents and royalties................ 3.2 2.9
Other........................................ 1.1 1.3
----- -----
Total debt outstandingrevenues............................. 100.0% 100.0%
----- -----
Costs of revenues:
Restaurant costs of sales (1)................ 31.5% 30.6%
Restaurant operating costs (1)............... 52.4 52.6
Costs of distribution and other sales (1).... 98.3 97.7
Franchise restaurant costs (1)............... 42.1 42.5
Total costs of revenues.................... 82.6 81.6
Selling, general and administrative............ 11.3 11.5
Earnings from operations................... 6.1 6.9
(1) As a percentage of the related sales and/or revenues.
The following table summarizes the number of JACK IN THE BOX restaurants as
of January 18, 2004 and January 19, 2003:
2004 2003
- -------------------------------------------------------------------------------
JACK IN THE BOX:
Company-operated............................. 1,545 1,515
Franchised................................... 414 365
----- -----
End of period total.......................... 1,959 1,880
===== =====
Revenues
Restaurant sales increased $38.3 million, or 6.8%, to $597.7 million in
2004 from $559.4 million in 2003. This growth primarily reflects an increase in
sales at JACK IN THE BOX company-operated restaurants, growth in the number of
company-operated restaurants and additional sales from Qdoba company-operated
restaurants, which were acquired in the second quarter of 2003. Sales at JACK IN
THE BOX restaurants open more than one fiscal year ("same-store") increased 3.1%
in 2004 compared with 2003, primarily due to the continued success of our
premium salad line, positive response to our new high-quality products,
including Classics on a Roll and our improved Chicken Breast Strips and improved
economic conditions compared with a year ago. The number of JACK IN THE BOX
company-operated restaurants increased 2.0% to 1,545 in 2004 from 1,515 a year
ago.
Distribution and other sales, representing distribution sales to
franchisees and QUICK STUFF sales, increased $15.6 million to $43.7 million in
2004 from $28.1 million in 2003. Sales from our QUICK STUFF locations increased
primarily due to an increase in the number of QUICK STUFF locations to eighteen
at the end of the quarter from twelve a year ago. Distribution sales also grew
in 2004 compared with 2003, primarily due to an increase in the number of JACK
IN THE BOX and Qdoba franchised restaurants serviced by our distribution
centers.
11
Franchise rents and royalties increased $3.7 million to $21.2 million in
2004 from $17.5 million in 2003, primarily reflecting an increase in the number
of JACK IN THE BOX franchised restaurants to 414 at the end of the quarter from
365 a year ago. As a percentage of franchise restaurant sales, franchise rents
and royalties decreased slightly to 12.3% in 2004 from 13.0% in 2003, primarily
due to the acquisition of Qdoba in the second quarter of fiscal year 2003, whose
royalties are lower than JACK IN THE BOX average rents and royalties.
Other revenues include principally gains and fees from the conversion of
company-operated restaurants, as well as interest income from notes receivable
and investments. Other revenues decreased $1.0 million to $7.3 million in 2004
from $8.3 million in 2003, primarily due to a decrease in gains and fees from
the conversion of 19 lower average sales volume restaurants in 2004 compared
with 9 restaurants a year ago. Gains related to these conversions were $5.1
million and $7.3 million, respectively. In the second quarter, we expect to
convert seven restaurants to franchises and generate approximately $4 million in
other revenues, and for the full year other revenues are expected to be
approximately $23 million, primarily from the conversion of 35 to 40
restaurants.
Costs and Expenses
Restaurant costs of sales, which include food and packaging costs,
increased to $301.5$188.4 million in 2004 from $171.2 million in 2003, primarily due
to sales growth and higher ingredient costs. As a percentage of restaurant
sales, costs of sales increased to 31.5% in 2004 from 30.6% in 2003, due to
higher ingredient costs, primarily beef which was approximately 20% higher than
a year ago.
Restaurant operating costs were $313.1 million, or 52.4% of restaurant
sales, in 2004 and $294.1 million, or 52.6% in 2003. The percentage improvement
in 2004 is primarily due to increased leverage on payroll and fixed costs
provided by higher sales in the quarter compared with a year ago, partially
offset by increases in insurance costs. Insurance expenses, primarily workers'
compensation, are expected to continue at higher levels throughout fiscal year
2004.
Costs of distribution and other sales increased to $42.9 million in 2004
from $27.5 million in 2003, primarily reflecting an increase in the related
sales. As a percentage of distribution and other sales, these costs increased to
98.3% in 2004 from 97.7% a year ago due to declines in distribution and fuel
margins. Lower fuel margins resulted from a change in our fuel pricing strategy
designed to achieve higher sales volumes at certain QUICK STUFF locations.
Distribution margins were impacted by growth in the percentage of our
distribution business serviced from our lower margin distribution centers.
Franchise restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
increased to $8.9 million in 2004 from $7.4 million in 2003, primarily
reflecting an increase in the number of franchised restaurants.
Selling, general and administrative expenses ("SG&A") increased to $75.4
million in 2004 from $70.7 million in 2003. SG&A improved to 11.3% of revenues
in 2004 compared with 11.5% in 2003 due to continued cost reduction initiatives
from our Profit Improvement Program and the increased leverage from higher
revenues, offset in part by higher pension costs. Pension costs have increased
due to declines in discount rates and in the assumed long-term rate of return on
plan assets, and are expected to continue at higher levels throughout fiscal
year 2004.
Interest expense was $15.9 million in 2004 compared with $8.3 million in
2003. This increase primarily relates to the refinancing of the Company's term
loan and the early redemption of the senior subordinated notes, which resulted
in a charge of $9.2 million for the payment of a call premium and the write-off
of deferred finance fees. In addition to providing us with a more flexible
capital structure, this refinancing transaction is expected to lower our
borrowing costs by approximately $3 million per year on average over the term of
our new term loan. The impact of these costs was partially offset by lower
average interest rates compared with a year ago.
The income tax provisions in both quarters reflect projected annual tax
rates of 38.0% of pre-tax earnings. The fiscal 2003 income tax provision was
subsequently adjusted to the effective annual rate of 36.2% of pretax earnings.
The lower income tax rate in 2003 resulted from the favorable resolution of a
long-standing tax matter. The final 2004 annual tax rate cannot be determined
until the end of the fiscal year; therefore, the actual rate could differ from
our current estimates.
12
Net Earnings
Net earnings were $15.6 million, or $.43 per diluted share, in 2004
compared to $21.2 million, or $.56 per diluted share, in 2003. In 2004, net
earnings includes a loss on early retirement of debt, which was $5.7 million,
net of income taxes, or $.15 per diluted share.
Liquidity and Capital Resources
General. Cash and cash equivalents increased $8.2 million to $30.6 million
at April 13, 2003January 18, 2004 from $249.6$22.4 million at the beginning of the fiscal year,
primarily reflecting our
acquisitiona temporary increase in cash balances. We generally expect to
maintain low levels of Qdoba which was funded bycash and cash equivalents, reinvesting available cash
flows from operations to develop new or enhance existing restaurants, and to
reduce borrowings under the revolving credit facility. At January 18, 2004, we
had no borrowings under our revolving credit facility.
Financial Condition. Our working capital deficit decreased $18.2 million to
$70.9 million at January 18, 2004 from $89.1 million at September 28, 2003,
primarily due to the temporary increase in our cash and a $12.9 million increase
in assets held for sale and leaseback at the end of the quarter. The increase in
assets held for sale and leaseback is due principally to an increase in costs
associated with the Company's Innovation Center expected to open this spring.
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. We also continually invest in our
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. At
the end of the quarter, our current ratio increased to .7 to 1 compared with .6
to 1 at the beginning of the year, improving for the same reasons discussed
above.
New Financing. On January 8, 2004, we secured a new senior term loan and
amended our revolving credit facility, each with extended maturities. Our new
financing is intended to provide a more flexible capital structure, facilitate
the execution of our strategic plan, and decrease borrowing costs by
approximately $3 million per year on average over the term of our new term loan.
Our credit facility provides borrowings in the aggregate amount of $475
million and is comprised of: (i) a $200 million revolving credit facility
maturing on January 8, 2008 with a rate of London Interbank Offered Rate
("LIBOR") plus 2.25% and (ii) a $275 million term loan maturing on January 8,
2011 with a rate of LIBOR plus 2.75%. The credit facility requires the payment
of an annual commitment fee based on the unused portion of the credit facility.
The annual commitment rate and the credit facility's interest rates are based on
a financial leverage ratio, as defined in the credit agreement. To secure our
respective obligations under the credit facility, the Company and certain of its
subsidiaries granted liens in substantially all personal property assets. Under
certain circumstances, the Company and each of its certain subsidiaries will be
required to grant liens in certain real property assets to secure their
respective obligations under the new credit facility. Additionally, certain of
our real and personal property secure other indebtedness of the Company. At
January 18, 2004, we had no borrowings under our revolving credit facility and
had letters of credit outstanding of $32.6 million.
We used the proceeds from the new term loan to refinance our existing $150
million term loan and redeem $125 million of 8 3/8% senior subordinated notes
due April 15, 2008, which resulted in a charge to interest expense of $9.2
million. The amended revolving credit facility is intended to support general
corporate purposes.
We are subject to a number of covenants under our various debt instruments,
including limitations on additional borrowings, acquisitions, loans to
franchisees, capital expenditures, lease commitments and dividend payments, as
well as requirements to maintain certain financial ratios, cash flows and net
worth. As of January 18, 2004, we were in compliance with all the debt
covenants.
Total debt outstanding increased to $310.2 million at January 18, 2004 from
$303.1 million at the beginning of the fiscal year due to an increase in capital
lease obligations associated with new restaurant equipment leases.
Franchise Conversions. We have continued our strategy of selectively
converting company-operated restaurants to franchises, converting 19 restaurants
in the quarter compared with nine a year ago. In the first quarter of 2004 and
2003, proceeds from the conversion of company-operated restaurants and
collections on notes receivable, primarily related to conversions, were $13.1
million and $5.2 million, respectively.
13
In the second quarter, we expect to convert seven restaurants to franchises
and generate approximately $4 million in other revenues, and for the full year
other revenues are expected to be approximately $23 million, primarily from the
conversion of 35 to 40 restaurants.
Other Transactions. In January 1994, we entered into financing lease
arrangements with two limited partnerships (the "Partnerships"), in which we
sold interests in related to 76
restaurants for a specified periodrestaurants. At the inception of time. The acquisition
of the properties, including costs and expenses, was funded through the issuance
of $70 million in 10.3% senior secured notes by a special purpose corporation
acting as agent for the Partnerships. On August 29, 2002, we entered into an
agreement to repurchase the interests in the restaurant properties that had been
encumbered by the financing lease arrangements, we recorded
cash and cash held in trust, and established financing lease obligations for a consent fee of
$1.3 million.
Onapproximately $70 million requiring semi-annual payments to cover interest and
sinking fund obligations due in equal installments on January 2,1, 2003 and
November 1, 2003. In January 2003, we paid a $1.3 million fee to retire the debt
early. The fee was charged to interest expense in the first quarter of fiscal
year 2003 when the obligations were retired. We used borrowings under our credit
facility and previous sinking fund payments to reacquire the interests in the
restaurant properties and retire the high interest rate bearing financing lease
obligations.
In December 1999fiscal years 2000 and fiscal 2002, our Board of Directors authorized the
repurchase of our outstanding common stock in the open market for an aggregate
amount not to exceed $90 million. Through April 13, 2003,Under these authorizations, we had acquired
4,115,853 shares in connection with this authorization at an aggregate cost of $90 million prior to the beginning of
fiscal year 2004 and hadhave no repurchase availability remaining. The stock
repurchase program was intended to increase shareholder value and offset the
dilutive effect of stock option exercises.
OnContractual Obligations and Commitments. The following is a summary of the
Company's contractual obligations and commercial commitments as of January 21, 2003, we acquired Qdoba, operator18,
2004:
Payments Due by Period (in thousands)
-----------------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 3-5 years 5 years
----------------------------------------------------------------------------------------------------------------------------
Contractual Obligations:
Credit facility term loan................. $ 275,000 $ 2,063 $ 5,500 $ 5,500 $ 261,937
Revolving credit facility................. - - - - -
Capital lease obligations................. 30,407 4,189 8,450 8,423 9,345
Other long-term debt obligations.......... 4,830 3,284 1,152 394 -
Operating lease obligations (1)........... 1,506,547 159,737 281,326 237,487 827,997
Guarantee (2)............................. 1,106 210 323 316 257
----------- ----------- ----------- ----------- -----------
Total contractual obligations............ $ 1,817,890 $ 169,483 $ 296,751 $ 252,120 $ 1,099,536
=========== =========== =========== =========== ===========
Other Commercial Commitments:
Stand-by letters of credit (3)............ $ 32,602 $ 32,602 $ - $ - $ -
=========== =========== =========== =========== ===========
(1) We exercised our purchase option rights under certain lease agreements
and franchiser of Qdoba
Mexican Grill(R)on February 27, 2004, purchased JACK IN THE BOX restaurant
properties for approximately $45$46 million, which will be converted to
sale and leaseback transactions over the balance of the fiscal year.
(2) Consists of a guarantee associated with one Chi-Chi's property. Due to
the bankruptcy of the Chi-Chi's restaurant chain, previously owned by
the Company, we are obligated to perform in accordance with the terms
of the guarantee agreement.
(3) Consists primarily of letters of credit for workers' compensation and
general liability insurance.
Capital Expenditures. Capital expenditures, including capital lease
obligations, were $30.8 million and $22.4 million in cash. The primary assets
acquired include $8.2 million in net2004 and 2003,
respectively. Cash flows from additions to property and equipment, and other long-term
assets, $18.0increased
$1.1 million to $23.5 million in intangible assets and $23.6 million in goodwill. Qdoba
operates in the fast-casual segment of the restaurant industry and, as of the
April 13, 2003, operated or franchised 92 restaurants in 18 states. This
acquisition is consistent with the Company's long-term strategy to transition2004 from a regional quick-service restaurant chain to a national restaurant company.
Capital Expenditures. Year-to-date capital expenditures decreased $4.3
million to $49.2$22.4 million in 2003, from $53.5 million in 2002, primarily due to an
increase in spending related to JACK IN THE BOX restaurant improvements and the
inclusion of Qdoba capital expenditures, primarily related to new
company-operated restaurants. These increases were partially offset by a decreasedecline
in expenditures for new restaurant expenditures,JACK IN THE BOX restaurants, reflecting a reduction in
the number of new restaurant openings to 4212 in 2003the first quarter of fiscal year
2004 from 4622 a year ago. Also contributing toDuring the decrease inquarter, we also incurred capital lease
obligations for certain restaurant equipment of $7.3 million.
In the second quarter of fiscal year 2004 and for the full year, we expect
capital expenditures wasand lease commitments to be approximately $29 million and
$150 million, respectively. Our capital projections include spending related to
approximately 14 and 65 new restaurants, respectively, brand re-invention
initiatives and our new Innovation Center, as well as additional capital lease
commitments for certain restaurant equipment.
14
Pension Funding. Lower discount rates and a reduction in our assumed
long-term rate of return on plan assets have contributed to an increase in the portionour
accumulated benefit plan obligations. Taking advantage of new
restaurant properties being leased rather than purchased due to changes in
financing market terms. Capital expenditures in 2003 included $31.1 million for
new restaurant expenditures, $15.1 million for existing restaurant improvements
and $3.0 million for other additions.
14
We plan to spend approximately $155 million during fiscal year 2003 on
capital expenditures compared with the $182 million originally disclosed in our
2002 Annual Report on Form 10-K filed with the SEC. The projected estimate
decrease reflects our current plancash
position and the upward trend in the equity markets, we contributed $17.0
million to lease a greater portion of our new
Company-operated restaurants rather than purchase such locations.pension plans in December 2003.
Future Liquidity. We require 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. Our primary
short-term and long-term sources of liquidity are expected to be cash flows from
operations, the revolving bank credit facility, and the sale and leaseback of
certain restaurant properties. Additional potential sources of liquidity include
financing opportunities and the conversion of Company-operatedcompany-operated restaurants to franchised restaurants. Based
upon current levels of operations and anticipated growth, we expect that cash
flows from operations, combined with other financing alternatives in place or
available, will be sufficient to meet debt service, capital expenditure and
working capital requirements.
We do not have material related party transactions or off-balance sheet
arrangements, other than our operating leases. We do not enter into commodity
contracts for which market price quotations are not available. Furthermore, we
are not aware of any other factors which are reasonably likely to affect our
liquidity, other than those disclosed as risk factors in our Form 10-K filed
with the SEC. While we have noted that certain operating expenses are rising,
including pension and insurance and occupancy costs, are rising and the economy has slowed
down, we believe that there are sufficient
funds available from operations, our existing credit facility and the sale and
leaseback of restaurant properties to accommodate the Company's future growth.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
- ------------------------------------------
TheDiscussion of Critical Accounting Policies
We have identified the following as the Company's most critical accounting
policies, which are those that are most important to the portrayal of the
Company's financial condition and results and require management's most
subjective and complex judgements,judgments. Information regarding the Company's other
significant accounting policies are detaileddisclosed in Note 1 of our most recent
Annual Report on Form 10-K filed with the SEC.
OTHER SIGNIFICANT KNOWN EVENTS, TRENDS OR UNCERTAINTIES EXPECTED TO IMPACTPension Benefits - --------------------------------------------------------------------------------
FUTURE OPERATIONSThe Company sponsors pension and other retirement plans
in various forms covering those employees who meet certain eligibility
requirements. Several statistical and other factors which attempt to anticipate
future events are used in calculating the expense and liability related to the
plans, including assumptions about the discount rate, expected return on plan
assets and the rate of increase in compensation levels, as determined by the
Company using specified guidelines. In addition, our outside actuarial
consultants also use certain statistical factors such as turnover, retirement
and mortality rates to estimate the Company's future benefit obligations. The
actuarial assumptions used may differ materially from actual results due to
changing market and economic conditions, higher or lower turnover and retirement
rates or longer or shorter life spans of participants. These differences may
impact the amount of pension expense recorded by the Company. Due principally to
decreases in discount rates and declines in the return on assets in the plans,
the pension expense in fiscal year 2004 is expected to be approximately $7.2
million higher than fiscal year 2003.
Self Insurance - ------------------
Future ApplicationThe Company is self-insured for a portion of Accounting Standards.its current
and prior years' losses related to its workers' compensation, general liability,
automotive, medical and dental programs. In November 2002,estimating the FASB's Emerging Issues Task Force ("EITF") discussed
Issue 02-16, AccountingCompany's
self-insurance reserves, we utilize independent actuarial estimates of expected
losses, which are based on statistical analyses of historical data. These
assumptions are closely monitored and adjusted when warranted by changing
circumstances. Should a Customer (includinggreater amount of claims occur compared to what was
estimated, or medical costs increase beyond what was expected, reserves might
not be sufficient, and additional expense may be recorded.
Long-lived Assets - Property, equipment and certain other assets, including
amortized intangible assets, are reviewed for impairment when indicators of
impairment are present. This review includes a Reseller) for Cash
Consideration Receivedmarket-level analysis and
evaluations of restaurant operating performance from operations and marketing
management. When indicators of impairment are present, we perform an impairment
analysis on a Vendor. Issue 02-16 provides guidance on how a
customer should account forrestaurant-by-restaurant basis. If the sum of undiscounted future
cash consideration received from a vendor. The
requirements of this Issue for volume based rebates apply to new arrangements,
including modifications of existing arrangements, entered into after November
21, 2002. The adoptionflows is less than the carrying value of the new accounting forasset, we recognize an
impairment loss by the amount which the carrying value exceeds the fair value of
the asset. Our estimates of future cash flows may differ from actual cash flows
due to, among other supplier payments is
effective for arrangements entered intothings, economic conditions or modified after December 31, 2002. We
are currently evaluating the effect that the adoption of this Issue will have on
our beverage contracts entered into subsequent to the above noted dates, which
will become effectivechanges in operating
performance. During the first quarter of fiscal year 2004.2004, we noted no
indication of impairment of these long-lived assets.
15
Goodwill and Other Intangibles - We doalso evaluate goodwill and intangible
assets not expectsubject to amortization annually, or more frequently if indicators of
impairment are present. If the adoptionestimated fair values of this Issuethese assets are less
than the related carrying amounts, an impairment loss is recognized. The methods
we use to estimate fair value include future cash flow assumptions, which may
differ from actual cash flows due to, among other things, economic conditions or
changes in operating performance. During the fourth quarter of 2003, we reviewed
the carrying value of our goodwill and indefinite life intangible assets and
determined that no impairment existed as of September 28, 2003.
Allowances for Doubtful Accounts - Our trade receivables consist primarily
of amounts due from franchisees for rents on subleased sites, royalties and
distribution sales. We also have a material impactnotes receivable related to short-term
financing provided on the sale of company-operated restaurants to certain
qualified franchisees. We continually monitor amounts due from franchisees and
maintain an allowance for doubtful accounts for estimated losses resulting from
the potential inability of our franchisees to make required payments. This
estimate is based on our operating resultsassessment of the collectibility of specific franchisee
accounts, as well as a general allowance based on historical trends, the
financial condition of our franchisees, consideration of the general economy and
the aging of such receivables. The Company has good relationships with its
franchisees and achieves high collection rates; however, if the future financial
condition of our franchisees were to deteriorate, resulting in their inability
to make specific required payments, additions to the allowance for doubtful
accounts may be required.
Legal Accruals - The Company is subject to claims and lawsuits in the
ordinary course of its business. A determination of the amount accrued, if any,
for these contingencies is made after analysis of each matter. We continually
evaluate such accruals and may increase or financial condition.
15
decrease accrued amounts as we deem
appropriate.
Future Application of Accounting Principles
In AprilDecember 2003, the FASB issued SFAS 149, Amendment132 Revised, Employers' Disclosures
about Pensions and Other Post Retirement Benefits. This Statement requires
revisions to employers' disclosures about pension plans and other post
retirement plans. The interim period disclosure requirements will be effective
beginning in the second quarter of Statement 133 on
Derivative Instrumentsfiscal year 2004 and Hedging Activities, which and amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
generallythe annual disclosure
requirements will be effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. We do not expect the
adoption of SFAS 149 to have a material impact on our operating results or
financial condition.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. The Statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. We do not expect the adoption of SFAS 150 to have
a material impact on our operating results or financial condition.
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities - an interpretation of Accounting Research Bulletin
No. 51 which requires that companies that control another entity through
interests other than voting interests should consolidate the controlled entity.
This Interpretation applies immediately to variable interest entities created
after January 31, 2003. For variable interest entities that existed prior to
February 1, 2003, the requirements of this Interpretation are effective for the
first fiscal year or interim period beginning after June 15, 2003. We are not
involved with any variable interest entities created after January 31, 2003. The
Company is assessing the impact, if any, that Interpretation 46 will have on its
consolidated financial statements.
Pension Funding.
Due to the continued downturn in the equity markets, the market value of
our pension plan assets have continued to decline, and lower interest rates have
caused our accumulated benefit plan obligation to increase during 2003. A
minimum pension liability adjustment is required when the accumulated benefit
obligation exceeds the fair value of plan assets and accrued benefit liabilities
at the measurement date. Based upon current plan asset values and anticipated
contributions through the measurement date, we anticipate we will be required to
recognize an additional minimum pension liability at September 28, 2003
resulting in an additional charge to other comprehensive income. Final
determination of the minimum pension liability adjustment will only be known at
the measurement date, which is June 30, 2003. As required by SFAS 87, Employers'
Accounting for Pensions, the minimum pension liability adjustment necessary will
not be reflected in the consolidated financial statements until the end of the
fiscal year, September 28, 2003.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
- ----------------------------------------------------------2004.
Cautionary Statements Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities law. These forward-looking
statements are principally contained in the sections captioned, Notes to
Unaudited Consolidated Financial Statements and Liquidity and Capital Resources.
Statements regarding our continuing investment in new restaurants and
refurbishment of existing facilities, expectations regarding our refinancing and
effective tax rate, expectations regarding any liability that may result from
claims and actions filed against us, our estimated and future expenses, our
brand reinvention, growth and QUICK STUFF strategies, our same store sales
trends, our cost of sales, the opening of our learning labs and Innovation
Center, the number and impact of our anticipated restaurant conversions, our
future financial performance, our sources of liquidity, uses of cash and sufficiency
of our cash flows are forward-looking statements. Forward-looking statements are
generally identifiable by the use of the words "anticipate," "assume,"
"believe," "estimate," "seek," "expect," "intend," "plan," "project," "may,"
"will,""will" "would," and similar expressions. Forward-looking statements are based on
management's current plans and assumptions and 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.
There is intense competition in the quick service restaurant industry with
respect to market share, restaurant locations, labor, menu and product
development. The Company competes primarily on the basis of quality, variety and
innovation of menu items, service, brand, convenience and price against several
larger national and international chains with potentially significantly greater
financial resources. The Company's results depend upon the effectiveness of its
strategies as compared to its competitors, and can be adversely affected by
16
aggressive competition from numerous and varied competitors in all areas of
business, including new product introductions, promotions and discounting. In
addition, restaurant sales can be affected by factors, including but not limited
to, demographic changes, consumer preferences, tastes and spending patterns,
perceptions about the health and safety of food products and severe weather
conditions. With approximately 40% of its restaurants in California, JACK IN THE
BOX restaurant sales can be significantly affected by demographic
changes, adverse weather, economic and political conditions and other
significant events in California. The national economy continuesCalifornia can significantly affect Jack in a downturn and is a significant
contributor to soft sales trends experienced by the Company and several of its
competitors; there can be no assurance as to when the trends can be reversed or
that earnings will not be materially affected.Box
restaurant sales. The quick service restaurant industry is mature, with
significant chain penetration. There can be no assurances that the Company's
growth objectives in the regional domestic markets in which it operates
restaurants and convenience stores will be met or that the new facilities will
be profitable. Anticipated and unanticipated delays in development, sales
softness and restaurant closures may have a material adverse effect on the
Company's results of operations. The development and profitability of
restaurants can be adversely affected by many factors including the ability of
the Company and its franchisees to select and secure suitable sites on
satisfactory terms, the availability of financing and general business and
16
economic conditions. The realization of gains from our program of selective
sales of Company-operated restaurants to existing and new franchisees depends
upon various factors, including sales trends at JACK IN THE BOXJack in the Box restaurants and
the financing market and economic conditions referred to above. The ongoing
success of our selective sale and leaseback of restaurant properties is subject
to changes in the economy, credit market, real estate market and the ability of
the company to obtain acceptable prices and terms. Our results of operations can
also be adversely affected by changes in commodity prices or supply, increasing
utility, occupancy and insurance costs, interest rates, inflation, recession and
other factors over which the Company has no control, including the possibility
of increased pension expense and contributions resulting from continued declines
in interestdiscount rates and stock market returns. In January 2003, the Company
completed its acquisition of Qdoba Restaurant Corporation, a fast-casual
restaurant chain. The Company may not successfully integrate or fully realize
the potential benefits or synergies of this or other acquisition transactions.
Other factors that can cause actual results to differ materially from
expectations include the unpredictable nature of litigation, including
strategies and settlement costs; changes in accounting standards, policies and
practices; new legislation and governmental regulation; potential variances
between estimated and actual liabilities; and the possibility of unforeseen
events affecting the industry in general.
Our income tax provision is sensitive to expected earnings and, as
expectations change, our income tax provision may vary from quarter-to-quarter
and year-to-year. In addition, from time-to-time, we may take positions for
filing our tax returns, which differ, from the treatment for financial reporting
purposes. Our effective tax rate for fiscal 20032004 is expected to be higher than
our fiscal 20022003 rate.
This discussion of uncertainties is not exhaustive. Additional risk factors
associated with our business are detailed in our most recent Annual Report on
Form 10-K filed with the SEC. Jack in the Box Inc. assumes no obligation and
does not intend to update these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISKS
Our primary exposure relating to financial instruments is to changes in
interest rates. Our credit facility, which is comprised of a revolving credit
facility and a term loan, bears interest at an annual rate equal to the prime
rate or the LIBOR plus an applicable margin based on a financial leverage ratio.
The majority of the credit facility borrowings are LIBOR based. As of April
13, 2003,January
18, 2004, our applicable marginmargins for the LIBOR based revolving loans and term
loan waswere set at 2.25% and 3.25%2.75%, respectively. A hypothetical 100 basis pointone percent
increase in short-term interest rates, based on the outstanding balance of our
revolving credit facility and term loan at April 13, 2003,January 18, 2004, would result in a
reductionan
estimated increase of $1.6$2.8 million in annual pretax earnings.interest expense.
Changes in interest rates also impact our pension expense.expense, as do changes in
the expected long-term rate of return on our pension plan assets. An assumed
discount rate is used in determining the present value of future cash outflows
currently expected to be required to satisfy the pension benefit obligationsobligation when
due. Additionally, an assumed long-term rate of return on plan assets is used in
determining the average rate of earnings expected on the funds invested or to be
invested to provide the benefits to meet our projected benefit obligation. A
hypothetical 3025 basis point reduction in the assumed discount rate and expected
long-term rate of return on plan assets would result in an estimated increase of
$1.2$1.4 million and $0.2 million, respectively, in our fiscal 2003future annual pension
expense.
17
We are also exposed to the impact of commodity and utility price
fluctuations related to unpredictable factors such as weather and various other
market conditions outside our control. Our ability to recover increased costs
through higher prices is limited by the competitive environment in which we
operate. From time-to-time we enter into commodity futures and option contracts to manage
these fluctuations. We had no openOpen commodity futures and option contracts were not
significant at April 13, 2003.January 18, 2004.
At April 13, 2003,January 18, 2004, we had no other material financial instruments subject
to significant market risk exposure.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such
17
term is defined under Rule 13a-14(c)Rules 13a-15(e) and 15d -15(e) promulgated under the
Securities Exchange Act of 1934, as amended, within the 90
days prior to the filing date of this report.amended. Based on theirthis evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of the dateend of the evaluation.period
covered by this quarterly report.
(b) There have been no significant changes including corrective actions
with regard to significant deficiencies or material weaknesses, in our internal controlscontrol over
financial reporting during the quarter ended January 18, 2004 that has
materially affected, or in other factors that could significantlyis reasonably likely to materially affect, these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.our internal
control over financial reporting.
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
On April 18, 2001, an action was filed by Robert Bellmore and Jeffrey
Fairbairn, individually and on behalf of all others similarly situated, in the
Superior Court of the State of California, San Diego County, seeking class
action status in alleging violations of California wage and hour laws. The
Company settled the action in fiscal year 2002 for approximately $9.3 million
without admission of liability and the Court approved the settlement on February
10, 2003. Through April 13, 2003 the Company has paid out approximately $7.9
million in connection with this settlement.
The Company is also subject to normal and routine litigation. In the
opinion of management, based in part on the advice of legal counsel, the
ultimate liability from all other pending legal proceedings, asserted legal
claims and known potential legal claims should not materially affect our
operating results and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information onNo matters were submitted to a vote of our stockholders at our
annual meeting can be found in our Quarterly Report on Form 10-Q for the first quarter
ended January 19, 2003 previously filed with18, 2004. Our annual meeting of stockholders was held February 13,
2004, at which the SEC.following matters were voted as indicated:
1. Election of the following directors to serve until the next
annual meeting of stockholders and until their successors
are elected and qualified.
For Withheld Abstain
--- -------- -------
Michael E. Alpert..................... 32,823,932 1,668,770 -
Edward W. Gibbons..................... 33,908,169 584,533 -
Anne B. Gust.......................... 32,723,132 1,769,570 -
Alice B. Hayes, Ph.D.................. 32,503,188 1,989,514 -
Murray H. Hutchison................... 32,123,171 2,369,531 -
Michael W. Murphy..................... 32,124,528 2,368,174 -
Linda A. Lang......................... 33,906,359 586,343 -
Robert J. Nugent...................... 33,529,084 963,618 -
L. Robert Payne....................... 33,522,934 969,768 -
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
2. Approve the 2004 Stock Incentive Plan.... 22,923,040 5,754,266 281,030 5,534,366
For Against Abstain
--- ------- -------
3. Ratification of appointment of KPMG LLP
as independent auditors................. 33,355,559 1,121,774 15,369
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6 (a). EXHIBITS
Number Description
3.1 Restated Certificate of Incorporation, as amended(7)
3.2 Amended and Restated Bylaws(13)Bylaws
4.1 Indenture for the 8 3/8% Senior Subordinated Notes due 2008(6)
(Instruments with respect to the registrant's long-term debt not
in excess of 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis have been omitted. The
registrant agrees to furnish supplementally a copy of any such
instrument to the Commission upon request.)
4.2 Shareholder Rights Agreement(3)
10.1 Amended and Restated Credit Agreement dated as of January 22, 20038, 2004
by and among Jack in the Box Inc. and the lenders named therein (17)
10.2 Purchase Agreements dated as of January 22, 1987 between
Foodmaker, Inc. and FFCA/IIP 1985 Property Company and F FCA/FFCA/IIP
1986 Property Company(1)
10.3 Land Purchase Agreements dated as of February 18, 1987 by and
between Foodmaker, Inc. and FFCA/IPI 1984 Property Company and
FFCA/IPI 1985 Property Company and Letter Agreement relating
thereto(1)
10.4.110.4.1* Amended and Restated 1992 Employee Stock Incentive Plan(4)
10.4.210.4.2* Jack in the Box Inc. 2002 Stock Incentive Plan(10)
10.510.5* Capital Accumulation Plan for Executives(9)
10.5.110.5.1* First Amendment dated as of August 2, 2002 to the Capital
Accumulation Plan for Executives(11)
10.610.6* Supplemental Executive Retirement Plan(9)
10.6.110.6.1* First Amendment dated as of August 2, 2002 to the Supplemental
Executive Retirement Plan (11)
10.7Plan(11)
10.7* Performance Bonus Plan(8)
10.810.8* Deferred Compensation Plan for Non-Management Directors(2)
10.910.9* Amended and Restated Non-Employee Director Stock Option Plan(7)
10.1010.10* Form of Compensation and Benefits Assurance Agreement for
Executives
(5)
10.11Executives(5)
10.11* Form of Indemnification Agreement between Jack in the Box Inc. and
certain officers and directors(11)
10.12 Consent Agreement(11)
10.1310.13* Executive Deferred Compensation Plan(13)
10.14Plan(12)
10.14* Form of Restricted Stock Award for certain executives(13)executives(12)
10.14(a) Schedule of Restricted Stock Awards(13)
10.15Awards
10.15* Executive Agreement between Jack in the Box Inc. and Gary J.
Beisler, President and Chief Executive Officer of Qdoba
Restaurant Corporation 99.1(13)
10.16* 2004 Stock Incentive Plan (14)
31.1 Certification of Chief Executive Officer 99.2pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer __________pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-----------
* Management contract or compensatory plan.
19
(1) Previously filed and incorporated herein by reference from registrant's
Registration Statement on Form S-1 (No. 33-10763) filed February 24, 1987.
(2) Previously filed and incorporated herein by reference from registrant's
Definitive Proxy Statement dated January 17, 1995 for the Annual Meeting of
Stockholders on February 17, 1995.
(3) Previously filed and incorporated by reference from registrant's current
report on Form 8-K dated July 26, 1996.
(4) Previously filed and incorporated herein by reference from registrant's
Registration Statement on Form S-8 (No.333-26781)(No. 333-26781) filed May 9, 1997.
(5) Previously filed and incorporated herein by reference from registrant's
Annual Report on Form 10-K for the fiscal year ended September 28, 1997.
(6) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 12, 1998.
(7) Previously filed and incorporated herein by reference from registrant's
Annual Report on Form 10-K for the fiscal year ended October 3, 1999.
19
(8) Previously filed and incorporated herein by reference from registrant's
Definitive Proxy Statement dated January 19, 2001 for the Annual Meeting of
Stockholders on February 23, 2001.
(9) Previously filed and incorporated herein by reference from registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
(10) Previously filed and incorporated herein by reference from the registrant's
Definitive Proxy Statement dated January 18, 2002 for the Annual Meeting of
Stockholders' on February 22, 2002.
(11) Previously filed and incorporated herein by reference from registrant's
Annual Report on Form 10-K for the fiscal year ended September 29, 2002.
(12) Previously filed and incorporated herein by reference from registrant's
current
reportQuarterly Report on Form 8-K dated10-Q for the quarter ended January 22,19, 2003.
(13) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 13, 2003.
(14) Previously filed and incorporated herein by reference from the registrant's
Definitive Proxy Statement dated January 19, 2003.9, 2004 for the Annual Meeting of
Stockholders' on February 13, 2004.
ITEM 6(b). FORM 8-K.8-K
--------
We did not file anyfiled the following reports on Form 8-K with the Securities and Exchange
Commission during the secondfirst quarter ended April 13, 2003, except as follows.January 18, 2004: On February 6,November 12,
2003, we filed a report on Form 8-K announcingcontaining an earnings release that Jack inreported
results of operations for the Box
Inc. entered into a new $350 million senior credit facility arranged by Wachovia
Securities, replacing a $175 million revolving credit facility which was due to
expire March 31,fourth quarter and fiscal year periods ended
September 28, 2003.
20
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.
JACK IN THE BOX INC.
By: /S/JOHN F. HOFFNER
-----------------------------------------------
John F. Hoffner
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
Date: May 28, 2003
21
CERTIFICATION
-------------
I, Robert J. Nugent, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack in the Box
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and p rocedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and repor t financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /S/ ROBERT J. NUGENT
----------------------------
Robert J. Nugent
Chief Executive Officer and
Chairman of the Board
Date: May 28, 2003
22
CERTIFICATION
-------------
I, John F. Hoffner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack in the Box
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and p rocedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and repor t financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
By: /S/ JOHN F. HOFFNER
----------------------------
John F. Hoffner
Executive Vice President and
Chief Financial Officer
Date: May 28, 2003
23March 2, 2004