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 July 4, 1999
------------January 23, 2000
----------------
Commission file no. 1-9390
------
FOODMAKER,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)Code)
Registrant's telephone number, including area code (619)(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[X] No --- ---[ ]
Number of shares of common stock, $.01 par value, outstanding as of the close of
business August 9, 1999February 29, 2000 - 38,267,479
----------38,205,327.
1
FOODMAKER,JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 4, September 27,January 23, October 3,
2000 1999
1998
- ------------------------------------------------------------------------------------------------------------------------------------ ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents......................equivalents........................ $ 5,2307,480 $ 9,952
Receivables.................................... 10,336 13,705
Inventories.................................... 20,502 17,93910,925
Accounts receivable, net......................... 5,822 9,156
Inventories...................................... 22,780 20,159
Prepaid expenses............................... 48,340 40,826
---------- ----------expenses................................. 11,354 15,387
Assets held for sale............................. 46,838 41,607
--------- ---------
Total current assets......................... 84,408 82,422
---------- ----------assets........................... 94,274 97,234
--------- ---------
Trading area rights.............................. 71,916 72,993
----------rights................................. 72,829 73,033
--------- ---------
Lease acquisition costs.......................... 15,800 17,157
---------- ----------costs............................. 14,808 15,352
--------- ---------
Other assets..................................... 40,027 39,309
---------- ----------assets........................................ 41,792 40,741
--------- ---------
Property and equipment, at cost................................. 824,080 759,680cost..................... 878,322 858,685
Accumulated depreciation and amortization...... (250,653) (227,973)
---------- ----------
573,427 531,707
---------- ----------
TOTAL........................................amortization........ (262,700) (251,401)
--------- ---------
615,622 607,284
--------- ---------
TOTAL.......................................... $ 785,578839,325 $ 743,588
========== ==========833,644
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...........debt............. $ 1,8501,899 $ 1,6851,695
Accounts payable............................... 34,702 52,086payable................................. 27,739 44,180
Accrued expenses............................... 162,959 171,974
---------- ----------expenses................................. 158,259 183,151
--------- ---------
Total current liabilities.................... 199,511 225,745
---------- ----------liabilities...................... 187,897 229,026
--------- ---------
Deferred income taxes........................... 4,147 2,347
---------- ----------taxes............................... 8,355 8,055
--------- ---------
Long-term debt, net of current maturities....... 310,762 320,050
---------- ----------maturities........... 327,693 303,456
--------- ---------
Other long-term liabilities..................... 73,656 58,466
---------- ----------liabilities......................... 79,390 75,270
--------- ---------
Stockholders' equity:
Common stock..................................stock..................................... 411 408411
Capital in excess of par value................ 288,344 285,940value................... 290,533 290,336
Accumulated deficit........................... (56,790) (114,905)deficit.............................. (18,055) (38,447)
Treasury stock................................stock................................... (36,899) (34,463)
(34,463)
----------- ------------------- ---------
Total stockholders' equity.................. 197,502 136,980
----------- ----------
TOTAL.......................................equity..................... 235,990 217,837
--------- ---------
TOTAL.......................................... $ 785,578839,325 $ 743,588
=========== ==========833,644
========= =========
See accompanying notes to financial statements.
2
FOODMAKER,JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
TwelveSixteen Weeks Ended
Forty Weeks Ended
------------------ -----------------
July 4, July 5, July 4, July 5,-------------------------
January 23, January 17,
2000 1999
1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------ ----------- -----------
Revenues:
Restaurant sales.........sales................................. $ 323,727448,226 $ 263,668 $ 1,011,833 $ 838,506384,440
Distribution and other sales.................. 9,175 6,634 28,365 18,985sales..................... 15,528 10,297
Franchise rents and royalities............. 9,086 8,285 29,686 27,248
Other.................... 460 1,979 1,671 49,510royalties.................... 12,640 11,701
Other............................................ 412 696
--------- ---------
----------- ----------
342,448 280,566 1,071,555 934,249476,806 407,134
--------- --------- ----------- ----------
Costs and expenses:
Costs of revenues:
Restaurant costs of sales 100,133 83,085 320,906 267,661sales..................... 139,988 123,596
Restaurant operating costs.................. 156,779 129,779 473,372 412,406costs.................... 221,234 187,341
Costs of distribution and other sales............ 9,038 6,460 27,919 18,517sales......... 15,332 10,170
Franchised restaurant costs.................. 5,003 5,365 17,943 17,820costs................... 6,142 7,154
Selling, general and administrative......... 37,574 29,544 117,385 104,685administrative.............. 53,533 44,905
Interest expense......... 6,344 7,707 21,815 26,913expense................................. 8,285 9,017
--------- -------- -------- --------
314,871 261,940 979,340 848,002
---------
-------- -------- --------444,514 382,183
--------- ---------
Earnings before income taxes.................... 27,577 18,626 92,215 86,247taxes........................ 32,292 24,951
Income taxes............... 10,200 6,000 34,100 27,600
--------- -------- -------- --------
Earnings before
extraordinary item....... 17,377 12,626 58,115 58,647
Extraordinary item - loss
on early extinguishment
of debt, net of taxes.... - (4,378) - (4,378)
--------- ---------taxes........................................ 11,900 9,200
--------- ---------
Net earnings...............earnings........................................ $ 17,37720,392 $ 8,248 $ 58,115 $ 54,269
========= =========15,751
========= =========
Earnings per share - basic:
Earnings before
extraordinary item...share:
Basic............................................ $ .450.53 $ .320.41
Diluted.......................................... $ 1.530.52 $ 1.49
Extraordinary item..... - .11 - .11
--------- -------- --------- ---------
Net earnings per share. $ .45 $ .21 $ 1.53 $ 1.38
========= ======== ========= =========
Earnings per share - diluted:
Earnings before
extraordinary item... $ .44 $ .31 $ 1.48 $ 1.46
Extraordinary item..... - .11 - .11
-------- -------- --------- ---------
Net earnings per share $ .44 $ .20 $ 1.48 $ 1.35
======== ======== ========= =========0.40
Weighted average shares outstanding:
Basic............... 38,209 39,300 38,104 39,214
Diluted............. 39,446 40,348 39,229 40,281Basic............................................ 38,256 38,000
Diluted.......................................... 39,395 38,991
See accompanying notes to financial statements.
3
FOODMAKER,JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FortySixteen Weeks Ended
--------------------
July 4, July 5,---------------------------
January 23, January 17,
2000 1999
1998
- ---------------------------------------------------------------------------------------------------------------------------------- ------------ ------------
Cash flows from operations:
Net earnings......................................earnings.................................... $ 58,11520,392 $ 58,64715,751
Non-cash items included above:
Depreciation and amortization................... 35,491 32,312amortization................ 17,252 13,697
Deferred income taxes........................... 1,800 4,000taxes........................ 300 500
Decrease in receivables......................... 3,334 451
Increase in inventories......................... (2,621) (3,477)
Decrease (increase) in receivables................ 3,369 (830)
Decrease (increase)prepaid expenses......... 4,033 (2,051)
Increase (decrease) in inventories................ (2,563) 22
Increase in prepaid expenses...................... (7,514) (3,608)accounts payable......... (16,441) 1,598
Decrease in accounts payable...................... (17,384) (14,378)
Increase in other liabilities..................... 12,728 9,850
---------liabilities................... (20,347) (12,492)
-------- ---------
Cash flows provided by operations............... 84,042 86,015
---------operations............ 5,902 13,977
-------- ---------
Cash flows from investing activities:
Additions to property and equipment............... (81,939) (61,203)equipment............. (24,492) (28,183)
Dispositions of property and equipment............ 4,776 4,099equipment.......... 1,096 565
Increase in trading area rights................... (1,910) (6,719)rights................. (1,060) (30)
Increase in other assets.......................... (2,665) (7,081)
---------assets........................ (1,738) (1,023)
Decrease (increase) in assets held for sale..... (5,231) 2,788
-------- ---------
Cash flows used in investing activities......... (81,738) (70,904)
---------activities...... (31,425) (25,883)
-------- ---------
Cash flows from financing activities:
Borrowings under revolving bank loans............. 256,500 118,000loans........... 158,000 100,500
Principal repayments under revolving bank loans........................................... (267,000) (32,000)loans. (134,000) (96,000)
Proceeds from issuance of long-term debt.......... 3,375 126,690debt........ 825 500
Principal payments on long-term debt,
including current maturities.................... (2,308) (251,166)
Extraordinary loss on retirementmaturities................. (508) (496)
Repurchase of debt,
net of tax......................................common stock...................... (2,436) - (4,378)
Proceeds from issuance of common stock............ 2,407 1,487
---------stock.......... 197 880
-------- ---------
Cash flows used inprovided by financing activities......... (7,026) (41,367)
---------activities.. 22,078 5,384
-------- ---------
Net decrease in cash and cash equivalents........... $ (4,722)(3,445) $ (26,256)
=========(6,522)
======== =========
See accompanying notes to financial statements.
4
FOODMAKER,JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements of Foodmaker,Jack in the
Box Inc.(the (the "Company") and its subsidiaries do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of financial condition and
results of operations for the interim periods have been included. Operating
results for any interim period are not necessarily indicative of the
results for any other interim period or for the full year. The Company
reports results quarterly with the first quarter having 16 weeks and each
remaining quarter having 12 weeks. Certain financial statement
reclassifications have been made in the prior year to conform to the
current year presentation. These financial statements should be read in
conjunction with the 19981999 financial statements.
2. The Company adopted Statement of Position ("SOP") 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, in 2000.
SOP 98-1 requires that certain costs related to the development or purchase
of internal use software be capitalized and amortized over the estimated
useful life of the software. The Statement also requires that costs related
to the preliminary project stage and the post-implementation/operations
stage of an internal use computer software development project be expensed
as incurred. The adoption of SOP 98-1 did not result in a material impact
in the financial position or results of operations of the Company.
3. The income tax provisions reflect the expectedprojected annual tax rate of 37% of
earnings before income taxes in 19992000 and the actual tax rate of 32%37% of
pretax earnings in 1998.1999. The favorable income tax rates result from the
Company's ability to realize previously unrecognized tax benefits. The
Company cannot determine with certainty the 19992000 annual tax rate until the
end of the fiscal year; thus the rate could differ from expectations.
3.4. Contingent Liabilities
On February 2, 1995, an action by Concetta Jorgensen was filed against the
Company in the U.S. District Court in San Francisco, California alleging
that restrooms at a JACK IN THE BOX restaurant failed to comply with laws
regarding disabled persons and seeking damages in unspecified amounts,
punitive damages, injunctive relief, attorneys' fees and prejudgment
interest. In an amended complaint, damages were also sought on behalf of
all physically disabled persons who were allegedly denied access to
restrooms at the restaurant. In February 1997, the Court ordered that the
action for injunctive relief proceed as a nationwide class action on behalf
of all persons in the United States with mobility disabilities. The Company
has reached agreement on settlement terms both as to the individual
plaintiff Concetta Jorgensen and the claims for injunctive relief, and the
settlement agreement has been approved by the U.S. District Court. The
settlement requires the Company to make access improvements at
Company-operated restaurants to comply with the standards set forth in the
Americans with Disabilities Act ("ADA") Access Guidelines. The settlement
requires compliance at 85% of the Company-operated restaurants by April
2001 and for the balance of Company-operated restaurants by October 2005.
The Company has begun to make modifications to its restaurants to improve
accessibility and anticipates investing an estimated $19 million in capital
improvements in connection with these modifications, including
5
approximately $6 million spent through January 23, 2000. Similar claims
have been made against JACK IN THE BOX franchisees and the Company relating
to franchised locations which may not be in compliance with the ADA. The
relief sought is (i) injunctive relief to bring these additional
restaurants into compliance with the ADA, (ii) monitoring expenses to
ensure compliance and (iii) attorneys' fees.
On November 6,5, 1996, an action was filed by the National JIB Franchisee
Association, Inc. (the "Franchisee Association") and several of the
Company's franchisees in the Superior Court of California, County of San
Diego in San Diego, California, against the Company and others. The lawsuit
alleged that certain Company policies are unfair business practices and
violate sections of the California Corporations Code regarding material
modifications of franchise agreements and interfere with franchisees' right
of association. It sought injunctive relief, a declaration of the rights
and duties of the parties,unspecified damages and rescission of alleged
material modifications of plaintiffs' franchise agreements. The complaint
contained allegations of fraud, breach of a fiduciary duty and breach of a
third-partythird party beneficiary contract in connection with certain payments that
the Company received from suppliers and sought unspecified damages,
interest, punitive damages and an accounting. However, on August 31, 1998,
the Court granted the Company's request for summary judgment on all claims
regarding an accounting, conversion, fraud, breach of fiduciary duty and
breach of third-partythird party beneficiary contracts. On March 10,1999,10, 1999, the courtCourt
granted motions by the Company, ruling, in essence, that the franchisees
would be unable to prove their remaining claims. On April 22, 1999,the
Court entered an order granting the Company's motion to enforce a
settlement with the Franchisee Association covering various aspects of the
franchise relationship, but involving no cash payments by the Company. In
accordance with that order, the FranchiseFranchisee Association's claims were
dismissed with prejudice. On June 10, 1999, a final judgment was entered in
favor of Foodmaker,the Company and against those plaintiffs with whom Foodmakerthe Company did
not settle. The Franchise AssciationFranchisee Association and certain individual plaintiffs
filed an appeal on August 13, 1999. The Company has settled with all
franchisees except one individual franchisee and the three corporate
entities in which that franchisee owns a substantial interest. Those
entities continue to pursue the appeal. Settlements have involved no cash
payments by the Company. Management intends to vigorously defend the
appeal.
5
On February 2, 1995, an action by Concetta Jorgensen was filed against the
Company in the U.S. District Court in San Francisco, California alleging
that restrooms at a Jack in the Box restaurant failed to comply with laws
regarding disabled persons and seeking damages in unspecified amounts,
punitive damages,injunctive relief, attorneys' fees and prejudgment
interest. In an amended complaint, damages were also sought on behalf of
all physically disabled persons who were allegedly denied access to
restrooms at the restaurant. In February 1997, the court ordered that the
action for injunctive relief proceed as a nationwide class action on behalf
of all persons in the United States with mobility disabilities. The Company
has reached agreement on settlement terms both as to the individual
plaintiff Concetta Jorgensen and the claims for injunctive relief, and the
settlement agreement has been approved by the U.S. District Court. The
settlement requires the Company to make access improvements at
Company-operated restaurants to comply with the standards set forth in
the Americans with Disabilities Act Access Guidelines. The settlement
requires compliance at 85% of the Company-operated restaurants by April
2001 and for the balance of Company-operated restaurants by October 2005.
The Company has agreed to make modifications to its restaurants to improve
accessibility and anticipates investing an estimated $19 million in capital
improvements in connection with these modifications, including amounts
previously spent. Similar claims have been made against Jack in the Box
franchisees and Foodmaker relating to franchised locations which may not
be in compliance with the Americans with Disabilities Act (ADA). The relief
sought is injunctive relief to bring these additional restaurants into
compliance with the ADA and attorneys' fees.
On April 6, 1996, an action was filed by one of the Company's international
franchisees, Wolsey, Ltd., a Hong Kong corporation, in the U.S. District
Court in San Diego, California against the Company and its directors, its
international franchising subsidiary, and certain current and former
officers of the Company. The complaint alleged certain contractual, tort,
and law violations, and sought $38.5 million in damages, injunctive relief,
attorneys' fees and costs. The Company filed a counterclaim seeking, among
other things, declaratory relief, and attorneys' fees and costs. Prior to
the trial, the Court dismissed portions of the plaintiff's claim, including
the single claim alleging wrongdoing by the Company's non-management
directors, and the claims against its current officers. The case proceeded
to trial on January 5, 1999. Prior to the conclusion of the trial, on
January 29, 1999, the parties reached agreement on a settlement, which
provided for a mutual exchange of non-cash consideration, including
execution of a new agreement between the Company and the plaintiff for
development of Jack in the Box restaurants in Asia. The settlement was
formally approved, aqnd judgment was entered on February 2, 1999.
On December 10, 1996, a suit was filed by the Company's Mexican licensee,
Foodmex, Inc.
("Foodmex") filed a suit,, in the U.S. District Court in San Diego, California against
the Company and its international franchising subsidiary. Foodmex formerly
operated several Jack in the BoxJACK IN THE BOX franchise restaurants in Mexico, but its
licenses were terminated by the Company for, among other reasons, chronic
insolvency and failure to meet operational standards. The Foodmex suit
alleged wrongful termination of its master license, breach of contract and
unfair competition and sought an injunction to prohibit termination of its
license as well as unspecified monetary damages. The Company and its
subsidiary counterclaimed and sought a preliminary injunction against
Foodmex. On February 24, 1998, the Court issued an order dismissing
Foodmex's complaint without prejudice. In March 1998, Foodmex filed a
Second Amended Complaint in the U.S. District Court in San Diego,
California alleging contractual, tort and law violations arising out of the
same business relationship and seeking damages in excess of $10 million,
attorneys' fees and costs. On June 25, 1999, the courtCourt granted Foodmaker's
6
the
Company's motion for summary judgement on the plaintiff's second amended complaint,Second Amended
Complaint, resulting in the complete dismissal of Foodmex's claim against
Foodmaker.6
the Company. On the same day, the courtCourt granted Foodmaker'sthe Company's motion for
partial summary judgement on its breach of contract, trademark
infringement, unfair competition and related claims, including the
Company's claim for a permanent injunction. The courtCourt ordered Foodmex to
cease using any of the Company's proprietary marks, and ordered it to cause
its Mexican sublicensees to cease using any of Foodmaker'sthe Company's proprietary
marks. IssuesOn December 22, 1999 Foodmex filed for bankruptcy protection in the
United States Bankruptcy Court for the District of Foodmex's liabilityNevada under Chapter 7
of the bankruptcy laws. While the Company continues to Foodmaker on the Company'sseek damages for
Foodmex's breach of promissory note, claim,the remaining issues and issuesamounts at
issue are not material to the Company's results of damages owed to Foodmaker by
Foodmex remain to be decided.operations or financial
condition. No trial date has been set.
The Company is also subject to normal and routine litigation. The amount of
liability from the claims and actions against the Company cannot be
determined with certainty, but in the opinion of management, the ultimate
liability from all pending legal proceedings, asserted legal claims and
known potential legal claims which are probable of assertion should not
materially affect the results of operations and liquidity of the Company.
Other than as described in this quarterly report, there have been no
material changes to the litigation matters set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended September 27, 1998.
The U.S. Internal Revenue Service ("IRS") examination of the Company's
federal income tax return for fiscal year 1996 resulted in the issuance of a
proposed adjustment to tax liability of $7.3 million (exclusive of
interest). The Company has filed a protest with the Regional Office of
Appeals of the IRS to contest the proposed assessment. Management believes
that an adequate provision for income taxes has been made.
7
FOODMAKER,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 19992000 and 19981999 refer to the
12-week and 40-week16-week periods ended July 4,January 23, 2000 and January 17, 1999, and July 5, 1998, respectively,
unless otherwise indicated.
Restaurant sales increased $60.0$63.8 million, and $173.3or 16.6%, to $448.2 million
respectively,
to $323.7 million and $1,011.8in 2000 from $384.4 million in 1999, from $263.7 million and $838.5
million in 1998, reflecting increases in both the number of
Company-operated restaurants and in per store average ("PSA") sales. The average
number of Company-operated restaurants for the 40-week period increased 11.3% to 1,1061,203 in 19992000 from
9861,081 restaurants in 1998.1999. PSA sales for comparable Company-operated
restaurants, those open more than one year, grew 9.8% and 8.4%5.7% in the 12-week
and 40-week periods of 19992000 compared with the
same periodsperiod in 1998.1999. Sales growth resulted from increases in the average number
of transactions of 6.4%3.4% and
5.0% in the respective 1999 periods and the balance of the increases from higher average transaction amounts.amounts of 2.3% compared to a
year ago. Management believes that the sales growth is attributable to effective
advertising and strategic initiatives, especiallyincluding the Assemble-To-Order ("ATO") program
in which sandwiches are made when customers order them. Newthem, new menu boards that
showcase the combo meals are helping to
increase average check amounts. In addition, a new drive-thruand an order confirmation system is helping to improve order accuracy while alerting customers to the
amount of their purchase.at drive-thru windows.
Distribution and other sales increased $2.6$5.2 million and $9.4 million,
respectively, to $9.2 million and $28.4$15.5 million in
19992000 from $6.6 million and
$19.0$10.3 million in 1998,1999, primarily due to an increase in fuel and
convenience store sales to $7.0 million in 2000 from $1.8 million in 1999. At
quarter-end, the number of franchise
restaurants serviced by the Company's distribution division, sales growth at
franchise restaurants and an increase in other sales.Company had seven locations compared with two a year ago.
Franchise rents and royalties increased $.8 million and $2.5$.9 million to $9.1$12.6 million and $29.7in
2000 from $11.7 million respectively, in 1999, from $8.3 million and
$27.2 million in 1998, and were slightly more than 10%which represent approximately 10.5% of
sales at franchise restaurantsrestaurant sales in both years. Franchise restaurant sales increasedgrew 7.1%
to $88.3$120.6 million and $286.2in 2000 from $112.6 million respectively, in 1999, benefiting from $79.2 million and $263.3 million
in 1998. Sales at domestic franchise restaurants were also strengthened by
implementing the
Company's strategic initiatives.initiatives described above.
Other revenues, typicallyprimarily interest income from investments and notes
receivable, also includeddeclined slightly to $.4 million in the second quarter2000 from $.7 million in 1998 income from the
settlement of litigation with meat suppliers (the "Litigation
Settlement") of approximately $45.8 million after litigation costs.
Other revenues declined to $.5 million and $1.7 million, respectively,
in 1999 from $2.0 million and $3.7 million excluding this unusual item in 1998,
reflecting lower cash investments after repaying debt.1999.
Restaurant costs of sales and operating costs increased with sales
growth and the addition of Company-operated restaurants. Restaurant costs of
sales, which include food and packaging costs, increased to $100.1 million and
$320.9$140.0 million in
19992000 from $83.1 million and $267.7$123.6 million in 1998.1999. As a percent of restaurant sales, costs of
sales declined to 30.9% and 31.7% of
sales, respectively,31.2% in 1999,2000 from 31.5% and 31.9%32.1% in 1998,1999, primarily due to lower
ingredient costs, especially beefcheese, shortening and pork.
8
In the second quarter in 1999, the Company reduced accrued liabilities and
restaurant operating costs by $18.0 million, primarily due to a change in
estimates resulting from improvements to its loss prevention and risk management
programs, which have been more successful than anticipated.produce.
Restaurant operating costs increased to $156.8$221.2 million and $491.4in 2000 from
$187.3 million excluding this
unusual adjustment, in 1999 from $129.8 million and $412.4 million,
respectively, in 1998.1999. As a percent of restaurant sales, operating costs
excluding the unusual adjustment decreasedincreased to 48.4% and 48.6%, respectively,49.4% in 2000 from 48.7% in 1999, from 49.2% in both periods of 1998. The improvements in 1999 reflect
improvedreflecting cost increases related
to initiatives designed to improve the overall guest experience and slightly
higher percentages of labor-related costs and occupancy expenses, which tend
to be less variable, increasing at a lesser rate than PSA sales growth.expenses.
Costs of distribution and other sales increased to $9.0 million and $27.9
million, respectively, in 1999 from $6.5 million and $18.5$15.3 million in
1998,2000 from $10.2 million in 1999, reflecting an increase in the related sales. As
a percent of distribution and other sales, these costs increasedwere 98.7% in 2000
compared to 98.5% and 98.4%, respectively, in 1999
from 97.4% and 97.5% in 1998, primarily due to the lower margin realized from
other sales.
Franchised98.8% a year ago.
8
Franchise restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
decreased slightlydeclined to $5.0$6.1 million and increased slightly to $17.9in 2000 from $7.2 million
respectively, in 1999, from $5.4 million and $17.8 million in 1998. The decline
in the most recent quarter is principallyprimarily due to
lower franchise-related legal expenses.
Selling, general and administrative costs increased to $37.6 million and
$117.4$53.5 million in
19992000 from $29.5 million and $104.7$44.9 million in 1998.1999. Advertising and promotion costs increased $3.0
million to $16.6$22.8 million and $52.0in 2000 from $19.8 million
respectively, in 1999, from $13.9 million and $44.5 million in 1998, slightly over 5% of
restaurant sales in all periods. Regional administrative and
training expenses are reflected in general and administrative costs in 1999.
The 1998 amounts, which had previously been included with restaurant
operating costs, have been reclassified to conform with the 1999
presentation. In 1998 general,both quarters. General, administrative and other costs
includedincreased to $30.7 million, or 6.4% of revenues, in 2000 from $25.1 million, or
6.2% of revenues, in 1999, primarily due to a non-cash charge of approximately $8 million primarily relateddecision to facilities
and customer service improvement projects. In 1999 general, administrativeincrease staffing
levels in the field to accommodate the growth program and other costs were 6.1% of revenues in both periodsto support
restaurant and in 1998,
excluding the non-cash charge, such costs were 5.6% and 5.9% of revenues
excluding the Litigation Settlement.revenue growth.
Interest expense declined $1.4$.7 million and $5.1to $8.3 million respectively, to
$6.3 million and $21.8in 2000 from $9.0
million in 1999 from $7.7 million and $26.9 million in
1998, principally due toreflecting a reduction in total average debt and lower interest rates. In 1998during the Company completed the refinancing plan described in "Liquidity and Capital
Resources." Asquarter
compared to a result of the plan, since the beginning of 1998 debt has been
reduced by approximately $35 million and effective interest rates are lower.year ago.
The income tax provisions reflect the expectedprojected annual tax rate of 37%
of earnings before income taxes in 19992000 and the actual tax rate of 32%37% of pretax
earnings in 1998.1999. The favorable income tax rates result from the Company's
ability to realize previously unrecognized tax benefits. The Company cannot
determine with certainty the 19992000 annual tax rate until the end of the fiscal
year; thus the rate could differ from expectations.
In 1998 the Company incurred an extraordinary loss of $7.0 million, less
income tax benefits of $2.6 million, on the early extinguishment of $125
million each of its 9 1/4% senior notes and its 9 3/4% senior subordinated
notes.
9
Net earnings in the 12-week period increased 38% to $17.4$4.6 million, or $.44$.12 per diluted share, to
$20.4 million, or $.52 per diluted share, in 19992000 from $12.6$15.8 million, or $.31 per diluted share,
before an extraordinary item in 1998. Net earnings in the 40-week period
were $58.1 million, or $1.48$.40
per diluted share, in 1999 and $58.6 million, or
$1.46 per diluted share, before an extraordinary item in 1998. Net earnings in
both 1999 and 1998 include unusual items, which increased the Company's net
income. In the second quarter of 1999, the Company reduced restaurant operating
costs by $11.3 million or $.29 per diluted share, net of income taxes, primarily
due to a change in estimates as described above. Earnings in 1998 included
income from the Litigation Settlement and a non-cash charge as described in
general and administrative costs, which combined were approximately $25.6
million, or $.64 per diluted share, net of income taxes. Excluding these
unusual items in both years, net earnings increased 42% in the 40-week period to
$46.8 million, or $1.19 per diluted share, in 1999 from $33.0 million, or $.82
per diluted share, before an extraordinary item in 1998.1999. The earnings increases
in 1999 compared to the same periods in 1998 reflectimprovement reflects the impact of
sales growth and lower interest expense, offset in part by the higher effective income tax
rate in 1999.improved margins.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $4.8$3.4 million to $5.2$7.5 million at
July 4,
1999January 23, 2000 from $10.0$10.9 million at the beginning of the fiscal year. The
Company expects to maintain low levels of cash and cash equivalents, and plans to
reinvestreinvesting
available cash flows from operations to develop new or enhance existing
restaurants, and to reduce borrowings under the revolving credit agreement.
The Company's working capital deficit decreased $28.2$38.2 million to $115.1
millionat July 4, 1999 from $143.3$93.6
million at September 27, 1998, principallyJanuary 23, 2000 from $131.8 million at October 3, 1999, primarily
due to a decline in current liabilities. The Company and the restaurant industry
ingeneralin general maintain relatively low levels of accounts receivable and inventories
and vendors grant trade credit for purchases such as food and supplies. The
Company also continually invests in its business through the addition of new
units and refurbishment of existing units, which are reflected as long-term
assets and not as part of working capital.
On April 1,In 1998, the Company entered into a new revolving bank credit
agreement, which provides for a credit facility expiring in 2003 of up to $175
million, including letters of credit of up to $25 million. At July 4, 1999,January 23, 2000,
the Company had borrowings of $87.0$110 million and approximately $81.0$58.5 million of
availability under the agreement. Beginning in September 1997, the Company initiated a refinancing plan to
reduce and restructure its debt. At that time, the Company prepaid $50 million
of its 9 1/4% senior notes due 1999 using available cash. In 1998 the Company
repaid the remaining $125 million of its 9 1/4% senior notes and all $125
million of its 9 3/4% senior subordinated notes due 2002.
In order to fund these repayments, on April 14, 1998 the Company completed
a private offering of $125 million of 8 3/8% senior subordinated notes due 2008,
redeemable beginning 2003. Additional funding sources included available cash,
as well as bank borrowings under the new bank credit facility. The Company
expects that annual interest expense will be reduced by over $10 million from
1997 levels due to the reduction in debt and lower interest rates on the new
debt. Total debt outstanding decreasedincreased to $312.6$329.6
million at July 4, 1999January 23, 2000 from $347.7$305.2 million at the beginning of the fiscal
year 1998.reflecting additional borrowings under the credit agreement which were used
to reduce current liabilities.
The Company is subject to a number of covenants under its various debt
instruments including limitations on additional borrowings, capital
expenditures, lease commitments and dividend payments, and requirements to
maintain certain financial ratios, cash flows and net worth. The bank credit
9
facility is secured by a first priority security interest in certain assets and
properties of the Company. In addition, certain of the Company's real estate and
equipment secure other indebtedness.
10
The Company requires capital principally to grow the business through
new restaurant construction, as well as to maintain, improve and refurbish
existing restaurants, and for general operating purposes. The Company's primary
sources of liquidity are expected to be cash flows from operations, the
revolving bank credit facility, and the sale and leaseback of restaurant
properties. Additional potential sources of liquidity include financing
opportunities and the conversion of Company-operated restaurants to franchised
restaurants. Based upon current levels of operations and anticipated growth, the
Company expects that cash flows from operations, combined with other financing
alternatives available, will be sufficient to meet debt service, capital
expenditure and working capital requirements.
Although the amount of liability from claims and actions against the
Company cannot be determined with certainty, management believes the ultimate
liability of such claims and actions should not materially affect the results of
operations and liquidity of the Company.
On December 3, 1999, the Company's Board of Directors authorized the
purchase of the Company's outstanding common stock in the open market for an
aggregate amount not to exceed $10 million. At January 23, 2000, the Company had
acquired 127,800 shares for an aggregate cost of $2.4 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure relating to financial instruments is to
changes in interest rates. The Company uses interest rate swap agreements to
reduce exposure to interest rate fluctuations. At July 4, 1999,January 23, 2000, the Company
had a $25 million notional amount interest rate swap agreement expiring in June
2001. This agreement effectively converts a portion of the Company's variable
rate bank debt to fixed rate debt and has a pay rate of 6.63%6.38%.
The Company's credit facility bears interest at an annual rate equal to
the prime rate or the London Interbank Offered Rate ("LIBOR") plus an applicable
margin based on a financial leverage ratio. As of January 23, 2000, the
Company's applicable margin was set at 0.625%. During the first quarter of
fiscal year 2000, the average interest rate on the credit facility was 6.7%.
At July 4, 1999,January 23, 2000, a hypothetical one percentage point increase in
short-term interest rates would result in a reduction of $.6$0.85 million in annual
pre-tax earnings. The estimated reduction is based on holding the unhedged
portion of bank debt at its July 4, 1999January 23, 2000 level.
At July 4, 1999,January 23, 2000, the Company had no other material financial
instruments subject to significant market exposure.
YEAR 2000 COMPLIANCE
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data using
only two digits of the year. Most computer programs, computers, and embedded
microprocessors controlling equipment were programmed to assume that all two
digit dates were preceded by "19," causing "00" to be interpreted as the year
1900. This formerly common practice now could result in a computer system or
embedded microprocessor which fails to recognize properly a year that begins
with "20," rather than "19." This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by
date-sensitive microprocessors, and is generally referred to as the "Year 2000"
issue.
The Company's State of Year 2000 Readiness.Activities. In 1995, the Company began to
formulateprepare a plan to address its Year 2000 issues. The Company's Year 2000 plan
now involves five phases: 1) Awareness, 2) Assessment, 3) Remediation, 4)
Testing and 5) Implementation.
Awareness involves helping employees who deal with the Company's computer
assets, and managers, executives and directors to understandimpact of the naturearrival of the Year 2000 problem. Assessment involves the identification and inventory of the
Company'son its
business. The Company assessed its information technology ("IT") systems and embedded
microprocessor technology ("ET")to determine which required modification or
replacement and which are critical to the determination asCompany's operations. The Company
10
applied internal and external resources to whether such technology will
properly recognize a year that begins with "20," rather than "19." IT/ETupgrade, repair or replace
significant systems that among other things, properly recognize a year beginning with "20"
are said to be "Year 2000 ready." Remediation involves the repair or
replacement of IT/ET systems that arewere not Year 2000 ready. Testing involvesready and had contingency plans in
place for any unavoidable Year 2000 risks. There can be no assurance that the
testing of repaired or replaced IT/ET systems. Implementation is the
installation and integration of remediated and tested IT/ET systems.
11
The phases overlap substantially. The Company has made substantial progresswill not incur Year 2000 related problems in the Awareness, Assessment, Remediation and Testing phases and has completed
implementation of a number of systems.
Awareness and Assessment. The Company has established an ad hoc Committee
of the Board of Directors and multiple management teams, which are responsible
for the Company's activities in addressing the Year 2000 issue. The Company has
also sent letters to approximately 2,700 of its vendors of goods and services
to bring the Year 2000 issue to their attention and to assess their readiness.
The Company has advised its franchisees (who operate approximately 22% of the
Jack in the Box restaurants) that they are required to be Year 2000 ready by
December 31, 1999 and has provided video information and regional presentations
regarding Year 2000 issues. The Company's franchisees are represented on a Year
2000 team. While the Awareness and Assessment phases will continue into the Year
2000, they are substantially complete at this time.
Remediation, Testing and Implementation. Although Remediation, Testing and
Implementation will be substantially completed during 1999, some systems
identified as non-critical may not be addressed until after January 2000. The
following table describes by category and status, major IT applications that
have been identified.
Remediation Status
Category Ready In Process
- --------------------------------------------------------------------------------
Mainframe
Third party developed software 100% 0%
Internally developed software 90% 10%
Hardware (Peripherals) 100% 0%
Desktop
Third party developed software 79% 21%
Internally developed software 40% 60%
Corporate hardware 70% 30%
Restaurant hardware 94% 6%
Client-Server
Third party developed software 60% 40%
Internally developed software 100% 0%
Hardware 66% 34%
Embedded Technology. The Company has identified categories of critical
restaurant equipment in which ET may be found, has sent letters to the majority
of the vendors of such equipment and is in the process of identifying the
remaining vendors. About 97% of restaurant equipment vendors who have received
12
letters have responded. The Company is reviewing the responses. To date,future, but the Company
has identified only one type of equipment with date sensitive ET that
the Company believes should be replaced. Replacement components have been
implemented in 63% of the Company restaurants with the remainder to be
implemented during 1999. Franchisees have been informed and offered the
opportunity to participate in the Company's replacement program. The Company
continues to evaluate information in letter responses and other materials
received from vendors, on web sites, and from other sources, in identifying date
sensitive ET.
Vendors of Important Goods and Services. The Company has identified and
sent letters to approximately 2,700 key vendors in an attempt to gain assurance
of vendors'incurred no significant Year 2000 readiness. As of July 1999, the Company had received
responses concerning Year 2000 readiness from approximately 63% of those vendors
and is pursuing responses from the remainder. The Company expectsrelated problems to continue
discussions with those it identifies as critical vendors of goods and services
throughout 1999 to attempt to ensure the uninterrupted supply of goods and
services and to develop contingency plans in the event of the failure of any of
such vendors to become and remain Year 2000 ready.date.
The Company's Franchisees. At July 4, 1999, 327Approximately one-fifth of JACK IN THE BOX
restaurants wereare operated by franchisees. The Company has completed an assessment ofprovided information to its
franchisees about the business risks associated with the Year 2000 readinessand shared
information with franchisees regarding the compliance status of point-of-sale
hardware and software and other restaurant equipment. The Company replaced, at
franchisees' expense, the non-compliant personal computers it hashad leased and
non-compliant software it had licensed to franchisees of approximately 80%92% of
franchised restaurant, together with software it has licensed them to use. Such
computers and software were determinedrestaurants. Franchisees have not to bereported any significant Year 2000
ready and are being
replaced with compliant computers and remediated software at franchisees'
expense during 1999. The Company has advised its franchisees, both domestic and
international, that they are required to be Year 2000 ready by December 31,
1999.related problems.
The Costs to Address the Company's Year 2000 Issues. TheAt January 23,
2000, the Company estimates
that it hashad incurred costs of approximately $11$13 million, to date for the
Awareness, Assessment, Remediation, Testing and Implementation phases ofwhich
substantially completed its Year 2000 plan. These amounts have come principally from the general operating
and capital budgets of the Company's Management Information Systems department.
The Company currently estimates the total costs of completing its Year 2000
plan, including costs incurred to date, to be approximately $13 million,efforts, with approximately 25% relating
to new systems which have been or will be capitalized. Some planned system
replacements, which are anticipated to provide significant future benefits, were
accelerated due to Year 2000 concerns and have
resulted in increased IT spending. This estimate is based on currently available
information and will be updated as the Company continues its assessment of third
party relationships, proceeds with its testing and implementation, and designs
contingency plans.
The Risks of the Company's Year 2000 Issues. If any IT or ET systems
critical to the Company's operations have been overlooked in the Assessment,
Remediation, Testing or Implementation phases, if any of the Company's
remediated internal computer systems are not successfully remediated, or if
a significant number of the Company's franchisees do not become Year 2000 ready
in a timely manner, there could be a material adverse effect on the Company's
results of operations, liquidity and financial condition of a magnitude which
the Company has not yet fully analyzed.
In addition, the Company has not yet been assured that (1) the computer
systems of all of its key vendors will be Year 2000 ready in a timely manner
13
or that (2) the computer systems of third parties with which the Company's
computer systems exchange data will be Year 2000 ready both in a timely
manner and in a manner compatible with continued data exchange with the
Company's computer systems.
If the vendors of the Company's most important goods and services or the
suppliers of the Company's necessary energy, telecommunications and
transportation needs fail to provide the Company with (1) the materials and
services which are necessary to produce, distribute and sell its products, (2)
the electrical power and other utilities necessary to sustain its operations, or
(3) reliable means of transporting supplies to its restaurants and franchisees,
such failure could have a material adverse effect on the results of operations,
liquidity and financial condition of the Company.
The Company's Contingency Plan. The Company is developing a business
contingency plan to address both unavoided and unavoidable Year 2000 risks.
Although the Company expects to have the plan substantially complete by late
summer, enhancements and revisions will be continuously considered and
implemented, as appropriate, throughout the remainder of the year and into
the Year 2000.concerns.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
including, but not limited to, the Company's expectations regarding its
effective tax rate, its continuing investment in new restaurants and
refurbishment of existing facilities, Year 2000 compliance and sources of
liquidity. Forward-looking statements are generally identifiable by the use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" and
similar expressions. Forward-looking statements are subject to known and unknown
risks and uncertainties which may cause actual results to differ materially from
expectations. The following is a discussion of some of those factors. The
Company's tax provision is highly sensitive to expected earnings and as
expectations change the Company's income tax provision may vary more
significantly from quarter to quarter and year to year than companies which have
been continuously profitable. However, the Company's effective tax rates are
expected to increase in the future. There can be no assurances that growth
objectives in the regional domestic markets in which the Company operates will
be met or that capital will be available for refurbishment of existing
facilities. The Company has urged certain vendors to develop and implement Year
2000 compliance plans. However, any failure by vendors to ensure compliance with
Year 2000 requirements could have a material, adverse effect on the financial
condition and results of operations of the Company after January 1, 2000.
Additional risk factors associated with the Company's business are
detailed in the Company's most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
14
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS 130,
requiring only additional informational disclosures, is effective for the
Company's fiscal year ending October 3, 1999.
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. This Statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is required to be restated. SFAS 131, requiring only
additional informational disclosures, is effective for the Company's fiscal year
ending October 3, 1999.
In June 1998, the FASBFinancial Accounting Standards Board issued SFASStatement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement iswas amended by SFAS 137 which defers the effective fordate to all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 is
effective for the Company's first quarter in the fiscal year ending September
30, 2001 and is not expected to have a material effect on the Company's
financial position or results of operations.
In March 1998, the AICPA issued a Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires that certain costs related to the development
or purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software. The SOP also requires that costs related
to the preliminary project stage and the post-implementation/operations stage
of an internal-use computer software development project be expensed as
incurred. This Statement is effective for fiscal years beginning after December
15, 1998 and requires that costs incurred prior to the initial application of
the SOP not be adjusted to the amounts that would have been capitalized had the
SOP been in effect when those costs were incurred. SOP 98-1 is effective for
the Company's fiscal year ending October 1, 2000, and is not expected to have
a material effect on the Company's financial position or results of operations.
1511
PART II - OTHER INFORMATION
There is no information required to be reported for any items under Part II,
except as follows:
Item 1. Legal Proceedings - See Note 34 to the Unaudited Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders in the first
quarter ended January 23, 2000. The Company's annual meeting was held
February 18, 2000 at which the following matters were voted as indicated:
For Withheld
---------- ----------
1. Election of the following directors
to serve until the next annual meeting
of stockholders and until their
successors are elected and qualified.
Michael E. Alpert..................... 32,549,414 1,234,753
Jay W. Brown.......................... 33,157,787 626,380
Paul T. Carter........................ 33,338,627 445,540
Charles W. Duddles.................... 33,331,382 452,785
Edward W. Gibbons..................... 33,330,819 453,348
Jack W. Goodall....................... 32,547,792 1,236,375
Alice B. Hayes, Ph.D.................. 33,290,293 493,874
Murray H. Hutchison................... 33,295,508 488,659
Robert J. Nugent...................... 33,146,187 637,980
L. Robert Payne....................... 33,315,405 468,762
For Against Abstain Not Voted
--------- ------- ------- ---------
2. Ratification of the
appointment of KPMG LLP as
independent accountants.... 33,384,719 33,463 365,985 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
------ -----------
10.1 Fourth Amendment dated as of December 6, 1999 to the
Revolving Credit Agreement dated as of April 1, 1998 by
and between Foodmaker, Inc. and the Banks named therein.
27 Financial Data Schedule (included only with electronic
filing)
(b) Reports on Form 8-K.
A form 8-K was filed on July 20, 1999, reporting under Item 5 thereof,
a change in the name of the Company to Jack in the Box Inc. effective
October 4, 1999.
16- None
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated.
FOODMAKER,JACK IN THE BOX INC.
By: DARWIN J. WEEKS
---------------
Darwin J. Weeks
Vice President, Controller
and Chief Accounting Officer
(Duly Authorized Signatory)
Date: August 18, 1999
17
March 8, 2000
13