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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED September 28, 2003
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COMMISSION FILE NUMBER 1-9390
Jack in the Box Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-2698708
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(State of Incorporation) (I.R.S. Employer Identification No.)
9330 Balboa Avenue, San Diego, CA 92123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 571-2121
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
The aggregate market value of the common stock held by non-affiliates of the
registrant, computed by reference to the closing price reported in the New York
Stock Exchange - Composite Transactions as of April 13, 2003, was approximately
$470.7 million.
Number of shares of common stock, $.01 par value, outstanding as of the
close of business December 12, 2003 - 36,306,285.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the 2004 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
JACK IN THE BOX INC.
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 15
Item 3. Legal Proceedings................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 17
Item 6. Selected Financial Data........................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 25
Item 8. Financial Statements and Supplementary Data....................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 25
Item 9A. Controls and Procedures........................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant................ 26
Item 11. Executive Compensation............................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 26
Item 13. Certain Relationships and Related Transactions.................... 26
Item 14. Principal Accounting Fees and Services............................ 26
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 27
2
PART I
ITEM 1. BUSINESS
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The Company
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(R) ("Qdoba") fast-casual restaurants. In fiscal 2003, we generated
total revenues of $2.1 billion. As of September 28, 2003, the JACK IN THE BOX
system included 1,947 restaurants, of which 1,553 were company-operated and 394
were franchise-operated. JACK IN THE BOX restaurants are located primarily in
the western and southern United States. Based on the number of units, JACK IN
THE BOX is the second or third largest quick-service hamburger chain in most of
its major markets. As of September 28, 2003, the Qdoba Mexican Grill system
included 111 fast-casual restaurants in 22 states, of which 34 were
company-operated and 77 were franchise-operated.
Background. The first JACK IN THE BOX restaurant, which offered only
drive-thru service, opened in 1951. By 1968, the JACK IN THE BOX chain had
expanded its operations to approximately 300 restaurants. After the Company was
purchased in 1968 by Ralston Purina Company, a major expansion program was
initiated in an effort to penetrate the eastern and midwestern markets, and by
1979 business had grown to over 1,000 units. In 1979, the Company decided to
divest 232 restaurants in the east and midwest to concentrate its efforts and
resources in the western and southwestern markets, which were believed to offer
the greatest growth and profit potential at that time. In 1985, a group of
private investors acquired the Company and, in 1987, a public offering of common
stock was completed. In 1988, the outstanding publicly-held shares were acquired
by private investors through a tender offer. In 1992, a recapitalization was
completed that included a public offering of common stock and indebtedness.
Since that time, we have continued to grow, primarily through the addition of
new company-operated restaurants, and we entered new markets in the Southeast
beginning in 1999. In addition, to supplement our core growth and balance the
risk associated with growing solely in the highly competitive quick-service
hamburger ("QSR") segment of the restaurant industry, on January 21, 2003, we
acquired Qdoba Restaurant Corporation, operator and franchiser of Qdoba Mexican
Grill, expanding our growth opportunities into the fast-casual restaurant
segment.
Strategic Plan. Our business plan to transition the Company from a regional
quick-service restaurant chain to a national restaurant company has evolved in
the current year to address trends related to the economy, competition and
consumer expectations, and include as its primary focus the re-invention of the
JACK IN THE BOX brand during the next three to five years. Also comprising a
significant component of our business plan is our multifaceted growth strategy,
which includes growing our restaurant base, increasing our franchising
activities, expanding our proprietary QUICK STUFF(R) convenience store concept
and continuing to grow Qdoba. We intend to remain flexible in our strategies to
grow the business in our pursuit of long-term increases in shareholder value.
Operating Strategy - Brand Re-invention. We believe that brand re-invention
will clearly differentiate us from our competition and make JACK IN THE BOX a
preferred brand by offering customers a better restaurant experience than
typically found in the QSR segment today. Brand re-invention will include
changes to the following aspects of the restaurant experience:
o Better Food. We believe that product innovation and our focus on
higher-quality products will further differentiate our menu from our
competitors, strengthen our brand and increase our appeal to a broader
consumer audience. In support of these initiatives, in fiscal 2003, we
successfully introduced Jack's Ultimate SaladsTM, a new line of premium
entree salads and recently launched Classics on a Roll, which includes two
new premium products, our Roasted Turkey Sandwich and Ultimate Club
Sandwich, served on a hearth-baked roll. We have also been working in
collaboration with renowned culinary experts to develop new premium
products for fiscal year 2004 and beyond, including a line of gourmet
burgers and chicken sandwiches. In addition to adding new products to our
product line, we have also undertaken a product deletion initiative
intended to refocus the menu on higher profit products that simplify
kitchen procedures and produce higher margins. We are also on course with
our new Innovation Center expected to open next summer. The Innovation
Center will unite research and development with product marketing and other
key support functions, with the goal of bringing its products to market
more rapidly.
3
o Improved Service. The next major aspect of brand re-invention involves
enhancements to the quality of our service. Our plan to enhance customer
service includes the implementation of computer-based training in our
restaurants, new recruiting tools and an improved mystery guest program,
which will improve our ability to assess the consumers' view of the
restaurant. In line with these efforts to improve guest service, we are
nearing completion of the rollout of our new point-of-sale ("POS") system
which permits credit and debit purchases, resulting in higher check
averages. Our new POS system cuts down on transaction processing times,
while providing our customers with more convenient payment alternatives.
o Re-Imaged Restaurants. The third important element of brand re-invention is
the renovation of the restaurant facility. Working with a prominent
branding and design firm, we have developed unique and proprietary,
interior and exterior, design schemes that will more fully incorporate our
fictional founder "Jack", into the restaurant experience. As the center of
our award-winning advertising campaign, Jack has been instrumental in
delivering our message of product quality, innovation and value to our
consumers. We are also in the process of designing and developing a new
prototype restaurant, which will reflect these new design schemes.
With approximately 80% of our restaurants company-owned, we believe that we
are in an excellent position to execute our brand re-invention strategy quickly
while maintaining quality and consistency in our restaurant operations. We plan
to test brand re-invention with the opening of two "concept" stores in San
Diego, California and the conversion of two existing markets by the end of
fiscal year 2004.
Growth Strategy. Our growth strategy is multifaceted and includes the
following components: (i) developing new company-operated restaurants; (ii)
expanding our unique convenience store concept, QUICK STUFF, a full-service
convenience store on a site shared with a full-sized JACK IN THE BOX restaurant
and a branded fuel station; (iii) expanding our franchising activities; and (iv)
growing Qdoba, our new fast-casual subsidiary. During the next two years, in an
effort to focus heavily on re-inventing our core business and to conserve
capital, we will slow our growth of new company-operated restaurants and plan
not to actively pursue additional restaurant concepts for acquisition.
o Company Restaurant Growth. We opened 90 new company-operated restaurants in
fiscal 2003, including six restaurants shared with a QUICK STUFF store and
fuel station. We believe our convenience store concept provides a strong
unit economic model and allows for increased penetration of existing
markets by providing additional site development flexibility in unique
locations where there is less competition. Fiscal year 2003 restaurant
growth was primarily in existing markets, as we continue to see
opportunities to increase our market penetration, and intend to leverage
media, supervision, and food delivery costs.
o Franchise Restaurant Growth. To improve margins and returns on capital over
time, our business model includes increasing the use of franchising as we
continue to grow the Company. Selective franchising will also enable us to
assume less financial risk and re-deploy proceeds into brand re-invention.
We have made strides in expanding our franchising activities as we
continued our selective conversion of company-operated restaurants to
franchises. We converted 36 JACK IN THE BOX restaurants in fiscal 2003 and
signed development agreements for the development of 18 new franchised
restaurants. Through continued conversions and new development agreements,
we intend to increase the percentage of franchised restaurants in the
system over the next several years to approximately 35% from approximately
20% at September 28, 2003.
o Expansion of Qdoba. We will continue to actively grow our new fast-casual
subsidiary. With a substantial number of new stores in its development
pipeline and double-digit increases in systemwide sales, at restaurants
open more than one year, in 2003 and 2002, Qdoba is well on its way to
becoming a national brand and a leader in the fastest-growing segment of
the restaurant industry.
Restaurant Concepts
JACK IN THE BOX. JACK IN THE BOX restaurants offer a broad selection of
distinctive, innovative products targeted primarily at the adult fast-food
consumer. The JACK IN THE BOX menu features a variety of hamburgers, salads,
specialty sandwiches, tacos, drinks and side items. Hamburgers, including the
signature Jumbo Jack(R), Sourdough Jack(R) and Ultimate Cheeseburger, accounted
for approximately 30% of our restaurant sales in fiscal 2003. JACK IN THE BOX
restaurants also offer a line of premium entree salads and sandwiches to appeal
to a broader customer base, including more women and consumers older than our
traditional target of men 18-34 years old and value-priced products, known as
"Jack's Value Menu," to compete against price-oriented competitors and because
value is important to certain fast-food customers. We believe that our
distinctive menu has been instrumental in developing brand loyalty and is
appealing to customers with a broad range of food preferences. Furthermore, we
believe that, as a result of our diverse menu, our restaurants are less
dependent than other quick-service chains on the commercial success of one or a
few products.
4
The JACK IN THE BOX restaurant chain was the first to develop and expand
the concept of drive-thru only restaurants. In addition to drive-thru windows,
most of our restaurants have seating capacities ranging from 20 to 100 persons
and are open 18-24 hours a day. Drive-thru sales currently account for
approximately 65% of sales at company-operated restaurants.
The following table summarizes the changes in the number of
company-operated and franchised JACK IN THE BOX restaurants since the beginning
of fiscal 1999:
Fiscal Year
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1999 2000 2001 2002 2003
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Company-operated restaurants:
Opened....................... 115 120 126 100 90
Sold to franchisees.......... - (13) (13) (22) (36)
Closed....................... (6) (4) (2) (3) (8)
Acquired from franchisees.... 13 17 9 1 -
End of period total.......... 1,191 1,311 1,431 1,507 1,553
Franchised restaurants:
Opened....................... 2 1 4 3 3
Acquired from Company........ - 13 13 22 36
Closed....................... (8) - - - -
Sold to Company.............. (13) (17) (9) (1) -
End of period total.......... 326 323 331 355 394
System end of period total..... 1,517 1,634 1,762 1,862 1,947
Qdoba. Qdoba restaurants offer a broad selection of fresh, high quality
"Nouveau-Mexican" food with unique bold tastes. The Qdoba menu fuses traditional
Mexican flavors with popular flavors from other cuisines and features a variety
of signature burritos, the "Naked Burrito" (a burrito served in a bowl without
the tortilla), non-traditional taco salads, 3-cheese nachos and five signature
salsas. Qdoba's broad menu allows it to satisfy multiple meal occasions, both
dine-in and take-out, for a wide variety of customers. The seating capacity at
Qdoba restaurants ranges from 60 to 80 persons including outdoor patio seating
availability.
Restaurant Expansion and Site Selection and Design
Restaurant Expansion. The Company's long-term growth strategy includes
continued restaurant expansion. We opened 90 new JACK IN THE BOX
company-operated restaurants in fiscal 2003 and intend to open and operate
approximately 65 new company-operated restaurants in fiscal year 2004. A slower
rate of restaurant growth is forecasted over the next two years in an effort to
conserve capital and focus on brand re-invention. Fiscal year 2004 restaurant
growth will be in existing markets, as we continue to see opportunities to
increase our market penetration, and we intend to leverage media, supervision,
and food delivery costs. During the next two years, we will cease expansion
activities in the southeast and allow existing restaurants in these markets to
more fully mature.
Of the 65 new JACK IN THE BOX company-operated restaurants forecasted in
fiscal year 2004, we plan to combine 15 with our branded convenience store
concept, QUICK STUFF. In addition to providing site development flexibility, our
branded convenience store concept also provides us with a solid unit economic
model, while retaining operating characteristics similar to our core business.
As of September 28, 2003, we owned and operated 18 QUICK STUFF stores and
estimate that co-branded sites will comprise approximately 20 to 25% of our new
Company restaurant growth over the next five years.
In fiscal year 2003, we opened six new Qdoba company-operated restaurants
and plan to open approximately 35 new company-operated restaurants in fiscal
year 2004. We remain committed to growing our fast-casual subsidiary and believe
that Qdoba has significant expansion potential.
5
Site Selection and Design. Site selections for all new restaurants are made
after an economic justification analysis and a review of demographic data and
other information relating to population density, traffic, competition,
restaurant visibility and access, available parking, surrounding businesses and
opportunities for market penetration. Restaurants developed by franchisees are
built to our specifications on sites which have been approved by us.
We have developed multiple restaurant prototypes to help reduce costs and
improve our flexibility in locating restaurants. Management believes that the
flexibility provided by the alternative configurations enables us to match the
restaurant configuration with specific economic, demographic and geographic
characteristics of a particular site. Typical development costs for new JACK IN
THE BOX and Qdoba restaurants ranged from approximately $1.3 million to $1.8
million and $0.4 million to $0.5 million, respectively, during fiscal year 2003.
We use lease financing and other means to lower our cash investment in a typical
JACK IN THE BOX restaurant to approximately $0.3 million to $0.4 million.
Franchising Program
JACK IN THE BOX. Our long-term growth strategy also includes the selective
expansion of our franchising operations. As of September 28, 2003, franchisees
operated 394 restaurants in 7 states. We intend to convert about 20 to 25% of
our existing JACK IN THE BOX company-operated restaurants to franchises over the
next few years and also plan to add a number of new franchised restaurants
through the sale of development agreements. We offer development agreements for
construction of one or more new restaurants over a defined period of time and in
a defined geographic area. Developers are required to pay a development fee, a
portion of which may be credited against franchise fees due for restaurants to
be opened in the future. Developers may forfeit such fees and lose their rights
to future development if they do not maintain the required schedule of openings.
The current franchise agreement provides for an initial franchise fee of
$50,000 per restaurant, royalties of 5% of gross sales, marketing fees of 5% of
gross sales and, in most instances, a 20-year term. Some existing agreements
provide for royalties and marketing fees at rates as low as 4%. In connection
with the conversion of a company-operated restaurant, the restaurant equipment
and the right to do business at that location are sold to the franchisee. The
aggregate price is equal to the negotiated fair market value of the restaurant
as a going concern, which depends on various factors, including the history of
the restaurant, its location and its cash flow potential. In addition, the land
and building are leased or subleased to the franchisee at a negotiated rent,
generally equal to the greater of a minimum base rent or a percentage of gross
sales. The franchisee is required to pay property taxes, insurance and
maintenance costs.
We view our non-franchised JACK IN THE BOX units as a potential resource
which, on a selected basis, can be sold to a franchisee, generating additional
current cash flow and revenues while still maintaining future cash flows and
earnings through franchise rents and royalties. While the ratio of franchised to
company-operated restaurants is expected to increase over the next several years
as we increase our franchising activities, we still expect to maintain a low
ratio relative to our major competitors.
Qdoba Mexican Grill. As of September 28, 2003, franchisees operated 77
restaurants in 20 states, and we anticipate approximately 70 new franchised
restaurants will open in fiscal year 2004. We offer area development agreements
for the construction of five to 20 new restaurants over a defined period of time
and in a defined geographic area for a development fee, a portion of which may
be credited against franchise fees due for restaurants to be opened in the
future. If the developer does not maintain the required schedule of openings,
they may forfeit such fee and lose their rights to future development. The
current franchise agreement provides for an initial franchise fee of $25,000 per
restaurant, royalties of 5% of gross sales, marketing fees of up to 2% of gross
sales and, in most instances, a 10-year term.
Restaurant Operations
Restaurant Management. Each restaurant is operated by a Company-employed
manager or a franchisee who are directly responsible for the operation of the
restaurants, including product quality, service, food handling safety,
cleanliness, inventory, cash control and the conduct and appearance of
employees. Our restaurant managers attend extensive management training classes
involving a combination of classroom instruction and on-the-job training in
specially designated training restaurants. Restaurant managers and supervisory
personnel train other restaurant employees in accordance with detailed
procedures and guidelines using training aids and video equipment available at
each location. We are in the process of enhancing the effectiveness of our
training by introducing a new, interactive system of computer-based training
("CBT"), which will replace each restaurant's use of videotapes with a
touch-screen computer terminal. The CBT technology incorporates audio, video and
text, all of which are updated on the computer via satellite technology.
6
Area managers supervise restaurant managers and regional vice presidents or
regional directors supervise area managers. Under our performance system,
regional vice presidents, regional directors, area managers and restaurant
managers are eligible for periodic bonuses based on achievement of location
profit, profit improvement and/or certain other operational performance
standards.
Customer Satisfaction. We devote significant resources toward ensuring that
all restaurants offer quality food and good service. Emphasis is placed on
ensuring that ingredients are delivered timely to the restaurants. Restaurant
food production systems are continuously developed and improved, and we train
our employees to be dedicated to delivering consistently good service. Through
our network of distribution, quality assurance, facilities services and
restaurant management personnel, including regional vice presidents, area
managers and restaurant managers, we standardize specifications for food
preparation and service, employee conduct and appearance, and the maintenance
and repair of our premises. Operating specifications and procedures are
documented in a series of manuals and video presentations. Most JACK IN THE BOX
restaurants receive approximately four quality, food safety and cleanliness
inspections and 26 "Mystery Guest" audits each year. Qdoba restaurants receive
at least three quality, food safety and cleanliness inspections each year.
Quality Assurance
Our "farm-to-fork" food safety and quality assurance program is designed to
maintain high standards for the food products and food preparation procedures
used by company-operated and franchised restaurants. We maintain product
specifications and approve product sources. We have a comprehensive,
restaurant-based Hazard Analysis & Critical Control Points ("HACCP") system for
managing food safety and quality. HACCP combines employee training, testing by
suppliers, and detailed attention to product quality at every stage of the food
preparation cycle. Our HACCP program has been recognized as a leader in the
industry by the USDA, FDA and the Center for Science in the Public Interest
In addition to our HACCP system, Jack in the Box uses ServSafe(R), a
nationally recognized food-safety training and certification program
administered in partnership with the National Restaurant Association. All
restaurant managers and grill employees receive special grill certification
training and are certified annually.
Purchasing and Distribution
We provide purchasing, warehouse and distribution services for all JACK IN
THE BOX company-operated and approximately one-third of our franchise-operated
restaurants. The remaining JACK IN THE BOX franchisees participate in a
purchasing cooperative they formed in 1996 and contract with another supplier
for distribution services. As of September 28, 2003, we also provided these
services to approximately 50 Qdoba restaurants. The remaining Qdoba restaurants
purchase product from approved suppliers and distributors. Some products,
primarily dairy and bakery items, are delivered directly by approved suppliers
to both company-operated and franchised restaurants.
Regardless of whether we provide distribution services to a restaurant or
not, we ensure that all suppliers meet our strict HACCP program standards
previously discussed. The primary commodities purchased by the restaurants are
beef, poultry, pork, cheese and produce. We monitor the primary commodities we
purchase in order to minimize the impact of fluctuations in price and
availability, and make advance purchases of commodities when considered to be
advantageous. However, certain commodities still remain subject to price
fluctuations. All essential food and beverage products are available, or can be
made available, upon short notice from alternative qualified suppliers.
Information Systems
We have centralized financial and accounting systems for company-operated
restaurants, which we believe are important in analyzing and improving profit
margins and accumulating marketing information for analysis. JACK IN THE BOX
restaurants use a specially designed computerized reporting and cash register
system which is being converted to a new touch screen POS system intended to
improve speed of service, allow us to accept debit and credit cards and to
decrease employee training time. All company-operated restaurants have been
equipped with this new POS system as of December 2003. We are also introducing a
new interactive computer-based training system in our JACK IN THE BOX
restaurants, scheduled to be installed in all company-operated restaurants by
mid-April. This system incorporates audio, video and text components and will be
the standard for new hire training and periodic workstation re-certifications.
Qdoba restaurants use POS software with touch screens, accept debit and credit
cards at all company-owned locations and use back-of-the-restaurant software to
control purchasing, inventory, food and labor costs. These software products
have been customized to meet Qdoba's operating standards.
7
Advertising and Promotion
The Company builds brand awareness through its marketing and advertising
programs and activities. These activities are supported primarily by contractual
contributions from all company and franchised restaurants based on a percentage
of sales. We use regional and local campaigns on television, radio and print
media to advertise restaurant products, promote brand awareness and attract
customers.
Employees
At September 28, 2003, we had approximately 45,730 employees, of whom
approximately 43,470 were restaurant employees, 690 were corporate personnel,
430 were distribution employees and 1,140 were field management and
administrative personnel. Employees are paid on an hourly basis, except
restaurant managers, operations and corporate management, and certain
administrative personnel. A majority of our restaurant employees are employed on
a part-time, hourly basis to provide services necessary during peak periods of
restaurant operations.
We have not experienced any significant work stoppages and believe our
labor relations are good. In fact, during the last three years we have realized
steady improvements in our hourly restaurant employee retention rate, and crew
turnover is currently at its lowest level in recent history. We support our
employees, including part-time workers, by offering competitive wages,
competitive benefits, including a pension plan and medical insurance for all of
our employees meeting certain requirements, and discounts on dining. We attempt
to motivate and retain our employees by providing them with opportunities for
increased responsibilities and advancement, as well as performance-based cash
incentives tied to sales, profitability and certain qualitative measures.
Executive Officers
The following table sets forth the name, age (as of December 31, 2003) and
position of each person who is an executive officer of Jack in the Box Inc.:
Name Age Positions
- ---- --- ---------
Robert J. Nugent ...... 62 Chairman of the Board and Chief Executive Officer
Linda A. Lang.......... 45 President, Chief Operating Officer and Director
John F. Hoffner........ 56 Executive Vice President and Chief Financial Officer
Lawrence E. Schauf..... 58 Executive Vice President and Secretary
Carlo E. Cetti......... 59 Senior Vice President, Human Resources and
Strategic Planning
William F. Motts....... 60 Senior Vice President, Restaurant Development
Paul L. Schultz........ 49 Senior Vice President, Operations and Franchising
David M. Theno, Ph.D... 53 Senior Vice President, Quality and Logistics
Pamela S. Boyd......... 48 Vice President, Financial Planning and Analysis
Stephanie E. Cline..... 58 Vice President, Chief Information Officer
Terri F. Graham........ 38 Vice President, Marketing
Jerry P. Rebel......... 46 Vice President, Controller
Harold L. Sachs........ 58 Vice President, Treasurer
Karen B. Bachmann...... 52 Vice President, Corporate Communications
Gary J. Beisler........ 47 Chief Executive Officer and President,
Qdoba Restaurant Corporation
8
Mr. Nugent has been Chairman of the Board since February 2001 and Chief
Executive Officer since April 1996. Mr. Nugent assumed the title of President
effective January 1, 2003 until November 7, 2003 upon Ms. Lang's promotion to
President. He was President from April 1996 to February 2001 and Executive Vice
President from February 1985 to April 1996. He has been a director since
February 1988. Mr. Nugent has 24 years of experience with the Company in various
executive and operations positions.
Ms. Lang was promoted to President and Chief Operating Officer effective
November 7, 2003. She was Executive Vice President from July 2002 to November
2003, Senior Vice President, Marketing from May 2001 to July 2002, Vice
President and Regional Vice President, Southern California Region from April
2000 to May 2001, Vice President, Marketing from March 1999 to April 2000 and
Vice President, Products, Promotions and Consumer Research from February 1996
until March 1999. Ms. Lang has 16 years of experience with the Company in
various marketing, finance and operations positions.
Mr. Hoffner has been Executive Vice President and Chief Financial Officer
since August 2001. Prior to joining the Company he was Executive Vice President
of Administration and Chief Financial Officer of Cost Plus, Inc. from June 1998
to August 2001 and Senior Vice President and Chief Financial Officer of Sweet
Factory, Inc. from April 1993 to June 1998.
Mr. Schauf has been Executive Vice President and Secretary since August
1996. Prior to joining the Company he was Senior Vice President, General Counsel
and Secretary of Wendy's International, Inc. from February 1991 to August 1996.
Mr. Cetti has been Senior Vice President, Human Resources and Strategic
Planning since July 2002. From October 1995 to July 2002, he was Vice President,
Human Resources and Strategic Planning. Mr. Cetti has 23 years of experience
with the Company in various human resources and training positions.
Mr. Motts has been Senior Vice President, Restaurant Development since
September 2003. From September 1988 to September 2003, he was Vice President,
Restaurant Development. Mr. Motts has 21 years of experience with the Company in
various restaurant development positions.
Mr. Schultz has been Senior Vice President, Operations and Franchising
since August 1999, and was Vice President from May 1988 to August 1999. Mr.
Schultz has 30 years of experience with the Company in various operations
positions.
Dr. Theno has been Senior Vice President, Quality and Logistics since May
2001. He was Vice President, Technical Services (formerly Quality Assurance,
Research and Development and Product Safety) from April 1994 to May 2001. Dr.
Theno has 11 years of experience with the Company in various quality assurance
and product safety positions.
Ms. Boyd has been a Vice President of the Company since November 2001. She
was Division Vice President, Planning and Analysis from October 1997 to November
2001 and Director, Planning and Analysis from November 1992 to October 1997. Ms.
Boyd has 16 years of experience with the Company in various finance positions.
Ms. Cline has been a Vice President of the Company since August 2000 and
Chief Information Officer since May 2000. She was Division Vice President of
Systems Development from August 1993 to May 2000. Ms. Cline has 26 years of
experience with the Company in various management information systems positions.
Ms. Graham has been a Vice President of the Company since July 2002. She
was Division Vice President, Marketing Services and Regional Marketing from
April 2000 to July 2002, and Director of Marketing Services from October 1998 to
July 2002. Ms. Graham has 13 years of experience with the Company in various
marketing positions.
Mr. Rebel has been Vice President, Controller since September 2003. Prior
to joining the Company he was Vice President, Controller of Fleming Companies
Inc. from February 2002 to September 2003. From January 1991 to February 2002,
he held various accounting and finance positions with CVS Corporation, including
Executive Vice President and Chief Financial Officer of the ProCare division
from September 2000 to February 2002, and Vice President Finance from July 1995
to September 2000.
9
Mr. Sachs has been Vice President, Treasurer since November 1999. He was
Treasurer from January 1986 to November 1999. Mr. Sachs has 25 years of
experience with the Company in various finance positions.
Ms. Bachmann has been Vice President, Corporate Communications since
November 1999. She was Division Vice President, Corporate Communications from
December 1994 until November 1999.
Mr. Beisler has been Chief Executive Officer of Qdoba Restaurant
Corporation since November 2000 and President since January 1999. He was Chief
Operating Officer from April 1998 to December 1998.
Trademarks and Service Marks
The JACK IN THE BOX and Qdoba Mexican Grill names are of material
importance to us and each is a registered trademark and service mark in the
United States. In addition, we have registered numerous service marks and trade
names for use in our businesses, including the JACK IN THE BOX logo, the Qdoba
logo and various product names and designs.
Seasonality
Our restaurant sales and profitability are subject to seasonal fluctuations
and are traditionally higher during the spring and summer months because of
factors such as increased travel and improved weather conditions, which affect
the public's dining habits.
Competition and Markets
The restaurant business is highly competitive and is affected by the
competitive changes in a geographic area, changes in the public's eating habits
and preferences, local and national economic conditions affecting consumer
spending habits, population trends and traffic patterns. Key elements of
competition in the industry are the quality and value of the food products
offered, quality and speed of service, advertising, name identification,
restaurant location and attractiveness of facilities.
Each JACK IN THE BOX and Qdoba restaurant competes directly and indirectly
with a large number of national and regional restaurant chains, as well as with
locally-owned quick-service restaurants and the fast casual segment. In selling
franchises, we compete with many other restaurant franchisers, some of whom have
substantially greater financial resources and higher total sales volume.
Regulation
Each restaurant is subject to regulation by federal agencies, as well as
licensing and regulation by state and local health, sanitation, safety, fire and
other departments. Difficulties or failures in obtaining any required licensing
or approval could result in delays or cancellations in the opening of new
restaurants.
We are also subject to federal and state laws regulating the offer and sale
of franchises. Such laws impose registration and disclosure requirements on
franchisers in the offer and sale of franchises and may also apply substantive
standards to the relationship between franchiser and franchisee, including
limitations on the ability of franchisers to terminate franchisees and alter
franchise arrangements. We believe we are operating in compliance with
applicable laws and regulations governing our operations.
We are subject to the Fair Labor Standards Act and various state laws
governing such matters as minimum wages, exempt status classification, overtime
and other working conditions. A significant number of our food service personnel
are paid at rates related to the federal and state minimum wage, and,
accordingly, increases in the minimum wage increase our labor costs. Federal and
state laws may also require us to provide paid and unpaid leave to our
employees, which could result in significant additional expense to us.
In addition, various proposals which would require employers to provide
health insurance for all of their employees are considered from time-to-time in
Congress and various states. Similar legislation was recently passed in
California and may go into effect as early as 2006. The imposition of any
requirement that we provide health insurance to all employees may have a
material adverse impact on the consolidated results of operations and financial
condition of the Company and the restaurant industry in general.
10
We are subject to certain guidelines under the Americans with Disabilities
Act of 1990 ("ADA") and various state codes and regulations, which require
restaurants to provide full and equal access to persons with physical
disabilities. To comply with such laws and regulations, the cost of remodeling
and developing restaurants has increased, principally due to the need to provide
certain older restaurants with ramps, wider doors, larger restrooms and other
conveniences.
We are also subject to various federal, state and local laws regulating the
discharge of materials into the environment. The cost of developing restaurants
has increased to comply with these laws. Additional costs relate primarily to
the necessity of obtaining more land, landscaping and below surface storm
drainage and the cost of more expensive equipment necessary to decrease the
amount of effluent emitted into the air and ground.
Company Website
The Company's primary website can be found at www.jackinthebox.com. The
Company makes available free of charge at this website (under the "Investors -
SEC Filings - SEC Filings by Jack in the Box Inc." caption) all of its reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, including its Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q and its Current Reports on Form 8-K and amendments to those reports.
These reports are made available on the website as soon as reasonably
practicable after their filing with, or furnishing to, the Securities and
Exchange Commission. Furthermore, we also make available on our website, and in
print to any shareholder who requests it, the Company's Corporate Governance
Guidelines, the Committee Charters for Audit, Compensation, and Nominating and
Governance Committees, as well as the Code of Ethics that applies to all
directors, officers and employees of the Company. Amendments to these documents
or waivers related to the Code of Ethics will be made available on the Company's
website as soon as reasonably practicable after their execution.
Forward-Looking Statements and Risk Factors
From time-to-time the Company makes oral and written statements that
reflect the Company's current expectations regarding future results of
operations, economic performance, financial condition and achievements of the
Company. The Company tries, whenever possible, to identify these forward-looking
statements by using words such as "anticipate," "assume," "believe," "estimate,"
"expect," "intend," "plan," "project", "may," "will," "would," and similar
expressions. Certain forward-looking statements are included in this Form 10-K,
principally in the sections captioned "Business," "Legal Proceedings," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Statements regarding our strategic plans and operating strategies,
including the effects of brand re-invention and its component product
innovation, service improvement and facility redesign initiatives, the results
of the Innovation Center; our plans for growth in number of restaurants,
convenience stores and in franchising; the effect of menu diversity;
expectations regarding the availability of alternative commodity suppliers, our
effective tax rate, labor relations, compliance with applicable law and
regulations and liabilities related to legal proceedings; growth in restaurant
sales and profitability; future charges related to Chi-Chi's bankruptcy; our
future capital expenditures and sources of liquidity are forward-looking
statements. Although we believe that the expectations reflected in our
forward-looking statements are based on reasonable assumptions, such
expectations may prove to be materially incorrect due to known and unknown risks
and uncertainties.
In some cases, information regarding certain important factors that could
cause actual results to differ materially from any forward-looking statement
appears together with such statement. In addition, the following factors, as
well as other possible factors not listed, could cause actual results to differ
materially from those expressed in forward-looking statements; weather
conditions that adversely affect the level of customer traffic; changes in
accounting policies and practices; assumptions relating to pension costs,
including the possibility of increased pension expense and contributions; the
Company's ability to successfully implement and realize value from new computer
systems and technology; the practical or psychological effects of terrorist acts
or government responses; war or the risk of war; the costs and other effects of
legal claims by franchisees, customers, vendors and others, including settlement
of those claims; and the effectiveness of management strategies and decisions.
Risks Related to the Food Service Industry. Food service businesses may be
affected by changes in consumer tastes, national, regional and local economic
and political conditions, demographic trends, and the impact on consumer eating
habits of new information regarding diet, nutrition and health. The performance
of individual restaurants may be adversely affected by factors such as traffic
patterns, demographics and the type, number and location of competing
restaurants.
11
Multi-unit food service businesses such as ours can also be materially and
adversely affected by wide-spread negative publicity of any type, but
particularly regarding food quality, illness, injury or other health concerns
with respect to certain foods. To minimize the risk of food-borne illness, we
have implemented a HACCP system for managing food safety and quality.
Nevertheless, the risk of food-borne illness cannot be completely eliminated.
Any outbreak of such illness attributed to our restaurants or within the food
service industry could have a material adverse effect on our financial condition
and results of operations.
Dependence on frequent deliveries of fresh produce and groceries subjects
food service businesses, such as ours, to the risk that shortages or
interruptions in supply, caused by adverse weather or other conditions, could
adversely affect the availability, quality and cost of ingredients. In addition,
unfavorable trends or developments concerning factors such as inflation,
increased food, labor, energy, insurance and employee benefit costs (including
increases in hourly wage, and worker's compensation insurance premiums),
increases in the number and locations of competing restaurants, regional weather
conditions and the availability of experienced management and hourly employees,
may also adversely affect the food service industry in general. Because our
chain is predominantly company-operated, it may have greater exposure to
operating cost issues than chains, which are primarily franchised. Changes in
economic conditions affecting our customers could reduce traffic in some or all
of our restaurants or impose practical limits on pricing, either of which could
have a material adverse effect on our financial condition and results of
operations. Our continued success will depend in part on our ability to
anticipate, identify and respond to changing conditions.
Risks Associated with Development. We intend to grow primarily by
developing additional company-owned restaurants and by franchising both existing
Company restaurants and new restaurants to be developed by franchisees.
Development involves substantial risks, including the risk of (i) the
availability of financing to franchisees and the Company at acceptable rates and
terms, (ii) development costs exceeding budgeted or contracted amounts, (iii)
delays in completion of construction, (iv) the inability to identify, or the
unavailability of suitable sites, both traditional and nontraditional, on
acceptable leasing or purchase terms, (v) developed properties not achieving
desired revenue or cash flow levels once opened, (vi) competition for suitable
development sites from competitors; (vii) incurring substantial unrecoverable
costs in the event a development project is abandoned prior to completion,
(viii) changes in governmental rules, regulations, and interpretations
(including interpretations of the requirements of the ADA) and (ix) general
economic and business conditions.
Although we intend to manage our development to reduce such risks, we
cannot assure you that present or future development will perform in accordance
with our expectations. We cannot assure you that we will complete the
development and construction of the facilities, or that any such development
will be completed in a timely manner or within budget, or that such restaurants
will generate our expected returns on investment. Our inability to expand in
accordance with our plans or to manage our growth could have a material adverse
effect on our results of operations and financial condition.
Risks Associated with Growth. Our franchising and convenience store/gas
station/restaurant co-brand development plans will require the implementation of
enhanced operational and financial systems and will require additional
management, operational, and financial resources. For example, we will be
required to recruit franchise sales and administrative personnel; and to recruit
and train managers and other personnel for each new company-owned restaurant, as
well as additional development and accounting personnel. We cannot assure you
that we will be able to manage our expanding operations effectively to continue
to recognize value from franchising and co-branding. The failure to implement
such systems and add such resources on a cost-effective basis could have a
material adverse effect on our results of operations and financial condition.
Reliance on Certain Markets. Because our business is regional, with nearly
70% of our restaurants located in the states of California and Texas, the
economic conditions, state and local government regulations and weather
conditions affecting those states may have a material impact upon our results.
Risks Related to Entering New Markets. We cannot assure you that we will be
able to successfully expand or acquire critical market presence in new
geographical markets, as we may encounter well-established competitors with
substantially greater financial resources. We may be unable to find attractive
locations, acquire name recognition, successfully market our products and
attract new customers. Competitive circumstances and consumer characteristics in
new markets may differ substantially from those in the markets in which we have
substantial experience. We cannot assure you that we will be able to
successfully integrate or profitably operate new company-operated or franchised
restaurants located in our new markets.
12
Competition. The restaurant industry is highly competitive with respect to
price, service, location, personnel and the type and quality of food, and there
are many well-established competitors. Each restaurant competes directly and
indirectly with a large number of national and regional restaurant chains, as
well as with locally-owned quick-service restaurants, fast-casual restaurants,
sandwich shops and similar types of businesses. The trend toward convergence in
grocery, deli and restaurant services may increase the number of our
competitors. Such increased competition could have a material adverse effect on
our financial condition and results of operations. Some of our competitors have
substantially greater financial, marketing, operating and other resources than
we have, which may give them a competitive advantage. Certain of our competitors
have introduced a variety of new products and engaged in substantial price
discounting in recent years and may continue to do so in the future. We plan to
take various steps in connection with our "brand re-invention" strategy,
including introducing new, higher quality products, discontinuing older menu
items, testing new service, recruiting and training initiatives and making
improvements to brand image at our restaurant facilities. However, there can be
no assurance of the success of our new products, initiatives or our overall
strategies or that competitive product offerings, pricing and promotions will
not have an adverse effect upon our results of operations and financial
condition.
Risks Related to Increased Labor Costs. We have a substantial number of
employees who are paid wage rates at or slightly above the minimum wage. As
federal and state minimum wage rates increase, we may need to increase not only
the wages of our minimum wage employees but also the wages paid to the employees
at wage rates which are above minimum wage. If competitive pressures or other
factors prevent us from offsetting the increased costs by increases in prices,
our profitability may decline. In addition, various proposals which would
require employers to provide health insurance for all of their employees are
being considered from time-to time-in Congress and various states. Similar
legislation was recently passed in California and may go into effect as early as
2006. The imposition of any requirement that we provide health insurance to all
employees would have a material adverse impact on the results of operations and
financial condition of the Company and the restaurant industry.
Risks Related to Advertising. Some of our competitors have greater
financial resources which enable them to purchase significantly more television
and radio advertising than we are able to purchase. Should our competitors
increase spending on advertising and promotion, should the cost of television or
radio advertising increase, or our advertising funds decrease for any reason,
including implementation of reduced spending strategies, or should our
advertising and promotion be less effective than our competitors', there could
be a material adverse effect on our results of operations and financial
condition.
Taxes. Our income tax provision is sensitive to expected earnings and, as
expectations change, our income tax provisions 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. The ultimate outcome of such positions could have an adverse impact on
our effective tax rate. Our effective tax rate for fiscal 2004 is expected to be
higher than our fiscal 2003 rate.
Risks Related to Franchise Operations. At September 28, 2003, we had 394
franchised JACK IN THE BOX restaurants. Currently our restaurants are
approximately 80% company-operated and 20% franchised. Our plan is to increase
the percentage of franchised restaurants over the next five years. Our ability
to sell franchises and to realize gains from such sales is uncertain. The
opening and success of franchised restaurants depends on various factors,
including the demand for our franchises and the selection of appropriate
franchisee candidates, the availability of suitable sites, the negotiation of
acceptable lease or purchase terms for new locations, permitting and regulatory
compliance, the ability to meet construction schedules, the availability of
financing, and the financial and other capabilities of our franchisees and
developers. We cannot assure you that developers planning the opening of
franchised restaurants will have the business abilities or sufficient access to
financial resources necessary to open the restaurants required by their
agreements. We cannot assure you that franchisees will successfully participate
in our strategic initiatives or operate their restaurants in a manner consistent
with our concept and standards. In addition, certain federal and state laws
govern our relationships with our franchisees. See "Risks Related to Government
Regulations" below.
Dependence on Key Personnel. We believe that our success will depend in
part on the continuing services of our key executives, including Robert J.
Nugent, Chairman of the Board and Chief Executive Officer, Linda A. Lang,
President and Chief Operating Officer, and John F. Hoffner, Executive Vice
President and Chief Financial Officer, none of whom are employed pursuant to an
employment agreement. The loss of the services of any of such executives could
have a material adverse effect on our business, and we cannot assure you that
qualified replacements would be available. Our continued growth will also depend
in part on our ability to attract and retain additional skilled management
personnel.
13
Risks Related to Government Regulations. The restaurant industry is subject
to extensive federal, state and local governmental regulations, including those
relating to the preparation and sale of food and those relating to building and
zoning requirements. We and our franchisees are also subject to laws governing
our relationships with employees, including minimum wage requirements, overtime,
working and safety conditions and citizenship requirements. See "Risks Related
to Increased Labor Costs" above. We are also subject to federal regulation and
certain state laws, which govern the offer and sale of franchises. Many state
franchise laws impose substantive requirements on franchise agreements,
including limitations on noncompetition provisions and on provisions concerning
the termination or nonrenewal of a franchise. Some states require that certain
materials be registered before franchises can be offered or sold in that state.
The failure to obtain or retain licenses or approvals to sell franchises could
adversely affect us and our franchisees. Changes in, and the cost of compliance
with, government regulations could have a material adverse effect on our
operations.
Environmental Risks and Regulations. As is the case with any owner or
operator of real property, we are subject to a variety of federal, state and
local governmental regulations relating to the use, storage, discharge, emission
and disposal of hazardous materials. Failure to comply with environmental laws
could result in the imposition of severe penalties or restrictions on operations
by governmental agencies or courts of law, which could adversely affect
operations. We do not have environmental liability insurance; nor do we maintain
a reserve to cover such events. We have engaged and may engage in real estate
development projects and own or lease several parcels of real estate on which
our restaurants are located. We are unaware of any significant environmental
hazards on properties we own or have owned, or operate or have operated. In the
event of the determination of contamination on such properties, the Company, as
owner or operator, could be held liable for severe penalties and costs of
remediation. We also operate motor vehicles and warehouses and handle various
petroleum substances and hazardous substances, and are not aware of any current
material liability related thereto.
14
ITEM 2. PROPERTIES
----------
The following table summarizes the locations of JACK IN THE BOX and Qdoba
restaurants by state as of September 28, 2003:
JACK IN THE BOX Qdoba
---------------------- ----------------------
Company- Company-
operated Franchised operated Franchised Total
- --------------------------------------------------------------------------------
Alabama............. - - - 2 2
Arizona............. 87 58 - 1 146
California.......... 554 292 - - 846
Colorado............ - - 22 6 28
Florida............. - - - 3 3
Georgia............. - - - 4 4
Hawaii.............. 28 1 - - 29
Idaho............... 22 - - 1 23
Illinois............ 13 - - 1 14
Indiana............. - - - 8 8
Kentucky............ - - - 7 7
Louisiana........... 20 - - - 20
Maryland............ - - - 1 1
Michigan............ - - - 8 8
Minnesota........... - - - 2 2
Missouri............ 49 - 1 - 50
Nevada.............. 51 13 - - 64
New Jersey.......... - - - 3 3
New Mexico.......... - 2 - - 2
North Carolina...... 28 - - 10 38
Oklahoma............ 2 - - - 2
Oregon.............. 41 2 - - 43
Pennsylvania........ - - - 1 1
South Carolina...... 22 - - - 22
South Dakota........ - - - 2 2
Tennessee........... 27 - - 2 29
Texas............... 485 26 4 - 515
Utah................ 2 - - - 2
Virginia............ - - - 2 2
Washington.......... 122 - 7 2 131
Wisconsin........... - - - 11 11
----- ----- ----- ----- -----
Total............. 1,553 394 34 77 2,058
===== ===== ===== ===== =====
Of our 1,553 JACK IN THE BOX restaurants and 34 Qdoba restaurants, we owned
760 restaurant buildings, including 538 located on leased land. In addition, we
leased 1,134 restaurants where both the land and building are leased, including
186 restaurants operated by franchisees. At September 28, 2003, franchisees
directly owned or leased 164 restaurants.
Number of restaurants
---------------------------
Company-
operated Franchised Total
- --------------------------------------------------------------------------------
Company-owned restaurant buildings:
On Company-owned land............................. 166 56 222
On leased land.................................... 473 65 538
----- ----- -----
Subtotal.......................................... 639 121 760
Company-leased restaurant buildings on leased land.. 948 186 1,134
Franchise directly-owned or directly-leased
Restaurant buildings.............................. - 164 164
----- ----- -----
Total restaurant buildings........................ 1,587 471 2,058
===== ===== =====
15
Our leases generally provide for fixed rental payments (with cost-of-living
index adjustments) plus real estate taxes, insurance and other expenses. In
addition, many of the leases provide for contingent rental payments of between
2% and 10% of the restaurant's gross sales once certain thresholds are met. We
have generally been able to renew our restaurant leases as they expire at
then-current market rates. The remaining terms of ground leases range from
approximately one year to 51 years, including optional renewal periods. The
remaining lease terms of our other leases range from approximately one year to
41 years, including optional renewal periods. At September 28, 2003, the leases
had initial terms expiring as follows:
Number of restaurants
-------------------------------
Ground Land and
leases building leases
- ---------------------------------------------------------------------------
2004 - 2008................................ 127 200
2009 - 2013................................ 139 312
2014 - 2018................................ 50 225
2019 and later............................. 222 397
Our principal executive offices in San Diego, California consist of an
owned facility of approximately 150,000 square feet and a leased facility of
approximately 44,000 square feet. Qdoba's corporate support center consists of a
leased facility in Wheat Ridge, Colorado. Additionally, we have acquired
approximately 8.5 acres of land, about one half of which is being utilized for
the development of our Innovation Center, currently under construction. We also
own one distribution center and lease an additional six, with remaining terms
ranging from one to 19 years, including optional renewal periods.
Certain of our real and personal property are pledged as collateral for
various components of our long-term debt.
ITEM 3. LEGAL PROCEEDINGS
-----------------
As previously reported, we reached a settlement in an action filed in 1995
regarding alleged failure to comply with the Americans with Disabilities Act
("ADA"). The settlement, as amended, requires compliance with ADA Access
Guidelines at company-operated restaurants by October 2003. We have complied
with our settlement obligations and met the October 2003 settlement deadline.
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 September 28, 2003 the Company has paid out
approximately $8.1 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 pending legal proceedings, asserted legal claims and
known potential legal claims should not materially affect our operating results,
financial position and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
fiscal quarter ended September 28, 2003.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The following table summarizes the equity compensation plans under which
Company Common Stock may be issued as of September 28, 2003. All plans were
approved by stockholders of the Company.
(c)
Number of securities
remaining for future
(a) (b) issuance under equity
Number of securities to Weighted-average compensation plans
be issued upon exercise exercise price of (excluding securities
of outstanding options outstanding options reflected in column (a))
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders..... 4,891,893 $21.10 1,107,500
The following table sets forth the high and low closing sales prices for
our common stock during the fiscal quarters indicated, as reported on the New
York Stock Exchange - Composite Transactions:
12 weeks ended
16 weeks ended ------------------------------------------------
Jan. 20, 2002 Apr. 14, 2002 July 7, 2002 Sept. 29, 2002
-------------------------------------------------------------------------------
High......... $28.00 $31.78 $34.00 $29.55
Low.......... 23.00 25.85 29.19 22.24
12 weeks ended
16 weeks ended ------------------------------------------------
Jan. 19, 2003 Apr. 13, 2003 July 6, 2003 Sept. 28, 2003
-------------------------------------------------------------------------------
High......... $22.98 $18.23 $22.84 $23.60
Low.......... 16.14 15.02 17.05 17.07
We did not pay any cash or other dividends during the last two fiscal years
and do not anticipate paying dividends in the foreseeable future. Our credit
agreements prohibit, and our public debt instruments restrict, our right to
declare or pay dividends or make other distributions with respect to shares of
our capital stock.
As of September 28, 2003, there were 486 stockholders of record.
17
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Our fiscal year is 52 or 53 weeks, ending the Sunday closest to September
30. Fiscal year 1999 included 53 weeks, and all other years include 52 weeks.
The following selected financial data of Jack in the Box Inc. for each fiscal
year was extracted or derived from financial statements which have been audited
by KPMG LLP, our independent auditors.
Fiscal Year
----------------------------------------------------------------------
2003 (1) 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Statement of Operations Data:
Revenues:
Restaurant sales...................... $1,864,180 $1,822,902 $1,714,126 $1,529,328 $1,372,899
Distribution and other sales.......... 108,738 77,445 66,565 59,091 41,828
Franchise rents and royalties......... 54,371 45,936 43,825 41,432 39,863
Other................................. 31,001 20,077 9,060 3,461 2,309
---------- ---------- ---------- ---------- ----------
Total revenues....................... 2,058,290 1,966,360 1,833,576 1,633,312 1,456,899
Costs of revenues (2).................... 1,689,924 1,584,384 1,477,184 1,301,757 1,142,995
---------- ---------- ---------- ---------- ----------
Gross profit............................. 368,366 381,976 356,392 331,555 313,904
Selling, general and
administrative expenses (3)........... 228,142 233,426 201,579 182,961 164,297
---------- ---------- ---------- ---------- ----------
Earnings from operations................. 140,224 148,550 154,813 148,594 149,607
Interest expense......................... 24,838 22,914 24,453 25,830 28,249
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
cumulative effect of accounting
change................................ 115,386 125,636 130,360 122,764 121,358
Income taxes (4)......................... 41,768 42,590 46,300 22,500 44,900
---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of
accounting change..................... $ 73,618 $ 83,046 $ 84,060 $ 100,264 $ 76,458
========== ========== ========== ========== ==========
Earnings per share before cumulative
effect of accounting change:
Basic................................ $ 2.02 $ 2.11 $ 2.17 $ 2.62 $ 2.00
Diluted.............................. 1.99 2.07 2.11 2.55 1.95
Balance Sheet Data (at end of period):
Total assets............................. $1,175,950 $1,063,444 $1,029,822 $ 906,828 $ 833,644
Long-term debt........................... 290,746 143,364 279,719 282,568 303,456
Stockholders' equity..................... 470,322 464,115 413,530 316,352 217,837
(1) Fiscal year 2003 includes Qdoba results of operations since January 21,
2003, representing approximately 36 weeks.
(2) Fiscal year 1999 reflects an $18.0 million reduction of restaurant
operating costs due to a change in estimates resulting from improvements to
our asset protection and risk management programs. This change was
supported by an independent actuarial study conducted to evaluate the
self-insured portion of our workers' compensation, general liability and
other insurance programs.
(3) Fiscal year 2003 includes $2.6 million related to lease-assumption
obligations on five sites arising from the recent bankruptcy of the Chi
Chi's restaurant chain, previously owned by the Company. Fiscal year 2002
includes $9.3 million for costs associated with the settlement of a class
action lawsuit and $6.4 million for costs related to the closure of eight
under-performing restaurants. These items are described in Item 7 - Costs
and Expenses.
(4) Fiscal year 2000 includes the recognition of $22.9 million in tax benefits
primarily resulting from the settlement of a tax case.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
Results of Operations
All comparisons under this heading among 2003, 2002 and 2001 refer to the
52-week periods ended September 28, 2003, September 29, 2002, and September 30,
2001, respectively, unless otherwise indicated.
The Company acquired Qdoba Restaurant Corporation ("Qdoba"), operator and
franchiser of Qdoba Mexican Grill, on January 21, 2003. Qdoba's operations are
included since the date of acquisition, representing 36 weeks of operations.
Revenues
Company-operated restaurant sales were $1,864.2 million, $1,822.9 million
and $1,714.1 million in 2003, 2002 and 2001, respectively. Restaurant sales
improved $41.3 million, or 2.3%, in 2003 and $108.8 million, or 6.3%, in 2002
compared with the respective prior year. This sales growth reflects an increase
in the number of JACK IN THE BOX company-operated restaurants and additional
sales from Qdoba company-operated restaurants in 2003, offset in part by a
decline in per store average ("PSA") sales in both years. The number of JACK IN
THE BOX company-operated restaurants at the end of the fiscal year grew to 1,553
in 2003 from 1,507 in 2002 and 1,431 in 2001, with new restaurant openings of
90, 100 and 126, respectively. Sales at JACK IN THE BOX company-operated
restaurants open more than one fiscal year ("same store sales") declined 1.7% in
2003 and 0.8% in 2002 compared with the respective prior year. These declines
are primarily due to increased competitive activity and economic softness in
certain markets, which were offset in part by new product introductions,
including our new line of premium salads, and modest selling price increases. We
continue to address pressures facing the quick-service restaurant industry and
make changes that we anticipate will improve sales and provide long-term growth
potential. In 2003, these changes included the addition of upgraded products to
our menu and improvements in restaurant operations, including speed of service,
order accuracy and menu appearance. On the strength of these product
introductions and operations improvements, same store sales increased 0.9% in
the fourth quarter of 2003 compared with the fourth quarter of 2002.
Distribution and other sales include distribution sales to JACK IN THE BOX
and Qdoba franchise-operated restaurants and sales from our fuel and convenience
stores ("QUICK STUFF"). Distribution and other sales grew to $108.7 million in
2003 from $77.4 million in 2002 and $66.6 million in 2001, principally due to
increases in the number of QUICK STUFF locations and distribution sales to
franchised restaurants. The number of QUICK STUFF locations at the end of the
fiscal year grew to 18 in 2003 from 12 in 2002 and nine in 2001. Distribution
sales to franchised restaurants grew due to an increase in the number of JACK IN
THE BOX franchises serviced by our distribution centers, as well as the addition
of certain Qdoba franchised restaurants in 2003. Higher PSA fuel sales also
contributed to the overall increase in 2003.
Franchise rents and royalties increased to $54.4 million in 2003 from $45.9
million in 2002 and $43.8 million in 2001, primarily reflecting an increase in
the number of JACK IN THE BOX franchised restaurants. The number of JACK IN THE
BOX franchised restaurants increased to 394 at the end of the fiscal year from
355 in 2002 and 331 in 2001. As a percentage of franchise restaurant sales,
franchise rents and royalties were 10.9%, 11.0% and 10.8% in 2003, 2002 and
2001, respectively. The slight percentage decline in 2003 is primarily due to
the consolidation of Qdoba's results of operations in 2003. In 2003, Qdoba
received royalties of 5% of franchise restaurant sales, and JACK IN THE BOX had
combined average rents and royalties of 11.4%. In 2002, the percentage growth
compared with 2001 primarily relates to increases in rents at certain franchised
restaurants.
Other revenues include gains and fees from the conversion of JACK IN THE
BOX company-operated restaurants to franchises, as well as interest income from
notes and investments receivable. Other revenues increased to $31.0 million in
2003 from $20.1 million in 2002 and $9.1 million in 2001, primarily due to our
continued strategy of selectively converting JACK IN THE BOX company-operated
restaurants to franchises. We converted 36 company-operated restaurants in 2003
compared with 22 in 2002 and 13 in 2001, resulting in franchise gains of $26.6
million, $17.1 million and $6.5 million, respectively.
19
Costs and Expenses
Restaurant costs of sales, which include food and packaging costs,
increased to $573.9 million in 2003 from $555.2 million in 2002 and $528.1
million in 2001. As a percentage of restaurant sales, costs of sales were 30.8%
in 2003, 30.5% in 2002 and 30.8% in 2001. The percentage increase in 2003
compared with 2002 principally resulted from higher food and packaging costs
associated with the initial rollout of Jack's Ultimate SaladsTM in the third
quarter. These cost increases were offset in part by certain margin improvement
initiatives and modest selling price increases. Restaurant costs of sales as a
percentage of restaurant sales improved in 2002 compared to 2001, as the impact
of slightly higher ingredient costs was offset by increased selling prices and
certain margin improvement initiatives.
Restaurant operating costs grew with the addition of company-operated
restaurants to $984.3 million, $931.7 million and $864.3 million in 2003, 2002
and 2001, respectively. As a percentage of restaurant sales, operating costs
increased to 52.8% in 2003 from 51.1% in 2002 and 50.4% in 2001. The percentage
increase in 2003 compared with 2002 was primarily due to higher workers'
compensation insurance expenses, utilities and costs related to our new point of
sale system. These cost increases were partially offset by decreases in
incentive compensation and intangibles amortization expense attributable to the
reclassification of our trading area rights to goodwill, which is no longer
amortized per the provisions of SFAS 142, Goodwill and Other Intangible Assets.
Restaurant operating costs as a percentage of restaurant sales increased in 2002
compared with 2001, primarily due to higher insurance costs and occupancy costs
on newer stores whose sales had not yet matured, which were partially offset by
lower utility and supply costs. Additionally, in 2003 and 2002, savings
generated from our Profit Improvement Program helped to offset the percent of
sales impact on occupancy and other fixed costs from same store sales declines
at JACK IN THE BOX company-operated restaurants. Insurance expenses and costs
associated with the new point of sale system are expected to continue at higher
levels in fiscal year 2004.
Costs of distribution and other sales were $106.0 million in 2003, $75.3
million in 2002 and $64.5 million in 2001. As a percentage of distribution and
other sales, these costs were 97.5% in 2003, 97.3% in 2002 and 96.9% in 2001.
The higher percentage in 2003 compared with 2002 is primarily due to a change in
our fuel pricing strategy designed to achieve higher sales volumes at certain
QUICK STUFF locations. Continuing reductions in QUICK STUFF labor costs and
other profit improvement initiatives partially offset the impact of lower fuel
margins. In 2003, distribution margins remained constant compared with 2002. The
cost percentage increased in 2002 compared with 2001, primarily due to reduced
margins in our distribution business related to softer sales at JACK IN THE BOX
restaurants.
Franchised restaurant costs, principally rent expense and depreciation on
properties leased to JACK IN THE BOX franchisees and other miscellaneous costs,
increased to $25.7 million in 2003 from $22.1 million in 2002 and $20.4 million
in 2001, primarily reflecting an increase in the number of franchised
restaurants.
Selling, general and administrative expenses were $228.1 million, $233.4
million and $201.6 million in 2003, 2002 and 2001, respectively. These expenses
were approximately 11.1% of revenues in 2003, 11.9% in 2002 and 11.0% in 2001.
In 2003, cost reduction initiatives from our Profit Improvement Program, lower
incentive bonus expense and the benefit provided from higher other revenues more
than offset higher pension costs and the reduction in JACK IN THE BOX same store
sales. In 2002, higher pension, bonus and legal costs were mitigated in part by
the increased leverage from higher revenues as well as savings generated from
our Profit Improvement Program. Pension costs have increased due to declines in
discount rates and in the return on plan assets, and these costs are expected to
increase further in fiscal year 2004. Fiscal year 2003 includes an unusual
charge of $2.6 million related to the assumption of certain lease obligations
arising from the recent bankruptcy of the Chi-Chi's restaurant chain, which was
previously owned by the Company. The Company anticipates it will not incur any
additional charges related to the Chi Chi's bankruptcy in future years. Fiscal
year 2002 also includes unusual charges of $9.3 million to settle a class action
lawsuit in California, and $6.4 million for impairment and lease exit costs
related to the closure of eight under-performing restaurants. Excluding these
unusual charges, which were 0.1% and 0.8% of revenues in 2003 and 2002,
respectively, selling, general and administrative expenses were approximately
11.0% of revenues in 2003, 11.1% in 2002 and 11.0% in 2001. The Company believes
it is useful to provide the impact that the unusual items in 2003 and 2002 had
on selling, general and administrative expenses because it facilitates more
relevant comparisons to prior-period financial results and to the results of the
Company's competitors.
20
Interest expense was $24.8 million, $22.9 million and $24.5 million in
2003, 2002 and 2001, respectively. Interest expense in 2003 compared with 2002
includes costs associated with the early retirement of our higher interest rate
financing lease obligations, the amortization of fees associated with the
Company's refinancing in January 2003, and an increase in total debt, primarily
due to the acquisition of Qdoba. The reduction in interest expense in 2002
compared with 2001 reflects lower average levels of debt and lower average
interest rates.
The income tax provisions reflect effective annual tax rates of 36.2%,
33.9% and 35.5% of pre-tax earnings in 2003, 2002 and 2001, respectively. The
lower rates in 2003 and 2002 resulted from the favorable resolutions of
long-standing tax matters. In 2001, the favorable tax rate resulted from our
ability to realize previously unrecognized tax benefits, including business tax
credit, tax loss and minimum tax credit carryforwards. Our effective tax rate is
expected to be higher in fiscal 2004.
In 2001, we adopted Staff Accounting Bulletin ("SAB") 101 which requires
that we recognize certain franchise percentage rents, which are contingent upon
certain annual sales levels, in the period in which the contingency is met
instead of being accrued for ratably. As a result of adopting SAB 101, we
recorded a one-time after-tax cumulative effect from this accounting change of
$1.9 million related to the deferral of franchise percentage rents not yet
earned as of the beginning of fiscal year 2001.
Net earnings were $73.6 million, or $1.99 per diluted share, in 2003, $83.0
million, or $2.07 per diluted share, in 2002 and $82.2 million, or $2.06 per
diluted share, in 2001. Each year includes unusual items as described above. In
2003, net earnings included $1.7 million, or $.05 per diluted share, for lease
obligations assumed in connection with the Chi-Chi's bankruptcy. In 2002, net
earnings included after-tax charges of $10.4 million, or $.26 per diluted share,
for costs associated with the settlement of a class action lawsuit in California
and the closure of eight under-performing restaurants. In 2001, net earnings
included $1.9 million, or $.05 per diluted share, for the cumulative effect of
the SAB 101 accounting change. Excluding all of these unusual items, net
earnings were $75.3 million, or $2.04 per diluted share, in 2003, $93.4 million,
or $2.33 per diluted share, in 2002, and $84.1 million, or $2.11 per diluted
share, in 2001. The Company believes it is useful to provide the impact that the
unusual items in each year had on net earnings and earnings per share amounts
because it facilitates more relevant comparisons to prior-period financial
results and to the results of the Company's competitors.
Liquidity and Capital Resources
General. Cash and cash equivalents increased $16.8 million to $22.4 million
at September 28, 2003 from $5.6 million at the beginning of the fiscal year due
to a temporary increase in cash balances, principally resulting from reductions
in capital expenditures from savings in new store build-out costs and from
leasing a greater portion of our new restaurants. We generally 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 agreement. At September 28, 2003,
we had no borrowings under our revolving credit facility.
Financial Condition. Our working capital deficit decreased $131.8 million
to $89.1 million at September 28, 2003 from $220.9 million at September 29,
2002. This decrease is primarily due to the temporary increase in our cash
balance at the end of the fiscal year, the reclassification of our revolving
credit facility to long-term debt and the repayment of financing lease
obligations in January 2003. 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 year, our current ratio was 0.6 to
1 compared with 0.3 to 1 at September 29, 2002, improving due to our high cash
balance, the credit facility reclassification and debt repayment discussed
above.
On January 22, 2003, we replaced our existing revolving credit facility
with a new senior credit facility. Our new credit facility provides for
borrowings in the aggregate amount of $350 million and is comprised of: (i) a
$200 million revolving credit facility maturing on January 22, 2006 with a rate
of London Interbank Offered Rate ("LIBOR") plus 2.25% and (ii) a $150 million
term loan maturing on July 23, 2007 with a rate of LIBOR plus 3.25%. This new
credit facility requires the payment of an annual commitment fee based on the
unused portion of the credit facility. The credit facility's interest rates and
the annual commitment rate 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 on
substantially all personal property assets. Under certain circumstances, the
Company and each of its certain subsidiaries will be required to grant liens on
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 September 28, 2003, we had no
borrowings under our revolving credit facility and had letters of credit
outstanding of $31.8 million.
21
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 September 28, 2003, we were in compliance with all such covenants.
Total debt outstanding increased to $303.1 million at September 28, 2003
from $249.6 million at the beginning of the fiscal year, primarily reflecting
our acquisition of Qdoba which was funded by borrowings under our new credit
facility.
New Financing. In December 2003, we began efforts to secure a new $275
million senior secured term loan and to amend our existing revolving credit
facility. We intend to use 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. The amended revolving credit facility
will continue to support general corporate purposes. We believe the new credit
facility will provide a more flexible capital structure, including extension of
the maturities of both our revolver and term loan, facilitate the execution of
our strategic plan, and decrease borrowing costs. While management is confident
about the prospects for the new credit facility, no assurance can be given that
the facility can be arranged on terms and conditions acceptable to the Company.
In the event that we are unable to obtain this new facility on acceptable terms,
the current facility will remain in place, and we believe it is adequate to
support the Company's current operations and anticipated growth.
Other Transactions. 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 sinking
fund payments to reacquire the interests in the restaurant properties and retire
the high interest rate bearing financing lease obligations.
During the last three years we have continued our strategy of selectively
converting company-operated restaurants to franchises. In 2003, 2002 and 2001,
these conversions generated cash proceeds of approximately $23.8 million, $10.0
million and $11.3 million, respectively.
In fiscal years 2000 and 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. Under these authorizations, the Company
repurchased 2,566,053 shares of Jack in the Box common stock during fiscal year
2003. Since the initiation of the share repurchase program in fiscal year 2000
through September 28, 2003, we acquired 4,115,853 shares at an aggregate cost of
$90 million, and at September 28, 2003 we had no repurchase availability
remaining. The stock repurchase program was intended to increase shareholder
value and offset the dilutive effect of stock option exercises.
On January 21, 2003, we acquired Qdoba, operator and franchiser of Qdoba
Mexican Grill, for approximately $45 million in cash. The primary assets
acquired include $8.2 million in net property and equipment and other long-term
assets, $18.0 million in intangible assets and $23.6 million in goodwill. Qdoba
operates in the fast-casual segment of the restaurant industry and, as of
September 28, 2003, operated or franchised 111 restaurants in 22 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.
22
Contractual Obligations and Commitments. The following is a summary of the
Company's contractual obligations and commercial commitments as of September 28,
2003:
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......... $ 149,250 $ 7,000 $ 25,000 $ 117,250 $ -
Revolving credit facility......... - - - - -
Capital lease obligations......... 23,529 2,113 5,606 6,523 9,287
Other long-term debt obligations.. 130,301 3,221 1,706 125,374 -
Operating lease obligations....... 1,518,872 159,452 284,890 238,798 835,732
Guarantees (1).................... 2,701 358 754 803 786
---------- --------- --------- --------- ---------
Total contractual obligations.... $1,824,653 $ 172,144 $ 317,956 $ 488,748 $ 845,805
========== ========= ========= ========= =========
Other Commercial Commitments:
Stand-by letters of credit (2)..... $ 31,833 $ 31,833 $ - $ - $ -
========== ========= ========= ========= =========
(1) Consists of guarantees associated with two Chi-Chi's properties. 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 agreements and have begun making lease payments in connection
with these two properties effective October 1, 2003.
(2) Consists primarily of letters of credit for workers' compensation and
general liability insurance.
Capital Expenditures. Capital expenditures decreased $30.7 million to
$111.9 million in 2003 from $142.6 million in 2002. This decrease relates to
lower expenditures on new restaurants, reflecting a reduction in the number of
new JACK IN THE BOX restaurant openings to 90 in 2003 from 100 a year ago, as
well as cost savings generated on our restaurant prototypes. Furthermore, we
purchased fewer new sites in 2003 compared with 2002, as the Company is now
leasing a greater portion of its new restaurants due to favorable lease terms.
We plan on spending approximately $150 million during fiscal year 2004 on
capital expenditures. The projected increase from fiscal 2003 reflects an
increase in Qdoba restaurant growth, spending related to our strategy to
re-invent the JACK IN THE BOX brand and costs associated with our new Innovation
Center which will support our product marketing, research and development and
quality assurance departments. These increases are partially offset by a
decrease in new restaurant expenditures reflecting a reduction in the number of
new JACK IN THE BOX restaurant openings in fiscal year 2004.
Pension Funding. Due to the downturn in the equity markets over the past
two years, the market value of our pension plan assets have declined.
Additionally, lower interest rates and a reduction in our assumed long-term rate
of return on plan assets have contributed to an increase in our accumulated
benefit plan obligation during 2003. A minimum pension liability adjustment is
required when the accumulated benefit obligation exceeds the fair value of plan
assets at the measurement date. As such, we were required to recognize an
additional minimum pension liability at September 28, 2003 and September 29,
2002. The additional liability recognized in both years, resulted in a
cumulative charge to other comprehensive income in the consolidated statements
of stockholders' equity of $27.2 million, an increase of $18.3 million compared
with a year ago when the Company recorded a charge of $8.9 million for similar
reasons.
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-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 available, will be sufficient to meet our debt service, capital
expenditure and working capital requirements.
23
Discussion 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 judgments. Information regarding the Company's other
significant accounting policies are disclosed in Note 1 of our consolidated
financial statements.
Pension Benefits - The 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 interest 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 - The Company is self-insured for a portion of its current
and prior years' losses related to its workers' compensation, general liability,
automotive, medical and dental programs. In estimating the Company'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 greater 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 are
reviewed for impairment when indicators of impairment are present. If the sum of
undiscounted future cash flows is less than the carrying value of the asset, 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 things, economic conditions or changes in
operating performance. In the fourth quarter of fiscal year 2002, we recorded
$2.5 million in impairment charges related to eight under-performing restaurants
scheduled for closure in fiscal year 2003. During the fourth quarter of 2003, we
determined that our fixed assets and finite life intangible assets were not
impaired at September 28, 2003.
Goodwill and Other Intangibles - We also evaluate goodwill and intangible
assets not subject to amortization annually, or more frequently if indicators of
impairment are present. If the determined fair values of these 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 receivables 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
inability of our franchisees to make required payments. This estimate is based
on our assessment 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 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 decrease accrued amounts as we deem
appropriate.
24
Future Accounting Changes
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46, Consolidation of Variable Interest Entities - an
interpretation of Accounting Research Bulletin No. 51 which requires companies
that control another entity through interests other than voting interests to
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 FASB has delayed the
requirements of this Interpretation until the first fiscal year or interim
period ending after December 15, 2003. The Company has assessed the impact that
Interpretation 46 may have on its consolidated financial statements, and
concluded that the continued consolidation of the Company's marketing funds is
appropriate. Based on a review of the franchise agreements and after considering
the policies and procedures the Company has in place related to franchising
activities, the Company has determined that the franchise arrangements entered
into after January 31, 2003 do not result in these franchises qualifying as
variable interest entities, and as such, consolidation of these franchises is
not required. We will continue to monitor this literature to determine if any
changes will have an impact on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
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 September
28, 2003, our applicable margins for the LIBOR based revolving loans and term
loan were set at 2.25% and 3.25%, respectively. A hypothetical one percent
increase in short-term interest rates, based on the outstanding balance of our
revolving credit facility and term loan at September 28, 2003, would result in a
reduction of $1.5 million in annual pre-tax earnings.
Changes in interest rates also impact our pension 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 obligation 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 25 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
$1.4 million and $0.2 million, respectively, in our future annual pension
expense.
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 futures and option contracts to manage
these fluctuations. Open futures and option contracts at September 28, 2003 were
not significant.
At September 28, 2003, we had no other material financial instruments
subject to significant market exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Consolidated Financial Statements and related financial information
required to be filed are indexed on page F-1 and are incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of our disclosure controls and procedures, as such
term is defined under Rules 13a-15(e) and 15d -15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this annual report.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
That portion of our definitive Proxy Statement appearing under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" to be filed with the Commission pursuant to Regulation 14A within
120 days after September 28, 2003 and to be used in connection with our 2004
Annual Meeting of Stockholders is hereby incorporated by reference.
Information regarding executive officers is set forth in Item 1 of Part I
of this Report under the caption "Executive Officers".
That portion of our definitive Proxy Statement appearing under the caption
"Audit Committee," relating to the members of the Company's Audit Committee and
the Audit Committee financial expert is also incorporated herein by reference.
The Company has adopted a Code of Ethics which applies to all Jack in the
Box Inc. directors, officers and employees, including the Chief Executive
Officer, Chief Financial Officer, Controller and all of the financial team. The
Code of Ethics is posted on the Company's website, www.jackinthebox.com (under
the "Investors - Code of Conduct" caption.) The Company intends to satisfy the
disclosure requirement regarding any amendment to, or waiver of, a provision of
the Code of Ethics for the Chief Executive Officer, Chief Financial Officer and
Controller or persons performing similar functions, by posting such information
on its website.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
That portion of our definitive Proxy Statement appearing under the caption
"Executive Compensation" to be filed with the Commission pursuant to Regulation
14A within 120 days after September 28, 2003 and to be used in connection with
our 2004 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
That portion of our definitive Proxy Statement appearing under the caption
"Security Ownership of Certain Beneficial Owners and Management" to be filed
with the Commission pursuant to Regulation 14A within 120 days after September
28, 2003 and to be used in connection with our 2004 Annual Meeting of
Stockholders is hereby incorporated by reference. Information regarding equity
compensation plans under which Company common stock may be issued as of
September 28, 2003 is set forth in Item 5 of this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
That portion of our definitive Proxy Statement appearing under the caption
"Certain Transactions," if any, to be filed with the Commission pursuant to
Regulation 14A within 120 days after September 28, 2003 and to be used in
connection with our 2004 Annual Meeting of Stockholders is hereby incorporated
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
That portion of our definitive Proxy Statement appearing under the caption
"Independent Auditor Fees and Services" to be filed with the Commission pursuant
to Regulation 14A within 120 days after September 28, 2003 and to be used in
connection with our 2004 Annual Meeting of Stockholders is hereby incorporated
by reference.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
ITEM 15(a)(1) Financial Statements. See Index to Consolidated Financial
---------------------
Statements on page F-1 of this report.
ITEM 15(a)(2) Financial Statement Schedules. Not applicable.
-----------------------------
ITEM 15(a)(3) Exhibits.
---------
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation, as amended(7)
3.2 Amended and Restated Bylaws(13)
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 Credit Agreement dated as of January 22, 2003 by and among Jack in the
Box Inc. and the lenders named therein(12)
10.2 Purchase Agreements dated as of January 22, 1987 between Foodmaker,
Inc. and FFCA/IIP 1985 Property Company and 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)
10.4.1* Amended and Restated 1992 Employee Stock Incentive Plan(4)
10.4.2* Jack in the Box Inc. 2002 Stock Incentive Plan(10)
10.5* Capital Accumulation Plan for Executives(9)
10.5.1* First Amendment dated as of August 2, 2002 to the Capital Accumulation
Plan for Executives(11)
10.6* Supplemental Executive Retirement Plan(9)
10.6.1* First Amendment dated as of August 2, 2002 to the Supplemental
Executive Retirement Plan(11)
10.7* Performance Bonus Plan(8)
10.8* Deferred Compensation Plan for Non-Management Directors(2)
10.9* Amended and Restated Non-Employee Director Stock Option Plan(7)
10.10* Form of Compensation and Benefits Assurance Agreement for Executives(5)
10.11* Form of Indemnification Agreement between Jack in the Box Inc. and
certain officers and directors(11)
10.12 Consent Agreement(11)
10.13* Executive Deferred Compensation Plan(13)
10.14* Form of Restricted Stock Award for certain executives(13)
10.14(a) Schedule of Restricted Stock Awards
10.15* Executive Agreement between Jack in the Box Inc. and Gary J.
Beisler, President and Chief Executive Officer of Qdoba Restaurant
Corporation (14)
23.1 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer pursuant 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.
27
(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) 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.
(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 by reference from registrant's current
report on Form 8-K dated January 22, 2003.
(13) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended January 19, 2003.
(14) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 13, 2003.
ITEM 15(b) We filed the following reports on Form 8-K with the Securities
and Exchange Commission during the fourth quarter ended September
28, 2003: On August 6, 2003, we filed a report on Form 8-K
furnishing an earnings release that reported results of
operations for the quarter ended July 6, 2003. On September 17,
2003, we filed a report on Form 8-K announcing our strategic plan
and containing first-quarter 2004 guidance.
ITEM 15(c) All required exhibits are filed herein or incorporated by
reference as described in Item 15(a)(3).
ITEM 15(d) All supplemental schedules are omitted as inapplicable or because
the required information is included in the Consolidated
Financial Statements or notes thereto.
28
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
JACK IN THE BOX INC.
By: JOHN F. HOFFNER
---------------
John F. Hoffner
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
Date: December 17, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
ROBERT J. NUGENT Chairman of the Board and Chief December 17, 2003
- --------------------- Executive Officer (Principal
Robert J. Nugent Executive Officer)
JOHN F. HOFFNER Executive Vice President and Chief December 17, 2003
- --------------------- Financial Officer (Principal
John F. Hoffner Financial Officer)
LINDA A. LANG President, Chief Operating Officer December 17, 2003
- --------------------- and Director
Linda A. Lang
MICHAEL E. ALPERT Director December 17, 2003
- ---------------------
Michael E. Alpert
EDWARD W. GIBBONS Director December 17, 2003
- ---------------------
Edward W. Gibbons
ANNE B. GUST Director December 17, 2003
- ---------------------
Anne B. Gust
ALICE B. HAYES Director December 17, 2003
- ---------------------
Alice B. Hayes
MURRAY H. HUTCHISON Director December 17, 2003
- ---------------------
Murray H. Hutchison
MICHAEL W. MURPHY Director December 17, 2003
- ---------------------
Michael W. Murphy
L. ROBERT PAYNE Director December 17, 2003
- ---------------------
L. Robert Payne
29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Earnings.............................. F-4
Consolidated Statements of Cash Flows............................ F-5
Consolidated Statements of Stockholders' Equity.................. F-6
Notes to Consolidated Financial Statements....................... F-7
Schedules not filed: All schedules have been omitted as the required information
is inapplicable or the information is presented in the financial statements or
related notes.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Jack in the Box Inc.:
We have audited the accompanying consolidated balance sheets of Jack in the Box
Inc. and subsidiaries as of September 28, 2003 and September 29, 2002, and the
related consolidated statements of earnings, cash flows and stockholders' equity
for the fifty-two weeks ended September 28, 2003, September 29, 2002, and
September 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jack in the Box Inc.
and subsidiaries as of September 28, 2003 and September 29, 2002, and the
results of their operations and their cash flows for the fifty-two weeks ended
September 28, 2003, September 29, 2003, and September 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company has
adopted the provisions of SFAS No. 142 "Accounting for Goodwill and Other
Intangible Assets," and, accordingly, has changed its method of accounting for
goodwill.
KPMG LLP
San Diego, California
November 7, 2003, except as to the
second paragraph of Note 4, which is
as of December 12, 2003
F-2
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
Sept. 28, Sept. 29,
2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 22,362 $ 5,620
Accounts receivable, net.............................. 31,582 26,176
Inventories........................................... 31,699 29,975
Prepaid expenses and other current assets............. 21,056 38,108
Assets held for sale and leaseback.................... 41,916 12,626
---------- ----------
Total current assets................................ 148,615 112,505
---------- ----------
Property and equipment, at cost:
Land.................................................. 93,438 105,298
Buildings............................................. 627,883 581,651
Restaurant and other equipment........................ 520,637 486,183
Construction in progress.............................. 42,150 46,355
---------- ----------
1,284,108 1,219,487
Less accumulated depreciation and amortization........ 417,148 372,556
---------- ----------
Property and equipment, net......................... 866,960 846,931
---------- ----------
Trading area rights, net............................... - 64,628
Goodwill............................................... 90,218 1,988
Other assets, net...................................... 70,157 37,392
---------- ----------
$1,175,950 $1,063,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................. $ 12,334 $ 106,265
Accounts payable...................................... 49,491 59,212
Accrued liabilities................................... 175,909 167,900
---------- ----------
Total current liabilities........................... 237,734 333,377
---------- ----------
Long-term debt, net of current maturities.............. 290,746 143,364
Other long-term liabilities............................ 143,238 96,727
Deferred income taxes.................................. 33,910 25,861
Stockholders' equity:
Preferred stock....................................... - -
Common stock $.01 par value, 75,000,000 authorized,
43,231,412 and 42,936,810 issued, respectively....... 432 429
Capital in excess of par value........................ 325,510 319,810
Retained earnings..................................... 300,682 227,064
Accumulated other comprehensive loss, net............. (27,184) (8,882)
Unearned compensation................................. (4,655) -
Treasury stock, at cost, 6,944,827 and
4,378,774 shares, respectively....................... (124,463) (74,306)
---------- ----------
Total stockholders' equity.......................... 470,322 464,115
---------- ----------
$1,175,950 $1,063,444
========== ==========
See accompanying notes to consolidated financial statements.
F-3
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Fiscal year
------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Revenues:
Restaurant sales....................... $1,864,180 $1,822,902 $1,714,126
Distribution and other sales........... 108,738 77,445 66,565
Franchise rents and royalties.......... 54,371 45,936 43,825
Other.................................. 31,001 20,077 9,060
---------- ---------- ----------
2,058,290 1,966,360 1,833,576
---------- ---------- ----------
Costs of revenues:
Restaurant costs of sales.............. 573,918 555,232 528,070
Restaurant operating costs............. 984,305 931,686 864,271
Costs of distribution and other sales.. 105,986 75,341 64,490
Franchised restaurant costs............ 25,715 22,125 20,353
---------- ---------- ----------
1,689,924 1,584,384 1,477,184
---------- ---------- ----------
Gross profit.............................. 368,366 381,976 356,392
Selling, general and administrative....... 228,142 233,426 201,579
---------- ---------- ----------
Earnings from operations.................. 140,224 148,550 154,813
Interest expense.......................... 24,838 22,914 24,453
---------- ---------- ----------
Earnings before income taxes and cumulative
effect of accounting change............ 115,386 125,636 130,360
Income taxes.............................. 41,768 42,590 46,300
---------- ---------- ----------
Earnings before cumulative effect of
accounting change...................... 73,618 83,046 84,060
Cumulative effect of adopting SAB 101..... - - (1,859)
---------- ---------- ----------
Net earnings.............................. $ 73,618 $ 83,046 $ 82,201
========== ========== ==========
Net earnings per share - basic:
Earnings before cumulative effect of
accounting change.................... $ 2.02 $ 2.11 $ 2.17
Cumulative effect of adopting SAB 101.. - - (.05)
---------- ---------- ----------
Net earnings per share................. $ 2.02 $ 2.11 $ 2.12
========== ========== ==========
Net earnings per share - diluted:
Earnings before cumulative effect of
accounting change.................... $ 1.99 $ 2.07 $ 2.11
Cumulative effect of adopting SAB 101.. - - (.05)
---------- ---------- ----------
Net earnings per share................. $ 1.99 $ 2.07 $ 2.06
========== ========== ==========
Weighted-average shares outstanding:
Basic.................................. 36,473 39,322 38,791
Diluted................................ 36,968 40,112 39,780
See accompanying notes to consolidated financial statements.
F-4
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal year
--------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings................................................ $ 73,618 $ 83,046 $ 82,201
Non-cash items included in operations:
Depreciation and amortization............................. 70,286 70,270 64,195
Deferred finance cost amortization........................ 2,849 2,070 2,075
Deferred income taxes, excluding the effect of the
Qdoba acquisition....................................... 15,984 13,300 5,747
Amortization of unearned compensation expense............. 497 - -
Cumulative effect of accounting change.................... - - 1,859
Impairment charge......................................... - 2,517 -
Tax benefit associated with exercise of stock options....... 188 3,466 7,531
Gains on the conversion of company-operated restaurants..... (26,562) (17,156) (6,521)
Changes in assets and liabilities, excluding the effect
of the Qdoba acquisition:
Decrease (increase) in receivables........................ (624) 6,007 (7,517)
Increase in inventories................................... (1,573) (620) (3,271)
Decrease (increase) in prepaid expenses and other
current assets.......................................... 897 (4,862) 61
Increase (decrease) in accounts payable................... (9,890) 4,201 1,954
Increase (decrease) in other liabilities.................. 22,142 (10,228) 18,934
--------- --------- ---------
Cash flows provided by operating activities............... 147,812 152,011 167,248
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment......................... (111,872) (142,588) (166,522)
Purchase of Qdoba, net of $2,856 cash acquired ............. (42,606) - -
Dispositions of property and equipment...................... 27,198 5,085 6,277
Proceeds from the conversion of Company-operated
restaurants............................................... 3,740 6,285 3,144
Decrease (increase) in assets held for sale
and leaseback............................................. (22,642) 35,703 (14,474)
Collections on notes receivable............................. 20,092 4,908 5,012
Other....................................................... (7,161) (1,803) (5,605)
--------- --------- ---------
Cash flows used in investing activities................... (133,251) (92,410) (172,168)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving bank loans....................... 510,500 385,140 503,500
Principal repayments under revolving bank loans............. (544,500) (416,140) (504,500)
Proceeds from issuance of long-term debt.................... 151,450 - -
Principal payments on long-term debt, including
current maturities........................................ (57,632) (2,264) (2,034)
Debt issuance and debt repayment costs...................... (7,843) - -
Repurchase of common stock.................................. (50,157) (33,287) (759)
Proceeds from issuance of common stock...................... 363 6,242 8,205
--------- --------- ---------
Cash flows provided by (used in) financing activities..... 2,181 (60,309) 4,412
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........... $ 16,742 $ (708) $ (508)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common stock Accumulated
------------------- Capital in other
Number of excess of Retained comprehensive Unearned Treasury
shares Amount par value earnings loss compensation stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2000...... 41,483,369 $ 415 $ 294,380 $ 61,817 $ - $ - $ (40,260) $ 316,352
Shares issued under stock
plans, net of tax benefit..... 935,373 9 15,727 - - - - 15,736
Purchase of treasury stock...... - - - - - - (759) (759)
Net earnings.................... - - - 82,201 - - - 82,201
---------- ------ ---------- -------- --------- --------- --------- ---------
Balance at September 30, 2001... 42,418,742 424 310,107 144,018 - - (41,019) 413,530
Shares issued under stock
plans, net of tax benefit..... 518,068 5 9,703 - - - - 9,708
Purchase of treasury stock...... - - - - - - (33,287) (33,287)
Comprehensive income (loss):
Net earnings.................. - - - 83,046 - - - 83,046
Additional minimum
pension liability, net...... - - - - (8,882) - - (8,882)
---------- ------ ---------- -------- --------- --------- --------- ---------
Total comprehensive income
(loss)........................ - - - 83,046 (8,882) - - 74,164
---------- ------ ---------- -------- --------- --------- --------- ---------
Balance at September 29, 2002 42,936,810 429 319,810 227,064 (8,882) - (74,306) 464,115
Shares issued under stock
plans, net of tax benefit..... 294,602 3 5,700 - - (5,152) - 551
Amortization of unearned
compensation.................. - - - - - 497 - 497
Purchase of treasury stock...... - - - - - - (50,157) (50,157)
Comprehensive income (loss):
Net earnings.................. - - - 73,618 - - - 73,618
Additional minimum pension
liability, net.............. - - - - (18,302) - - (18,302)
---------- ------ ---------- -------- --------- --------- --------- ---------
Total comprehensive income
(loss)........................ - - - 73,618 (18,302) - - 55,316
---------- ------ ---------- -------- --------- --------- --------- ---------
Balance at September 28, 2003... 43,231,412 $ 432 $ 325,510 $300,682 $ (27,184) $ (4,655) $(124,463) $ 470,322
========== ====== ========== ======== ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations - Jack in the Box Inc. (the "Company") operates and
franchises JACK IN THE BOX quick-service restaurants and Qdoba Mexican
Grill(R) fast-casual restaurants.
Basis of presentation and fiscal year - The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions are eliminated.
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the fiscal 2003 presentation. Our fiscal
year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal
years 2003, 2002 and 2001 include 52 weeks.
Financial instruments - The fair values of cash and cash equivalents,
accounts and notes receivable, accounts payable and accrued liabilities
approximate the carrying amounts due to their short maturities. The fair
values of each of our long-term debt instruments are based on quoted market
values, where available, or on the amount of future cash flows associated
with each instrument, discounted using our current borrowing rate for
similar debt instruments of comparable maturity. The estimated fair values
of our long-term debt at September 28, 2003 and September 29, 2002
approximate their carrying values.
From time-to-time, we use commodity derivatives to reduce the risk of price
fluctuations related to raw material requirements for commodities such as
beef and pork. We also use utility derivatives to reduce the risk of price
fluctuations related to natural gas. We do not speculate using derivative
instruments, and we purchase derivative instruments only for the purpose of
risk management.
We account for our derivative instruments and hedging activities under
Statement of Financial Accounting Standards ("SFAS") 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137, 138
and 149. Our derivative instruments are not designated as hedge
transactions. The fair values of our derivative instruments are included in
the consolidated balance sheets. The changes in the fair value of our
commodity and natural gas derivatives are reflected in restaurant costs of
sales and restaurant operating costs, respectively, in the consolidated
statements of earnings. Changes in the fair value of our interest rate
swap, which expired in June 2001, are included in interest expense in the
consolidated statements of earnings for the fiscal year ended September 30,
2001.
At September 28, 2003, we had no other material financial instruments
subject to significant market exposure.
Cash and cash equivalents - We invest cash in excess of operating
requirements only in short-term, highly liquid investments with original
maturities of three months or less, which are considered cash equivalents.
Inventories are valued at the lower of cost or market on a first-in,
first-out basis.
Assets held for sale and leaseback primarily represent the costs for new
sites that will be sold and leased back when construction is completed.
Gains or losses realized on the sale leaseback transactions are deferred
and amortized to income over the lease terms. The leases are classified in
accordance with SFAS 13, Accounting for Leases.
F-7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment, at cost - Expenditures for new facilities and
equipment, and those that substantially increase the useful lives of the
property, are capitalized. Facilities leased under capital leases are
stated at the present value of minimum lease payments at the beginning of
the lease term, not to exceed fair value. Maintenance, repairs, and minor
renewals are expensed as incurred. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the accounts, and gains or losses on the dispositions are reflected in
results of operations.
Buildings, equipment and leasehold improvements are depreciated using the
straight-line method based on the estimated useful lives of the assets, or
over the lease term for certain capital leases (buildings 15 to 33 years
and equipment 3 to 30 years).
Other assets primarily include lease acquisition costs, deferred franchise
contract costs, deferred finance costs and company-owned life insurance
("COLI") policies. Lease acquisition costs represent the fair values of
acquired lease contracts having contractual rents lower than fair market
rents and are amortized over the remaining lease term. Deferred franchise
contract costs, which represent the acquired value of franchise contracts,
are amortized over the term of the franchise agreement. Deferred finance
costs are amortized using the interest method over the terms of the
respective loan agreements, from 4 to 10 years. COLI policies are recorded
at their cash surrender values. We purchase COLI policies to offset a
portion of our obligations under our non-qualified deferred compensation
and defined benefit pension plans.
Impairment of long-lived assets - Property, equipment and certain other
assets are evaluated for impairment when indicators of impairment are
present. Impairment is recognized when the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Long-lived assets that are held for disposal are reported
at the lower of their carrying value or fair value, less estimated costs to
sell.
In addition, we evaluate goodwill and intangible assets not subject to
amortization annually, or more frequently if indicators of impairment are
present. If the determined fair values of these assets are less than the
related carrying amounts an impairment loss is recognized. We performed our
annual impairment test in the fourth quarter of fiscal year 2003, and
determined these assets were not impaired at September 28, 2003.
Preopening costs are those typically associated with the opening of a new
restaurant and consist primarily of employee training costs and are
expensed as incurred.
Restaurant closure costs - In June 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS 146, Accounting for Costs Associated with Exit
or Disposal Activities. This Statement requires that, subsequent to
December 31, 2002, all costs associated with exit or disposal activities be
recognized when they are incurred rather than at the date of a commitment
to an exit or disposal plan. Prior to December 31, 2002, we charged costs
associated with restaurant closures to operations when management committed
to closing a restaurant. Restaurant closure costs, which are included in
selling, general and administrative expenses, consist of future lease
commitments, net of anticipated sublease rentals, and expected ancillary
costs.
Self-insurance - We are self-insured for a portion of our workers'
compensation, general liability, automotive, and employee medical and
dental claims. We utilize a paid loss plan for our workers' compensation,
general liability and automotive programs, which have predetermined loss
limits per occurrence and in the aggregate. We establish our insurance
liability and reserves using independent actuarial estimates of expected
losses as the basis for determining reported claims and for estimating
claims incurred but not reported.
F-8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Franchise operations - Franchise arrangements generally provide for initial
franchise fees and continuing payments to us based on a percentage of
sales. Among other things, a franchisee may be provided the use of land and
building, generally for a period of 20 years, and is required to pay
negotiated rent, property taxes, insurance and maintenance. Franchise fees
are recorded as revenue when we have substantially performed all of our
contractual obligations. Expenses associated with the issuance of the
franchise are expensed as incurred. Franchise royalties are recorded in
income on an accrual basis. Gains on the sale of restaurant businesses to
franchisees are recorded as other revenue when the sales are consummated
and certain other criteria are met.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements. SAB 101 required a change in the recognition of franchise
percentage rents, which are contingent upon certain annual sales levels,
from an accrual basis to recognition in the period in which the contingency
is met. We adopted SAB 101 in the fourth quarter of fiscal year 2001 and
reported the cumulative effect of this change in our 2001 consolidated
statement of earnings. Other than the recording of this one-time cumulative
effect, the adoption of SAB 101 does not have a material effect on our
annual results of operations.
Advertising costs - The Company maintains marketing funds which include
contributions of approximately 5% and 1% of sales at all company-operated
JACK IN THE BOX and Qdoba restaurants, respectively, as well as contractual
marketing fees paid monthly by franchisees. Production costs of
commercials, programming and other marketing activities are expensed to the
marketing funds when the advertising is first used, and the costs of
advertising are charged to operations as incurred. Our contributions to the
marketing funds and other marketing expenses, which are included in
selling, general and administrative expenses in the accompanying
consolidated statements of earnings, were $94,807, $91,157 and $86,539 in
2003, 2002 and 2001, respectively.
Income taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, as well as tax loss and credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Net earnings per share - Basic earnings per share is computed using the
weighted-average shares outstanding during the period. Diluted earnings per
share is computed using the dilutive effect of including stock options and
restricted stock in the calculation of weighted-average shares outstanding.
Restricted stock - Restricted stock awards are 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.
F-9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock options - Stock awards are accounted for under Accounting Principles
Board ("APB") 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 SFAS 123, Accounting for Stock-Based
Compensation, we would have recorded net earnings and earnings per share
amounts as follows:
2003 2002 2001
-----------------------------------------------------------------------------------------------------
Net earnings, as reported................................. $ 73,618 $ 83,046 $ 82,201
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of taxes............................. 4,808 4,450 4,462
---------- ---------- ----------
Pro forma net earnings.................................... $ 68,810 $ 78,596 $ 77,739
========== ========== ==========
Net earnings per share:
Basic-as reported....................................... $ 2.02 $ 2.11 $ 2.12
Basic-pro forma......................................... $ 1.89 $ 2.00 $ 2.00
Diluted-as reported..................................... $ 1.99 $ 2.07 $ 2.06
Diluted-pro forma....................................... $ 1.86 $ 1.96 $ 1.95
For the pro forma disclosures, the estimated fair values of the options
were amortized over their vesting periods of up to five years. Refer to
Note 10, Stock-Based Employee Compensation, for information regarding the
assumptions used by the Company in valuing its stock options.
Segment reporting - An operating segment is defined as a component of an
enterprise that engages in business activities from which it may earn
revenues and incur expenses, and about which separate financial information
is regularly evaluated by chief operating decision makers in deciding how
to allocate resources. Similar operating segments can be aggregated into a
single operating segment if the businesses are similar. Jack in the Box
Inc. operates its business in two operating segments, JACK IN THE BOX and
Qdoba.
Estimations - In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America, management is required to make certain assumptions and
estimates that affect reported amounts of assets, liabilities, revenues,
expenses and the disclosure of contingencies. In making these assumptions
and estimates, management may from time to time seek advice from, and
consider information provided by, actuaries and other experts in a
particular area. Actual amounts could differ from these estimates.
2. QDOBA ACQUISITION
On January 21, 2003 we acquired 100% of the outstanding stock of Qdoba
Restaurant Corporation ("Qdoba"), operator and franchiser of Qdoba Mexican
Grill(R), for approximately $45,000 in cash. Qdoba's results of operations
have been included since the date of acquisition, representing 36 weeks of
operations. The purchase was financed by borrowings under our credit
facility. Qdoba operates in the fast-casual segment of the restaurant
industry and, as of September 28, 2003, operated or franchised 111
restaurants in 22 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.
F-10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
2. 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 franchise contracts, which are being amortized
over a period of 26 years, and an unamortized trademark asset. None of the
goodwill 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 the following pro forma amounts:
2003 2002
---------------------------------------------------------------------------
Total revenues............................... $2,066,398 $1,988,522
Net earnings................................. 73,097 80,886
Net earnings per share - Basic............... $ 2.00 $2.06
Net earnings per share - Diluted............. $ 1.98 $2.02
The pro forma results include interest expense on the Company's credit
facility, which was used to finance the acquisition. The pro forma amounts
are not necessarily indicative of the results that would have resulted had
the acquisition occurred at the beginning of the periods presented, nor is
it necessarily indicative of anticipated future results.
3. 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, trading area rights were 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.
F-11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
3. INTANGIBLE ASSETS (continued)
Intangible assets consist of the following as of September 28, 2003 and
September 29, 2002:
2003 2002(1)
---------------------------------------------------------------------------
Amortized intangible assets:
Gross carrying amount...................... $ 61,069 $ 161,145
Less accumulated amortization.............. 40,229 80,771
--------- ---------
Net carrying amount........................ $ 20,840 $ 80,374
========= =========
Unamortized intangible assets:
Goodwill................................... $ 90,218 $ -
Trademark.................................. 8,800 -
--------- ---------
$ 99,018 $ -
========= =========
(1) Amortized intangible assets at September 29, 2002 include TAR
($106,705 carrying amount and accumulated amortization of $41,077) and
goodwill ($3,094 carrying amount and accumulated amortization of
$1,106), which are no longer amortized in 2003.
The weighted-average life of the amortized intangible assets is
approximately 28 years. Total amortization expense related to intangible
assets was $2,066 for fiscal year 2003. The estimated amortization expense
for each fiscal year through 2007 is $2,300.
The changes in the carrying amount of goodwill during fiscal year 2003 were
as follows:
Jack in the Box Qdoba Total
------------------------------------------------------------------------------------------
Balance at September 29, 2002................ $ 1,988 $ - $ 1,988
Reclassification of TAR and other............ 64,613 - 64,613
Goodwill acquired............................ - 23,617 23,617
--------- --------- ---------
Balance at September 28, 2003................ $ 66,601 $ 23,617 $ 90,218
========= ========= =========
Had the provisions of SFAS 142 been adopted at the beginning of the periods
presented below, the Company would have reported net earnings and basic and
diluted per share amounts as follows:
2003 2002 2001
------------------------------------------------------------------------------------------
Net earnings, as reported.................... $ 73,618 $ 83,046 $ 82,201
Goodwill and TAR amortization, net of taxes.. - 2,848 2,775
--------- --------- ---------
Adjusted net earnings ....................... $ 73,618 $ 85,894 $ 84,976
========= ========= =========
Net earnings, as reported - basic............ $ 2.02 $ 2.11 $ 2.12
Goodwill and TAR amortization, net of taxes.. - .07 .07
--------- --------- ---------
Adjusted net earnings- basic................. $ 2.02 $ 2.18 $ 2.19
========= ========= =========
Net earnings, as reported - diluted.......... $ 1.99 $ 2.07 $ 2.06
Goodwill and TAR amortization, net of taxes.. - .07 .08
--------- --------- ---------
Adjusted net earnings- diluted............... $ 1.99 $ 2.14 $ 2.14
========= ========= =========
F-12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
4. LONG-TERM DEBT
2003 2002
---------------------------------------------------------------------------------------------------------
The detail of long-term debt at each year-end follows:
Term loan, variable interest rate based on an applicable margin plus
LIBOR, 4.42% at September 28, 2003, quarterly payments of $375 through
January 31, 2004 and $3,125 thereafter, due in equal
installments on April 30, 2007 and July 23, 2007....................... $ 149,250 $ -
Bank loans, replaced during fiscal year 2003............................. - 34,000
Senior subordinated notes, 8 3/8% interest, net of discount of $95
and $116, respectively, reflecting an 8.4% effective interest rate
due April 15, 2008, redeemable beginning April 15, 2003................ 124,905 124,884
Financing lease obligations, net of discounts of $223 at September 29,
2002, retired during fiscal year 2003.................................. - 69,777
Secured notes, 11 1/2% interest, due in monthly
installments through May 1, 2005....................................... 2,489 3,887
Capitalized lease obligations, 9.41% average interest rate............... 23,529 15,290
Other notes, principally unsecured, 10% average interest rate ........... 2,907 1,791
---------- ----------
303,080 249,629
Less current portion..................................................... 12,334 106,265
---------- ----------
$ 290,746 $ 143,364
========== ==========
On January 22, 2003, we replaced our existing revolving credit facility
with a new senior credit facility. Our new credit facility provides for
borrowings in the aggregate amount of $350,000 and is comprised of: (i) a
$200,000 revolving credit facility maturing on January 23, 2006 with a rate
of London Interbank Offered Rate ("LIBOR") plus 2.25% and (ii) a $150,000
term loan maturing on July 23, 2007 with a rate of LIBOR plus 3.25%. This
new credit facility requires the payment of an annual commitment fee based
on the unused portion of the credit facility. The credit facility's
interest rates and annual commitment rate 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 on 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 its respective obligations under the new credit facility.
Additionally, certain of our real and personal property secure other
indebtedness of the Company. At September 28, 2003, we had no borrowings
under our revolving credit facility and approximately $168,200 of
availability under the agreement.
In December 2003, we began efforts to secure a new $275,000 senior secured
term loan and to amend our existing revolving credit facility. We intend to
use 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. The amended revolving credit facility will continue to support
general corporate purposes. In the event that we are unable to obtain this
new facility on acceptable terms, the current facility will remain in
place, and we believe it is adequate to support the Company's current
operations and anticipated growth.
We are subject to a number of customary covenants under our various credit
agreements, including limitations on additional borrowings, acquisitions,
loans to franchisees, capital expenditures, lease commitments and dividend
payments, and requirements to maintain certain financial ratios, cash flows
and net worth. As of September 28, 2003, we were in compliance with all of
these covenants.
F-13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
4. LONG-TERM DEBT (continued)
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 $70,000 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
$1,300. 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.
Aggregate maturities on all long-term debt are $12,334, $16,575, $15,737,
$120,541 and $128,606 for the years 2004 through 2008, respectively.
Interest capitalized during the construction period of restaurants and in
2003 the Company's Innovation Center was $1,130, $1,696 and $2,441 in 2003,
2002 and 2001, respectively.
5. LEASES
As Lessee - We lease restaurants and other facilities under leases having
terms expiring at various dates through 2054. The leases generally have
renewal clauses of 5 to 20 years exercisable at our option and, in some
instances, have provisions for contingent rentals based upon a percentage
of defined revenues. Total rent expense was as follows:
2003 2002 2001
---------------------------------------------------------------------------
Minimum rentals................... $ 167,109 $ 152,754 $ 135,151
Contingent rentals................ 6,029 7,292 7,200
--------- --------- ---------
173,138 160,046 142,351
Less sublease rentals............. (17,744) (15,113) (13,629)
--------- --------- ---------
$ 155,394 $ 144,933 $ 128,722
========= ========= =========
Future minimum lease payments under capital and operating leases are as
follows:
Fiscal Capital Operating
year leases leases
---------------------------------------------------------------------------
2004........................................... $ 4,513 $ 159,452
2005........................................... 4,496 148,450
2006........................................... 4,472 136,440
2007........................................... 4,442 125,118
2008........................................... 4,068 113,680
Thereafter..................................... 13,966 835,732
--------- ----------
Total minimum lease payments.................... 35,957 $1,518,872
--------- ==========
Less amount representing interest............... (12,428)
---------
Present value of obligations under capital
leases........................................ 23,529
Less current portion............................ (2,113)
---------
Long-term capital lease obligations............. $ 21,416
=========
F-14
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
5. LEASES (continued)
Total minimum lease payments have not been reduced for future minimum
sublease rents of $272,378 expected to be recovered under our operating
subleases. Assets recorded under capital leases are included in property
and equipment and consisted of the following at each year-end:
2003 2002
---------------------------------------------------------------------------
Buildings....................................... $ 21,386 $ 21,386
Equipment....................................... 9,222 -
--------- ---------
30,608 21,386
Less accumulated amortization................... (8,847) (7,881)
--------- ---------
$ 21,761 $ 13,505
========= =========
As Lessor - We lease or sublease restaurants to certain franchisees and
others under agreements that generally provide for the payment of
percentage rentals in excess of stipulated minimum rentals, usually for a
period of 20 years. Total rental revenue was $32,749, $28,755 and $27,213,
including contingent rentals of $9,319, $10,559 and $11,091, in 2003, 2002
and 2001, respectively.
The minimum rents receivable expected to be received under these
non-cancelable leases, excluding contingent rentals, are as follows:
Fiscal Capital Operating
year leases leases
---------------------------------------------------------------------------
2004........................................... $ 350 $ 27,027
2005........................................... 350 25,867
2006........................................... 350 23,806
2007........................................... 350 21,754
2008........................................... 350 19,992
Thereafter..................................... 4,645 177,269
--------- ---------
Total minimum future rentals.................... 6,395 $ 295,715
--------- =========
Less amount representing unearned income........ (5,928)
---------
Net investment (included in other assets)....... $ 467
=========
Land and building assets held for lease were $51,603 and $42,509, net of
accumulated amortization of $27,668 and $26,078 as of September 28, 2003
and September 29, 2002, respectively.
6. RESTAURANT CLOSING AND IMPAIRMENT CHARGES
In the fourth quarter of fiscal year 2002, management committed to closing
eight under-performing restaurants during 2003. As a result of management's
plan to close these restaurants, in 2002 we recorded non-cash charges of
$2,517 for the impairment of the related long-lived assets and lease exit
charges of $3,915. These charges have been included in selling, general and
administrative expenses in the consolidated statements of earnings.
Total accrued restaurant closing costs were $7,011 and $6,966 as of
September 28, 2003 and September 29, 2002, respectively, and are included
in accrued expenses and other long-term liabilities. In fiscal year 2003,
lease exit costs of $1,516 were charged to operations, resulting from
revisions to certain sublease assumptions, and cash payments of $1,471 were
applied against the restaurant closing costs accrual.
F-15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
7. INCOME TAXES
The fiscal year income taxes consist of the following:
2003 2002 2001
---------------------------------------------------------------------------
Federal - current....................... $ 21,137 $ 24,745 $ 34,658
- deferred...................... 15,634 11,249 5,419
State - current....................... 4,647 4,545 4,695
- deferred...................... 350 2,051 328
-------- -------- --------
Subtotal................................ 41,768 42,590 45,100
Income tax benefit related to cumulative
effect of accounting change .......... - - 1,200
-------- -------- --------
Income taxes............................ $ 41,768 $ 42,590 $ 46,300
======== ======== ========
A reconciliation of the federal statutory income tax rate to our effective
tax rate is as follows:
2003 2002 2001
---------------------------------------------------------------------------
Computed at federal statutory rate.............. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.. 2.8 3.6 2.5
Benefit of jobs tax credits..................... (1.2) (1.1) (1.2)
Adjustment of tax loss, contribution and
tax credit carryforwards...................... - - 1.7
Reduction to valuation allowance................ - - (2.6)
Adjustment to estimated tax accruals............ (.6) (4.4) -
Other, net...................................... .2 .8 .1
---- ---- ----
36.2% 33.9% 35.5%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at each
year-end are presented below:
2003 2002
--------------------------------------------------------------------------------------------------------
Deferred tax assets:
Accrued pension and postretirement benefits.............................. $ 29,716 $ 19,229
Accrued insurance........................................................ 14,585 11,222
Accrued vacation pay expense............................................. 11,796 10,711
Deferred income.......................................................... 13,836 13,248
Other reserves and allowances............................................ 8,787 10,489
Tax loss and tax credit carryforwards.................................... 626 -
Other, net............................................................... 8,004 7,812
-------- --------
Total gross deferred tax assets.......................................... 87,350 72,711
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation... 100,184 85,139
Intangible assets........................................................ 21,076 13,433
-------- --------
Total gross deferred tax liabilities..................................... 121,260 98,572
-------- --------
Net deferred tax liabilities............................................. $ 33,910 $ 25,861
======== ========
During fiscal year 2002, we finalized an examination by the U.S. Internal
Revenue Service ("IRS") for tax years 1997 to 1999. This exam included a
review of the tax treatment of certain settlements that we entered into
during these years. We recognized tax benefits, primarily as a result of
the resolution of these items, which reduced our fiscal year 2002 provision
for income taxes. During fiscal year 2003, our lower income tax rate
results primarily from the favorable resolution of a long-standing tax
matter.
F-16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
7. INCOME TAXES (continued)
As of September 28, 2003, we had tax loss carryforwards, which may be used
to reduce regular federal income taxes. These carryforwards begin to expire
in 2019.
As of September 28, 2003, we had not recorded a valuation allowance because
we believe it is more likely than not that the net deferred tax assets will
be realized through future taxable income or alternative tax strategies.
From time-to-time, we may take positions for filing our tax returns, which
may differ from the treatment of the same item for financial reporting
purposes. The ultimate outcome of these items will not be known until such
time as the IRS has completed its examination or until the statute of
limitations has expired.
8. RETIREMENT, SAVINGS AND BONUS PLANS
We have non-contributory defined benefit pension plans covering those
employees meeting certain eligibility requirements. These plans are subject
to modification at any time. The plans provide retirement benefits based on
years of service and compensation. It is our practice to fund retirement
costs as necessary.
Qualified plans Non-qualified plan
------------------------ ------------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year....... $ 94,088 $ 79,503 $ 23,590 $ 22,672
Service cost.................................. 5,357 4,586 511 298
Interest cost................................. 7,186 6,063 1,725 1,747
Actuarial (gain) loss......................... 34,001 5,779 5,573 (672)
Benefits paid................................. (2,117) (1,843) (1,016) (795)
Plan amendment................................ 1,080 - 1,280 340
-------- -------- -------- --------
Benefit obligation at end of year............. $139,595 $ 94,088 $ 31,663 $ 23,590
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 64,907 $ 70,403 $ - $ -
Actual return on plan assets.................. 2,543 (7,573) - -
Employer contributions........................ 19,595 3,920 1,016 795
Benefits paid................................. (2,117) (1,843) (1,016) (795)
-------- -------- -------- --------
Fair value of plan assets at end of year...... $ 84,928 $ 64,907 $ - $ -
======== ======== ======== ========
Reconciliation of funded status:
Funded status................................. $(54,667) $(29,181) $(31,663) $(23,590)
Unrecognized net loss......................... 62,064 26,516 8,590 3,090
Unrecognized prior service cost............... 956 (31) 5,570 4,892
Additional contribution....................... - 15,195 - -
-------- -------- -------- --------
Net amount recognized......................... $ 8,353 $ 12,499 $(17,503) $(15,608)
======== ======== ======== ========
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability..................... $(30,735) $(15,155) $(29,430) $(22,578)
Accumulated other comprehensive loss.......... 38,132 12,459 6,357 2,078
Additional contribution ...................... - 15,195 - -
Intangible assets............................. 956 - 5,570 4,892
-------- -------- -------- --------
Net amount recognized......................... $ 8,353 $ 12,499 $(17,503) $(15,608)
======== ======== ======== ========
F-17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
8. RETIREMENT, SAVINGS AND BONUS PLANS (continued)
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. The downturn in the fixed
income and equity markets has caused the market value of our pension plan
assets to decline, and lower interest rates have caused our accumulated
benefit obligation to increase. As a result, we were required to recognize
an additional minimum pension liability at September 28, 2003 and September
29, 2002. The additional liability recognized in both years resulted in a
cumulative charge to other comprehensive income in the consolidated
statements of stockholders' equity of $27,183, an increase of $18,301
compared with a year ago when the Company recorded a charge of $8,882 for
similar reasons. All defined benefit pension plan obligations, regardless
of the funding status of the underlying plans, are fully supported by the
financial strength of the Company.
In determining the present values of benefit obligations, we assumed
discount rates of 6.15% and 7.30% at the measurement dates of June 30, 2003
and 2002, respectively. The assumed rate of increase in compensation levels
was 3.5%, in 2003 and 2002, for the qualified plans and 5.0% for the
non-qualified plan in 2003 and 2002. The long-term rate of return on assets
was 7.5% and 8.5%, respectively, in 2003 and 2002. Assets of the qualified
plans consist primarily of listed stocks and bonds.
The components of the fiscal year net defined benefit pension cost are as
follows:
Qualified plans Non-qualified plan
--------------------------- ---------------------------
2003 2002 2001 2003 2002 2001
---------------------------------------------------------------------------------------------
Service cost..................... $ 5,357 $ 4,586 $ 3,917 $ 511 $ 298 $ 255
Interest cost.................... 7,186 6,063 5,442 1,725 1,747 1,432
Expected return on plan assets... (6,468) (5,917) (5,889) - - -
Recognized actuarial loss........ 2,378 - - - - -
Net amortization................. 93 (36) (28) 674 770 508
------- ------- ------- ------- ------- -------
Net periodic pension cost........ $ 8,546 $ 4,696 $ 3,442 $ 2,910 $ 2,815 $ 2,195
======= ======= ======= ======= ======= =======
We maintain savings plans pursuant to Section 401(k) of the Internal
Revenue Code which allows administrative and clerical employees who have
satisfied the service requirements and reached age 21, to defer a
percentage of their pay on a pre-tax basis. We contribute an amount equal
to 50% of the first 4% of compensation that is deferred by the participant.
Our contributions under these plans were $1,874, $1,838 and $1,651 in 2003,
2002 and 2001, respectively. We also maintain an unfunded, non-qualified
deferred compensation plan, which was created in 1990 for key executives
and other members of management who are excluded from participation in the
qualified savings plan. This plan allows participants to defer up to 50% of
their salary and 100% of their bonus, on a pre-tax basis. We match an
amount equal to 100% of the first 3% contributed by the employee. Our
contributions under the non-qualified deferred compensation plan were $685,
$617 and $680 in 2003, 2002 and 2001, respectively. In each plan, a
participant's right to Company contributions vests at a rate of 25% per
year of service.
We maintain bonus plans that allow certain officers and management of the
Company to earn annual bonuses based upon achievement of certain financial
and performance goals approved by the Compensation Committee of our Board
of Directors. Under these plans, $484, $3,682 and $1,297 was expensed in
2003, 2002 and 2001, respectively.
F-18
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
8. RETIREMENT, SAVINGS AND BONUS PLANS (continued)
We maintain a deferred compensation plan for non-management directors.
Under the plan's equity option, those who are eligible to receive
directors' fees or retainers may choose to defer receipt of their
compensation. The amounts deferred are converted into stock equivalents at
the then-current market price of our common stock. We provide a deferment
credit equal to 25% of the compensation initially deferred. Under this
plan, our liability is adjusted at the end of each reporting period to
reflect the then-current market price of our common stock. In 2003, 2002
and 2001 we (credited) expensed a total of $(95), $(312) and $234,
respectively, for both the deferment credit and the stock appreciation
(depreciation) on the deferred compensation.
9. POSTRETIREMENT BENEFIT PLAN
We sponsor a health care plan that provides postretirement medical benefits
for employees who meet minimum age and service requirements. The plan is
contributory, with retiree contributions adjusted annually, and contains
other cost-sharing features such as deductibles and coinsurance. Our policy
is to fund the cost of medical benefits in amounts determined at the
discretion of management.
2003 2002
---------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year....... $ 9,099 $ 7,729
Service cost.................................. 322 278
Interest cost................................. 661 595
Participant contributions..................... 36 46
Actuarial loss................................ 3,631 676
Benefits paid................................. (206) (225)
-------- ---------
Benefit obligation at end of year............. $ 13,543 $ 9,099
======== =========
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ -
Employer contributions........................ 170 179
Participant contributions..................... 36 46
Benefits paid................................. (206) (225)
-------- ---------
Fair value of plan assets at end of year...... $ - $ -
======== =========
Reconciliation of funded status:
Funded status................................. $(13,543) $ (9,099)
Unrecognized net gain......................... (5,413) (9,957)
-------- ---------
Net liability recognized...................... $(18,956) $ (19,056)
======== =========
All of the net liability recognized in the reconciliation of funded status
is included as an accrued benefit liability in the consolidated balance
sheets. In determining the above information, we assumed a discount rate of
6.15% and 7.30% at the measurement dates of June 30, 2003 and 2002,
respectively.
The components of the fiscal year net periodic postretirement benefit cost
are as follows:
2003 2002 2001
---------------------------------------------------------------------------
Service cost................................. $ 322 $ 278 $ 247
Interest cost................................ 661 595 537
Net amortization............................. (914) (1,113) (1,282)
------ ------ ------
Net periodic benefit (income) cost........... $ 69 $ (240) $ (498)
====== ====== ======
F-19
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
9. POSTRETIREMENT BENEFIT PLAN (continued)
For measurement purposes, a 12.0% and 12.5% annual rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 2004 for plan participants under age 65 and age 65 or older,
respectively. These trend rate assumptions decrease in each successive year
until reaching 5.0% in 2014. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by 1.0% percent in each year would
increase the accumulated postretirement benefit obligation as of September
28, 2003 by $2,325, or 17.2%, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 2003 by
$199, or 20.2%.
10. STOCK-BASED EMPLOYEE COMPENSATION
We offer stock plans to attract, retain and motivate key officers,
non-employee directors and employees to work toward the future financial
success of the Company. All of the Plans are administered by the
Compensation Committee of the Board of Directors and have been approved by
the stockholders of the Company.
In January 1992, we adopted the 1992 Employee Stock Incentive Plan (the
"1992 Plan") and, as part of a merger, assumed outstanding options to
employees under our predecessor's 1990 Stock Option Plan. Under the 1992
Plan, employees are eligible to receive stock options, restricted stock and
other various stock-based awards. Subject to certain adjustments, up to a
maximum of 3,775,000 shares of common stock may be sold or issued under the
1992 Plan. No awards shall be granted after January 3, 2002, although
common stock may be issued thereafter pursuant to awards granted prior to
such date.
In August 1993, we adopted the 1993 Stock Option Plan (the "1993 Plan").
Under the 1993 Plan, employees who do not receive stock options under the
1992 Plan are eligible to receive annually stock options with an aggregate
exercise price equivalent to a percentage of their eligible earnings.
Subject to certain adjustments, up to a maximum of 3,000,000 shares of
common stock may be sold or issued under the 1993 Plan. No awards shall be
granted after February 12, 2003, although common stock may be issued
thereafter pursuant to awards granted prior to such date.
In February 1995, we adopted the Non-Employee Director Stock Option Plan
(the "Director Plan"). Under the Director Plan, any eligible director of
Jack in the Box Inc. who is not an employee of the Company or its
subsidiaries is granted annually an option to purchase shares of common
stock at fair market value. The actual number of shares that may be
purchased under the option is based on the relationship of a portion of
each director's compensation to the fair market value of the common stock,
but is limited to a maximum of 10,000 shares annually. Subject to certain
adjustments, up to a maximum of 650,000 shares of common stock may be sold
or issued under the Director Plan. Unless sooner terminated, no awards
shall be granted after February 17, 2005, although common stock may be
issued thereafter pursuant to awards granted prior to such date.
In February 2002, we adopted the Jack in the Box Inc. 2002 Stock Incentive
Plan (the "2002 Plan"), to continue the objectives of the 1992 Employee
Stock Incentive Plan. Under the 2002 Plan, officers and other key employees
are eligible to receive stock options and incentive stock awards. Subject
to certain adjustments, up to a maximum of 1,900,000 shares of common stock
may be sold or issued under the 2002 Plan.
The terms and conditions of the stock-based awards under the plans are
determined by the Compensation Committee of the Board of Directors on each
award date and may include provisions for the exercise price, expirations,
vesting, restriction on sales and forfeiture, as applicable. Options
granted under the plans have terms not exceeding 11 years and provide for
an option exercise price of not less than 100% of the quoted market value
of the common stock at the date of grant.
F-20
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
10. STOCK-BASED EMPLOYEE COMPENSATION (continued)
The following is a summary of stock option activity for the three fiscal
years ended September 28, 2003:
Option exercise price per share
-------------------------------
Weighted-
Shares Range average
-----------------------------------------------------------------------------------------------
Balance at October 1, 2000................... 4,056,430 $ 1.13 - 26.63 $15.16
Granted..................................... 996,699 26.00 - 32.77 26.27
Exercised................................... (935,373) 1.13 - 26.63 8.51
Canceled.................................... (119,655) 5.75 - 26.63 23.20
---------
Balance at September 30, 2001................ 3,998,101 4.19 - 32.77 19.24
Granted..................................... 815,341 23.00 - 31.87 25.01
Exercised................................... (518,068) 22.52 - 34.09 29.56
Canceled.................................... (114,442) 7.50 - 26.63 24.42
---------
Balance at September 29, 2002................ 4,180,932 4.19 - 32.77 21.12
Granted..................................... 879,196 22.98 - 15.37 20.71
Exercised................................... (42,002) 15.94 - 23.29 20.41
Canceled.................................... (126,233) 5.75 - 26.63 23.14
---------
Balance at September 28, 2003................ 4,891,893 4.19 - 32.77 21.10
=========
The following is a summary of stock options outstanding at September 28,
2003:
Options outstanding Options exercisable
--------------------------------------------------- -----------------------------
Weighted-average Weighted- Weighted-
Range of Number remaining contractual average Number average
exercise prices outstanding life in years exercise price exercisable exercise price
------------------------------------------------------------------------------------------------------
$ 4.19 - 19.06 1,394,099 3.84 $ 13.11 1,367,099 $ 13.06
19.51 - 23.25 1,385,973 8.27 21.87 422,790 22.96
23.88 - 26.00 1,627,820 8.01 25.46 706,624 25.48
26.63 - 32.77 484,001 6.40 27.19 378,387 26.90
--------- ---------
4.19 - 32.77 4,891,893 6.74 21.10 2,874,900 19.39
========= =========
At September 28, 2003, September 29, 2002 and September 30, 2001, the
number of options exercisable were 2,874,900, 2,228,821 and 2,158,151,
respectively, and the weighted-average exercise prices of those options
were $19.39, $17.71, and $14.81, respectively.
The weighted-average fair value of options granted was $9.18 in 2003,
$11.35 in 2002 and $12.70 in 2001. The fair value of each option granted
has been estimated on the date of grant using the Black-Scholes
option-pricing model. Valuation models require the input of highly
subjective assumptions, including the expected volatility of the stock
price. Therefore, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the value of employee
stock options. The following weighted-average assumptions were used for
stock option grants in each fiscal year:
2003 2002 2001
--------------------------------------------------------------------------
Risk-free interest rate...................... 3.6% 4.2% 5.8%
Volatility................................... 40.0% 40.0% 40.0%
Dividends.................................... 0.0% 0.0% 0.0%
Expected life................................ 6 years 6 years 6 years
F-21
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
10. STOCK-BASED EMPLOYEE COMPENSATION (continued)
The Company awarded 252,600 shares of restricted stock to certain
executives during fiscal year 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. In 2003, $497 was expensed in connection with these awards.
11. STOCKHOLDERS' EQUITY
Preferred stock - We have 15,000,000 shares of preferred stock authorized
for issuance at a par value of $.01 per share. No preferred shares have
been issued.
On July 26, 1996, the Board of Directors declared a dividend of one
preferred stock purchase right (a "Right") for each outstanding share of
our common stock, which Rights expire on July 26, 2006. Each Right entitles
a stockholder to purchase for an exercise price of $40, subject to
adjustment, one one-hundredth of a share of the Company's Series A Junior
Participating Cumulative Preferred Stock, or, under certain circumstances,
shares of common stock of Jack in the Box Inc. or a successor company with
a market value equal to two times the exercise price. The Rights would only
become exercisable for all other persons when any person acquires a
beneficial interest of at least 20% of the Company's outstanding common
stock. The Rights have no voting privileges and may be redeemed by the
Board of Directors at a price of $.001 per Right at any time prior to or
shortly after the acquisition of a beneficial ownership of 20% of the
outstanding common shares. There are 383,486 shares of Series A Junior
Participating Cumulative Preferred Stock reserved for issuance upon
exercise of the Rights.
Treasury stock - Pursuant to a stock repurchase program authorized by our
Board of Directors, the Company repurchased 2,566,053, 1,208,200, and
35,800 shares of our common stock for approximately $50,157, $33,287 and
$759 during 2003, 2002 and 2001, respectively. At September 28, 2003, we
had no repurchase availability remaining.
Accumulated other comprehensive loss - Minimum pension liability
adjustments comprise the only components of accumulated other comprehensive
loss at September 28, 2003 and September 29, 2002.
F-22
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
12. AVERAGE SHARES OUTSTANDING
Net earnings per share for each fiscal year is based on the
weighted-average number of common shares outstanding during the year,
determined as follows (in thousands):
2003 2002 2001
---------------------------------------------------------------------------
Shares outstanding, beginning of fiscal year.... 38,558 39,248 38,348
Effect of common stock issued................... 15 274 470
Effect of common stock reacquired............... (2,100) (200) (27)
------ ------ ------
Weighted-average shares outstanding - basic..... 36,473 39,322 38,791
Assumed additional shares issued upon exercise
of stock options, net of shares reacquired
at the average market price.................... 288 790 989
Effect of restricted stock issued............... 207 - -
------ ------ ------
Weighted-average shares outstanding - diluted... 36,968 40,112 39,780
====== ====== ======
The diluted weighted-average shares outstanding computation excludes
3,546,906, 468,050 and 496,125 antidilutive stock options in 2003, 2002 and
2001, respectively.
13. COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
Commitments - During fiscal year 2003, the Company entered into a purchase
agreement to sell 25 company-operated restaurants to an existing
franchisee, subject to certain conditions. Though September 28, 2003, 12 of
the restaurants had been converted, and the remaining 13 restaurants are
expected to convert during the first and second quarters of fiscal year
2004.
The Company is principally liable for lease obligations on various
properties sub-leased to third parties. We are also obligated under lease
guarantee agreements associated with two Chi Chi's restaurant properties.
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 two guarantee agreements, as well as three other lease agreements. As
of September 28, 2003, we had accrued approximately $2,625 in connection
with these lease obligations, which expire over the respective lease terms
ending in 2010 and 2011. The Company anticipates it will not incur any
additional charges related to the Chi Chi's bankruptcy in future years.
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 $9,300 without admission of liability, and the
Court approved the settlement on February 10, 2003. Through September 28,
2003 the Company has paid out approximately $8,100 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 pending legal proceedings, asserted legal
claims and known potential legal claims should not materially affect our
operating results, financial position and liquidity.
Guarantees - The Company's wholly owned subsidiary Foodmaker International
Franchising Inc. (the "Subsidiary Guarantor") guarantees, fully and
unconditionally, its $125,000 senior subordinated notes. The Subsidiary
Guarantor has no significant operations or any significant assets or
liabilities other than the guaranty of indebtedness of the Company, and
therefore, no separate financial statements of the Subsidiary Guarantor are
presented.
F-23
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
14. SEGMENT REPORTING
Prior to the acquisition of Qdoba Restaurant Corporation, the Company
operated its business in a single segment. Subsequent to the acquisition,
the Company has two operating segments, JACK IN THE BOX and Qdoba, based on
the Company's management structure and method of internal reporting. 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:
2003 2002 2001
---------------------------------------------------------------------------
Revenues ........................ $2,038,292 $1,966,360 $1,833,576
Earnings from operations......... 139,591 148,550 154,813
Capital expenditures............. 108,438 142,588 166,522
Total assets..................... 1,167,185 1,063,444 1,029,822
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:
2003 2002 2001
---------------------------------------------------------------------------
Revenues......................... $2,038,292 $1,966,360 $1,833,576
Qdoba revenues and other ........ 19,998 - -
---------- ---------- ----------
Consolidated revenues............ $2,058,290 $1,966,360 $1,833,576
========== ========== ==========
A reconciliation of reportable segment earnings from operations to
consolidated earnings from operations follows:
2003 2002 2001
---------------------------------------------------------------------------
Earnings from operations......... $ 139,591 $ 148,550 $ 154,813
Qdoba earnings from operations .. 633 - -
---------- ---------- ----------
Consolidated earnings from
operations...................... $ 140,224 $ 148,550 $ 154,813
========== ========== ==========
A reconciliation of reportable segment total assets to consolidated total
assets follows:
2003 2002 2001
---------------------------------------------------------------------------
Total assets..................... $1,167,185 $1,063,444 $1,029,822
Qdoba total assets............... 55,613 - -
Investment in Qdoba and other.... (46,848) - -
---------- ---------- ----------
Consolidated total assets........ $1,175,950 $1,063,444 $1,029,822
========== ========== ==========
F-24
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
15. SUPPLEMENTAL CASH FLOW INFORMATION
2003 2002 2001
---------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized...... $21,463 $21,670 $22,635
Income tax payments....................... 18,665 40,672 30,174
Capital lease obligations incurred......... 9,222 475 -
The consolidated statements of cash flows also exclude the following
non-cash transactions: (i) the use of sinking fund payments, which were
recorded as other current assets as of September 29, 2002 to retire
financing lease obligations during 2003; and (ii) non-cash proceeds from
the Company's financing of a portion of the sale of company-operated
restaurants to certain qualified franchisees in all years, included in
accounts receivable.
16. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Sept. 28, Sept. 29,
2003 2002
---------------------------------------------------------------------------
Accounts receivable:
Trade..................................... $ 8,460 $ 6,777
Construction advances..................... 870 1,942
Notes receivable.......................... 17,988 12,186
Other..................................... 4,951 5,581
Allowances for doubtful accounts.......... (687) (310)
--------- ---------
$ 31,582 $ 26,176
========= =========
Accrued liabilities:
Payroll and related taxes................. $ 49,853 $ 55,222
Sales and property taxes.................. 21,623 19,280
Insurance................................. 40,479 27,606
Advertising............................... 13,704 13,339
Other..................................... 50,250 52,453
--------- ---------
$ 175,909 $ 167,900
========= =========
F-25
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
17. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
12 weeks ended
16 weeks ended ---------------------------------------------
Fiscal year 2003 Jan. 19, 2003 Apr. 13, 2003 July 6, 2003 Sept. 28, 2003
-------------------------------------------------------------------------------------------------
Revenues.......................... $613,334 $463,349 $488,574 $493,033
Gross profit...................... 113,104 83,988 86,454 84,820
Net earnings...................... 21,160 16,319 19,772 16,367
Net earnings per share:
Basic......................... .57 .45 .55 .45
Diluted....................... .56 .44 .54 .45
12 weeks ended
16 weeks ended ---------------------------------------------
Fiscal year 2002 Jan. 20, 2002 Apr. 14, 2002 July 7, 2002 Sept. 29, 2002
-------------------------------------------------------------------------------------------------
Revenues.......................... $594,180 $447,630 $461,219 $463,331
Gross profit...................... 115,187 83,634 92,362 90,793
Net earnings...................... 26,674 18,186 24,202 13,984
Net earnings per share:
Basic......................... .68 .46 .61 .36
Diluted....................... .67 .45 .60 .35
18. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal year 2003, we adopted SFAS 142, Goodwill and
Other Intangible Assets, which establishes accounting and reporting
standards for goodwill and separable intangible assets. For more
information regarding the adoption of this Statement, refer to Note 3,
Intangible Assets.
In the first quarter of fiscal year 2003, we adopted the provisions of SFAS
143, Accounting for Asset Retirement Obligations, which addresses
accounting and reporting standards for legal obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. The adoption did not have a material impact on our
results of operations or financial position.
In the first quarter of fiscal year 2003, we adopted the provisions of SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement retains the fundamental provisions of SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, but addresses its significant implementation issues. The
adoption did not have a material impact on our results of operations or
financial position.
In the first quarter of fiscal year 2003, we adopted the provisions of SFAS
145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB
Statement 13, and Technical Corrections. SFAS 145 addresses inconsistencies
in accounting for sale-leaseback transactions and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
adoption did not have a material impact on our results of operations or
financial position.
In the first quarter of fiscal year 2003, we adopted the provisions of SFAS
146, Accounting for Costs Associated with Exit or Disposal Activities. This
Statement requires that costs associated with exit or disposal activities
be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The adoption impacts exit
liabilities recorded by the Company subsequent to December 31, 2002. The
adoption did not have a material impact on our results of operations or
financial position.
F-26
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
18. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS (continued)
In the first quarter of fiscal year 2003, we adopted the interim disclosure
requirements of FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which provides guidance on the recognition and
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. Effective
December 31, 2002, we adopted the initial recognition and measurement
provisions of this Interpretation. The adoption did not have a material
impact on our results of operations or financial position.
In the second quarter of fiscal year 2003, the Company adopted the
disclosure requirements of 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 compensation. We
account for our stock-based employee compensation under APB Opinion 25,
Accounting for Stock Issued to Employees.
In November 2002, FASB's Emerging Issues Task Force ("EITF") discussed
Issue 02-16, Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor. Issue 02-16 provides guidance on how
a customer should account for 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 adoption of the new accounting for other
supplier payments is effective for arrangements entered into or modified
after December 31, 2002. We have evaluated 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 effective in the first quarter of
fiscal year 2004, and do not expect the adoption of this Issue will have a
material impact on our operating results or financial condition.
In January 2003, FASB issued Interpretation 46, Consolidation of Variable
Interest Entities - an interpretation of Accounting Research Bulletin No.
51 which requires companies that control another entity through interests
other than voting interests to 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 FASB has delayed the requirements of this
Interpretation until the first fiscal year or interim period ending after
December 15, 2003. The Company has assessed the impact that Interpretation
46 may have on its consolidated financial statements, and concluded that
the continued consolidation of the Company's marketing funds is
appropriate. Based on a review of the franchise agreements and after
considering the policies and procedures the Company has in place related to
franchising activities, the Company has determined that the franchise
arrangements entered into after January 31, 2003 do not result in these
franchises qualifying as variable interest entities, and as such,
consolidation of these franchises is not required. We will continue to
monitor this literature to determine if any changes will have an impact on
the Company.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which 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 generally 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. The adoption of SFAS 149 did not have a material impact on
our operating results or financial condition.
F-27
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
18. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS (continued)
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. The adoption of
SFAS 150 has not had, and is not expected to have, a material impact on our
operating results or financial condition.
In May 2003, the Emerging Issues Task Force released Issue 01-8,
Determining Whether an Arrangement Contains a Lease. This Issue requires
the reporting of revenue as rental or leasing income that was previously
reported as part of product sales or services revenue and applies to new or
modified arrangements beginning after May 28, 2003. The adoption of Issue
01-8 did not have a material impact on our operating results or financial
condition.
F-28