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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 11, 2004
Commission file no. 1-9390
JACK IN THE BOX INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2698708
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
9330 BALBOA AVENUE, SAN DIEGO, CA 92123
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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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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of shares of common stock, $.01 par value, outstanding as of the close of
business May 18, 2004 -36,489,625.
1
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
Page
----
PART I
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets......................... 3
Unaudited Consolidated Statements of Earnings................. 4
Unaudited Consolidated Statements of Cash Flow................ 5
Notes to Unaudited Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 19
Item 4. Controls and Procedures....................................... 19
PART II
Item 1. Legal Proceedings............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders........... 20
Item 6. Exhibits and Reports on Form 8-K.............................. 21
Signature..................................................... 23
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 11, September 28,
2004 2003
- --------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................... $ 11,116 $ 22,362
Accounts and notes receivable, net........... 28,236 31,582
Inventories.................................. 33,054 31,699
Prepaid expenses and other current assets.... 21,524 21,056
Assets held for sale and leaseback........... 126,603 41,916
----------- -----------
Total current assets....................... 220,533 148,615
----------- -----------
Property and equipment, net..................... 881,257 866,960
Goodwill........................................ 90,218 90,218
Intangible assets, net.......................... 28,635 29,640
Other assets, net............................... 43,088 40,517
----------- -----------
TOTAL...................................... $ 1,263,731 $ 1,175,950
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 8,860 $ 12,334
Accounts payable............................. 56,803 51,031
Accrued expenses............................. 206,205 174,369
----------- -----------
Total current liabilities.................. 271,868 237,734
----------- -----------
Deferred income taxes........................... 41,510 33,910
Long-term debt, net of current maturities....... 303,928 290,746
Other long-term liabilities..................... 138,199 143,238
Stockholders' equity:
Common stock................................. 434 432
Capital in excess of par value............... 327,897 325,510
Retained earnings............................ 335,894 300,682
Accumulated other comprehensive loss, net.... (27,184) (27,184)
Unearned compensation........................ (4,352) (4,655)
Treasury stock............................... (124,463) (124,463)
----------- -----------
Total stockholders' equity................. 508,226 470,322
----------- -----------
TOTAL...................................... $ 1,263,731 $ 1,175,950
=========== ===========
See accompanying notes to consolidated financial statements.
3
JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------- -------------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Restaurant sales.............................. $ 459,709 $ 418,272 $ 1,057,421 $ 977,703
Distribution and other sales.................. 39,495 24,282 83,165 52,424
Franchise rents and royalties................. 13,035 10,496 34,252 27,997
Other......................................... 5,027 10,298 12,348 18,559
---------- ---------- ----------- -----------
517,266 463,348 1,187,186 1,076,683
---------- ---------- ----------- -----------
Costs of revenues:
Restaurant costs of sales..................... 139,397 125,515 327,846 296,743
Restaurant operating costs.................... 238,495 224,264 551,634 518,323
Costs of distribution and other sales......... 38,848 23,789 81,755 51,281
Franchised restaurant costs................... 7,243 5,804 16,184 13,244
---------- ---------- ----------- -----------
423,983 379,372 977,419 879,591
---------- ---------- ----------- -----------
Selling, general and administrative............. 58,490 51,854 133,902 122,582
---------- ---------- ----------- -----------
Earnings from operations........................ 34,793 32,122 75,865 74,510
Interest expense................................ 4,074 5,802 19,973 14,061
---------- ---------- ----------- -----------
Earnings before income taxes.................... 30,719 26,320 55,892 60,449
Income taxes.................................... 11,114 10,001 20,680 22,970
---------- ---------- ----------- -----------
Net earnings.................................... $ 19,605 $ 16,319 $ 35,212 $ 37,479
========== ========== =========== ===========
Net earnings per share:
Basic......................................... $ .54 $ .45 $ .98 $ 1.02
Diluted....................................... $ .53 $ .44 $ .96 $ 1.00
Weighted-average shares outstanding:
Basic......................................... 36,115 36,399 36,077 36,866
Diluted....................................... 36,811 36,846 36,694 37,306
See accompanying notes to consolidated financial statements.
4
JACK IN THE BOX INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Twenty-Eight Weeks Ended
--------------------------------
April 11, April 13,
2004 2003
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings.............................................................. $ 35,212 $ 37,479
Non-cash items included in operations:
Depreciation and amortization........................................... 41,250 37,217
Amortization of unearned compensation .................................. 303 234
Deferred finance cost amortization...................................... 967 1,595
Provision for deferred income taxes..................................... 7,600 7,616
Loss on early retirement of debt........................................ 9,180 -
Gains on the conversion of company-operated restaurants................... (9,274) (16,595)
Changes in assets and liabilities, excluding the effect of the Qdoba
acquisition:
Increase in receivables................................................. (4,550) (5,100)
Increase in inventories................................................. (1,355) (1,904)
Decrease (increase) in prepaid expenses and other current assets........ (468) 6,069
Increase (decrease) in accounts payable................................. 5,772 (18,617)
Increase in other liabilities........................................... 47,343 19,687
----------- -----------
Cash flows provided by operating activities............................. 131,980 67,681
----------- -----------
Cash flows from investing activities:
Additions to property and equipment....................................... (61,294) (49,223)
Purchase of Qdoba, net of $2,856 cash acquired............................ - (42,606)
Dispositions of property and equipment.................................... 3,264 18,543
Proceeds from the conversion of company-operated restaurants.............. 8,491 2,228
Increase in assets held for sale and leaseback............................ (81,262) (9,065)
Collections on notes receivable........................................... 13,208 12,251
Pension contributions..................................................... (17,000) (4,400)
Other..................................................................... (5,848) (2,643)
----------- -----------
Cash flows used in investing activities................................. (140,441) (74,915)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving bank loans..................................... 45,000 479,500
Principal repayments under revolving bank loans........................... (40,000) (506,500)
Proceeds from term loans.................................................. 275,000 150,000
Principal payments on long-term debt, including current maturities........ (278,296) (55,521)
Debt issuance and debt repayment costs.................................... (6,878) (7,586)
Repurchase of common stock................................................ - (50,157)
Proceeds from issuance of common stock.................................... 2,389 120
----------- -----------
Cash flows provided by (used in) financing activities................... (2,785) 9,856
----------- -----------
Net increase (decrease) in cash and cash equivalents........................ $ (11,246) $ 2,622
=========== ===========
See accompanying notes to consolidated financial statements.
5
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. GENERAL
The accompanying unaudited consolidated financial statements of Jack in the
Box Inc. (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United
States of America and the rules and regulations of the Securities and
Exchange Commission ("SEC"). In our opinion, all adjustments considered
necessary for a fair presentation of financial condition and results of
operations for the interim periods have been included. Operating results
for any interim period are not necessarily indicative of the results for
any other interim period or for the full year. Our fiscal year is 52 or 53
weeks ending the Sunday closest to September 30. Fiscal year 2004 includes
53 weeks and fiscal year 2003 includes 52 weeks. Our first quarter includes
16 weeks and each remaining quarter includes 12 weeks, with the exception
of the fourth quarter of fiscal year 2004 which will include 13 weeks.
Certain financial statement reclassifications have been made in the prior
year to conform to the current year presentation. These financial
statements should be read in conjunction with the notes to the fiscal year
2003 consolidated financial statements contained in our Annual Report on
Form 10-K filed with the SEC.
2. STOCK-BASED EMPLOYEE COMPENSATION
Stock awards are accounted for under Accounting Principles Board Opinion
25, Accounting for Stock Issued to Employees, using the intrinsic method.
Under this method, 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 Statement of Financial Accounting Standards ("SFAS") 123,
Accounting for Stock-Based Compensation, we would have recorded net
earnings as follows:
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- --------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------
Net earnings, as reported................... $ 19,605 $ 16,319 $ 35,212 $ 37,479
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of taxes....... 1,427 1,264 3,144 2,918
--------- --------- --------- ---------
Pro forma net earnings..................... $ 18,178 $ 15,055 $ 32,068 $ 34,561
--------- --------- --------- ---------
Net earnings per share:
Basic-as reported......................... $ .54 $ .45 $ .98 $ 1.02
Basic-pro forma........................... $ .50 $ .41 $ .89 $ .94
Diluted-as reported....................... $ .53 $ .44 $ .96 $ 1.00
Diluted-pro forma......................... $ .49 $ .41 $ .87 $ .93
3. ACCOUNTING CHANGES
In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS 132 Revised, Employers' Disclosures about Pensions and Other Post
Retirement Benefits. This Statement requires revisions to employers'
disclosures about pension plans and other post retirement plans. In the
second quarter, we adopted the interim period disclosure requirements which
are included in Note 7, Net Periodic Benefit Costs. The annual disclosure
requirements will be effective for fiscal year 2004.
6
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
4. CURRENT ASSETS
In the second quarter of fiscal year 2004, we exercised our purchase option
under certain lease agreements and acquired 80 restaurant properties for
approximately $85,000. We intend to resell and leaseback these properties
over the balance of the fiscal year and achieve more favorable rental
rates, and as such, they have been classified as current assets.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at April 11, 2004 and September
28, 2003:
2004 2003
---------------------------------------------------------------------------
Amortized intangible assets:
Gross carrying amount.................. $ 60,785 $ 61,069
Less: accumulated amortization......... 40,950 40,229
---------- ----------
Net carrying amount.................... $ 19,835 $ 20,840
========== ==========
Unamortized intangible assets:
Goodwill............................... $ 90,218 $ 90,218
Qdoba trademark........................ 8,800 8,800
---------- ----------
$ 99,018 $ 99,018
========== ==========
Amortized intangible assets include lease acquisition costs and acquired
franchise contracts. Lease acquisition costs represent the fair values of
acquired lease contracts having contractual rents lower than fair market
rents, and are amortized on a straight-line basis over the remaining lease
term. Acquired franchise contracts are amortized over the term of the
franchise agreements based on the projected royalty revenue stream. The
weighted-average life of the amortized intangible assets is approximately
28 years. Total amortization expense related to intangible assets was $441
and $477 in the quarter and $1,054 and $1,116 year-to-date in 2004 and
2003, respectively. The estimated amortization expense for each fiscal year
through 2008 ranges from approximately $1,400 to $1,800.
6. INDEBTEDNESS
New Financing. On January 8, 2004, we secured a new senior term loan and
amended our revolving credit facility, each with extended maturities. Our
new financing is intended to provide a more flexible capital structure,
facilitate the execution of our strategic plan, and decrease borrowing
costs by approximately $3,000 per year on average over the term of our new
term loan.
Our credit facility provides borrowings in the aggregate amount of $475,000
and is comprised of: (i) a $200,000 revolving credit facility maturing on
January 8, 2008 with a rate of London Interbank Offered Rate ("LIBOR") plus
2.25% and (ii) a $275,000 term loan maturing on January 8, 2011 with a rate
of LIBOR plus 2.75%. The credit facility requires the payment of an annual
commitment fee based on the unused portion of the credit facility. The
annual commitment rate and the credit facility's interest rates are based
on a financial leverage ratio, as defined in the credit agreement. The
Company and certain of its subsidiaries granted liens in substantially all
personal property assets to secure our respective obligations under the
credit facility. Under certain circumstances, the Company and each of its
certain subsidiaries will be required to grant liens in certain real
property assets to secure their respective obligations under the new credit
facility. Additionally, certain of our real and personal property secure
other indebtedness of the Company. At April 11, 2004, we had borrowings of
$5,000 under our revolving credit facility and letters of credit
outstanding of approximately $33,372.
We are subject to a number of covenants under our various debt instruments,
including limitations on additional borrowings, acquisitions, loans to
franchisees, capital expenditures, lease commitments and dividend payments,
as well as requirements to maintain certain financial ratios, cash flows
and net worth. As of April 11, 2004, we were in compliance with all the
debt covenants.
Debt Extinguishment. We used the proceeds from the new term loan to
refinance our existing $150,000 term loan and redeem $125,000 of 8 3/8%
senior subordinated notes due April 15, 2008, which resulted in a charge to
interest expense of approximately $9,200.
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
7. NET PERIODIC BENEFIT COST
We have non-contributory defined benefit pension plans covering those
employees meeting certain eligibility requirements. The components of net
defined benefit pension costs for each period is presented below:
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- ---------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Service cost............................... $ 1,857 $ 1,387 $ 4,333 $ 3,236
Interest cost.............................. 2,417 2,105 5,639 4,912
Expected return on plan assets............. (1,626) (1,528) (3,795) (3,566)
Recognized actuarial loss.................. 1,279 562 2,984 1,311
Net amortization........................... 339 181 792 423
-------- -------- -------- --------
Net periodic pension cost.................. $ 4,266 $ 2,707 $ 9,953 $ 6,316
======== ======== ======== ========
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. The
components of net periodic postretirement benefit cost for each period is
presented below:
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- ---------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Service cost............................... $ 60 $ 77 $ 139 $ 173
Interest cost.............................. 190 158 444 356
Net amortization........................... (116) (219) (272) (492)
-------- -------- -------- --------
Net periodic postretirement benefit cost... $ 134 $ 16 $ 311 $ 37
======== ======== ======== ========
8. INCOME TAXES
The income tax provisions reflect the projected annual tax rates for 2004
and 2003 of 37.0% and 38.0%, respectively. During the quarter, we reduced
our projected annual tax rate for 2004 to 37% from 38%, primarily as a
result of the company's ongoing tax-planning initiatives. The fiscal 2003
income tax provision was adjusted to the effective annual rate of 36.2% of
pretax earnings, resulting from the favorable resolution of a long-standing
tax matter. The final 2004 annual tax rate cannot be determined until the
end of the fiscal year; therefore, the actual rate could differ from our
current estimates.
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
9. AVERAGE SHARES OUTSTANDING
Net earnings per share for each period is based on the weighted-average
number of shares outstanding during the period, determined as follows (in
thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------- ---------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------
Shares outstanding, beginning of fiscal year... 36,034 38,558 36,034 38,558
Effect of common stock issued.................. 81 11 43 7
Effect of common stock reacquired.............. - (2,170) - (1,699)
------- ------- ------- -------
Weighted-average shares outstanding - basic.... 36,115 36,399 36,077 36,866
Assumed additional shares issued upon
exercise of stock options, net of shares
reacquired at the average market price........ 621 229 440 267
Effect of restricted stock issued.............. 75 218 177 173
------- ------- ------- -------
Weighted-average shares outstanding - diluted.. 36,811 36,846 36,694 37,306
======= ======= ======= =======
Stock options excluded (1)..................... 2,010 4,044 2,020 3,603
======= ======= ======= =======
(1) Excluded from diluted weighted-average shares outstanding because
their exercise prices exceeded the average market price of common
stock for the period.
10. CONTINGENCIES AND LEGAL MATTERS
The Company is principally liable for lease obligations on various
properties sub-leased to third parties. We are also obligated under a lease
guarantee agreement associated with one Chi-Chi's restaurant property. Due
to the bankruptcy of the Chi-Chi's restaurant chain, previously owned by
the Company, we are obligated to perform in accordance with the terms of
the guarantee agreement, as well as four other lease agreements which
expire at various dates in 2010 and 2011. During fiscal year 2003, we
established an accrual for these lease obligations and do not anticipate
incurring any additional charges related to the Chi-Chi's bankruptcy in
future years.
Legal Proceedings - The Company is also subject to normal and routine
litigation. In the opinion of management, based in part on the advice of
legal counsel, the ultimate liability from all pending legal proceedings,
asserted legal claims and known potential legal claims should not
materially affect our operating results, financial position or liquidity.
11. SEGMENT REPORTING
Prior to the acquisition of Qdoba, the Company operated its business in a
single segment. Subsequent to the Qdoba acquisition the Company has two
operating segments, JACK IN THE BOX and Qdoba, based on the Company's
management structure and internal method of reporting. Based upon certain
quantitative thresholds, only JACK IN THE BOX is considered a reportable
segment.
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
11. SEGMENT REPORTING (continued)
Summarized financial information concerning our reportable segment is shown
in the following table:
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------------- -------------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------
Revenues................................... $ 509,082 $ 457,258 $ 1,169,321 $ 1,070,593
Earnings from operations................... 34,871 31,895 76,281 74,283
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:
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------------- -------------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------
Revenues................................... $ 509,082 $ 457,258 $ 1,169,321 $ 1,070,593
Other...................................... 8,184 6,090 17,865 6,090
---------- ---------- ----------- -----------
Consolidated revenues...................... $ 517,266 $ 463,348 $ 1,187,186 $ 1,076,683
========== ========== =========== ===========
A reconciliation of reportable segment earnings from operations to
consolidated earnings from operations follows:
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------------- -------------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------
Earnings from operations................... $ 34,871 $ 31,895 $ 76,281 $ 74,283
Other...................................... (78) 227 (416) 227
---------- ---------- ----------- -----------
Consolidated earnings from operations...... $ 34,793 $ 32,122 $ 75,865 $ 74,510
========== ========== =========== ===========
12. SUPPLEMENTAL CASH FLOW INFORMATION
The consolidated statements of cash flows exclude the following non-cash
transactions: (i) equipment capital lease commitments of $7,908 in 2004;
(ii) non-cash proceeds from the Company's short-term financing of a portion
of the sale of company-operated restaurants to certain qualified
franchisees of $5,264 and $17,035 in 2004 and 2003, respectively, included
in accounts receivable; and (iii) the use of sinking fund payments to
retire financing lease obligations during 2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
All comparisons under this heading between 2004 and 2003 refer to the
12-week ("quarter") and 28-week ("year-to-date") periods ended April 11, 2004
and April 13, 2003, respectively, unless otherwise indicated.
The Company acquired Qdoba Restaurant Corporation ("Qdoba"), operator and
franchiser of Qdoba Mexican Grill(R), on January 21, 2003. As such, Qdoba's
results of operations are not reflected in the consolidated results for the
first quarter of fiscal year 2003.
Overview
Jack in the Box Inc. (the "Company") owns, operates and franchises JACK IN
THE BOX(R) quick-service restaurants and Qdoba Mexican Grill ("Qdoba")
fast-casual restaurants. As of April 11, 2004, the JACK IN THE BOX system
included 1,973 restaurants, of which 1,552 were company-operated and 421 were
franchise-operated. JACK IN THE BOX restaurants are located primarily in the
western and southern United States. As of April 11, 2004, the Qdoba Mexican
Grill system included 138 restaurants.
The Company's primary source of revenue is from the sale of food and
beverages at company-operated restaurants. The Company also derives revenue from
distribution sales to JACK IN THE BOX and Qdoba franchises, retail sales from
fuel and convenience stores ("QUICK STUFF(R)"), royalties from franchised
restaurants, rents from real estate leased to certain franchisees, franchise
fees, and the sale of company-operated restaurants to franchisees.
The quick-serve restaurant industry has become more complex and challenging
in recent years. Challenges presently facing the sector include higher levels of
consumer expectations, intense competition with respect to market share,
restaurant locations, labor, and menu and product development, the emergence of
a new fast-casual restaurant segment, changes in the economy and trends for
healthier eating.
To address these challenges and others, and support our goal of
transitioning to a national restaurant company, management has developed a two
part strategic plan centered around brand reinvention and multifaceted growth.
Brand reinvention initiatives include product innovation with a focus on
high-quality products, enhancements to the quality of service and renovation to
the restaurant facility. Our multifaceted growth strategy includes growing our
restaurant base, increasing our franchising activities, expanding our
proprietary QUICK STUFF fuel and convenience store concept and continuing to
grow Qdoba. We believe that brand reinvention will differentiate us from our
competition and that our growth strategy will support us in our objective to
become a national restaurant company.
The following summarizes the most significant events occurring in fiscal
year 2004:
o Increase in Company-operated Restaurant Sales. New product
introductions and quality improvements to existing products have
resulted in increased sales trends in the quarter and year-to-date,
which are expected to continue. We project sales at JACK IN THE BOX
restaurants open more than one fiscal year ("same-store sales") to
increase 3.0% to 3.5% in the third quarter and grow 4.0% to 4.5% in
fiscal year 2004.
o Increase in Restaurant Costs of Sales. In 2004, restaurant costs of
sales have been unfavorably impacted by higher commodity costs,
primarily beef. Beef costs were approximately 6% higher than a year
ago in the quarter and 13% year-to-date, but are expected to moderate
during the remainder of the year.
o Refinancing Transaction. In the first quarter of fiscal year 2004, we
secured new financing intended to provide a more flexible capital
structure, facilitate the execution of our strategic plan, and
decrease borrowing costs. In connection with the refinancing, we
recorded a $9.2 million charge to interest expense for the early
retirement of debt. In addition to providing us with a more flexible
capital structure, this refinancing transaction is expected to lower
our borrowing costs by approximately $3 million per year on average
over the life of our new term loan.
o Purchase Option. In the second quarter of fiscal year 2004, we
exercised our purchase option under certain lease agreements and
acquired 80 restaurant properties for approximately $85 million. We
intend to resell and leaseback these properties over the balance of
the fiscal year and achieve more favorable rental rates.
11
o Brand Reinvention Progress. We converted two JACK IN THE BOX
restaurants in San Diego that will serve as learning labs for our
brand reinvention initiative. These fast-casual restaurants feature an
upgraded menu, a total redesign to the interior and exterior of the
restaurant facility, a higher level of guest service and a new brand
name, JBX(TM). The results of these two concept restaurants will be
evaluated, and we plan to expand the test to selected restaurants in
two additional markets, Bakersfield, California and Boise, Idaho, by
calendar year-end. We are also planning to expand the test to a fourth
market in fiscal year 2005. As we have stated previously, following
our testing period, any expansion of brand reinvention is anticipated
to take four to five years, and will occur only after evaluation of
our market testing.
o Innovation Center. We have also opened our new Innovation Center,
which unites research and development with product marketing and other
key support functions. The Innovation Center will help us research
evolving consumer preferences, develop new products and design new
restaurant processes and equipment.
o Annual Income Tax Rate. In the quarter, we reduced our estimated
annual tax rate to 37% from 38%, primarily as a result of our ongoing
tax-planning initiatives.
The following table sets forth, unless otherwise indicated, the percentage
relationship to total revenues of certain items included in the Company's
statements of earnings.
STATEMENTS OF EARNINGS DATA
Twelve Weeks Ended Twenty-Eight Weeks Ended
-------------------- ------------------------
April 11, April 13, April 11, April 13,
2004 2003 2004 2003
------------------------------------------------------------------------------------------------
Revenues:
Restaurant sales........................... 88.9% 90.3% 89.1% 90.8%
Distribution and other sales............... 7.6 5.2 7.0 4.9
Franchise rents and royalties.............. 2.5 2.3 2.9 2.6
Other...................................... 1.0 2.2 1.0 1.7
----- ----- ----- -----
Total revenues........................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Costs of revenues:
Restaurant costs of sales (1).............. 30.3% 30.0% 31.0% 30.4%
Restaurant operating costs (1)............. 51.9 53.6 52.2 53.0
Costs of distribution and other sales (1).. 98.4 98.0 98.3 97.8
Franchise restaurant costs (1)............. 55.6 55.3 47.2 43.7
Total costs of revenues.................. 82.0 81.9 82.3 81.7
Selling, general and administrative.......... 11.3 11.2 11.3 11.4
Earnings from operations................. 6.7 6.9 6.4 6.9
(1) As a percentage of the related sales and/or revenues.
The following table summarizes the number of restaurants as of April 11,
2004 and April 13, 2003:
SYSTEMWIDE UNITS
2004 2003
----------------------------------------------------------------------------
JACK IN THE BOX:
Company-operated........................... 1,552 1,527
Franchised................................. 421 370
------ ------
Total system............................... 1,973 1,897
====== ======
Consolidated:
Company-operated........................... 1,594 1,556
Franchised................................. 517 433
------ ------
Total system............................... 2,111 1,989
====== ======
12
Revenues
Restaurant sales were $459.7 million and $1,057.4 million, respectively, in
2004 compared with $418.3 million and $977.7 million in 2003. This growth
primarily reflects an increase in sales at JACK IN THE BOX company-operated
restaurants, growth in the number of company-operated restaurants and additional
sales from Qdoba company-operated restaurants, which were acquired in the second
quarter of 2003. Same-store sales at JACK IN THE BOX restaurants increased 8.2%
and 5.2%, respectively, in 2004 compared with 2003, primarily due to the
continued success of our premium salad line, positive response to our new
high-quality products, including our new PannidoTM line of gourmet sandwiches,
our reduced reliance on discounted products and improved economic conditions
compared with a year ago. The number of JACK IN THE BOX company-operated
restaurants increased 1.6% to 1,552 in 2004 from 1,527 a year ago.
Distribution and other sales, representing distribution sales to JACK IN
THE BOX and Qdoba franchisees as well as QUICK Stuff sales, increased $15.2
million and $30.7 million, respectively, to $39.5 million and $83.2 million in
2004 compared with 2003. QUICK Stuff fuel and convenience store sales increased
primarily due to an increase in the number of QUICK STUFF locations to 21 at the
end of the quarter from 12 a year ago. Distribution sales also grew in 2004
compared with 2003, primarily due to an increase in the number of JACK IN THE
BOX and Qdoba franchised restaurants serviced by our distribution centers.
Franchise rents and royalties increased $2.5 million and $6.3 million,
respectively, to $13.0 million and $34.3 million in 2004 compared with 2003,
primarily reflecting an increase in the number of JACK IN THE BOX franchised
restaurants to 421 at the end of the quarter from 370 a year ago as well as an
increase in same-store sales at franchised restaurants. As a percentage of
franchise restaurant sales, franchise rents and royalties increased slightly to
9.5% in the quarter from 9.3% a year ago, primarily due to higher contractual
rents and royalties provided by the 51 additional JACK IN THE BOX restaurants
sold to franchisees since a year ago. Year-to-date, the percentage decreased
slightly to 11.0% in 2004 from 11.3% in 2003, primarily due to the acquisition
of Qdoba in the second quarter of fiscal year 2003, whose royalties are lower
than JACK IN THE BOX average rents and royalties.
Other revenues include principally gains and fees from the sale of
company-operated restaurants to franchisees, as well as minor levels of interest
income from notes receivable and investments. Other revenues decreased $5.3
million and $6.2 million, respectively, to $5.0 million and $12.3 million in
2004 compared with 2003. This decrease is primarily due to lower average gains
recognized in 2004 compared with 2003, reflecting differences in the sales
volume and cash flows of the restaurants sold in 2004 and more challenging
financial market conditions. In the quarter, we converted seven restaurants
compared with five a year ago. Year-to-date, we converted 26 restaurants versus
14 in 2003. Franchise gains related to these conversions were $4.2 million and
$9.3 million, respectively, in 2004 and $9.3 million and $16.6 million in 2003.
In the third quarter, we expect to generate approximately $6 million in other
revenues primarily from the sale of approximately 12 restaurants to franchisees,
and for the full year other revenues are expected to be approximately $24
million, primarily from the conversion of approximately 50 restaurants compared
with approximately $31 million primarily from 35 conversions last year.
Costs and Expenses
Restaurant costs of sales, which include food and packaging costs,
increased to $139.4 million and $327.8 million, respectively, in 2004 from
$125.5 million $296.7 million in 2003, primarily due to sales growth and higher
ingredient costs. As a percentage of restaurant sales, costs of sales increased
to 30.3% and 31.0%, respectively, in 2004 from 30.0% and 30.4% in 2003, due to
higher ingredient costs, primarily beef, which was approximately 6% higher than
a year ago in the quarter and 13% higher year-to-date.
Restaurant operating costs grew with the addition of company-operated
restaurants to $238.5 million and $551.6 million, respectively, in 2004 from
$224.3 million and $518.3 million in 2003. As a percentage of restaurant sales,
operating costs improved to 51.9% and 52.2%, respectively, in 2004 from 53.6%
and 53.0% in 2003. The percentage improvement in 2004 is primarily due to
increased leverage on labor and fixed costs provided by higher sales in 2004
compared with a year ago, partially offset by increases in insurance costs.
Costs of distribution and other sales increased to $38.8 million and $81.8
million, respectively, in 2004 from $23.8 million and $51.3 million in 2003,
primarily reflecting an increase in the related sales. As a percentage of
distribution and other sales, these costs increased to 98.4% and 98.3% in 2004
from 98.0% and 97.8% a year ago, primarily due to slight declines in
distribution and fuel margins. Lower fuel margins resulted from a change in our
fuel pricing strategy designed to achieve higher sales volumes at certain QUICK
STUFF locations. Distribution margins were impacted by growth in the percentage
of our distribution business serviced from our lower margin distribution
centers.
13
Franchise restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
increased to $7.2 million and $16.2 million, respectively, in 2004 from $5.8
million and $13.2 million in 2003, primarily reflecting an increase in the
number of franchised restaurants.
Selling, general and administrative expenses ("SG&A") increased to $58.5
million and $133.9 million, respectively, in 2004 from $51.8 million and $122.6
million in 2003. As a percentage of revenues, SG&A expenses increased to 11.3%
in the quarter compared with 11.2% in 2003 and improved to 11.3% year-to-date
from 11.4% a year ago. Cost increases for pension benefits, brand reinvention
market tests, Innovation Center relocation and incentive accruals were offset by
leverage from higher revenues and continued cost reduction initiatives from our
Profit Improvement Program. Pension costs have increased due to declines in
discount rates and in the assumed long-term rate of return on plan assets, and
are expected to continue at higher levels throughout fiscal year 2004.
Interest expense was $4.1 million and $20.0 million, respectively, in 2004
compared with $5.8 million and $14.1 million in 2003. The decrease in interest
rates in the quarter relates primarily to lower average interest rates
associated with the Company's recent refinancing. The year-to-date increase in
interest expense primarily relates to the refinancing of the Company's term loan
and the early redemption of the senior subordinated notes, which resulted in a
$9.2 million charge for the payment of a call premium and the write-off of
deferred financing fees.
The income tax provisions reflect the projected annual tax rates for 2004
and 2003 of 37.0% and 38.0%, respectively. During the quarter, we reduced our
projected annual tax rate for 2004 to 37% from 38%, primarily as a result of the
company's ongoing tax-planning initiatives. The fiscal 2003 income tax provision
was adjusted to the effective annual rate of 36.2% of pretax earnings resulting
from the favorable resolution of a long-standing tax matter. The final 2004
annual tax rate cannot be determined until the end of the fiscal year;
therefore, the actual rate could differ from our current estimates.
Net Earnings
Net earnings were $19.6 million in the quarter, or $.53 per diluted share,
in 2004 compared to $16.3 million, or $.44 per diluted share, in 2003.
Year-to-date net earnings were $35.2 million, or $.96 per diluted share, in 2004
compared to $37.5 million, or $1.00 per diluted share, in 2003. In 2004,
year-to-date net earnings includes a loss on early retirement of debt recorded
in the first quarter, which was $5.7 million, net of income taxes, or $.15 per
diluted share.
Liquidity and Capital Resources
General. Cash and cash equivalents decreased to $11.1 million at April 11,
2004 from $22.4 million at the beginning of the fiscal year, primarily
reflecting the use of cash to acquire 80 leased JACK IN THE BOX restaurant
properties during the second quarter. 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 new credit facility.
Financial Condition. Our working capital deficit was $51.3 million at April
11, 2004 compared with $89.1 million at September 28, 2003, reflecting an $84.7
million increase in assets held for sale and leaseback from the acquisition of
80 leased restaurant properties. The Company plans to resell and leaseback these
properties over the balance of the fiscal year, and as such they have been
classified as current assets. The Company and the restaurant industry in general
maintain relatively low levels of accounts receivable and inventories, and
vendors grant trade credit for purchases such as food and supplies. We also
continually invest in our business through the addition of new units and
refurbishment of existing units, which are reflected as long-term assets and not
as part of working capital. At the end of the quarter, our current ratio
increased to .8 to 1 compared with .6 to 1 at the beginning of the year,
improving for the same reasons discussed above.
New Financing. On January 8, 2004, we secured a new senior term loan and
amended our revolving credit facility, each with extended maturities. Our new
financing is intended to provide a more flexible capital structure, facilitate
the execution of our strategic plan, and decrease borrowing costs by
approximately $3 million per year on average over the life of our new term loan.
Furthermore, the new term loan provides for a more favorable repayment schedule
set at 1% per year for the first 6 years of the 7-year term.
14
Our credit facility provides borrowings in the aggregate amount of $475
million and is comprised of: (i) a $200 million revolving credit facility
maturing on January 8, 2008 with a rate of London Interbank Offered Rate
("LIBOR") plus 2.25% and (ii) a $275 million term loan maturing on January 8,
2011 with a rate of LIBOR plus 2.75%. The credit facility requires the payment
of an annual commitment fee based on the unused portion of the credit facility.
The annual commitment rate and the credit facility's interest rates are based on
a financial leverage ratio, as defined in the credit agreement. To secure our
respective obligations under the credit facility, the Company and certain of its
subsidiaries granted liens in substantially all personal property assets. Under
certain circumstances, the Company and each of its certain subsidiaries will be
required to grant liens in certain real property assets to secure their
respective obligations under the new credit facility. Additionally, certain of
our real and personal property secure other indebtedness of the Company. At
April 11, 2004, we had borrowings of $5.0 million under our revolving credit
facility and had letters of credit outstanding of $33.4 million.
We used the proceeds from the new term loan to refinance our existing $150
million term loan and redeem $125 million of 8 3/8% senior subordinated notes
due April 15, 2008, which resulted in a charge to interest expense of $9.2
million. The amended revolving credit facility is intended to support general
corporate purposes.
We are subject to a number of covenants under our various debt instruments,
including limitations on additional borrowings, acquisitions, loans to
franchisees, capital expenditures, lease commitments and dividend payments, as
well as requirements to maintain certain financial ratios, cash flows and net
worth. As of April 11, 2004, we were in compliance with all the debt covenants.
Total debt outstanding increased to $312.8 million at April 11, 2004 from
$303.1 million at the beginning of the fiscal year, primarily due to an increase
in capital lease obligations associated with new restaurant equipment leases.
Franchise Conversions. We have continued our strategy of selectively
converting company-operated restaurants to franchises, converting 26 restaurants
in 2004 compared with 14 a year ago. Year-to-date, proceeds from the conversion
of company-operated restaurants and collections on notes receivable, primarily
related to conversions, were $21.7 million and $14.5 million, respectively, in
2004 and 2003.
In the third quarter, we expect to convert approximately 12 restaurants to
franchises and generate approximately $6 million in other revenues, and for the
full year other revenues are expected to be approximately $24 million, primarily
from the conversion of approximately 50 restaurants.
Other Transactions. During the second quarter of fiscal year 2004, we
exercised our purchase option under certain lease agreements and purchased 80
JACK IN THE BOX restaurant properties for approximately $85 million. These
assets are included in assets held for sale and leaseback at April 11, 2004 as
we plan to resell and leaseback these properties over the balance of the fiscal
year at more favorable rental rates.
In January 1994, we entered into financing lease arrangements with two
limited partnerships (the "Partnerships") related to 76 restaurants. At the
inception of the financing lease arrangements, we recorded cash and cash held in
trust, and established financing lease obligations of approximately $70 million
requiring semi-annual payments to cover interest and sinking fund obligations
due in equal installments on January 1, 2003 and November 1, 2003. In January
2003, we paid a $1.3 million fee to retire the debt early. The fee was charged
to interest expense in the first quarter of fiscal year 2003 when the
obligations were retired. We used borrowings under our credit facility and
previous sinking fund payments to reacquire the interests in the restaurant
properties and retire the high interest rate bearing financing lease
obligations.
In 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, we acquired
4,115,853 shares at an aggregate cost of $90 million prior to the beginning of
fiscal year 2004 and have no repurchase availability remaining. The stock
repurchase program was intended to increase shareholder value and offset the
dilutive effect of stock option exercises.
15
Contractual Obligations and Commitments. The following is a summary of the
Company's contractual obligations and commercial commitments as of April 11,
2004:
Payments Due by Period (in thousands)
-------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 3-5 years 5 years
-------------------------------------------------------------------------------------------------------------------
Contractual Obligations:
Credit facility term loan................ $ 275,000 $ 2,750 $ 5,500 $ 5,500 $ 261,250
Revolving credit facility................ 5,000 - - 5,000 -
Capital lease obligations................ 29,937 4,345 8,770 7,776 9,046
Other long-term debt obligations......... 2,851 1,765 744 342 -
Operating lease obligations ............. 1,494,720 154,811 280,431 237,860 821,618
Guarantee (1)............................ 1,094 198 321 317 258
---------- ---------- ---------- ---------- ----------
Total contractual obligations........... $1,808,602 $ 163,869 $ 295,766 $ 256,795 $1,092,172
========== ========== ========== ========== ==========
Other Commercial Commitments:
Stand-by letters of credit (2)........... $ 33,372 $ 33,372 $ - $ - $ -
========== ========== ========== ========== ==========
(1) Consists of a guarantee associated with one Chi-Chi's property. Due to
the bankruptcy of the Chi-Chi's restaurant chain, previously owned by
the Company, we are obligated to perform in accordance with the terms
of the guarantee agreement.
(2) Consists primarily of letters of credit for workers' compensation and
general liability insurance.
Capital Expenditures. Year-to-date capital expenditures, including capital
lease obligations, were $69.2 million and $49.2 million in 2004 and 2003,
respectively. Capital spending for additions to property and equipment,
increased to $61.3 million in 2004 from $49.2 million in 2003, primarily due to
a recent decision to finance the new Innovation Center utilizing the Company's
credit facility instead of through a sale and leaseback transaction. Increases
in JACK IN THE BOX restaurant improvements and Qdoba capital expenditures,
primarily related to new company-operated restaurants, also contributed to the
overall increase, but to a lesser extent. These increases were partially offset
by a decrease in expenditures for new JACK IN THE BOX restaurants, reflecting a
reduction in the number of new restaurant openings to 26 in 2004 from 42 a year
ago. Year-to-date, we also incurred capital lease obligations of $7.9 million
for certain restaurant equipment.
In the third quarter of fiscal year 2004 and for the full year, we expect
capital expenditures and lease commitments to be approximately $35 million and
$155 million, respectively. Our capital projections include spending related to
approximately 13 and 65 new JACK IN THE BOX restaurants, respectively, brand
reinvention initiatives and additional capital lease commitments for certain
restaurant equipment.
Pension Funding. Lower discount rates and a reduction in our assumed
long-term rate of return on plan assets have contributed to an increase in our
accumulated benefit plan obligations. Taking advantage of our cash position and
the upward trend in the equity markets, we contributed $17.0 million to our
pension plans in December 2003 compared with $4.4 million a year ago.
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
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 in place or
available, will be sufficient to meet debt service, capital expenditure and
working capital requirements.
We do not have material related party transactions or off-balance sheet
arrangements, other than our operating leases. We do not enter into commodity
contracts for which market price quotations are not available. Furthermore, we
are not aware of any other factors which are reasonably likely to affect our
liquidity, other than those disclosed as risk factors in our Form 10-K filed
with the SEC. While we have noted that certain operating expenses are rising,
including pension and insurance costs, we believe that there are sufficient
funds available from operations, our existing credit facility and the sale and
leaseback of restaurant properties to accommodate the Company's future growth.
16
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 most recent
Annual Report on Form 10-K filed with the SEC.
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 discount rates and declines in the return on assets in the plans,
the pension expense in fiscal year 2004 is expected to be approximately $7.2
million higher than fiscal year 2003.
Self-Insurance - The Company is self-insured for a substantial 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, including
amortized intangible assets, are reviewed for impairment when indicators of
impairment are present. This review includes a market-level analysis and
evaluations of restaurant operating performance from operations and marketing
management. When indicators of impairment are present, we perform an impairment
analysis on a restaurant-by-restaurant basis. If the sum of undiscounted future
cash flows is less than the net 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. During the quarter, we recorded an immaterial impairment charge
related to one restaurant we intend to close upon the expiration of its lease at
the end of the calendar year. During 2004, we noted no other indicators of
impairment of our long-lived assets.
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 estimated 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 notes receivable related to short-term
financing provided on the sale of company-operated restaurants to certain
qualified franchisees. We continually monitor amounts due from franchisees and
maintain an allowance for doubtful accounts for estimated losses resulting from
the potential inability of our franchisees to make required payments. This
estimate is based on our 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 achieves high collection rates; however, if the future financial
condition of our franchisees were to deteriorate, resulting in their inability
to make specific required payments, additions to the allowance for doubtful
accounts may be required.
Legal Accruals - The Company is subject to claims and lawsuits in the
ordinary course of its business. A determination of the amount accrued, if any,
for these contingencies is made after analysis of each matter. We continually
evaluate such accruals and may increase or decrease accrued amounts as we deem
appropriate.
17
Cautionary Statements Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities law. These forward-looking
statements are principally contained in the sections captioned, Notes to
Unaudited Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations. Statements regarding
our expectations about the impact of our refinancing and our borrowing costs,
our effective tax rate, expectations regarding any liability that may result
from claims and actions filed against us, our contingent obligations and future
charges related to the Chi-Chi's bankruptcy, estimated and future costs,
expenses, same-store sales and other revenues, our brand reinvention strategy
and testing plans, our growth strategy, the impact of our Innovation Center, our
anticipated capital expenditures relating to new restaurants, brand reinvention
and refurbishment of existing facilities, our future financial performance,
sources of liquidity, including the sale and leaseback of restaurant properties
and conversion of company-operated restaurants to franchised restaurants, uses
of cash and sufficiency of our cash flows are forward-looking statements.
Forward-looking statements are generally identifiable by the use of the words
"anticipate," "assume," "believe," "estimate," "seek," "expect," "intend,"
"plan," "project," "may," "will," "would," and similar expressions.
Forward-looking statements are based on management's current plans and
assumptions and are subject to known and unknown risks and uncertainties, which
may cause actual results to differ materially from expectations. The following
is a discussion of some of those factors.
There is intense competition in the quick service restaurant industry with
respect to market share, restaurant locations, labor, menu and product
development. The quick-service restaurant segment itself faces competitive
pressures from the emerging "fast-casual" chains. The Company competes primarily
on the basis of quality, variety and innovation of menu items, service, brand,
convenience and price against several larger national and international chains
with potentially significantly greater financial resources. The Company's
results depend upon the effectiveness of its strategies, including its brand
reinvention strategy, as compared to its competitors, and can be adversely
affected by aggressive competition from numerous and varied competitors in all
areas of business, including new product introductions, advertising and
promotions, and discounting. In addition, restaurant sales can be affected by
factors, including but not limited to, demographic changes, consumer
preferences, tastes and spending patterns, widespread negative publicity,
perceptions about the health and safety of food products and severe weather
conditions. With approximately 70% of its restaurants in California and Texas,
JACK IN THE BOX restaurant sales can be significantly affected by demographic
changes, adverse weather, economic and political conditions and other
significant events in those states. The quick service restaurant industry is
mature, with significant chain penetration. There can be no assurances that the
Company's growth objectives in the regional domestic markets in which it
operates restaurants and convenience stores will be met or that the new
facilities will be profitable. The development and profitability of restaurants
can be adversely affected by many factors including the ability of the Company
and its franchisees to select and secure suitable sites on satisfactory terms,
the availability of financing and general business and general economic
conditions. The realization of gains from our program of selective sales of
company-operated restaurants to existing and new franchisees depends upon
various factors, including failure of the market for our franchisees to develop
as expected, sales trends at franchised restaurants and the financing market and
economic conditions. The Company has provided a portion of the purchase
financing for certain franchisees that have acquired franchises for existing
restaurants from the Company. There can be no assurance that all such borrowers
will make timely payments or ultimately perform on the terms contemplated. The
ongoing success of our selective sale and leaseback of restaurant properties is
subject to changes in the economy, credit market, real estate market and the
ability of the company to obtain acceptable prices and terms. The success of our
brand reinvention initiatives at franchised sites will depend upon franchisees'
willingness to participate in our strategy and the availability of financing
resources at satisfactory rates and terms. Our results of operations can also be
adversely affected by changes in commodity prices or supply, higher costs
associated with new technologies, increasing occupancy and insurance costs,
including workers compensation insurance, interest rates, inflation, recession,
the effects of war and terrorist activities and other factors over which the
Company has no control, including the possibility of increased pension expense
and contributions resulting from declines in discount rates and stock market
returns. Because a large majority of its restaurants are company-operated, the
Company's earnings are more sensitive to increasing costs than majority
franchised chains. In January 2003, the Company completed its acquisition of
Qdoba Restaurant Corporation, a fast-casual restaurant chain. The Company may
not successfully integrate or fully realize the potential benefits or synergies
of this or other acquisition transactions. Other factors that can cause actual
results to differ materially from expectations include the unpredictable nature
of litigation, including strategies and settlement costs; changes in accounting
standards, policies and practices; new legislation and governmental regulation;
potential variances between estimated and actual liabilities; and the
possibility of unforeseen events affecting the industry in general.
18
Our income tax provision is sensitive to expected earnings and, as
expectations change, our income tax provision may vary from quarter-to-quarter
and year-to-year. In addition, from time-to-time, we may take positions for
filing our tax returns, which differ, from the treatment for financial reporting
purposes. Our effective tax rate for fiscal 2004 is expected to be higher than
our fiscal 2003 rate.
This discussion of uncertainties is not exhaustive. Additional risk factors
associated with our business are described in our most recent Annual Report on
Form 10-K filed with the SEC. Jack in the Box Inc. assumes no obligation and
does not intend to update these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our primary exposure relating to financial instruments is to changes in
interest rates. Our credit facility, which is comprised of a revolving credit
facility and a term loan, bears interest at an annual rate equal to the prime
rate or the LIBOR plus an applicable margin based on a financial leverage ratio.
The majority of the credit facility borrowings are LIBOR based. As of April 11,
2004, our applicable margins for the LIBOR based revolving loans and term loan
were set at 2.25% and 2.75%, 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 April 11, 2004, would result in an estimated
increase of $2.8 million in annual interest expense.
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. We had no open commodity futures and option contracts at
April 11, 2004.
At April 11, 2004, we had no other material financial instruments subject
to significant market exposure.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of 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 quarterly report.
(b) There have been no significant changes in our internal control over
financial reporting during the quarter ended April 11, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
19
PART II. OTHER INFORMATION
There is no information required to be reported for any items under Part
II, except as follows:
ITEM 1. LEGAL PROCEEDINGS
The Company is also subject to normal and routine litigation. In the
opinion of management, based in part on the advice of legal counsel, the
ultimate liability from all pending legal proceedings, asserted legal claims and
known potential legal claims should not materially affect our operating results,
financial position or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information on matters submitted to a vote of stockholders at our annual
meeting held on February 13, 2004 can be found in our Quarterly Report on Form
10-Q for the quarter ended January 18, 2004 previously filed with the SEC.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6 (a). Exhibits
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation, as amended(7)
3.2 Amended and Restated Bylaws (16)
4.1 Indenture for the 8 3/8% Senior Subordinated Notes due 2008(6)
(Instruments with respect to the registrant's long-term debt not in
excess of 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis have been omitted. The registrant
agrees to furnish supplementally a copy of any such instrument to the
Commission upon request.)
4.2 Shareholder Rights Agreement(3)
10.1 Amended and Restated Credit Agreement dated as of January 8, 2004 by
and among Jack in the Box Inc. and the lenders named therein (16)
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(12)
10.14* Form of Restricted Stock Award for certain executives(12)
10.14(a) Schedule of Restricted Stock Awards(14)
10.15* Executive Agreement between Jack in the Box Inc. and Gary J.
Beisler, President and Chief Executive Officer of Qdoba Restaurant
Corporation(13)
10.16* 2004 Stock Incentive Plan(15)
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.
21
(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 herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 13, 2003.
(13) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 13, 2003.
(14) Previously filed and incorporated herein by reference from the registrant
Quarterly Report on Form 10-Q for the quarter ended July 6, 2003.
(15) Previously filed and incorporated herein by reference from the registrant's
Definitive Proxy Statement dated January 9, 2004 for the Annual Meeting of
Stockholders' on February 13, 2004.
(16) Previously filed and incorporated herein by reference from the registrant's
Quarterly Report on Form 10-Q for the quarter ended January 18, 2004.
ITEM 6(b). FORM 8-K.
---------
We filed the following reports on Form 8-K with the Securities and Exchange
Commission during the second quarter ended April 11, 2004: On February 18, 2004,
we filed a report on Form 8-K containing an earnings release that reported
results of operations for the first quarter ended January 18, 2004.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated.
JACK IN THE BOX INC.
By: /S/JOHN F. HOFFNER
------------------------------
John F. Hoffner
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
Date: May 20, 2004