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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 OCTOBER 3, 1999
COMMISSION FILE NUMBER 1-9390
Jack in the Box Inc. (formerly Foodmaker, 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
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of November 26, 1999, computed by reference to the closing
price reported in the New York Stock Exchange - Composite Transactions, was
approximately $795 million.
Number of shares of common stock, $.01 par value, outstanding as of the
close of business November 26, 1999 - 38,295,027.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the 2000 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
ITEM 1. BUSINESS
The Company
Overview. On October 4, 1999, Foodmaker, Inc. changed its name to
Jack in the Box Inc. (the "Company"). The Company owns, operates and franchises
JACK IN THE BOX(R) quick-service hamburger restaurants. As of October 3, 1999,
the JACK IN THE BOX system included 1,517 restaurants, of which 1,191 were
Company-operated and 326 were franchised. In fiscal 1999, the Company generated
revenues of $1.5 billion. JACK IN THE BOX restaurants are located primarily in
the western United States. Based on the number of units, JACK IN THE BOX is the
third largest quick-service hamburger chain in most of its major markets.
JACK IN THE BOX restaurants offer a broad selection of distinctive,
innovative products targeted at the adult fast-food consumer. The
JACK IN THE BOX menu features a variety of hamburgers, specialty sandwiches,
Mexican foods, finger foods and side items. The core of the JACK IN THE BOX menu
is hamburgers, including the signature Jumbo Jack(R), Sourdough Jack(R) and
Ultimate Cheeseburger. In addition, the Company offers products unique to the
hamburger segment, such as the Teriyaki Chicken Bowl and Chicken Fajita Pita.
JACK IN THE BOX restaurants also offer value-priced product alternatives, known
as "Jack's Value Menu," to compete against price-oriented competitors. The
Company believes that its distinctive menu has been instrumental in developing
brand loyalty and appealing to customers with a broader range of food
preferences. JACK IN THE BOX restaurants focus on guest service in providing a
restaurant experience which exceeds the guests' expectations.
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 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 64% of sales at Company-operated restaurants.
History. The first JACK IN THE BOX restaurant, which offered only
drive-thru service, opened in 1950, and the JACK IN THE BOX chain expanded its
operations to approximately 300 restaurants in 1968. After Ralston Purina
Company purchased the Company in 1968, a major expansion program was initiated
in an effort to penetrate the eastern and midwestern markets, and by 1979 the
business grew to over 1,000 units. In 1979, the Company's management decided to
divest of 232 restaurants in the east and midwest and concentrate its efforts
and resources in the western and southwestern markets, which it believed offered
the greatest growth and profit potential at that time. In 1985, the Company was
acquired by a group of private investors and, in 1987, completed a public
offering of common stock. In 1988, the outstanding publicly-held shares were
acquired by private investors through a tender offer. In 1992, the Company
completed a recapitalization that included a public offering of common stock and
indebtedness.
Operating Strategy. The Company's operating strategy includes: (i)
offering quality products with high perceived value, (ii) providing fast and
friendly customer service, (iii) maintaining a strong brand image, and (iv)
targeting an attractive demographic segment. Beginning in 1994, the Company
began a series of operating initiatives to improve food quality and guest
service. These initiatives include improvements in food preparation and service
methods, product reformulations and innovations, and training and retention of
employees. In addition, the Company launched its award-winning, irreverent
advertising campaign featuring its fictional founder "Jack" which has been
instrumental in delivering the message of product quality, innovation and value
to customers. The Company believes its menu and marketing campaign appeal to a
broad segment of the population, particularly its primary target market of men
aged 18-34, the demographic group with the highest incidence of fast-food
consumption. The Company operates nearly 80% of its restaurants, one of the
highest percentages in the quick-service restaurant industry, which the Company
believes enables it to implement its operating strategy and introduce product
innovations consistently across the entire system better than other
quick-service restaurant chains.
Menu Strategy. The menu strategy for JACK IN THE BOX restaurants is to
provide high quality products that represent good value and appeal to the
preferences of its customers. The menu features traditional hamburgers and side
items in addition to specialty sandwiches, Mexican foods, finger foods,
breakfast foods, unique side items and desserts.
1
The Company recognizes the advantages of improving existing products
through ingredient specifications and changes in preparation and cooking
procedures. Such major improvements are communicated to the public through
point-of-purchase and television media, with messages such as "We won't make
it - `til you order it." During fiscal 1999, the Company implemented its
Assemble-to-Order ("ATO") program. This program and the addition of new menu
boards have had a favorable impact on sales.
JACK IN THE BOX restaurants operate in the hamburger segment which is
the largest segment of the quick-service industry. Hamburgers, including the
Jumbo Jack, Sourdough Jack and the Ultimate Cheeseburger, accounted for
approximately one-quarter of the Company's restaurant sales in fiscal 1999.
However, management believes that, as a result of its diverse menu,
JACK IN THE BOX restaurants are less dependent on the commercial success of
one or a few products than other quick-service chains, and the JACK IN THE BOX
menu appeals to guests with a broad range of food preferences.
Growth Strategy. The Company's business strategy is to (i) increase
same store sales and profitability through the continued implementation of its
successful operating strategy and (ii) capitalize on its strong brand name and
proven operating strategy by developing new restaurants.
The Company believes that its strategy of focusing on food quality and
guest service will allow it to differentiate itself from competitors and
maintain its restaurant level margins among the highest in the industry. The
Company intends to continue to increase same store sales and profitability
through improvements in food quality and guest service, product innovations and
creative marketing. For example, the Company recently implemented its ATO
program by remodeling its restaurant kitchens to improve food quality and to
allow for more efficient operations. In addition, the Company's new drive-thru
menu boards feature an electronic order confirmation system that allows
customers to read their order on an electronic screen, which the Company
believes will reduce errors and increase customer satisfaction. Also, in
response to consumer demand, self-serve drink stations were implemented in the
vast majority of restaurants, improving guest satisfaction and reducing labor.
The Company intends to capitalize on its strong brand name and proven
operating strategy to achieve attractive returns on investment by developing new
Company-operated restaurants and, to a lesser extent, franchised restaurants.
The Company opened 115 new Company-operated restaurants in fiscal 1999 and
intends to open and operate slightly increased levels of new restaurants in each
of the next several years. Newly-opened restaurants typically have sales levels
similar to existing restaurants. The Company believes that its brand is
underpenetrated in many of its existing markets and intends to leverage media
and food delivery costs by increasing its market penetration. In addition, the
Company believes that it can further leverage the JACK IN THE BOX brand name by
expanding to contiguous and selected high growth new markets. The Company has
also begun opening a limited number of restaurants on nontraditional sites, such
as adjacent to convenience stores and gas stations, and intends to continue to
add nontraditional sites to increase its penetration of existing markets.
Site selections for all new JACK IN THE BOX restaurants are made after
an extensive review of demographic data and other information relating to
population density, restaurant visibility and access, available parking,
surrounding businesses and opportunities for market penetration. JACK IN THE BOX
restaurants developed by franchisees are built to Company specifications on
sites which have been approved by the Company.
The Company uses several configurations in building new JACK IN THE BOX
restaurants, with the largest restaurants seating 90 customers and the smallest,
44 customers. The typical development costs range from approximately $1.3
million to $1.5 million. The Company seeks to use lease financing and other
means to lower its cash investment in a typical leased restaurant to
approximately $300,000 to $400,000. Management believes that the flexibility
provided by the alternative configurations enables the Company to match the
restaurant configuration with specific economic, demographic and geographic
characteristics of the site.
2
The following table sets forth the growth in Company-operated and
franchised JACK IN THE BOX restaurants since the beginning of fiscal 1995:
Fiscal Year
------------------------------------------
1995 1996 1997 1998 1999
------------------------------ ------ ------ ------ ------ ------
Company-operated restaurants:
Opened .................. 21 26 75 102 115
Sold to franchisees ..... (6) -- (8) (2) --
Closed .................. (4) (15) (6) (8) (6)
Acquired from franchisees 42 5 23 14 13
End of period total ..... 863 879 963 1,069 1,191
Franchised restaurants:
Opened .................. 12 10 5 2 2
Acquired from Company ... 6 -- 8 2 --
Closed .................. (1) (3) (21) (5) (8)
Sold to Company ......... (42) (5) (23) (14) (13)
End of period total ..... 389 391 360 345 326
System end of period total ... 1,252 1,270 1,323 1,414 1,517
The following table summarizes, by state, the geographical locations of
JACK IN THE BOX restaurants at October 3, 1999:
Company-
operated Franchised Total
---------------------------------------- -------- ---------- -----
Arizona ................................ 76 44 120
California ............................. 491 237 728
Hawaii ................................. 27 1 28
Idaho .................................. 17 -- 17
Illinois ............................... 13 -- 13
Missouri ............................... 44 -- 44
Nevada ................................. 31 10 41
New Mexico ............................. -- 2 2
Oregon ................................. 20 2 22
Texas .................................. 383 30 413
Washington ............................. 89 -- 89
----- ----- -----
Total ................................ 1,191 326 1,517
===== ===== =====
Restaurant Operations. Significant resources are devoted to ensure that
all JACK IN THE BOX restaurants offer the highest quality food and service.
Emphasis is placed on ensuring that quality ingredients are delivered to the
restaurants, restaurant food production systems are continuously developed and
improved, and all employees are dedicated to delivering consistently high
quality food and service. Through its network of corporate quality assurance,
facilities services and restaurant management personnel, including regional vice
presidents, area managers and restaurant managers, the Company standardizes
specifications for the preparation and service of its food, the conduct and
appearance of its employees, and the maintenance and repair of its premises.
Operating specifications and procedures are documented in a series of manuals
and video presentations. Most restaurants, including franchised units, receive
approximately four quality and image inspections and 26 mystery guest reviews
each year.
Each JACK IN THE BOX restaurant is operated by a Company-employed
manager or a franchisee who normally attends an extensive range of management
training classes. The Company's management training program involves 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 prescribed by the Company, utilizing training aids including video
equipment available at each location. The restaurant managers are directly
responsible for the operation of the restaurants, including product quality,
food handling safety, cleanliness, service, inventory, cash control and the
conduct and appearance of employees.
3
Restaurant managers are supervised by area managers, each of whom is
responsible for approximately 15-20 restaurants. The area managers are
supervised by ten regional vice presidents. Under the Company's performance
system, regional vice presidents, area and restaurant managers are eligible for
quarterly bonuses based on a percentage of location operating profit and profit
improvement over the prior year.
The Company's "farm-to-fork" food safety and quality assurance program
is designed to maintain high standards for the food and materials and food
preparation procedures used by Company-operated and franchised restaurants. The
Company maintains product specifications and approves sources for obtaining such
products. The Company has developed 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. The
Company's HACCP program has been recognized as a leader in the industry by the
USDA, FDA and the Center for Science in the Public Interest.
The Company provides purchasing, warehouse and distribution services
for both Company-operated and some franchised restaurants. Some products,
primarily dairy and bakery items, are delivered directly by approved suppliers
to both Company-operated and franchised restaurants. Prior to 1996, most
JACK IN THE BOX franchisees used the Company's distribution services to the
full extent available even though they were permitted to purchase products
directly from any approved source. In 1996, JACK IN THE BOX franchisees formed a
purchasing cooperative and contracted with another supplier for distribution
services. This transition by most franchisees resulted in a substantial decline
in distribution sales, but had only a minor impact on profitability since
distribution is a low margin business.
The primary commodities purchased by JACK IN THE BOX restaurants are
beef, poultry, pork, cheese and produce. The Company monitors the primary
commodities it purchases in order to minimize the impact of fluctuations in
price and availability, and makes advance purchases of commodities when
considered to be advantageous. However, the Company remains subject to price
fluctuations in certain commodities. All essential food and beverage products
are available, or upon short notice can be made available, from alternative
qualified suppliers.
The Company maintains centralized financial and accounting controls
for Company-operated JACK IN THE BOX restaurants which it believes are important
in analyzing profit margins. JACK IN THE BOX restaurants use a specially
designed computerized reporting and cash register system. The system provides
point-of-sale transaction data and accumulates marketing information. Sales data
is collected and analyzed on a weekly basis by management.
Franchising Program. The growth of the JACK IN THE BOX concept occurs
primarily through the building of new Company-operated restaurants. The Company
does not presently recruit new franchisees. The JACK IN THE BOX franchising
strategy allows selected franchisee development of restaurants in existing
franchised markets. The Company offers 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 prepay one-half of the franchise
fees for restaurants to be opened in the future and may forfeit such fees and
lose their rights to future developments if they do not maintain the required
schedule of openings.
The current JACK IN THE BOX 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, known as
"Trading Area Rights," are sold to the franchisee, in most cases for cash. 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 (typically 8 1/2%). The franchisee is required to pay property taxes,
insurance and maintenance costs. The Company's franchise agreement also provides
the Company a right of first refusal on each proposed sale of a franchised
restaurant, which it exercises from time to time when the proposed sale price
and terms are acceptable to the Company.
4
The Company views its non-franchised JACK IN THE BOX units as a
potential resource which, on a selected basis, can be sold to a franchisee to
generate additional immediate cash flow and revenues while still maintaining
future cash flows and earnings through franchise rents and royalties. Although
franchised units totaled 326 of the 1,517 JACK IN THE BOX restaurants at
October 3, 1999, the ratio of franchised to Company-operated restaurants is low
relative to the Company's major competitors.
Advertising and Promotion. The Company engages in substantial marketing
programs and activities. Advertising costs are paid from a fund comprised of (i)
an amount contributed each year by the Company equal to at least 5% of the gross
sales of its Company-operated JACK IN THE BOX restaurants and (ii) the marketing
fees paid by franchisees. The Company's use of advertising media is limited to
regional and local campaigns both on television and radio spots and in print
media. Approximately $86.6 million was spent on advertising and promotions in
fiscal 1999, including franchisee contributions of $17.3 million. The current
advertising campaign relies on a series of television and radio spot
advertisements to promote individual products and to develop the JACK IN THE BOX
brand. The Company also spent $1.0 million in fiscal 1999 for local marketing
purposes. Franchisees are encouraged to, and generally do, spend funds in
addition to those expended by the Company for local marketing programs.
Employees. At October 3, 1999, the Company had approximately 37,800
employees, of whom approximately 35,650 were restaurant employees, 550 were
corporate personnel, 300 were distribution employees and 1,300 were field
management and administrative personnel. Employees are paid on an hourly basis,
except restaurant managers, corporate and field management, and administrative
personnel. A majority of the Company's restaurant employees are employed on a
part-time, hourly basis to provide services necessary during peak periods of
restaurant operations. The Company has not experienced any significant work
stoppages and believes its labor relations are good. The Company competes in the
job market for qualified employees and believes its wage rates are comparable to
those of its competitors.
Trademarks and Service Marks
The JACK IN THE BOX name is of material importance to the Company and
is a registered trademark and service mark in the United States and in certain
foreign countries. In addition, the Company has registered numerous service
marks and trade names for use in its business, including the JACK IN THE BOX
logo and various product names and designs.
Competition and Markets
The restaurant business is highly competitive and is affected by
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 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 coffee shops. In selling franchises,
the Company competes with many other restaurant franchisers, and some of its
competitors have substantially greater financial resources and higher total
sales volume.
Regulation
Each JACK IN THE BOX restaurant is subject to regulation by federal
agencies and to 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.
The Company is also subject to federal and a substantial number of
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. The Company believes
it is operating in substantial compliance with applicable laws and regulations
governing its operations.
The Company is subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wages, overtime and other working
conditions. A significant number of the Company's food service personnel are
paid at rates related to the federal and state minimum wage, and accordingly,
increases in the minimum wage increase the Company's labor costs.
5
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. The imposition of any requirement that the
Company provide health insurance to all employees would have a material adverse
impact on the consolidated operations and financial condition of the Company and
the restaurant industry.
The Company is 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.
The Company is also subject to various federal, state and local laws
regulating the discharge of materials into the environment. The cost of
developing restaurants has increased as a result of the Company's compliance
with such laws. Such 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.
Forward-Looking Statements and Risk Factors
This Form 10-K contains "forward-looking statements" within the meaning
of the securities laws. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, and have based these
expectations on our beliefs as well as assumptions we have made, such
expectations may prove to be materially incorrect due to known and unknown risks
and uncertainties.
These forward-looking statements are principally contained in the
sections captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Statements regarding the Company's
future financial performance, including growth in net sales, earnings, cash
flows from operations and sources of liquidity; expectations regarding effective
tax rates; the number of new restaurants to be opened in the future; continuing
investment in new restaurants and refurbishment of existing facilities and Year
2000 compliance are forward-looking statements. In addition, in those and other
portions of this Form 10-K, the words "anticipates," "believes," "estimates,"
"seeks," "expects," "plans," "intends" and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the following cautionary statements
identify important factors that could cause actual results to differ materially
from those expressed in any forward-looking statements. In addition to other
factors discussed in this Form 10-K, other factors that could cause results to
differ materially are: the effectiveness and cost of advertising and promotional
efforts; the degree of success of product offerings; weather conditions;
difficulties in obtaining ingredients and variations in ingredient costs; the
ability to control operating, general and administrative costs and to raise
prices sufficiently to offset cost increases; the ability to recognize value
from any current or future co-branding efforts; competitive products and pricing
and promotions; the impact of any wide-spread negative publicity; the impact on
consumer eating habits of new scientific information regarding diet, nutrition
and health; competition for labor; general economic conditions; changes in
consumer tastes and in travel and dining-out habits; the impact on operations
and the costs to comply with laws and regulations and other activities of
governing entities; 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 are
often affected by changes in consumer tastes, national, regional and local
economic conditions and demographic trends. 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.
6
Multi-unit food service businesses such as JACK IN THE BOX can also be
materially and adversely affected by publicity resulting from poor food quality,
illness, injury or other health concerns with respect to the nutritional value
of certain food.
In early 1993, the Company's business was severely disrupted as a
result of an outbreak of food-borne illness bacteria attributed to hamburgers
served in JACK IN THE BOX restaurants, principally in the state of Washington.
To minimize the risk of any such occurrence in the future, the Company has
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 JACK IN THE BOX restaurants or within the food
service industry could have a material adverse effect on the financial condition
and results of operations of the Company.
Dependence on frequent deliveries of fresh produce and groceries
subjects food service businesses, such as the Company's, 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 and employee benefit costs (including
increases in hourly wage and unemployment tax rates), 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 and the Company's financial
condition and results of operations in particular. Changes in economic
conditions affecting the Company's customers could reduce traffic in some or all
of the Company's restaurants or impose practical limits on pricing, either of
which could have a material adverse effect on the Company's financial condition
and results of operations. The continued success of the Company will depend in
part on the ability of the Company's management to anticipate, identify and
respond to changing conditions.
Risks Associated with Development. The Company intends to grow
primarily by developing additional Company-owned restaurants. Development
involves substantial risks, including the risk of (i) development costs
exceeding budgeted or contracted amounts, (ii) delays in completion of
construction, (iii) failing to obtain all necessary zoning and construction
permits, (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 (some
of which have greater financial resources than the Company), (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 the Company intends to manage its development to reduce such
risks, there can be no assurance that present or future developments will
perform in accordance with the Company's expectations. There can be no assurance
that the Company will complete the development and construction of the
facilities or that any such developments will be completed in a timely manner or
within budget or that such restaurants will generate the Company's expected
returns on investment. The Company's inability to expand in accordance with its
plans or to manage its growth could have a material adverse effect on its
results of operations and financial condition.
Risks Associated with Growth. The Company's development plans will
require the implementation of enhanced operational and financial systems and
will require additional management, operational, and financial resources. For
example, the Company will be required to recruit and train managers and other
personnel for each new Company-owned restaurant as well as additional
development and accounting personnel. There can be no assurance that the Company
will be able to manage its expanding operations effectively. The failure to
implement such systems and add such resources on a cost-effective basis could
have a material adverse effect on the Company's results of operations and
financial condition.
Reliance on Certain Markets. Because the Company's business is
regional, with approximately three-fourths of JACK IN THE BOX 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 the Company's results.
7
Risks Related to Entering New Markets. During fiscal 2000, the Company
expects to open restaurants in new markets. There can be no assurance that the
Company will be able to successfully enter into new geographical markets, as it
may encounter well-established competitors with substantially greater financial
resources. The Company may be unable to find attractive locations, successfully
market its products and attract customers. Competitive circumstances and
consumer characteristics in new markets may differ substantially from those in
the markets in which the Company has substantial experience. There can be no
assurance that the Company will be able to successfully integrate or profitably
operate new Company-operated or franchised restaurants located in its new
markets.
Competition. The restaurant industry is highly competitive with respect
to price, service, location and food quality, and there are many
well-established competitors. Certain of the Company's competitors have engaged
in substantial price discounting in recent years and may continue to do so in
the future. In addition, factors such as increased food, labor and benefits
costs and the availability of experienced management and hourly employees may
adversely affect the restaurant industry in general and the Company's
restaurants in particular. Each JACK IN THE BOX 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 coffee shops. Some of
its competitors have substantially greater financial resources and higher total
sales volume. Any changes in these factors could adversely affect the
profitability of the Company.
Exposure to Commodity Pricing. Although the Company may take hedging
positions in certain commodities from time to time and opportunistically
contract for some of these items in advance of a specific need, there can be no
assurances that the Company will not be subject to the risk of substantial and
sudden price increases, shortages or interruptions in supply of such items,
which could have a material adverse effect on the Company.
Risks Related to Increased Labor Costs. The Company has 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, the Company may need to
increase not only the wages of its 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 the Company from offsetting the increased
costs by increases in prices, the Company's 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. The imposition of any requirement that the Company
provide health insurance to all employees would have a material adverse impact
on the operations and financial condition of the Company and the restaurant
industry.
Taxes. The Company has been required, because of operating losses
incurred in past years, to establish valuation allowances against deferred tax
assets recorded for loss and tax credit carryforwards and various other items.
Until there is sufficient available evidence that the Company will be able to
realize such deferred tax assets through future taxable earnings, the Company's
tax provision will be highly sensitive to the expected level of annual earnings,
the impact of the alternative minimum tax under the Internal Revenue Code and
the limited current recognition of the deferred tax assets. As a result of
changing expectations, the relationship of the Company's income tax provision to
pre-tax earnings will vary more significantly from quarter to quarter and year
to year than companies that have been continuously profitable. However, the
Company believes that its effective tax rates are likely to increase in the
future.
Leverage. The Company is highly leveraged. Its substantial indebtedness
may limit the Company's ability to respond to changing business and economic
conditions. The contracts under which the Company acquired its debt impose
significant operating and financial restrictions which limit the Company's
ability to borrow money, sell assets or make capital expenditures or investments
without the approval of certain lenders. In addition to cash flows generated by
operations, other financing alternatives may be required in order to repay the
Company's substantial debt as it comes due. There can be no assurance that the
Company will be able to refinance its debt or obtain additional financing or
that any such financing will be on terms favorable to the Company.
8
Risks Related to Franchise Operations. At October 3, 1999, the Company
had 326 franchised JACK IN THE BOX restaurants. The opening and success of
franchised restaurants depends on various factors, including 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 and the financial and other capabilities of the Company's
franchisees and developers. There can be no assurance 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. There can also be no assurance that franchisees
will successfully operate their restaurants in a manner consistent with the
Company's concept and standards.
In addition, certain federal and state laws govern the Company's
relationships with its franchisees. See "Risks Related to Government
Regulations" below. In November 1996, an action was filed by the National JIB
Franchisee Association, Inc. (the "Franchisee Association") and several of the
franchisees against the Company and others. See Item 3-Legal Proceedings.
Dependence on Key Personnel. The Company believes that its success will
depend in part on the continuing services of its key executives, including
Robert J. Nugent, President and Chief Executive Officer, Charles W. Duddles,
Executive Vice President, Chief Financial Officer and Chief Administrative
Officer and Kenneth R. Williams, Executive Vice President, Marketing and
Operations, 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 the Company's business, and there can be no assurance that qualified
replacements would be available. The Company's continued growth will also depend
in part on its ability to attract and retain additional skilled management
personnel.
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. The Company and its franchisees are also
subject to laws governing their relationships with employees, including minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements. See "Risks Related to Increased Labor Costs" above. The Company is
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 the Company and
its franchisees. Changes in government regulations could have a material adverse
effect on the Company.
Environmental Risks and Regulations. As is the case with any owner or
operator of real property, the Company is 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. The Company does not have environmental liability
insurance, nor does it maintain a reserve, to cover such events. The Company has
engaged and may engage in real estate development projects and owns or leases
several parcels of real estate on which its restaurants are located. The Company
is unaware of any significant environmental hazards on properties it owns or has
owned, or operates or has operated. In the event of the determination of
contamination on such properties, the Company, as owner or operator, can be held
liable for severe penalties and costs of remediation. The Company also operates
motor vehicles and warehouses and handles various petroleum substances and
hazardous substances, but is not aware of any current material liability related
thereto.
Risks Associated With Year 2000 Compliance. See Item 7-Management's
Discussion and Analysis of Financial Condition and Results of Operations
("Item 7")-Year 2000 Compliance.
9
ITEM 2. PROPERTIES
At October 3, 1999, the Company owned 619 JACK IN THE BOX restaurant
buildings, including 399 located on leased land. In addition, it leased 814
restaurants where both the land and building are leased, including 142
restaurants operated by franchisees. At October 3, 1999, franchisees directly
owned or leased 84 restaurants.
Number of restaurants
---------------------------
Company- Franchise-
operated operated Total
------------------------------------------- -------- -------- ------
Company-owned restaurant buildings:
On Company-owned land .................. 168 52 220
On leased land ......................... 351 48 399
----- ----- -----
Subtotal ............................... 519 100 619
Company-leased restaurant buildings
on leased land ......................... 672 142 814
Franchise directly-owned or
directly-leased restaurant buildings ... -- 84 84
----- ----- -----
Total restaurant buildings ................ 1,191 326 1,517
===== ===== =====
The Company's 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. The Company has generally
been able to renew its restaurant leases as they expire at then current market
rates. The remaining lease terms of ground leases range from approximately one
year to 55 years, including optional renewal periods. The remaining lease terms
of the Company's other leases range from approximately one year to 40 years,
including optional renewal periods. At October 3, 1999, the leases had initial
terms expiring as follows:
Number of restaurants
---------------------------
Years initial Ground Land and
lease term expires leases building leases
--------------------------------------------- -------- ---------------
2000 - 2004.................................. 114 110
2005 - 2009.................................. 139 341
2010 - 2014.................................. 64 139
2015 and later............................... 82 224
In addition, the Company owns its principal executive offices in San
Diego, California, consisting of approximately 150,000 square feet. The Company
owns one warehouse and leases an additional five with remaining terms ranging
from one to 19 years, including optional renewal periods. Substantially all the
Company's real and personal property are pledged as collateral for various
components of the Company's long-term debt.
ITEM 3. LEGAL PROCEEDINGS
On February 2, 1995, an action by Concetta Jorgensen was filed against
the Company in the U.S. District Court in San Francisco, California alleging
that restrooms at a JACK IN THE BOX restaurant failed to comply with laws
regarding disabled persons and seeking damages in unspecified amounts, punitive
damages, injunctive relief, attorneys' fees and prejudgment interest. In an
amended complaint, damages were also sought on behalf of all physically disabled
persons who were allegedly denied access to restrooms at the restaurant. In
February 1997, the court ordered that the action for injunctive relief proceed
as a nationwide class action on behalf of all persons in the United States with
mobility disabilities. The Company has reached agreement on settlement terms
both as to the individual plaintiff Concetta Jorgensen and the claims for
injunctive relief, and the settlement agreement has been approved by the U.S.
District Court. The settlement requires the Company to make access improvements
at Company-operated restaurants to comply with the standards set forth in the
ADA Access Guidelines. The settlement requires compliance at 85% of the
Company-operated restaurants by April 2001 and for the balance of
Company-operated restaurants by October 2005. The Company has agreed to make
modifications to its restaurants to improve accessibility and anticipates
investing an estimated $19 million in capital improvements in connection with
these modifications, including approximately $5 million spent through
10
October 3, 1999. Similar claims have been made against JACK IN THE BOX
franchisees and the Company relating to franchised locations which may not be in
compliance with the ADA. The relief sought is (i) injunctive relief to bring
these additional restaurants into compliance with the ADA, (ii) monitoring
expenses to ensure compliance and (iii) attorneys' fees.
On November 5, 1996, an action was filed by the Franchisee Association
and several of the Company's franchisees in the Superior Court of California,
County of San Diego in San Diego, California, against the Company and others.
The lawsuit alleged that certain Company policies are unfair business practices
and violate sections of the California Corporations Code regarding material
modifications of franchise agreements and interfere with franchisees' right of
association. It sought injunctive relief, a declaration of the rights and duties
of the parties, unspecified damages and rescission of alleged material
modifications of plaintiffs' franchise agreements. The complaint contained
allegations of fraud, breach of a fiduciary duty and breach of a third party
beneficiary contract in connection with certain payments that the Company
received from suppliers and sought unspecified damages, interest, punitive
damages and an accounting. However, on August 31, 1998, the Court granted the
Company's request for summary judgment on all claims regarding an accounting,
conversion, fraud, breach of fiduciary duty and breach of third party
beneficiary contracts. On March 10, 1999, the Court granted motions by the
Company, ruling, in essence, that the franchisees would be unable to prove their
remaining claims. On April 22, 1999, the Court entered an order granting the
Company's motion to enforce a settlement with the Franchisee Association
covering various aspects of the franchise relationship, but involving no cash
payments by the Company. In accordance with that order, the Franchisee
Association's claims were dismissed with prejudice. On June 10, 1999, a final
judgment was entered in favor of the Company and against those plaintiffs with
whom the Company did not settle. The Franchisee Association and certain
individual plaintiffs filed an appeal on August 13, 1999. Management intends to
vigorously defend the appeal.
On December 10, 1996, a suit was filed by the Company's Mexican
licensee, Foodmex, Inc., in the U.S. District Court in San Diego, California
against the Company and its international franchising subsidiary. Foodmex
formerly operated several JACK IN THE BOX franchise restaurants in Mexico, but
its licenses were terminated by the Company for, among other reasons, chronic
insolvency and failure to meet operational standards. The Foodmex suit alleged
wrongful termination of its master license, breach of contract and unfair
competition and sought an injunction to prohibit termination of its license as
well as unspecified monetary damages. The Company and its subsidiary
counterclaimed and sought a preliminary injunction against Foodmex. On February
24, 1998, the Court issued an order dismissing Foodmex's complaint without
prejudice. In March 1998, Foodmex filed a Second Amended Complaint in the U.S.
District Court in San Diego, California alleging contractual, tort and law
violations arising out of the same business relationship and seeking damages in
excess of $10 million, attorneys' fees and costs. On June 25, 1999, the Court
granted the Company's motion for summary judgement on the plaintiff's Second
Amended Complaint, resulting in the complete dismissal of Foodmex's claim
against the Company. On the same day, the Court granted the Company's motion for
partial summary judgement on its breach of contract, trademark infringement,
unfair competition and related claims, including the Company's claim for a
permanent injunction. The Court ordered Foodmex to cease using any of the
Company's proprietary marks, and ordered it to cause its Mexican sublicensees to
cease using any of the Company's proprietary marks. Issues regarding Foodmex's
liability for breach of a promissory note and damages owed to the Company by
Foodmex remain to be decided. No trial date has been set.
The Company is also subject to normal and routine litigation. The
amount of liability from the claims and actions against the Company cannot be
determined with certainty, but in the opinion of management, the ultimate
liability from all pending legal proceedings, asserted legal claims and known
potential legal claims which are probable of assertion should not materially
affect the results of operations and liquidity of the Company.
The U.S. Internal Revenue Service ("IRS") examination of the Company's
federal income tax return for fiscal year 1996 resulted in the issuance of a
proposed adjustment to tax liability of $7.3 million (exclusive of interest).
The Company has filed a protest with the Regional Office of Appeals of the IRS
to contest the proposed assessment. Management believes that an adequate
provision for income taxes has been made.
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 October 3, 1999.
11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low closing sales prices
for the Company's common stock during the fiscal quarters indicated, as reported
on the New York Stock Exchange-Composite Transactions:
16 weeks ended 12 weeks ended
-------------- --------------------------------------------
Jan. 18, 1998 Apr. 12, 1998 July 5, 1998 Sept. 27, 1998
- ------------------------------------------------------------------------
High....... $20.25 $20.63 $20.94 $17.63
Low........ 14.75 15.25 16.25 13.00
16 weeks ended 12 weeks ended 13 weeks ended
-------------- --------------------------- --------------
Jan. 17, 1999 Apr. 11, 1999 July 4, 1999 Oct. 3, 1999
- ------------------------------------------------------------------------
High....... $23.06 $26.63 $28.56 $29.31
Low........ 13.06 22.00 22.38 22.44
The Company has not paid any cash or other dividends (other than the
issuance of the Rights, as described in Note 8 to the Consolidated Financial
Statements) during its last two fiscal years and does not anticipate paying
dividends in the foreseeable future. The Company's credit agreements prohibit
and its public debt instruments restrict the Company's right to declare or pay
dividends or make other distributions with respect to shares of its capital
stock.
As of October 3, 1999, there were approximately 500 stockholders of
record.
12
ITEM 6. SELECTED FINANCIAL DATA
The Company's fiscal year is 52 or 53 weeks, ending the Sunday closest
to September 30. The following selected financial data of the Company for each
of the four 52-week periods from 1995 to 1998 and the 53-week period of 1999 are
extracted or derived from financial statements which have been audited by KPMG
LLP, independent auditors.
Fiscal Year
--------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Statement of Operations Data:
Revenues:
Restaurant sales.................... $1,372,899 $1,112,005 $ 986,583 $ 892,029 $ 804,084
Distribution and other sales........ 41,828 26,407 45,233 132,421 179,689
Franchise rents and royalties....... 39,863 35,904 35,426 34,048 32,530
Other revenues (1).................. 2,309 49,740 4,500 4,324 2,413
---------- ---------- ---------- ---------- ----------
Total revenues.................... 1,456,899 1,224,056 1,071,742 1,062,822 1,018,716
---------- ---------- ---------- ---------- ----------
Costs of revenues (2)................. 1,142,995 951,619 869,721 882,270 871,792
Equity in loss of FRI (3)............. -- -- -- -- 57,188
Selling, general and
administrative expenses (4)......... 164,297 134,926 116,459 109,075 109,731
Interest expense...................... 28,249 33,058 40,359 46,126 48,463
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes and extraordinary item........ 121,358 104,453 45,203 25,351 (68,458)
Income taxes.......................... 44,900 33,400 9,900 5,300 500
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary item.................. $ 76,458 $ 71,053 $ 35,303 $ 20,051 $ (68,958)
========== ========== ========== ========== ==========
Earnings (loss) per share
before extraordinary item:
Basic ............................ $ 2.00 $ 1.82 $ .91 $ .52 $ (1.78)
Diluted .......................... 1.95 1.77 .89 .51 (1.78)
Balance Sheet Data (at end of period):
Total assets ......................... $ 833,644 $ 743,588 $ 681,758 $ 653,638 $ 662,674
Long-term debt ....................... 303,456 320,050 346,191 396,340 440,219
Stockholders' equity ................. 217,837 136,980 87,879 51,384 31,253
----------
(1) Includes the recognition of a $45.8 million Litigation Settlement in 1998 as
described in Item 7 - Revenues.
(2) Reflects an $18.0 million reduction of restaurant operating costs in 1999 as
described in Item 7 - Costs and Expenses.
(3) Reflects the complete write-off of the Company's $57.2 million investment in
Family Restaurants, Inc. ("FRI") in 1995.
(4) Includes the recognition of an $8.0 million stockholders' lawsuit settlement
in 1995.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
All comparisons under this heading between 1999, 1998 and 1997 refer to
the 53-week period ended October 3, 1999, and the 52-week periods ended
September 27, 1998 and September 28, 1997, respectively, unless otherwise
indicated.
Revenues
Company-operated restaurant sales were $1,372.9 million, $1,112.0
million and $986.6 million in 1999, 1998 and 1997, respectively. Restaurant
sales improved from the prior year by $260.9 million, or 23.5%, in 1999 and
$125.4 million, or 12.7%, in 1998, reflecting increases in the average number of
Company-operated restaurants and per store average ("PSA") sales. The increase
in 1999 also included restaurant sales of approximately $28 million for the
additional week. The average number of Company-operated restaurants grew to
1,120 in 1999 from 998 in 1998 and 900 in 1997 with new restaurant openings of
115, 102 and 75, respectively. PSA weekly sales for comparable restaurants
increased 8.7% in 1999 and 2.8% in 1998 compared to the respective prior year,
due to increases in both the number of transactions and the average transaction
amounts. The Company believes restaurant sales improvements are attributed to
its two-tier marketing strategy featuring both premium sandwiches and
value-priced alternatives, as well as to a popular brand-building advertising
campaign that features the Company's fictional founder, "Jack". Also
contributing to sales growth in 1999 were the Company's strategic initiatives,
including an Assemble-to-Order ("ATO") program in which sandwiches are made when
customers order them, new menu boards that showcase combo meals and a new order
confirmation system at drive-thru windows.
Distribution and other sales were $41.8 million, $26.4 million and
$45.2 million in 1999, 1998 and 1997, respectively. Distribution sales of food
and supplies to franchisees and others (excluding Chi-Chi's Mexican restaurants)
were $30.9 million in 1999, $24.3 million in 1998 and $9.9 million in 1997,
reflecting increases in the number of restaurants serviced by the Company's
distribution division and PSA sales growth at franchise restaurants. Total
distribution and other sales in 1997 include $35.3 million to Chi-Chi's Mexican
restaurants, prior to expiration of their contract. Because distribution is a
low-margin business, the decrease in distribution revenues in 1998 did not have
a material impact on the results of operations or financial condition of the
Company. Other sales from fuel and convenience store operations increased to
$10.9 million in 1999 from $2.1 million in 1998 as the number of locations
operated by the Company grew to seven during 1999 from one in 1998.
Franchise rents and royalties were $39.9 million, $35.9 million and
$35.4 million in 1999, 1998 and 1997, respectively, slightly more than 10% of
sales at franchise-operated restaurants in each of those years. Franchise
restaurant sales were $384.7 million in 1999, $345.9 million in 1998 and $352.2
million in 1997, benefiting in 1999 from the Company's strategic initiatives
described above. The percentages of sales in 1999 and 1998 were fractionally
higher due to increases in percentage rents at certain franchised restaurants.
In 1998, other revenues, typically interest income from investments
and notes receivable, also included a litigation settlement received from
various meat suppliers of $58.5 million, of which $45.8 million (the "Litigation
Settlement") was realized after litigation costs. Excluding this unusual item in
1998, other revenues declined to $2.3 million in 1999 from $4.0 million in 1998
and $4.5 million in 1997, reflecting lower investments as cash has been utilized
in refinancing activities.
Costs and Expenses
Restaurant costs of sales, which include food and packaging costs,
increased with sales growth and the addition of Company-operated restaurants to
$432.2 million in 1999 from $353.5 million in 1998 and $322.4 million in 1997.
As a percent of restaurant sales, costs of sales were 31.5% in 1999, 31.8% in
1998 and 32.7% in 1997. The restaurant costs of sales percentages decreased in
1999 and 1998 compared to 1997 primarily due to favorable ingredient costs,
principally beef, pork and beverages, offset partially by increased cheese and
produce costs.
14
Restaurant operating costs were $646.8 million, $549.2 million and
$478.7 million in 1999, 1998 and 1997, respectively. In 1999, the Company
reduced accrued liabilities and restaurant operating costs by $18.0 million,
primarily due to a change in estimates resulting from improvements to its loss
prevention and risk management programs, which have been more successful than
anticipated. This change in estimates was supported by an independent actuarial
study conducted to evaluate the self-insured portion of the Company's workers'
compensation, general liability and other insurance programs. Restaurant
operating costs were 48.4% of restaurant sales in 1999, excluding the change in
estimates, 49.4% in 1998 and 48.5% in 1997. The restaurant operating costs
percentage declined in 1999 compared to 1998, reflecting improved rates of
labor-related costs and occupancy expenses, which increased at a lesser rate
than PSA sales growth. The percentage increase in 1998 compared to 1997
primarily reflects higher labor costs due to increases in minimum wage and
initial training for operational improvements. Additionally, new restaurant
preopening costs increased approximately .2% of sales in 1998, principally due
to an increase in new restaurants.
Costs of distribution and other sales were $41.2 million in 1999, $25.8
million in 1998 and $45.0 million in 1997, reflecting the fluctuations in
distribution and other sales. Costs of distribution and other sales were 98.5%
of related sales in 1999, 97.8% in 1998 and 99.4% in 1997. The higher percentage
in 1999 was primarily due to start-up costs related to fuel and convenience
store operations. In 1997, costs included $.4 million in expenses related to the
closure of a distribution center which had been used principally to distribute
to Chi-Chi's Mexican restaurants.
Franchised restaurant costs, which consist principally of rents and
depreciation on properties leased to franchisees and other miscellaneous costs,
were $22.7 million, $23.0 million and $23.6 million in 1999, 1998 and 1997,
respectively. The declines in 1999 and 1998 compared to 1997 principally reflect
decreases in franchise-related legal expenses.
Selling, general and administrative expenses were $164.3 million,
$134.9 million and $116.5 million in 1999, 1998 and 1997, respectively.
Advertising and promotion costs were $70.3 million in 1999, $58.3 million in
1998 and $51.9 million in 1997, representing approximately 5.1% of restaurant
sales in 1999, 5.2% in 1998 and 5.3% in 1997. In 1999, regional administrative
and training expenses are reflected as general and administrative costs. Such
costs, which had previously been included with restaurant operating costs, have
been reclassified in prior years to conform with the 1999 presentation. General,
administrative and other costs were approximately 6.5% of revenues in 1999, 6.3%
in 1998 and 6.0% in 1997. The higher percentage in 1999 reflects costs
associated with the implementation of the ATO program and other guest
initiatives, accelerated restaurant growth, higher incentive compensation
attributable to the Company's earnings improvement and increased pension
expense. In 1998, such costs included a non-cash charge of approximately $8
million, primarily related to facilities and customer service improvement
projects.
Interest expense declined to $28.2 million in 1999 from $33.1 million
in 1998 and $40.4 million in 1997, principally due to a reduction in total debt
outstanding and lower interest rates. Over this three-year period, total
long-term debt has been reduced by $93 million and certain debt has been
refinanced at lower rates. See "Liquidity and Capital Resources."
The tax provisions reflect effective annual tax rates of 37%, 32% and
22% of pre-tax earnings in 1999, 1998 and 1997, respectively. The favorable
income tax rates in each year result from the Company's ability to realize, as
the Company's profitability has improved, previously unrecognized tax benefits
such as business tax credit, tax loss and minimum tax credit carryforwards.
In 1998, the Company incurred an extraordinary loss of $7.0 million,
less income tax benefits of $2.6 million, on the early extinguishment of $125
million each of its 9 1/4% senior notes and its 9 3/4% senior subordinated
notes. In 1997, the Company incurred a similar extraordinary loss of $1.6
million, less income tax benefits of $.3 million, on the early repayment of $50
million of the 9 1/4% senior notes.
Net earnings were $76.5 million, or $1.95 per diluted share, in 1999,
$66.7 million, or $1.66 per diluted share, in 1998 and $34.1 million, or $.86
per diluted share, in 1997. Fiscal year 1999 and 1998 include unusual items,
which increased the Company's net earnings. In 1999, restaurant operating costs
were reduced by $18.0 million due to a change in estimates as described above.
This change in estimates increased 1999 net earnings by $11.4 million, or $.29
per diluted share, net of income taxes. In 1998, net earnings included
approximately $25.7 million, or $.64 per diluted share, net of income taxes,
from the Litigation Settlement income offset by the aforementioned non-cash
15
charge, and the extraordinary loss of $4.4 million, or $.11 per share. Excluding
these unusual and extraordinary items, earnings increased 43% to $65.1 million
or $1.66 per diluted share, in 1999 from $45.4 million, or $1.13 per diluted
share, in 1998, which had increased 29% from $35.3 million, or $.89 per diluted
share, before an extraordinary item, in 1997.
Liquidity and Capital Resources
Cash and cash equivalents increased $1.0 million to approximately $10.9
million at October 3, 1999 from approximately $9.9 million at the beginning of
the fiscal year. The Company expects 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.
The Company's working capital deficit decreased $11.5 million to $131.8
million at October 3, 1999 from $143.3 million at September 27, 1998,
principally due to an increase in prepaid expenses. 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. The Company also continually invests in its business through
the addition of new units and refurbishment of existing units, which are
reflected as long-term assets and not as part of working capital.
On April 1, 1998, the Company entered into a new revolving bank credit
agreement, which provides for a credit facility expiring in 2003 of up to $175
million, including letters of credit of up to $25 million. At October 3, 1999,
the Company had borrowings of $86.0 million and approximately $81.1 million of
availability under the agreement.
Beginning in September 1997, the Company initiated a refinancing plan
to reduce and restructure its debt. At that time, the Company prepaid $50
million of its 9 1/4% senior notes due 1999 using available cash. In 1998, the
Company repaid the remaining $125 million of its 9 1/4% senior notes and all
$125 million of its 9 3/4% senior subordinated notes due 2002.
In order to fund these repayments, the Company completed, on April 14,
1998, a private offering of $125 million of 8 3/8% senior subordinated notes due
2008, redeemable beginning 2003. Additional funding sources included available
cash, as well as bank borrowings under the new bank credit facility. Total debt
outstanding has decreased $93.0 million to $305.2 million at October 3, 1999
from $398.2 million at the beginning of fiscal year 1997.
The Company is subject to a number of covenants under its various debt
instruments including limitations on additional borrowings, capital
expenditures, lease commitments and dividend payments, and requirements to
maintain certain financial ratios, cash flows and net worth. The bank credit
facility is secured by a first priority security interest in certain assets and
properties of the Company. In addition, certain of the Company's real estate and
equipment secure other indebtedness.
The Company requires capital principally to grow the business through
new restaurant construction, as well as to maintain, improve and refurbish
existing restaurants, and for general operating purposes. The Company's primary
sources of liquidity are expected to be cash flows from operations, the
revolving bank credit facility, and the sale and leaseback of restaurant
properties. Additional potential sources of liquidity include financing
opportunities and the conversion of Company-operated restaurants to franchised
restaurants.
Based upon current levels of operations and anticipated growth, the
Company expects that sufficient cash flows will be generated from operations so
that, combined with available financing alternatives, the Company will be able
to meet debt service, capital expenditure and working capital requirements.
Although the amount of liability from claims and actions described in
Note 10 of the Consolidated Financial Statements cannot be determined with
certainty, management believes the ultimate liability of such claims and actions
should not materially affect the results of operations and liquidity of the
Company.
16
Seasonality
The Company's 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.
Year 2000 Compliance
The information provided below constitutes a "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information and Business Disclosure Act of
1998.
The Company's State of Year 2000 Readiness. In 1995, the Company began
to prepare a plan to address the impact of the arrival of the Year 2000 on its
business. The Company assessed its information technology ("IT") systems and
embedded microprocessor technology ("ET") to determine which technology required
modification or replacement and which are critical to the Company's operations.
The Company applied internal and external resources to upgrade, repair or
replace significant systems that were not Year 2000 ready. Remediation, testing
and implementation of the Company's major IT applications and date sensitive ET
are substantially complete.
The Company's Franchisees. Approximately one-fifth of JACK IN THE BOX
restaurants are operated by franchisees. The Company has provided information to
its franchisees about the business risks associated with the Year 2000 in video
presentations, correspondence and personal meetings over the last two years and
has advised them that they are required to be Year 2000 ready by December 31,
1999. The Company shared information with franchisees regarding the
compliance status of point-of-sale hardware and software and other restaurant
equipment, as well as its own compliance efforts in corporate offices and
Company-operated restaurants. The Company replaced, at franchisees' expense, the
non-compliant personal computers it had leased and non-compliant software it had
licensed to franchisees of approximately 92% of franchised restaurants. In
addition, franchisees were provided with copies of contingency plans applicable
to Company restaurants.
The Costs to Address the Company's Year 2000 Issues. At fiscal year
end, the Company estimates that it had incurred costs of more than $12 million
for its Year 2000 efforts. The Company believes the total costs of completing
its Year 2000 plan will be approximately $13 million with approximately 25%
relating to new systems which have been or will be capitalized. Some planned
system replacements, which are anticipated to provide significant future
benefits, were accelerated due to Year 2000 concerns.
The Risks of the Company's Year 2000 Issues. The Company communicated
with approximately 3,000 of its vendors with regard to Year 2000 issues, seeking
to gain assurance of Year 2000 readiness. Of the approximately 240 vendors which
were identified as critical, all have responded that they expect to address all
Year 2000 issues affecting the supply of products or services to JACK IN THE BOX
restaurants on a timely basis. There can be no guarantees that the Company's
vendors will be Year 2000 ready in a timely manner or that third parties with
which the Company's computer systems exchange data will be Year 2000 ready both
in a timely manner and in a manner compatible with continued data exchange with
the Company's computer systems.
The Company believes that its most reasonably likely worst case Year
2000 scenario would relate to problems with the systems of third parties rather
than the Company's internal systems. If the vendors of the Company's most
important goods and services or the suppliers of the Company's necessary energy,
telecommunications and transportation needs fail to provide the Company with (1)
the materials and services which are necessary to produce, distribute and sell
its products, (2) the electrical power and other utilities necessary to sustain
its operations, or (3) reliable means of transporting supplies to its
restaurants and franchisees, such failure could have a material adverse effect
on the results of operations, liquidity and financial condition of the Company.
If any IT or ET systems critical to the Company's operations have not
been adequately addressed, any of the Company's internal computer systems have
not been successfully remediated, or a significant number of the Company's
franchisees are not Year 2000 ready, there could be a material adverse effect
on the Company's results of operations, liquidity and financial condition.
17
The Company's Contingency Plan. The Company has developed business
contingency plans to address both unavoided and unavoidable Year 2000 risks
including restaurant specific contingency plans and checklists for restaurant
managers, regional plans, and plans addressing various functions at its
corporate headquarters. The Company is designating personnel to be available to
coordinate responsive actions in the event emergencies occur. Refinements to the
plans will be continuously considered and implemented, as appropriate,
throughout the remainder of the year and into the Year 2000.
Future Accounting Changes
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. This Statement is effective for
fiscal years beginning after December 15, 1998 and requires that costs incurred
prior to the initial application of the SOP not be adjusted to the amounts that
would have been capitalized had the SOP been in effect when those costs were
incurred. SOP 98-1 is effective for the Company's fiscal year ending October 1,
2000, and is not expected to have a material effect on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement was amended by SFAS 137 which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 is effective for the Company's first quarter in the fiscal year ending
September 30, 2001 and is not expected to have a material effect on the
Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure relating to financial instruments is to
changes in interest rates. The Company uses interest rate swap agreements to
reduce exposure to interest rate fluctuations. At October 3, 1999, the Company
had a $25 million notional amount interest rate swap agreement expiring in June
2001. This agreement effectively converts a portion of the Company's variable
rate bank debt to fixed rate debt and has a pay rate of 6.63%.
The Company's $175 million credit facility bears interest at an annual
rate equal to the prime rate or the London Interbank Offered Rate ("LIBOR") plus
an applicable margin based on a financial leverage ratio. As of October 3, 1999,
the Company's applicable margin was set at .875%. In fiscal year 1999, the
average interest rate paid on the credit facility was 6.5%.
At October 3, 1999, a hypothetical one percentage point increase in
short-term interest rates would result in a reduction of $.6 million in annual
pre-tax earnings. The estimated reduction is based on holding the unhedged
portion of bank debt at its October 3, 1999 level.
At October 3, 1999, the Company 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.
18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age (as of January 1, 2000)
and position of each person who is a director or executive officer of the
Company.
Name Age Positions
-------------------------- ---- ----------------------------------------
Robert J. Nugent(3)(6) 58 President, Chief Executive Officer
and Director
Charles W. Duddles 59 Executive Vice President, Chief
Financial Officer, Chief
Administrative Officer and Director
Kenneth R. Williams 57 Executive Vice President, Marketing
and Operations
Lawrence E. Schauf 54 Executive Vice President and Secretary
Paul L. Schultz 45 Senior Vice President, Operations and
Franchising
Karen C. Bachmann 48 Vice President, Corporate Communications
Donald C. Blough 51 Vice President, Chief Information Officer
Bruce N. Bowers 53 Vice President, Logistics
Carlo E. Cetti 55 Vice President, Human Resources and
Strategic Planning
William F. Motts 56 Vice President, Restaurant Development
Harold L. Sachs 54 Vice President, Treasurer
David M. Theno, Ph.D. 49 Vice President, Technical Services
Linda A. Vaughan 41 Vice President, Marketing
Charles E. Watson 44 Vice President, Real Estate and
Construction
Darwin J. Weeks 53 Vice President, Controller and
Chief Accounting Officer
Jack W. Goodall(3)(4)(5) 61 Chairman of the Board
Michael E. Alpert(4)(5) 57 Director
Jay W. Brown(2)(3)(6) 54 Director
Paul T. Carter(1)(2)(6) 77 Director
Edward W. Gibbons(1)(4) 63 Director
Alice B. Hayes, Ph.D.(2)(5) 62 Director
Murray H. Hutchison(1)(2)(5) 61 Director
L. Robert Payne(1)(4) 66 Director
----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
(4) Member of the Finance Committee.
(5) Member of the Nominating and Governance Committee.
(6) Member of the Year 2000 Ad Hoc Committee.
Mr. Nugent has been President and Chief Executive Officer since April
1996. He was Executive Vice President from February 1985 to April 1996. He has
been a director since February 1988. Mr. Nugent has 20 years of experience with
the Company in various executive and operations positions.
Mr. Duddles has been Executive Vice President and Chief Administrative
Officer since May 1988. He has been Chief Financial Officer since October 1985.
He has been a director since February 1988. Mr. Duddles has 20 years of
experience with the Company in various finance positions.
Mr. Williams has been Executive Vice President, Marketing and
Operations since May 1996 and was Senior Vice President from January 1993 to May
1996. Mr. Williams has 34 years of experience with the Company in various
operations positions.
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.
19
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 26 years of experience with the Company in various operations
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. Blough has been Vice President, Chief Information Officer (formerly
Vice President, Management Information Systems) since August 1993. Mr. Blough
has 21 years of experience with the Company in various management information
systems positions.
Mr. Bowers has been Vice President, Logistics (formerly Purchasing and
Distribution) since April 1982. Mr. Bowers has 30 years of experience with the
Company in various manufacturing, purchasing and distribution positions.
Mr. Cetti has been Vice President, Human Resources and Strategic
Planning since March 1994. Mr. Cetti has 19 years of experience with the Company
in various human resources and training positions.
Mr. Motts has been Vice President, Restaurant Development since
September 1988. Mr. Motts has 17 years of experience with the Company in various
restaurant development positions.
Mr. Sachs has been Vice President, Treasurer since November 1999. He
was Treasurer from January 1986 to November 1999. Mr. Sachs has 21 years of
experience with the Company in various finance positions.
Dr. Theno has been Vice President, Technical Services (formerly Quality
Assurance, Research and Development and Product Safety) since April 1994. He was
Vice President, Quality Assurance and Product Safety from March 1993 to April
1994.
Ms. Vaughan has been Vice President, Marketing since March 1999. She
was Vice President, Products, Promotions and Consumer Research from February
1996 until March 1999. She was Division Vice President, New Products and
Promotions from November 1994 until February 1996. Ms. Vaughan has 12 years of
experience with the Company in various marketing and finance positions.
Mr. Watson has been Vice President, Real Estate and Construction since
April 1997. From July 1995 to March 1997, he was Vice President, Real Estate and
Construction of Boston Chicken, Inc. He was Division Vice President, Real Estate
and Construction of the Company from November 1991 through June 1995. Mr. Watson
has 14 years of experience with the Company in various real estate and
construction positions.
Mr. Weeks has been Vice President, Controller and Chief Accounting
Officer since August 1995 and was previously Division Vice President and
Assistant Controller from April 1982 through July 1995. Mr. Weeks has 23 years
of experience with the Company in various finance positions.
Mr. Goodall has been Chairman of the Board since October 1985. For more
than five years prior to his retirement in April 1996, he was President and
Chief Executive Officer of the Company. Mr. Goodall is a director of Ralcorp
Holdings, Inc.
Mr. Alpert has been a director of the Company since August 1992. Mr.
Alpert was a partner in the San Diego office of the law firm of Gibson, Dunn &
Crutcher LLP for more than 5 years prior to his retirement in August 1992. He is
currently Advisory Counsel to Gibson, Dunn & Crutcher LLP. Gibson, Dunn &
Crutcher LLP provides legal services to the Company from time to time.
Mr. Brown has been a director of the Company since February 1996. He is
currently a principal with Westgate Group, LLC. From April 1995 to September
1998, Mr. Brown was President and CEO of Protein Technologies International,
Inc., the world's leading supplier of soy-based proteins to the food and paper
processing industries. He was Chairman and CEO of Continental Baking Company
from October 1984 to July 1995 and President of Van Camp Seafood Company from
August 1983 to October 1984. From July 1981 through July 1983, he served as Vice
President of Marketing for the Company. Mr. Brown is a director of Agribrands
International, Inc. and Eagle OPG, Inc.
20
Mr. Carter has been a director of the Company since June 1991. Mr.
Carter has been an insurance consultant for the Government Division of Corroon &
Black Corporation since February 1987. He retired in February 1987 as Chairman
and Chief Executive Officer of Corroon & Black Corporation, Southwestern Region
and as Director and Senior Vice President of Corroon & Black Corporation. Mr.
Carter is a director of Borrego Springs National Bank.
Mr. Gibbons has been a director of the Company since October 1985 and
has been a general partner of Gibbons, Goodwin, van Amerongen, an investment
banking firm, for more than five years preceding the date hereof. Mr. Gibbons is
also a director of Robert Half International, Inc. and Summer Winds Garden
Centers, Inc.
Dr. Hayes has been a director of the Company since September 1999. She
has been the President of the University of San Diego since 1995. From 1989 to
1995, Dr. Hayes served as Executive Vice President and Provost of Saint Louis
University. Previously, she spent 27 years at Loyola University of Chicago,
where she served in various executive positions. Dr. Hayes is also a director of
the Pulitzer Publishing Company, the Old Globe Theatre, Independent Colleges of
Southern California, The San Diego Foundation, Loyola University of Chicago,
Scripps Bank, and Catholic Charities, Diocese of San Diego.
Mr. Hutchison has been a director of the Company since May 1998. He
served 18 years as Chief Executive Officer and Chairman of International
Technology Corp., one of the largest publicly traded environmental engineering
firms in the U.S., until his retirement in 1996. Mr. Hutchison is a director of
Sunrise Medical, Inc., Cadiz Land Company Inc., Senior Resource Group, and is
Chairman of the Huntington Hotel Corp.
Mr. Payne has been a director of the Company since August 1986. He has
been President and Chief Executive Officer of Multi-Ventures, Inc. since
February 1976 and was Chairman of the Board of Grossmont Bank, a wholly-owned
subsidiary of Bancomer, S.A., from February 1974 until October 1995.
Multi-Ventures, Inc. is a real estate development and investment company that is
also the managing partner of the San Diego Mission Valley Hilton and the Hanalei
Hotel. He was a principal in the Company prior to its acquisition by its former
parent, Ralston Purina Company, in 1968.
That portion of the Company's definitive Proxy Statement appearing
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" to
be filed with the Commission pursuant to Regulation 14A within 120 days after
October 3, 1999 and to be used in connection with its 2000 Annual Meeting of
Shareholders is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
That portion of the Company's definitive Proxy Statement appearing
under the caption "Executive Compensation" to be filed with the Commission
pursuant to Regulation 14A within 120 days after October 3, 1999 and to be used
in connection with its 2000 Annual Meeting of Stockholders is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That portion of the Company's 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 October 3, 1999 and to be used in connection with its 2000 Annual
Meeting of Stockholders is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of the Company's definitive Proxy Statement appearing
under the caption "Certain Transactions" to be filed with the Commission
pursuant to Regulation 14A within 120 days after October 3, 1999 and to be used
in connection with its 2000 Annual Meeting of Stockholders is hereby
incorporated by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a)(1) Financial Statements. See Index to Consolidated Financial
Statements on page F-1 of this report.
21
ITEM 14(a)(2) Financial Statement Schedules. Not applicable.
ITEM 14(a)(3) Exhibits.
Number Description
- ------ ------------------------
3.1 Restated Certificate of Incorporation, as amended
3.2 Restated Bylaws
4.1 Indenture for the 8 3/8% Senior Subordinated Notes due 2008(6)
(Instruments with respect to the registrant's long-term debt
not in excess of 10% of the total assets of the registrant and
its subsidiaries on a consolidated basis have been omitted. The
registrant agrees to furnish supplementally a copy of any such
instrument to the Commission upon request.)
10.1.1 Revolving Credit Agreement dated as of April 1, 1998 by and between
Foodmaker, Inc. and the Banks named therein(6)
10.1.2 First Amendment dated as of August 24, 1998 to the Revolving
Credit Agreement dated as of April 1, 1998 by and between
Foodmaker, Inc. and the Banks named therein(7)
10.1.3 Second Amendment dated as of February 27, 1999 to the Revolving
Credit Agreement dated as of April 1, 1998 by and between
Foodmaker, Inc. and the Banks named therein(8)
10.1.4 Third Amendment dated as of September 17, 1999 to the Revolving Credit
Agreement dated as of April 1, 1998 by and between Foodmaker, Inc. and
the Banks named therein
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 Amended and Restated 1992 Employee Stock Incentive Plan(4)
10.5 Capital Accumulation Plan for Executives(2)
10.6 Supplemental Executive Retirement Plan(2)
10.7 Performance Bonus Plan(7)
10.8 Deferred Compensation Plan for Non-Management Directors(3)
10.9 Amended and Restated Non-Employee Director Stock Option Plan
10.10 Form of Compensation and Benefits Assurance Agreement for Executives(5)
23.1 Consent of KPMG LLP
27 Financial Data Schedule (included only with electronic filing)
- ----------
(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
Annual Report on Form 10-K for the fiscal year ended September 30, 1990.
(3) 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.
(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 September 27, 1998.
(8) Previously filed and incorporated herein by reference from registrant's
Quarterly Report on Form 10-Q for the quarter ended April 11, 1999.
22
ITEM 14(b) The Company filed Forms 8-K effective July 20, 1999 and
October 5, 1999 with the Securities and Exchange Commission
reporting its name change from Foodmaker, Inc. to
Jack in the Box Inc.
ITEM 14(c) All required exhibits are filed herein or incorporated by reference
as described in Item 14(a)(3).
ITEM 14(d) All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial
Statements or notes thereto.
23
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: CHARLES W. DUDDLES
------------------
Charles W. Duddles
Executive Vice President,
Chief Financial Officer, Chief
Administrative Officer and Director
Date: December 2, 1999
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
--------- ----- ----
JACK GOODALL Chairman of the Board December 2, 1999
- ---------------------
Jack Goodall
ROBERT J. NUGENT President, Chief Executive December 2, 1999
- --------------------- Officer and Director
Robert J. Nugent (Principal Executive Officer)
CHARLES W. DUDDLES Executive Vice President, December 2, 1999
- --------------------- Chief Financial Officer,
Charles W. Duddles Chief Administrative Officer
and Director
(Principal Financial Officer)
DARWIN J. WEEKS Vice President, Controller and December 2, 1999
- --------------------- Chief Accounting Officer
Darwin J. Weeks (Principal Accounting Officer)
MICHAEL E. ALPERT Director December 2, 1999
- ---------------------
Michael E. Alpert
JAY W. BROWN Director December 2, 1999
- ---------------------
Jay W. Brown
PAUL T. CARTER Director December 2, 1999
- ---------------------
Paul T. Carter
EDWARD W. GIBBONS Director December 2, 1999
- ---------------------
Edward Gibbons
ALICE B. HAYES Director December 2, 1999
- ---------------------
Alice B. Hayes
MURRAY H. HUTCHISON Director December 2, 1999
- ---------------------
Murray H. Hutchison
L. ROBERT PAYNE Director December 2, 1999
- ---------------------
L. Robert Payne
24
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
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 October 3, 1999 and September 27, 1998, and the
related consolidated statements of earnings, cash flows and stockholders' equity
for the fifty-three weeks ended October 3, 1999, and the fifty-two weeks ended
September 27, 1998 and September 28, 1997. 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 generally accepted auditing
standards. 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 October 3, 1999 and September 27, 1998, and the results
of their operations and their cash flows for the fifty-three weeks ended October
3, 1999, and the fifty-two weeks ended September 27, 1998 and September 28, 1997
in conformity with generally accepted accounting principles.
KPMG LLP
San Diego, California
November 5, 1999
F-2
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
October 3, September 27,
1999 1998
- ------------------------------------------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 10,925 $ 9,952
Accounts receivable, net..................... 9,156 13,705
Inventories.................................. 20,159 17,939
Prepaid expenses............................. 15,387 12,338
Assets held for sale......................... 41,607 28,488
---------- ---------
Total current assets...................... 97,234 82,422
---------- ---------
Property and equipment:
Land......................................... 89,352 90,159
Buildings.................................... 379,595 332,840
Restaurant and other equipment............... 334,577 269,135
Construction in progress..................... 55,161 67,546
---------- ---------
858,685 759,680
Less accumulated depreciation
and amortization........................... 251,401 227,973
---------- ---------
607,284 531,707
---------- ---------
Other assets, net.............................. 129,126 129,459
---------- ---------
$ 833,644 $ 743,588
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 1,695 $ 1,685
Accounts payable............................. 44,180 52,086
Accrued liabilities.......................... 183,151 171,974
---------- ---------
Total current liabilities................. 229,026 225,745
---------- ---------
Long-term debt, net of current maturities...... 303,456 320,050
Other long-term liabilities.................... 75,270 58,466
Deferred income taxes.......................... 8,055 2,347
Stockholders' equity:
Preferred stock.............................. -- --
Common stock $.01 par value, 75,000,000
authorized, 41,105,434 and 40,756,899
issued, respectively...................... 411 408
Capital in excess of par value............... 290,336 285,940
Accumulated deficit.......................... (38,447) (114,905)
Treasury stock, at cost, 2,828,974 shares.... (34,463) (34,463)
---------- ---------
Total stockholders' equity................ 217,837 136,980
---------- ---------
$ 833,644 $ 743,588
========== =========
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
-------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Revenues:
Restaurant sales....................... $1,372,899 $1,112,005 $ 986,583
Distribution and other sales........... 41,828 26,407 45,233
Franchise rents and royalties.......... 39,863 35,904 35,426
Other.................................. 2,309 49,740 4,500
---------- ---------- ----------
1,456,899 1,224,056 1,071,742
---------- ---------- ----------
Costs and expenses:
Costs of revenues:
Restaurant costs of sales............ 432,231 353,534 322,377
Restaurant operating costs........... 646,815 549,221 478,747
Costs of distribution and other sales 41,217 25,821 44,978
Franchised restaurant costs.......... 22,732 23,043 23,619
Selling, general and administrative.... 164,297 134,926 116,459
Interest expense....................... 28,249 33,058 40,359
---------- ---------- ----------
1,335,541 1,119,603 1,026,539
---------- ---------- ----------
Earnings before income taxes
and extraordinary item................. 121,358 104,453 45,203
Income taxes............................. 44,900 33,400 9,900
---------- ---------- ----------
Earnings before extraordinary item....... 76,458 71,053 35,303
Extraordinary item-loss on early
extinguishment of debt, net of taxes... -- (4,378) (1,252)
---------- ---------- ----------
Net earnings............................. $ 76,458 $ 66,675 $ 34,051
========== ========== ==========
Earnings per share-basic:
Earnings before extraordinary item..... $ 2.00 $ 1.82 $ .91
Extraordinary item..................... -- (.11) (.03)
---------- ---------- ----------
Net earnings per share................. $ 2.00 $ 1.71 $ .88
========== ========== ==========
Earnings per share-diluted:
Earnings before extraordinary item..... $ 1.95 $ 1.77 $ .89
Extraordinary item..................... -- (.11) (.03)
---------- ---------- ----------
Net earnings per share................. $ 1.95 $ 1.66 $ .86
========== ========== ==========
Weighted average shares outstanding:
Basic.................................. 38,144 39,092 38,933
Diluted................................ 39,281 40,113 39,776
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
-----------------------------------
1999 1998 1997
- -------------------------------------------------------- --------- --------- ---------
Cash flows from operating activities:
Net earnings before extraordinary item ............... $ 76,458 $ 71,053 $ 35,303
Non-cash items included in operations:
Depreciation and amortization ...................... 45,857 40,201 37,922
Deferred finance cost amortization ................. 1,794 1,913 2,036
Deferred income taxes .............................. 5,708 585 (7,017)
Decrease (increase) in receivables ................... 4,549 (3,223) 2,000
Decrease (increase) in inventories ................... (2,220) 361 2,550
Increase in prepaid expenses ......................... (3,049) (1,184) (1,324)
Increase (decrease) in accounts payable .............. (7,906) 12,511 10,282
Increase in other accrued liabilities ................ 35,537 25,925 39,218
--------- --------- ---------
Cash flows provided by operating activities ...... 156,728 148,142 120,970
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment .................. (134,333) (111,098) (59,660)
Dispositions of property and equipment ............... 12,172 5,431 3,357
Increase in trading area rights ...................... (3,864) (6,763) (5,553)
Decrease (increase) in assets held for sale........... (13,119) 2,337 (21,494)
Other ................................................ (4,024) (8,358) (1,401)
--------- --------- ---------
Cash flows used in investing activities .......... (143,168) (118,451) (84,751)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt, including
current maturities ................................. (9,833) (251,504) (51,817)
Proceeds from issuance of long-term debt ............. 4,347 127,690 950
Borrowings under revolving bank loans ................ 334,000 224,500 --
Principal repayments under revolving bank loans ...... (345,500) (127,000) --
Extraordinary loss on retirement of debt, net of taxes -- (4,378) (1,252)
Repurchase of common stock ........................... -- (20,000) --
Proceeds from issuance of common stock ............... 4,399 2,426 2,444
--------- --------- ---------
Cash flows used in financing activities .......... (12,587) (48,266) (49,675)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ... $ 973 $ (18,575) $ (13,456)
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized ............... $ 26,873 $ 30,551 $ 38,759
Income tax payments ................................ 26,451 28,519 7,179
See accompanying notes to consolidated financial statements.
F-5
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Common stock
------------------------ Capital in
Number of excess of Accumulated Treasury
shares Amount par value deficit stock Total
------------------------------------- ------------- ---------- ------------- -------------- ------------ -----------
Balance at September 29, 1996...... 40,253,179 $ 403 $ 281,075 $ (215,631) $(14,463) $ 51,384
Exercise of stock options and
warrants......................... 256,290 2 1,711 -- -- 1,713
Tax benefit associated with
exercise of stock options........ -- -- 731 -- -- 731
Net earnings....................... -- -- -- 34,051 -- 34,051
----------- ----- ---------- ---------- -------- ---------
Balance at September 28, 1997...... 40,509,469 405 283,517 (181,580) (14,463) 87,879
Exercise of stock options and
warrants......................... 247,430 3 1,701 -- -- 1,704
Tax benefit associated with
exercise of stock options........ -- -- 722 -- -- 722
Purchases of treasury stock........ -- -- -- -- (20,000) (20,000)
Net earnings....................... -- -- -- 66,675 -- 66,675
----------- ------ --------- ---------- -------- ---------
Balance at September 27, 1998...... 40,756,899 408 285,940 (114,905) (34,463) 136,980
Exercise of stock options and
warrants......................... 348,535 3 2,733 -- -- 2,736
Tax benefit associated with
exercise of stock options........ -- -- 1,663 -- -- 1,663
Net earnings....................... -- -- -- 76,458 -- 76,458
----------- ------ --------- ---------- -------- ---------
Balance at October 3, 1999......... 41,105,434 $ 411 $ 290,336 $ (38,447) $(34,463) $ 217,837
=========== ====== ========= ========== ======== =========
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 - On October 4, 1999, Foodmaker, Inc. changed its
name to Jack in the Box Inc. (the "Company"). The Company operates and
franchises JACK IN THE BOX quick-serve restaurants with operations
principally in the western and southwestern United States.
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 with the 1999 presentation. The Company's
fiscal year is 52 or 53 weeks ending the Sunday closest to September 30.
The financial statements include the accounts of the Company for and as of
the 53 weeks ended October 3, 1999, and 52 weeks ended September 27, 1998
and September 28, 1997.
Financial instruments - The fair value of the Company's cash equivalents,
accounts receivable and accounts payable approximate the carrying amounts
due to their short maturities. The fair values of each of the Company's
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 the Company's current borrowing rate for
similar debt instruments of comparable maturity. The estimated fair values
of the Company's long-term debt at October 3, 1999 and September 27, 1998
approximate carrying values.
The Company uses commodities hedging instruments to reduce the risk of
price fluctuations related to future raw materials requirements for
commodities such as beef and pork. The terms of such instruments generally
do not exceed twelve months, and depend on the commodity and other market
factors. Gains and losses are deferred and subsequently recorded as cost
of products sold in the statement of earnings in the same period as the
hedged transactions.
The Company uses interest rate swap agreements in the management of
interest rate exposure. The interest rate differential to be paid or
received is normally accrued as interest rates change, and is recognized
as a component of interest expense over the life of the agreements. At
October 3, 1999, the Company had a $25 million notional amount interest
rate swap agreement expiring in June 2001. This agreement effectively
converts a portion of the Company's variable rate bank debt to fixed rate
debt and has a pay rate of 6.63%.
At October 3, 1999, the Company had no other material financial
instruments subject to significant market exposure.
Cash and cash equivalents - The Company invests cash in excess of
operating requirements 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 (first-in, first-out method)
or market.
Assets held for sale primarily represent the costs for new sites that
will be sold and leased back when construction is completed, as well as
costs for buildings on lessor owned land for which the Company will be
reimbursed by lessor at the conclusion of construction. Gains and losses
realized on the sale leaseback transactions are deferred and credited
to income over the lease terms. The leases are classified in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 13,
Accounting for Leases.
Preopening costs are those typically associated with the opening of a new
restaurant and consist primarily of employee training costs. Preopening
costs are expensed as incurred.
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 trading area rights, lease acquisition
costs, deferred franchise contract costs, deferred finance costs and
goodwill. Trading area rights represent the amount allocated under
purchase accounting to reflect the value of operating existing restaurants
within their specific trading area. These rights are amortized on a
straight-line basis over the period of control of the property, not
exceeding 40 years, and are retired when a restaurant is franchised or
sold.
Lease acquisition costs represent the acquired values of existing lease
contracts having lower contractual rents than fair market rents and are
amortized over the remaining lease term.
Also included in other assets are deferred franchise contract costs which
represent the acquired value of franchise contracts in existence at the
time the Company was acquired in 1988 and are amortized over the term of
the franchise agreement, usually 20 years; deferred finance costs which
are amortized using the interest method over the terms of the respective
loan agreements, from 4 to 10 years; and goodwill which represents the
excess of purchase price over the fair value of net assets acquired and
is amortized on a straight-line basis over 40 years.
Impairment of Long-Lived Assets - In accordance with SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, the Company evaluates impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company also
accounts for long-lived assets that are held for disposal at the lower of
cost or fair value.
Franchise operations - Franchise arrangements generally provide for
initial license fees of $50 (formerly $25) per restaurant and continuing
payments to the Company based on a percentage of sales. Among other
things, the 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 the Company has substantially performed all of
its contractual obligations. Expenses associated with the issuance of the
franchise are expensed as incurred. Franchise rents and royalties are
recorded as income on an accrual basis. Gains on sales of restaurant
businesses to franchisees, which have not been material, are recorded as
other revenues when the sales are consummated and certain other criteria
are met.
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.
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)
Net earnings per share - The consolidated financial statements are
presented in accordance with SFAS 128, Earnings per Share. SFAS 128
requires the presentation of basic earnings per share, computed using the
weighted average number of shares outstanding during the period, and
diluted earnings per share, computed using the additional dilutive effect
of all potential common stock. The diluted earnings per share computation
includes the dilutive impact of stock options and warrants.
Stock options - The Company accounts for stock options under the intrinsic
value based method, as prescribed by Accounting Principles Board ("APB")
Opinion No. 25, whereby compensation expense is recognized for the excess,
if any, of the quoted market price of the Company stock at the date of
grant over the option price. The Company's policy is to grant stock
options at fair value at the date of grant. The Company has included pro
forma information in Note 7, as permitted by SFAS 123, Accounting for
Stock-Based Compensation.
Advertising costs - The Company maintains a marketing fund consisting of
funds contributed by the Company equal to at least 5% of gross sales of
all Company-operated JACK IN THE BOX restaurants and contractual marketing
fees paid monthly by franchisees. Production costs of commercials,
programming and other marketing activities are expensed to the marketing
fund when the advertising is first used and the costs of advertising are
charged to operations as incurred. The Company's contributions to the
marketing fund and other marketing expenses, which are included in
selling, general and administrative expenses in the accompanying
consolidated statements of earnings, were $70,297, $58,256 and $51,870 in
1999, 1998 and 1997, respectively.
Segment reporting - In 1999, the Company adopted SFAS 131, Disclosures
about Segments of an Enterprise and Related Information, which establishes
reporting standards for a company's operating segments and related
disclosures about its products, services, geographic areas and major
customers. 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 the chief operating decision maker in deciding how
to allocate resources. This Statement allows aggregation of similar
operating segments into a single operating segment if the businesses are
considered similar under the criteria of this Statement. The Company
believes it operates in a single segment.
Estimations - In preparing the consolidated financial statements in
conformity with generally accepted accounting principles, 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.
In 1999, the Company reduced accrued liabilities and restaurant operating
costs by $18.0 million, primarily due to a change in estimates resulting
from improvements to its loss prevention and risk management programs,
which have been more successful than anticipated. This change in estimates
was supported by an independent actuarial study conducted to evaluate the
self-insured portion of the Company's workers' compensation, general
liability and other insurance programs.
F-9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
2. LONG-TERM DEBT
1999 1998
----------------------------------------------------- -------- --------
The detail of long-term debt at each year end follows:
Bank loans, variable interest rate based
on established market indicators which
approximate the prime rate or less............... $ 86,000 $ 97,500
Senior subordinated notes, 8 3/8% interest,
net of discount of $179 and $200, respect-
ively, reflecting an 8.4% effective
interest rate due April 15, 2008,
redeemable beginning April 15, 2003.............. 124,821 124,800
Financing lease obligations, net of discounts
of $1,413 and $1,794 reflecting a 10.3%
effective interest rate, semi-annual payments
of $3,413 and $747 to cover interest and
sinking fund requirements, and due in equal
installments January 1, 2003 and November 1,
2003, respectively............................... 68,587 68,206
Secured notes, 11 1/2% interest, due in monthly
installments through May 1, 2005................. 7,011 7,931
Secured notes, 9 1/2% interest, due
August 1, 2017, repaid in 1999................... -- 8,171
Capitalized lease obligations, 11% average
interest rate.................................... 16,842 13,529
Other notes, principally unsecured, 10%
average interest rate ........................... 1,890 1,598
-------- --------
305,151 321,735
Less current portion............................... 1,695 1,685
-------- --------
$303,456 $320,050
======== ========
On April 1, 1998, the Company entered into a revolving bank credit
agreement, which expires March 31, 2003 and provides for a credit facility
of up to $175 million, including letters of credit of up to $25 million.
The credit agreement requires the payment of an annual commitment fee of
approximately .2% of the unused credit line. At October 3, 1999, the
Company had borrowings of $86.0 million and approximately $81.1 million of
availability under the agreement.
Beginning in September 1997, the Company initiated a refinancing plan to
reduce and restructure its debt. At that time, the Company prepaid $50
million of its 9 1/4% senior notes due 1999 using available cash. The
retirement of these notes resulted in an extraordinary loss of $1,602,
less income tax benefits of $350, on the early extinguishment of the debt.
In 1998, the Company repaid the remaining $125 million of its 9 1/4%
senior notes and all $125 million of its 9 3/4% senior subordinated notes
due 2002, and incurred an extraordinary loss of $6,978, less income tax
benefits of $2,600, relating to the early extinguishment of the debt.
In order to fund these repayments, the Company completed, on April 14,
1998, a private offering of $125 million of 8 3/8% senior subordinated
notes due 2008, redeemable beginning 2003. Additional funding sources
included available cash, as well as bank borrowings under the new bank
credit facility. The Company is subject to a number of covenants under
its various credit agreements, including limitations on additional
borrowings, capital expenditures, lease commitments and dividend payments,
and requirements to maintain certain financial ratios, cash flows and net
worth. The secured notes and bank loans are secured by substantially all
the Company's real and personal property. In addition, certain of the
Company's real estate and equipment secure other indebtedness.
In January 1994, the Company entered into financing lease arrangements
with two limited partnerships (the "Partnerships"), in which interests in
76 restaurants for a specified period of time were sold. The acquisition
of the properties, including costs and expenses, was funded through the
issuance by a special purpose corporation acting as agent for the
Partnerships of $70 million of senior secured notes. On January 1, 2003
and November 1, 2003, the Company must make offers to reacquire 50% of
the properties at each date at a price which is sufficient, in
F-10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
2. LONG-TERM DEBT (continued)
conjunction with previous sinking fund deposits, to retire the notes.
If the Partnerships reject the offers, the Company may purchase the
properties at less than fair market value or cause the Partnerships to
fund the remaining principal payments on the notes and, at the Company's
option, cause the Partnerships to acquire the Company's residual interest
in the properties. If the Partnerships are allowed to retain their
interests, the Company has available options to extend the leases for
total terms of up to 35 years, at which time the ownership of the property
will revert to the Company. The transactions are reflected as financings
with the properties remaining in the Company's consolidated financial
statements.
Aggregate maturities and sinking fund requirements on all long-term debt
are $3,190, $3,446, $3,668, $110,691 and $37,598 for the years 2000
through 2004, respectively. The 2003 amount is net of $12,706 of
accumulated sinking fund payments.
Interest capitalized during the construction period of restaurants was
$1,469, $1,203 and $683 in 1999, 1998 and 1997, respectively.
3. LEASES
As Lessee - The Company leases restaurant 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 the option
of the Company and, in some instances, have provisions for contingent
rentals based upon a percentage of defined revenues. Total rent expense
for all operating leases was $108,700 $94,275 and $84,964, including
contingent rentals of $6,066, $4,561 and $4,513 in 1999, 1998 and 1997,
respectively.
Future minimum lease payments under capital and operating leases are as
follows:
Fiscal Capital Operating
Year leases leases
-----------------------------------------------------------------------
2000....................................... $ 2,240 $ 95,250
2001....................................... 2,223 93,495
2002....................................... 2,221 91,030
2003....................................... 2,222 88,817
2004....................................... 2,222 86,234
Thereafter................................. 20,304 584,337
------- ----------
Total minimum lease payments................... 31,432 $1,039,163
==========
Less amount representing interest.............. 14,590
-------
Present value of obligations
under capital leases......................... 16,842
Less current portion........................... 613
-------
Long-term capital lease obligations............ $16,229
=======
Building assets recorded under capital leases were $15,466 and $12,301,
net of accumulated depreciation of $5,470 and $4,790, as of October 3,
1999 and September 27, 1998, respectively.
As Lessor - The Company leases or subleases restaurants to certain
franchisees and others under agreements which 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 $25,134,
$22,747 and $22,624, including contingent rentals of $9,655, $6,976 and
$6,744 in 1999, 1998 and 1997, respectively.
F-11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
3. LEASES (continued)
The minimum rents receivable under these non-cancelable leases are as
follows:
Fiscal Sales-type Operating
year leases leases
-------------------------------------------- --------- ---------
2000.................................... $ 44 $ 20,303
2001.................................... 44 17,757
2002.................................... 44 16,340
2003.................................... 44 14,314
2004.................................... 45 12,697
Thereafter.............................. 85 53,187
-------- ---------
Total minimum future rentals................ 306 $ 134,598
=========
Less amount representing interest........... 89
--------
Net investment (included in other assets)... $ 217
========
Land and building assets held for lease were $44,962 and $55,285, net of
accumulated depreciation of $20,814 and $20,157, as of October 3, 1999
and September 27, 1998, respectively.
4. INCOME TAXES
The fiscal year income taxes consist of the following:
1999 1998 1997
----------------------------------------- -------- -------- --------
Federal - current........................ $ 31,227 $ 24,618 $ 12,222
- deferred....................... 6,709 3,707 (6,248)
State - current........................ 7,965 5,597 4,345
- deferred....................... (1,001) (3,122) (769)
-------- -------- --------
Subtotal ................................ 44,900 30,800 9,550
Income tax benefit of extraordinary item. -- 2,600 350
-------- -------- --------
Income taxes............................. $ 44,900 $ 33,400 $ 9,900
======== ======== ========
A reconciliation of fiscal year income taxes with the amounts computed at
the statutory federal rate of 35% follows:
1999 1998 1997
----------------------------------------- -------- -------- --------
Computed at federal statutory rate....... $ 42,475 $ 36,559 $ 15,821
State income taxes, net of federal effect 4,526 1,609 2,324
Jobs tax credit wages.................... (1,281) (861) (180)
Reduction to valuation allowance......... (1,842) (4,581) (10,816)
Adjustment of tax loss, contribution and
tax credit carryforwards............. 425 584 1,986
Other, net............................... 597 90 765
-------- -------- --------
$ 44,900 $ 33,400 $ 9,900
======== ======== ========
F-12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
4. INCOME TAXES (continued)
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:
1999 1998
------------------------------------------------- -------- --------
Deferred tax assets:
Tax loss and tax credit carryforwards.......... $ 25,123 $ 36,867
Accrued insurance.............................. 15,377 18,610
Accrued pension and postretirement benefits.... 13,296 12,756
Accrued vacation pay expense................... 7,686 7,019
Other reserves and allowances.................. 7,422 7,586
Deferred income................................ 9,819 4,282
Other, net..................................... 8,515 5,842
-------- --------
Total gross deferred tax assets................ 87,238 92,962
Less valuation allowance....................... 26,965 29,815
-------- --------
Net deferred tax assets........................ 60,273 63,147
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation.................. 57,776 53,203
Intangible assets.............................. 10,552 12,291
-------- --------
Total gross deferred tax liabilities........... 68,328 65,494
-------- --------
Net deferred tax liability..................... $ 8,055 $ 2,347
======== ========
The valuation allowance of $26,965 as of October 3, 1999 and $29,815 as of
September 27, 1998 represents deferred tax assets that may not be realized
by the reversal of future taxable differences. The net change in the
valuation allowance was a decrease of $2,850 for fiscal year 1999 and a
decrease of $4,581 for fiscal year 1998. These decreases related to the
expected future use of tax credit carryforwards and deferred tax assets,
and actual use of tax loss carryforwards. Management believes it is more
likely than not that the net deferred tax assets will be realized through
future taxable income or alternative tax strategies.
At October 3, 1999, the Company had tax loss carryforwards which expire in
2001.
From time to time, the Company may take positions for filing its 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 U.S. Internal Revenue Service ("IRS") has completed
its examination or until the statute of limitations has expired. As of
October 3, 1999, the IRS had completed its examinations of the Company's
federal income tax returns through fiscal year 1995.
F-13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
5. RETIREMENT, SAVINGS AND BONUS PLANS
The Company has non-contributory defined benefit pension plans covering
substantially all salaried and hourly 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 the Company's practice to fund retirement costs as
necessary.
Qualified plans Non-qualified plan
------------------- -------------------
1999 1998 1999 1998
------------------------------------------------- -------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ....... $ 65,369 $ 52,728 $ 16,294 $ 12,829
Service cost .................................. 4,744 3,116 408 342
Interest cost ................................. 4,541 4,047 1,153 1,006
Actuarial (gain) loss ......................... (4,192) 6,759 (24) 2,539
Benefits paid ................................. (1,520) (1,281) (440) (422)
-------- -------- -------- --------
Benefit obligation at end of year ............. $ 68,942 $ 65,369 $ 17,391 $ 16,294
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year. $ 55,454 $ 50,916 $ -- $ --
Actual return on plan assets .................. 2,214 3,699 -- --
Employer contributions ........................ 4,704 2,120 440 422
Benefits paid ................................. (1,520) (1,281) (440) (422)
-------- -------- -------- --------
Fair value of plan assets at end of year ...... $ 60,852 $ 55,454 $ -- $ --
======== ======== ======== ========
Reconciliation of funded status:
Funded status ................................. $ (8,090) $ (9,915) $(17,392) $(16,294)
Unrecognized net loss ......................... 8,026 9,628 2,665 2,795
Unrecognized prior service cost ............... (138) (173) 4,431 4,899
Unrecognized net transition asset ............. 19 28 58 84
-------- -------- -------- --------
Net liability recognized ...................... $ (183) $ (432) $(10,238) $ (8,516)
======== ======== ======== ========
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost .......................... $ -- $ 22 $ -- $ --
Accrued benefit liability ..................... (183) (454) (13,599) (11,764)
Intangible asset .............................. -- -- 3,361 3,248
-------- -------- -------- --------
Net liability recognized ...................... $ (183) $ (432) $(10,238) $ (8,516)
======== ======== ======== ========
In determining the present values of benefit obligations, the Company's
actuaries assumed discount rates of 7.50% and 7.00% at the measurement
dates of June 30, 1999 and 1998, respectively. The assumed rate of
increase in compensation levels was 4% for the qualified plans and 5% for
the non-qualified plan in 1999 and 1998, respectively. The long-term rate
of return on assets was 8.5% in both years. Assets of the qualified plans
consist primarily of listed stocks and bonds.
F-14
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
5. RETIREMENT, SAVINGS AND BONUS PLANS (continued)
The components of the fiscal year net defined benefit pension cost are as
follows:
Qualified plans Non-qualified plan
--------------------------- -------------------------
1999 1998 1997 1999 1998 1997
------------------ ------- ------- ------- ------- ------- -------
Service cost ..... $ 4,744 $ 3,116 $ 2,839 $ 408 $ 342 $ 230
Interest cost .... 4,541 4,047 3,657 1,153 1,006 680
Expected return
on plan assets.. (5,257) (4,458) (3,595) -- -- --
Net amortization.. 426 (26) 256 601 495 259
------- ------- ------- ------- ------- -------
Net periodic
pension cost.... $ 4,454 $ 2,679 $ 3,157 $ 2,162 $ 1,843 $ 1,169
======= ======= ======= ======= ======= =======
The Company maintains a savings plan 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
from 2% to 12% of their pay on a pre-tax basis. The Company contributes an
amount equal to 50% of the first 4% of compensation that is deferred by
the participant. The Company's contributions under this plan were $1,328,
$1,141 and $1,138 in 1999, 1998 and 1997, respectively. The Company also
maintains an unfunded, non-qualified deferred compensation plan, which was
created in 1990 for key executives and other members of management who
were then excluded from participation in the qualified savings plan. This
plan allows participants to defer up to 15% of their salary on a pre-tax
basis. The Company contributes an amount equal to 100% of the first 3%
contributed by the employee. The Company's contributions under the
non-qualified deferred compensation plan were $481, $372 and $324 in 1999,
1998 and 1997, respectively. In each plan, a participant's right to
Company contributions vests at a rate of 25% per year of service.
The Company maintains a bonus plan that allows 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 the Company's Board of Directors. Under this plan, $6,390,
$3,834 and $3,493 was expensed in 1999, 1998 and 1997, respectively.
The Company maintains 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 the Company's common stock. The Company
provides a deferment credit equal to 25% of the compensation initially
deferred. Under this plan, a total of $562, $262 and $835 was expensed in
1999, 1998 and 1997, respectively, for both the deferment credit and the
stock appreciation on the deferred compensation.
F-15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
6. POSTRETIREMENT BENEFIT PLAN
The Company sponsors 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 Company's policy is to fund the cost of
medical benefits in amounts determined at the discretion of management.
1999 1998
--------------------------------------------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year.... $ 16,270 $ 13,201
Service cost............................... 638 517
Interest cost.............................. 1,137 1,021
Actuarial (gain) loss...................... (1,370) 1,499
Benefits paid.............................. (210) 32
-------- --------
Benefit obligation at end of year.......... $ 16,465 $ 16,270
======== ========
Change in plan assets:
Fair value of plan assets at
beginning of year........................ $ -- $ --
Employer contributions..................... 177 71
Benefits paid.............................. (177) (71)
-------- --------
Fair value of plan assets at end of year... $ -- $ --
======== ========
Reconciliation of funded status:
Funded status.............................. $(16,465) $(16,270)
Unrecognized net gain...................... (1,965) (352)
-------- --------
Net liability recognized................... $(18,430) $(16,622)
======== ========
All of the net liability recognized in the reconciliation of funded
status is included as an accrued benefit liability in the statements of
financial position.
In determining the above information, the Company's actuaries assumed a
discount rate of 7.5% and 7.0% at the measurement dates of June 30, 1999
and 1998, respectively.
The components of the fiscal year net periodic postretirement benefit cost
are as follows:
1999 1998 1997
--------------------------------------- ------- ------- -------
Service cost........................... $ 638 $ 517 $ 530
Interest cost.......................... 1,137 1,021 913
Net amortization....................... -- (88) (120)
------- ------- -------
Net periodic pension cost.............. $ 1,775 $ 1,450 $ 1,323
======= ======= =======
For measurement purposes, an 8.0% annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 2000 for plan participants under age 65; the rate was assumed
to decrease .5% per year to 5.0% by the year 2006 and remain at that level
thereafter. For plan participants age 65 years or older, a 6.0% annual
health care cost trend rate was assumed for 2000; the rate was assumed to
decrease .5% per year to 4.0% by the year 2004 and remain at that level
thereafter. 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 one percentage point in each year would increase
the accumulated postretirement benefit obligation as of October 3, 1999 by
$3,440, or 21%, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1999 by $417
or 23%.
F-16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
7. STOCK OPTIONS
The Company offers stock option plans to attract, retain and motivate key
officers, non-employee directors and employees by providing for or
increasing the proprietary interests of such persons to work toward the
future financial success of the Company.
In January 1992, the Company adopted the 1992 Employee Stock Incentive
Plan (the "1992 Plan") and, as part of a merger, assumed outstanding
options to employees under its predecessor's 1990 Stock Option Plan and
assumed contractually the options to purchase 42,750 shares of common
stock granted to two non-employee directors of the Company. 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 16, 2002,
although stock may be issued thereafter pursuant to awards granted prior
to such date.
In August 1993, the Company 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 December 11, 2003, although common stock
may be issued thereafter pursuant to awards granted prior to such date.
In February 1995, the Company adopted the Non-Employee Director Stock
Option Plan (the "Director Plan"). Under the Director Plan, any eligible
director of the Company who is not an employee of the Company or a
subsidiary of the Company 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 fewer than 10,000 shares. 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.
The terms and conditions of the stock-based awards under the plans are
determined by a 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-17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
7. STOCK OPTIONS (continued)
The following is a summary of stock option activity for the three fiscal
years ended October 3, 1999:
Option exercise price per share
---------------------------------------
Weighted
Shares Range average
-------------------------------- ---------------------------------------
Balance at September 29, 1996... 2,712,587 .96-12.25 6.52
Granted..................... 807,165 10.13-12.63 12.35
Exercised................... (251,640) .96-12.25 6.76
Canceled.................... (111,078) 5.75-12.63 8.77
---------
Balance at September 28, 1997... 3,157,034 .96-12.63 7.90
Granted..................... 761,046 17.44-19.06 18.93
Exercised................... (198,200) 1.13-12.63 8.27
Canceled.................... (108,759) 5.75-19.06 11.37
---------
Balance at September 27, 1998... 3,611,121 .96-19.06 10.10
Granted..................... 655,541 13.56-26.63 26.24
Exercised................... (297,148) .96-19.06 9.00
Canceled.................... (105,801) 5.75-26.63 15.27
---------
Balance at October 3, 1999...... 3,863,713 .96-26.63 12.78
=========
The following is a summary of stock options outstanding at October 3,
1999:
Options outstanding Options exercisable
------------------------------------- --------------------
Weighted average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life in years price exercisable price
------------ ----------- ------------- -------- ----------- -------
$ .96-4.19 533,570 1.87 $ 1.29 533,570 $ 1.29
5.00-7.50 828,402 6.29 6.52 716,711 6.41
8.13-12.13 838,358 4.98 10.95 838,358 10.95
12.25-19.06 1,022,763 8.78 16.85 344,370 15.71
24.13-26.63 640,620 10.18 26.35 70,000 24.13
--------- ---------
.96-26.63 3,863,713 6.70 12.78 2,503,009 8.62
========= =========
At October 3, 1999, September 27, 1998 and September 28, 1997, the number
of options exercisable were 2,503,009, 2,239,930 and 1,835,341,
respectively and the weighted average exercise price of those options were
$8.62, $7.32 and $6.40, respectively.
Effective fiscal year 1997, the Company adopted the disclosure
requirements of SFAS 123. As permitted under this Statement, the Company
will continue to measure stock-based compensation cost using its current
"intrinsic value" accounting method.
For purposes of the following pro forma disclosures required by SFAS 123,
the fair value of each option granted after fiscal 1995 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 provide a reliable single
measure of the value of employee stock options. The following assumptions
were used for grants: risk-free interest rates of 5.5%, 5.7% and 6.4% in
1999, 1998 and 1997, respectively; expected volatility of 35%, 34% and
35%, respectively; and an expected life of 6 years in each year. The
Company has not paid any cash or other dividends and does not anticipate
paying dividends in the foreseeable future, therefore the expected
dividend yield is zero.
F-18
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
7. STOCK OPTIONS (continued)
The weighted average fair value of options granted was $11.58 in 1999,
$8.32 in 1998 and $5.80 in 1997. Had compensation expense been recognized
for stock-based compensation plans in accordance with provisions of SFAS
123, the Company would have recorded net earnings of $74,391, or $1.95 per
basic share and $1.89 per diluted share, in 1999; $65,011, or $1.66 per
basic share and $1.62 per diluted share, in 1998; and $33,211, or $.85 per
basic share and $.83 per diluted share, in 1997.
For the pro forma disclosures, the options' estimated fair values were
amortized over their vesting periods. The pro forma disclosures do not
include a full five years of grants since SFAS 123 does not apply to
grants before 1995. Therefore, these pro forma amounts are not indicative
of anticipated future disclosures.
8. STOCKHOLDERS' EQUITY
The Company has 15,000,000 shares of preferred stock authorized for
issuance at a par value of $.01 per share. No 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
the Company's 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 Series A Junior
Participating Cumulative Preferred Stock of the Company, or, under certain
circumstances, shares of common stock of the Company 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
has acquired or commences to acquire 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
382,765 shares of Series A Junior Participating Cumulative Preferred Stock
reserved for issuance upon exercise of the Rights.
In conjunction with the December 1988 acquisition of the Company, warrants
expiring November 30, 1998 for the purchase of 1,584,573 shares of common
stock were issued and were exercisable at $.93 per share, as adjusted. As
of the date of expiration, warrants for 1,583,343 shares had been
exercised and the remaining warrants were canceled.
At October 3, 1999, the Company had 6,446,659 shares of common stock
reserved for issuance upon the exercise of stock options.
F-19
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
9. AVERAGE SHARES OUTSTANDING
Fiscal year net earnings per share is based on the weighted average number
of shares outstanding during the year, determined as follows:
1999 1998 1997
---------------------------------------------- ---------- ---------- ----------
Shares outstanding, beginning of fiscal year . 37,927,925 39,096,815 38,840,525
Effect of common stock issued ................ 215,635 144,739 92,081
Effect of common stock reacquired ............ -- (150,047) --
---------- ---------- ----------
Weighted average shares outstanding - basic .. 38,143,560 39,091,507 38,932,606
Assumed additional shares issued upon exercise
of stock options and warrants, net of shares
reacquired at the average market price ..... 1,136,949 1,021,378 843,638
---------- ---------- ----------
Weighted average shares outstanding - diluted 39,280,509 40,112,885 39,776,244
========== ========== ==========
The diluted weighted average shares outstanding computation excludes
345,040, 290,042 and 306,302 antidilutive shares in 1999, 1998 and 1997,
respectively.
10. CONTINGENCIES AND LEGAL MATTERS
In 1998, the Company settled litigation it filed against various meat
suppliers seeking reimbursement for all damages, costs and expenses
incurred in connection with food-borne illness attributed to hamburgers
served at JACK IN THE BOX restaurants in 1993. The Company received in
its second quarter of fiscal 1998 approximately $58.5 million in the
settlement, of which a net of approximately $45.8 million was realized
after litigation costs and before income taxes (the "Litigation
Settlement"). The net Litigation Settlement is reflected in other income
in 1998.
On February 2, 1995, an action by Concetta Jorgensen was filed against the
Company in the U.S. District Court in San Francisco, California alleging
that restrooms at a JACK IN THE BOX restaurant failed to comply with laws
regarding disabled persons and seeking damages in unspecified amounts,
punitive damages, injunctive relief, attorneys' fees and prejudgment
interest. In an amended complaint, damages were also sought on behalf of
all physically disabled persons who were allegedly denied access to
restrooms at the restaurant. In February 1997, the court ordered that the
action for injunctive relief proceed as a nationwide class action on
behalf of all persons in the United States with mobility disabilities. The
Company has reached agreement on settlement terms both as to the
individual plaintiff Concetta Jorgensen and the claims for injunctive
relief, and the settlement agreement has been approved by the U.S.
District Court. The settlement requires the Company to make access
improvements at Company-operated restaurants to comply with the standards
set forth in the Americans with Disabilities Act ("ADA") Access
Guidelines. The settlement requires compliance at 85% of the
Company-operated restaurants by April 2001 and for the balance of
Company-operated restaurants by October 2005. The Company has agreed to
make modifications to its restaurants to improve accessibility and
anticipates investing an estimated $19 million in capital improvements in
connection with these modifications, including approximately $5 million
spent through October 3, 1999. Similar claims have been made against
JACK IN THE BOX franchisees and the Company relating to franchised
locations which may not be in compliance with the ADA. The relief sought
is (i) injunctive relief to bring these additional restaurants into
compliance with the ADA, (ii) monitoring expenses to ensure compliance and
(iii) attorneys' fees.
F-20
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
10. CONTINGENCIES AND LEGAL MATTERS (continued)
On November 5, 1996, an action was filed by the National JIB Franchisee
Association, Inc. (the "Franchisee Association") and several of the
Company's franchisees in the Superior Court of California, County of San
Diego in San Diego, California, against the Company and others. The
lawsuit alleged that certain Company policies are unfair business
practices and violate sections of the California Corporations Code
regarding material modifications of franchise agreements and interfere
with franchisees' right of association. It sought injunctive relief, a
declaration of the rights and duties of the parties, unspecified damages
and rescission of alleged material modifications of plaintiffs' franchise
agreements. The complaint contained allegations of fraud, breach of a
fiduciary duty and breach of a third party beneficiary contract in
connection with certain payments that the Company received from suppliers
and sought unspecified damages, interest, punitive damages and an
accounting. However, on August 31, 1998, the Court granted the Company's
request for summary judgment on all claims regarding an accounting,
conversion, fraud, breach of fiduciary duty and breach of third party
beneficiary contracts. On March 10, 1999, the Court granted motions by the
Company, ruling, in essence, that the franchisees would be unable to prove
their remaining claims. On April 22, 1999, the Court entered an order
granting the Company's motion to enforce a settlement with the Franchisee
Association covering various aspects of the franchise relationship, but
involving no cash payments by the Company. In accordance with that order,
the Franchisee Association's claims were dismissed with prejudice. On
June 10, 1999, a final judgment was entered in favor of the Company and
against those plaintiffs with whom the Company did not settle. The
Franchisee Association and certain individual plaintiffs filed an appeal
on August 13, 1999. Management intends to vigorously defend the appeal.
On December 10, 1996, a suit was filed by the Company's Mexican licensee,
Foodmex, Inc., in the U.S. District Court in San Diego, California
against the Company and its international franchising subsidiary. Foodmex
formerly operated several JACK IN THE BOX franchise restaurants in
Mexico, but its licenses were terminated by the Company for, among other
reasons, chronic insolvency and failure to meet operational standards.
The Foodmex suit alleged wrongful termination of its master license,
breach of contract and unfair competition and sought an injunction to
prohibit termination of its license as well as unspecified monetary
damages. The Company and its subsidiary counterclaimed and sought a
preliminary injunction against Foodmex. On February 24, 1998, the Court
issued an order dismissing Foodmex's complaint without prejudice. In
March 1998, Foodmex filed a Second Amended Complaint in the U.S. District
Court in San Diego, California alleging contractual, tort and law
violations arising out of the same business relationship and seeking
damages in excess of $10 million, attorneys' fees and costs. On June 25,
1999, the Court granted the Company's motion for summary judgement on the
plaintiff's Second Amended Complaint, resulting in the complete dismissal
of Foodmex's claim against the Company. On the same day, the Court
granted the Company's motion for partial summary judgement on its breach
of contract, trademark infringement, unfair competition and related
claims, including the Company's claim for a permanent injunction. The
Court ordered Foodmex to cease using any of the Company's proprietary
marks, and ordered it to cause its Mexican sublicensees to cease using
any of the Company's proprietary marks. Issues regarding Foodmex's
liability for breach of a promissory note, and damages owed to the
Company by Foodmex remain to be decided. No trial date has been set.
The Company is also subject to normal and routine litigation. The amount
of liability from the claims and actions against the Company cannot be
determined with certainty, but in the opinion of management, the ultimate
liability from all pending legal proceedings, asserted legal claims and
known potential legal claims which are probable of assertion should not
materially affect the results of operations and liquidity of the Company.
F-21
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
10. CONTINGENCIES AND LEGAL MATTERS (continued)
The IRS examination of the Company's federal income tax return for fiscal
year 1996 resulted in the issuance of a proposed adjustment to tax
liability of $7.3 million (exclusive of interest). The Company has filed
a protest with the Regional Office of Appeals of the IRS to contest the
proposed assessment. Management believes that an adequate provision for
income taxes has been made.
The Company has six wholly-owned subsidiaries, consisting of CP
Distribution Co., CP Wholesale Co., Jack in the Box, Inc. (an inactive
New Jersey corporation), Foodmaker International Franchising Inc.
(collectively, the "Subsidiary Guarantors") and two other non-guarantor
subsidiaries (collectively, the "Non-Guarantor Subsidiaries"). The
Subsidiary Guarantors comprise all of the direct and indirect
subsidiaries of the Company (other than the Non-Guarantor Subsidiaries
which conduct no material operations, have no significant assets on a
consolidated basis and account for only an insignificant share of the
Company's consolidated revenues). Each of the Subsidiary Guarantors'
guarantees of the Company's $125 million senior subordinated notes is
full, unconditional and joint and several. The Subsidiary Guarantors have
no significant operations or any significant assets or liabilities on a
consolidated basis, other than guarantees of indebtedness of the Company,
and therefore, no separate financial statements of the Subsidiary
Guarantors are presented because management has determined that they are
not material to investors.
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
October 3, September 27,
1999 1998
---------------------------------------------- --------- ---------
Accounts receivable:
Trade ...................................... $ 7,989 $ 6,987
Notes ...................................... 67 908
Other ...................................... 2,929 8,395
Allowances for doubtful accounts ........... (1,829) (2,585)
--------- ---------
$ 9,156 $ 13,705
========= =========
Other Assets:
Trading area rights, net of amortization
of $29,057 and $25,313, respectively ..... $ 73,033 $ 72,993
Lease acquisition costs, net of amortization
of $24,625 and $23,613, respectively ..... 15,352 17,157
Other, net of amortization
of $14,681 and $12,932, respectively ..... 40,741 39,309
--------- ---------
$ 129,126 $ 129,459
========= =========
Accrued liabilities:
Payroll and related taxes .................. $ 45,314 $ 38,201
Sales and property taxes ................... 17,978 12,723
Insurance .................................. 28,548 47,502
Advertising ................................ 15,517 10,098
Capital improvements ....................... 13,798 17,432
Interest ................................... 7,092 7,510
Income tax liabilities ..................... 30,767 14,463
Other ...................................... 24,137 24,045
--------- ---------
$ 183,151 $ 171,974
========= =========
F-22
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(continued)
12. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
16 weeks
ended 12 weeks ended
-------- ------------------------------
Jan. 18, Apr. 12, July 5, Sept. 27,
1998 1998 1998 1998
---------------------------- -------- -------- -------- --------
Revenues ................... $343,774 $309,909 $280,566 $289,807
Gross profit ............... 65,955 96,013 55,877 54,592
Earnings before
extraordinary item ...... 11,674 34,347 12,626 12,406
Net earnings ............... 11,674 34,347 8,248 12,406
Earnings per share before
extraordinary item:
Basic ................ .30 .88 .32 .32
Diluted .............. .29 .85 .31 .31
16 weeks 13 weeks
ended 12 weeks ended ended
-------- ------------------- --------
Jan. 17, Apr. 11, July 4, Oct. 3,
1999 1999 1999 1999
---------------------------- -------- -------- -------- --------
Revenues ................... $407,134 $321,973 $342,448 $385,344
Gross profit ............... 78,873 81,047 71,495 82,489
Net earnings ............... 15,751 24,987 17,377 18,343
Earnings per share:
Basic ................ .41 .66 .45 .48
Diluted .............. .40 .64 .44 .47
F-23