10-Q 1 0001.txt FORM 10-Q FOR THIRD QUARTER OF FY 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 9, 2000 ------------ Commission file no. 1-9390 ------ JACK IN THE BOX INC. (Exact name of registrant as specified in its charter) DELAWARE 5-2698708 ------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 9330 BALBOA AVENUE, SAN DIEGO, CA 92123 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (858) 571-2121 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of common stock, $.01 par value, outstanding as of the close of business August 15, 2000 - 38,324,861. 1 JACK IN THE BOX INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) July 9, October 3, 2000 1999 --------------------------------------------------- --------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents...................... $ 7,268 $ 10,925 Accounts receivable, net....................... 10,665 9,156 Inventories.................................... 25,303 20,159 Prepaid expenses............................... 15,121 15,387 Assets held for sale........................... 52,326 41,607 ---------- ---------- Total current assets......................... 110,683 97,234 ---------- ---------- Trading area rights............................... 72,413 73,033 ---------- ---------- Lease acquisition costs........................... 14,038 15,352 ---------- ---------- Other assets...................................... 42,713 40,741 ---------- ---------- Property and equipment, at cost................... 923,950 858,685 Accumulated depreciation and amortization...... (280,502) (251,401) ---------- ---------- 643,448 607,284 ---------- ---------- TOTAL........................................ $ 883,295 $ 833,644 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt........... $ 1,983 $ 1,695 Accounts payable............................... 33,530 44,180 Accrued expenses................................ 184,390 183,151 ---------- ---------- Total current liabilities.................... 219,903 229,026 ---------- ---------- Deferred income taxes............................. 8,955 8,055 ---------- ---------- Long-term debt, net of current maturities......... 299,918 303,456 ---------- ---------- Other long-term liabilities....................... 84,078 75,270 ---------- ---------- Stockholders' equity: Common stock................................... 414 411 Capital in excess of par value................. 291,449 290,336 Retained earnings (deficit).................... 18,838 (38,447) Treasury stock................................. (40,260) (34,463) ---------- ---------- Total stockholders' equity................... 270,441 217,837 ---------- ---------- TOTAL........................................ $ 883,295 $ 833,644 ========== ========== See accompanying notes to consolidated financial statements. 2 JACK IN THE BOX INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
Twelve Weeks Ended Forty Weeks Ended -------------------------------- --------------------------- July 9, July 4, July 9, July 4, 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Revenues: Restaurant sales.............................. $ 364,314 $ 323,727 $ 1,159,989 $ 1,011,833 Distribution and other sales.................. 14,599 9,175 43,508 28,365 Franchise rents and royalties................. 9,740 9,086 31,684 29,686 Other......................................... 1,658 460 2,431 1,671 --------- --------- ----------- ----------- 390,311 342,448 1,237,612 1,071,555 --------- --------- ----------- ----------- Costs and expenses: Costs of revenues: Restaurant costs of sales.................. 111,638 100,133 359,702 320,906 Restaurant operating costs................. 177,599 156,779 569,221 473,372 Costs of distribution and other sales...... 14,318 9,038 42,738 27,919 Franchised restaurant costs................ 4,606 5,003 15,448 17,943 Selling, general and administrative........... 43,009 37,574 139,094 117,385 Interest expense.............................. 6,133 6,344 20,424 21,815 --------- --------- ----------- ----------- 357,303 314,871 1,146,627 979,340 --------- --------- ----------- ----------- Earnings before income taxes..................... 33,008 27,577 90,985 92,215 Income taxes..................................... 12,200 10,200 33,700 34,100 --------- --------- ----------- ----------- Net earnings..................................... $ 20,808 $ 17,377 $ 57,285 $ 58,115 ========= ========= =========== =========== Net earnings per share: Basic......................................... $ .54 $ .45 $ 1.50 $ 1.53 Diluted....................................... $ .53 $ .44 $ 1.46 $ 1.48 Weighted average shares outstanding: Basic......................................... 38,269 38,209 38,249 38,104 Diluted....................................... 39,371 39,446 39,336 39,229
See accompanying notes to consolidated financial statements. 3 JACK IN THE BOX INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Forty Weeks Ended ------------------------ July 9, July 4, 2000 1999 -------------------------------------------------------------------------------- Cash flows from operations: Net earnings........................................ $ 57,285 $ 58,115 Non-cash items included above: Depreciation and amortization.................... 44,427 35,491 Deferred income taxes............................ 900 1,800 Decrease (increase) in receivables.................. (1,509) 3,369 Increase in inventories............................. (5,144) (2,563) Decrease (increase) in prepaid expenses............. 266 (4,737) Decrease in accounts payable........................ (10,650) (17,384) Increase in other liabilities....................... 9,807 12,728 -------- -------- Cash flows provided by operations................ 95,382 86,819 -------- -------- Cash flows from investing activities: Additions to property and equipment................. (77,156) (81,939) Dispositions of property and equipment.............. 3,286 4,776 Increase in trading area rights..................... (2,541) (1,910) Increase in other assets............................ (3,665) (2,665) Increase in assets held for sale.................... (10,719) (2,777) --------- -------- Cash flows used in investing activities.......... (90,795) (84,515) --------- -------- Cash flows from financing activities: Borrowings under revolving bank loans............... 338,000 256,500 Principal repayments under revolving bank loans..... (341,000) (267,000) Proceeds from issuance of long-term debt............ 825 3,375 Principal payments on long-term debt, including current maturities............................... (1,385) (2,308) Repurchase of common stock.......................... (5,797) - Proceeds from issuance of common stock.............. 1,116 2,407 --------- -------- Cash flows used in financing activities.......... (8,241) (7,026) --------- -------- Net decrease in cash and cash equivalents............... $ (3,654) $ (4,722) ========= ======== See accompanying notes to consolidated financial statements. 4 JACK IN THE BOX INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements of Jack in the Box Inc. (the "Company") and its subsidiaries do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of financial condition and results of operations for the interim periods have been included. Operating results for any interim period are not necessarily indicative of the results for any other interim period or for the full year. The Company reports results quarterly with the first quarter having 16 weeks and each remaining quarter having 12 weeks. Certain financial statement reclassifications have been made in the prior year to conform to the current year presentation. These financial statements should be read in conjunction with the 1999 financial statements. 2. The income tax provisions reflect the projected annual tax rate of 37% of earnings before income taxes in 2000 and the actual tax rate of 37% of pretax earnings in 1999. The favorable income tax rates result from the Company's ability to realize previously unrecognized tax benefits. The Company cannot determine with certainty the 2000 annual tax rate until the end of the fiscal year; thus the rate could differ from expectations. 3. Contingent Liabilities On February 2, 1995, an action by Concetta Jorgensen was filed against the Company in the U.S. District Court in San Francisco, California alleging that restrooms at a Jack in the Box restaurant failed to comply with laws regarding disabled persons and seeking damages in unspecified amounts, punitive damages, injunctive relief, attorneys' fees and prejudgment interest. In an amended complaint, damages were also sought on behalf of all physically disabled persons who were allegedly denied access to restrooms at the restaurant. In February 1997, the Court ordered that the action for injunctive relief proceed as a nationwide class action on behalf of all persons in the United States with mobility disabilities. The Company has reached agreement on settlement terms both as to the individual plaintiff Concetta Jorgensen and the claims for injunctive relief, and the settlement agreement has been approved by the U.S. District Court. The settlement requires the Company to make access improvements at Company-operated restaurants to comply with the standards set forth in the Americans with Disabilities Act ("ADA") Access Guidelines. The settlement requires compliance at Company-operated restaurants by October 2005. The Company has begun to make modifications to its restaurants to improve accessibility and anticipates investing an estimated $24 million in capital improvements in connection with these modifications, including approximately $11 million spent through July 9, 2000. Similar claims have been made against Jack in the Box franchisees and the Company relating to franchised locations which may not be in compliance with the ADA. A settlement agreement has been reached which provides for injunctive relief requiring franchisees to bring their franchised restaurants into compliance with the ADA and requiring payment by the Company of monitoring expenses to ensure compliance and attorney's fees. 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. 5 JACK IN THE BOX INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS All comparisons under this heading between fiscal years 2000 and 1999 refer to the 12-week and 40-week periods ended July 9, 2000 and July 4, 1999, respectively, unless otherwise indicated. Restaurant sales increased $40.6 million and $148.2 million, respectively, to $364.3 million and $1,160.0 million in 2000 from $323.7 million and $1,011.8 million in 1999, reflecting increases in both the number of Company-operated restaurants and in per store average ("PSA") sales. The average number of Company-operated restaurants for the 40-week period increased 11.0% to 1,228 in 2000 from 1,106 restaurants in 1999. PSA sales for comparable Company-operated restaurants, those open more than one year, grew 2.6% and 3.9%, respectively, in the 12-week and 40-week periods of 2000 compared with the same periods in 1999. Sales growth resulted from increases in the average transaction amounts of 2.3% and 2.0% in the respective 2000 periods and the remainder from higher average number of transactions. Management believes that the sales growth is attributable to effective advertising and strategic initiatives, including the Assemble-To-Order program in which sandwiches are made when customers order them, new menu boards that showcase combo meals and an order confirmation system at drive-thru windows. Distribution and other sales increased $5.4 million and $15.1 million, respectively, to $14.6 million and $43.5 million in 2000 from $9.2 million and $28.4 million in 1999, primarily due to an increase in other sales at fuel and convenience stores to $7.0 million and $20.8 million in 2000 from $2.0 million and $5.6 million in 1999. At July 9, 2000, the Company had seven fuel and convenience store locations compared with two a year ago. Franchise rents and royalties increased $.6 million and $2.0 million, respectively, to $9.7 million and $31.7 million in 2000 from $9.1 million and $29.7 million in 1999, which represent slightly over 10.5% of franchise restaurant sales in 2000 and a slightly lower percentage in 1999. Franchise restaurant sales grew to $91.1 million and $301.1 million, respectively, in 2000 from $88.3 million and $286.2 million in 1999, benefiting from the Company's strategic initiatives described above. Other revenues, primarily franchise fees and interest income from investments and notes receivable, increased to $1.7 million and $2.4 million, respectively, in 2000 from $.5 million and $1.7 million in 1999. The increase is principally due to $1.2 million received in the quarter for additional franchise fees from refranchising 13 restaurants and fees that franchisees paid to extend the term of their franchises for three years. Restaurant costs of sales and operating costs increased with sales growth and the addition of Company-operated restaurants. Restaurant costs of sales, which include food and packaging costs, increased to $111.6 million and $359.7 million in 2000 from $100.1 million and $320.9 million in 1999. As a percent of restaurant sales, costs of sales declined to 30.6% and 31.0%, respectively, in 2000 from 30.9% and 31.7% in 1999, primarily due to lower ingredient costs, especially dairy, shortening and bakery, partially offset by higher beef and pork costs. Restaurant operating costs increased to $177.6 million and $569.2 million, respectively, in 2000 from $156.8 million and $491.4 million in 1999, excluding an unusual adjustment. In the second quarter of 1999, the Company reduced accrued expenses 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. As a percent of restaurant sales, operating costs increased to 48.7% and 49.1%, respectively, in 2000 from 48.4% and 48.6% in 1999 excluding the unusual adjustment, reflecting cost increases related to initiatives described above which are designed to improve the overall guest experience and slightly higher percentages of labor-related expenses. Costs of distribution and other sales increased to $14.3 million and $42.7 million, respectively, in 2000 from $9.0 million and $27.9 million in 1999, reflecting an increase in the related sales. As a percent of distribution and other sales, these costs were 98.1% and 98.2%, respectively, in 2000 compared to 98.5% and 98.4% a year ago. 6 Franchised restaurant costs, which consist principally of rents and depreciation on properties leased to franchisees and other miscellaneous costs, declined to $4.6 million and $15.4 million, respectively, in 2000 from $5.0 million and $17.9 million in 1999, primarily due to lower franchise-related legal expenses. Selling, general and administrative costs increased to $43.0 million and $139.1 million, respectively, in 2000 from $37.6 million and $117.4 million in 1999. Advertising and promotion costs increased to $18.6 million and $59.1 million, respectively, in 2000 from $16.6 million and $52.0 million in 1999, slightly over 5% of restaurant sales in all periods. General, administrative and other costs were 6.3% and 6.5% of revenues, respectively, in 2000 compared to 6.1% of revenues in both periods of 1999, primarily due to a decision to increase staffing levels in the field to accommodate the growth program and other costs to support restaurant and revenue growth. Interest expense declined $.2 million and $1.4 million, respectively, to $6.1 million and $20.4 million in 2000 from $6.3 million and $21.8 million in 1999, reflecting a reduction in total average debt compared to a year ago. The income tax provisions reflect the projected annual tax rate of 37% of earnings before income taxes in 2000 and the actual tax rate of 37% of pretax earnings in 1999. The favorable income tax rates result from the Company's ability to realize previously unrecognized tax benefits. The Company cannot determine with certainty the 2000 annual tax rate until the end of the fiscal year; thus the rate could differ from expectations. In 2000, net earnings were $20.8 million, or $.53 per diluted share, in the 12-week period and $57.3 million, or $1.46 per diluted share, in the 40-week period. In 1999, net earnings were $17.4 million, or $.44 per diluted share, in the 12-week period and $58.1 million, or $1.48 per diluted share, in the 40-week period. Excluding the unusual adjustment to restaurant operating costs and related tax effects, net earnings in 1999 were $46.8 million, or $1.19 per diluted share, in the 40-week period. Net earnings increased 19.7% and 22.5%, respectively, in 2000 compared to the same periods in 1999, excluding this unusual item, reflecting the impact of sales growth and improved margins. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased slightly to $7.3 million at July 9, 2000 from $10.9 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 $22.6 million to $109.2 million at July 9, 2000 from $131.8 million at October 3, 1999, primarily due to an increase in assets held for sale and a decline in current liabilities. 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. In 1998, the Company entered into a revolving bank credit agreement which provides for a credit facility expiring in 2003 of up to $175 million, including letters of credit of up to $25 million. At July 9, 2000, the Company had borrowings of $83.0 million and approximately $83.0 million of availability under the agreement. Total debt outstanding decreased slightly to $301.9 million at July 9, 2000 from $305.2 million at the beginning of the fiscal year. 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. 7 The Company requires capital principally to grow the business through new restaurant construction, as well as to maintain, improve and refurbish existing restaurants, and for general operating purposes. The Company's primary sources of liquidity are expected to be cash flows from operations, the revolving bank credit facility, and the sale and leaseback of restaurant properties. Additional potential sources of liquidity include financing opportunities and the conversion of Company-operated restaurants to franchised restaurants. Based upon current levels of operations and anticipated growth, the Company expects that cash flows from operations, combined with other financing alternatives available, will be sufficient to meet debt service, capital expenditure and working capital requirements. The Company is subject to normal and routine litigation. Although the amount of liability from claims and actions against the Company cannot be determined with certainty, management believes the ultimate liability of such claims and actions should not materially affect the results of operations and liquidity of the Company. On December 3, 1999, the Company's Board of Directors authorized the purchase of the Company's outstanding common stock in the open market for an aggregate amount not to exceed $10 million. At July 9, 2000, the Company had acquired 305,800 shares under this authorization for an aggregate cost of $5.8 million. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary exposure relating to financial instruments is to changes in interest rates. The Company uses interest rate swap agreements to reduce exposure to interest rate fluctuations. At July 9, 2000, the Company had a $25 million notional amount interest rate swap agreement expiring in June 2001. This agreement effectively converts a portion of the Company's variable rate bank debt to fixed rate debt and has a pay rate of 6.38%. The Company's credit facility bears interest at an annual rate equal to the prime rate or the London Interbank Offered Rate ("LIBOR") plus an applicable margin based on a financial leverage ratio. As of July 9, 2000, the Company's applicable margin was set at .625%. During the third quarter of fiscal year 2000, the average interest rate on the credit facility was 7.0%. At July 9, 2000, 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 July 9, 2000 level. At July 9, 2000, the Company had no other material financial instruments subject to significant market exposure. 8 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements including, but not limited to, the Company's expectations regarding its effective tax rate, its continuing investment in new restaurants and refurbishment of existing facilities and sources of liquidity. Forward-looking statements are generally identifiable by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" and similar expressions. Forward-looking statements are subject to known and unknown risks and uncertainties which may cause actual results to differ materially from expectations. The following is a discussion of some of those factors. The Company's tax provision is highly sensitive to expected earnings and as expectations change the Company's income tax provision may vary more significantly from quarter to quarter and year to year than companies which have been continuously profitable. However, the Company's effective tax rates are expected to increase in the future. There can be no assurances that growth objectives in the regional domestic markets in which the Company operates will be met or that capital will be available for refurbishment of existing facilities. Multi-unit food service businesses such as JACK IN THE BOX restaurants can be materially and adversely affected by publicity about allegations of poor food quality, foreign objects in food, illness, injury or other health concerns with respect to the nutritional value of certain foods. The deregulation of utilities and power shortages or interruptions may adversely affect the profitability of businesses, including the Company's business in the areas in which they occur. Additional risk factors associated with the Company's business are detailed in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. NEW ACCOUNTING STANDARDS 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, as amended, is effective for the Company's first quarter in the fiscal year ending September 30, 2001. Management has not yet addressed the effect of this standard on the Company's current reporting and disclosures. 9 PART II - OTHER INFORMATION There is no information required to be reported for any items under Part II, except as follows: Item 1. Legal Proceedings - See Note 3 to the Unaudited Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Number Description 10.1 Fifth Amendment dated as of May 3, 2000 to the Revolving Credit Agreement dated as of April 1, 1998 by and between Jack in the Box Inc. and the Banks named therein. 27 Financial Data Schedule (included only with electronic filing) (b) Reports on Form 8-K - None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated. JACK IN THE BOX INC. By: DARWIN J. WEEKS ---------------------------- Darwin J. Weeks Vice President, Controller and Chief Accounting Officer (Duly Authorized Signatory) Date: August 21, 2000