þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 95-2698708 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
9330 Balboa Avenue, San Diego, CA | 92123 | |
(Address of principal executive offices) | (Zip Code) |
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 par value | New York Stock Exchange, Inc. |
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EXHIBIT 10.6.2 | ||||||||
EXHIBIT 10.8.1 | ||||||||
EXHIBIT 10.14(a) | ||||||||
EXHIBIT 10.19 | ||||||||
EXHIBIT 10.21 | ||||||||
EXHIBIT 23.1 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 | ||||||||
EXHIBIT 32.2 |
2
| Menu Innovation. We believe that menu innovation and our focus on higher-quality products will further differentiate Jack in the Box from competitors, strengthen our brand and attract a broader consumer audience. In support of this initiative, in fiscal 2006 Jack in the Box enhanced its menu in the following ways: expanded our line of burgers and sandwiches served on artisan, hearth-baked ciabatta bread to include the Chipotle Chicken Ciabatta and Breakfast Ciabatta sandwiches; introduced buttermilk biscuits with two sandwiches a Bacon, Egg & Cheese and Sausage, Egg & Cheese; and enhanced our real ice cream shakes, including new flavors like Vanilla Malted Crunch and Orange & Cream, by adding a retro-style swirl of creamy whipped topping and a cherry. We also leveraged partnerships with several major brand-name vendors and added the following: a fresh fruit cup from Del Monte; Minute Maid orange juice, Dannon bottled water, and a Chocolate Chip Cookie Cheesecake made with Nestle Toll House semi-sweet morsels. Additional premium-quality products are in various stages of test and development as we continue to innovate and enhance product quality as a means to differentiate our menu from other quick-service chains. | ||
| Improved Service. A second major aspect of brand reinvention is to improve the level and consistency of guest service. In fiscal year 2006, we continued to build upon recent internal service initiatives to help us attract higher-quality applicants for crew-member positions, which can improve employee productivity, maximize retention, and reduce new employee training costs. These initiatives include access to affordable healthcare for all crew members including part-time employees, an ESL (English-as-a-second-language) program for our Spanish team members, and computer-based training in all of our restaurants. In the field, Jack in the Box implemented a team approach to management that focuses on coaching restaurant teams, not just managing them, to achieve excellence in all aspects of restaurant operations. A breakthrough three-day conference for company and franchise restaurant managers engaged them in the service vision and provided tools for improving guest service. Similar meetings in every region subsequently delivered the same messages and tools to all of our restaurant teams as well as most of our distribution centers. |
3
| Re-imaged Restaurants. The third element of brand reinvention is renovation of our restaurant facilities. In fiscal 2006, the company re-imaged approximately 150 restaurants, including our entire Waco and Seattle markets, with a comprehensive program that includes a complete redesign of the dining room and common areas. Interior finishes include ceramic tile floors; a mix of seating styles, such as booths, bars and high-top round tables; decorative pendant lighting; and graphics and wall collages. Other elements of the program include flat-screen televisions, music, uniforms, menu boards and packaging, along with new paint schemes, landscaping and other exterior enhancements. We believe it is important to create a destination dining experience for guests while remaining consistent with our goals of upgrading the quality of our food and guest service. |
| Jack in the Box Growth. Sales at company-operated Jack in the Box restaurants open more than one year (same-store sales) increased 4.8% in fiscal 2006. We credit the progress made in reinventing the Jack in the Box brand with this increase, and we believe ongoing success in executing that strategy will continue to grow sales and customer traffic. In fiscal 2006, we opened 36 new company and franchise-operated Jack in the Box restaurants, 11 with our proprietary Quick Stuff® convenience-store and fuel station business. Restaurant growth in fiscal 2006 was in existing markets, as we continued to see opportunities to increase our market penetration. In 2007, we plan to open 40-45 new company and franchise-operated restaurants. Our growth strategy for Jack in the Box includes expansion into new contiguous markets through both company investment and franchise development. | ||
| Qdoba Growth. In 2006, we opened 71 new company and franchise-operated Qdoba restaurants, and plan to add 80-90 new units in fiscal 2007. We will continue to actively expand our fast-casual subsidiary, primarily through aggressive franchise growth. With a substantial number of new stores in its development pipeline and a 5.9% increase in system same-store sales in fiscal 2006, Qdoba is emerging as a leader in this fast-growing segment of the restaurant industry and is well on its way to becoming a national brand. |
4
Fiscal Year | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Company-operated restaurants: |
||||||||||||||||||||
Opened |
29 | 38 | 56 | 90 | 100 | |||||||||||||||
Sold to franchisees |
(82 | ) | (58 | ) | (49 | ) | (36 | ) | (22 | ) | ||||||||||
Closed |
(6 | ) | (5 | ) | (2 | ) | (8 | ) | (3 | ) | ||||||||||
Acquired from franchisees |
| 1 | | | 1 | |||||||||||||||
End of period total |
1,475 | 1,534 | 1,558 | 1,553 | 1,507 | |||||||||||||||
Franchised restaurants: |
||||||||||||||||||||
Opened |
7 | 11 | 5 | 3 | 3 | |||||||||||||||
Acquired from Company |
82 | 58 | 49 | 36 | 22 | |||||||||||||||
Sold to Company |
| (1 | ) | | | (1 | ) | |||||||||||||
Closed |
| (1 | ) | | | | ||||||||||||||
End of period total |
604 | 515 | 448 | 394 | 355 | |||||||||||||||
System end of period total |
2,079 | 2,049 | 2,006 | 1,947 | 1,862 |
5
6
7
Name | Age | Positions | ||||
Linda A. Lang
|
48 | Chairman of the Board and Chief Executive Officer | ||||
Paul L. Schultz
|
52 | President and Chief Operating Officer | ||||
Jerry P. Rebel
|
49 | Executive Vice President and Chief Financial Officer | ||||
Lawrence E. Schauf
|
61 | Executive Vice President and Secretary | ||||
Carlo E. Cetti
|
62 | Senior Vice President, Human Resources and Strategic Planning | ||||
David M. Theno, Ph.D.
|
56 | Senior Vice President, Quality and Logistics | ||||
Pamela S. Boyd
|
51 | Vice President, Financial Planning and Analysis | ||||
Stephanie E. Cline
|
61 | Vice President, Chief Information Officer | ||||
Terri F. Graham
|
41 | Vice President, Chief Marketing Officer | ||||
Paul D. Melancon
|
50 | Vice President, Controller | ||||
Harold L. Sachs
|
61 | Vice President, Treasurer | ||||
Gary J. Beisler
|
50 | Chief Executive Officer and President, Qdoba Restaurant Corporation |
8
9
10
11
12
13
Number of restaurants at October 1, 2006 | ||||||||||||
Company- | ||||||||||||
operated | Franchised | Total | ||||||||||
Company-owned restaurant buildings: |
||||||||||||
On Company-owned land |
159 | 63 | 222 | |||||||||
On leased land |
448 | 128 | 576 | |||||||||
Subtotal |
607 | 191 | 798 | |||||||||
Company-leased restaurant buildings on leased land |
938 | 313 | 1,251 | |||||||||
Franchise directly-owned or directly-leased
restaurant buildings |
| 348 | 348 | |||||||||
Total restaurant buildings |
1,545 | 852 | 2,397 | |||||||||
Number of restaurants | ||||||||
Ground | Land and | |||||||
leases | building leases | |||||||
2007 2011 |
187 | 329 | ||||||
2012 2016 |
69 | 305 | ||||||
2017 2021 |
166 | 407 | ||||||
2022 and later |
154 | 210 |
14
12
weeks ended |
16 weeks ended | |||||||||||||||
Oct. 1, 2006 | July 9, 2006 | Apr. 16, 2006 | Jan. 22, 2006 | |||||||||||||
High |
$ | 53.97 | $ | 46.32 | $ | 44.23 | $ | 36.83 | ||||||||
Low |
37.85 | 37.97 | 34.80 | 27.99 | ||||||||||||
12
weeks ended |
16 weeks ended | |||||||||||||||
Oct. 2, 2005 | July 10, 2005 | Apr. 17, 2005 | Jan. 23, 2005 | |||||||||||||
High |
$ | 39.00 | $ | 41.95 | $ | 38.73 | $ | 39.00 | ||||||||
Low |
27.35 | 34.95 | 32.75 | 31.80 |
(c) | ||||||||||||
Number of securities | ||||||||||||
remaining for future | ||||||||||||
(a) | (b) | issuance under equity | ||||||||||
Number of securities to be | Weighted-average | compensation plans | ||||||||||
issued upon exercise of | exercise price of | (excluding securities | ||||||||||
outstanding options, warrants and rights (1) | outstanding options(1) | reflected in column (a)(2)) | ||||||||||
Equity compensation
plans approved by
security holders |
3,334,930 | $ | 27.57 | 1,942,746 |
(1) | Includes 217,413 shares issuable in connection with the Companys outstanding performance-vested stock awards. The weighted-average exercise price in column (b) excludes the impact of the performance-vested stock awards since their exercise price is zero. | |
(2) | Includes 100,000 shares that are reserved for issuance under the Companys Employee Stock Purchase Plan. |
15
Fiscal Year | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003(1) | 2002 | ||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Restaurant sales |
$ | 2,100,955 | $ | 2,045,400 | $ | 2,033,482 | $ | 1,864,180 | $ | 1,822,902 | ||||||||||
Distribution and other sales |
512,907 | 348,482 | 197,762 | 108,738 | 77,445 | |||||||||||||||
Franchise rents and royalties |
101,356 | 80,390 | 66,653 | 54,371 | 45,936 | |||||||||||||||
Gains on sale of company-operated
restaurants and other |
50,431 | 29,276 | 22,568 | 29,509 | 19,284 | |||||||||||||||
Total revenues |
2,765,649 | 2,503,548 | 2,320,465 | 2,056,798 | 1,965,567 | |||||||||||||||
Costs of revenues |
2,283,135 | 2,078,121 | 1,913,285 | 1,695,709 | 1,589,090 | |||||||||||||||
Selling, general and
administrative expenses (2) |
300,819 | 273,821 | 264,257 | 228,141 | 233,345 | |||||||||||||||
Earnings from operations |
181,695 | 151,606 | 142,923 | 132,948 | 143,132 | |||||||||||||||
Interest expense, net (3) |
12,075 | 13,402 | 25,419 | 23,346 | 22,121 | |||||||||||||||
Earnings before income taxes and
cumulative effect of accounting
change |
169,620 | 138,204 | 117,504 | 109,602 | 121,011 | |||||||||||||||
Income taxes (4) |
60,545 | 46,667 | 42,820 | 39,518 | 40,791 | |||||||||||||||
Earnings before cumulative effect of
accounting change (5) |
$ | 109,075 | $ | 91,537 | $ | 74,684 | $ | 70,084 | $ | 80,220 | ||||||||||
Earnings per share before cumulative
effect of accounting change: |
||||||||||||||||||||
Basic |
$ | 3.12 | $ | 2.57 | $ | 2.06 | $ | 1.92 | $ | 2.04 | ||||||||||
Diluted (6) |
$ | 3.04 | $ | 2.48 | $ | 2.02 | $ | 1.90 | $ | 2.00 | ||||||||||
Balance Sheet Data (at end of period): |
||||||||||||||||||||
Total assets |
$ | 1,520,461 | $ | 1,337,986 | $ | 1,324,666 | $ | 1,142,481 | $ | 1,035,845 | ||||||||||
Long-term debt |
254,231 | 290,213 | 297,092 | 290,746 | 143,364 | |||||||||||||||
Stockholders equity |
710,885 | 565,372 | 553,399 | 450,434 | 447,761 |
(1) | Fiscal year 2003 includes Qdoba results of operations since January 21, 2003, representing approximately 36 weeks. | |
(2) | Fiscal year 2006 includes a charge of $7.3 million due to the change in stock option expensing requirements upon the adoption of SFAS 123R, a charge of approximately $1.6 million related to the closure of 7 locations, a charge of approximately $2.5 million related to the impairment of long-lived assets, and a charge of approximately $2.4 million related to a legal settlement. Fiscal year 2005 includes a charge of approximately $3.0 million related to the cancellation of the Companys test of a fast-casual concept called JBX Grill. Fiscal year 2003 includes $2.6 million related to lease-assumption obligations on five sites arising from the bankruptcy of the Chi-Chis restaurant chain, previously owned by the Company. Fiscal year 2002 includes $9.3 million for costs associated with the settlement of a class action lawsuit and $6.3 million for costs related to the closure of eight under-performing restaurants. | |
(3) | Fiscal year 2004 includes a $9.2 million charge related to the refinancing of the Companys term loan and the early redemption of its senior subordinated notes. | |
(4) | Fiscal year 2005 includes a $2.1 million benefit related to the resolution of a prior years tax position . | |
(5) | In 2006, we adopted Financial Accounting Standards Board Interpretation (FIN) 47 which requires that we record a liability for an asset retirement obligation at the end of a lease if the amount can be reasonably estimated. As a result of adopting FIN 47, we recorded an after-tax cumulative effect from this accounting change of $1.0 million related to the depreciation and interest expense that would have been charged prior to the adoption. | |
(6) | Fiscal year 2004 earnings per diluted share includes approximately $.03 per share related to an additional week. |
16
| Restaurant Sales. New product introductions and strong customer response to marketing messages promoting the chains premium products and value menu contributed to sales growth at Jack in the Box restaurants increasing both the average check and number of transactions. This positive sales momentum resulted in an increase in same-store sales of 4.8% at Jack in the Box company-operated restaurants and 5.9% at Qdoba system restaurants. | ||
| Improved Service. We hosted a breakthrough three-day conference for all Jack in the Box company and franchise restaurant managers to engage them in the service vision and provide them tools for improving guest service at their restaurants. | ||
| New Restaurant Designs. In 2006, we completed re-imaging approximately 150 Jack in the Box restaurants including entire markets in Seattle, Washington and Waco, Texas. The re-image program is intended to promote more in-restaurant dining by creating an inviting atmosphere that reflects the personality of Jack. | ||
| Franchising. Pursuant to our strategic initiative to expand franchising activities, we sold 82 Jack in the Box company-operated restaurants to franchisees. In the fourth quarter, the Company sold all of its company-operated restaurants in Hawaii to a new franchise operator generating gains and fees on sale of approximately $15.6 million. | ||
| Repurchase of Common Stock. Pursuant to a stock repurchase program authorized by our Board of Directors, the Company repurchased approximately 1.4 million shares of its common stock in the first quarter of 2006 for approximately $50 million. | ||
| Interest Rate Swap. To further reduce exposure to rising interest rates, we entered into a third interest rate swap that will effectively convert $60 million of our variable rate term loan borrowings to a fixed-rate basis beginning March 2008, concurrent with the end of our existing $60 million interest rate swap, through April 2010. | ||
| Effective October 1, 2006, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143 (FIN 47), which clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The adoption of this statement reduced fiscal 2006 income by approximately $.03 per diluted share. This change is not expected to have a material impact on Company operations in the future. |
17
Fiscal Year | ||||||||||||
Oct. 1, | Oct. 2, | Oct. 3, | ||||||||||
2006 | 2005 | 2004 | ||||||||||
Revenues: |
||||||||||||
Restaurant sales |
76.0 | % | 81.7 | % | 87.6 | % | ||||||
Distribution and other sales |
18.5 | 13.9 | 8.5 | |||||||||
Franchised rents and royalties |
3.7 | 3.2 | 2.9 | |||||||||
Gains on sale of company-operated
restaurants and other |
1.8 | 1.2 | 1.0 | |||||||||
Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Costs of revenues: |
||||||||||||
Restaurant costs of sales (1) |
31.2 | % | 31.7 | % | 31.0 | % | ||||||
Restaurant operating costs (1) |
51.3 | 51.4 | 51.9 | |||||||||
Costs of distribution and other sales (1) |
98.7 | 98.7 | 98.2 | |||||||||
Franchised restaurant costs (1) |
43.9 | 43.9 | 47.9 | |||||||||
Total costs of revenues |
82.6 | 83.0 | 82.4 | |||||||||
Selling, general and administrative expenses |
10.9 | 10.9 | 11.4 | |||||||||
Earnings from operations |
6.6 | 6.1 | 6.2 |
(1) | As a percentage of the related sales and/or revenues. |
2006 | ||||
Reduction in earnings from operations |
$ | 7,270 | ||
Reduction in earnings before income taxes and cumulative effect of accounting change |
7,270 | |||
Reduction in net earnings |
4,432 | |||
Reduction in earnings per share: |
||||
Basic |
$ | 0.13 | ||
Diluted |
$ | 0.12 |
18
Oct. 1, | Oct. 2, | Oct. 3, | ||||||||||
2006 | 2005 | 2004 | ||||||||||
Jack in the
Box: |
||||||||||||
Company-operated |
1,475 | 1,534 | 1,558 | |||||||||
Franchised |
604 | 515 | 448 | |||||||||
Total system |
2,079 | 2,049 | 2,006 | |||||||||
Qdoba: |
||||||||||||
Company-operated |
70 | 57 | 47 | |||||||||
Franchised |
248 | 193 | 130 | |||||||||
Total system |
318 | 250 | 177 | |||||||||
Consolidated: |
||||||||||||
Company-operated |
1,545 | 1,591 | 1,605 | |||||||||
Franchised |
852 | 708 | 578 | |||||||||
Total system |
2,397 | 2,299 | 2,183 | |||||||||
19
20
21
Payments Due by Period (in thousands) | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Credit facility term loan (1) |
$ | 333,737 | $ | 48,611 | $ | 37,445 | $ | 247,681 | $ | | ||||||||||
Revolving credit facility |
| | | | | |||||||||||||||
Capital lease obligations (1) |
32,102 | 7,267 | 10,168 | 4,399 | 10,268 | |||||||||||||||
Other long-term debt obligations (1) |
502 | 239 | 263 | | | |||||||||||||||
Operating lease obligations |
1,664,976 | 178,595 | 321,889 | 269,421 | 895,071 | |||||||||||||||
Guarantee (2) |
1,675 | 1,003 | 517 | 155 | | |||||||||||||||
Total contractual obligations |
$ | 2,032,992 | $ | 235,715 | $ | 370,282 | $ | 521,656 | $ | 905,339 | ||||||||||
Other Commercial Commitments: |
||||||||||||||||||||
Stand-by letters of credit (3) |
$ | 40,448 | $ | 40,448 | $ | | $ | | $ | | ||||||||||
(1) | Obligations related to the Companys credit facility term loan, capital lease obligations, and other long-term debt obligations include interest expense estimated at interest rates in effect on October 1, 2006. | |
(2) | Consists of a guarantee associated with one Chi-Chis property. Due to the bankruptcy of the Chi-Chis restaurant chain, previously owned by the Company, we are obligated to perform in accordance with the terms of the guarantee agreement. | |
(3) | Consists primarily of letters of credit for workers compensation and general liability insurance. Letters of credit outstanding against our credit facility totaled $0.3 million. Letters of credit outstanding under our cash-collateralized letters of credit agreement totaled $40.2 million and do not impact the borrowing capacity under our credit facility. |
22
23
24
25
26
27
Number | Description | |
3.1
|
Restated Certificate of Incorporation, as amended(5) | |
3.2
|
Amended and Restated Bylaws(24) | |
4.1
|
Indenture for the 8 3/8% Senior Subordinated Notes due 2008(4) (Instruments with respect to the registrants 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
|
Amended and Restated Credit Agreement dated as of January 8, 2004 by and among Jack in the Box Inc. and the lenders named therein(11) | |
10.1.1
|
First Amendment dated as of June 18, 2004 to the Amended and Restated Credit Agreement(12) | |
10.1.2
|
Second Amendment and Consent dated as of September 24, 2004 to the Amended and Restated Credit Agreement(15) | |
10.1.3
|
Third Amendment dated as of January 31, 2005 to the Amended and Restated Credit Agreement(17) | |
10.1.4
|
Fourth Amendment dated as of September 30, 2005 to the Amended and Restated Credit Agreement (20) | |
10.2
|
Purchase Agreements dated as of January 22, 1987 between Foodmaker, Inc. and FFCA/IIP 1985 Property Company and FFCA/IIP 1986 Property
Company(1) |
|
10.3
|
Land Purchase Agreements dated as of February 18, 1987 by and between Foodmaker, Inc. and FFCA/IPI 1984 Property Company and FFCA/IPI 1985
Property Company and Letter Agreement relating thereto(1) |
|
10.4.1*
|
Amended and Restated 1992 Employee Stock Incentive Plan(3) | |
10.4.2*
|
Jack in the Box Inc. 2002 Stock Incentive Plan(7) | |
10.5*
|
Capital Accumulation Plan for Executives(6) | |
10.5.1*
|
First Amendment dated as of August 2, 2002 to the Capital Accumulation Plan for Executives(8) | |
10.6*
|
Supplemental Executive Retirement Plan(6) | |
10.6.1*
|
First Amendment dated as of August 2, 2002 to the Supplemental Executive Retirement Plan(8) | |
10.6.2*
|
Second Amendment dated as of November 9, 2006 to the Supplemental Executive Retirement Plan | |
10.7*
|
Amended and Restated Performance Bonus Plan(21) | |
10.7.1*
|
Bonus Program for Fiscal 2006 Under the Performance Bonus Plan(23) | |
10.8*
|
Deferred Compensation Plan for Non-Management Directors(2) | |
10.8.1*
|
Amended and Restated Deferred Compensation Plan for Non-Management Directors effective November 9, 2006 | |
10.9*
|
Amended and Restated Non-Employee Director Stock Option Plan(5) | |
10.10*
|
Form of Compensation and Benefits Assurance Agreement for Executives(22) | |
10.11*
|
Form of Indemnification Agreement between Jack in the Box Inc. and certain officers and directors(8) | |
10.12
|
Consent Agreement(8) | |
10.13*
|
Executive Deferred Compensation Plan(9) | |
10.14*
|
Form of Restricted Stock Award for certain executives(9) | |
10.14.1*
|
Form of Restricted Stock Award for certain executives under the 2004 Stock Incentive Plan(18) | |
10.14(a)*
|
Schedule of Restricted Stock Awards | |
10.15*
|
Executive Agreement between Jack in the Box Inc. and Gary J. Beisler, President and Chief Executive Officer of Qdoba Restaurant
Corporation(10) |
|
10.16*
|
Amended and Restated 2004 Stock Incentive Plan(16) | |
10.17*
|
Form of Stock Option Awards(13) | |
10.18*
|
Retirement
Agreement between Jack in the Box Inc. and John F. Hoffner, Executive
Vice President and Chief Financial Officer(14) |
|
10.19*
|
Executive Compensation Base Salaries | |
10.20*
|
Jack in the Box Inc. Non-Employee Director Stock Option Award
Agreement under the 2004 Stock Incentive Plan(19) |
|
10.21*
|
Summary of Director Compensation | |
23.1
|
Consent of Independent Registered Public Accounting Firm | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
28
* | Management contract or compensatory plan. | |
(1) | Previously filed and incorporated herein by reference from registrants Registration
Statement on Form S-1 (No. 33-10763) filed
February 24, 1987. |
|
(2) | Previously filed and incorporated herein by reference from registrants Definitive Proxy
Statement dated January 17, 1995 for the Annual Meeting of
Stockholders on February 17, 1995. |
|
(3) | Previously filed and incorporated herein by reference from registrants Registration
Statement on Form S-8 (No. 333-26781) filed May 9,
1997. |
|
(4) | Previously filed and incorporated herein by reference from registrants Quarterly Report on
Form 10-Q for the quarter ended April 12, 1998. |
|
(5) | Previously filed and incorporated herein by reference from registrants Annual Report on Form
10-K for the fiscal year ended October 3, 1999. |
|
(6) | Previously filed and incorporated herein by reference from registrants Annual Report on Form
10-K for the fiscal year ended September 30, 2001. |
|
(7) | Previously filed and incorporated herein by reference from the registrants Definitive Proxy
Statement dated January 18, 2002 for the Annual Meeting of Stockholders on February 22, 2002. |
|
(8) | Previously filed and incorporated herein by reference from registrants Annual Report on Form
10-K for the fiscal year ended September 29, 2002. |
|
(9) | Previously filed and incorporated herein by reference from registrants Quarterly Report on
Form 10-Q for the quarter ended January 19, 2003. |
|
(10) | Previously filed and incorporated herein by reference from registrants Quarterly Report on
Form 10-Q for the quarter ended April 13, 2003. |
|
(11) | Previously filed and incorporated herein by reference from the registrants Quarterly Report
on Form 10-Q for the quarter ended January 18, 2004. |
|
(12) | Previously filed and incorporated herein by reference from the registrants Quarterly Report
on Form 10-Q for the quarter ended July 4, 2004. |
|
(13) | Previously filed and incorporated herein by reference from the registrants Current Report on
Form 8-K dated September 10, 2004. |
|
(14) | Previously filed and incorporated herein by reference from the registrants Current Report on
Form 8-K dated November 17, 2004. |
|
(15) | Previously filed and incorporated herein by reference from registrants Annual Report on Form
10-K for the fiscal year ended October 3, 2004. |
|
(16) | Previously filed and incorporated herein by reference from the registrants Current Report on
Form 8-K dated February 24, 2005. |
|
(17) | Previously filed and incorporated herein by reference from the registrants Quarterly Report
on Form 10-Q for the quarter ended January 23, 2005. |
|
(18) | Previously filed and incorporated herein by reference from the registrants Current Report on
Form 8-K dated October 24, 2005. |
|
(19) | Previously filed and incorporated herein by reference from the registrants Current Report on
Form 8-K dated November 10, 2005. |
|
(20) | Previously
filed and incorporated herein by reference from registrants
Annual Report on
Form 10-K for the fiscal year ended October 2, 2005. |
|
(21) | Previously filed and incorporated herein by reference from the registrants Definitive Proxy Statement dated January 13, 2006 for the Annual Meeting of Stockholders on February 17, 2006. |
|
(22) | Previously filed and incorporated herein by reference from the registrants Quarterly Report on Form 10-Q for the quarter ended July 9, 2006. |
|
(23) | Previously
filed and incorporated herein by reference from the registrants Current Report on Form 8-K dated September 18, 2006. |
|
(24) | Previously filed and incorporated herein by reference from the registrants Current Report on
Form 8-K dated November 13, 2006. |
29
ITEM 15(b)
|
All required exhibits are filed herein or incorporated by reference as described in Item 15(a)(3). | |
ITEM 15(c)
|
All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. |
JACK IN THE BOX INC. | ||||
By: | /S/ JERRY P. REBEL | |||
Jerry P. Rebel | ||||
Executive Vice President and Chief Financial Officer | ||||
(principal financial officer) | ||||
(Duly Authorized Signatory) | ||||
Date: November 22, 2006 |
Signature | Title | Date | ||
/S/ LINDA A. LANG
|
Chairman of the Board and Chief Executive Officer (principal executive officer) | November 22, 2006 | ||
/S/ JERRY P. REBEL
|
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) | November 22, 2006 | ||
/S/ MICHAEL E. ALPERT
|
Director | November 22, 2006 | ||
/S/ ANNE B. GUST
|
Director | November 22, 2006 | ||
/S/ GEORGE FELLOWS
|
Director | November 22, 2006 | ||
/S/ ALICE B. HAYES
|
Director | November 22, 2006 | ||
/S/ MURRAY H. HUTCHISON
|
Director | November 22, 2006 | ||
/S/ MICHAEL W. MURPHY
|
Director | November 22, 2006 | ||
/S/ L. ROBERT PAYNE
|
Director | November 22, 2006 | ||
/S/ DAVID M. TEHLE
|
Director | November 22, 2006 |
30
Page | ||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-7 |
F-1
F-2
October 1, | October 2, | |||||||
2006 | 2005 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents (includes restricted cash of
approximately
$47,655 and $45,580, respectively) |
$ | 233,906 | $ | 103,708 | ||||
Accounts and notes receivable, net |
30,874 | 21,227 | ||||||
Inventories |
41,202 | 40,007 | ||||||
Prepaid expenses |
23,489 | 19,790 | ||||||
Deferred income taxes |
43,889 | 38,340 | ||||||
Assets held for sale and leaseback |
23,059 | 55,743 | ||||||
Other current assets |
6,711 | 5,155 | ||||||
Total current assets |
403,130 | 283,970 | ||||||
Property and equipment, at cost: |
||||||||
Land |
98,962 | 96,544 | ||||||
Buildings |
759,459 | 702,634 | ||||||
Restaurant and other equipment |
574,630 | 566,976 | ||||||
Construction in progress |
72,255 | 57,394 | ||||||
1,505,306 | 1,423,548 | |||||||
Less accumulated depreciation and amortization |
590,530 | 545,563 | ||||||
Property and equipment, net |
914,776 | 877,985 | ||||||
Intangible assets, net |
21,021 | 22,093 | ||||||
Goodwill |
92,187 | 92,187 | ||||||
Other assets, net |
89,347 | 61,751 | ||||||
$ | 1,520,461 | $ | 1,337,986 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 37,539 | $ | 7,788 | ||||
Accounts payable |
61,059 | 56,064 | ||||||
Accrued liabilities |
240,320 | 211,438 | ||||||
Total current liabilities |
338,918 | 275,290 | ||||||
Long-term debt, net of current maturities |
254,231 | 290,213 | ||||||
Other long-term liabilities |
145,587 | 148,251 | ||||||
Deferred income taxes |
70,840 | 58,860 | ||||||
Stockholders equity: |
||||||||
Preferred stock $.01 par value, 15,000,000 shares
authorized, none issued |
| | ||||||
Common stock $.01 par value, 75,000,000 shares
authorized, 46,960,155 and 45,391,851 issued, respectively |
470 | 454 | ||||||
Capital in excess of par value |
431,624 | 380,161 | ||||||
Retained earnings |
555,046 | 447,015 | ||||||
Accumulated other comprehensive loss |
(1,796 | ) | (29,563 | ) | ||||
Unearned compensation |
| (8,233 | ) | |||||
Treasury stock, at cost, 11,196,728 and 9,752,028 shares,
respectively |
(274,459 | ) | (224,462 | ) | ||||
Total stockholders equity |
710,885 | 565,372 | ||||||
$ | 1,520,461 | $ | 1,337,986 | |||||
F-3
Fiscal Year | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Revenues: |
||||||||||||
Restaurant sales |
$ | 2,100,955 | $ | 2,045,400 | $ | 2,033,482 | ||||||
Distribution and other sales |
512,907 | 348,482 | 197,762 | |||||||||
Franchise rents and royalties |
101,356 | 80,390 | 66,653 | |||||||||
Gains on sale of company-operated
restaurants and other |
50,431 | 29,276 | 22,568 | |||||||||
2,765,649 | 2,503,548 | 2,320,465 | ||||||||||
Costs of revenues: |
||||||||||||
Restaurant costs of sales |
654,659 | 647,567 | 631,185 | |||||||||
Restaurant operating costs |
1,078,029 | 1,051,400 | 1,055,913 | |||||||||
Costs of distribution and other sales |
505,991 | 343,836 | 194,251 | |||||||||
Franchised restaurant costs |
44,456 | 35,318 | 31,936 | |||||||||
2,283,135 | 2,078,121 | 1,913,285 | ||||||||||
Selling, general and administrative expenses |
300,819 | 273,821 | 264,257 | |||||||||
Earnings from operations |
181,695 | 151,606 | 142,923 | |||||||||
Interest expense, net |
12,075 | 13,402 | 25,419 | |||||||||
Earnings before income taxes and cumulative effect of
accounting change |
169,620 | 138,204 | 117,504 | |||||||||
Income taxes |
60,545 | 46,667 | 42,820 | |||||||||
Earnings before cumulative effect of accounting change |
109,075 | 91,537 | 74,684 | |||||||||
Cumulative effect of accounting change, net |
1,044 | | | |||||||||
Net earnings |
$ | 108,031 | $ | 91,537 | $ | 74,684 | ||||||
Earnings per share basic: |
||||||||||||
Earnings before cumulative effect of
accounting change |
$ | 3.12 | $ | 2.57 | $ | 2.06 | ||||||
Cumulative effect of accounting change, net |
0.03 | | | |||||||||
Net earnings per share |
$ | 3.09 | $ | 2.57 | $ | 2.06 | ||||||
Earnings per share diluted: |
||||||||||||
Earnings before cumulative effect of
accounting change |
$ | 3.04 | $ | 2.48 | $ | 2.02 | ||||||
Cumulative effect of accounting change, net |
0.03 | | | |||||||||
Net earnings per share |
$ | 3.01 | $ | 2.48 | $ | 2.02 | ||||||
Weighted-average shares outstanding: |
||||||||||||
Basic |
34,944 | 35,625 | 36,237 | |||||||||
Diluted |
35,917 | 36,938 | 36,961 |
F-4
Fiscal Year | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 108,031 | $ | 91,537 | $ | 74,684 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
88,295 | 86,156 | 84,446 | |||||||||
Deferred finance cost amortization |
1,132 | 982 | 1,456 | |||||||||
Provision for deferred income taxes |
(11,186 | ) | (3,237 | ) | 4,024 | |||||||
Share-based
compensation expense for equity classified awards |
9,285 | 1,396 | 584 | |||||||||
Pension and postretirement expense |
25,860 | 18,321 | 20,870 | |||||||||
Gains on cash surrender value of Company-owned life insurance |
(3,265 | ) | (4,127 | ) | (2,564 | ) | ||||||
Gains on the sale of company-operated restaurants |
(42,046 | ) | (23,334 | ) | (17,918 | ) | ||||||
Losses on the disposition of property and equipment, net |
9,095 | 6,615 | 3,583 | |||||||||
Loss on early retirement of debt |
| | 9,180 | |||||||||
Impairment charges and other |
4,580 | 3,404 | 1,438 | |||||||||
Cumulative effect of change in accounting principle |
1,044 | | | |||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in receivables |
(10,765 | ) | 162 | (6,720 | ) | |||||||
Increase in inventories |
(1,195 | ) | (5,964 | ) | (2,344 | ) | ||||||
Increase in prepaid expenses and other current assets |
(4,436 | ) | (2,570 | ) | (1,054 | ) | ||||||
Increase in accounts payable |
4,995 | 2,561 | 2,695 | |||||||||
Pension contributions |
(16,465 | ) | (23,658 | ) | (31,335 | ) | ||||||
Tax benefits from share-based compensation |
| 9,771 | 2,867 | |||||||||
Increase (decrease) in other liabilities |
42,881 | (127 | ) | 26,913 | ||||||||
Cash flows provided by operating activities |
205,840 | 157,888 | 170,805 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property and equipment |
(150,032 | ) | (126,134 | ) | (120,065 | ) | ||||||
Proceeds from the sale of property and equipment |
1,899 | 2,094 | 1,656 | |||||||||
Proceeds from the sale of company-operated restaurants |
54,389 | 33,517 | 21,486 | |||||||||
Proceeds from (purchase of) assets held for sale and leaseback, net |
32,891 | (15,751 | ) | 16,149 | ||||||||
Collections on notes receivable |
5,389 | 895 | 21,911 | |||||||||
Purchase of investments |
(7,325 | ) | (6,284 | ) | (6,302 | ) | ||||||
Other |
(1,739 | ) | (2,858 | ) | 16,768 | |||||||
Cash flows used in investing activities |
(64,528 | ) | (114,521 | ) | (48,397 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Principal payments on debt |
(8,049 | ) | (8,204 | ) | (7,772 | ) | ||||||
Debt costs |
(260 | ) | (343 | ) | (7,103 | ) | ||||||
Repurchase of common stock |
(49,997 | ) | (92,861 | ) | (7,138 | ) | ||||||
Excess tax benefits from share-based compensation arrangements |
12,327 | | | |||||||||
Proceeds from issuance of common stock |
34,865 | 30,049 | 8,943 | |||||||||
Cash flows used in financing activities |
(11,114 | ) | (71,359 | ) | (13,070 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
$ | 130,198 | $ | (27,992 | ) | $ | 109,338 | |||||
F-5
Accumulated | ||||||||||||||||||||||||||||||||
Common Stock | Capital in | other | ||||||||||||||||||||||||||||||
Number | excess of | Retained | comprehensive | Unearned | Treasury | |||||||||||||||||||||||||||
of shares | Amount | par value | earnings | loss | compensation | stock | Total | |||||||||||||||||||||||||
Balance at September 28, 2003 |
43,231,412 | $ | 432 | $ | 325,510 | $ | 280,794 | $ | (27,184 | ) | $ | (4,655 | ) | $ | (124,463 | ) | $ | 450,434 | ||||||||||||||
Shares issued under stock plans,
including tax benefit |
615,100 | 6 | 12,816 | | | (3,917 | ) | | 8,905 | |||||||||||||||||||||||
Amortization of unearned
compensation |
| | | | | 584 | | 584 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | | (7,138 | ) | (7,138 | ) | ||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | 74,684 | | | | 74,684 | ||||||||||||||||||||||||
Additional minimum
pension liability, net of taxes |
| | | | 25,930 | | | 25,930 | ||||||||||||||||||||||||
Total comprehensive income |
| | | 74,684 | 25,930 | | | 100,614 | ||||||||||||||||||||||||
Balance at October 3, 2004 |
43,846,512 | 438 | 338,326 | 355,478 | (1,254 | ) | (7,988 | ) | (131,601 | ) | 553,399 | |||||||||||||||||||||
Shares issued under stock plans,
including tax benefit |
1,545,339 | 16 | 41,835 | | | (2,031 | ) | | 39,820 | |||||||||||||||||||||||
Amortization of unearned
compensation,
forfeitures and change in value
of
common stock |
| | | | | 1,786 | | 1,786 | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | | (92,861 | ) | (92,861 | ) | ||||||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||
Net earnings |
| | | 91,537 | | | | 91,537 | ||||||||||||||||||||||||
Gains on interest rate swaps,
net of taxes |
| | | | 417 | | | 417 | ||||||||||||||||||||||||
Additional minimum
pension liability, net of taxes |
| | | | (28,726 | ) | | | (28,726 | ) | ||||||||||||||||||||||
Total comprehensive income (loss) |
| | | 91,537 | (28,309 | ) | | | 63,228 | |||||||||||||||||||||||
Balance at October 2, 2005 |
45,391,851 | 454 | 380,161 | 447,015 | (29,563 | ) | (8,233 | ) | (224,462 | ) | 565,372 | |||||||||||||||||||||
Shares issued under stock plans,
including tax benefit |
1,568,304 | 16 | 50,411 | | | | | 50,427 | ||||||||||||||||||||||||
Share-based compensation |
| | 9,285 | | | | | 9,285 | ||||||||||||||||||||||||
Reclass of unearned compensation upon
adoption of SFAS 123R |
| | (8,233 | ) | | | 8,233 | | | |||||||||||||||||||||||
Purchase of treasury stock |
| | | | | | (49,997 | ) | (49,997 | ) | ||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | 108,031 | | | | 108,031 | ||||||||||||||||||||||||
Gains on interest rate swaps,
net of taxes |
| | | | 180 | | | 180 | ||||||||||||||||||||||||
Additional minimum
pension liability, net of taxes |
| | | | 27,587 | | | 27,587 | ||||||||||||||||||||||||
Total comprehensive income |
| | | 108,031 | 27,767 | | | 135,798 | ||||||||||||||||||||||||
Balance at October 1, 2006 |
46,960,155 | $ | 470 | $ | 431,624 | $ | 555,046 | $ | (1,796 | ) | $ | | $ | (274,459 | ) | $ | 710,885 | |||||||||||||||
F-6
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Nature of operations Founded in 1951, Jack in the Box Inc. (the Company) owns, operates, and franchises Jack in the Box® quick-service restaurants and Qdoba Mexican Grill® (Qdoba) fast-casual restaurants, in a combined 43 states. The company also operates 55 proprietary convenience stores called Quick Stuff®, which include a major-branded fuel station and are developed adjacent to a full-size Jack in the Box restaurant. | ||
Basis of presentation and fiscal year The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of any variable interest entities where we are deemed the primary beneficiary. All significant intercompany transactions are eliminated. Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the fiscal 2006 presentation, including the reclassification of interest income to interest expense, net from other revenues. Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2006 and 2005 include 52 weeks, and fiscal year 2004 includes 53 weeks. | ||
References to the Company throughout these notes to the consolidated financial statements are made using the first person notations of we, us and our. | ||
Financial instruments The fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities approximate the carrying amounts due to their short maturities. Company-owned life insurance (COLI) policies, included in other assets, are recorded at their cash surrender values. The fair values of each of our long-term debt instruments are based on quoted market values, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our long-term debt at October 1, 2006 and October 2, 2005 approximate their carrying values. | ||
From time-to-time, we use commodity derivatives to reduce the risk of price fluctuations related to raw material requirements for commodities such as beef and pork, and utility derivatives to reduce the risk of price fluctuations related to natural gas. We also use interest rate swap agreements to manage interest rate exposure. We do not speculate using derivative instruments, and we purchase derivative instruments only for the purpose of risk management. | ||
All derivatives are recognized on the consolidated balance sheets at fair value based upon quoted market prices. Changes in the fair values of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as a hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income are classified to earnings in the period the hedged item affects earnings. If the underlying hedge transaction ceases to exist, any associated amounts reported in other comprehensive income are reclassified to earnings at that time. Any ineffectiveness is recognized in earnings in the current period. At October 1, 2006, we had three interest rate swaps in effect and no outstanding commodity or utility derivatives. Refer to Note 4, Long-Term Debt, for additional discussion regarding our interest rate swaps. | ||
At October 1, 2006 and October 2, 2005, we had no material financial instruments subject to significant market exposure other than the COLI policies discussed above. | ||
Cash and cash equivalents We invest 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. | ||
Restricted cash To reduce our letter of credit fees incurred under the Companys credit facility, we entered into a cash-collateralized letter of credit agreement in October 2004. At October 1, 2006, we had letters of credit outstanding under this agreement of $40,165, which were collateralized by approximately $47,655 of cash and cash equivalents. Although we intend to continue this agreement, we have the ability to terminate the arrangement, thereby eliminating the restrictions on cash and cash equivalents. | ||
Accounts and notes receivable, net is primarily comprised of receivables from franchisees and tenants. Franchisee receivables include rents, royalties, and marketing fees associated with the franchise agreements and receivables arising from distribution services provided to most franchisees. Tenant receivables relate to subleased properties where the Company is on the master lease agreement. The allowance for doubtful accounts is based on historical experience and a review of existing receivables. Changes in accounts receivable are classified as an operating activity in the consolidated statements of cash flows. | ||
Inventories are valued at the lower of cost or market on a first-in, first-out basis. Changes in inventories are classified as an operating activity in the consolidated statements of cash flows. |
F-7
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
Assets held for sale and leaseback typically represent the costs for new sites that we plan to sell and lease back when construction is completed. Gains or losses realized on sale-leaseback transactions are deferred and amortized to income over the lease terms. During 2005, we exercised our purchase option under certain lease arrangements. In fiscal year 2006, we sold and leased back these properties at more favorable rental rates resulting in a decrease in assets held for sale and leaseback at October 1, 2006 compared with October 2, 2005. | ||
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 and repairs 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 generally depreciated using the straight-line method based on the estimated useful lives of the assets, over the initial lease term for certain assets acquired in conjunction with the lease commencement for leased properties, or the remaining lease term for certain assets acquired after the commencement of the lease for leased properties. Building and leasehold improvement assets are assigned lives that range from 3 to 35 years; and equipment assets are assigned lives that range from 2 to 35 years. In certain situations, one or more option periods may be used in determining the depreciable life of assets related to leased properties if we deem that an economic penalty would be incurred otherwise. In either circumstance, the Companys policy requires lease term consistency when calculating the depreciation period, in classifying the lease and in computing straight-line rent expense. | ||
Effective October 1, 2006, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143 (FIN 47), which clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The impact from the adoption of this statement is discussed in Note 2, Asset Retirement Obligations. | ||
Other assets primarily include lease acquisition costs, acquired franchise contract costs, deferred finance costs and COLI policies. Lease acquisition costs primarily represent the fair values of acquired lease contracts having contractual rents lower than fair market rents, and are amortized on a straight-line basis over the remaining initial lease term, generally 18 years. Acquired franchise contract costs, which represent the acquired value of franchise contracts, are amortized over the term of the franchise agreements, generally 10 years, based on the projected royalty revenue stream. Deferred finance costs are amortized using the effective-interest method over the terms of the respective loan agreements, from 4 to 7 years. | ||
Company-owned life insurance We have purchased company-owned life insurance policies. As of October 1, 2006 and October 2, 2005, the cash surrender values of these policies were $54,350 and $43,741 respectively. A portion of these policies resides in an umbrella trust for use only to pay plan benefits to participants in the Companys non-qualified pension and defined contribution plans, or to pay creditors if the Company becomes insolvent. The cash surrender values of those policies covered under the trust were $24,420 and $22,927 as of October 1, 2006 and October 2, 2005, respectively. The trust also includes cash of $811 and $830 as of October 1, 2006 and October 2, 2005, respectively. | ||
Leases We review all leases for capital or operating classification at their inception under the guidance of Statement of Financial Accounting Standard (SFAS 13), Accounting for Leases. Our operations are primarily conducted under operating leases. Within the provisions of certain of our leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term. Differences between amounts paid and amounts expensed are recorded as deferred rent. The lease term commences on the date when we have the right to control the use of the leased property. Certain of our leases also include contingent rent provisions based on sales levels, which is accrued at the point in time we determine that it is probable such sales levels will be achieved. |
F-8
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
Impairment of long-lived assets Property, equipment and certain other assets, including amortized intangible assets, are reviewed for impairment when indicators of impairment are present. This review includes a restaurant-level analysis that takes into consideration a restaurants operating cash flows, the period of time since a restaurant has been opened or remodeled, and the maturity of the related market. When indicators of impairment are present, we perform an impairment analysis on a restaurant-by-restaurant basis. If the sum of undiscounted future cash flows is less than the net carrying value of the asset, we recognize an impairment loss by the amount which the carrying value exceeds the fair value of the asset. Long-lived assets that are held for disposal are reported at the lower of their carrying value or fair value, less estimated costs to sell. | ||
In addition, goodwill and intangible assets not subject to amortization are evaluated for impairment annually or more frequently if indicators of impairment are present. If the determined fair values of these assets are less than the related carrying amounts, an impairment loss is recognized. We performed our annual impairment tests of goodwill and non-amortized intangible assets in the fourth quarter of fiscal years 2006 and 2005, and determined these assets were not impaired at October 1, 2006 and October 2, 2005. | ||
Revenue recognition Revenue from restaurant and fuel and convenience store sales are recognized when the food, beverage, and fuel products are sold. | ||
We provide purchasing, warehouse and distribution services for most of our franchise-operated restaurants. Revenue from these services is recognized at the time of physical delivery of the inventory. | ||
Franchise arrangements generally provide for initial franchise fees and continuing royalty payments to us based on a percentage of sales. Among other things, a franchisee may be provided the use of land and building, generally for a period of 20 years, and is required to pay negotiated rent, property taxes, insurance and maintenance. Franchise fees are recorded as revenue when we have substantially performed all of our contractual obligations. Expenses associated with the issuance of the franchise are expensed as incurred. Franchise royalties are recorded in revenues on an accrual basis. Certain franchise rents, which are contingent upon sales levels, are recognized in the period in which the contingency is met. Gains on the sale of restaurant businesses to franchisees are recorded when the sales are consummated and certain other gain recognition criteria are met. These gains are included in gains on sale of company-operated restaurants and other in the consolidated statements of earnings and were $42,046, $23,334 and $17,918 in fiscal years 2006, 2005 and 2004, respectively. | ||
Preopening costs associated with the opening of a new restaurant consist primarily of employee training costs and are expensed as incurred. | ||
Restaurant closure costs All costs associated with exit or disposal activities are recognized when they are incurred. Restaurant closure costs, which are included in selling, general and administrative expenses, consist of future lease commitments, net of anticipated sublease rentals, and expected ancillary costs. | ||
Self-insurance We are self-insured for a portion of our workers compensation, general liability, automotive, and employee medical and dental claims. We utilize a paid loss plan for our workers compensation, general liability and automotive programs, which have predetermined loss limits per occurrence and in the aggregate. We establish our insurance liability and reserves using independent actuarial estimates of expected losses for determining reported claims and as the basis for estimating claims incurred but not reported. | ||
Advertising costs We maintain marketing funds which include contributions of approximately 5% and 1% of sales at all company-operated Jack in the Box and Qdoba restaurants, respectively, as well as contractual marketing fees paid monthly by franchisees. Production costs of commercials, programming and other marketing activities are charged to the marketing funds when the advertising is first used, and the costs of advertising are charged to operations as incurred. Our contributions to the marketing funds and other marketing expenses, which are included in selling, general, and administrative expenses in the accompanying consolidated statements of earnings, were $107,451, $104,605 and $103,721 in 2006, 2005 and 2004, respectively. | ||
Contingencies We recognize liabilities for contingencies when we have an exposure that indicates it is both probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. |
F-9
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
Variable interest entities FASB issued Interpretation No. 46 (revised 2003), Consolidation of Variable Interest Entities requires the primary beneficiary of a variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entitys expected losses, receives a majority of the entitys expected residual returns, or both, because of ownership, contractual or other financial interests in the entity. | ||
The primary entities in which we possess a variable interest are franchise entities, which operate our franchised restaurants. We do not possess any ownership interests in franchise entities and we do not generally provide financial support to our franchisees. We have reviewed these franchise entities and determined that the Company is not the primary beneficiary of the entities and therefore, these entities have not been consolidated. | ||
We use two advertising funds to administer our advertising programs. These funds are consolidated into the Companys financial statements as they are deemed variable interest entities for which the Company is the primary beneficiary. Contributions to these funds are designed for advertising, and the Company administers the funds contributions. In accordance with SFAS 45, Accounting for Franchise Fee Revenue, contributions from franchisees, when received, are recorded as offsets to the Companys reported advertising expense in its consolidated statements of earnings. | ||
Income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. | ||
Net earnings per share Basic net earnings per share is computed using the weighted-average shares outstanding during the period. Diluted net earnings per share is computed using the dilutive effect of including stock options and nonvested stock in the calculation of weighted-average shares outstanding. | ||
Segment reporting An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Companys chief operating decision makers in deciding how to allocate resources. Similar operating segments can be aggregated into a single operating segment if the businesses are similar. The Company operates its business in two operating segments, Jack in the Box and Qdoba. | ||
Share-based compensation Effective October 3, 2005, we adopted the fair value recognition provisions of SFAS 123 (revised 2004), Share-Based Payment (123R), which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial statements. The Company selected the modified prospective method of adoption. Under this method, compensation expense in 2006 included: (a) all share-based payments granted prior to, but not yet vested as of, October 3, 2005, estimated in accordance with the original provisions of SFAS 123, Accounting for Stock-Based Compensation, and (b) all share-based payments granted on or after October 3, 2005, estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated. | ||
SFAS 123R requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation as opposed to recognizing forfeitures as they occur. The adjustment to apply estimated forfeitures to previously recognized share-based compensation was considered immaterial and as such was not classified as a cumulative effect of a change in accounting principle. Furthermore, we reclassified the balance in unearned compensation to capital in excess of par value in our consolidated balance sheet on October 3, 2005, in accordance with the provisions of SFAS 123R. | ||
SFAS 123R also requires companies to calculate an initial pool of excess tax benefits available at the adoption date to absorb any tax deficiencies that may be recognized under SFAS 123R. The pool includes the net excess tax benefits that would have been recognized if the Company had adopted SFAS 123 for recognition purposes on its effective date. | ||
We have elected to calculate the pool of excess tax benefits under the alternative transition method described in FASB Staff Position (FSP) 123-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, which also specifies the method we must use to calculate excess tax benefits reported on the statement of cash flows. The excess tax benefits from share-based payment arrangements classified as financing cash flows for the year ended October 1, 2006 of $12,327 would not have been materially different if we had not adopted SFAS 123R; however, they would have been classified as operating cash flows rather than as financing cash flows. |
F-10
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
Compensation expense for the Companys share-based compensation awards are generally recognized on a straight-line basis during the service period of the respective grant. Certain awards accelerate vesting upon the recipients retirement from the Company. In these cases, for awards granted prior to October 3, 2005, the Company recognizes compensation costs over the service period and accelerates any remaining unrecognized compensation when the employee retires. For awards granted after October 2, 2005, the Company recognizes compensation costs over the shorter of the vesting period or the period from the date of grant to the date the employee becomes eligible to retire. For awards granted prior to October 3, 2005, had the Company recognized compensation cost over the shorter of the vesting period or the period from the date of grant to becoming retirement eligible, compensation costs recognized under SFAS 123R would not have been materially different. | ||
In 2006, we recognized total share-based compensation expense, including expenses for stock options, performance-vested stock awards, nonvested stock and directors deferred compensation, and related tax benefits of $12,170 and $4,751, respectively. | ||
The change in stock option expensing requirements resulting from our adoption of SFAS 123R impacted the fiscal 2006 consolidated statement of earnings as follows: |
2006 | ||||
Reduction in earnings from operations |
$ | 7,270 | ||
Reduction in earnings before income taxes and cumulative effect of accounting change |
7,270 | |||
Reduction in net earnings |
4,432 | |||
Reduction in earnings per share: |
||||
Basic |
$ | 0.13 | ||
Diluted |
$ | 0.12 |
Prior to fiscal year 2006, stock awards were accounted for under Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, using the intrinsic method, whereby compensation expense was recognized for the excess, if any, of the quoted market price of the Companys stock at the date of grant over the exercise price. We applied the disclosure provisions of SFAS 123 as if the fair value based method had been applied in measuring compensation expense. | ||
Had compensation expense been recognized for our stock-based compensation plans by applying the fair value recognition provisions of SFAS 123, we would have recorded net earnings and earnings per share amounts as follows: |
2005 | 2004 | |||||||
Net earnings, as reported |
$ | 91,537 | $ | 74,684 | ||||
Add: Stock-based employee compensation included in reported net income,
net of taxes |
1,056 | 1,356 | ||||||
Deduct: Total stock-based employee compensation expense determined
under fair-value-based method for all awards, net of taxes |
(7,869 | ) | (7,156 | ) | ||||
Pro forma net earnings |
$ | 84,724 | $ | 68,884 | ||||
Net earnings per share: |
||||||||
Basic as reported |
$ | 2.57 | $ | 2.06 | ||||
Basic pro forma |
$ | 2.38 | $ | 1.90 | ||||
Diluted as reported |
$ | 2.48 | $ | 2.02 | ||||
Diluted pro forma |
$ | 2.29 | $ | 1.86 |
For the pro forma disclosures, the estimated fair values of the options were amortized on a straight-line basis over their vesting periods of up to five years. Refer to Note 10, Share-Based Employee Compensation, for information regarding the assumptions used by the Company in valuing its stock options. |
F-11
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) | |
Estimations In preparing the consolidated financial statements in conformity with U.S. 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 materially from these estimates . | ||
2. | ASSET RETIREMENT OBLIGATIONS | |
Effective October 1, 2006, we adopted the provisions of FIN 47, which clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are contingent on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. | ||
This interpretation only applied to legal obligations associated with the removal of improvements in surrendering our leased properties. The impact of adopting FIN 47 was the recognition of an additional asset of $460 (net of accumulated amortization of $353); an asset retirement obligation of $2,150; and a charge of $1,690 ($1,044, net of tax), which was recorded as a cumulative effect of change in accounting principle in the consolidated statement of earnings. | ||
Had depreciation and interest expense been recognized for asset retirement obligations by applying the recognition provisions of FIN 47 as of the beginning of each fiscal year, we would have recognized an asset retirement liability as of October 2, 2005 and October 3, 2004 of $2,075 and $1,923, respectively, and the impact to net earnings and earnings per share in all fiscal years presented would have been immaterial. | ||
In addition to the asset retirement obligations recorded by the Company upon the adoption of FIN 47, the Company has recorded asset retirement obligations associated with the removal of fuel tanks, in connection with the adoption of SFAS 143, Accounting for Asset Retirement Obligations in fiscal year 2003. The following table is a reconciliation of the asset retirement obligation activity for fiscal years 2006 and 2005: |
2006 | 2005 | |||||||
Asset retirement obligation at beginning of the year |
$ | 163 | $ | 149 | ||||
Adoption of FIN 47 |
2,150 | | ||||||
New obligations incurred |
68 | | ||||||
Accretion |
18 | 14 | ||||||
Asset retirement obligation at end of the year |
$ | 2,399 | $ | 163 | ||||
F-12
3. | INTANGIBLE ASSETS | |
Intangible assets consist of the following as of October 1, 2006 and October 2, 2005: |
2006 | 2005 | |||||||
| | | ||||||||
Amortized intangible assets: |
||||||||
Gross carrying amount |
$ | 59,151 | $ | 60,181 | ||||
Less accumulated amortization |
(46,930 | ) | (46,888 | ) | ||||
Net carrying amount |
$ | 12,221 | $ | 13,293 | ||||
Unamortized intangible assets: |
||||||||
Goodwill |
$ | 92,187 | $ | 92,187 | ||||
Trademark |
8,800 | 8,800 | ||||||
$ | 100,987 | $ | 100,987 | |||||
Amortized intangible assets include lease acquisition costs and acquired franchise contracts. The weighted-average life of the amortized intangible assets is approximately 26 years. Total amortization expense related to intangible assets was $1,048, $1,173 and $1,260 in fiscal years 2006, 2005 and 2004, respectively. The estimated amortization expense for each year from fiscal year 2007 through 2011 is $935, $788, $757, $742 and $741, respectively. | ||
There were no changes to goodwill during fiscal year 2006. The changes in the carrying amount of goodwill during fiscal year 2005 were as follows: |
Jack in the Box | Qdoba | Total | ||||||||||
Balance at October 3, 2004 |
$66,601 | $ | 23,617 | $ | 90,218 | |||||||
Goodwill acquired |
1,267 | 702 | 1,969 | |||||||||
Balance at October 2, 2005 |
$67,868 | $ | 24,319 | $ | 92,187 | |||||||
During fiscal year 2005, aggregate goodwill of $1,969 was recorded in connection with the acquisition of one Jack in the Box franchised restaurant and three Qdoba franchised restaurants. |
4. | LONG-TERM DEBT |
2006 | 2005 | |||||||
| | | ||||||||
The detail of long-term debt at each year-end follows: |
||||||||
Term loan, variable interest rate based on an applicable
margin plus LIBOR, 6.89% at October 1, 2006, quarterly
payments of $688 through January 29, 2010 and subsequent
quarterly payments of $64,625 through January 8, 2011 |
$ | 268,125 | $ | 270,875 | ||||
Capital lease obligations, 8.19% average interest rate |
23,175 | 26,315 | ||||||
Other notes, principally unsecured, 9.55% average interest rate |
470 | 811 | ||||||
291,770 | 298,001 | |||||||
Less current portion |
(37,539 | ) | (7,788 | ) | ||||
$ | 254,231 | $ | 290,213 | |||||
Credit facility Our credit facility is comprised of: (i) a $200,000 revolving credit facility maturing on January 8, 2008 with a rate of London Interbank Offered Rate (LIBOR) plus 2.25% and (ii) a $268,125 term loan maturing on January 8, 2011 with a rate of LIBOR plus 1.50%. The credit facility requires the payment of an annual commitment fee of 0.375% of the unused portion of the credit facility. The annual commitment rate and the credit facilitys interest rates are based on a financial leverage ratio, as defined in the credit agreement. The credit facility also requires prepayments of the term loan based on an excess cash flow calculation as defined in the credit agreement. At October 1, 2006, the excess cash flow calculation requires a payment of $29,109 which has been classified as current in the Companys consolidated balance sheet. The Company and certain of its subsidiaries granted liens in substantially all personal property assets to secure our respective obligations under the credit facility. The credit agreement may also require certain of the Companys real property assets to be pledged as collateral in the event of a ratings downgrade as defined in the credit agreement. Additionally, certain of our real and personal property secure other indebtedness of the |
F-13
4. | LONG-TERM DEBT (continued) | |
Company. At October 1, 2006, we had no borrowings under our revolving credit facility and had letters of credit outstanding against our credit facility of $283. | ||
Effective October 6, 2005, we amended our credit agreement to achieve a 25 basis point reduction in the term loans applicable margin, to expand the categories of investments allowable under the credit agreement, and to provide for an aggregate amount of $200,000 for the acquisition of our common stock or the potential payment of cash dividends. | ||
Interest rate swaps We are exposed to interest rate volatility with regard to existing variable rate debt. To reduce our exposure to rising interest rates, we have entered into three interest-rate swap agreements. In March 2005, under two agreements the Company effectively converted $130,000 of our variable rate term loan borrowings to a fixed-rate basis through March 2008. In April 2006, we entered into an interest rate swap agreement that will effectively convert $60,000 of our variable rate term loan borrowings to a fixed-rate basis beginning March 2008, concurrent with the end of our existing $60,000 interest rate swap, through April 2010. | ||
These agreements have been designated as cash flow hedges under the terms of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, with effectiveness assessed based on changes in the present value of the term loan interest payments. There was no hedge ineffectiveness in 2006 or 2005. Accordingly, changes in the fair value of the interest rate swap contracts were recorded, net of taxes, as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. | ||
Covenants We are subject to a number of customary covenants under our various credit agreements, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases and dividend payments, and requirements to maintain certain financial ratios, cash flows and net worth. As of October 1, 2006, we complied with all debt covenants. | ||
Future cash payments Aggregate maturities on all long-term debt are $37,539, $8,387, $4,952, $4,039 and $229,311 for the years 2007 through 2011, respectively. | ||
Capitalized interest We capitalize interest in connection with the construction of our restaurants and other facilities. Interest capitalized in 2006, 2005 and 2004 was $1,403, $1,052 and $1,997, respectively. Capitalized interest in 2004 includes dollars associated with the construction of our Innovation Center. | ||
5. | LEASES | |
As lessee We lease restaurants and other facilities, which generally have renewal clauses of 5 to 20 years exercisable at our option. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our leases also have rent escalation clauses and require the payment of property taxes, insurance and maintenance costs. We also lease certain restaurant, office and warehouse equipment, as well as various transportation equipment. Minimum rental obligations are accounted for on a straight-line basis over the term of the initial lease. Total rent expense was as follows: |
2006 | 2005 | 2004 | ||||||||||
Minimum rentals |
$ | 191,772 | $ | 184,277 | $ | 179,041 | ||||||
Contingent rentals |
3,765 | 3,157 | 5,250 | |||||||||
195,537 | 187,434 | 184,291 | ||||||||||
Less sublease rentals |
(33,202 | ) | (26,087 | ) | (22,087 | ) | ||||||
$ | 162,335 | $ | 161,347 | $ | 162,204 | |||||||
F-14
5. | LEASES (continued) | |
Future minimum lease payments under capital and operating leases are as follows: |
Fiscal | Capital | Operating | ||||||
year | leases | leases | ||||||
| | | ||||||||
2007 |
$ | 7,267 | $ | 178,595 | ||||
2008 |
6,894 | 167,484 | ||||||
2009 |
3,274 | 154,405 | ||||||
2010 |
2,265 | 139,860 | ||||||
2011 |
2,133 | 129,561 | ||||||
Thereafter |
10,269 | 895,071 | ||||||
Total minimum lease payments |
32,102 | $ | 1,664,976 | |||||
Less amount representing interest, 8.19% average interest rate |
(8,927 | ) | ||||||
Present value of obligations under capital leases |
23,175 | |||||||
Less current portion |
(5,466 | ) | ||||||
Long-term capital lease obligations |
$ | 17,709 | ||||||
Future minimum sublease rents of $706,295 are expected to be recovered under our operating subleases. Assets recorded under capital leases are included in property and equipment and consisted of the following at each year-end: |
2006 | 2005 | |||||||
| | | ||||||||
Buildings |
$ | 23,165 | $ | 23,072 | ||||
Equipment |
19,783 | 18,289 | ||||||
42,948 | 41,361 | |||||||
Less accumulated amortization |
(24,104 | ) | (19,255 | ) | ||||
$ | 18,844 | $ | 22,106 | |||||
Amortization of assets under capital leases is included in depreciation and amortization expense. | ||
As lessor We lease or sublease restaurants to certain franchisees and others under agreements that generally provide for the payment of percentage rentals in excess of stipulated minimum rentals, usually for a period of 20 years. Most of our leases have rent escalation clauses and renewal clauses of 5 to 20 years. Total rental revenue was $58,775, $46,753 and $40,899, including contingent rentals of $11,698, $10,280 and $10,290, in 2006, 2005 and 2004, respectively. | ||
The minimum rents receivable expected to be received under these non-cancelable leases, excluding contingent rentals, are as follows: |
Direct | ||||||||
Fiscal | financing | Operating | ||||||
year | leases | leases | ||||||
| | | ||||||||
2007 |
$ | 343 | $ | 52,553 | ||||
2008 |
343 | 50,168 | ||||||
2009 |
343 | 47,251 | ||||||
2010 |
343 | 44,746 | ||||||
2011 |
343 | 44,512 | ||||||
Thereafter |
3,856 | 505,154 | ||||||
Total minimum future rentals |
5,571 | $ | 744,384 | |||||
Less amount representing unearned income |
(5,207 | ) | ||||||
Net investment (included in other assets) |
$ | 364 | ||||||
Assets held for lease consisted of the following at each year end: |
2006 | 2005 | |||||||
Land |
$ | 25,981 | $ | 24,293 | ||||
Buildings |
131,810 | 98,551 | ||||||
Equipment |
3,109 | 2,018 | ||||||
160,900 | 124,862 | |||||||
Less accumulated amortization |
(70,554 | ) | (50,416 | ) | ||||
$ | 90,346 | $ | 74,446 | |||||
F-15
6. | RESTAURANT CLOSING, IMPAIRMENT CHARGES AND OTHER | |
In 2006, we recorded non-cash charges of $1,648 for the impairment of long-lived assets related to seven Jack in the Box restaurants which we closed or the lease expired. In 2006, based upon our estimates of future cash flows, we also recorded non-cash charges of $2,478 to write-down the carrying value of eight Jack in the Box restaurants, primarily in our southeast region, which we continue to operate. These charges are included in selling, general and administrative expenses in the consolidated statements of earnings. | ||
In the fourth quarter of fiscal 2005, we incurred costs of approximately $3,000 related to the cancellation of the Companys test of a fast-casual concept called JBX Grill. These charges are included in selling, general and administrative expenses in the consolidated statements of earnings. | ||
Total accrued restaurant closing costs, included in accrued expenses and other long-term liabilities, were $5,084 as of October 1, 2006 and $5,495 as of October 2, 2005. In fiscal years 2006, 2005 and 2004, lease exit costs of $454, $143 and $287, respectively, were charged to operations, resulting from revisions to certain sublease assumptions and, in 2006, the closure of two region offices. Cash payments of $865, $969 and $977, were applied against the restaurant closing costs accrual in 2006, 2005 and 2004, respectively. | ||
7. | INCOME TAXES | |
The fiscal year income taxes consist of the following: |
2006 | 2005 | 2004 | ||||||||||
Federal current |
$ | 62,257 | $ | 44,007 | $ | 33,082 | ||||||
deferred |
4,853 | (18,191 | ) | 17,986 | ||||||||
State current |
8,828 | 5,897 | 5,715 | |||||||||
deferred |
1,578 | (3,069 | ) | 2,546 | ||||||||
Subtotal |
77,516 | 28,644 | 59,329 | |||||||||
Income taxes related to
additional minimum
pension liability and
interest rate swaps |
(17,617 | ) | 18,023 | (16,509 | ) | |||||||
Income tax benefit
related to cumulative
effect of accounting
change |
646 | | | |||||||||
Income taxes |
$ | 60,545 | $ | 46,667 | $ | 42,820 | ||||||
A reconciliation of the federal statutory income tax rate to our effective tax rate is as follows: |
2006 | 2005 | 2004 | ||||||||||
Computed at federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal tax benefit |
3.2 | 3.0 | 3.2 | |||||||||
Benefit of jobs tax credits |
(.8 | ) | (1.4 | ) | (1.2 | ) | ||||||
Benefit of research and experimentation credits |
(.8 | ) | | | ||||||||
Adjustment to estimated tax accruals |
(.8 | ) | (2.7 | ) | | |||||||
Other, net |
(.1 | ) | (.1 | ) | (.6 | ) | ||||||
35.7 | % | 33.8 | % | 36.4 | % | |||||||
F-16
7. | 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: |
2006 | 2005 | |||||||
Deferred tax assets: |
||||||||
Accrued pension and post retirement benefits |
$ | 19,074 | $ | 29,351 | ||||
Accrued insurance |
18,714 | 17,937 | ||||||
Leasing transactions |
14,377 | 13,744 | ||||||
Accrued vacation pay expense |
12,539 | 12,458 | ||||||
Deferred income |
4,614 | 5,643 | ||||||
Other reserves and allowances |
9,072 | 7,213 | ||||||
Tax loss and tax credit carryforwards |
2,736 | 2,571 | ||||||
Other, net |
6,946 | 2,294 | ||||||
Total gross deferred tax assets |
88,072 | 91,211 | ||||||
Valuation allowance |
(2,560 | ) | (2,320 | ) | ||||
Total net deferred tax assets |
85,512 | 88,891 | ||||||
Deferred tax liabilities: |
||||||||
Property and equipment, principally due to differences in depreciation |
89,172 | 87,899 | ||||||
Intangible assets |
23,291 | 21,512 | ||||||
Total gross deferred tax liabilities |
112,463 | 109,411 | ||||||
Net deferred tax liabilities |
$ | 26,951 | $ | 20,520 | ||||
Deferred tax assets at October 1, 2006 include state net operating loss carryforwards of approximately $41,458 expiring at various times between 2010 and 2026. At October 1, 2006 and October 2, 2005, the Company recorded a valuation allowance related to state net operating losses of $2,560 and $2,230, respectively. The current year change in the valuation allowance of $240 related to state net operating losses. The Company believes that it is more likely than not that these loss carryforwards will not be realized. Management believes that the remaining deferred tax assets will be realized through future taxable income or alternative tax strategies. | ||
From time-to-time, we may take positions for filing our tax returns, which may differ from the treatment of the same item for financial reporting purposes. The ultimate outcome of these items will not be known until the Internal Revenue Service has completed its examination or until the statute of limitations has expired. | ||
8. | RETIREMENT AND SAVINGS PLANS | |
We have non-contributory defined benefit pension plans covering those employees meeting certain eligibility requirements. The plans provide retirement benefits based on years of service and compensation and are subject to modification at anytime. It is our practice to fund retirement costs as necessary. |
F-17
8. | RETIREMENT AND SAVINGS PLANS (continued) | |
We use a June 30 measurement date for our defined benefit pension plans. The following table provides a reconciliation of the changes in benefit obligations, plan assets and funded status of our qualified and non-qualified plans as of June 30, 2006 and June 30, 2005. |
Qualified plans | Non-qualified plan | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Change in benefit obligation: |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 210,363 | $ | 151,334 | $ | 37,544 | $ | 30,878 | ||||||||
Service cost |
12,042 | 8,393 | 771 | 644 | ||||||||||||
Interest cost |
12,258 | 10,053 | 2,067 | 2,043 | ||||||||||||
Actuarial (gain) loss |
(35,351 | ) | 43,486 | (2,326 | ) | 4,919 | ||||||||||
Benefits paid |
(3,281 | ) | (2,903 | ) | (1,828 | ) | (1,306 | ) | ||||||||
Plan amendment and other |
| | 525 | 366 | ||||||||||||
Benefit obligation at end of year |
$ | 196,031 | $ | 210,363 | $ | 36,753 | $ | 37,544 | ||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 158,928 | $ | 127,016 | $ | | $ | | ||||||||
Actual return on plan assets |
15,893 | 12,615 | | | ||||||||||||
Employer contributions |
14,000 | 22,200 | 1,828 | 1,306 | ||||||||||||
Benefits paid |
(3,281 | ) | (2,903 | ) | (1,828 | ) | (1,306 | ) | ||||||||
Fair value of plan assets at end of year |
$ | 185,540 | $ | 158,928 | $ | | $ | | ||||||||
Reconciliation of funded status: |
||||||||||||||||
Funded status |
$ | (10,491 | ) | $ | (51,435 | ) | $ | (36,753 | ) | $ | (37,544 | ) | ||||
Unrecognized net loss |
34,376 | 81,608 | 7,308 | 10,370 | ||||||||||||
Unrecognized prior service cost |
584 | 708 | 4,110 | 4,255 | ||||||||||||
Unrecognized net transition obligation |
| | 142 | 237 | ||||||||||||
Net amount recognized |
$ | 24,469 | $ | 30,881 | $ | (25,193 | ) | $ | (22,682 | ) | ||||||
Amounts recognized in the statement of
financial position consist of: |
||||||||||||||||
Accrued benefit liability |
$ | | $ | (16,701 | ) | $ | (33,362 | ) | $ | (34,100 | ) | |||||
Prepaid benefit cost |
24,469 | 4,733 | | | ||||||||||||
Accumulated other comprehensive loss |
| 42,141 | 3,917 | 6,926 | ||||||||||||
Intangible assets |
| 708 | 4,252 | 4,492 | ||||||||||||
Net asset (liability) recognized |
$ | 24,469 | $ | 30,881 | $ | (25,193 | ) | $ | (22,682 | ) | ||||||
A minimum pension liability adjustment is required when the accumulated benefit obligation exceeds the fair value of plan assets and accrued benefit liabilities at the measurement date. In 2005, lower interest rates caused our accumulated benefit obligation to exceed the fair value of plan assets. As required, we recognized an additional minimum pension liability at October 2, 2005. In 2006, higher interest rates caused our accumulated benefit obligations to decrease, while an improved return on investments and employer contributions contributed to an increase in the market value of our plan assets. As a result, we were able to fully reverse the qualified plans additional minimum pension liability and a portion of the non-qualified plans additional minimum pension liability at October 1, 2006. The reversal resulted in a cumulative pre-tax charge to other comprehensive income in the consolidated statement of stockholders equity of $3,917 in fiscal year 2006, a decrease of $45,150 compared with a year ago. |
F-18
8. | RETIREMENT AND SAVINGS PLANS (continued) | |
As of June 30, 2006, the qualified plans fair market value of plan assets exceeded the respective accumulated benefit obligations. As of June 30, 2005, the accumulated benefit obligation under one of the qualified plans of $161,910 exceeded the fair market value of plan assets totaling $145,208. The non-qualified plan is an unfunded plan and, as such, had no plan assets as of June 30, 2006 and June 30, 2005. |
2006 | 2005 | |||||||
Qualified plans: |
||||||||
Projected benefit obligation |
$ | 196,031 | $ | 210,363 | ||||
Accumulated benefit obligation |
164,548 | 174,869 | ||||||
Fair value of plan assets |
185,540 | 158,928 | ||||||
Non-qualified plan: |
||||||||
Projected benefit obligation |
$ | 36,753 | $ | 37,544 | ||||
Accumulated benefit obligation |
33,362 | 34,100 | ||||||
Fair value of plan assets |
| |
Net periodic pension cost - The components of the fiscal year net defined benefit pension cost are as follows: |
Qualified plans | Non-qualified plan | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Service cost |
$ | 12,042 | $ | 8,393 | $ | 8,170 | $ | 771 | $ | 644 | $ | 536 | ||||||||||||
Interest cost |
12,258 | 10,053 | 8,943 | 2,067 | 2,043 | 1,941 | ||||||||||||||||||
Expected return on plan assets |
(12,428 | ) | (9,438 | ) | (7,040 | ) | | | | |||||||||||||||
Recognized actuarial loss |
8,416 | 4,072 | 6,272 | 735 | 442 | 603 | ||||||||||||||||||
Amortization of unrecognized prior
service cost |
124 | 124 | 124 | 671 | 652 | 648 | ||||||||||||||||||
Amortization of unrecognized net
transition obligation |
| | | 95 | 95 | 95 | ||||||||||||||||||
Net periodic pension cost |
$ | 20,412 | $ | 13,204 | $ | 16,469 | $ | 4,339 | $ | 3,876 | $ | 3,823 | ||||||||||||
Assumptions - We determine our actuarial assumptions on an annual basis. In determining the present values of the Companys benefit obligations and net periodic pension costs as of and for the fiscal years ended October 1, 2006, October 2, 2005 and October 3, 2004, respectively, we used the following weighted-average assumptions: |
Qualified plans | Non-qualified plan | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Assumptions used to determine benefit
obligations (1): |
||||||||||||||||||||||||
Discount rate |
6.60 | % | 5.50 | % | 6.45 | % | 6.60 | % | 5.50 | % | 6.45 | % | ||||||||||||
Long-term rate of return on assets |
7.75 | 7.50 | 7.50 | N/A | N/A | N/A | ||||||||||||||||||
Rate of future compensation
increases |
3.50 | 3.50 | 3.50 | 5.00 | 5.00 | 5.00 | ||||||||||||||||||
Assumptions used to determine net
periodic pension cost (2): |
||||||||||||||||||||||||
Discount rate |
5.50 | % | 6.45 | % | 6.15 | % | 5.50 | % | 6.45 | % | 6.15 | % | ||||||||||||
Long-term rate of return on assets |
7.75 | 7.50 | 7.50 | N/A | N/A | N/A | ||||||||||||||||||
Rate of future compensation
increases |
3.50 | 3.50 | 3.50 | 5.00 | 5.00 | 5.00 |
(1) | Determined as of end of year. | |
(2) | Determined as of beginning of year. |
F-19
8. | RETIREMENT AND SAVINGS PLANS (continued) | |
The assumed discount rate for our pension plans reflects the market rates for high-quality bonds currently available. The Companys discount rate was determined by considering the average of pension yield curves constructed of a population of high-quality bonds. The resulting discount rate reflects the matching of plan liability cash flows to the yield curves. The long-term rate of return on assets was determined taking into consideration our projected asset allocation and economic forecasts prepared with the assistance of our actuarial consultants. | ||
Plan assets - As of October 1, 2006, our target asset allocation was 41% U.S. equities, 38% debt securities, 15% international equities and 6% balanced fund. We regularly monitor our asset allocation and senior financial management and the Finance Committee of the Board of Directors review performance results at least quarterly. We believe our long-term asset allocation will continue to approximate our target allocation. The qualified plans had the following asset allocations at June 30, 2006 and June 30, 2005: |
2006 | 2005 | |||||||
U.S. equities |
41 | % | 41 | % | ||||
International equities |
15 | 15 | ||||||
Debt securities |
38 | 38 | ||||||
Balanced fund |
6 | 6 | ||||||
100 | % | 100 | % | |||||
Future cash flows - During fiscal year 2007, we expect to contribute approximately $12,000 to our qualified plans and $2,100 to our non-qualified plan. Total qualified and non-qualified plan pension benefits expected to be paid in each fiscal year from 2007 through 2011 are $5,437, $6,145, $6,821, $7,396 and $8,095, respectively. The aggregate expected benefits to be paid in the five fiscal years from 2012 through 2016 are $57,072. Expected benefits to be paid are based on the same assumptions used to measure our benefit obligation at October 1, 2006 and include estimated future employee service. | ||
Defined contribution plans - We maintain savings plans pursuant to Section 401(k) of the Internal Revenue Code which allow administrative and clerical employees who have satisfied the service requirements and reached age 21, to defer a percentage of their pay on a pre-tax basis. We match 50% of the first 4% of compensation deferred by the participant. Our contributions under these plans were $1,931, $1,815 and $1,940 in 2006, 2005 and 2004, respectively. We also maintain an unfunded, non-qualified deferred compensation plan for key executives and other members of management who are excluded from participation in the qualified savings plan. This plan allows participants to defer up to 50% of their salary and 100% of their bonus, on a pre-tax basis. We match 100% of the first 3% contributed by the participant. Our contributions under the non-qualified deferred compensation plan were $1,244, $1,091 and $645 in 2006, 2005 and 2004, respectively. In each plan, a participants right to Company contributions vests at a rate of 25% per year of service. | ||
9. | POSTRETIREMENT BENEFIT PLANS | |
We sponsor health care plans that provide postretirement medical benefits for employees who meet minimum age and service requirements. The plans are contributory; with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. Our policy is to fund the cost of medical benefits in amounts determined at the discretion of management. |
F-20
9. | POSTRETIREMENT BENEFIT PLANS (continued) |
2006 | 2005 | |||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 18,822 | $ | 14,217 | ||||
Service cost |
272 | 292 | ||||||
Interest cost |
1,023 | 1,127 | ||||||
Participant contributions |
102 | 88 | ||||||
Actuarial (gain) loss |
(2,973 | ) | 3,581 | |||||
Benefits paid |
(563 | ) | (483 | ) | ||||
Benefit obligation at end of year |
$ | 16,683 | $ | 18,822 | ||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | | $ | | ||||
Employer contributions |
461 | 395 | ||||||
Participant contributions |
102 | 88 | ||||||
Benefits paid |
(563 | ) | (483 | ) | ||||
Fair value of plan assets at end of year |
$ | | $ | | ||||
Reconciliation of funded status: |
||||||||
Funded status |
$ | (16,683 | ) | $ | (18,822 | ) | ||
Unrecognized prior service cost |
816 | 1,001 | ||||||
Unrecognized actuarial gain, net |
(6,338 | ) | (3,737 | ) | ||||
Net liability recognized |
$ | (22,205 | ) | $ | (21,558 | ) | ||
The net liability recognized in the reconciliation of funded status is included in other long-term liabilities in the consolidated balance sheets. | ||
Assumptions - We determine our actuarial assumptions on an annual basis. In determining the present values of our benefit obligation and net periodic benefit cost as of and for the fiscal years ended October 1, 2006, October 2, 2005 and October 3, 2004, respectively, we used the following assumptions: |
2006 | 2005 | 2004 | ||||||||||
Assumptions used to determine benefit obligation: |
||||||||||||
Discount rate |
6.60% | 5.50% | 6.45% | |||||||||
Measurement date |
6/30/2006 | 6/30/2005 | 6/30/2004 | |||||||||
Assumptions used to determine net periodic benefit cost: |
||||||||||||
Discount rate |
5.50% | 6.45% | 6.15% | |||||||||
Measurement date |
6/30/2005 | 6/30/2004 | 6/30/2003 |
The assumed discount rate reflects the market rates for high-quality bonds currently available. The Companys discount rate was determined by considering the average yield curves constructed of a population of high quality bonds. |
Net periodic benefit cost - The components of the fiscal year net periodic benefit cost are as follows: |
2006 | 2005 | 2004 | ||||||||||
Service cost |
$ | 272 | $ | 292 | $ | 259 | ||||||
Interest cost |
1,023 | 1,127 | 825 | |||||||||
Recognized actuarial gain |
(371 | ) | (376 | ) | (506 | ) | ||||||
Amortization of prior service cost |
185 | 185 | | |||||||||
Amortization of losses |
| 4 | | |||||||||
Net periodic benefit cost |
$ | 1,109 | $ | 1,232 | $ | 578 | ||||||
F-21
9. | POSTRETIREMENT BENEFIT PLANS (continued) | |
Health care cost trend rates - For measurement purposes, the weighted-average assumed health care cost trend rates were as follows for each fiscal year: |
2006 | 2005 | |||||||
Health care cost trend rate for next year: |
||||||||
Participants under age 65 |
9.12 | % | 9.00 | % | ||||
Participants age 65 or older |
9.50 | % | 9.50 | % | ||||
Rate to which the cost trend rate is assumed to decline |
4.94 | % | 5.00 | % | ||||
Year the rate reaches the ultimate trend rate |
2014 | 2014 |
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by 1.0% in each year would increase the accumulated benefit obligation as of October 1, 2006 by $2,250 and the aggregate of the service and interest cost components of net periodic benefit cost for 2006 by $173. If the assumed health care cost trend rates decreased by 1.0% in each year, the accumulated benefit obligation would decrease by $1,909 as of October 1, 2006, and the aggregate of the service and interest components of net periodic benefit cost for 2006 would decrease by $146. | ||
Future cash flows - During fiscal year 2007, we expect to contribute approximately $500 to our postretirement benefit plans. The future benefits expected to be paid and the Medicare Part D Subsidy expected to be received are as follows: |
Fiscal | Gross | Medicare | ||||||
year | payments | subsidy | ||||||
2007 |
$ | 647 | $ | 34 | ||||
2008 |
758 | 40 | ||||||
2009 |
841 | 49 | ||||||
2010 |
914 | 60 | ||||||
2011 |
975 | 71 | ||||||
Thereafter |
5,922 | 556 |
10. | SHARE-BASED EMPLOYEE COMPENSATION | |
Stock incentive plans We offer share-based compensation plans to attract, retain, and motivate key officers, non-employee directors, and employees to work toward the financial success of the Company. The Companys incentive plans are administered by the Compensation Committee of the Board of Directors and have been approved by the stockholders of the Company. Effective November 2005, the Amended and Restated 2004 Stock Incentive Plan (the 2004 Plan) is the only plan under which new awards may be issued. | ||
The 2004 Plan was adopted in February 2004 and amended in February 2005 to increase the share authorization. The 2004 plan provides for the issuance of up to 3,250,000 common shares in connection with the granting of stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units or performance units to key employees and directors. No more than 650,000 shares may be granted under this plan as restricted stock or performance-based awards. | ||
There are four other plans under which we can no longer issue awards, although awards outstanding under these plans may still vest and be exercised: the 1992 Employee Stock Incentive Plan (the 1992 Plan); the 1993 Stock Option Plan (the 1993 Plan); the 2002 Stock Incentive Plan (the 2002 Plan); and the Non-Employee Director Stock Option Plan (the Director Plan). | ||
In January 1992, we adopted the 1992 Plan, which allowed the Company to grant eligible employees stock options annually, restricted stock and other various share-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. | ||
In August 1993, we adopted the 1993 Plan, which allowed the Company to grant eligible employees who did not receive stock options under the 1992 Plan to grant stock options with an aggregate exercise price equivalent to a percentage of the employees eligible earnings. Approximately 3,000,000 shares of common stock may be sold or issued under the 1993 Plan. |
F-22
10. | SHARE-BASED EMPLOYEE COMPENSATION (continued) | |
In February 2002, we adopted the 2002 Plan, which allowed the Company to grant eligible officers and other key employees stock options and incentive stock awards. Subject to certain adjustments, up to a maximum of 1,900,000 shares of common stock may be sold or issued under the 2002 Plan. | ||
In February 1995, we adopted the Director Plan, which allowed the Company to grant stock options annually to any eligible non-employee director of the Company. The actual number of shares that may be purchased under the option was based on the relationship of a portion of each directors compensation to the fair market value of the common stock, but was limited to a maximum of 10,000 shares annually. Subject to certain adjustments, up to a maximum of 650,000 shares of common stock may be sold or issued under the Director Plan. | ||
The terms and conditions of the share-based awards under the plans are determined by the Compensation Committee of the Board of Directors on each award date, and may include provisions for the exercise price, expirations, vesting, restriction on sales and forfeitures, as applicable. | ||
As of October 1, 2006, 1,842,746 shares of common stock were available for future issuance under the Companys stock incentive plans. We issue new shares to satisfy stock option exercises and other share-based award stock issuances. | ||
Non-management directors deferred compensation plan - We also maintain a deferred compensation plan for non-management directors under which those who are eligible to receive fees or retainers may choose to defer receipt of their compensation. The amounts deferred are converted into stock equivalents at the market value of our common stock. For directors who elect to defer, we provide an additional credit equal to 25% of the compensation initially deferred. Upon separation from the Board of Directors, these liabilities are settled in cash based on the number of stock equivalents multiplied by the then current market price of our common stock. Effective November 9, 2006, the deferred compensation plan has been amended to eliminate the 25% company match and require payment in shares of the Companys common stock. | ||
Employee stock purchase plan - In February 2006, the stockholders of the Company approved an employee stock purchase plan for all eligible employees to purchase shares of common stock at 95% of the fair market value on the date of purchase. Employees may authorize the Company to withhold up to 15% of their base compensation during any offering period, subject to certain limitations. A maximum of 100,000 shares of common stock may be issued under the plan. As of October 1, 2006, no shares have been issued. During fiscal 2006, the Company received cash from employees of $136 for the first offering period, which began June 1, 2006. | ||
Stock options - Generally, options granted to employees have contractual terms up to 11 years and provide for an option exercise price of 100% of the closing market value of the common stock at the date of grant. Furthermore, options generally vest over a four-year period, or sooner for employees meeting certain age and years of service thresholds. Options issued to directors vest over a period of six months. | ||
The following is a summary of stock option activity for fiscal year 2006: |
Weighted- | ||||||||||||||||
Weighted- | average | |||||||||||||||
average | remaining | Aggregate | ||||||||||||||
exercise | contractual | intrinsic | ||||||||||||||
Shares | price | term (years) | value | |||||||||||||
Options outstanding at October 2, 2005 |
4,473,700 | $ | 23.56 | |||||||||||||
Granted |
373,600 | 48.46 | ||||||||||||||
Exercised |
(1,609,554 | ) | 21.66 | |||||||||||||
Forfeited |
(107,367 | ) | 22.79 | |||||||||||||
Expired |
(12,862 | ) | 19.73 | |||||||||||||
Options outstanding at October 1, 2006 |
3,117,517 | 27.57 | 6.37 | $ | 76,830 | |||||||||||
Options exercisable at October 1, 2006 |
1,933,699 | 24.56 | 5.29 | 53,402 | ||||||||||||
Options exercisable and expected to vest at
October 1, 2006 |
3,072,616 | 27.39 | 6.36 | 76,156 | ||||||||||||
F-23
10. | SHARE-BASED EMPLOYEE COMPENSATION (continued) | |
Effective in the fourth quarter of fiscal 2005, we began utilizing a binomial-based model to determine the fair value of options granted. The fair value of all prior options granted has been estimated on the date of grant using the Black-Scholes option-pricing model. Valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. The following weighted-average assumptions were used for stock option grants in each year: |
2006 | 2005 | 2004 | ||||||||||
Risk-free interest rate |
4.12 | % | 4.10 | % | 3.70 | % | ||||||
Expected dividends yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Expected stock price volatility |
34.88 | % | 35.50 | % | 40.40 | % | ||||||
Expected life of options (in years) |
5.92 | 6.00 | 6.00 |
In 2006, the risk-free interest rate was determined by a yield curve of risk-free rates based on published U.S. Treasury spot rates in effect at the time of grant, and has a term equal to the expected life. In 2005 and 2004, the risk-free rates were based on the grant date rate for zero coupon U.S. government issues with a remaining term similar to the expected life. | ||
The dividend yield assumption is based on the Companys history and expectations of dividend payouts. | ||
The expected stock price volatility in 2006 represents an average of the implied volatility and the Companys historical volatility. In 2005 and 2004, prior to using a binomial-based model, the expected stock price volatility was based on the historical volatility of the Companys stock for a period approximating the expected life. | ||
The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends. | ||
The weighted-average grant-date fair value of options granted was $20.42, $13.71, and $9.66 in 2006, 2005, and 2004, respectively. The intrinsic value of stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of stock options exercised was $33,718, $25,507, and $7,533 in 2006, 2005, and 2004, respectively. | ||
In 2006, we expensed $7,270 in connection with the Companys stock option awards. As of October 1, 2006, there was approximately $12,057 of total unrecognized compensation cost related to stock options granted under the Companys stock incentive plans. That cost is expected to be recognized over a weighted-average period of 2.05 years. | ||
Performance-vested stock awards The Company began granting performance-vested stock awards to certain employees in fiscal year 2005. Performance awards represent a right to receive a certain number of shares of common stock upon achievement of performance goals at the end of a three-year period. The first three-year performance period ends September 30, 2007. The expected cost of the shares is being reflected over the performance period and is reduced for estimated forfeitures. The expected cost for all awards granted is based on the fair value of the Companys stock on the date of grant, reduced for estimated forfeitures, as it is the Companys intent to settle these awards with shares of common stock. | ||
The following is a summary of performance-vested stock award activity for fiscal year 2006: |
Weighted- | ||||||||
average | ||||||||
grant date | ||||||||
Shares | fair value | |||||||
Performance-vested stock awards outstanding at October 2, 2005 |
156,371 | $ | 32.36 | |||||
Granted |
73,416 | 52.56 | ||||||
Forfeited |
(12,374 | ) | 32.19 | |||||
Performance-vested stock awards outstanding at October 1, 2006 |
217,413 | 39.19 | ||||||
Vested at October 1, 2006 |
629 | 29.91 | ||||||
In 2006 and 2005, the expense recognized in connection with these awards was $1,210 and $838, respectively. As of October 1, 2006, there was approximately $6,471 of total unrecognized compensation cost related to performance-vested stock awards. That cost is expected to be recognized over a weighted-average period of 1.92 years. To date, no shares of common stock have been issued in connection with these awards. |
F-24
10. | SHARE-BASED EMPLOYEE COMPENSATION (continued) | |
Nonvested stock awards The Company generally issues nonvested stock awards to certain executives under the Companys share ownership guidelines. These nonvested stock awards vest upon retirement or termination based upon years of service as provided in the award agreement. These awards are amortized to compensation expense over the estimated vesting period based upon the fair value of the Companys common stock on the award date. | ||
The following is a summary of nonvested stock activity for fiscal year 2006: |
Weighted- | ||||||||
average | ||||||||
grant date | ||||||||
Shares | fair value | |||||||
Nonvested stock outstanding at October 2, 2005 |
345,470 | $ | 23.72 | |||||
Granted |
5,500 | 41.25 | ||||||
Issued |
(8,250 | ) | 20.95 | |||||
Forfeited |
(46,750 | ) | 20.95 | |||||
Nonvested stock outstanding at October 1, 2006 |
295,970 | 24.56 | ||||||
Vested at October 1, 2006 |
59,780 | 20.36 | ||||||
In 2006, 2005, and 2004, the expense recognized in connection with these awards was $805, $558 and $584, respectively. As of October 1, 2006, there was approximately $4,999 of total unrecognized compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted-average period of 6.07 years. In 2006, the total fair value of shares granted and issued was $227 and $173, respectively. During 2005 and 2004, the Company granted 57,870 and 35,000 shares of nonvested stock, respectively with a grant date fair value of $2,031 and $1,012, respectively. No shares were issued in 2005 or 2004. | ||
Non-management directors deferred compensation Under our deferred compensation plan for non-management directors, our liability is adjusted at the end of each reporting period to reflect the value of the directors stock equivalents at the then market price of our common stock. In 2006, 2005, and 2004, the amount deferred and the stock appreciation on the deferred compensation recognized was $2,885, $280, and $1,550, respectively. Cash used to settle directors deferred compensation upon a directors retirement from the Board in fiscal 2006 was $1,067. | ||
The following is a summary of the stock equivalent activity for fiscal year 2006: |
Weighted- | ||||||||
average | ||||||||
Stocks | grant date | |||||||
equivalents | fair value | |||||||
Stock equivalents outstanding at October 2, 2005 |
123,083 | $ | 18.22 | |||||
Deferred directors compensation |
10,431 | 38.96 | ||||||
Cash distribution |
(27,410 | ) | 38.92 | |||||
Stock equivalents outstanding at October 1, 2006 |
106,104 | 21.30 | ||||||
F-25
11. | STOCKHOLDERS EQUITY | |
Preferred stock - We have 15,000,000 shares of preferred stock authorized for issuance at a par value of $.01 per share. No preferred shares have been issued. | ||
Treasury stock - Pursuant to stock repurchase programs authorized by the Board of Directors, we repurchased 1,444,700, 2,578,801 and 228,400 shares of our common stock for $49,997, $92,861, and $7,138 during 2006, 2005, and 2004, respectively. As of October 1, 2006, we had approximately $100,000 of repurchase availability remaining. | ||
Comprehensive income Our total comprehensive income, net of taxes, was as follows: |
2006 | 2005 | 2004 | ||||||||||
Net earnings |
$ | 108,031 | $ | 91,537 | $ | 74,684 | ||||||
Net unrealized gains related to cash flow hedges,
net of taxes of $117 and $266, respectively |
180 | 417 | | |||||||||
Additional minimum pension liability, net of taxes of
$17,563, (18,289), and $16,509, respectively |
27,587 | (28,726 | ) | 25,930 | ||||||||
Total comprehensive income |
$ | 135,798 | $ | 63,228 | $ | 100,614 | ||||||
The components of accumulated other comprehensive income (loss), net of taxes, were as follows as of October 1, 2006 and October 2, 2005: |
2006 | 2005 | |||||||
Additional minimum pension liability adjustment |
$ | (2,393 | ) | $ | (29,980 | ) | ||
Net unrealized gains related to cash flow hedges |
597 | 417 | ||||||
Accumulated other comprehensive income (loss) |
$ | (1,796 | ) | $ | (29,563 | ) | ||
12. | AVERAGE SHARES OUTSTANDING | |
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands): |
2006 | 2005 | 2004 | ||||||||||
Weighted-average shares outstanding basic |
34,944 | 35,625 | 36,237 | |||||||||
Assumed additional shares issued upon
exercise of stock options, net of shares
reacquired at the average market price |
907 | 1,158 | 644 | |||||||||
Assumed vesting of nonvested stock, net of shares
reacquired at the average market price |
66 | 155 | 80 | |||||||||
Weighted-average shares outstanding diluted |
35,917 | 36,938 | 36,961 | |||||||||
Stock options excluded (1) |
337 | | 1,281 | |||||||||
Performance based awards excluded (2) |
217 | 156 | 93 |
(1) | Excluded from diluted weighted-average shares outstanding because their exercise prices, unamortized compensation and tax benefits exceeded the average market price of common stock for the period. | |
(2) | Excluded from diluted weighted-average shares outstanding because the number of shares issued is contingent on achievement of performance goals at the end of a three-year performance period. |
F-26
13. | COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS | |
Commitments - We are principally liable for lease obligations on various properties subleased to third parties. We are also obligated under a lease guarantee agreement associated with a Chi-Chis restaurant property. Due to the bankruptcy of the Chi-Chis restaurant chain, previously owned by the Company, we are obligated to perform in accordance with the terms of a guarantee agreement, as well as four other lease agreements, which expire at various dates in 2010 and 2011. During fiscal year 2003, we established an accrual for these lease obligations and do not anticipate incurring any additional charges in future years related to Chi-Chis bankruptcy. As of October 1, 2006, our accrual for the lease guarantee was $1,012 and the maximum potential amount of future payments was $1,675. | ||
Legal Proceedings - During the first quarter of fiscal year 2006, we recorded a $2,400 charge for a legal settlement related to a labor matter in California. | ||
We are also subject to normal and routine litigation. In the opinion of management, based in part on the advice of legal counsel, the ultimate liability from all other pending legal proceedings, asserted legal claims and known potential legal claims is not expected to materially affect our operating results, financial position and liquidity. | ||
14. | SEGMENT REPORTING | |
The Company operates its business in two operating segments, Jack in the Box and Qdoba, based on the Companys management structure and internal method of reporting. Based upon certain quantitative thresholds, only Jack in the Box is considered a reportable segment. Summarized financial information concerning our reportable segment is shown in the following table: |
2006 | 2005 | 2004 | ||||||||||
Revenues |
$ | 2,690,705 | $ | 2,445,149 | $ | 2,282,406 | ||||||
Earnings from operations |
172,485 | 147,188 | 141,217 | |||||||||
Cash flows used for additions to property and equipment |
142,075 | 117,951 | 112,518 | |||||||||
Total assets |
1,490,536 | 1,319,171 | 1,313,326 |
Interest expense and income taxes are not reported on an operating segment basis in accordance with our method of internal reporting. | ||
A reconciliation of reportable segment revenues to consolidated revenue follows: |
2006 | 2005 | 2004 | ||||||||||
Revenues |
$ | 2,690,705 | $ | 2,445,149 | $ | 2,282,406 | ||||||
Qdoba revenues |
74,944 | 58,399 | 38,059 | |||||||||
Consolidated revenues |
$ | 2,765,649 | $ | 2,503,548 | $ | 2,320,465 | ||||||
A reconciliation of reportable segment earnings from operations to consolidated earnings from operations follows: |
2006 | 2005 | 2004 | ||||||||||
Earnings from operations |
$ | 172,485 | $ | 147,188 | $ | 141,217 | ||||||
Qdoba earnings from operations |
9,210 | 4,418 | 1,706 | |||||||||
Consolidated earnings from operations |
$ | 181,695 | $ | 151,606 | $ | 142,923 | ||||||
A reconciliation of reportable segment total assets to consolidated total assets follows: |
2006 | 2005 | 2004 | ||||||||||
Total assets |
$ | 1,490,536 | $ | 1,319,171 | $ | 1,313,326 | ||||||
Qdoba total assets |
74,132 | 67,989 | 60,494 | |||||||||
Investment in Qdoba and other |
(44,207 | ) | (49,174 | ) | (49,154 | ) | ||||||
Consolidated total assets |
$ | 1,520,461 | $ | 1,337,986 | $ | 1,324,666 | ||||||
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15. | SUPPLEMENTAL CASH FLOW INFORMATION |
2006 | 2005 | 2004 | ||||||||||
Cash paid during the year for: |
||||||||||||
Interest, net of amounts capitalized |
$ | 20,234 | $ | 15,654 | $ | 23,564 | ||||||
Income tax payments |
44,285 | 43,678 | 29,265 | |||||||||
Capital lease obligations incurred |
1,818 | 911 | 9,912 |
The consolidated statements of cash flows also exclude non-cash proceeds from our short-term financing of a portion of the sale of company-operated restaurants to certain qualified franchisees of $5,265 in 2004 included in accounts receivable. | ||
16. | SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION |
October 1, | October 2, | |||||||
2006 | 2005 | |||||||
Accounts and notes receivable, net: |
||||||||
Trade |
$ | 24,234 | $ | 16,498 | ||||
Notes receivable and other |
6,955 | 5,022 | ||||||
Allowances for doubtful accounts |
(315 | ) | (293 | ) | ||||
$ | 30,874 | $ | 21,227 | |||||
Accrued liabilities: |
||||||||
Payroll and related taxes |
$ | 76,822 | $ | 75,101 | ||||
Sales and property taxes |
23,377 | 21,335 | ||||||
Insurance |
49,035 | 47,072 | ||||||
Income taxes |
19,188 | 7,577 | ||||||
Advertising |
19,976 | 17,620 | ||||||
Other |
51,922 | 42,733 | ||||||
$ | 240,320 | $ | 211,438 | |||||
Other long-term liabilities: |
||||||||
Pension and postretirement benefits |
$ | 51,116 | $ | 67,135 | ||||
Non-qualified deferred compensation |
31,096 | 26,285 | ||||||
Deferred rent |
41,594 | 37,714 | ||||||
Other |
21,781 | 17,117 | ||||||
$ | 145,587 | $ | 148,251 | |||||
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17. | UNAUDITED QUARTERLY RESULTS OF OPERATIONS |
16 weeks | ||||||||||||||||
ended | 12 weeks ended | |||||||||||||||
Fiscal year 2006 | Jan. 22, 2006 | Apr. 16, 2006 | July 9, 2006 | Oct. 1, 2006 | ||||||||||||
Revenues |
$ | 819,717 | $ | 626,236 | $ | 648,988 | $ | 670,708 | ||||||||
Earnings from operations |
44,049 | 38,000 | 44,901 | 54,745 | ||||||||||||
Earnings before cumulative effect
of accounting change |
25,223 | 21,787 | 27,841 | 34,224 | ||||||||||||
Net earnings |
25,223 | 21,787 | 27,841 | 33,180 | ||||||||||||
Earnings before cumulative effect of
accounting change |
||||||||||||||||
Basic |
.72 | .63 | .79 | .97 | ||||||||||||
Diluted |
.70 | .61 | .77 | .95 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
.72 | .63 | .79 | .94 | ||||||||||||
Diluted |
.70 | .61 | .77 | .92 |
16 weeks | ||||||||||||||||
ended | 12 weeks ended | |||||||||||||||
Fiscal year 2005 | Jan. 23, 2005 | Apr. 17, 2005 | July 10, 2005 | Oct. 2, 2005 | ||||||||||||
Revenues |
$ | 737,707 | $ | 576,001 | $ | 589,303 | $ | 600,537 | ||||||||
Earnings from operations |
43,538 | 34,743 | 38,159 | 35,166 | ||||||||||||
Net earnings |
25,430 | 20,677 | 23,886 | 21,544 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
.71 | .57 | .68 | .61 | ||||||||||||
Diluted |
.68 | .55 | .66 | .59 |
18. | NEW ACCOUNTING PRONOUNCEMENTS | |
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements of accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impractical. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes made in fiscal years beginning after the statement was issued. We expect the adoption of this standard will not have a material impact on our consolidated financial position, results of operations or cash flows. | ||
In June 2006, the FASB ratified the consensuses of Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the Issue is an accounting policy decision. The Companys accounting policy is to present the taxes within the scope of EITF 06-3 on a net basis. The guidance is effective for interim and annual periods beginning after December 15, 2006. | ||
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. We are currently evaluating the impact of FIN 48 on our consolidated financial statements, which is effective for fiscal years beginning after December 15, 2006. |
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18. | NEW ACCOUNTING PRONOUNCEMENTS (continued) | |
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement applies under other accounting pronouncements that currently require or permit fair value measurements and is effective for fiscal years beginning after November 15, 2007. We are currently in the process of assessing the impact that SFAS 157 will have on our consolidated financial statements. | ||
In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires recognition of the overfunded or underfunded status of a defined benefit plan as an asset or liability. Under SFAS 158, unrecognized prior service costs and actuarial gains and losses must be recognized as a component of accumulated other comprehensive income (loss). Additionally, SFAS 158 requires that companies measure their plan assets and benefit obligations at the end of their fiscal year. SFAS 158 is effective as of the end of fiscal years ending after December 15, 2006, except for the measurement date provisions which are effective for fiscal years ending after December 15, 2008. We will not be able to determine the impact the adoption of SFAS 158 will have on our consolidated financial statements until the end of fiscal year 2007 when such valuation is completed. However, based on valuations performed as of June 30, 2006, had we been required to adopt the provisions of SFAS 158 as of October 1, 2006, our qualified defined benefit plan and unfunded non-qualified defined benefit plan and postretirement benefit plans would have been underfunded by $10,500, $36,800 and $16,700, respectively. To recognize our underfunded positions and to appropriately record our unrecognized prior service costs and actuarial gains and losses as a component of accumulated other comprehensive income (loss), we would have been required to decrease stockholders equity by $28,400 for our defined benefit plans and increase stockholders equity by approximately $3,400 for our postretirement benefit plans. As of October 1, 2006, in accordance with existing pension literature, we have recorded a prepaid benefit cost for our qualified defined benefit plan of $24,469. | ||
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the first interim period of the fiscal year ending after November 15, 2006. The adoption of this statement is not expected to have a material impact on the Companys financial position or results of operations. | ||
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. | ||
19. | SUBSEQUENT EVENT (unaudited) | |
On November 21, 2006, the Company announced the commencement of modified Dutch Auction tender offer (the Tender Offer) for up to 5.5 million shares of its common stock at a price per share not less than $55.00 and not greater than $61.00, for a maximum aggregate purchase price of $335,500. The shares sought represent approximately 15.5% of the Companys shares outstanding as of November 21, 2006. The Tender Offer will expire, unless extended by the Company, at midnight Eastern Standard Time on December 19, 2006. | ||
The Company is expecting to fund the Tender Offer with available cash and a new credit facility. The Company has received commitments for a new $625,000 credit facility, which will be comprised of a $150,000 revolving credit facility and a $475,000 term loan. Proceeds from the new credit facility will be used to repay the Companys existing term loan with the remaining proceeds, along with existing cash, used to fund the Tender Offer. The Company expects to close the new credit facility by December 18, 2006. |
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