Jack In The Box 2006 Annual Report Download - page 57

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
F-7
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 Company’ s 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.