Cracker Barrel 2006 Annual Report Download - page 39

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At July 28, 2006, the Company had $723,000 outstand-
ing under the Term Loan B and no amounts outstanding
under the Delayed-Draw or the Revolving Credit facilities.
The Company is exposed to market risk, such as
changes in interest rates and commodity prices. The
Company does not hold or use derivative financial
instruments for trading purposes. Prior to 2006, the
Company had no derivative financial instruments that
required fair value accounting treatment.
The Company’s policy has been to manage interest
cost using a mix of fixed and variable rate debt
(see Notes 6, 12 and 14). To manage this risk in a cost
efficient manner, the Company entered into an
interest rate swap on May 4, 2006 in which it agreed to
exchange with a counterparty, at specified intervals
effective August 3, 2006, the difference between fixed
and variable interest amounts calculated by reference
to an agreed-upon notional principal amount. Interest
rate swaps that meet specific conditions under SFAS
No. 133 are accounted for as cash flow hedges. The
swapped portion of our Term Loan B will be fixed at
a rate of 5.57% plus our then current credit spread, or
7.07% based on today’s credit spread, over the 7-year
life of the term loan and the interest rate swap. The
swapped portion is $525,000 to May 2, 2007, $650,000
from May 3, 2007 to May 4, 2008, $625,000 from
May 5, 2008 to May 3, 2009, $600,000 from May 4, 2009
to May 2, 2010, $575,000 from May 3, 2010 to May 2,
2011, $550,000 from May 3, 2011 to May 2, 2012, and
$525,000 for May 3, 2012 to May 2, 2013. The esti-
mated fair value of this interest rate swap liability was
$7,220 at July 28, 2006 and is included in other
long-term obligations. The offset to the interest rate
swap liability is in other comprehensive loss, net of
the deferred tax asset. Any portion of the fair value of
the swap determined to be ineffective will be recognized
currently in earnings.
While changes in the prime rate or LIBOR would
affect the cost of funds borrowed in the future, the
Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the
Company’s consolidated financial position, results of
operations or cash flows would not be material.
Commodity Price Risk. Many of the food products
purchased by the Company are affected by commodity
pricing and are, therefore, subject to price volatility
caused by weather, production problems, delivery diffi-
culties and other factors which are outside the control
of the Company and which are generally unpredictable.
Four food categories (beef, dairy (including eggs),
pork and poultry) account for the largest shares of the
Company’s food purchases at approximately 19%, 11%,
10% and 9%, respectively. Other categories affected by
the commodities markets, such as produce and seafood,
may each account for as much as 6% of the Company’s
food purchases. While the Company has some of its
food items prepared to its specifications, the Company’s
food items are based on generally available products,
and if any existing suppliers fail, or are unable to
deliver in quantities required by the Company, the
Company believes that there are sufficient other quality
suppliers in the marketplace that its sources of supply
can be replaced as necessary. The Company also recog-
nizes, however, that commodity pricing is extremely
volatile and can change unpredictably and over short
periods of time. Changes in commodity prices would
affect the Company and its competitors generally, and
depending on the terms and duration of supply
contracts, sometimes simultaneously. The Company also
enters into supply contracts for certain of its products
in an effort to minimize volatility of supply and
pricing. In many cases, or over the longer term, the
Company believes it will be able to pass through some
or much of the increased commodity costs by adjusting
its menu pricing. From time to time, competitive
circumstances, or judgments about consumer acceptance
of price increases, may limit menu price flexibility,
and in those circumstances increases in commodity
prices can result in lower margins for the Company, as
happened in 2005.
Strategic Initiatives
As previously announced in the Current Report on Form
8-K filed with the Securities and Exchange Commission
(“SEC”) on March 17, 2006, the Company, with the
assistance of a financial advisor, undertook a review of
its capital structure and other potential initiatives
intended to enhance shareholder value (the “Review”).