with McDonald's, which bears interest at the U.S. prime rate plus 100 basis points. At September 30, 2005, we had $4.6 million outstanding under this line of credit with
McDonald's, bearing interest at 7.5% on that date. We expect that this line of credit will be terminated in connection with this offering and that we will repay any outstanding amounts.
also exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials, are commodities that are affected by weather,
seasonality and other factors outside our control. We work closely with our suppliers and use a mix of forward, fixed and formula pricing protocols. Though we do not have long-term supply
contracts or guaranteed purchase amounts, our pricing protocols with suppliers can remain in effect for periods ranging from one month to a year, depending on the outlook for prices of the particular
ingredient. We've tried to increase, where necessary, the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues,
weather, crises and other world events that may affect supply prices. Long-term increases in ingredient prices could adversely affect our future results if we could not increase menu
prices at the same pace for competitive or other reasons. Similarly, if we believe the ingredient price increase to be short in duration we may choose not to pass on the cost increases, which could
adversely affect our short-term financial results.
Over the past five years, inflation has not significantly affected our operating results. The impact of inflation could, however, significantly affect our
operations in the following ways:
beverage and packaging costs as a percentage of revenue has fluctuated in the past, generally in response to changes in availability of our main ingredients. Based on
current market conditions, we believe that the cost of our main ingredients should not experience significant volatility, except for short-term chicken prices, which have increased as a
result of the damage to chicken farms caused by hurricane Katrina. In addition, diesel prices could also experience further increases as a result of the shut-down of several oil refineries
by hurricanes Katrina and Rita, which could cause our other ingredient costs to increase.
pay many of our crew members hourly rates related to the applicable federal or state minimum wage (although all of our crew members make more than the minimum wage). Our
workers' compensation and health insurance costs have been and are subject to continued inflationary pressures.
for construction, taxes, repairs, maintenance and insurance are all subject to inflationary pressures and impact our occupancy costs.
some markets, inflation rates may be higher than the national average.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, which replaces the requirements under SFAS 123 and APB 25. The statement sets accounting
requirements for share-based compensation to employees, including employee stock option and purchase plans, and requires all share-based payments, including employee stock options, to be recognized in
the financial statements based on their fair value. It carried forward prior guidance on accounting for awards to non-employees. We adopted SFAS 123R during the first quarter of
2005 using the modified-prospective transition method. Results for prior periods will not be restated. Had we adopted SFAS 123R in prior periods, the impact would
have approximated the impact of SFAS 123 as described in note 1 of our consolidated financial statements and above in "Other Factors Affecting Our Results."
October 2005, the FASB issued FSP 13-1, which requires rental costs associated with ground or building operating leases incurred during a construction period
to be recognized as rental expense.