Papa Johns 2003 Annual Report Download - page 38

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Forward-Looking Statements
Certain information contained in this annual report, particularly information regarding future financial
performance and plans and objectives of management, is forward-looking. Certain factors could cause
actual results to differ materially from those expressed in forward-looking statements. These factors
include, but are not limited to the uncertainties associated with litigation; increases in projected claims
losses for the Company’s self-insured coverage or within the captive franchise insurance program;
increases in advertising promotions and discounting by competitors which may adversely affect sales;
new product and concept developments by food industry competitors; the ability of the Company and its
franchisees to open new restaurants and operate new and existing restaurants profitably; increases in
food, labor, utilities, fuel, employee benefits, insurance and similar costs; the ability to obtain ingredients
from alternative suppliers if needed; health- or disease-related disruptions or consumer concerns about
the commodity supply; economic and political and health conditions in the countries in which the
Company or its franchisees operate; the selection and availability of suitable restaurant locations;
negotiation of suitable lease or financing terms; constraints on permitting and construction of restaurants;
higher than anticipated construction costs; the hiring, training and retention of management and other
personnel; changes in consumer taste, demographic trends, traffic patterns and the type, number and
location of competing restaurants; federal and state laws governing such matters as wages, working
conditions, citizenship requirements and overtime; and labor shortages in various markets resulting in
higher required wage rates. These factors might be especially harmful to the financial viability of
franchises in under-penetrated or emerging markets, leading to greater unit closings than anticipated. Our
international operations are subject to additional factors, including currency regulations and fluctuations;
differing cultures and consumer preferences; diverse government regulations and structures; ability to
source high quality ingredients and other commodities in a cost-effective manner; differing interpretation
of the obligations established in franchise agreements with international franchisees; and the successful
conversion of Perfect Pizza restaurants to Papa John’s restaurants.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our debt at December 28, 2003 is principally comprised of a $61.0 million outstanding principal balance
on the $175.0 million unsecured revolving line of credit. The interest rate on the revolving line of credit
is variable and is based on LIBOR plus a 62.5 to 100.0 basis point spread, tiered based upon debt and
cash flow levels. In November 2001, we entered into an interest rate swap agreement that provides for a
fixed rate of 5.31%, as compared to LIBOR, on $100.0 million of floating rate debt from March 2003 to
March 2004, reducing to a notional value of $80.0 million from March 2004 to March 2005, and
reducing to a notional value of $60.0 million in March 2005 with an expiration date of March 2006.
The effective interest rate on the line of credit, including the impact of the interest rate swap agreement,
was 6.06% as of December 28, 2003. An increase in the present interest rate of 100 basis points on the
debt balance outstanding as of December 28, 2003, as mitigated by the interest rate swap, would have no
impact on interest expense since the debt balance is less than $100.0 million.
Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate
fluctuations do not have a significant impact on our operating results.
Cheese costs, historically representing 35% to 40% of our total food cost, are subject to seasonal
fluctuations, weather, availability, demand and other factors that are beyond our control. We have a
purchasing arrangement with a third-party entity, BIBP, for the sole purpose of reducing cheese price
volatility to domestic system-wide restaurants. Under this arrangement, we are able to purchase cheese at
a fixed price per pound throughout a given quarter, based in part on historical average cheese prices.
Gains and losses incurred by the selling entity are used as a factor in determining adjustments to the