Papa Johns 2001 Annual Report Download - page 39

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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, our ability and the ability of our franchisees to obtain suitable locations
and financing for new restaurant development; the hiring, training, and retention of management and
other personnel; competition in the industry with respect to price, service, location, and food quality; an
increase in food cost due to seasonal fluctuations, weather, and demand; changes in consumer tastes and
demographic trends; changes in federal and state laws, such as increases in minimum wage; and risks
inherent to international development, including operational or market risks associated with the planned
conversion of Perfect Pizza restaurants to Papa John’s in the United Kingdom.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company’s debt at December 30, 2001 is principally comprised of a $104.6 million outstanding
principal balance on the $200.0 million unsecured revolving line of credit. The interest rate on the
revolving line of credit is variable and is based on the London Interbank Offered Rate (LIBOR). The
interest rate on the revolving line of credit was 2.37% as of December 30, 2001. In March 2000, we
entered into a $100.0 million interest rate collar, which is effective until March 2003. The collar
establishes a 6.36% floor and a 9.50% ceiling on the LIBOR base rate on a no-fee basis. As a result of the
collar, the effective interest rate on the line of credit was 6.66% as of December 30, 2001. An increase in
the interest rate of 100 basis points on the debt balance outstanding as of December 30, 2001, which
would be mitigated by the interest rate collar based on present interest rates, would increase interest
expense approximately $46,000 annually.
During 2001, the Company 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.
Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate
fluctuations do not have a significant impact on the Company.
Cheese, representing approximately 35% to 40% of our food cost, is subject to seasonal fluctuations,
weather, availability, demand and other factors that are beyond our control. We have entered into a
purchasing arrangement with a third-party entity formed at the direction of the Franchise Advisory
Council for the sole purpose of reducing cheese price volatility. 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 selling price over time. As a result, for any given quarter, the established price paid by
the Company may be less than or greater than the prevailing average market price. Over the long term, we
expect to purchase cheese at a price approximating the actual average market price, with less short-term
volatility. See “Note 11” of “Notes to Consolidated Financial Statements” for further information. The
Company does not generally make use of financial instruments to hedge commodity prices, partly
because of the arrangement with BIBP.