Papa Johns 2005 Annual Report Download - page 45

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43
During the fourth quarter of 2005, we entered into a new interest rate swap agreement that provides for a
fixed rate of 4.98%, as compared to LIBOR, on the following amount of floating rate debt:
March 15, 2006 to January 16, 2007 $50 million
January 16, 2007 to January 15, 2009 $60 million
January 15, 2009 to January 15, 2011 $50 million
The effective interest rate on the line of credit, including the impact of the November 2001 interest rate
swap agreement, was 5.61% as of December 25, 2005. An increase in the present interest rate of 100
basis points on the line of credit debt balance outstanding as of December 25, 2005, as mitigated by the
interest rate swap based on present interest rates, would have no impact on interest expense since the
debt balance is less than the $60.0 million notional amount. The annual impact of a 100-basis-point
increase in interest rates on the debt associated with BIBP would be $61,000.
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. As previously
discussed in Results of Operations and Critical Accounting Policies and Estimates, we have a purchasing
arrangement with a third-party entity, BIBP, formed at the direction of our Franchise Advisory Council
for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. Under this
arrangement, domestic Company-owned and franchised restaurants 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 BIBP are used as a factor in determining adjustments to the selling price to restaurants
over time. Accordingly, for any given quarter, the price paid by the domestic Company-owned and
franchised restaurants may be less than or greater than the prevailing average market price.
As a result of the adoption of FIN 46, Papa John’s began consolidating the operating results of BIBP in
2004. Consolidation accounting requires the portion of BIBP operating income (loss) related to domestic
Company-owned restaurants to be reflected as a reduction (increase) in the “Domestic Company-owned
restaurant expenses – cost of sales” line item, thus reflecting the actual market price of cheese had the
purchasing arrangement not existed. The consolidation of BIBP had a significant impact on our operating
results in 2005 and 2004 and is expected to have a significant impact on future operating results
depending on the prevailing spot block market price of cheese as compared to the price charged to
domestic restaurants. Over time, we expect BIBP to achieve break-even financial results.