Papa Johns 2006 Annual Report Download - page 52

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self-insured coverage or within the captive franchise insurance program could have a significant impact
on our operating results. Additionally, domestic franchisees are only required to purchase seasoned sauce
and dough from our QC Centers and changes in purchasing practices by domestic franchisees could
adversely affect the financial results of our QC Centers. Our international operations are subject to
additional factors, including economic, political and health conditions in the countries in which the
Company or its franchisees operate; currency regulations and fluctuations; differing business and social
cultures and consumer preferences; diverse government regulations and structures; ability to obtain high-
quality ingredients and other commodities in a cost-effective manner; and differing interpretation of the
obligations established in franchise agreements with international franchisees.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our debt at December 31, 2006 was principally comprised of a $96.5 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 50.0 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 provided
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.
During December 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 December 2005 interest rate
swap agreement, was 5.64% as of December 31, 2006. An increase in the present interest rate of 100
basis points on the line of credit debt balance outstanding as of December 31, 2006, as mitigated by the
interest rate swap based on present interest rates, would increase interest expense approximately
$465,000. The annual impact of a 100-basis-point increase in interest rates on the debt associated with
BIBP would be $5,000.
Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate
fluctuations have not had 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