Papa Johns 2007 Annual Report Download - page 62

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55
franchisees operate; currency regulations and fluctuations; differing business and social cultures and
consumer preferences; diverse government regulations and structures; ability to source 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 30, 2007 was principally comprised of a $134.0 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 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% and in March 2007, we entered into an additional interest rate swap agreement that provides for
a fixed rate of 5.18%, as compared to LIBOR, on the following amount of floating rate debt:
Floating
Rate Debt
Fixed
Rates
The first interest rate swap agreement:
March 15, 2006 to January 16, 2007 $50 million 4.98%
January 16, 2007 to January 15, 2009 $60 million 4.98%
January 15, 2009 to January 15, 2011 $50 million 4.98%
The second interest rate swap agreement:
March 1, 2007 to January 31, 2009 $30 million 5.18%
The effective interest rate on the line of credit, including the impact of the two interest rate swap
agreements, was 5.5% as of December 30, 2007. An increase in the present interest rate of 100 basis
points on the line of credit balance outstanding as of December 30, 2007, as mitigated by the interest rate
swap based on present interest rates, would increase interest expense approximately $440,000. The
annual impact of a 100 basis point increase in interest rates on the third-party debt associated with BIBP
would be $87,000.
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 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.