Papa Johns 2008 Annual Report Download - page 65

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our debt at December 28, 2008 was principally comprised of a $123.5 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, or other bank developed rates at our option. During December 2005, March 2007
and August 2008, we entered into interest rate swap agreements that provide for fixed rates of 4.98%,
5.18% and 3.74% respectively, 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 third interest rate swap agreement:
January 31, 2009 to January 31, 2011 $50 million 3.74%
The effective interest rate on the line of credit, including the impact of the interest rate swap agreements,
was 4.4% as of December 28, 2008. An increase in the present interest rate of 100 basis points on the line
of credit balance outstanding as of December 28, 2008, as mitigated by the interest rate swap agreements
based on present interest rates, would increase interest expense approximately $335,000. The annual
impact of a 100 basis point increase in interest rates on the third-party debt associated with BIBP would
be $71,000.
Approximately 3.4% of our total revenues in 2008 were derived from sales to customers and royalties
outside the contiguous United States. Accordingly, foreign exchange rate fluctuations have not had a
significant impact on our operating results and thus we did not enter into financial instruments to manage
foreign currency exchange risk.
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. Historically,
under this arrangement, domestic Company-owned and franchised restaurants have been 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 have been 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 required by FIN 46, Papa John’s consolidates the operating results of BIBP. 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