Papa Johns 2009 Annual Report Download - page 66

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59
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our debt at December 27, 2009 was principally comprised of a $99.0 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, or other bank developed rates at our option.
We have two interest rate swap agreements that provide for fixed rates of 4.98% and 3.74%, as compared
to LIBOR, on the following amount of floating rate debt:
Floating
Rate Debt
Fixed
Rates
The first interest rate swap agreement:
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:
January 31, 2009 to January 31, 2011 $50 million 3.74%
The effective interest rate on the line of credit, net of the two interest rate swap agreements, was 4.99%
as of December 27, 2009. An increase in the present interest rate of 100 basis points on the line of credit
balance outstanding as of December 27, 2009, net of the interest rate swap agreements, would have no
impact on interest expense.
We do not enter into financial instruments to manage foreign currency exchange rates since less than 4%
of our total revenues are derived from sales to customers and royalties outside the contiguous United
States.
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. The BIBP formula used to establish the price of cheese charged to restaurants was modified
in 2009. Under the modified price formula, we anticipate BIBP will substantially repay its cumulative
deficit by the end of 2011.
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 existed. The
consolidation of BIBP had a significant impact on our operating results in 2009, 2008 and 2007 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.