Papa Johns 2008 Annual Report Download - page 39

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32
increased operating margin for the average restaurant approximately 1.4% for the last two months of
2008.
With respect to the BIBP cheese cost relief for 2009, for the first two months of the year the price per
pound was set at a level approximately equal to the Q4-08 modified price, and substantially less than the
price as would have been determined by the standard formula. Effective in March 2009, we will modify
the BIBP formula to establish the price of cheese on a more frequent basis at the projected spot market
price plus a certain mark-up. The amount of the mark-up depends on the projected spot market prices.
Under this new price formula, we anticipate BIBP will substantially repay its cumulative deficit by the
end of 2011.
Franchise Support Initiatives
In late 2008, the Company announced a comprehensive package of domestic franchise system support
initiatives in response to the current economic and consumer climate. The initiatives included:
• As previously discussed, providing cheese cost relief to our system in late 2008 and 2009 by
modifying the cheese pricing formula used by BIBP Commodities, Inc.;
• Providing additional system-wide national marketing support for 2009;
• Providing expanded targeted royalty relief and local marketing support for struggling franchisees
or markets;
• Convening a lender summit, principally of regional banks and other lenders, to educate them on
the Papa John’s model with the goal of expanding credit availability to franchisees;
• Providing financing on a selected basis to assist new or existing franchisees with the acquisition
of troubled franchised restaurants; and
• For the first six months of 2009, suspending collection of the 0.25% royalty rate increase that
was scheduled for January 2009 with the effect that the royalty rate will remain at 4.25% for the
first six months of 2009 (with the Company deciding whether to continue to suspend collection
of the royalty rate increase at mid-year).
We estimate the gross incremental impact of these and certain other support initiatives and non-recurring
costs on the Company’s operating income, excluding the impact of consolidating BIBP’s operating
results, to be $12.0 million to $14.0 million for 2009 (excluding any favorable impact from increased
marketing).
We believe the support program will produce long-term shareholder benefits for the Papa John's system
by mitigating potential unit closures and strengthening our brand during these challenging times. In
addition to reducing unit closures, other important objectives of the support program include growing
market share in a consolidating category, stabilizing transaction levels and targeting a substantial multi-
year increase in online ordering percentage.
Recent Accounting Standards
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of SFAS No. 115. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2008 or our first quarter of fiscal 2009. This statement provides
companies with the option to measure, at specified election dates, many financial instruments and certain
other items at fair value that are not currently measured at fair value. Companies electing to adopt SFAS
No. 159 will report unrealized gains and losses on items for which the fair value option has been elected
in earnings at each subsequent reporting date. The Company does not intend to elect the SFAS No. 159
fair value measurement option.