Papa Johns 2010 Annual Report Download - page 81

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74
3. Accounting for Variable Interest Entities (continued)
Through December 2010, we had a purchasing agreement with BIBP, a special-purpose entity formed at
the direction of our Franchise Advisory Council, for the sole purpose of reducing cheese price volatility
to domestic system-wide restaurants. BIBP is an independent, franchisee-owned corporation. BIBP
purchases cheese at the market price and sells it to our distribution subsidiary, PJ Food Service, Inc.
(“PJFS”), at a fixed price. PJFS in turn sells cheese to Papa John’s restaurants (both Company-owned
and franchised) at a set price. PJFS purchased $153.0 million, $142.4 million and $165.4 million of
cheese from BIBP during 2010, 2009 and 2008, respectively.
We are deemed the primary beneficiary of BIBP, a VIE, for accounting purposes. We recognize the
operating losses generated by BIBP if BIBP’s shareholders’ equity is in a net deficit position. Further, we
recognize the subsequent operating income generated by BIBP up to the amount of any losses previously
recognized. We recognized pre-tax income of $21.0 million ($13.5 million net of tax, or $0.51 per diluted
share) in 2010, pre-tax income of $22.5 million ($14.6 million net of tax, or $0.52 per diluted share) in
2009 and pre-tax loss of $10.5 million ($6.9 million net of tax, or $0.24 per diluted share) in 2008,
reflecting BIBP’s operating income (losses), net of BIBP’s shareholders’ equity.
BIBP had an accumulated deficit (representing prior purchases of cheese by PJFS from BIBP at below
market prices) of $14.2 million at December 26, 2010. PJFS agreed to pay BIBP the amount equal to the
accumulated deficit at December 26, 2010. Accordingly, BIBP recorded a decrease of $14.2 million in
cost of sales and PJFS recorded a corresponding increase in cost of sales. This transaction did not have
any impact on the Company's 2010 consolidated income statement results since both PJFS and BIBP are
fully consolidated.
As of February 15, 2011, substantially all of our domestic franchisees have entered into a cheese
purchasing agreement with the Company. The cheese purchasing agreement requires participating
domestic franchisees to commit to purchase cheese through PJFS, or to pay the franchisee’s portion of
any accumulated cheese liability upon ceasing to purchase cheese from PJFS when a liability exists.
Accordingly, beginning in 2011, the consolidation of BIBP, or a similarly structured program, will no
longer have a significant impact on our consolidated statements of income.
4. Acquisitions
We acquired 11 restaurants in Florida in 2009 at a purchase price of $2.8 million, which was comprised
of a cash payment of approximately $460,000 and the cancellation of a $2.3 million note due to us. We
recorded goodwill of $1.5 million associated with this acquisition. The business combination was
accounted for by the purchase method of accounting, whereby operating results subsequent to the
acquisition date are included in our consolidated financial statements. The goodwill associated with the
above-mentioned acquisition was eligible for deduction over 15 years under U.S. tax regulations.
There were no significant acquisitions during 2010 and 2008.