Papa Johns 2002 Annual Report Download - page 27

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compensation and the effect of the method on reported results in both interim and annual financial
statements. The Company adopted the required disclosures in fiscal 2002.
SFAS No. 123
Effective at the beginning of fiscal 2002, we elected to expense the cost of employee stock options in
accordance with the fair value method contained in SFAS No. 123. Under SFAS No. 123, the fair value
for options is estimated at the date of grant using a Black-Scholes option pricing model which requires the
input of highly subjective assumptions including the expected stock price volatility. The election was
effective as of the beginning of fiscal 2002 and applies to all stock options issued after the effective date.
The compensation expense recognized in 2002 due to the adoption of SFAS No. 123 was minimal.
Prior to 2002, we followed Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, in accounting for our employee stock options. Under
APB No. 25, no compensation expense is recognized provided the exercise price of employee stock
options equals or exceeds the market price of the underlying stock on the date of grant. Had we followed
SFAS No. 123 in prior years by recording the fair value of options at the date of grant as a compensation
expense over the vesting period, earnings per share would have been reduced by $0.03 in 2002, $0.04 in
2001 and $0.24 in 2000. See “Note 18” of “Notes to Consolidated Financial Statements” for additional
information.
Interpretation No. 46 of Accounting Research Bulletin No. 51
In January 2003, the FASB issued Interpretation No. 46 of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, that addresses the potential consolidation of Variable Interest Entities
(VIE’s). This interpretation would be applied to existing VIE’s as of the beginning of the first interim
period subsequent to June 15, 2003 and would apply immediately to VIE’s created after January 31,
2003.
We have a purchasing arrangement with a third-party entity, BIBP Commodities, Inc. (“BIBP”), formed
at the direction of our Franchise Advisory Council for the sole purpose of reducing cheese price volatility.
BIBP purchases cheese at the market price and sells it to our distribution subsidiary, PJ Food Service, Inc.
(“PJFS”), at a fixed quarterly price based in part upon historical average market prices. PJFS in turn sells
cheese to Papa John’s restaurants (Company-owned and franchised) at a set quarterly price. The purchase
of cheese by PJFS from BIBP is not guaranteed. PJFS purchased $147.7 million, $154.1 million and
$136.6 million of cheese during 2002, 2001 and 2000, respectively, from BIBP.
BIBP has a $15 million line of credit with a commercial bank. The $15 million line of credit is not
guaranteed by Papa John’s. Papa John’s has a commitment to lend up to $2.6 million to BIBP if the $15
million line of credit is fully utilized. BIBP did not have any outstanding borrowings under either credit
facility at December 29, 2002 or December 30, 2001.
Gains or losses incurred by BIBP, due to differences in the actual market price of cheese purchased and
the established quarterly sales price, are factors used to determine the price for subsequent quarters. Had
BIBP not been in existence and PJFS had therefore been required to purchase cheese at actual market
prices, our consolidated net income would have increased by approximately $3.0 million in 2002,
decreased by approximately $1.6 million in 2001 and increased by approximately $1.2 million in 2000.