Papa Johns 2002 Annual Report Download - page 48

Download and view the complete annual report

Please find page 48 of the 2002 Papa Johns annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 80

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80

47
2. Significant Accounting Policies (continued)
Foreign Currency Translation
The local currency is the functional currency for our foreign subsidiary, Papa John’s UK. Earnings are
translated into U.S. dollars using monthly average exchange rates, while balance sheet accounts are
translated using year-end exchange rates. The resulting translation adjustments are included as a
component of accumulated other comprehensive income (loss).
Derivative Financial Instruments
Effective January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the
derivative meets the hedge criteria of SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
depending on the nature of the hedge, changes in the fair value of the derivative are either offset against
the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in
accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value, if any, is immediately recognized in earnings.
In connection with the line of credit facility, in March 2000, we entered into a no-fee interest rate collar
(“Collar”) with a notional amount of $100.0 million, a 30-day LIBOR rate range of 6.36% (floor) to
9.50% (ceiling) and an expiration date of March 2003. The purpose of the Collar is to provide a hedge
against the effects of rising interest rates. The adoption of SFAS No. 133, as amended by SFAS No. 137
and SFAS No. 138, resulted in the cumulative effect of an accounting change of $1.7 million ($1.1
million after tax) charged against accumulated other comprehensive income (loss) to reflect the fair value
of our interest rate collar as of the date of adoption. The adoption of SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, had no impact on earnings.
In November 2001, we entered into an interest rate swap agreement (“Swap”) that provides for a fixed
rate of 5.31%, as compared to LIBOR, on $100.0 million of floating rate debt from March 2003 to March
2004, reducing to a notional value of $80.0 million from March 2004 to March 2005, and reducing to a
notional value of $60.0 million in March 2005 with an expiration date of March 2006. The purpose of the
Swap is to provide a hedge against the effects of rising interest rates on the forecasted future borrowings.
We recognized charges of $4.3 million ($2.7 million after tax) and $2.1 million ($1.3 million after tax) in
accumulated other comprehensive income (loss) in 2002 and 2001, respectively, for the net change in fair
value of our interest rate collar and interest rate swap. Fair value is based on a quoted market price. The
Collar and Swap are deemed effective hedges in accordance with SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138 (see Note 8).