Papa Johns 2003 Annual Report Download - page 48

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47
2. Significant Accounting Policies (continued)
The following table illustrates the effect on income and earnings per share (before cumulative effect of a
change in accounting principle) if the fair value based method had been applied to all outstanding and
unvested awards in 2003, 2002 and 2001:
(in thousands, except per share data and assumptions)
2003
2002
2001
Income before cumulative effect of a change in accounting
principle (as reported)
33,976
$
46,797
$
47,245
$
Add: Stock-based employee compensation expense included in
reported income before cumulative effect of a change in accounting
principle, net of related tax effects
152
36
-
Deduct: Stock-based employee compensation expense determined under
the fair value based method for all awards, net of related tax effects
(383)
(721)
(792)
Pro forma income before cumulative effect of a change in accounting
principle
33,745
$
46,112
$
46,453
$
Earnings per share - before cumulative effect of a change in
accounting principle:
Basic - as reported
1.89
$
2.33
$
2.09
$
Basic - pro forma
1.88
$
2.30
$
2.06
$
Assuming dilution - as reported
1.88
$
2.31
$
2.08
$
Assuming dilution - pro forma
1.87
$
2.28
$
2.04
$
Assumptions (weighted average):
Risk-free interest rate
1.9%
2.3%
2.5%
Expected dividend yield
0.0%
0.0%
0.0%
Expected volatility
0.32
0.47
0.48
Expected life (in years)
1.9
6.3
5.2
See Note 18 for additional information related to our stock option programs.
Derivative Financial Instruments
The Company recognizes 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 as
defined by certain accounting standards, 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 9.5%
(ceiling) and an expiration date of March 2003. 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 Collar and Swap is to provide a hedge against the
effects of rising interest rates on the forecasted future borrowings.