Papa Johns 2004 Annual Report Download - page 53

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4. Accounting for Variable Interest Entities (continued)
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial
interest in the VIE (“a variable interest holder”) is obligated to absorb a majority of the risk of loss from
the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party absorbs a
majority of the VIEs losses), or both. A variable interest holder that consolidates the VIE is called the
primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the
VIEs assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as
if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that
the variable interest holder is not required to consolidate but in which it has a significant variable
interest.
We have a purchasing arrangement with BIBP Commodities, Inc. (“BIBP”), a special purpose entity
formed at the direction of our Franchise Advisory Council in 1999, 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 quarterly price based in part upon historical average market prices.
PJFS in turn sells cheese to Papa John’s restaurants (both Company-owned and franchised) at a set
quarterly price. PJFS purchased $138.2 million, $126.7 million and $147.7 million of cheese from BIBP
during 2004, 2003 and 2002, respectively.
As defined by FIN 46, we are the primary beneficiary of BIBP, a VIE, and we began consolidating the
balance sheet of BIBP as of December 28, 2003. A cumulative effect adjustment was not required upon
initial consolidation because BIBP had a surplus in stockholders’ equity at the December 28, 2003
adoption date, and such surplus is reflected as a minority interest liability in other long-term liabilities in
the consolidated balance sheet at December 28, 2003.
We recognize the operating losses generated by BIBP if BIBP’s shareholders’ equity is in a net deficit
position. Further, we will recognize the subsequent operating income generated by BIBP up to the
amount of any losses previously recognized. During 2004, we recognized pre-tax losses of $23.5 million
($14.7 million net of tax, or $0.84 per share), reflecting BIBP’s 2004 operating losses, net of BIBP’s
shareholders’ equity. The impact on future operating income from the consolidation of BIBP is expected
to continue to be significant for any given reporting period due to the noted volatility of the cheese
market, but is not expected to be cumulatively significant over time.
BIBP has a $20.0 million line of credit with a commercial bank. The $20.0 million line of credit is not
guaranteed by Papa John’s. If the line of credit is substantially utilized, Papa John’s will provide
additional funding in the form of a loan to BIBP. As of December 26, 2004, BIBP had borrowings of
$14.1 million and a letter of credit of $3.0 million outstanding under the commercial line of credit facility
and $10.0 million under the line of credit from Papa John’s (the $10.0 million outstanding balance under
the line of credit is eliminated upon consolidation of the financial results of BIBP with Papa John’s).
BIBP had no borrowings at December 28, 2003. BIBP had outstanding borrowings of $16.6 million
under the commercial bank facility and $10.0 million under the line of credit from Papa John’s as of
March 1, 2005.