Papa Johns 2005 Annual Report Download - page 63

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5. 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, 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 $151.9
million, $138.2 million and $126.7 million of cheese from BIBP during 2005, 2004 and 2003,
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. We recognized pre-tax gains of $4.5 million ($2.8 million
net of tax, or $0.08 per share) and pre-tax losses of $23.5 million ($14.7 million net of tax, or $0.42 per
share) in 2005 and 2004, respectively, reflecting BIBP’s operating income (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 an $18.0 million line of credit with a commercial bank, which is not guaranteed by Papa
John’s. Papa John’s has agreed to provide additional funding in the form of a loan to BIBP. As of
December 25, 2005, BIBP had borrowings of $6.1 million and a letter of credit of $3.0 million
outstanding under the commercial line of credit facility and $13.1 million under the line of credit from
Papa John’s (the $13.1 million outstanding balance under the line of credit is eliminated upon
consolidation of the financial results of BIBP with Papa John’s). 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 at December 26, 2004 (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 outstanding borrowings of $12.4 million under the
commercial bank facility and $8.3 million under the line of credit from Papa John’s as of February 21,
2006.