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฀
57
Papa฀John’s฀International,฀Inc.฀and฀Subsidiaries฀
Notes฀to฀Consolidated฀Financial฀Statements฀
฀
1.฀฀Description฀of฀Business฀
฀
Papa฀ John’s฀ International,฀ Inc.฀ (referred฀ to฀ as฀ the฀ “Company,”฀ “Papa฀ John’s”฀ or฀ in฀ the฀ first฀ person฀
notations฀of฀“we,”฀“us”฀and฀“our”)฀operates฀and฀franchises฀pizza฀delivery฀and฀carryout฀restaurants฀under฀
the฀ trademark฀ “Papa฀ John’s,”฀ currently฀ in฀ all฀ 50฀ states฀ and฀ 34฀ countries.฀ Substantially฀ all฀ revenues฀ are฀
derived฀ from฀ retail฀ sales฀ of฀ pizza฀ and฀ other฀ food฀ and฀ beverage฀ products฀ to฀ the฀ general฀ public฀ by฀
Company-owned฀restaurants,฀franchise฀royalties,฀sales฀of฀franchise฀and฀development฀rights,฀and฀sales฀to฀
franchisees฀of฀food฀and฀paper฀products,฀printing฀and฀ promotional฀items,฀risk฀management฀services,฀ and฀
information฀systems฀and฀related฀services฀used฀in฀their฀operations.฀
฀
2.฀฀Significant฀Accounting฀Policies฀
฀
Principles฀of฀Consolidation฀
฀
The฀ accompanying฀ consolidated฀ financial฀ statements฀ include฀ the฀ accounts฀ of฀ Papa฀ John’s฀ and฀ its฀
subsidiaries.฀ The฀ results฀ of฀ our฀ Company-owned฀ operations฀ in฀ China฀ were฀ consolidated฀ one฀ month฀ in฀
arrears฀ until฀ fiscal฀ 2013.฀ The฀ inclusion฀ of฀ the฀ additional฀ month฀ of฀ operations฀ in฀ fiscal฀ 2013฀ resulted฀ in฀
$2.1฀ million฀ of฀ incremental฀ international฀ revenues฀ and฀ an฀ incremental฀ loss฀ before฀ income฀ taxes฀ of฀
$215,000฀reported฀in฀the฀international฀segment.฀This฀change฀in฀ our฀consolidation฀policy฀ did฀not฀have฀ a฀
material฀ impact฀ to฀ our฀ financial฀ results฀ for฀ any฀ of฀ the฀ years฀ presented.฀ All฀ intercompany฀ balances฀ and฀
transactions฀have฀been฀eliminated.฀
฀
Fiscal฀Year฀
฀
Our฀fiscal฀year฀ends฀on฀the฀last฀Sunday฀in฀December฀of฀each฀year.฀All฀fiscal฀years฀presented฀consist฀of฀52฀
weeks฀except฀for฀the฀2012฀fiscal฀year,฀which฀consists฀of฀53฀weeks.฀
฀
Variable฀Interest฀Entities฀
฀
Papa฀ John’s฀ domestic฀ restaurants,฀ both฀ Company-owned฀ and฀ franchised,฀ participate฀ in฀ Papa฀ John’s฀
Marketing฀Fund,฀Inc.฀(“PJMF”),฀a฀nonstock฀corporation฀designed฀to฀operate฀at฀break-even฀for฀the฀purpose฀
of฀ designing฀ and฀ administering฀ advertising฀ and฀ promotional฀ programs฀ for฀ all฀ participating฀ domestic฀
restaurants.฀ PJMF฀ is฀ a฀ variable฀ interest฀ entity฀ (“VIE”)฀ as฀ it฀ does฀ not฀ have฀ sufficient฀ equity฀ to฀ fund฀ its฀
operations฀ without฀ ongoing฀ financial฀ support฀ and฀ contributions฀ from฀ its฀ members.฀ Based฀ on฀ the฀
ownership฀and฀governance฀structure฀and฀operating฀procedures฀of฀PJMF,฀we฀have฀determined฀that฀we฀do฀
not฀ have฀ the฀ power฀ to฀ direct฀ the฀ most฀ significant฀ activities฀ of฀ PJMF฀ and฀ are฀ therefore฀ not฀ the฀ primary฀
beneficiary.฀Accordingly,฀we฀determined฀that฀consolidation฀is฀not฀appropriate.฀
฀
In฀connection฀with฀a฀new฀multi-year฀supplier฀agreement,฀the฀Company฀received฀a฀ $5.0฀million฀supplier฀
marketing฀ payment฀ in฀ 2012.฀ The฀ Company฀ is฀ recognizing฀ the฀ supplier฀ marketing฀ payment฀ evenly฀ as฀
income฀over฀the฀five-year฀term฀of฀the฀agreement฀($1.0฀million฀per฀year).฀The฀Company฀then฀contributed฀
the฀ supplier฀ marketing฀ payment฀ to฀ PJMF฀ for฀ the฀ benefit฀ of฀ domestic฀ restaurants.฀ The฀ Company’s฀
contribution฀to฀PJMF฀was฀fully฀ expensed฀in฀ 2012.฀PJMF฀elected฀to฀ distribute฀ the฀$5.0฀ million฀ supplier฀
marketing฀payment฀to฀the฀domestic฀system฀as฀advertising฀credits฀in฀2012.฀Our฀domestic฀Company-owned฀
restaurants’฀ portion฀ of฀ the฀ advertising฀ credits฀ resulted฀ in฀ an฀ increase฀ in฀ income฀ before฀ income฀ taxes฀ of฀
approximately฀$1.0฀million฀in฀2012.฀
฀
฀ ฀