Papa Johns 2010 Annual Report Download - page 83

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76
6. Restaurant Impairment and Dispositions
The following table summarizes restaurant impairment and disposition losses (gains) included in other
general expenses in the accompanying consolidated statements of income during 2010, 2009 and 2008:
(In thousands) 2010 2009 2008
Net book value of divested restaurants 2,828$ 659$ 15,915$
Intangible asset - investment in continuing franchise agreement (1) - - (3,579)
Adjusted net book value of divested restaurants 2,828 659 12,336
Cash proceeds received 1,397 830 2,145
Fair value of notes receivable (2) 1,431 312 6,857
Total consideration at fair value (2) 2,828 1,142 9,002
(Gain) loss on restaurants sold - (483) 3,334
Loss on domestic restaurant closures and restaurants sold 95 1,140 2,441
Adjustment to long-lived asset impairment reserves (3) 158 - 743
PJUK impairment charge (4) - - 2,300
Total restaurant impairment and disposition losses 253$ 657$ 8,818$
(1) As a part of the sales of these restaurants in 2008, we recorded a $3.6 million intangible asset for
the investment in the continuing franchise agreement, representing the discounted value of the
royalties we will receive over the next ten years. The $3.6 million intangible asset will be
amortized over the ten-year franchise agreement as a reduction in royalty income of $360,000
annually. The intangible assets are recorded in other assets in the accompanying consolidated
balance sheets at net book values of $2.8 million at December 26, 2010 and $3.2 million at
December 27, 2009, respectively.
(2) We sold 12 Company-owned restaurants to franchisees in 2010 and 2009 and 62 restaurants in
2008. As a part of the agreements to sell some of the restaurants, we received notes receivable
totaling $1.4 million in 2010, $500,000 (fair value of $312,000) in 2009 and $8.4 million (fair
value of $6.9 million) in 2008.
(3) We identified certain under-performing restaurants located in one market that were subject to
impairment charges due to the restaurants’ declining performance (two restaurants in 2010 and
14 restaurants in 2008). The decline in operating results was a result of increased competition,
increased operating expenses and deteriorating economic conditions in that market. During our
review of potentially impaired restaurants, we considered several indicators, including restaurant
profitability, annual comparable sales, operating trends and actual operating results at a market
level. We estimated the undiscounted cash flows over the estimated lives of the assets for each of
our restaurants that met certain impairment indicators and compared those estimates to the
carrying values of the underlying assets. The forecasted cash flows were based on our assessment
of the individual restaurant’s future profitability, which is based on the restaurant’s historical
financial performance, the maturing of the restaurant’s market, as well as our future operating
plans for the restaurant and its market. In estimating fair market value based on future cash flows,
we used a discount rate of 10.5%, which approximated the return we expected on those types of
investments.
(4) During 2008, we recorded a goodwill impairment charge of $2.3 million associated with our
PJUK operations.