Papa Johns 2000 Annual Report Download - page 37

32
Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), requires impairment losses to be
recognized for long-lived assets used in operations when indicators of impairment are present and the
estimate of undiscounted cash flows is not sufficient to recover asset carrying amounts. SFAS No. 121
also requires long-lived assets held for disposal to be carried at the lower of carrying value or fair value,
less costs of disposal, once management has committed to a plan of disposal or closure.
The Company determined that certain domestic restaurants were impaired due to specific operational
performance indicators. Certain domestic restaurants' operational performance declined during 2000 due
to increased competition and increased operating expenses, such as salaries, reflecting general operating
conditions. In addition, the performance of certain acquired markets did not meet expectations in 2000,
which indicated that some of the acquired restaurants were impaired. During our review for potentially
impaired restaurants, we considered several indicators, including individual restaurant profitability, annual
comparable sales, operating trends, as well as actual operating results. In accordance with SFAS No. 121,
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 these estimates to the carrying values of
the underlying assets.
The forecasted cash flows were based on our assessment of the individual store's future profitability
which is based on the restaurant's historical results, the maturity of the restaurant's market as well as our
future plans for the restaurant and its market. In estimating forecasted cash flows, we used a discount
rate of 12% which approximates the return we would expect on those types of investments. Based on our
analysis, we determined that 52 restaurants were impaired by a total of $6.8 million.
The impairment or write-off of certain assets was principally comprised of technology assets, including the
development of our on-line ordering capabilities. The Company reviewed the future use of certain
technological and other assets and determined that the assets were no longer beneficial to the Company or
the carrying value of the assets was impaired due to lower future cash flows based on our updated
strategy to focus on our primary business activities. Based on an asset analysis and an analysis of
estimated future cash flows in accordance with SFAS No. 121, a charge of $6.7 million was recorded.
We established a reserve of $4.2 million for franchisee notes receivable. We concluded the reserve was
necessary due to certain franchisees' deteriorating economic performance and underlying collateral value.
Substantially all of the reserve, approximately $4.1 million, relates to notes receivable with a related party
franchisee.
Prior to year-end, we identified and committed to close 13 restaurants in 2001 due to deteriorating
economic performance and poor outlook for improvement. A charge of $3.1 million was recorded.
During the fourth quarter of 2000, the Company decided to close 20 field offices to reduce future costs
and to allow our operations area supervisors and district managers to spend more time in our restaurants.
We also eliminated certain positions in the fourth quarter to reduce future administrative costs. These
actions resulted in a charge of $2.6 million in the fourth quarter.
In December 2000, the Company agreed to pay $750,000 to settle a lawsuit with a vendor.
The special charge resulted in a write-down of asset carrying value of $20.2 million and the establishment
of accrued liabilities for cash payments of $3.9 million. We paid approximately $200,000 during the fourth