Papa Johns 2003 Annual Report Download - page 26

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sales, improved restaurant operating margins and flat to increasing levels of free cash flow could result in
annual earnings per share percentage growth in the low double digits over the next few years.
Results of Operations and Critical Accounting Policies and Estimates
The results of operations are based on the preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States. The preparation of consolidated
financial statements requires management to select accounting policies for critical accounting areas as
well as estimates and assumptions that affect the amounts reported in the consolidated financial
statements. The Company’s accounting policies are more fully described in Note 2 of Notes to
Consolidated Financial Statements. Significant changes in assumptions and/or conditions in our critical
accounting policies could materially impact the operating results. We have identified the following
accounting policies and related judgments as critical to understanding the results of our operations.
Allowance for Doubtful Accounts and Notes Receivable
We establish reserves for uncollectible accounts and notes receivable based on overall receivable aging
levels and a specific evaluation of accounts and notes for franchisees with known financial difficulties.
These reserves and corresponding write-offs could significantly increase if the identified franchisees
continue to experience deteriorating financial results.
Long-lived and Intangible Assets
The recoverability of long-lived and intangible (i.e., goodwill) assets is evaluated annually or more
frequently if impairment indicators exist. Indicators of impairment include historical financial
performance, operating trends and our future operating plans. If impairment indicators exist, we evaluate
the recoverability of long-lived and intangible assets based on forecasted undiscounted cash flows. The
estimation of future cash flows requires management’s judgment concerning future operations, economic
growth in local or regional markets and the impact of competition. There are inherent uncertainties
related to these factors and management’s judgments in applying these factors to the analysis of long-
lived and intangible asset impairment. It is possible that the assumptions underlying the impairment
analysis will change in such a manner that additional impairment charges may occur.
The Company’s restaurant operating profitability declined significantly during 2003 primarily as a result
of negative sales trends, coupled with increasing costs, both as a result of management initiatives (e.g.,
across-the-board salary increases for restaurant general managers and assistant managers) and outside
factors (e.g., health care and insurance costs). During 2003, we recorded charges of $2.5 million to
reflect the impairment of 25 domestic restaurants. See “Note 6” of “Notes to Consolidated Financial
Statements” for additional information.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles
and health insurance coverage provided to our employees, and the captive insurance program provided to
our franchisees are self-insured up to certain individual and aggregate reinsurance levels. Losses are
accrued based upon estimates of the aggregate retained liability for claims incurred using certain
actuarial projections and our claims loss experience. The estimated insurance claims losses could be
significantly affected should the frequency or ultimate cost of claims significantly differ from historical
trends used to estimate the insurance reserves recorded by the Company. In 2003, we recorded a $6.3
million increase in existing claims loss reserves, as compared to expected claims costs, at our captive