Papa Johns 2004 Annual Report Download - page 25

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The recoverability of intangible assets (i.e., goodwill) is evaluated annually, or more frequently if
impairment indicators exist, on a reporting unit basis by comparing the fair value derived from
discounted cash flows of the reporting unit to its carrying value.
At December 26, 2004, we had a net investment of approximately $28.6 million associated with PJUK,
our United Kingdom subsidiary, which was substantially composed of goodwill associated with our
acquisition of the subsidiary. PJUK has reported deteriorating operating results for the past two years
primarily due to lower sales by Perfect Pizza restaurants and a decrease in net franchise units due to
restaurant closings. We have developed plans for PJUK to improve its operating results, which include an
anticipated increase in net franchise unit openings over the next several years. If these plans are not
successful and operating results continue to deteriorate, we may be required to record a significant
impairment charge associated with our United Kingdom subsidiary.
See “Note 7” 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 third-
party 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.
Effective October 2004, a third party commercial insurance company began providing fully-insured
coverage to franchisees participating in the franchise insurance program and we ceased providing new
coverage via our captive insurance subsidiary. Accordingly, this new arrangement eliminates our risk of
loss for franchise insurance coverage written after September 2004. Our operating income will still be
subject to potential adjustments for changes in estimated insurance reserves for policies written from
October 2000 to September 2004. Such adjustments, if any, will be determined in part based upon semi-
annual actuarial valuations. Our captive insurance company recorded increases in existing claims loss
reserves of $1.1 million and $6.3 million in 2004 and 2003, respectively, as compared to expected claims
costs, based on updated actuarial valuations. See “Note 11” of “Notes to Consolidated Financial
Statements” for additional information.
Consolidation of BIBP Commodities Inc. (“BIBP”) as a Variable Interest Entity
BIBP is a franchisee-owned corporation that conducts a cheese-purchasing program on behalf of
domestic Company-owned and franchised restaurants. As required by the Financial Accounting
Standards Board’s (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (FIN 46), we began consolidating the financial
results of BIBP in the fourth quarter of 2003. We recognized pre-tax losses of approximately $23.5
million during 2004 from the consolidation of BIBP. We expect the consolidation of BIBP to continue to
have a significant impact on Papa John’s operating income in future periods due to the volatility of
cheese prices. Papa John’s will recognize the operating losses generated by BIBP if the shareholders’
equity of BIBP is in a net deficit position. Further, Papa John’s will recognize subsequent operating
income generated by BIBP up to the amount of BIBP losses previously recognized by Papa John’s.