Papa Johns 2005 Annual Report Download - page 27

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discounted expected cash flows of the reporting unit to its carrying value. We recorded a goodwill
impairment charge of $1.1 million associated with PJUK during the fourth quarter of 2005, reflecting our
updated estimated fair value of PJUK.
We have developed strategic plans for PJUK to improve future operating results. These plans include
selling the Perfect Pizza operations, consisting of the franchised units and related distribution operations,
initiatives to increase brand awareness and increase net Papa John’s brand franchise unit openings over
the next several years. If such initiatives, including the sale of the Perfect Pizza operations, are not
successful, additional impairment charges may occur.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles
and health insurance coverage provided to our employees 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.
From October 2000 through September 2004, our franchisee insurance program, which provides
insurance to our franchisees, was self-insured. Beginning in October 2004, a third-party commercial
insurance company began providing fully-insured coverage to franchisees participating in the franchise
insurance program. Accordingly, this new agreement 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 the inception of the
Captive insurance company in October 2000 to September 2004. Such adjustments, if any, will be
determined in part based upon periodic actuarial valuations.
Deferred Income Tax Assets and Tax Reserves
As of December 25, 2005, we had a net deferred income tax asset balance of $9.0 million, of which
approximately $7.2 million relates to BIBP’s net operating loss carryforward. We have not provided a
valuation allowance for the deferred income tax assets related to BIBP’s net operating losses, since we
believe it is more likely than not that BIBP’s future earnings will be sufficient to ensure the realization of
the net deferred income tax assets for federal and state purposes.
Certain tax authorities periodically audit the Company. We provide reserves for potential exposures
when we consider it probable that a taxing authority may take a sustainable position on a matter contrary
to our filed position. We evaluate these issues on a quarterly basis to adjust for events, such as court
rulings or audit settlements that may impact our ultimate payment for such exposures.
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 income of approximately $4.5
million during 2005 and 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