Papa Johns 2008 Annual Report Download - page 37

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30
the sale and the second component is an investment in the continuing franchise agreement, representing
the discounted value of future royalties less any incremental direct operating costs, that would be
collected under the ten-year franchise agreement.
During 2008, we sold to domestic franchisees a total of 62 Company-owned restaurants located primarily
in three markets. As part of the sales of these restaurants, 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 from the purchaser/franchisee. The intangible asset is recorded in
other assets in the accompanying consolidated balance sheet at December 28, 2008. The $3.6 million
intangible asset will be amortized over the ten-year franchise agreement as a reduction in the royalty
income of $360,000 annually.
At December 28, 2008, we had a net investment of approximately $15.7 million associated with our
United Kingdom subsidiary (PJUK), excluding the $3.5 million loan due from the purchaser of Perfect
Pizza. During 2008, we recorded a goodwill impairment charge of $2.3 million associated with our PJUK
operations. We have developed plans for PJUK to continue to improve in operating results. The plans
include efforts to increase Papa John’s brand awareness in the United Kingdom, improve sales and
profitability for individual restaurants and increase net PJUK franchised unit openings over the next
several years. We will continue to periodically evaluate our progress in achieving these plans.
If our initiatives with PJUK and certain domestic markets are not successful, future impairment charges
could 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. During 2008, we recorded a $1.7 million
decrease in existing claims losses, as compared to the previous year's expected claims costs, based on
updated actuarial valuations.