Papa Johns 2009 Annual Report Download - page 36

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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 will be
amortized over the ten-year franchise agreement as a reduction in royalty income of $360,000 annually.
The intangible asset is recorded in other assets in the accompanying consolidated balance sheet at
December 27, 2009 with a remaining value of approximately $3.2 million.
At December 27, 2009, we had a net investment of approximately $21.8 million associated with our
United Kingdom subsidiary (PJUK). During 2008, we recorded a goodwill impairment charge of $2.3
million associated with our PJUK operations (none in 2009 or 2007). We updated our evaluation of the
fair value of our PJUK subsidiary in 2009. Our analysis indicated the fair value exceeded the carrying
value by approximately 10%. The goodwill allocated to this entity approximated $15.2 million at
December 27, 2009. We have developed plans for PJUK to continue to improve its 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.
We updated our evaluation of the fair value of our investment in our domestic Company-owned
restaurants during 2009. We test for goodwill impairment at the region level, which is one step below the
reporting segment level. Based on our evaluation, our West Region, which had goodwill of
approximately $20.8 million at December 27, 2009, was not subject to impairment since the estimated
fair value of our West Region exceeded the carrying value by approximately 10%.
If our growth 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 captive insurance company, which provided 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 arrangement eliminates our risk of loss for franchise insurance coverage
written after September 2004. Our operating income is still 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.