Papa Johns 2001 Annual Report Download - page 33

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• Other operating expenses were 0.7% lower in 2001 primarily due to improved cost controls in
mileage reimbursement and bad debt expense. Other operating expenses include an allocation of
the QC Centers’ operating expenses equal to 3.0% of Company-owned restaurant sales in order to
assess a portion of the costs of dough production and food and equipment purchasing and storage
to Company-owned restaurants.
Domestic commissary, equipment and other margin was 10.2% in 2001 compared to 10.3% in 2000. Cost
of sales decreased to 73.7% in 2001 compared to 75.2% in 2000, primarily resulting from operational
improvements and the impact of increased revenues from expanded insurance and other services provided
in 2001 with no corresponding cost of sales. Salaries and benefits and other operating costs as a
percentage of sales increased to 16.1% in 2001 from 14.4% in 2000 primarily as a result of the costs
related to expanded insurance and other services provided to franchisees in 2001.
International operating margin increased to 16.4% in 2001 from 15.1% in 2000 with the improvement
primarily in Company-owned restaurant operations in the United Kingdom.
General and administrative expenses decreased to 7.2% of revenues for 2001 compared to 7.7% of
revenues in 2000. The decrease reflects our ongoing efforts to control costs primarily through
organizational efficiencies resulting from our management restructuring in 2001.
The special charges of $20.9 million incurred in 2000 related principally to the impairment or closing of
certain restaurants, impairment of certain technology assets, closing of field offices and related severance
as well as advertising litigation expense (see “Item 3. Legal Proceedings” and “Note 4” of the “Notes to
Consolidated Financial Statements”). The special charges resulted in a write-down of asset carrying value
of $16.0 million and the establishment of accrued liabilities for cash payments of $4.9 million, including
$1.0 million of litigation costs associated with the “Better Ingredients. Better Pizza” lawsuit with Pizza
Hut. At December 30, 2001, the remaining accrued liability related to the special charge was $1.4 million,
which relates to future lease payments for closed or abandoned sites.
The impairment of the restaurant and other corporate assets in 2000 reduced depreciation and
amortization in 2001 approximately $2.1 million as compared to 2000. The closing of the 20 field offices
and the severance and exit costs reduced salaries and operating expenses approximately $900,000 in 2001
as compared to 2000.
The provision for uncollectible franchisee notes receivable was $537,000 in 2001 compared to $4.2
million in 2000. The provision for 2001 was based on our evaluation of specific franchisee notes
receivable, the franchisees’ operating results and the estimated underlying collateral value of the
restaurant’s assets. Substantially all of the reserve at December 31, 2000 related to notes receivable with a
related party franchisee, which was written off during 2001 without any additional impact on earnings
(see “Note 7” of the “Notes to Consolidated Financial Statements”).
Pre-opening and other general expenses increased to $3.5 million in 2001 from $2.2 million in 2000. Pre-
opening costs of $246,000, relocation costs of $906,000, impairment losses of $556,000 and net losses on
restaurant and other asset dispositions of $555,000 were included in the 2001 amount. Pre-opening costs
of $1.1 million, relocation costs of $1.3 million and net gains on restaurant and other asset dispositions of
$200,000 were included in the 2000 amount. The 2001 amount also includes costs related to franchise
support initiatives undertaken during 2001.
Depreciation and amortization was $35.2 million and $34.2 million in 2001 and 2000, respectively, or
3.6% of revenues for both years, including goodwill amortization of $2.8 million for 2001 and $2.9
million for 2000. The adoption of SFAS 142 will result in a reduction of approximately $2.8 million in