Papa Johns 2002 Annual Report Download - page 36

35
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 7.1% of revenues for 2001 compared to 7.6% of
revenues in 2000. The decrease reflects our 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 “Note 7” 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.
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 notes receivable was $537,000 in 2001 compared to $4.2 million in 2000.
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.
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.
Net Interest. Net interest expense was $6.9 million in 2001 compared to $5.8 million in 2000 due to an
increase in the average debt balance outstanding for 2001 incurred by the Company to fund our share
repurchase program, partially offset by lower effective interest rates. The average interest rate on our debt
was 6.6% in 2001 compared to 7.1% in 2000.
Income Tax Expense. The effective income tax rate was 37.7% in 2001 compared to 38.3% in 2000 due
primarily to effective state and local tax planning strategies.
Operating Income and Earnings per Common Share. Operating income in 2001 was $82.8 million, or
8.5% of total revenues, compared to $57.4 million, or 6.0% of total revenues in 2000. The increase in
2001 operating income as a percentage of sales was principally due to the impact of the special charges
recorded in 2000 ($20.9 million), a decrease in the provision for uncollectible notes receivable ($3.7
million), and a decrease in general and administrative expenses ($2.9 million). These increases in
operating income were partially offset by a decrease in restaurant operating margin.
Diluted earnings per share were $2.08 in 2001 compared to $1.28 in 2000. In December 1999, we began a
repurchase program for our common stock. Through December 30, 2001, an aggregate of $217.3 million
had been repurchased (representing 8.9 million shares, or approximately 29.1% of shares outstanding at