Papa Johns 2003 Annual Report Download - page 35

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Domestic commissary, equipment and other margin was 9.9% for 2002 compared to 10.1% in 2001. Cost
of sales was 71.7% of revenues in 2002 compared to 73.0% in 2001 primarily due to a decrease in lower
margin equipment sales and an increase in sales of higher margin insurance-related services to
franchisees. Salaries and benefits and other operating costs increased to 18.4% in 2002 from 16.9% in
2001, primarily as a result of lower sales by commissaries (certain operating costs are fixed in nature),
and expanded insurance-related services provided to franchisees.
International operating margin decreased to 16.2% in 2002 from 16.4% in 2001 due primarily to
increased food and operating costs associated with the United Kingdom commissary operation.
General and administrative expenses were $72.4 million or 7.7% of revenues in 2002 as compared to
$69.5 million or 7.1% of revenues in 2001. The primary components of the $2.9 million increase were
$3.6 million of additional corporate and restaurant management bonuses and $1.1 million of costs related
to the development of certain quality initiatives, intended to better evaluate and monitor the quality and
consistency of the customer experience, partially offset by savings in salaries and travel cost.
A provision for uncollectible notes receivable of $2.8 million was recorded for 2002 based on our
evaluation of our franchise loan portfolio. The provision for uncollectible notes receivable was $537,000
in 2001.
The net 2002 restaurant closure, impairment and disposition charge was $1.1 million in 2002
(representing 19 closed, two impaired and 14 disposed of units) as compared to a gain of ($1.2 million)
in 2001 (representing 17 closed, six impaired and 50 disposed of units).
Other general expenses were $6.1 million for 2002 compared to $4.8 million in 2001. The 2002 amount
includes $156,000 of pre-opening costs, $590,000 of relocation costs, $2.0 million of disposition-related
costs of other assets, $900,000 of costs related to the refurbishment program for our heated delivery bag
system and $1.7 million of losses related to a terminated vendor relationship. The 2001 amount includes
pre-opening costs of $246,000, relocation costs of $906,000 and disposition-related costs of $2.4 million.
The 2001 amount also includes costs related to certain franchisee support initiatives.
Depreciation and amortization was $31.7 million (3.4% of revenues) in 2002 compared to $35.2 million
(3.6% of revenues) in 2001, including goodwill amortization of $2.8 million for 2001. There is no
goodwill amortization in 2002 with the adoption of SFAS No. 142, Goodwill and Other Intangible
Assets. On a pro forma basis, depreciation and amortization for the year ended 2001 would have been
$32.4 million (3.3% of revenues) had SFAS No. 142 been adopted at that time. See “Note 5” of the
“Notes to Consolidated Financial Statements” for additional information.
Net Interest. Net interest expense was $6.6 million in 2002 compared to $6.9 million in 2001 primarily
due to lower effective interest rates in 2002, which were partially offset by lower interest income from
reduced franchise notes receivable in 2002.
Income Tax Expense. The effective income tax rate was 37.5% in 2002 compared to 37.7% in 2001.
Operating Income and Earnings per Common Share. Operating income in 2002 was $81.4 million, or
8.6% of total revenues, compared to $82.8 million, or 8.5% of total revenues in 2001.
Diluted earnings per share were $2.31 in 2002 compared to $2.08 in 2001. On a pro forma basis,
assuming the adoption of SFAS No. 142 in 2001, operating income would have been $85.6 million, or
8.8% of total revenues, and diluted earnings per share would have been $2.15 in 2001. The decrease in
2002 operating income as a percentage of sales as compared to the pro forma 2001 percentage is