SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0–21660
PAPA JOHN'S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
61-1203323
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification number)
2002 Papa Johns Boulevard
Louisville, Kentucky 40299-2334
(Address of principal executive offices)
(502) 261–7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes ý No o
At November 8, 2001, there were outstanding 22,696,150 shares of the registrant’s common stock, par value $.01 per share.
INDEX
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets – September 30, 2001 and December 31, 2000
Condensed Consolidated Statements of Income – Three Months and Nine Months Ended September 30, 2001 and September 24, 2000
Condensed Consolidated Statements of Stockholders' Equity – Nine Months Ended September 30, 2001 and September 24, 2000
Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2001 and September 24, 2000
Notes to Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II.
OTHER INFORMATION
Legal Proceedings
Item 6.
Exhibits and Reports on Form 8-K
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30, 2001
December 31, 2000
(Unaudited)
(Note)
Assets
Current assets:
Cash and cash equivalents
$
11,610
6,141
Investments
-
5,745
Accounts receivable
23,887
23,064
Inventories
12,237
18,321
Prepaid expenses and other current assets
5,412
7,422
Deferred income taxes
5,272
4,822
Total current assets
58,418
65,515
Net property and equipment
248,081
245,874
Notes receivable from franchisees
20,766
16,675
Intangibles
50,194
49,394
Other assets
16,150
16,527
1,424
1,673
Total assets
395,033
395,658
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
20,731
23,586
Accrued expenses
50,481
45,266
Current portion of debt
225
897
Total current liabilities
71,437
69,749
Unearned franchise and development fees
3,439
6,033
Long-term debt, net of current portion
112,585
145,710
Other long-term liabilities
13,511
7,845
Stockholders’ equity:
Preferred stock
Common stock
309
307
Additional paid-in capital
198,791
193,029
Accumulated other comprehensive loss
(3,593
)
(277
Retained earnings
202,033
166,316
Treasury stock
(203,479
(193,054
Total stockholders’ equity
194,061
166,321
Total liabilities and stockholders’ equity
Note: The balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.
See accompanying notes.
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended
Nine Months Ended
(In thousands, except per share amounts)
Sept. 30, 2001
Sept. 24, 2000
Domestic revenues:
Restaurant sales
107,753
108,542
336,888
330,342
Franchise royalties
12,446
11,432
37,934
34,169
Franchise and development fees
806
1,198
2,456
3,814
Commissary sales
97,426
83,112
284,472
254,598
Equipment and other sales
13,479
12,982
42,156
37,834
International revenues:
Royalties and franchise and development fees
1,573
1,278
4,259
3,764
Restaurant and commissary sales
6,590
6,259
19,075
18,866
Total revenues
240,073
224,803
727,240
683,387
Costs and expenses:
Domestic restaurant expenses:
Cost of sales
27,973
26,304
81,979
81,202
Salaries and benefits
31,392
30,506
99,179
91,477
Advertising and related costs
8,523
8,959
27,907
30,639
Occupancy costs
6,527
6,020
19,239
16,890
Other operating expenses
14,850
15,663
46,451
45,717
89,265
87,452
274,755
265,925
Domestic commissary, equipment and other expenses:
82,309
72,042
238,718
219,456
7,450
6,768
22,867
19,966
9,805
7,496
29,836
22,301
99,564
86,306
291,421
261,723
International operating expenses
5,432
5,411
16,274
15,684
General and administrative expenses
16,811
17,202
52,993
51,614
Special charge
1,017
Pre-opening and other general expenses (income)
1,672
(477
2,767
463
Depreciation and amortization
8,961
8,727
26,270
25,389
Total costs and expenses
221,705
204,621
664,480
621,815
Operating income
18,368
20,182
62,760
61,572
Other income (expense):
Investment income
479
685
1,583
1,569
Interest expense
(2,061
(2,380
(6,976
(4,854
Income before income taxes
16,786
18,487
57,367
58,287
Income tax expense
6,335
7,026
21,650
22,309
Net income
10,451
11,461
35,717
35,978
Basic earnings per common share
.46
.48
1.58
1.42
Earnings per common share - assuming dilution
1.57
1.41
Basic weighted average shares outstanding
22,574
23,866
22,625
25,331
Diluted weighted average shares oustanding
22,714
24,005
22,765
25,550
Note: Certain 2000 amounts have been reclassified to conform to the 2001 presentation.
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Total Stockholders'Equity
(Dollars in thousands)
Balance at December 26, 1999
305
189,920
(390
134,492
(32,194
292,133
Comprehensive income:
Unrealized loss on investments, net of tax of $295
(481
Other, net
232
Comprehensive income
35,729
Exercise of stock options
1
901
902
Tax benefit related to exercise of non-qualified stock options
200
Acquisition of treasury stock (6,327,000 shares)
(155,468
Common equity put options
(5,060
Other
91
Balance at September 24, 2000
306
191,112
(639
170,470
(192,722
168,527
Balance at December 31, 2000
Cumulative effect of accounting change, net of tax of $646 (see Note 2)
(1,053
Change in valuation of interest rate collar, net of tax of $1,282
(2,093
(170
32,401
2
5,633
5,635
368
Acquisition of treasury stock (657,000 shares)
(14,548
4,123
(239
Balance at September 30, 2001
Note: At September 30, 2001, the accumulated other comprehensive loss of $3,593,000 was comprised of an unrealized loss on the interest rate collar of $3,146,000 (net of tax) and unrealized foreign currency translation losses of $447,000.
Condensed Consolidated Statements of Cash Flows
September 24, 2000
Operating activities
Net cash provided by operating activities
68,426
60,460
Investing activities
Purchase of property and equipment
(26,311
(40,559
Proceeds from sale or maturity of investments
5,397
15,070
Loans to franchisees
(8,722
(9,368
Loan repayments from franchisees
4,225
6,372
Acquisitions
(1,306
(6,534
Proceeds from divestitures
6,482
257
839
Net cash used in investing activities
(19,978
(34,180
Financing activities
Net proceeds (repayments) from line of credit facility
(32,900
152,500
Payments on long-term debt
(915
(6,366
Proceeds from exercise of stock options
Acquisition of treasury stock
(81
470
Net cash used in financing activities
(42,809
(7,962
Effect of exchange rate changes on cash and cash equivalents
(318
Change in cash and cash equivalents
5,469
18,000
Cash and cash equivalents at beginning of period
3,698
Cash and cash equivalents at end of period
21,698
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2001, are not necessarily indicative of the results that may be expected for the year ended December 30, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) for the year ended December 31, 2000.
2. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities and its amendments, Statements No. 137 and 138 in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
In connection with the line of credit facility, in March 2000 Papa John’s entered into a no-fee interest rate collar with a notional amount of $100.0 million, a 30-day LIBOR rate range of 6.36% (floor) to 9.50% (ceiling) and an expiration date of March 2003. The purpose of the Collar is to provide a hedge against the effects of rising interest rates. The adoption of SFAS 133, as amended, on January 1, 2001, resulted in the cumulative effect of an accounting change of $1.7 million ($1.1 million after tax) in other comprehensive income. The Company recognized a charge of $3.4 million ($2.1million after tax) in other comprehensive income for the nine months ended September 30, 2001. The adoption of SFAS 133, as amended, had no impact on earnings.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets,effective for fiscal years beginning after December 15, 2001. With the adoption of SFAS 142, companies will no longer amortize goodwill and intangible assets with indefinite useful lives. Instead, goodwill and intangible assets with indefinite useful lives will be subject to an annual review for impairment. Other intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of.
As of September 30, 2001, our balance sheet included $49.5 million of goodwill, net of accumulated amortization of $7.8 million. We are in the process of evaluating the impact of the new accounting standard and anticipate a reduction of approximately $2.8 million in amortization expense beginning in 2002. Management does not expect the results of the impairment tests to have a material impact on the Company’s consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. SFAS 143 applies to legal obligations associated with the retirement (i.e., sale, abandonment or disposal in some manner) of a tangible long-lived asset that results from the acquisition, construction or development and the normal operation of a long-lived asset. This Statement establishes accounting standards for the recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
3. Common Equity Put Options
At September 30, 2001, 50,000 common equity put options sold by the Company were outstanding at an exercise price of $23.65. The $1.2 million total exercise price of the options was classified as a part of other long-term liabilities and the related offset was recorded in treasury stock, net of premiums received at September 30, 2001. The options expired out-of-the-money on October 5, 2001.
4. Reserve for Special Charge
During the fourth quarter of 2000, the Company incurred a $24.1 million special charge comprised of $20.2 million for the write-down of the carrying value of certain assets and the establishment of accrued liabilities for cash payments of $3.9 million. The accrued liabilities were primarily comprised of the future lease payments pertaining to the closure of certain restaurants and field offices, settlement of vendor litigation and severance of certain employees. As of September 30, 2001, the Company had paid approximately $2.0 million associated with these accrued liabilities. We expect to pay substantially all remaining exit cost liabilities, which are primarily comprised of future lease payments for closed restaurants, by mid 2002.
5. Comprehensive Income
Comprehensive income is comprised of the following:
Cumulative effect of accounting change, net of tax
Change in valuation of interest rate collar, net of tax
(1,113
Unrealized loss on investments, net of tax
21
25
(130
9,363
11,352
6. Segment Information
We have defined four reportable segments: domestic restaurants, domestic commissaries, domestic franchising and international operations.
The domestic restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues from retail sales of pizza, breadsticks, cheesesticks and soft drinks to the general public. The domestic commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants. The domestic franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and the collection of royalties from our domestic franchisees. The international operations segment consists of our Company-owned restaurants located in the United Kingdom, our Company-owned commissary operations located outside of the contiguous United States and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. All other business units that do not meet the quantitative thresholds for determining reportable segments consist of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of restaurant equipment, printing and promotional items, risk management services, and information systems and related services used in restaurant operations.
Segment information is as follows:
Revenues from external customers:
Domestic restaurants
Domestic commissaries
Domestic franchising
13,252
12,630
40,390
37,983
International
8,163
7,537
23,334
22,630
All others
Total revenues from external customers
Intersegment revenues:
31,887
30,819
96,237
92,879
152
39
118
588
559
1,712
1,759
4,110
3,949
12,513
12,146
Total intersegment revenues
36,737
35,366
110,769
106,902
Income (loss) before income taxes:
707
3,661
9,457
11,244
5,942
5,252
19,787
18,084
12,553
11,254
37,273
34,097
431
101
135
775
1,117
1,773
2,613
3,781
Unallocated corporate expenses (A)
(3,939
(3,571
(11,758
(9,675
Elimination of intersegment (profits) loss
(25
17
(140
(19
Total income before income taxes
Fixed assets:
159,895
65,072
11,378
Unallocated corporate assets
106,725
Accumulated depreciation and amortization
(100,261
Net fixed assets
(A) The increase in unallocated corporate expenses for the nine months ended September 30, 2001 is primarily due to an increase in net interest and other general expenses, partially offset by a decrease in the special charge (incurred in 2000) and a decrease in general and administrative expenses.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Restaurant Progression:
Papa John's Restaurant Progression:
U.S. Company-owned:
Beginning of period
639
605
631
573
Opened
3
13
15
29
Closed
(1
(7
(2
Acquired from franchisees
16
23
Sold to franchisees
(32
End of period
623
616
International Company-owned:
10
Converted (1)
5
6
U.S. franchised:
1,937
1,784
1,902
1,681
56
117
185
(22
(10
(48
Acquired from Company
19
32
7
Sold to Company
(16
(23
Reclassification (2)
(14
1,973
1,831
International franchised:
106
46
69
26
9
30
Opened - UK
4
14
116
Total restaurants — end of period
2,722
2,509
Perfect Pizza Restaurant Progression:
Company-owned:
12
(5
Franchised:
196
202
194
(6
192
Total restaurants - end of period
195
203
(1) Represents Perfect Pizza restaurants converted to Papa John's restaurants during the period.
(2) Represents the reclassification of 11 Hawaii units and 3 Alaska units opened prior to 2001 from domestic franchising to international franchising. Effective January 1, 2001, for restaurant unit purposes, "domestic" operations includes only those units located in the contiguous United States.
Results of Operations
Revenues. Total revenues increased 6.8% to $240.1 million for the three months ended September 30, 2001, from $224.8 million for the comparable period in 2000, and 6.4% to $727.2 million for the nine months ended September 30, 2001, from $683.4 million for the comparable period in 2000.
Domestic Company-owned restaurant sales were relatively flat at $107.8 million for the three months ended September 30, 2001, compared to $108.5 million for the same period in 2000, and increased 2.0% to $336.9 million for the nine months ended September 30, 2001, from $330.3 million for the comparable period in 2000. Sales were favorably impacted by an increase of 3.4% and 5.3% in the number of equivalent Company-owned Papa John’s restaurants opened during the three and nine months ended September 30, 2001, respectively, compared to the corresponding periods in the prior year. “Equivalent restaurants” represents the number of restaurants open at the beginning of a period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis. Company-owned restaurant sales were negatively impacted by a comparable sales decrease of 3.3% and 1.5% for the three and nine months ended September 30, 2001, respectively. Additionally, average sales decreased for units not in the comparable sales base.
Domestic franchise sales increased 10.2% to $319.8 million for the three months ended September 30, 2001, from $290.3 million for the same period in 2000, and 11.9% to $975.0 million for the nine months ended September 30, 2001, from $871.3 million for the comparable period in 2000. These increases primarily resulted from a 9.3% and 11.2% increase in the number of equivalent franchised domestic restaurants open during the three and nine months ended September 30, 2001, respectively, over the same periods in 2000. Comparable sales for franchised restaurants increased 1.3% and 2.0% for the three and nine months ended September 30, 2001, respectively. Domestic franchise royalties increased 8.9% to $12.4 million for the three months ended September 30, 2001, from $11.4 million for the comparable period in 2000, and increased 11.0% to $37.9 million for the nine months ended September 30, 2001, from $34.2 million for the same period in 2000. These increases resulted from the increase in domestic franchise sales previously described.
The comparable sales base and average weekly sales for the three and nine months ended September 30, 2001 for domestic Company-owned and domestic franchised restaurants consisted of the following:
Company
Franchise
Comparable sales base units
572
1,690
560
1,568
Comparable sales base percentage
93
%
87
90
82
Average weekly sales - comparable units
13,643
12,967
14,302
13,599
Average weekly sales - other units
10,614
10,305
10,235
10,481
Average weekly sales - all units
13,421
12,610
13,895
13,029
Domestic franchise and development fees decreased to $806,000 for the three months ended September 30, 2001, from $1.2 million for the same period in 2000, and decreased to $2.5 million for the nine months ended September 30, 2001, from $3.8 million for the comparable period in 2000. These decreases were due to 39 and 117 domestic franchise openings during the three and nine months ended September 30, 2001, compared to 56 and 185 opened during the same periods in 2000.
Domestic commissary, equipment and other sales increased 15.4% to $110.9 million for the three months ended September 30, 2001, from $96.1 million for the same period in 2000, and increased 11.7% to $326.6 million for the nine months ended September 30, 2001, from $292.4 million for the same period in 2000. The increases were primarily a result of the previously mentioned increase in equivalent units and sales. The increase in the third quarter revenue was also due to expanded insurance and other services provided to franchisees and increased commodity costs, primarily cheese.
International revenues, which include the Perfect Pizza operations, increased 12.6% and 10.7% for the three and nine months ended September 30, 2001, compared to the same periods in 2000 prior to the impact of unfavorable currency exchange rates. After the impact of exchange rates, international revenues increased 8.3% to $8.2 million for the three months ended September 30, 2001, from $7.5 million for the same period in 2000, and increased 3.1% to $23.3 million for the nine months ended September 30, 2001, from $22.6 million for the same period in 2000. These increases were due to an increase in the number of equivalent international franchise units open in 2001 compared to the 2000 period.
Costs and Expenses. The restaurant operating margin for domestic Company-owned units was 17.2% and 18.4% for the three and nine months ended September 30, 2001, compared to 19.4% and 19.5% for the same periods in 2000, consisting of the following differences:
• Cost of sales was 1.7% higher for the three-month period in 2001 compared to the same period in 2000 due to an increase in commodity costs, primarily cheese. Cost of sales was 0.3% lower for the nine-month period in 2001 compared to the same period in 2000 due primarily to lower cheese prices, partially offset by increases in certain other commodity costs.
• Salaries and benefits were 1.0% and 1.8% higher for the three and nine month periods in 2001, compared to the same periods in 2000 due primarily to higher wage rates.
• Advertising and related costs were 0.3% ($400,000) and 1.0% ($2.7 million) lower for the three and nine month periods in 2001, compared to the same periods in 2000 due to spending reductions.
• Occupancy costs were 0.5% and 0.6% higher for the three and nine month periods in 2001 compared to the same periods in 2000 due to higher utility and rental costs.
• Other operating expenses decreased 0.7% for the three months ended September 30, 2001, compared to the prior year due to improved cost controls. Other operating expenses as a percentage of sales were flat for the nine months ended September 30, 2001, compared to the prior year, as the impact of improved cost controls was offset by costs associated with a first quarter 2001 corporate operations team meeting previously held in the fourth quarter of 1999.
Domestic commissary, equipment and other margin was 10.2% during the third quarter for both 2001 and 2000, and 10.8% for the nine months ended September 30, 2001, compared to 10.5% for the same period in 2000. Cost of sales decreased to 74.2% for the three months ended September 30, 2001 from 75.0% in 2000, due to the impact of increased revenues from expanded services provided in 2001 with no corresponding cost of sales, partially offset by an increase in cheese costs. Cost of sales decreased to 73.1% for the nine months ended September 30, 2001 from 75.0% in 2000, primarily resulting from the impact of lower cheese costs and the impact of the 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 15.6% for the third quarter of 2001, from 14.8% in 2000, and increased to 16.1% for the nine months ended September 30, 2001, from 14.5% for the same period in 2000. The increases are primarily a result of costs related to expanded insurance and other services provided to franchisees in 2001.
International operating margin increased to 17.6% for the three-month period in 2001 from 13.5% in 2000 due primarily to an improvement in Company-owned restaurant operations in the United Kingdom. International operating margin decreased to 14.7% for the nine-month period in 2001 from 16.9% in 2000 due primarily to an increase in costs to support the conversion of Perfect Pizza restaurants to Papa John’s in the United Kingdom.
General and administrative expenses decreased to 7.0% of revenues in the third quarter of 2001, compared to 7.7% of revenues for the comparable period in 2000, due to the Company’s ongoing efforts to control costs during 2001 primarily through organizational efficiencies resulting from the Company’s February 2001 management restructuring. General and administrative expenses for the nine months ended September 30, 2001 were 7.1% of revenues compared to 7.6% of revenues in the same period of 2000, prior to the impact of management bonuses earned this year for exceeding earnings targets. After the impact of such bonuses, the 2001 general and administrative expenses represented 7.3% of revenues.
The special charge of $1.0 million for the nine months ended September 30, 2000, represents costs (principally legal costs) associated with the lawsuit filed against us by Pizza Hut, Inc. claiming that our "Better Ingredients. Better Pizza." slogan constituted false and deceptive advertising. On March 19, 2001, the United States Supreme Court denied Pizza Hut's Petition for Writ of Certiorari pertaining to this matter.
Pre-opening and other general expenses were $1.7 million in the third quarter of 2001, compared to a net gain of $477,000 for the same period in 2000, and $2.8 million for the first nine months of 2001, compared to $463,000 for the same period in 2000. Pre-opening costs of $21,000, relocation costs of $484,000 and net disposition-related costs of $881,000 were included in third quarter 2001 amount, compared to pre-opening costs of $386,000, no relocation costs and net disposition-related gains of $672,000 in the 2000 amount. Pre-opening costs of $177,000, relocation costs of $877,000 and net disposition-related losses of $308,000 were included in the nine months ended September 30, 2001, compared to pre-opening costs of $739,000, relocation costs of $663,000 and net disposition-related gains of $843,000 in the 2000 amount. The year-to-date 2001 amount also includes costs related to franchise support initiatives undertaken during 2001.
Depreciation and amortization was $9.0 million (3.7% of revenues) for the three months ended September 30, 2001, compared to $8.7 million (3.9% of revenues) for the same period in 2000, and $26.3 million (3.6% of revenues) for the nine months ended September 30, 2001, compared to $25.4 million (3.7% of revenues) for the same period in 2000. Goodwill amortization for the three and nine months ended September 30, 2001, was $704,000 and $2.1 million, compared to $776,000 and $2.3 million for the same periods in 2000.
Net interest expense was $1.6 million in the third quarter of 2001, compared to $1.7 million in 2000, and $5.4 million for the nine months ended September 30, 2001, compared to $3.3 million for the same period in 2000. The increase for the nine-month period is due to an increase in the debt incurred by the Company to fund our stock repurchase program. The average interest rate on our debt was 6.6% for the first nine months of 2001 compared to 7.0% for the same period in 2000.
The effective income tax rate was 37.7% for the three and nine months ended September 30, 2001, compared to 38.0% and 38.3% for the comparable periods in 2000, due primarily to effective state and local tax planning strategies.
Operating Income and Earnings per Common Share. Operating income for the three months ended September 30, 2001 was $18.4 million or 7.7% of total revenues, compared to $20.2 million or 9.0% of revenues in 2000, and increased to $62.8 million or 8.6% of total revenues for the nine months ended September 30, 2001, from $61.6 million or 9.0% of total revenues for the same period in 2000. The decline in 2001 operating income as a percentage of sales for the three and nine months ended September 30, 2001 was principally due to a decrease in restaurant operating margin and an increase in pre-opening and other general expenses as previously discussed.
Diluted earnings per share for the three months ended September 30, 2001 was $0.46 compared to $0.48 in 2000 and $1.57 for the nine months ended in 2001 compared to $1.41 in 2000. In December 1999, the Company began a share repurchase program for its common stock. Through September 30, 2001, a total of 8.3 million shares were repurchased under the program. The repurchase of the Company's common shares resulted in an increase in diluted earnings per share of approximately $0.03 for the three months ended September 30, 2001 and $0.10 for the nine months ended September 30, 2001, compared to the same periods for 2000.
Liquidity and Capital Resources
Cash flow from operations increased to $68.4 million for the nine months ended September 30, 2001, from $60.5 million for the comparable period in 2000, due primarily to changes in components of working capital. The principal changes in working capital were a reduction in inventories and an increase in accrued income taxes.
We require capital primarily for the development and acquisition of restaurants, the addition of new commissary and support services facilities and equipment, the enhancement of corporate systems and facilities, and the funding of franchisee loans. Additionally, we began a share repurchase program in December 1999. Share repurchases of $14.5 million, capital expenditures of $26.3 million, net payments on debt of $33.8 million, and net loans to franchisees of $4.5 million for the nine months ended September 30, 2001, were funded primarily by cash flow from operations, proceeds from stock option exercises, proceeds from restaurant divestitures, the liquidation of investments and available cash and cash equivalents.
The Board of Directors has authorized the repurchase of up to $275.0 million of the Company’s common stock through December 30, 2001, and $72.5 million was remaining for repurchase under this authorization as of September 30, 2001. During the nine months ended September 30, 2001, the Company repurchased 657,000 shares for $14.5 million at an average price of $22.14 per share. A total of 8.3 million shares have been repurchased for $202.5 million at an average price of $24.47 since the repurchase program started in 1999. The Company’s debt, which is primarily due to the stock repurchase program, was $112.8 million at September 30, 2001, compared to $146.6 million at December 31, 2000.
Capital resources available at September 30, 2001, include $11.6 million of cash and cash equivalents and approximately $87.9 million remaining borrowing capacity under a $200.0 million, three-year, unsecured revolving line of credit agreement expiring in March 2003. We expect to fund planned capital expenditures and additional discretionary repurchases of our common stock, if any, for the remainder of 2001 from these resources and operating cash flows.
Forward Looking Statements
Certain information contained in this quarterly report, particularly information regarding future financial performance and plans and objectives of management, is forward looking. Certain factors could cause actual results to differ materially from those expressed in forward-looking statements. These factors include, but are not limited to, our ability and the ability of our franchisees to obtain suitable locations and financing for new restaurant development; the hiring, training, and retention of management and other personnel; competition in the industry with respect to price, service, location and food quality; an increase in food cost due to seasonal fluctuations, weather or demand; changes in consumer tastes or demographic trends; changes in federal or state laws, such as increases in minimum wage; and risks inherent to international development, including operational or market risks associated with the planned conversion of Perfect Pizza restaurants to Papa John’s in the United Kingdom. See “Part I. Item 1. – Business Section - Forward Looking Statements” of the Form 10-K for the fiscal year ended December 31, 2000 for additional factors.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to claims and legal actions in the ordinary course of our business. We believe that all such claims and actions currently pending against us are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.
Item 6. Exhibits and Reports on Form 8-K.
a.
Exhibits
Exhibit
Number
Description
11
Calculation of Earnings per Share
99.1
Cautionary Statements. Exhibit 99.1 to our Annual Report on Form 10K for the fiscal year ended December 31, 2000 (Commission File No. 0-21660) is incorporated herein by reference.
b.
Current Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarterly period ended September 30, 2001.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company’s debt at September 30, 2001 is principally comprised of a $112.1 million outstanding principal balance on the $200.0 million unsecured revolving line of credit. The interest rate on the revolving line of credit is variable and is based on the London Interbank Offered Rate (LIBOR). The interest rate on the revolving line of credit was 3.26% as of September 30, 2001. In March 2000, we entered into a $100.0 million interest rate collar, which is effective until March 2003. The collar establishes a 6.36% floor and a 9.50% ceiling on the LIBOR base rate on a no-fee basis. As a result of the collar, the effective interest rate on the line of credit was 6.58% as of September 30, 2001. An increase in the interest rate of 100 basis points, which would be mitigated by the interest rate collar based on present interest rates, would increase interest expense approximately $121,000 annually.
Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations do not have a significant impact on the Company.
Cheese, which historically has represented 40% of food costs, is subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have entered into a purchasing arrangement with a third-party entity formed at the direction of the Franchise Advisory Council for the sole purpose of reducing cheese price volatility. Under this arrangement, we are able to purchase cheese at a fixed price per pound throughout the quarter, based in part on historical average cheese prices. Gains and losses incurred by the selling entity will be used as a factor in determining adjustments to the selling price over time. As a result, for any given quarter, the established price paid by the Company may be less than or greater than the prevailing average market price. Over the long term, we expect to purchase cheese at a price approximating the actual average market price, with less short-term (intra-quarter) volatility.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PAPA JOHN’S INTERNATIONAL, INC.
(Registrant)
Date: November 13, 2001
J. David Flanery, Vice President-Finance and Controller