SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001
OR
[ ] 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 (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) 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 X No
----- -----
At May 9, 2001, there were outstanding 22,442,808 shares of the
registrant's common stock, par value $.01 per share.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
April 1, 2001 and December 31, 2000 2
Condensed Consolidated Statements of
Income - Three Months Ended April 1,
2001 and March 26, 2000 3
Condensed Consolidated Statements of
Stockholders' Equity - Three Months
Ended
April 1, 2001 and March 26, 2000 4
Condensed Consolidated Statements of Cash
Flows - Three Months Ended April 1, 2001
and March 26, 2000 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 13
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) APRIL 1, 2001 DECEMBER 31, 2000
- ----------------------------------------------------------------------------------
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,372 $ 6,141
Investments - 5,745
Accounts receivable 24,682 23,064
Inventories 17,037 18,321
Prepaid expenses and other current
assets 9,226 7,422
Deferred income taxes 4,972 4,822
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 64,289 65,515
Net property and equipment 247,042 245,874
Notes receivable from franchisees 18,527 16,675
Intangibles 48,608 49,394
Other assets 16,421 16,527
Deferred Income taxes 2,181 1,673
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 397,068 $395,658
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,898 $ 23,586
Accrued expenses 52,723 45,266
Current portion of debt 569 897
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 73,190 69,749
Unearned franchise and development fees 4,440 6,033
Long-term debt, net of current portion 144,485 145,710
Other long-term liabilities 8,470 7,845
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 308 307
Additional paid-in capital 193,964 193,029
Accumulated other comprehensive loss (2,460) (277)
Retained earnings 179,069 166,316
Treasury stock (204,398) (193,054)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 166,483 166,321
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 397,068 $ 395,658
================================================================================
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.
2
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
(In thousands, except per share amounts) APRIL 1, 2001 MARCH 26, 2000
- ---------------------------------------------------------------------------------
DOMESTIC REVENUES:
Restaurant sales $117,357 $110,155
Franchise royalties 13,109 11,122
Franchise and development fees 810 1,351
Commissary sales 95,385 84,788
Equipment and other sales 14,063 12,222
INTERNATIONAL REVENUES:
Royalties and franchise and development fees 1,349 1,179
Restaurant and commissary sales 5,933 6,232
- ------------------------------------------------------------------------------
TOTAL REVENUES 248,006 227,049
COSTS AND EXPENSES:
Domestic restaurant expenses:
Cost of sales 27,677 27,474
Salaries and benefits 35,118 30,517
Advertising and related costs 9,484 10,585
Occupancy costs 6,347 5,411
Other operating expenses 16,594 15,083
- ------------------------------------------------------------------------------
95,220 89,070
Domestic commissary, equipment and other expenses:
Cost of sales 79,426 73,021
Salaries and benefits 7,883 6,481
Other operating expenses 9,787 7,345
- ------------------------------------------------------------------------------
97,096 86,847
International operating expenses 5,251 5,147
General and administrative expenses 19,327 17,408
Special charge - 889
Pre-opening and other general expenses 133 218
Depreciation and amortization 8,527 8,223
- ------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 225,554 207,802
- ------------------------------------------------------------------------------
OPERATING INCOME 22,452 19,247
Other income (expense):
Investment-income 583 292
Interest expense (2,551) (804)
- ------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 20,484 18,735
Income tax expense 7,731 7,194
- ------------------------------------------------------------------------------
NET INCOME $ 12,753 $ 11,541
==============================================================================
Basic earnings per common share $ .56 $ .43
==============================================================================
Earnings per common share - assuming dilution $ .56 $ .43
==============================================================================
Basic weighted average shares outstanding 22,807 26,851
==============================================================================
Diluted weighted average shares oustanding 22,901 27,104
==============================================================================
Note: Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
SEE ACCOMPANYING NOTES.
3
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
(Dollars in thousands) STOCK CAPITAL INCOME (LOSS) EARNINGS STOCK EQUITY
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 26, 1999 $ 305 $ 189,920 $ (390) $ 134,492 $(32,194) $ 292,133
Comprehensive income:
Net income - - - 11,541 - 11,541
Unrealized loss on investments,
net of tax of $286 - - (492) - - (492)
Other, net 402 402
---------------
Comprehensive income 11,451
Exercise of stock options 1 350 - - - 351
Tax benefit related to exercise of
non-qualified stock options - 81 - - - 81
Acquisition of treasury stock
(3,444,500 shares) - - - - (87,370) (87,370)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 26, 2000 $ 306 $ 190,351 $ (480) $146,033 $(119,564) $ 216,646
==================================================================================================================
BALANCE AT DECEMBER 31, 2000 $ 307 $ 193,029 $ (277) $166,316 $(193,054) $ 166,321
Comprehensive income:
Net income - - - 12,753 - 12,753
Cumulative effect of accounting
change, net of tax of $646
(see Note 2) - - (1,053) - - (1,053)
Change in valuation of interest
rate collar, net of tax of $593 - - (969) - - (969)
Other, net - - (161) - - (161)
---------------
Comprehensive income 10,570
Exercise of stock options 1 1,119 - - - 1,120
Tax benefit related to exercise of
non-qualified stock options - 94 - - - 94
Acquisition of treasury stock
(637,000 shares) - - - - (14,093) (14,093)
Common equity put options - - - - 2,749 2,749
Other - (278) - - - (278)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT APRIL 1, 2001 $ 308 $ 193,964 $ (2,460) $ 179,069 $ (204,398) $166,483
==================================================================================================================
(NOTE)
Note: At April 1, 2001, the accumulated other comprehensive loss of $2,460,000
was comprised of an unrealized loss on interest rate collar of
$2,022,000 (net of tax) and unrealized foreign currency translation
losses of $438,000 (net of tax).
SEE ACCOMPANYING NOTES.
4
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
(In thousands) APRIL 1, 2001 MARCH 26, 2000
- -------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 21,267 $ 25,643
INVESTING ACTIVITIES
Purchase of property and equipment (9,892) (14,559)
Proceeds from sale or maturity of investments 5,397 15,014
Loans to franchisees (3,902) (3,693)
Loan repayments from franchisees 1,260 587
Acquisitions - (6,022)
Proceeds from divestitures 3,010 -
Other 68 410
- ------------------------------------------------------------------------------------
Net cash used in investing activities (4,059) (8,263)
FINANCING ACTIVITIES
Net proceeds (repayments) from line of credit facility (1,000) 83,500
Payments on long-term debt (565) (5,443)
Proceeds from exercise of stock options 1,120 351
Acquisition of treasury stock (14,093) (87,370)
Other (278) (186)
- ------------------------------------------------------------------------------------
Net cash used in financing activities (14,816) (9,148)
Effect of exchange rate changes on cash and cash
equivalents (161) (34)
- ------------------------------------------------------------------------------------
Change in cash and cash equivalents 2,231 8,198
Cash and cash equivalents at beginning of period 6,141 3,698
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,372 $ 11,896
====================================================================================
Note: Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
SEE ACCOMPANYING NOTES.
5
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 1, 2001
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 months ended April 1, 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 PRONOUNCEMENT
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 ("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 $1.6 million ($969,000 after tax) in other
comprehensive income for the three months ended April 1, 2001. The adoption of
SFAS 133, as amended, had no impact on earnings.
3. COMMON EQUITY PUT OPTIONS
At April 1, 2001, 125,000 common equity put options sold by the Company were
outstanding. If exercised, the put options would require the Company to purchase
125,000 shares of its common stock at an exercise price of $19.50. The $2.4
million total exercise price of the options outstanding was classified as a part
of other long-term liabilities at April 1, 2001, and the related offset was
recorded in treasury stock, net of premiums received. The options expire in July
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 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 April
1, 2001, the Company had paid approximately $1.4 million associated with these
costs. We expect to pay a majority of the remaining exit cost liabilities, which
are primarily comprised of future lease payments for closed restaurants and
field offices, during 2001.
6
5. 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.
7
5. SEGMENT INFORMATION (CONTINUED)
THREE MONTHS ENDED
(In thousands) APRIL 1, 2001 MARCH 26, 2000
- --------------------------------------------------------------
REVENUES FROM EXTERNAL CUSTOMERS:
Domestic restaurants $117,357 $110,155
Domestic commissaries 95,385 84,788
Domestic franchising 13,919 12,473
International 7,282 7,411
All others 14,063 12,222
- ------------------------------------------------------------
TOTAL REVENUES FROM EXTERNAL
CUSTOMERS $248,006 $227,049
============================================================
INTERSEGMENT REVENUES:
Domestic commissaries $ 33,641 $ 29,697
Domestic franchising - 40
International 545 568
All others 4,953 4,000
- ------------------------------------------------------------
TOTAL INTERSEGMENT REVENUES $ 39,139 $ 34,305
============================================================
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic restaurants $ 5,018 $ 4,008
Domestic commissaries 7,278 5,977
Domestic franchising 12,402 11,235
International (290) 302
All others 788 982
Unallocated corporate expenses (4,646) (3,730)
Elimination of intersegment
profits (66) (39)
- ------------------------------------------------------------
TOTAL INCOME BEFORE INCOME TAXES $ 20,484 $ 18,735
============================================================
FIXED ASSETS:
Domestic restaurants $156,973
Domestic commissaries 63,658
International 4,451
All others 11,315
Unallocated corporate assets 97,928
Accumulated depreciation and
amortization (87,283)
- ---------------------------------------------
NET FIXED ASSETS $247,042
=============================================
Note: Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESTAURANT PROGRESSION:
THREE MONTHS ENDED
APRIL 1, 2001 MARCH 26, 2000
------------- --------------
PAPA JOHN'S RESTAURANT PROGRESSION:
U.S. Company-owned:
Beginning of period 631 573
Opened 6 5
Closed (3) -
Acquired from franchisees 10 20
Sold to franchisees (12) (5)
---------------------------
End of period 632 593
International Company-owned:
Beginning of period 10 -
---------------------------
End of period 10 -
U.S. franchised:
Beginning of period 1,902 1,681
Opened 36 62
Closed (12) (6)
Sold to Company (10) (20)
Acquired from Company 12 5
Reclassification (1) (14) -
---------------------------
End of period 1,914 1,722
International franchised:
Beginning of period 69 26
Opened 7 7
Opened - UK 2 -
Converted 5 -
Reclassification (1) 14 -
---------------------------
End of period 97 33
---------------------------
Total restaurants-- end of period 2,653 2,348
===========================
PERFECT PIZZA RESTAURANT PROGRESSION:
Company-owned
Beginning of period 3 12
Opened 1 -
Closed - (1)
Sold to franchisees (1) -
---------------------------
End of period 3 11
Franchised
Beginning of period 202 194
Acquired from Company 1 -
Converted (5) -
---------------------------
End of period 198 194
---------------------------
Total restaurants - end of period 201 205
===========================
(1) 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.
9
RESULTS OF OPERATIONS
REVENUES. Total revenues increased 9.2% to $248.0 million in 2001, from $227.0
million in 2000.
During the first quarter of 2001, domestic company-owned restaurant sales
increased 6.5% to $117.4 million from $110.2 million for the same period in
2000, primarily resulting from a 5.4% increase in the number of equivalent
company-owned domestic restaurants open in the 2001 period compared to the 2000
period. "Equivalent restaurants" represents the number of restaurants open at
the beginning of a period, adjusted for restaurants opened or acquired during
the period on a weighted average basis. Also, sales increased 3.5% over 2000 for
company-owned restaurants open throughout both periods. Comparable sales for the
first quarter benefited from the timing of the Company's national Anniversary
promotion; the promotion ran during the first quarter of 2001 (January and
February) and in the second quarter of 2000 (April).
Domestic franchise sales increased 16.8% to $332.2 million from $284.3 million
for the same period in 2000, primarily resulting from a 13.8% increase in the
number of equivalent franchised domestic restaurants open in the 2001 period
compared to the 2000 period, coupled with a 4.8% comparable sales increase for
the quarter. Domestic franchise royalties increased 17.9% to $13.1 million in
the first quarter of 2001 from $11.1 million for the same period in 2000,
resulting from the increase in domestic franchise sales previously described.
The first quarter comparable sales base for domestic company-owned restaurants
consisted of 562 units, or 90.9% of total equivalent units, and the domestic
franchise base consisted of 1,596 units or 84.1% of total equivalent units.
Average weekly sales for restaurants included in the corporate comparable base
were $15,007, while other company-owned units averaged $10,581 for an overall
average of $14,605. Average weekly sales for the restaurants included in the
franchise comparable base were $14,000, while other franchise units averaged
$10,650 for an overall average of $13,469.
Domestic franchise and development fees were $810,000 compared to $1.4 million
for the same period in 2000 due to 36 domestic franchise openings in 2001
compared to 62 in 2000.
Domestic commissary and equipment and other sales increased 12.8% to $109.4
million in the first quarter of 2001 from $97.0 million for the same period in
2000, primarily resulting from the franchised equivalent unit and sales growth
previously noted, partially offset by the impact of lower cheese prices.
International revenues, which include the Perfect Pizza operations, increased
8.1% during the quarter compared to the same period in 2000 prior to the impact
of unfavorable currency exchange rates. After the impact of exchange rate
changes, international revenues were $7.3 million in the quarter compared to
$7.4 million for the same period in 2000.
COSTS AND EXPENSES. The restaurant operating margin at domestic company-owned
units was 18.9% during the first quarter of 2001 compared to 19.1% for the same
period in 2000, consisting of the following differences:
o Cost of sales was 1.4% lower in 2001 due primarily to favorable cheese
prices, partially offset by increases in certain other commodity costs.
o Salaries and benefits were 2.2% higher in 2001 due primarily to higher wage
rates and the impact of increased staffing for our national Anniversary
promotion held during the first quarter of 2001 (versus the second quarter of
2000).
o Advertising and related costs were 1.5% lower ($1.1 million reduction) in
2001 as advertising expenditures were undertaken more efficiently during the
quarter.
o Occupancy costs were 0.5% higher in 2001 due primarily to higher utility
costs.
o Other operating expenses were 0.4% higher in 2001 as we incurred costs in the
first quarter of 2001 associated with a corporate operations team meeting,
which was previously held during the fourth quarter of 1999.
Domestic commissary, equipment and other margin was 11.3% in the first quarter
2001 compared to 10.5% for the same period in 2000. Cost of sales was 72.6% in
2001 compared to 75.3% in 2000, primarily resulting from the impact of lower
cheese costs. Salaries and other operating costs as a percentage of sales
increased from 14.3% in 2000 to 16.1% in 2001 primarily as a result of expanded
services provided to franchisees and corporate restaurants.
International operating expenses of $5.3 million in 2001 were substantially flat
over 2000.
10
General and administrative expenses decreased to 7.4% of revenues in the first
quarter of 2001 compared to 7.7% of revenues in the comparable period in 2000,
prior to the impact of management bonuses earned this year for exceeding the
first quarter earnings target. After the impact of such bonuses, first quarter
general and administrative expenses represented 7.8% of revenues.
The special charge of $889,000 in 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 was 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 $133,000 in the first quarter of
2001 compared to $218,000 for the comparable period in 2000. Pre-opening costs
of $60,000 and relocation costs of $151,000 were included in the 2001 amount as
compared to pre-opening costs of $34,000 and relocation costs of $329,000 in the
2000 amount. The net gain associated with the first quarter 2001 sale of 12
domestic company-owned restaurants to franchisees was substantially offset by
additional franchisee support initiatives undertaken during the quarter.
Depreciation and amortization was $8.5 million (3.4% of revenues) for 2001 as
compared to $8.2 million (3.6% of revenues) in 2000, including goodwill
amortization of $703,000 for 2001 and $771,000 for 2000.
Net interest expense was $2.0 million in the first quarter of 2001 compared to
$512,000 in 2000, due to an increase in the debt incurred by the Company to fund
our stock repurchase program. The effective income tax rate was 37.7% in the
first quarter of 2001 compared to 38.4% for the comparable period 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 April 1, 2001 was $22.5 million, or 9.1% of total revenues, as
compared to $19.2 million or 8.5% of revenues. Excluding the special charge in
2000, operating income in 2000 was 8.9% of revenues. The decline in 2001
operating income as a percentage of sales, as compared to 2000, was principally
due to a decrease in the restaurant operating margin and the increase in general
and administrative expenses.
Diluted earnings per share for the three months ended April 1, 2001 was $0.56
compared to $0.43 in 2000 ($0.45 excluding the special charge). In December
1999, the Company began a share repurchase program of its common stock. Through
April 1, 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 $.05 for the three months ended April 1,
2001 in comparison to the same period for 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations decreased to $21.3 million for the three months ended
April 1, 2001, from $25.6 million for the comparable period in 2000, due
primarily to changes in components of working capital.
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 $14.1 million, capital expenditures of $9.9 million,
net payments on debt of $1.6 million, and net loans to franchisees of $2.6
million for the three months ended April 1, 2001, were funded primarily by cash
flow from operations, 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 $73.0 million was
remaining for repurchase under this authorization as of April 1, 2001. During
the first three months of 2001, the Company repurchased 637,000 shares for $14.1
million at an average price of $22.12 per share. A total of 8.3 million shares
have been repurchased for $202.0 million at an average price of $24.47 since the
repurchase program started in 1999.
The Company's debt at April 1, 2001 was $145.1 million compared to $146.6
million at December 31, 2000. Earnings before interest, taxes, depreciation and
amortization (EBITDA), excluding the special charge, increased
11
9.2% to $31.0 million for the three months ended April 1, 2001, compared to
$28.4 million for the same period in the prior year.
Capital resources available at April 1, 2001, include $8.4 million of cash and
cash equivalents and $56.0 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.
12
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.
1. We filed a Current Report on Form 8-K dated February 8, 2001
attaching a press release dated February 7, 2001 announcing a
restructuring of our management team and revised guidance on the
special charge taken in the fourth quarter ending December 31, 2000.
The press release also announced guidance on projected earnings per
share for 2001.
2. We filed a Current Report on Form 8-K dated March 12, 2001 attaching
a press release dated February 27, 2001 announcing fourth quarter
and full-year 2000 results and an increase in the stock repurchase
authorization to $275 million. The press release also announced
additional guidance on projected earnings per share for 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt at April 1, 2001 is principally comprised of a $144.0 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 weighted average
interest rate on the revolving line of credit was 5.99% as of April 1, 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. An increase in the interest
rate of 100 basis points, which would be partially mitigated by the interest
rate collar based on present interest rates, would increase interest expense
approximately $440,000 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. Ultimately, we will purchase cheese at a price
approximating the actual average market price, but with less short-term
volatility.
13
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: May 14, 2001 /s/ J. David Flanery
-------------------------
J. David Flanery, Vice
President-Finance and
Controller
14
EXHIBIT 11- Calculation of Earnings per Share
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) APRIL 1, 2001 MARCH 26, 2000
- -----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net Income $ 12,753 $ 11,541
Weighted average shares outstanding 22,807 26,851
-----------------------------------
Basic earnings per share $ 0.56 $ 0.43
===================================
DILUTED EARNINGS PER SHARE:
Net Income $ 12,753 $ 11,541
Weighted average shares outstanding 22,807 26,851
Dilutive effect of outstanding common stock options 94 253
-----------------------------------
Diluted weighted average shares outstanding 22,901 27,104
-----------------------------------
Diluted earnings per share $ 0.56 $ 0.43
===================================
