UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý                                 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 26, 2006

 

OR

 

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)

 

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  o Accelerated filer   ý    Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes o             No  ý

 

At April 19, 2006, there were outstanding 32,596,301 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 – March 26, 2006 and December 25, 2005
	Consolidated Statements of Income – Three Months Ended March 26, 2006 and March 27, 2005
	Consolidated Statements of Stockholders’ Equity – Three Months Ended March 26, 2006 and March 27, 2005
	Consolidated Statements of Cash Flows – Three Months Ended March 26, 2006 and March 27, 2005
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits

 

1

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

(In thousands)		March 26, 2006			December 25, 2005
		(Unaudited)			(Note)
Assets
Current assets:
Cash and cash equivalents		$	17,595		$	22,098
Accounts receivable		21,501			21,300
Inventories		22,723			26,030
Prepaid expenses and other current assets		11,782			13,456
Deferred income taxes		6,607			7,085
Assets of discontinued operations held for sale		—			2,039
Total current assets		80,208			92,008
Investments		5,108			6,282
Net property and equipment		178,222			178,447
Notes receivable		10,540			7,667
Deferred income taxes		3,333			1,899
Goodwill		41,307			41,878
Other assets		15,596			13,772
Assets of discontinued operation held for sale		—			8,609
Total assets		$	334,314		$	350,562
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	29,389		$	28,937
Income and other taxes		24,058			16,862
Accrued expenses		46,518			49,634
Current portion of debt		12,450			6,100
Total current liabilities		112,415			101,533
Unearned franchise and development fees		6,980			7,256
Long-term debt, net of current portion		20,015			49,016
Other long-term liabilities		30,250			31,478
Stockholders’ equity:
Preferred stock		—			—
Common stock		335			331
Additional paid-in capital		169,795			160,999
Accumulated other comprehensive income (loss)		391			(290		)
Retained earnings		16,241			239
Treasury stock		(22,108		)	—
Total stockholders’ equity		164,654			161,279
Total liabilities and stockholders’ equity		$	334,314		$	350,562

 

Note:

The balance sheet at December 25, 2005 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

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended
(In thousands, except per share amounts)		March 26, 2006			March 27, 2005
Domestic revenues:
Company-owned restaurant sales		$	106,740		$	110,714
Variable interest entities restaurant sales		2,446			5,167
Franchise royalties		14,238			13,365
Franchise and development fees		588			703
Commissary sales		102,692			100,912
Other sales		10,870			13,392
International revenues:
Royalties and franchise and development fees		1,457			1,558
Restaurant and commissary sales		3,318			2,826
Total revenues		242,349			248,637
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales		20,878			25,240
Salaries and benefits		31,501			34,139
Advertising and related costs		9,192			9,611
Occupancy costs		6,162			6,600
Other operating expenses		13,803			14,066
Total domestic Company-owned restaurant expenses		81,536			89,656
Variable interest entities restaurant expenses		2,107			4,612
Domestic commissary and other expenses:
Cost of sales		83,543			82,428
Salaries and benefits		7,465			7,454
Other operating expenses		11,140			14,170
Total domestic commissary and other expenses		102,148			104,052
Loss (income) from the franchise cheese-purchasing program, net of minority interest		(4,576		)	1,009
International operating expenses		3,423			2,709
General and administrative expenses		24,244			21,297
Minority interests and other general expenses		1,698			1,917
Depreciation and amortization		6,561			7,344
Total costs and expenses		217,141			232,596
Operating income from continuing operations		25,208			16,041
Investment income		376			377
Interest expense		(801		)	(1,502		)
Income from continuing operations before income taxes		24,783			14,916
Income tax expense		9,170			5,519
Income from continuing operations		15,613			9,397
Income from discontinued operations, net of tax		389			568
Net income		$	16,002		$	9,965
Basic earnings per common share:
Income from continuing operations		$	0.47		$	0.28
Income from discontinued operations, net of tax		0.01			0.02
Basic earnings per common share		$	0.48		$	0.30
Earnings per common share assuming dilution
Income from continuing operations		$	0.46		$	0.28
Income from discontinued operations, net of tax		0.01			0.02
Earnings per common share - assuming dilution		$	0.47		$	0.30
Basic weighted average shares outstanding		33,122			33,178
Diluted weighted average shares outstanding		33,983			33,564

 

See accompanying notes.

 

3

 

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

										Accumulated
		Common					Additional			Other									Total
		Stock Shares		Common			Paid-In			Comprehensive			Retained			Treasury			Stockholders’
(In thousands)		Outstanding		Stock			Capital			Income (Loss)			Earnings			Stock			Equity
Balance at December 26, 2004		33,460		$	650		$	242,331		$	(555	)	$	317,142		$	(420,345	)	$	139,223
Comprehensive income:
Net income		—		—			—			—			9,965			—			9,965
Change in valuation of interest rate swap agreement, net of tax of $124		—		—			—			520			—			—			520
Other, net		—		—			—			(31		)	—			—			(31		)
Comprehensive income		10,454
Issuance of common stock from treasury stock		55		—			—			—			—			1,000			1,000
Exercise of stock options		372		4			5,221			—			—			—			5,225
Tax benefit related to exercise of non-qualified stock options		—		—			251			—			—			—			251
Acquisition of treasury stock		(807	)	—			—			—			—			(13,932		)	(13,932		)
Other		—		—			213			—			—			—			213
Balance at March 27, 2005		33,080		$	654		$	248,016		$	(66	)	$	327,107		$	(433,277	)	$	142,434
Balance at December 25, 2005		33,081		$	331		$	160,999		$	(290	)	$	239		$	—		$	161,279
Comprehensive income:
Net income		—		—			—			—			16,002			—			16,002
Change in valuation of interest rate swap agreements, net of tax of $359		—		—			—			611			—			—			611
Other, net		—		—			—			70			—			—			70
Comprehensive income		16,683
Exercise of stock options		437		4			6,604			—			—			—			6,608
Tax benefit related to exercise of non-qualified stock options		—		—			1,538			—			—			—			1,538
Acquisition of treasury stock		(716	)	—			—			—			—			(22,108		)	(22,108		)
Other		—		—			654			—			—			—			654
Balance at March 26, 2006		32,802		$	335		$	169,795		$	391		$	16,241		$	(22,108	)	$	164,654

 

At March 27, 2005, the accumulated other comprehensive loss of $66 was comprised of net unrealized loss on the interest rate

swap agreement of $444, offset by unrealized foreign currency translation gains of $378.

 

At March 26, 2006, the accumulated other comprehensive gain of $391 was comprised of net unrealized gain on the interest rate swap

agreement of $244, net unrealized gain on investments of $6 and unrealized foreign currency translation gains of $141.

 

See accompanying notes.

 

4

 

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended
(In thousands)		March 26, 2006			March 27, 2005
Operating activities
Income from continuing operations		$	15,613		$	9,397
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Restaurant closure, impairment and disposition losses		103			119
Provision for uncollectible accounts and notes receivable		1,085			593
Depreciation and amortization		6,561			7,344
Deferred income taxes		(1,335		)	(1,221		)
Stock-based compensation expense		698			229
Excess tax benefit related to exercise of non-qualified stock options		(2,586		)	—
Other		1,697			416
Changes in operating assets and liabilities:
Accounts receivable		(1,478		)	2,326
Inventories		3,307			710
Prepaid expenses and other current assets		1,625			2,229
Other assets and liabilities		(2,438		)	(593		)
Accounts payable		451			(9,019		)
Income and other taxes		7,196			5,054
Accrued expenses		(4,493		)	1,440
Unearned franchise and development fees		(276		)	(343		)
Net cash provided by operating activities from continuing operations		25,730			18,681
Operating cash flows from discontinued operations		414			892
Net cash provided by operating activities		26,144			19,573
Investing activities
Purchase of property and equipment		(6,094		)	(3,356		)
Proceeds from sale of property and equipment		17			5
Purchase of investments		(2,014		)	(3,443		)
Proceeds from sale or maturity of investments		3,129			3,680
Loans to franchisees and affiliates		(820		)	(1,260		)
Loan repayments from franchisees and affiliates		3,027			450
Acquisitions		(543		)	—
Proceeds from divestiture of discontinued operations		8,020			—
Net cash provided by (used in) investing activities		4,722			(3,924		)
Financing activities
Net repayments on line of credit facility		(29,000		)	(10,300		)
Net proceeds from short-term debt - variable interest entities		6,350			2,150
Proceeds from issuance of common stock		—			1,000
Excess tax benefit related to exercise of non-qualified stock options		2,586			—
Proceeds from exercise of stock options		6,608			5,225
Acquisition of common stock		(22,108		)	(13,932		)
Other		159			(331		)
Net cash used in financing activities		(35,405		)	(16,188		)
Effect of exchange rate changes on cash and cash equivalents		36			(54		)
Change in cash and cash equivalents		(4,503		)	(593		)
Cash and cash equivalents at beginning of period		22,098			14,698
Cash and cash equivalents at end of period		$	17,595		$	14,105

 

See accompanying notes.

 

5

 

Papa John’s International, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

March 26, 2006

 

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 March 26, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. 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 25, 2005.

 

2.              Two-for-One Common Stock Split

 

In December 2005, our Board of Directors approved a two-for-one stock split of our outstanding shares of common stock. The stock split was effected in the form of a stock dividend and entitled each shareholder of record at the close of business on December 23, 2005 to receive one additional share for every outstanding share of common stock held on the record date. The stock dividend was distributed on January 13, 2006 with approximately 16.5 million shares of common stock distributed. All per share and share amounts in the accompanying condensed consolidated financial statements and notes to the financial statements have been adjusted to reflect the stock split.

 

In conjunction with the stock split, we retired all shares held in treasury as of December 23, 2005.

 

3.              Discontinued Operations

 

In March 2006, the Company sold its Perfect Pizza operations, consisting of the franchise rights and leases related to the 109 franchised Perfect Pizza restaurants, as well as the distribution operations, with annual revenues in 2005 approximating $13.6 million. The total proceeds from the sale were approximately $13.0 million, with $8.0 million received in cash at closing, and the balance to be received under the terms of an interest-bearing note to be retired by the purchaser over the next five years. There was no gain or loss recognized in connection with the sale of Perfect Pizza.

 

6

 

We have classified our Perfect Pizza operations as discontinued operations in the accompanying financial statements. The following summarizes the results of the discontinued operations for the three months ended March 26, 2006 and March 27, 2005 (in thousands, except per share data):

 

		Three Months Ended
		March 26, 2006			March 27, 2005
Net sales		$	2,421		$	3,737
Operating expenses		1,449			2,326
G&A expenses		330			431
Other expenses		25			79
Income before income taxes		617			901
Income tax expense		228			333
Net income from discontinued operations		$	389		$	568
Basic earnings per common share		$	0.01		$	0.02
Earnings per common share - assuming dilution		$	0.01		$	0.02

 

4. Accounting for Variable Interest Entities

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46). In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 provides a framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.

 

In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

 

FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (“a variable interest holder”) is obligated to absorb a majority of the risk of loss from the VIEs activities, is entitled to receive a majority of the VIEs residual returns (if no party absorbs a majority of the VIEs losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIEs assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest.

 

We have a purchasing arrangement with BIBP Commodities, Inc. (“BIBP”), a special purpose entity formed at the direction of our Franchise Advisory Council in 1999, for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. BIBP is an independent, franchisee-owned corporation. BIBP purchases cheese at the market price and sells it to our distribution subsidiary, PJ Food Service, Inc. (“PJFS”), at a fixed quarterly price based in part upon historical average market prices. PJFS in turn sells cheese to Papa John’s restaurants (both Company-owned and franchised) at a set quarterly price. PJFS purchased $36.3 million and $37.9 million of cheese from BIBP for the three months ended March 26, 2006 and March 27, 2005, respectively.

 

7

 

As defined by FIN 46, we are the primary beneficiary of BIBP, a VIE, and we began consolidating the balance sheet of BIBP as of December 28, 2003. We recognize the operating losses generated by BIBP if BIBP’s shareholders’ equity is in a net deficit position. Further, we will recognize the subsequent operating income generated by BIBP up to the amount of any losses previously recognized. We recognized a pre-tax gain of $5.4 million ($3.4 million net of tax, or $0.10 per share) in the first quarter of 2006 and a pre-tax loss of $1.6 million ($1.0 million net of tax, or $0.03 per share) for the comparable period in 2005 from the consolidation of BIBP. The impact on future operating income from the consolidation of BIBP is expected to continue to be significant for any given reporting period due to the noted volatility of the cheese market, but is not expected to be cumulatively significant over time.

 

BIBP has an $18.0 million line of credit with a commercial bank, which is not guaranteed by Papa John’s. Papa John’s has agreed to provide additional funding in the form of a loan to BIBP. As of March 26, 2006, BIBP had outstanding borrowings of $12.5 million and a letter of credit of $3.0 million outstanding under the commercial line of credit facility and $4.9 million under the line of credit from Papa John’s (the $4.9 million outstanding balance under the line of credit is eliminated upon consolidation of the financial results of BIBP with Papa Johns).

 

In addition, Papa John’s has extended loans to certain franchisees. Under FIN 46, Papa John’s is deemed the primary beneficiary of three franchise entities as of March 26, 2006. These entities operate a total of 14 restaurants with annual revenues approximating $9.0 million. Our net loan balance receivable from these three entities is $1.4 million at March 26, 2006, with no further funding commitments. The consolidation of these franchise entities has had no significant impact on Papa John’s operating results and is not expected to have a significant impact in future periods.

 

The following table summarizes the balance sheets for our consolidated VIEs as of March 26, 2006 and December 25, 2005:

 

		March 26, 2006									December 25, 2005
(In thousands)		BIBP			Franchisees			Total			BIBP			Franchisees			Total
Assets:
Cash and cash equivalents		$	2,793		$	130		$	2,923		$	—		$	174		$	174
Accounts receivable		—			27			27			—			30			30
Accounts receivable - Papa John’s		5,228			—			5,228			5,484			—			5,484
Other assets		1,068			390			1,458			1,315			435			1,750
Net property and equipment		—			1,048			1,048			—			1,195			1,195
Goodwill		—			460			460			—			460			460
Deferred income taxes		5,159			—			5,159			7,153			—			7,153
Total assets		$	14,248		$	2,055		$	16,303		$	13,952		$	2,294		$	16,246
Liabilities and stockholders’ equity (deficit):
Accounts payable and accrued expenses		$	5,451		$	408		$	5,859		$	6,693		$	440		$	7,133
Short-term debt - third party		12,450			—			12,450			6,100			—			6,100
Short-term debt - Papa John’s		4,889			1,354			6,243			13,053			1,532			14,585
Total liabilities		$	22,790		$	1,762		$	24,552		$	25,846		$	1,972		$	27,818
Stockholders’ equity (deficit)		(8,542		)	293			(8,249		)	(11,894		)	322			(11,572		)
Total liabilities and stockholders’ equity (deficit)		$	14,248		$	2,055		$	16,303		$	13,952		$	2,294		$	16,246

 

8

 

5.              Debt

 

Our debt is comprised of the following (in thousands):

 

		March 26, 2006			December 25, 2005
Revolving line of credit		$	20,000		$	49,000
Debt associated with VIEs *		12,450			6,100
Other		15			16
Total debt		32,465			55,116
Less: current portion of debt		(12,450		)	(6,100		)
Long-term debt		$	20,015		$	49,016

 

*The VIEs’ third-party creditors do not have any recourse to Papa John’s.

 

6.              Calculation of Earnings Per Share

 

The calculations of basic earnings per common share from continuing operations and earnings per common share – assuming dilution from continuing operations are as follows (in thousands, except per share data):

 

		Three Months Ended
		March 26, 2006			March 27, 2005
Basic earnings per common share:
Income from continuing operations		$	15,613		$	9,397
Weighted average shares outstanding		33,122			33,178
Basic earnings per common share		$	0.47		$	0.28
Earnings per common share - assuming dilution:
Income from continuing operations		$	15,613		$	9,397
Weighted average shares outstanding		33,122			33,178
Dilutive effect of outstanding common stock options		861			386
Diluted weighted average shares outstanding		33,983			33,564
Earnings per common share - assuming dilution		$	0.46		$	0.28

 

7.              Stock-Based Compensation

 

We award stock options from time to time under the Papa John’s International, Inc. 1999 Team Member Stock Ownership Plan (the “1999 Plan”) and the Papa John’s International, Inc. 2003 Stock Option Plan for Non-Employee Directors (the “Directors Plan”) and other such agreements as may arise. Shares of common stock authorized for issuance under the 1999 Plan are approximately 6.3 million, which includes shares transferred in from the Papa John’s International, Inc. 1993 Stock Ownership Incentive Plan (the “1993 Plan”), which terminated on April 15, 2003 and 700,000 shares under the Directors Plan. Options granted prior to 2003 generally expire ten years from the date of grant and vest over one to five-year periods, except for certain options awarded under a previous, multi-year operations compensation program that vested immediately upon grant. The options granted in 2003 and 2004 under the 1999 Plan and the Directors Plan generally expire 30 months from the date of grant and vest over a 12-month period. Options granted in 2005 generally expire five years from the date of grant and vest over a 24-month period. There were no options granted during the first quarter of 2006.

 

9

 

Effective at the beginning of fiscal 2002, we elected to expense the cost of employee stock options in accordance with the fair value method contained in Statement of Financial Accounting Standards (SFAS) No. 123, Accounting and Disclosure of Stock-Based Compensation. Under SFAS No. 123, the fair value for options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. The election was effective as of the beginning of fiscal 2002 and applies to all stock options issued after the effective date.

 

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123. As required, we adopted the provisions of SFAS No. 123(R) effective at the beginning of our fiscal 2006, using the modified-prospective method. Upon adoption of SFAS No. 123(R), we elected to continue using the Black-Scholes option-pricing model. If we had adopted SFAS No. 123(R) in prior years, the impact on our 2005 operating income of that standard would have been minimal. SFAS No. 123(R) requires the benefit of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow in the accompanying consolidated statements of cash flows. Operating income and cash flow operating results for 2005 have not been restated for the adoption of SFAS No. 123(R).

 

During the three months ended March 26, 2006 and March 27, 2005, we recorded $440,000 and $144,000, respectively, in stock-based employee compensation expense, net of tax effects. At March 26, 2006, there was $2.9 million of unrecognized compensation cost related to nonvested option awards, of which the Company expects to recognize $2.3 million in 2006 and $629,000 in 2007.

 

During the three months ended March 26, 2006 and March 27, 2005, a total of 437,000 and 372,000 options were exercised, respectively. The total intrinsic value of the options exercised during the three months ended March 26, 2006 and March 27, 2005 was $7.4 million and $1.4 million respectively. Cash received upon the exercise of stock options was $6.6 million and $5.2 million during the three months ended March 26, 2006 and March 27, 2005 and the related tax benefits realized were $2.7 million and $500,000 during the corresponding periods.

 

The weighted average fair value per option at the date of grant for options granted in the first quarter of 2005 was $4.35 (no options were granted in the first quarter of 2006), as valued using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

		Three Months Ended
		March 27, 2005
Risk-free interest rate		4.0	%
Expected dividend yield		0.0	%
Expected volatility		0.30
Expected term (in years)		3.0

 

The estimated volatility is based on the historical volatility of our stock and other factors. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk free rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

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Information pertaining to option activity for the three months ended March 26, 2006 is as follows (number of options and aggregate intrinsic value in thousands):

 

		Number of Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
							(in years)
Outstanding-beginning of year		3,185		$	16.09
Granted		—		—
Exercised		437		15.09
Cancelled		20		18.08
Outstanding at March 26, 2006		2,728		$	16.23		3.10		$	45,312	*
Exercisable at March 26, 2006		1,397		$	14.83				$	25,160	*

 

* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of our stock was $32.84 at March 26, 2006.

 

The number, weighted average exercise price and weighted average remaining contractual life of options outstanding as of March 26, 2006, and the number and weighted average exercise price of options exercisable as of March 26, 2006 follow (number of options in thousands):

 

							Weighted			Weighted
		Range of			Number of		Average			Average
		Exercise Prices			Options		Exercise Price			Remaining Life
Outstanding options:		$	11.13 - $14.99		698		$	12.81		2.62
		15.00 - 17.99			1,610		16.76			3.22
		18.00 - 27.76			420		19.90			3.47
Total					2,728		$	16.23		3.10
Exercisable options:		$	11.13 - $14.99		691		$	12.81
		15.00 - 17.99			500		15.59
		18.00 - 27.76			206		19.77
Total					1,397		$	14.83

 

Effective in the second quarter of 2006, we granted approximately 525,000 options to employees and 80,000 options to non-employee directors with a five-year life, a two-year vesting period and an estimated fair value of $9.00 per option. In addition, we granted approximately 30,000 shares of performance-based restricted stock to employees with a performance period of three years.

 

8.              Segment Information

 

We have defined five reportable segments: domestic restaurants, domestic commissaries, domestic franchising, international operations and variable interest entities (VIEs).

 

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 principally from retail sales of pizza and side items, such as breadsticks, cheesesticks, chicken strips, chicken wings, dessert pizza, 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 principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants. The domestic franchising segment

 

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consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our domestic franchisees. The international operations segment principally consists of our Company-owned restaurants and distribution sales to franchised Papa John’s restaurants located in the United Kingdom 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. VIEs consist of entities in which we are the primary beneficiary, as defined in Note 4, and include BIBP and certain franchisees to which we have extended loans. 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 printing and promotional items, risk management services, and information systems and related services used in restaurant operations and certain partnership development activities.

 

Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes and eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the related profit in consolidation.

 

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.

 

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Our segment information is as follows:

 

		Three Months Ended
(In thousands)		March 26, 2006			March 27, 2005
Revenues from external customers:
Domestic Company-owned restaurants		$	106,740		$	110,714
Domestic commissaries		102,692			100,912
Domestic franchising		14,826			14,068
International		4,775			4,384
Variable interest entities (1)		2,446			5,167
All others		10,870			13,392
Total revenues from external customers		$	242,349		$	248,637
Intersegment revenues:
Domestic commissaries		$	27,884		$	32,384
Domestic franchising		314			298
International		132			44
Variable interest entities (1)		36,253			37,867
All others		2,947			3,092
Total intersegment revenues		$	67,530		$	73,685
Income (loss) from continuing operations before income taxes:
Domestic Company-owned restaurants (2)		$	9,301		$	4,557
Domestic commissaries (3)		7,353			6,952
Domestic franchising		13,014			12,807
International (4)		(2,341		)	(857		)
Variable interest entities		5,389			(1,595		)
All others		1,499			787
Unallocated corporate expenses (5)		(8,882		)	(7,678		)
Elimination of intersegment (profits) losses		(550		)	(57		)
Total income from continuing operations before income taxes		$	24,783		$	14,916
Property and equipment:
Domestic Company-owned restaurants		$	132,616
Domestic commissaries		72,896
International		4,255
Variable interest entities (6)		2,165
All others		15,693
Unallocated corporate assets		124,357
Accumulated depreciation and amortization		(173,760		)
Net property and equipment		$	178,222

 

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