Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 28, 1997
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
incorporation or organization) Identification Number)
11492 Bluegrass Parkway, Suite 175
Louisville, Kentucky 40299-2370
(Address of principal executive offices)
(502) 266-5200
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
(Name of each exchange
(Title of Each Class) on which registered)
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value The Nasdaq Stock Market
- --------------------------------------------------------------------------------
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 17, 1998, there were 29,199,131 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the shares of
Registrant's Common Stock held by non-affiliates of the Registrant at such date
was $785,395,747 based on the last sale price of the Common Stock on March 17,
1998 as reported by The Nasdaq Stock Market. For purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III are incorporated by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders
to be held May 21, 1998.
TABLE OF CONTENTS
-----------------
PART I
- ------
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
- -------
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Consolidated Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
- --------
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
- -------
Item 14. Exhibits, Consolidated Financial Statement
Schedules and Reports on Form 8-K
1
PART I
Item 1. Business
General
Papa John's International, Inc. (the "Company") operates and franchises
pizza delivery and carry-out restaurants under the trademark "Papa John's" in 41
states and the District of Columbia, encompassing substantially all of the
continental United States except the Northwest and upper Northeast region. The
first Company-owned restaurant opened in 1985 and the first franchised
restaurant opened in 1986. At December 28, 1997, there were 1,517 Papa John's
restaurants in operation, consisting of 401 Company-owned and 1,116 franchised
restaurants.
Strategy
The Company's objective is to become the leading chain of pizza delivery
restaurants in each of its targeted markets. To accomplish this objective, the
Company has developed a strategy designed to achieve high levels of customer
satisfaction and repeat business, as well as to establish recognition and
acceptance of the Papa John's brand. The key elements of the Company's strategy
include:
Focused, High Quality Menu. Papa John's restaurants offer a focused menu of
high quality pizza, breadsticks and cheesesticks. Papa John's original crust
pizza is prepared using fresh dough (not frozen), 100% real mozzarella cheese,
pizza sauce made from vine-ripened, fresh-packed tomatoes (not concentrate) and
proprietary mix of savory spices, and a choice of high quality meat and
vegetable toppings in generous portions. A thin crust pizza, introduced in 1996,
is made with a prepared crust and the same high quality toppings as Papa John's
original crust pizza. The Company believes its focused menu creates a strong
identity in the marketplace and simplifies operations.
Efficient Operating System. The Company believes that its operating and
distribution systems, restaurant layout and designated delivery areas result in
lower restaurant operating costs, improved food quality and superior customer
service. The Company's commissary system takes advantage of volume purchasing of
food and supplies, and provides consistency and efficiencies of scale in dough
production. This eliminates the need for each restaurant to order food from
multiple vendors and commit substantial labor and other resources to dough
preparation. Because Papa John's restaurants have a focused menu and specialize
in delivery and carry-out services, each team member can concentrate on a well-
defined function in preparing and delivering the customer's order.
Commitment to Employee Training and Development. The Company is committed
to the development and motivation of its team members through on-going training
programs, incentive compensation and opportunities for advancement. Team member
training programs for the Company and its franchisees are conducted at training
centers across the United States. The Company offers financial and stock
incentives to restaurant team members at various levels based on the achievement
of performance goals. The Company's growth also provides significant
opportunities for advancement. The Company believes these factors create an
entrepreneurial spirit throughout the organization, resulting in a positive work
environment and motivated, customer-oriented team members.
Targeted, Cost-Effective Marketing. The Company's restaurant-level
marketing programs target the delivery area of each restaurant, making extensive
use of distinctive print materials in direct mail and store-to-door couponing.
Local marketing efforts also include a variety of community-oriented activities
with schools, sports teams and other organizations. In markets in which the
Company or its franchisees have a significant presence,
2
local marketing efforts are supplemented with radio and television advertising.
The first national television commercial aired in the Fall of 1997.
Franchise System. The Company is committed to developing a strong franchise
system by attracting experienced operators, expanding in a controlled manner and
ensuring that each franchisee adheres to the Company's high standards. In 1997,
the Company began developing an international franchise department and expects
to open the first franchised restaurants outside the U.S. in late 1998 or 1999.
The Company seeks to attract franchisees with experience in multi-unit
restaurant operations and with the financial resources and management capability
to open multiple locations. To ensure consistent food quality, each domestic
franchisee is required to purchase dough and spice mix from the Company and all
other supplies either from the Company or its approved suppliers. Commissaries
outside the U.S. may be operated by franchisees pursuant to license agreements.
The Company devotes significant resources to provide its franchisees with
assistance in restaurant operations, team member training, marketing, site
selection and restaurant design.
Unit Economics
The Company believes its unit economics are exceptional. The 302 Company-
owned restaurants that were open throughout the entire 1997 fiscal year
generated average sales of $713,000, average cash flow (operating income plus
depreciation) of $142,000 and average restaurant operating income of $119,000
(or 16.7% of average sales). A significant number of these restaurants were
operating in newer markets. Historically, in the initial months of operations,
particularly in new markets, sales have been lower and costs higher than for
mature restaurants. However, recent trends indicate that new markets are opening
with higher than historical sales volumes.
The average cash investment for the 76 Company-owned restaurants opened
during the 1997 fiscal year, exclusive of land and pre-opening costs, was
approximately $257,000. The Company expects the average cash investment for
restaurants to be opened in 1998 to approximate $260,000.
Expansion
A total of 364 restaurants were opened during 1997, consisting of 76
Company-owned and 288 franchised restaurants. The Company plans to open
approximately 70 restaurants in 1998 and expects its franchisees to open
approximately 300 restaurants in 1998. Newer market expansion is planned for the
Upper Northeast Coast, West Coast and Rocky Mountain regions, in addition to
building out existing markets throughout the country. As part of its growth
strategy, the Company will continue to consider acquiring restaurants from its
franchisees. The Company acquired 23 restaurants from its franchisees during the
1997 fiscal year. See "Note 3" of "Notes to Consolidated Financial Statements."
The ability of the Company and its franchisees to open new restaurants is
affected by a number of factors, many of which are beyond the control of the
Company and its franchisees. These factors include, among other things,
selection and availability of suitable restaurant and commissary locations,
negotiation of suitable lease or financing terms, constraints on permitting and
construction of restaurants and the hiring, training and retention of management
and other personnel. Accordingly, there can be no assurance that the Company or
its franchisees will be able to meet planned growth targets or open restaurants
in markets now targeted for expansion.
The Company's expansion strategy is to cluster restaurants in targeted
markets, thereby increasing consumer awareness and enabling the Company to take
advantage of operational, distribution and advertising efficiencies. The
Company's experience in developing markets indicates that market penetration
through the opening of multiple restaurants within a particular market results
in increased average restaurant sales in that market. The Company has co-
developed markets with franchisees or divided markets among franchisees, and
will
3
continue to utilize market co-development in the future. In determining which
new markets to develop, the Company considers many factors, including the size
of the market, demographics and population trends, competition, and availability
and costs of real estate. Before entering a new market, the Company analyzes
detailed information of these factors and each market is toured and evaluated by
senior management.
Menu
Papa John's restaurants offer a focused menu of high quality pizza,
breadsticks and cheesesticks, as well as canned soft drinks. Papa John's
original crust pizza is prepared using fresh dough (not frozen). The Company's
thin crust pizza is made with a prepared crust which simplifies store-level
operations. All Papa John's pizzas are made from high protein wheat flour, 100%
real mozzarella cheese, pizza sauce made with vine-ripened, fresh-packed
tomatoes (not concentrate) and a proprietary mix of savory spices, and a choice
of high quality meat and vegetable toppings in generous portions. Fresh onions
and green peppers are purchased from local produce suppliers. Each original
crust pizza is served with a container of Papa John's special garlic sauce and
two pepperoncinis, and each thin crust pizza is served with a container of
special seasonings and two pepperoncinis. The Company believes its limited menu
helps create a strong identity among consumers and simplifies operations,
resulting in lower restaurant operating costs, improved food quality and
superior customer service.
Restaurant Design and Site Selection
The exterior of most Papa John's restaurants is characterized by backlit
awnings, neon window designs and other visible signage. A typical Papa John's
restaurant ranges from 1,200 to 1,500 square feet and is designed to facilitate
a smooth flow of food orders through the restaurant. The layout includes
specific areas for order taking, pizza preparation and routing, resulting in
simplified operations, lower training and labor costs, increased efficiency and
improved consistency and quality of food products. The typical interior of a
Papa John's restaurant has a vibrant red and white color scheme with green
striping, and includes a bright menu board, custom counters and a carry-out
customer area. The counters are designed to allow customers to watch the team
members slap out the dough and put sauce and toppings on pizzas.
The Company considers the location of a restaurant to be important and
therefore devotes significant resources to the investigation and evaluation of
potential sites. The site selection process includes trade area demographics,
target population density, household income levels and competitive factors. A
member of the Company's development team inspects each potential Company-owned
or franchised restaurant location and the surrounding market before a site is
approved. Papa John's restaurants are typically located in strip shopping
centers or free-standing buildings that provide visibility, curb appeal and
accessibility. The Company's restaurant design may be configured to fit a wide
variety of building shapes and sizes, thereby increasing the number of suitable
locations for Papa John's restaurants.
Since 1994, the Company has opened a greater number of free-standing
restaurants. The Company seeks either existing buildings suitable for
conversion, or locations suitable for the construction of its prototype
restaurant. Free-standing buildings generally provide more signage and better
visibility, accessibility and parking. The Company believes that these locations
improve Papa John's image and brand awareness and expects that, over time, free-
standing and prototype units will approximate 25% of total Company-owned
restaurants. During 1997, the Company constructed its first multi-bay unit,
housing a Company-owned restaurant in addition to third party tenants.
Management believes that improved site selection may result from the Company
maintaining control of the multi-bay development process. This strategy will
continue to be evaluated as operational and financial results for these types of
units become available for analysis.
4
Commissary System; Purchasing
The Company's commissary system supplies pizza dough, food products, paper
products, smallwares and cleaning supplies twice weekly to each Papa John's
restaurant in the U.S. This commissary system enables the Company to closely
monitor and control product quality and consistency, while lowering food costs.
The Company opened a distribution facility in Phoenix, Arizona in the first
quarter of 1997 and full-service commissaries in Rotterdam, New York in the
first quarter and Des Moines, Iowa in the third quarter of 1997. A full-service
commissary in Portland, Oregon is planned for mid-1998 and a new, expanded and
modernized Louisville commissary is planned for late-1998 to support restaurant
expansion plans. The Company's other full-service commissaries are in Orlando,
Florida; Raleigh, North Carolina; Jackson, Mississippi; and Denver, Colorado.
The Company also operates a distribution center in Dallas, Texas. The commissary
system capacity is continually evaluated in relation to planned restaurant
growth, and additional facilities developed as operational or economic
conditions warrant.
The Company sets quality standards for all products used in Papa John's
restaurants and designates approved outside suppliers of food and paper products
which must meet the Company's quality standards. In order to ensure product
quality and consistency, all Papa John's restaurants are required to purchase
proprietary spice mix and dough from the Company's commissaries. Franchisees may
purchase other goods directly from approved suppliers or the Company's
commissaries. The Company has negotiated national purchasing agreements with
most of its suppliers. These agreements generally result in volume discounts to
the Company, allowing it to sell the products to franchisees at prices which the
Company believes are below those franchisees could normally obtain
independently. Products are distributed to restaurants by refrigerated trucks
leased and operated by the Company or transported by dedicated logistics
companies.
All of the equipment, fixtures and smallwares needed to open a Papa John's
restaurant are available for purchase through the Company. The Company also
provides layout and design services and recommends subcontractors, signage
installers and telephone systems to its franchisees. Although not required to do
so, substantially all of the Company's franchisees purchase most of their
equipment from the Company.
Marketing Programs
The Company's restaurant-level marketing programs target the delivery area
of each restaurant, making extensive use of distinctive print materials in
direct mail and store-to-door couponing. The local marketing efforts also
include a variety of community-oriented activities with schools, sports teams
and other organizations. In markets in which the Company or its franchisees have
a significant presence, local marketing efforts are supplemented with radio and
television advertising.
In addition to extensive local store marketing, all Company-owned and
franchised Papa John's restaurants within a developed market are required to
join an advertising cooperative ("Co-op"). Each member restaurant contributes a
percentage of sales to the Co-op for market wide programs, such as radio,
television and billboards. The rate of contribution and uses of the monies
collected are determined by a majority vote of the Co-op's members. The
restaurant-level and Co-op marketing efforts are supported by print and
electronic advertising materials that are produced by the Papa John's Marketing
Fund, Inc., a non-profit corporation (the "Marketing Fund"), for use by both the
Company and its franchisees. The Marketing Fund produced and aired the systems
first national television commercial in 1997. Additional national television
buys are planned for 1998. The required Marketing Fund contribution can be up to
1.5% of sales, as established from time to time by the governing board of the
Marketing Fund (currently 1.0%). The required contribution can be increased
above 1.5% only upon approval of not less than 60% of Marketing Fund members.
5
The Company also provides both Company-owned and franchised restaurants
with catalogs for uniforms and promotional items and pre-approved, print
marketing materials. These items can be ordered through toll-free "800" numbers.
Company Operations
Restaurant Personnel. A typical Papa John's restaurant employs a restaurant
manager, two assistant managers and approximately 20 - 25 hourly team members,
most of whom work part-time. The manager is responsible for the day-to-day
operation of the restaurant and for maintaining Company-established operating
standards. The Company seeks to hire experienced restaurant managers and staff
and motivate and retain them by providing opportunities for advancement and
performance-based financial and stock incentives. The Company has a relatively
low managerial turnover rate which it believes results in decreased training
costs and higher productivity.
The Company employs area supervisors, each of whom has responsibility for
overseeing three to five Company-owned restaurants. The Company also employs
regional vice presidents and district managers who oversee area supervisors and
managers within their respective markets. These team members are also eligible
to earn performance-based financial and stock incentives.
Training and Education. The Company has team members dedicated to training
and overseeing new restaurant openings, including a full-time coordinator in
each of its markets. The Company provides an on-site training team three days
before and three days after the opening of each Company-owned and franchise
restaurant. Each regional vice president, district manager, area supervisor and
restaurant manager is required to complete the Company's management training
program and on-going development programs in which instruction is given on all
aspects of the Company's systems and operations. The programs include classroom
instruction and hands-on training at an operating Papa John's restaurant. The
programs are conducted at the Company's training centers located within Company-
owned and franchised restaurants. The Company's training also includes an
education and safety program for its delivery drivers.
Point of Sale Technology. Point of sale technology (the Company's
proprietary PROFIT SystemTM) was in place in all Company-owned restaurants and
substantially all franchised restaurants at the end of 1997. The Company
believes this technology increases speed and accuracy in order taking and
pricing, reduces paper work and allows the restaurant manager to better monitor
and control food and labor costs. The Company believes the PROFIT System
enhances restaurant-level marketing capabilities through the development of a
data base containing information on customers and their buying habits with
respect to the Company's products. Polling capabilities allow the Company to
obtain current restaurant operating information, thereby improving the speed,
accuracy and efficiency of restaurant-level reporting.
Reporting. Managers at Company-owned restaurants utilize daily reports of
sales, cash deposits and operating costs. Physical inventories of all food and
beverage items are taken weekly. The Company's area supervisors prepare weekly
operating projections for each of the restaurants under their supervision.
Hours of Operations. Papa John's restaurants are open seven days a week,
typically from 11:00 a.m. to 12:30 a.m. Monday through Thursday, 11:00 a.m. to
1:30 a.m. on Friday and Saturday and 12:00 noon to 11:30 p.m. on Sunday.
Franchise Program
General. The Company continues to attract many franchisees with significant
restaurant experience. The Company considers its franchisees to be a vital part
of the system's continued growth and believes its relationship
6
with its franchisees is excellent. At December 28, 1997, there were 1,116
franchised restaurants operating in 40 states and the District of Columbia and
the Company had development agreements for approximately 715 additional
franchised restaurants committed to open through 2001. There can be no assurance
that all of these restaurants will be opened or that the development schedule
set forth in the development agreements will be achieved. During the 1997 fiscal
year, 288 franchised restaurants were opened.
Approval. Franchisees are approved on the basis of the applicant's
business background, restaurant operating experience and financial resources.
The Company generally seeks franchisees who will enter into development
agreements for multiple restaurants. The Company seeks franchisees who have
restaurant experience or, in the case of franchisees who do not have restaurant
experience, the Company requires the franchisee to hire a full-time operator who
has either an equity interest or the right to acquire an equity interest in the
franchise operation.
Development and Franchise Agreements. The Company enters into development
agreements with its domestic franchisees for the opening of a specified number
of restaurants within a defined period of time within a specified geographic
area. Under the Company's current standard development agreement, the franchisee
is required to pay, at the time of signing the agreement, a non-refundable fee
of $5,000 per restaurant covered by the development agreement. This amount is
credited against the standard $20,000 franchise fee payable to the Company upon
signing the franchise agreement for a specific location. Generally, a franchise
agreement is executed when a franchisee secures a location. In 1997, the Company
began developing an international franchise department and expects to open the
first franchised restaurants outside the U.S. in late 1998 or 1999.
The Company's current standard franchise agreement provides for a term of
10 years (with one ten-year renewal option) and payment to the Company of a
royalty fee of 4% of sales. The current standard franchise agreement, as well as
substantially all existing franchise agreements, permit the Company to increase
the royalty fee up to 5% of sales after the agreement has been in effect for
three years. However, the royalty fee cannot be increased to an amount greater
than the percentage royalty fee then in effect for new franchisees.
The Company has the right to terminate a franchise agreement for a variety
of reasons, including a franchisee's failure to make payments when due or
failure to adhere to the Company's policies and standards. Many state franchise
laws limit the ability of a franchisor to terminate or refuse to renew a
franchise.
The Company has entered into a limited number of development and franchise
agreements for non-traditional restaurant units. These agreements generally
cover venues or areas not originally targeted for development and have terms
differing from the standard agreement. The Company does not believe these
contracts have a significant impact on revenues or profits.
Franchise Restaurant Development. The Company provides assistance to its
franchisees in selecting sites and developing restaurants and the physical
specifications for typical restaurants. Each franchisee is responsible for
selecting the location for its restaurants but must obtain Company approval of
restaurant design and location based on accessibility and visibility of the site
and targeted demographic factors, including population, density, income, age and
traffic. The Company provides design plans, fixtures and equipment for most
franchisee locations at competitive prices.
Franchisee Loan Program. At the beginning of the third quarter of 1996, the
Company established a program under which selected franchisees developing ten or
more Papa John's restaurants may borrow funds for use in the construction and
development of their restaurants. Loans made under the program typically bear
interest at fixed or floating rates (ranging from 5.5% to 10.0% at December 28,
1997), and are secured by the fixtures, equipment and signage (and where
applicable, the land) of the restaurant and the ownership interests in the
franchisee. In limited cases, the Company has obtained a purchase option with
respect to the financed restaurants.
7
A franchisee utilizing the loan program must open at least 20% of the
restaurants covered by the franchisee's development agreement with its own
equity capital prior to receiving funds from the Company under the program.
At December 28, 1997, loans outstanding under the franchise loan program
totaled $15.1 million, with commitments to lend up to an additional $4.5
million. The Company does not expect to significantly expand the franchise loan
program beyond current commitment levels at this time.
Franchise Training and Support. Every franchisee is required to have a
principal operator approved by the Company who satisfactorily completes the
Company's two-week training program and who devotes his or her full business
time and efforts to the operation of the franchisee's restaurants. Each
franchised restaurant manager is also required to complete the Company's two-
week training program. The Company provides an on-site training crew three days
before and three days after the opening of a franchisee's first two restaurants
and ongoing supervision thereafter. Multi-unit franchisees are encouraged to
hire a full-time training coordinator to train new team members for their
restaurants. The Company's franchise consultants, reporting to the Vice
President of Franchise Operations, maintain open communication with the
franchise community, relaying operating and marketing information and new ideas
between the Company and franchisees.
Franchise Operations. All franchisees are required to operate their Papa
John's restaurants in compliance with the Company's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. Each franchisee has
full discretion to determine the prices to be charged to its customers.
Franchise Advisory Board. The Company has a Franchise Advisory Board that
consists of Company and franchisee representatives. The Advisory Board holds
quarterly meetings to discuss new marketing ideas, operations, growth and other
relevant issues.
Reporting. The Company collects weekly and monthly sales and other
operating information from its franchisees. The Company has agreements with most
of its franchisees permitting the Company to electronically debit the
franchisees bank accounts for the payment of royalties, Marketing Fund
contributions and purchases of commissary products from the Company. This system
significantly reduces the resources needed to process receivables, improves cash
flow and virtually eliminates past-due accounts related to these items.
Franchisees generally are required to purchase and install the Papa John's
PROFIT System in their restaurants. See "Company Operations -- Point of Sale
Technology."
Competition
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well established
competitors with substantially greater financial and other resources than the
Company. Competitors include a large number of national and regional restaurant
chains, as well as local pizza operators. Some of the Company's competitors have
been in existence for a substantially longer period than the Company and may be
better established in the markets where the Company's restaurants are, or may
be, located. Within the pizza segment of the restaurant industry, the Company
believes that its primary competitors are the national pizza chains, including
Pizza Hut, Domino's and Little Caesars. A change in the pricing or other
marketing strategies of one or more of these competitors could have an adverse
impact on the Company's sales and earnings.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of
8
experienced management and hourly team members may adversely affect the
restaurant industry in general and the Company's restaurants in particular.
With respect to the sale of franchises, the Company competes with many
franchisors of restaurants and other business concepts. In general, there is
also active competition for management personnel, capital and attractive
commercial real estate sites suitable for Papa John's restaurants.
Government Regulation
The Company and its franchisees are subject to various federal, state and
local laws affecting the operation of their respective businesses. Each Papa
John's restaurant is subject to licensing and regulation by a number of
governmental authorities, which include health, safety, sanitation, building and
fire agencies in the state or municipality in which the restaurant is located.
Difficulties in obtaining, or the failure to obtain, required licenses or
approvals can delay or prevent the opening of a new restaurant in a particular
area. The Company's commissary and distribution facilities are licensed and
subject to regulation by state and local health and fire codes, and the
operation of its trucks is subject to Department of Transportation regulations.
The Company is also subject to federal and state environmental regulations.
The Company is subject to Federal Trade Commission ("FTC") regulation and
various state laws regulating the offer and sale of franchises. Several state
laws also regulate substantive aspects of the franchisor-franchisee
relationship. The FTC requires the Company to furnish to prospective franchisees
a franchise offering circular containing prescribed information. A number of
states in which the Company might consider franchising also regulate the sale of
franchises and require registration of the franchise offering circular with
state authorities. Substantive state laws that regulate the franchisor-
franchisee relationship presently exist in a substantial number of states, and
bills have been introduced in Congress from time to time (some of which are now
pending) which would provide for federal regulation of the franchisor-franchisee
relationship in certain respects. The state laws often limit, among other
things, the duration and scope of non-competition provisions and the ability of
a franchisor to terminate or refuse to renew a franchise.
The Company is also subject to the Americans With Disabilities Act of 1990,
which, among other things, may require certain minor renovations to its
restaurants to meet federally-mandated requirements. The cost of these
renovations is not expected to be material to the Company. Further government
initiatives, if enacted, including a proposed system of mandated health
insurance, could adversely affect the Company and its franchisees as well as the
restaurant industry in general.
Trademarks
The Company's rights in its trademarks and service marks are a significant
part of its business. The Company is the owner of the federal registration of
the trademark "Papa John's." The Company has also registered "Pizza Papa John's
and design" as a trademark and a service mark. The Company owns federal
registrations for the marks "Pizza Papa John's Delivering the Perfect Pizza! and
design", "Call your Papa", "Perfect Pizza Perfect Price", "Delivering the
Perfect Pizza!", "Pizza Papa John's Print Network", "The Pizza of Summer" and
"We Deliver Perfection."
9
The Company has applied for the registration of "Pick 5", "Better
Ingredients. Better Pizza.", "Pizza Papa John's. Better Ingredients. Better
Pizza.", "Papa John's International Pizza Games", "Papa-size it" and "Perfect
Original and design" as trademarks and service marks. The Company has also
applied to register its principal trademark, "Pizza Papa John's and design" in
69 foreign countries and the European community. The mark has been registered in
17 countries. The Company is aware of the use by other persons in certain
geographic areas of names and marks which are the same as or similar to the
Company's marks. It is the Company's policy to pursue registration of its marks
whenever possible and to vigorously oppose any infringement of its marks.
Employees
As of December 28, 1997, the Company employed 14,219 persons, of whom
approximately 12,579 were restaurant team members, 525 were restaurant
management and supervisory personnel, 453 were corporate personnel and 662 were
commissary and support services personnel. Most restaurant team members work
part-time and are paid on an hourly basis. None of the Company's team members is
covered by a collective bargaining agreement. The Company considers its employee
relations to be excellent.
Forward Looking Statements
This Form 10-K contains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act"), including
information within Management's Discussion and Analysis of Financial Condition
and Results of Operation. The following cautionary statements are being made
pursuant to the provisions of the Act and with the intention of obtaining the
benefits of the "safe harbor" provisions of the Act. Although the Company
believes that its expectations are based on reasonable assumptions, actual
results may differ materially from those in the forward looking statements as a
result of various factors, including but not limited to, the following:
1. The ability of the Company and its franchisees to continue to expand
through the opening of new restaurants is affected by a number of factors, many
of which are beyond the control of the Company and its franchisees. These
factors include, among other things, selection and availability of suitable
restaurant locations, negotiation of suitable lease or financing terms,
constraints on permitting and construction of other restaurants, higher than
anticipated construction costs, and the hiring, training and retention of
management and other personnel. Accordingly, there can be no assurance that the
Company or its franchisees will be able to meet planned growth targets or open
restaurants in markets now targeted for expansion.
2. The restaurant industry is intensely competitive with respect to
price, service, location and food quality, and there are many well established
competitors with substantially greater financial and other resources than the
Company and its franchisees. Some of these competitors have been in existence
for a substantially longer period than the Company or its franchisees and may be
better established in the markets where restaurants operated by the Company or
its franchisees are, or may be, located. A change in the pricing or other
marketing or promotional strategies of one or more of the Company's major
competitors could have an adverse impact on sales and earnings at restaurants
operated by the Company and its franchisees.
3. Changes in consumer taste, demographic trends, traffic patterns and
the type, number and location of competing restaurants as well as increased food
and other costs could adversely affect the Company's restaurant business.
4. The Company's restaurant operations are subject to federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. A significant number of hourly personnel employed by
the Company and its franchisees are paid at rates related to the federal minimum
wage. Accordingly, further increases in the minimum wage will increase labor
costs for the Company and its franchisees.
10
Item 2. Properties
As of December 28, 1997, the Company and its franchisees operated 1,517
Papa John's restaurants.
Company-owned Restaurants
-------------------------
Number of
Restaurants
-----------
Colorado................................................. 23
Delaware................................................. 8
Florida.................................................. 44
Georgia.................................................. 59
Illinois................................................. 2
Indiana.................................................. 28
Kentucky................................................. 28
Maryland................................................. 45
Missouri................................................. 12
New Mexico............................................... 7
North Carolina........................................... 42
South Carolina........................................... 2
Tennessee................................................ 26
Texas.................................................... 56
Virginia................................................. 16
Washington, D.C.......................................... 3
---
Total Company-owned Restaurants..................... 401
===
11
Franchised Restaurants
----------------------
Number of
Restaurants
-----------
Alabama.................................................. 43
Arkansas................................................. 13
Arizona.................................................. 14
California............................................... 14
Colorado................................................. 9
Connecticut.............................................. 3
Florida.................................................. 133
Georgia.................................................. 38
Illinois................................................. 52
Indiana.................................................. 63
Iowa..................................................... 8
Kansas................................................... 11
Kentucky................................................. 46
Louisiana................................................ 33
Maryland................................................. 12
Massachusetts............................................ 6
Michigan................................................. 23
Minnesota................................................ 26
Mississippi.............................................. 15
Missouri................................................. 24
Nebraska................................................. 7
Nevada................................................... 5
New Hampshire............................................ 3
New Jersey............................................... 11
New Mexico............................................... 1
New York................................................. 14
North Carolina........................................... 33
North Dakota............................................. 2
Ohio..................................................... 134
Oklahoma................................................. 12
Pennsylvania............................................. 35
South Carolina........................................... 33
South Dakota............................................. 1
Tennessee................................................ 42
Texas.................................................... 82
Utah..................................................... 8
Virginia................................................. 68
West Virginia............................................ 15
Wisconsin................................................ 19
Wyoming.................................................. 4
Washington, D.C.......................................... 1
-----
Total Franchised Restaurants........................ 1,116
=====
12
Most Papa John's restaurants are located in leased space. The initial term
of most restaurant leases is five years or less with most leases providing for
one or more options to renew for at least one additional term. Virtually all of
the Company's leases specify a fixed annual rent. Generally, the leases are
triple net leases which require the Company to pay all or a portion of the cost
of insurance, taxes and utilities. Certain leases further provide that the lease
payments may be increased annually based on changes in the Consumer Price Index.
Information with respect to the Company's leased commissaries and other
facilities is set forth below.
Facility Square Footage
-------- --------------
Louisville, KY Corporate Headquarters 58,000
Louisville, KY Commissary 38,000
Jackson, MS Commissary 30,000
Raleigh, NC Commissary 27,000
Dallas, TX Distribution Center 20,000
Denver, CO Commissary 21,000
Phoenix, AZ Distribution Center 26,000
Des Moines, IA Commissary 31,000
Rotterdam, NY Commissary 40,000
The Company owns approximately five acres in Orlando on which its 63,000
square foot full-service commissary is located. In addition, the Company owns
approximately 37 acres in Louisville, Kentucky, and has built a 40,000 square
foot building on the land consolidating its printing and promotional operations.
The Company has begun construction of additional facilities on the land in 1998
of approximately 242,000 square feet, approximately 30-40% of which will
accommodate relocation and expansion of the Louisville commissary operation and
Novel Approach promotional division, and the remainder of which will accommodate
relocation and consolidation of corporate offices. The facility is scheduled for
completion in late-1998 or early-1999. The Company believes that it will
continue to need additional office and commissary space.
Item 3. Legal Proceedings
The Company is subject to claims and legal actions in the ordinary course
of its business. The Company believes that all such claims and actions currently
pending against it are either adequately covered by insurance or would not have
a material adverse effect on the Company if decided in a manner unfavorable to
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the current executive officers of the Company, together
with their ages, their positions with the Company and the year in which they
first became an officer of the Company:
First Elected
Name Age Position Executive Officer
---- --- -------- -----------------
John H. Schnatter 36 Founder, Chairman and Chief 1985
Executive Officer
Charles W. Schnatter 35 Senior Vice President, General 1991
Counsel and Secretary
Blaine E. Hurst 41 President 1995
E. Drucilla Milby 44 Chief Financial Officer and Treasurer 1991
Wade S. Oney 37 Chief Operating Officer 1995
Robert J. Wadell 42 President - PJ Food Service, Inc. 1990
Richard J. Emmett 42 Senior Vice President - Senior Counsel 1992
J. David Flanery 41 Vice President and Corporate 1994
Controller
Syl J. Sosnowski 56 Vice President -- Marketing and 1995
Support Services
John Schnatter created the Papa John's concept and founded the Company in
1985. He has served as Chairman of the Board and Chief Executive Officer since
1990, and from 1985 to 1990, served as President. John Schnatter has also been a
franchisee of the Company since 1986.
Charles Schnatter has served as General Counsel and Secretary since 1991
and has been a Senior Vice President of the Company since 1993. From 1988 to
1991, he was an attorney with Greenebaum Doll & McDonald PLLC, Louisville,
Kentucky, a law firm which provides legal services to the Company. Charles
Schnatter was a franchisee of the Company from 1989 to 1997.
Blaine Hurst has served as President since 1996. From 1995 to 1996, Mr.
Hurst served as Chief Information Officer after having joined the Company in
January 1995 as Vice President of Information Systems. From 1993 to 1995, Mr.
Hurst was Vice President of Information Systems for Boston Chicken, Inc. From
1989 to 1993, Mr. Hurst was a consulting partner with Ernst & Young LLP. Mr.
Hurst has been a franchisee of the Company since 1996.
Dru Milby has served as Chief Financial Officer since 1995 and Treasurer
since 1993. Ms. Milby held the position of Vice President -- Finance from 1991
to 1995. From 1990 to 1991, Ms. Milby was Director of Financial Planning for
American Air Filter. From 1987 to 1990, Ms. Milby was Manager of Financial
Reporting and Systems Support for KFC International, the operator and franchisor
of KFC restaurants. From 1983 to 1987, Ms. Milby held various positions with KFC
International and KFC USA in the areas of general accounting, financial
reporting and financial systems. Ms. Milby is a licensed Certified Public
Accountant and Certified Management Accountant.
14
Wade Oney has served as Chief Operating Officer since 1995. From 1992 to
1995, Mr. Oney served as the Company's Regional Vice President of Southeast
Operations. From 1989 to 1992, Mr. Oney held various positions with Domino's
Pizza, Inc. as follows: from 1991 to 1992, Senior Vice President, Northeast;
from 1990 to 1991 Senior Vice President, Product Implementation; and from 1989
to 1990, Vice President of Operations. Mr. Oney has been a franchisee of the
Company since 1993.
Robert Wadell has served as President of PJ Food Service, Inc. since 1995,
after having served as Vice President of Commissary Operations from 1990 to
1995. From 1988 to 1990, Mr. Wadell was employed with Mr. Gatti's in the
position of Regional Franchise Director, responsible for overseeing the
operations of 65 franchised restaurants in an eight-state area. From 1983 to
1988, Mr. Wadell was an Area Supervisor for Mr. Gatti's, and from 1979 to 1983,
was a store operator for Mr. Gatti's.
Richard Emmett was appointed Senior Vice President and Senior Counsel in
March 1997, after having served as Senior Vice President-Development from August
1996 to March 1997. From 1992 to 1996, Mr. Emmett held the position of Vice
President and Senior Counsel. From 1983 to 1992, Mr. Emmett was an attorney with
the law firm of Greenebaum Doll & McDonald PLLC, having become a partner of such
firm in 1989. Mr. Emmett was a franchisee of the Company from 1992 to 1997.
David Flanery has served as Vice President since 1995 after having joined
the Company in 1994 as Corporate Controller. From 1979 to 1994, Mr. Flanery was
with Ernst & Young LLP in a variety of positions, most recently as Senior Audit
Manager. Mr. Flanery is a licensed Certified Public Accountant.
Syl Sosnowski has served as Vice President of Marketing and Support
Services since 1995. From 1990 to 1995, Mr. Sosnowski served as Vice President
of Marketing and Sales for Carvel Corporation.
John and Charles Schnatter are brothers. There are no other family
relationships among the Company's executive officers and other key personnel.
15
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol PZZA. As of March 9, 1998, there were
approximately 719 record holders of common stock. The following table sets forth
for the quarters indicated the high and low sale prices of the Company's common
stock, as reported by The Nasdaq Stock Market. All sale prices have been
adjusted to reflect a 3-for-2 stock split to stockholders of record on March 12,
1996, and an additional 3-for-2 stock split to stockholders of record on
November 8, 1996. Each stock split was effected in the form of a 50% stock
dividend.
1997 High Low
- ---- ---- ---
First Quarter $35.13 $23.75
Second Quarter 37.50 22.63
Third Quarter 39.50 30.44
Fourth Quarter 37.75 28.00
1996
- ----
First Quarter $29.83 $16.80
Second Quarter 35.33 25.67
Third Quarter 35.00 26.00
Fourth Quarter 37.33 29.50
Since its initial public offering of common stock in 1993, the Company has
not paid dividends on its common stock, and has no plans to do so in the
foreseeable future.
16
Item 6. Selected Consolidated Financial Data
The selected financial data presented below for each of the years in the
five-year period ended December 28, 1997 was derived from the audited
consolidated financial statements of the Company. The selected financial data
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes thereto included in Item 7 and Item 8, respectively, of
this Form 10-K.
(In thousands, except per share data) Year Ended (1)
-----------------------------------------------------------------
Dec. 28, Dec. 29, Dec. 31, Dec. 25, Dec. 26,
1997 1996 1995 1994 1993
-----------------------------------------------------------------
System wide Restaurant Sales
Company-owned $251,153 $167,982 $111,747 $ 66,267 $ 32,505
Franchised 616,456 451,214 347,003 231,343 133,846
-----------------------------------------------------------------
Total $867,609 $619,196 $458,750 $297,610 $166,351
=================================================================
Income Statement Data
Revenues:
Restaurant sales $251,153 $167,982 $111,747 $ 66,267 $ 32,505
Franchise royalties 24,318 17,827 13,561 9,163 5,290
Franchise and development fees 5,327 4,286 3,508 3,274 2,379
Commissary sales 188,034 142,998 105,874 67,515 41,013
Equipment and other sales 39,952 26,959 18,665 15,316 8,046
-----------------------------------------------------------------
Total revenues 508,784 360,052 253,355 161,535 89,233
Operating income(2) 39,194 25,629 15,819 10,064 6,221
Other income 3,431 3,917 1,910 1,318 247
-----------------------------------------------------------------
Income before income taxes(2) 42,625 29,546 17,729 11,382 6,468
Income tax expense(2) 15,772 10,932 6,525 4,182 2,393
-----------------------------------------------------------------
Net income(2) $ 26,853 $ 18,614 $ 11,204 $ 7,200 $ 4,075
=================================================================
Basic earnings per share(2) $ .93 $ .66 $ .45 $ .31 $ .20
=================================================================
Diluted earnings per share(2)(3) $ .91 $ .65 $ .44 $ .30 $ .20
=================================================================
Basic weighted average shares outstanding 28,916 28,010 25,139 23,525 20,191
=================================================================
Diluted weighted average shares outstanding(3) 29,592 28,670 25,552 24,033 20,815
=================================================================
Balance Sheet Data
Total assets $253,243 $212,061 $128,819 $ 76,173 $ 27,789
Long-term debt 1,505 1,680 2,510 1,279 -
Stockholders' equity 212,733 180,643 106,282 62,609 19,269
- -----------------------------------------------------
(1) The Company operates on a 52-53 week fiscal year ending on the last Sunday
of December of each year. The 1997, 1996, 1994, and 1993 fiscal years consisted
of 52 weeks and the 1995 fiscal year consisted of 53 weeks.
(2) Information for 1993 reflects pro forma adjustments assuming that the
Company had been treated as a C Corporation rather than an S Corporation for
income tax purposes for the entire year, with assumed combined federal, state
and local effective income tax rates aggregating 37%, and the Company's
compensation program for the top three executive officers that was adopted
during 1993 had been in effect for the entire year, which would have reduced
compensation expense by $154,000.
(3) Reflects the dilutive effect of stock options as required by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". See "Note 2" of
"Notes to Consolidated Financial Statements."
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Papa John's International, Inc. (the "Company") began operations in 1985
with the opening of the first Papa John's restaurant in Jeffersonville, Indiana.
At December 28, 1997, there were 1,517 Papa John's restaurants in operation,
consisting of 401 Company-owned and 1,116 franchised restaurants. The Company's
revenues are principally derived from retail sales of pizza to the general
public by Company-owned restaurants, franchise royalties, sales of franchise and
development rights, and sales to franchisees of food and paper products,
restaurant equipment, printing and promotional items, and information systems
and related services used in their operations.
The Company intends to continue to expand the number of Company-owned and
franchised restaurants. The Company's expansion strategy is to cluster
restaurants in targeted markets, thereby increasing consumer awareness and
enabling the Company to take advantage of operational, distribution and
advertising efficiencies. The Company believes that its expansion strategy has
contributed to increases in comparable annual sales for Company-owned
restaurants of 9.3% in 1997, 11.9% in 1996 and 9.0% in 1995. The Company
anticipates that future comparable sales increases, if any, will be at a lesser
rate than in recent years. Average sales for Company-owned restaurants open a
full year increased to $713,000 for 1997 from $682,000 for 1996. This increase
is attributable to continuing strong sales of maturing restaurants and to the
fact that several new markets were entered in 1995 and 1996, with generally
lower sales volumes throughout 1996 as those markets were built out. Average
sales volumes in new markets are generally lower than in those markets in which
the Company has established a significant market position, although recent
trends indicate that new markets are opening with stronger than historical sales
volumes.
Approximately 45% of the Company's revenues for 1997 and 47% for 1996 were
derived from the sale to franchisees of food and paper products, restaurant
equipment, printing and promotional items and information systems equipment and
software and related services by the Company, its commissary subsidiary, PJ Food
Service, Inc., and the Company's support services subsidiary, Printing &
Promotions, Inc. The Company believes that, in addition to supporting both
Company and franchised growth, these subsidiaries contribute to product quality
and consistency throughout the Papa John's system.
The Company continually strives to obtain high quality sites with greater
access and visibility, and to enhance the appearance and quality of its
restaurants. The Company believes that these factors improve Papa John's image
and brand awareness. During 1997 and 1996, the Company pursued a greater number
of free-standing conversion and prototype locations and expects to continue this
strategy in 1998. Over time, the Company expects that these free-standing units
will approximate 25% of the total Company-owned restaurants.
The average cash investment for the 76 Company-owned restaurants opened
during 1997, exclusive of land and pre-opening costs, increased to approximately
$257,000 from $208,000 for the 66 units opened in 1996. This increase was
primarily due to the planned increase in the percentage of higher-cost free-
standing units opened during 1997. The Company expects the average cash
investment for restaurants opening in 1998 to approximate $260,000 as the
Company plans to build a number of free-standing units in 1998 comparable to
1997.
Pre-opening costs are capitalized and amortized on a straight-line basis
over a period of one year from the opening date of the restaurant or commissary
facility.
18
In April 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued an Exposure Draft of a Proposed
Statement of Position, "Reporting on the Costs of Start-Up Activities" (the
"SOP") which, if finalized, would require adoption at the beginning of 1999. The
Company's initial application of the SOP would require the write-off of deferred
pre-opening costs as of the date of adoption, and such write-off would be
reported, on a net of tax basis, as the cumulative effect of a change in
accounting principle. The Company does not expect the adoption of the SOP to
significantly impact future operating income due to the relative consistency of
new facility openings and length of the current amortization period. Deferred
pre-opening costs as of December 28, 1997 were $3.8 million.
The Company defers certain costs incurred in connection with the
development of its information systems and amortizes such costs over periods of
up to five years from the date of completion.
The Company's fiscal year ends on the last Sunday in December of each year.
The 1997 and 1996 fiscal years consisted of 52 weeks and the 1995 fiscal year
consisted of 53 weeks.
The Board of Directors approved a 3-for-2 stock split in February 1996 and
an additional 3-for-2 stock split in October 1996, each of which was effected in
the form of a 50% stock dividend. All share data included in this Annual Report
have been restated to reflect these stock splits.
Results of Operations
The following tables set forth the percentage relationship to total
revenues, unless otherwise indicated, of certain income statement data, and
certain restaurant data for the years indicated:
Year Ended
---------------------------------
Dec. 28, Dec. 29, Dec. 31,
1997 1996 1995
---------------------------------
Income Statement Data:
Revenues:
Restaurant sales 49.4% 46.7% 44.1%
Franchise royalties 4.7 4.9 5.3
Franchise and development fees 1.0 1.2 1.4
Commissary sales 37.0 39.7 41.8
Equipment and other sales 7.9 7.5 7.4
--------------------------------
Total revenues 100.0 100.0 100.0
Costs and expenses:
Restaurant cost of sales(1) 26.4 28.0 28.4
Restaurant operating expenses(1) 54.9 54.9 54.8
Commissary, equipment and other expenses(2) 91.5 91.1 93.1
General and administrative expenses 7.3 7.4 7.9
Depreciation and amortization 3.9 3.8 3.4
Total costs and expenses 92.3 92.9 93.8
--------------------------------
Operating income 7.7 7.1 6.2
Other income (expense):
Investment income 0.9 1.0 0.7
Other (0.2) 0.1 0.1
--------------------------------
Income before income taxes 8.4 8.2 7.0
Income tax expense 3.1 3.0 2.6
--------------------------------
Net income 5.3% 5.2% 4.4%
================================
(1) As a percentage of Restaurant sales.
(2) As a percentage of Commissary sales and Equipment and other sales on a
combined bases.
19
Year Ended
------------------------------------
Dec. 28, Dec. 29, Dec. 31,
1997 1996 1995
------------------------------------
Restaurant Data:
Percentage increase in comparable Company-owned
restaurant sales(3) 9.3% 11.9% 9.0%
Average sales for Company-owned restaurants
open full year $713,000 $682,000 $657,000
Number of Company-owned restaurants:
Beginning of period 303 217 133
Opened 76 66 61
Closed (1) (2) -
Acquired 23 22 23
-----------------------------------
End of period 401 303 217
Number of franchised restaurants:
Beginning of period 857 661 499
Opened 288 224 190
Closed (6) (6) (5)
Sold to Company (23) (22) (23)
-----------------------------------
End of period 1,116 857 661
-----------------------------------
Total restaurants-end of period 1,517 1,160 878
===================================
(3) Includes only Company-owned restaurants open throughout the periods being
compared.
1997 Compared to 1996
Revenues. Total revenues increased 41.3% to $508.8 million in 1997, from
$360.1 million in 1996.
Restaurant sales increased 49.5% to $251.2 million in 1997, from $168.0
million in 1996. This increase was primarily due to a 42.0% increase in the
number of equivalent Company-owned restaurants open during 1997 as compared to
1996. "Equivalent restaurants" represents the number of restaurants open at the
beginning of a given period, adjusted for restaurants opened or acquired during
the period on a weighted average basis. Also, comparable sales increased 9.3% in
1997 over 1996 for Company-owned restaurants open throughout both years.
Franchise royalties increased 36.4% to $24.3 million in 1997, from $17.8
million in 1996. This increase was primarily due to a 30.5% increase in the
number of equivalent franchised restaurants open during 1997 as compared to
1996. Also, comparable sales increased 7.4% in 1997 over 1996 for franchised
restaurants open throughout both years.
Franchise and development fees increased 24.3% to $5.3 million in 1997,
from $4.3 million in 1996. This increase was primarily due to the 288 franchised
restaurants opened during 1997, as compared to 224 opened during 1996, an
increase of 28.6%, partially offset by the lower per unit franchise and
development fees collected on certain non-traditional restaurant units opened in
1997. The average dollar amount of fees per franchised restaurant may vary from
period to period, depending on the mix of restaurants opened pursuant to older
development agreements and "Hometown restaurants" which generally have lower
required
20
fees than traditional restaurants opened pursuant to standard development
agreements. Hometown restaurants are located in smaller markets, generally with
less than 9,000 households.
Commissary sales increased 31.5% to $188.0 million in 1997, from $143.0
million in 1996. This increase was primarily due to the increases in equivalent
franchised restaurants and comparable sales for franchised restaurants noted
above, partially offset by the impact of lower average cheese prices in 1997.
Equipment and other sales increased 48.2% to $40.0 million in 1997, from
$27.0 million in 1996. This increase was primarily due to the increase in
equivalent franchised restaurants open during 1997 as compared to 1996 and the
increase in franchised restaurants opened during 1997 as compared to 1996. A
portion of the equipment and other sales increase was also attributable to the
increase in sales of the Papa John's PROFIT System, a proprietary point of sale
system, and related PROFIT support services to the franchisees, as well as
increasing insurance commissions from franchisees. The Company initiated an
insurance agency function for franchisees during the fourth quarter of 1996.
Costs and Expenses. Restaurant cost of sales, which consists of food,
beverage and paper costs, decreased as a percentage of restaurants sales to
26.4% in 1997, from 28.0% in 1996. The primary reason for the decrease is
attributable to lower average cheese prices for the year and increased
efficiencies at both mature and newly-opened stores.
Restaurant salaries and benefits increased as a percentage of restaurant
sales to 27.0% in 1997, from 26.7% in 1996. The increase is primarily due to the
impact of increases in the federal minimum wage in October 1996 and September
1997, and increased staffing levels during the second quarter of 1997 to ensure
quality customer service was delivered during the 12th Anniversary Promotion.
Restaurant advertising and related costs decreased as a percentage of
restaurant sales to 9.3% in 1997, from 9.6% in 1996. The decrease in 1997 was
primarily the result of higher 1996 costs related to the fourth quarter rollout
of a new thin crust product. Also, restaurant level advertising is intentionally
managed to higher levels for new restaurants; therefore, as the percentage of
new Company-owned restaurant openings to existing Company-owned restaurants
decreases, the overall advertising cost percentage also decreases.
Other restaurant operating expenses were relatively consistent as a
percentage of restaurant sales at 13.5% for 1997 and 13.6% for 1996. Other
operating expenses include an allocation of commissary operating expenses equal
to 3% of Company-owned restaurant sales in order to assess a portion of the
costs of dough production and food and equipment purchasing and storage to
Company-owned restaurants.
Commissary, equipment and other expenses include cost of sales and
operating expenses associated with sales of food, paper, equipment, information
systems and printing and promotional items to franchisees and other customers.
These costs increased as a percentage of combined commissary sales and equipment
and other sales to 91.5% in 1997, from 91.1% in 1996. Cost of sales as a
percentage of combined commissary sales and equipment and other sales decreased
to 77.8% in 1997 from 79.3% in 1996, due to the timing of certain favorable
commodity price changes. The decrease was more than offset by an increase in
salaries and benefits and other operating expenses to 13.7% in 1997 compared to
11.8% in 1996, due primarily to increased
21
delivery costs resulting from larger commissary service areas and staffing and
other costs related to the opening of three commissary facilities in 1997.
General and administrative expenses declined slightly as a percentage of
total revenues to 7.3% in 1997 from 7.4% in 1996.
Depreciation and amortization increased as a percentage of total revenues
to 3.9% in 1997, from 3.8% in 1996. This increase was primarily due to
additional capital expenditures by the Company, intangibles related to
acquisitions, deferred pre-opening costs for newly-opened restaurants and
commissaries and other deferred expenses, primarily systems development costs.
Investment Income. Investment income increased to $4.5 million in 1997,
from $3.5 million in 1996. The increase was the result of higher average amounts
outstanding under the franchise loan program which earn higher average rates of
interest in comparison to the securities held in the investment portfolio.
Amounts receivable under the program increased from $5.1 million at December
1996, to $15.1 million at December 1997.
Other Income (Expense). Other income (expense) fluctuated from income of
$433,000 in 1996, to expense of $1.1 million in 1997. This fluctuation was
primarily attributable to the equipment and leasehold write-offs related to an
increasing number of restaurant relocations during the year.
Income Tax Expense. Income tax expense reflects a combined federal, state
and local effective income tax rate of 37.0% in 1997 and 1996.
1996 Compared to 1995
Revenues. Total revenues increased 42.1% to $360.1 million in 1996, from
$253.4 million in 1995.
Restaurant sales increased 50.3% to $168.0 million in 1996, from $111.7
million in 1995. This increase was primarily due to a 44.3% increase in the
number of equivalent Company-owned restaurants open during 1996 as compared to
1995. "Equivalent restaurants" represents the number of restaurants open at the
beginning of a given period, adjusted for restaurants opened or acquired during
the period on a weighted average basis. Also, comparable sales increased 11.9%
in 1996 over 1995, for Company-owned restaurants open throughout both years.
Franchise royalties increased 31.5% to $17.8 million in 1996, from $13.6
million in 1995. This increase was primarily due to a 30.1% increase in the
number of equivalent franchised restaurants open during 1996 as compared to
1995. Also, comparable sales increased 5.9% in 1996 over 1995, for franchised
restaurants open throughout both years.
Franchise and development fees increased 22.2% to $4.3 million in 1996,
from $3.5 million in 1995. This increase was primarily due to the 224 franchised
restaurants opened during 1996, as compared to 190 opened during 1995, an
increase of 17.9%, and an increasing number of franchise renewals.
22
Commissary sales increased 35.1% to $143.0 million in 1996, from $105.9
million in 1995. This increase was primarily due to the increases in equivalent
franchised restaurants and comparable sales for franchised restaurants noted
above. Additionally, sales for the Orlando commissary increased in 1996 as
compared to 1995 due to its conversion from a dough production facility to a
full-service commissary and distribution center beginning in August 1995.
Equipment and other sales increased 44.4% to $27.0 million in 1996, from
$18.7 million in 1995. This increase was primarily due to the increase in
equivalent franchised restaurants open during 1996 as compared to 1995, the
increase in franchised restaurants opened during 1996 as compared to 1995 and
the increased installations of point of sale technology (the Papa John's PROFIT
System) in franchised restaurants during 1996 as compared to 1995.
Costs and Expenses. Restaurant cost of sales, which consists of food,
beverage and paper costs, decreased as a percentage of restaurants sales to
28.0% in 1996, from 28.4% in 1995. The primary reason for the decrease is
attributable to increased efficiencies at both mature and newly-opened stores,
offset somewhat by higher average cheese prices for the year.
Restaurant salaries and benefits (26.7% in 1996 and 26.8% in 1995) and
occupancy costs (5.1% in 1996 and 5.3% in 1995) decreased slightly as a
percentage of restaurant sales primarily as a result of efficiencies related to
strong restaurant sales and a generally maturing restaurant base.
Restaurant advertising and related costs increased as a percentage of
restaurant sales to 9.6% in 1996, from 9.4% in 1995. The increase was primarily
driven by fourth quarter advertising campaigns related to the roll-out of the
new Papa John's "Better Thin" product to all markets.
Other restaurant operating expenses increased as a percentage of restaurant
sales to 13.6% for 1996, from 13.3% for 1995. The increase in other restaurant
operating expenses was primarily due to an increased emphasis on managerial
training programs throughout Company-owned restaurants during 1996.
Commissary, equipment and other expenses include cost of sales and
operating expenses associated with sales of food, paper, equipment, information
systems and printing and promotional items to franchisees and other customers.
These costs decreased as a percentage of combined commissary sales and equipment
and other sales to 91.1% in 1996, from 93.1% in 1995. This improvement was
primarily due to volume related operating efficiencies in the commissaries.
General and administrative expenses decreased as a percentage of total
revenues to 7.4% in 1996, from 7.9% in 1995. The decrease was primarily due to
improved organizational efficiencies over an increasing revenue base.
Additionally, savings in certain insurance costs were realized as a result of
coverage changes implemented during the fourth quarter of 1995.
Depreciation and amortization increased as a percentage of total revenues
to 3.8% in 1996, from 3.4% in 1995. This increase was primarily due to
additional capital expenditures by the Company, intangibles related to
acquisitions, deferred pre-opening costs for newly-opened restaurants and
commissaries and other deferred expenses, primarily systems development costs.
These factors resulting in increased depreciation and amortization were
partially offset
23
by the impact of a change in the depreciable lives of certain restaurant
equipment and signage effective at the beginning of the third quarter of 1995 to
more accurately reflect the economic lives of such assets. The estimated useful
life for ovens and certain other restaurant equipment was extended from five to
seven years, and the estimated useful life for restaurant signage was extended
from five to ten years.
Investment Income. Investment income increased to $3.5 million in 1996,
from $1.7 million in 1995. Average investment balances increased during 1996,
compared to 1995, as a result of the investment of the net proceeds of the
Company's public offerings of common stock in August 1995 and May 1996.
Income Tax Expense. Income tax expense reflects a combined federal, state
and local effective income tax rate of 37.0% in 1996, as compared to 36.8% in
1995. This increase was primarily due to the impact of higher federal and state
statutory income tax rates due to higher taxable income levels, substantially
offset by the impact of tax-exempt income generated by the investment portfolio
during 1996.
Impact of Year 2000
Some of the Company's older purchased software programs were written using
two digits rather than four to define the applicable year. As a result, this
time-sensitive software recognizes a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations
resulting in disruptions of important administrative processes, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its systems will function properly with respect
to dates in the year 2000 and thereafter. Management believes the total Year
2000 project cost is immaterial to financial position, net income and
liquidity. Much of the cost related to Year 2000 coincides with existing
management plans to replace certain systems (principally the general ledger and
related subsidiary systems) in order to accommodate the Company's planned
growth.
The project is estimated to be completed in early 1999, which is prior to
any anticipated impact on its operating systems. The Company believes that with
modifications to existing software and/or conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material impact on certain
administrative processes of the Company.
Liquidity and Capital Resources
The Company requires 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. Capital expenditures of $43.1 million, acquisitions
of $6.2 million, and loans to franchisees of $12.3 million for 1997, were
primarily funded by cash flow from operations, available cash and liquidation of
investments.
24
Total 1998 capital expenditures are expected to be approximately $84.0
million, primarily for the development or relocation of restaurants, commissary
facilities and corporate offices. The Company plans to open approximately 70 new
Company-owned restaurants during 1998, and has identified an additional 15
restaurants for potential relocation.
The Company plans to open a full service commissary in Portland, Oregon by
mid-1998. In late-1998, the Company plans to open a 242,000 square foot facility
in Louisville, Kentucky, approximately 30-40% of which will accommodate
relocation and expansion of the Louisville commissary operations and Novel
Approach promotional division and the remainder of which will accommodate
relocation and consolidation of corporate offices.
The Company has been approved to receive up to $21.0 million in incentives
under the Kentucky Jobs Development Act in connection with the relocation of the
corporate offices. Based upon the expected timing of completion of the facility,
the Company expects to earn approximately $14.0 million of such incentives
through 2007.
Additionally, during 1998 the Company expects to fund up to $4.5 million in
additional loans under existing franchisee loan program commitments.
Approximately $15.1 million was outstanding under this program as of December
28, 1997. At this time, the Company does not expect to significantly expand the
program beyond existing commitments.
Capital resources available at December 28, 1997 include $18.7 million of
cash and cash equivalents, $57.9 million of investments and $8.0 million under a
line of credit expiring in June 1998. The Company expects to fund planned
capital expenditures and disbursements under the franchise loan program for the
next twelve months from these resources and operating cash flows.
Impact of Inflation
The Company does not believe inflation has materially affected earnings
during the past three years. Substantial increases in costs, particularly labor,
employee benefits or food costs, could have a significant impact on the Company.
25
Item 8. Consolidated Financial Statements and Supplemental Data
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts) Year Ended
- -------------------------------------------------------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------
Revenues:
Restaurant sales $ 251,153 $ 167,982 $ 111,747
Franchise royalties 24,318 17,827 13,561
Franchise and development fees 5,327 4,286 3,508
Commissary sales 188,034 142,998 105,874
Equipment and other sales 39,952 26,959 18,665
- -------------------------------------------------------------------------------------------------
Total revenues 508,784 360,052 253,355
Costs and expenses:
Restaurant expenses:
Cost of sales 66,417 47,092 31,703
Salaries and benefits 67,830 44,774 29,946
Advertising and related costs 23,298 16,074 10,513
Occupancy costs 12,785 8,527 5,896
Other operating expenses 33,882 22,801 14,913
- -------------------------------------------------------------------------------------------------
204,212 139,268 92,971
Commissary, equipment and other expenses:
Cost of sales 177,263 134,771 101,342
Salaries and benefits 13,091 9,023 7,072
Other operating expenses 18,181 11,009 7,577
- -------------------------------------------------------------------------------------------------
208,535 154,803 115,991
General and administrative expenses 37,051 26,694 19,954
Depreciation 13,267 9,063 5,776
Amortization 6,525 4,595 2,844
- -------------------------------------------------------------------------------------------------
Total costs and expenses 469,590 334,423 237,536
Operating income 39,194 25,629 15,819
Other income (expense):
Investment income 4,505 3,484 1,659
Other, net (1,074) 433 251
- -------------------------------------------------------------------------------------------------
Income before income taxes 42,625 29,546 17,729
Income tax expense 15,772 10,932 6,525
- -------------------------------------------------------------------------------------------------
Net income $ 26,853 $ 18,614 $ 11,204
=================================================================================================
Basic earnings per share $ .93 $ .66 $ .45
=================================================================================================
Diluted earnings per share $ .91 $ .65 $ .44
=================================================================================================
Basic weighted average shares outstanding 28,916 28,010 25,139
=================================================================================================
Diluted weighted average shares outstanding 29,592 28,670 25,552
=================================================================================================
Supplemental Data:
Revenues - affiliates $ 62,986 $ 47,012 $ 34,673
=================================================================================================
Other income - affiliates $ 514 $ 85 $ 48
=================================================================================================
See accompanying notes.
26
Papa John's International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 28, December 29,
(Dollars in thousands, except per share amounts) 1997 1996
- -------------------------------------------------------------------------------
Assets
Current asset:
Cash and Cash equivalents $ 18,692 $ 24,063
Accounts receivable 12,678 10,169
Accounts receivable-affiliates 2,454 2,932
Inventories 9,091 6,839
Deferred pre-opening costs 3,827 2,654
Prepaid expenses and other current assets 2,434 1,591
- -------------------------------------------------------------------------------
Total current assets 49,176 48,248
Investments 57,933 65,067
Net property and equipment 112,601 80,717
Notes receivable-franchisees 7,083 2,646
Notes receivable-affiliates 7,997 2,407
Other assets 18,453 12,976
- -------------------------------------------------------------------------------
Total assets $253,243 $212,061
===============================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,148 $ 13,105
Accrued expenses 15,132 9,237
Deferred income taxes 102 672
- -------------------------------------------------------------------------------
Total current liabilities 30,382 23,014
Unearned franchise and development fees 4,613 3,378
Deferred income taxes 3,987 3,285
Other long-term liabilities 1,528 1,741
Stockholders' equity:
Preferred stock ($.01 par value per share;
authorized 5,000,000 shares, no shares issued) - -
Common stock ($.01 par value per share; authorized
50,000,000 shares, issued 29,127,717 in 1997 and
28,776,348 in 1996) 291 288
Additional paid-in capital 149,850 143,978
Unrealized gain on investments 321 977
Retained earnings 62,752 35,882
Treasury stock (36,437 shares in 1997 and 36,460
shares in 1996, at cost) (481) (482)
- -------------------------------------------------------------------------------
Total stockholders' equity 212,733 180,643
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $253,243 $212,061
===============================================================================
See accompanying notes.
27
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Unrealized Total
Common Paid-In Gain (Loss) on Retained Treasury Stockholders'
(In thousands) Stock Capital Investments Earnings Stock Equity
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 25, 1994 $ 244 $ 55,627 $ (651) $ 8,002 $ (613) $ 62,609
Issuance of common stock 18 29,982 -- -- -- 30,000
Exercise of stock options 2 567 -- -- -- 569
Tax benefit related to exercise of
non-qualified stock options -- 1,085 -- -- -- 1,085
Acquisitions 4 782 -- -- -- 786
Change in unrealized gain (loss)
on investments -- -- 388 -- -- 388
Net income -- -- -- 11,204 -- 11,204
Other -- -- -- (368) 9 (359)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 268 88,043 (263) 18,838 (604) 106,282
Issuance of common stock 17 50,534 -- -- -- 50,551
Exercise of stock options 2 1,429 -- -- -- 1,431
Tax benefit related to exercise of
non-qualified stock options -- 1,315 -- -- -- 1,315
Acquisitions 1 2,602 -- (1,542) -- 1,061
Change in unrealized gain (loss)
on investments -- -- 1,240 -- -- 1,240
Net income -- -- -- 18,614 -- 18,614
Other -- 55 -- (28) 122 149
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 288 143,978 977 35,882 (482) 180,643
Exercise of stock options 3 3,533 -- -- 1 3,537
Tax benefit related to exercise of
non-qualified stock options -- 2,339 -- -- -- 2,339
Change in unrealized gain (loss)
on investments -- -- (656) -- -- (656)
Net income -- -- -- 26,853 -- 26,853
Other -- -- -- 17 -- 17
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 $ 291 $ 149,850 $ 321 $ 62,752 $ (481) $ 212,733
==========================================================================================================================
See accompanying notes.
28
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands) Year Ended
- --------------------------------------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
Operating activities
Net income $ 26,853 $ 18,614 $ 11,204
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 13,267 9,063 5,776
Amortization 7,255 5,241 2,960
Deferred income taxes 528 1,956 1,249
Other (601) 430 239
Changes in operating assets and
liabilities:
Accounts receivable (2,017) (2,903) (4,701)
Inventories (2,234) (1,651) (2,671)
Deferred pre-opening costs (5,823) (4,247) (3,282)
Prepaid expenses and other
current assets (817) (499) (22)
Other assets (827) (3,253) (2,074)
Accounts payable 2,043 3,717 2,626
Accrued expenses 5,885 2,630 2,376
Unearned franchise and development
fees 1,195 700 829
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 44,707 29,798 14,509
Investing activities
Purchase of property and equipment (43,135) (28,792) (32,683)
Purchase of investments (41,445) (65,031) (15,247)
Proceeds from sale or maturity of
investments 46,696 26,572 12,387
Loans to franchisees (12,348) (7,823) (420)
Loan repayments from franchisees 2,321 -- --
Deferred systems development costs (1,989) (2,614) (2,078)
Acquisitions (6,168) (30) (673)
Other 316 161 (81)
- --------------------------------------------------------------------------------
Net cash used in investing activities (55,752) (77,557) (38,795)
Financing activities
Proceeds from issuance of long-term
debt -- -- 2,000
Payments on long-term debt (175) (1,367) (2,492)
Proceeds from issuance of common stock -- 50,551 30,000
Proceeds from exercise of stock
options 3,537 1,431 569
Tax benefit related to exercise of
non-qualified stock options 2,339 1,315 1,085
Other (27) (12) 255
- --------------------------------------------------------------------------------
Net cash provided by financing
activities 5,674 51,918 31,417
- --------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (5,371) 4,159 7,131
Cash and cash equivalents at beginning
of year 24,063 19,904 12,773
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 18,692 $ 24,063 $ 19,904
================================================================================
See accompanying notes.
29
Papa John's International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business
Papa John's International, Inc. (the "Company") operates and franchises pizza
delivery and carry-out restaurants under the trademark "Papa John's," currently
in 41 states and the District of Columbia. Substantially all revenues are
derived from retail sales of pizza to the general public by Company-owned
restaurants, franchise royalties, sales of franchise and development rights, and
sales to franchisees of food and paper products, restaurant equipment, printing
and promotional items, and information systems and related services used in
their operations.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal Year
The Company's fiscal year ends on the last Sunday in December of each year. The
1997 and 1996 fiscal years consisted of 52 weeks and the 1995 fiscal year
consisted of 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Revenue Recognition
Franchise fees are recognized when a franchised restaurant begins operations, at
which time the Company has performed its obligations related to such fees. Fees
received pursuant to development agreements which grant the right to develop
franchised restaurants in future periods in specific geographic areas are
deferred and recognized on a pro rata basis as the franchised restaurants
subject to the development agreements begin operations. Both franchise and
development fees are nonrefundable. Franchise royalties, which are based on a
percentage of franchised restaurants' sales, are recognized as earned.
Cash Equivalents
Cash equivalents consist of all highly liquid investments with a maturity of
three months or less at date of purchase. These investments are carried at cost
which approximates fair value.
30
2. Significant Accounting Policies (continued)
Accounts Receivable
Substantially all accounts receivable are due from franchisees for purchases of
food and paper products, restaurant equipment, supplies, printing and
promotional items, information systems and related services, and for royalties
from December sales. Credit is extended based on an evaluation of the
franchisee's financial condition and, generally, collateral is not required. The
Company considers substantially all amounts to be collectible.
Inventories
Inventories, which consist of food products, paper goods and supplies,
smallwares, store equipment and printing and promotional items, are stated at
the lower of cost, determined under the first-in, first-out (FIFO) method, or
market.
Deferred Pre-Opening Costs
Pre-opening costs, which represent certain expenses incurred before a new
restaurant or commissary facility opens, are capitalized and amortized on a
straight-line basis over a period of one year from the facility's opening date.
Total costs deferred were approximately $5.8 million in 1997, $4.2 million in
1996 and $3.0 million in 1995.
In April 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued an Exposure Draft of a Proposed
Statement of Position, "Reporting on the Costs of Start-Up Activities" (the
"SOP") which, if finalized, would require adoption at the beginning of 1999. The
Company's initial application of the SOP would require the write-off of deferred
pre-opening costs as of the date of adoption, and such write-off would be
reported, on a net of tax basis, as the cumulative effect of a change in
accounting principle. The Company does not expect the adoption of the SOP to
significantly impact future operating income due to the relative consistency of
new facility openings and the length of the current amortization period.
Deferred pre-opening costs as of December 28, 1997 were $3.8 million.
Investments
The Company determines the appropriate classification of investment securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. All investment securities held by the Company at December 28, 1997,
have been classified as available-for-sale. Available-for-sale securities are
stated at fair value as determined primarily through quoted market prices.
Unrealized gains and losses, net of tax, are reported as a separate component of
stockholders' equity. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization and
accretion, along with interest and dividends earned and realized gains and
losses, are included in investment income. The cost of securities sold is based
on the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets (generally
five to ten years for restaurant, commissary and other equipment, and 20 to 25
years for buildings and improvements).
31
2. Significant Accounting Policies (continued)
Leasehold improvements are amortized over the terms of the respective leases,
including the first renewal period (generally five to ten years).
Systems Development Costs
The Company defers certain systems development and related costs which meet
established criteria. Amounts deferred are amortized over periods not exceeding
five years beginning in the month subsequent to completion of the related
systems project. Total costs deferred were approximately $2.0 million in 1997,
$2.6 million in 1996, and $2.1 million in 1995. Unamortized deferred systems
development costs were $4.3 million at December 28, 1997 and $3.8 million at
December 29, 1996, and are reported in other assets in the accompanying balance
sheets.
Advertising and Related Costs
Advertising and related costs include Company-owned restaurant activities such
as mail coupons, door hangers and promotional items, and Company-owned
restaurant contributions to the Papa John's Marketing Fund, Inc. (the "Marketing
Fund") and local market cooperative advertising funds. All such advertising and
related costs are expensed as incurred. Contributions by Company-owned and
franchised restaurants to the Marketing Fund and the cooperative advertising
funds are based on an established percentage of monthly restaurant revenues. The
Marketing Fund is responsible for the development of marketing and advertising
materials for use throughout the Papa John's system. The local market
cooperative advertising funds are responsible for developing and conducting
advertising activities in a specific market, including the placement of
electronic and print materials developed by the Marketing Fund. Such funds are
accounted for separately and are not included in the consolidated financial
statements of the Company.
Earnings per Share
In 1997, the Financial Accounting Standards Board (the "FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Diluted earnings per share is based upon
weighted average shares outstanding adjusted for the dilutive effect of stock
options. Basic and diluted earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements. The calculations of basic and diluted earnings per share for the
years ended December 28, 1997, December 29, 1996 and December 31, 1995 are as
follows (in thousands, except per share data):
1997 1996 1995
- --------------------------------------------------------------------------------
Basic earnings per share:
Net income $26,853 $18,614 $11,204
Weighted average shares outstanding 28,916 28,010 25,139
- --------------------------------------------------------------------------------
Basic earnings per share $ 0.93 $ 0.66 $ 0.45
================================================================================
Diluted earnings per share:
Net income $26,853 $18,614 $11,204
Weighted average shares outstanding 28,916 28,010 25,139
Dilutive effect of outstanding common stock options 676 660 413
- --------------------------------------------------------------------------------
Diluted weighted average shares outstanding 29,592 28,670 25,552
- --------------------------------------------------------------------------------
Diluted earnings per share $ 0.91 $ 0.65 $ 0.44
================================================================================
Options to purchase common stock with an exercise price greater than the average
market price were not included in the computation of diluted earnings per share
because the effect would have been antidilutive. The number of antidilutive
options was 695,000 in 1997, 217,000 in 1996, and 42,000 in 1995.
32
2. Significant Accounting Policies (continued)
Prior Year Data
Certain prior year data has been reclassified to conform to the 1997
presentation.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is required to be adopted for 1998 interim financial reporting. This
Statement will require additional disclosures related to comprehensive income
(which includes items such as unrealized gains and losses on available-for-sale
securities, not included in the income statement) in the Company's financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which is required to be adopted for 1998
year-end financial reporting. This Statement does not have any impact on the
financial results or financial condition of the Company, but may result in
certain changes in required disclosures of segment information.
33
3. Business Combinations
During the second quarter of 1997, the Company acquired four Papa John's
restaurants in Arlington, Texas for approximately $488,000 in cash and 16 Papa
John's restaurants in North Carolina for $5.0 million (consisting of $4,960,000
in cash and a credit of $40,000 towards future development fees). A majority
ownership interest in the franchisee of the North Carolina restaurants was held
by certain directors and officers, including the Chief Executive Officer of the
Company.
During the fourth quarter of 1997, the Company acquired three Papa John's
restaurants near Denver, Colorado for $720,000 in cash. These restaurants were
owned by the Chief Executive Officer of the Company and his wife.
The above business combinations were accounted for by the purchase method of
accounting whereby operating results subsequent to the acquisition date are
included in the Company's financial statements.
During the fourth quarter of 1997, the Company acquired a 49% equity ownership
interest in Mountain Pizza Group, L.L.C. ("MPG"), an entity which operates seven
Papa John's restaurants in Denver, Colorado, for $150,000 in cash. The operating
results of MPG will be accounted for by the equity method of accounting. The 49%
equity ownership interest was acquired from the President of the Company, who
remains the 51% majority owner of MPG.
During 1996, the Company purchased the assets of four Papa John's restaurants
from franchisees for total consideration of approximately $1.5 million,
consisting of 51,800 shares of common stock of the Company (valued at $1.4
million) and $30,000 in cash. Additionally during 1996, the Company acquired a
franchisee operating eighteen Papa John's restaurants in a transaction accounted
for as a pooling of interests. The Company issued 46,593 shares of its common
stock (valued at $1.5 million) and retired $3.5 million of acquiree debt in
connection with this acquisition.
During 1995, the Company purchased the assets of eight Papa John's restaurants
from franchisees for total consideration of approximately $2.0 million,
consisting of 54,170 shares of common stock of the Company (valued at $650,000),
$574,000 in credits toward future development and franchise fees and $770,000 in
cash. Additionally during 1995, the Company acquired franchisees operating 15
Papa John's restaurants in transactions accounted for as poolings of interests.
The Company issued 346,080 shares of its common stock (valued at $6.0 million)
and retired $1.2 million of acquiree debt in connection with these acquisitions.
34
4. Investments
A summary of the Company's available-for-sale securities as of December 28, 1997
and December 29, 1996 follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------
December 28, 1997
U.S. Government securities $ 1,001 $ -- $ (4) $ 997
Corporate debt securities 500 -- (1) 499
Municipal bonds 40,073 125 (1) 40,197
Mortgage-backed securities 556 5 -- 561
Fixed income mutual funds 10,822 -- (217) 10,605
Equity securities 3,320 736 -- 4,056
Interest receivable 1,018 -- -- 1,018
- ------------------------------------------------------------------------------------
Total $ 57,290 $ 866 $ (223) $ 57,933
====================================================================================
December 29, 1996
U.S. Government securities $ 4,003 $ 11 $ (17) $ 3,997
Corporate debt securities 500 -- (1) 499
Municipal bonds 45,852 142 (1) 45,993
Mortgage-backed securities 1,078 -- (1) 1,077
Fixed income mutual funds 10,822 -- (221) 10,601
Equity securities -- 1,772 -- 1,772
Interest receivable 1,128 -- -- 1,128
- ------------------------------------------------------------------------------------
Total $ 63,383 $ 1,925 $ (241) $ 65,067
====================================================================================
The amortized cost and estimated fair value of securities at December 28, 1997,
by contractual maturity, are shown below (in thousands). Expected maturities
will differ from contractual maturities because the issuers of securities may
have the right to prepay obligations without prepayment penalties.
Amortized Estimated
Cost Fair Value
- -------------------------------------------------------------------------------
Due in one year or less $ 26,277 $ 26,322
Due after one year through three years 15,297 15,371
Mortgage-backed securities 556 561
Fixed income mutual funds 10,822 10,605
Equity securities 3,320 4,056
Interest receivable 1,018 1,018
- -------------------------------------------------------------------------------
Total $ 57,290 $ 57,933
===============================================================================
35
5. Net Property and Equipment
Net property and equipment consists of the following (in thousands):
1997 1996
- -------------------------------------------------------------------------------
Land $ 14,219 $ 10,273
Buildings and improvements 13,478 10,734
Leasehold improvements 35,406 20,169
Equipment and other 70,419 49,496
Construction in progress 11,790 10,841
- -------------------------------------------------------------------------------
145,312 101,513
Less accumulated depreciation and amortization (32,711) (20,796)
- -------------------------------------------------------------------------------
Net property and equipment $ 112,601 $ 80,717
===============================================================================
6. Franchisee Loan Program
During 1996, the Company established a program under which selected franchisees
may borrow funds for use in the construction and development of their
restaurants. Loans outstanding to franchisees were approximately $15.1 million
as of December 28, 1997 and $5.1 million as of December 29, 1996. As of December
28, 1997, commitments to lend up to an additional $4.5 million had been made.
Such loans bear interest at fixed or floating rates (ranging from 5.5% to 10.0%
at December 28, 1997), and are generally secured by the fixtures, equipment,
signage and, where applicable, land of each restaurant and the ownership
interests in the franchisee. Interest earned on franchisee loans was
approximately $1.1 million in 1997 and $153,000 in 1996, and is reported in
investment income in the accompanying statements of income. Approximately $8.0
million of the loans outstanding as of December 28, 1997 were to franchisees in
which the Company or certain directors or officers of the Company had an
ownership interest.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
1997 1996
- -------------------------------------------------------------------------------
Salaries, wages and bonuses $ 2,124 $ 1,738
Taxes other than income 4,045 2,857
Accrued insurance 3,520 1,242
Income taxes 2,495 1,228
Other 2,948 2,172
- -------------------------------------------------------------------------------
Total $ 15,132 $ 9,237
===============================================================================
36
8. Long-Term Debt and Credit Arrangements
Long-term debt consists of a $2.0 million economic development loan (the "Loan")
from the State of Mississippi in connection with the opening of a commissary in
Jackson, Mississippi. The balance of the loan was $1.5 million as of December
28, 1997 and $1.7 million as of December 29, 1996, and is classified in accrued
expenses and other long-term liabilities in the accompanying balance sheets.
The Company has a $10.0 million revolving credit agreement, which expires on
June 29, 1998. Outstanding balances accrue interest at 1% below the prime rate
or at rates tied to other interest indices at the election of the Company. In
the event of any default, the lender has a security interest in the Company's
cash account balances maintained with the lender. Letters of credit in the
amount of $2.0 million have been issued under the agreement on the Company's
behalf, reducing the remaining borrowing capacity to $8.0 million at December
28, 1997.
9. Income Taxes
A summary of the provision for income taxes follows (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
Current
Federal $ 13,061 $ 7,658 $ 4,469
State and local 2,183 1,318 807
Deferred (federal and state) 528 1,956 1,249
- --------------------------------------------------------------------------------
Total $ 15,772 $ 10,932 $ 6,525
================================================================================
Significant deferred tax assets (liabilities) follow (in thousands):
1997 1996
- -------------------------------------------------------------------------------
Unearned development fees $ 1,630 $ 1,055
Unrealized loss on investments 82 91
Accrued expenses 1,405 263
Other 270 204
- -------------------------------------------------------------------------------
Total deferred tax assets 3,387 1,613
Valuation allowance related to
unrealized loss on investments (82) (84)
- -------------------------------------------------------------------------------
Net deferred tax asset 3,305 1,529
Deferred expenses (3,158) (2,107)
Accelerated depreciation (3,833) (2,594)
Unrealized gain on warrant (270) (656)
Other (133) (129)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (7,394) (5,486)
- -------------------------------------------------------------------------------
Net deferred tax liability $ (4,089) $ (3,957)
===============================================================================
37
9. Income Taxes (continued)
The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense for the years ended December 28, 1997, December 29, 1996 and
December 25, 1995 is as follows (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
Tax at U.S. federal statutory rate $ 14,919 $ 10,341 $ 6,063
State and local income taxes 1,459 1,011 567
Tax exempt investment income (783) (788) (188)
Other 177 368 83
- --------------------------------------------------------------------------------
Total $ 15,772 $ 10,932 $ 6,525
================================================================================
Income taxes paid were $11.0 million in 1997, $6.5 million in 1996 and $3.2
million in 1995.
10. PJ America, Inc. Stock Warrant
PJ America, Inc. ("PJ America"), a franchisee of the Company, completed an
initial public offering ("IPO") of its common stock effective October 25, 1996.
In connection with the IPO, PJ America issued to the Company a warrant to
purchase 225,000 shares of its common stock. The warrant is exercisable in whole
or in part at any time within five years from the closing date of the IPO, and
the purchase price of each share of common stock pursuant to the warrant is
$11.25 per share (90% of the IPO price of $12.50 per share). The warrant was
issued by PJ America to the Company in consideration for the grant by the
Company of rights to enter into development agreements for certain specified
territories and the waiver by the Company of certain market transfer fees. The
Company's agreement with PJ America anticipates that PJ America will pay
standard development and franchise fees in connection with opening restaurants
in the specified territories.
The Company did not recognize income in connection with receipt of the warrant.
The warrant is classified as an available-for-sale security, and accordingly, is
stated at fair value in the balance sheet, with unrealized gains, net of tax,
reported as a separate component of stockholders' equity.
The fair value of the warrant was $731,250 on December 28, 1997, based upon a
closing price per share of $14.50 for PJ America common stock on that date, and
is reported in investments in the accompanying balance sheets. The intrinsic
value of the warrant (market value of PJ America common stock less the exercise
price of the warrant) is considered a reasonable approximation of the fair value
of the warrant.
Certain officers and/or directors of the Company are also officers and/or
directors of PJ America.
38
11. Related Party Transactions
Certain officers and directors of the Company own equity interests in entities
that operate and/or have rights to develop franchised restaurants. Prior to the
Company's initial public offering of common stock in June 1993, certain of these
affiliated entities entered into agreements to acquire area development rights
at reduced development fees and also pay reduced initial franchise fees when
restaurants are opened. All such entities pay royalties at the same rate as
other franchisees. Following is a summary of transactions and balances with
affiliated entities (in thousands):
1997 1996 1995
- -----------------------------------------------------------------------
Revenues from affiliates:
Commissary sales $47,153 $35,972 $26,180
Equipment and other sales 8,187 5,628 4,265
Franchise royalties 6,265 4,512 3,518
Franchise and development fees 1,381 900 710
- -----------------------------------------------------------------------
Total $62,986 $47,012 $34,673
=======================================================================
Other income $ 514 $ 85 $ 48
=======================================================================
Accounts receivable-affiliates $ 2,454 $ 2,932 $ 2,093
=======================================================================
Notes receivables-affiliates $ 7,997 $ 2,407 $ 728
=======================================================================
During 1997, the Company acquired full or partial ownership in 26 Papa John's
restaurants from related parties (see Note 3).
The Company paid $689,000 in 1997, $515,000 in 1996 and $149,000 in 1995 for
charter aircraft services provided by entities owned by certain directors and
officers, including the Chief Executive Officer, of the Company.
The Company advanced $197,000 in 1997 and $384,000 in 1996, in premiums for
split-dollar life insurance coverage on the Chief Executive Officer for the
purpose of funding estate tax obligations. The Company and the officer share the
cost of the premiums. The premiums advanced by the Company will be repaid out of
the cash value or proceeds of the policies.
In December 1996, the Company sold its 10% ownership interest in L-N-W Pizza,
Inc. ("L-N-W"), a franchisee that operates Papa John's restaurants in Florida,
back to L-N-W. The Chief Operating Officer of the Company was the 90% owner of
L-N-W prior to the sale and is now the sole owner. The Company sold its 10%
interest for total consideration of $411,000, which represented a gross value of
approximately $400,000 per restaurant.
39
12. Lease Commitments
The Company leases office, retail and commissary space under operating leases
with terms generally ranging from three to five years and providing for at least
one renewal. Certain leases further provide that the lease payments may be
increased annually based on the Consumer Price Index. The Company also leases
certain equipment under operating leases with terms ranging from three to seven
years. Future minimum lease payments are as follows: 1998 - $8.3 million; 1999 -
$7.0 million; 2000 - $5.6 million; 2001 - $3.9 million; 2002 -$1.9 million; and
thereafter - $3.3 million. Total rent expense was $7.9 million in 1997, $4.6
million in 1996 and $3.2 million in 1995.
13. Stock Options
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company awards stock options under the Papa John's International, Inc. 1993
Stock Ownership Incentive Plan (the "Incentive Plan") and the Papa John's
International, Inc. 1993 Non-Employee Directors Stock Option Plan (the
"Directors Plan"). Shares of common stock authorized for issuance are 4,737,500
under the Incentive Plan and 270,000 under the Directors Plan. On February 26,
1998, the Board of Directors amended the Incentive Plan to increase the number
of shares available for issuance under the Plan to 6,000,000 shares. The
amendment will be submitted for stockholder approval at the Annual Meeting of
Stockholders scheduled for May 21, 1998. Options granted under both plans
generally expire ten years from the date of grant and vest over one to five year
periods, except for options awarded under a multi-year operations compensation
program which vest immediately upon grant.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 25, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free interest rates of 5.7% and 5.9%; a dividend
yield of 0%; volatility factors of the expected market price of the Company's
common stock of .47; and a weighted-average expected life of the options of 3.6
years.
40
13. Stock Options (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share amounts):
1997 1996 1995
=======================================================================
Pro forma net income $19,754 $14,772 $10,922
Pro forma earnings per share:
Basic $ 0.68 $ 0.53 $ 0.43
Diluted $ 0.67 $ 0.52 $ 0.43
Because SFAS 123 is applicable only to options granted subsequent to December
25, 1994, its pro forma effect will not be fully reflected until a complete five
years of vesting occurs for 1995 option awards in 2000.
Information pertaining to options for 1997, 1996 and 1995 is as follows (number
of options in thousands):
1997 1996 1995
Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
============================ ============================= =============================
Outstanding-beginning of year 3,532 $20.98 1,725 $12.01 1,188 $ 6.46
Granted 2,259 29.30 2,108 27.31 903 17.07
Exercised 351 10.09 180 7.13 240 2.61
Cancelled 243 25.91 121 19.04 126 11.48
---------------------------- ----------------------------- -----------------------------
Outstanding-end of year 5,197 $25.28 3,532 $20.98 1,725 $12.01
============================ ============================= =============================
Exercisable-end of year 1,567 $21.96 870 $13.19 421 $ 3.63
============================ ============================= =============================
Weighted-average fair value
of options granted during
the year $10.22 $ 9.65 $ 5.03
======= ======= =======
41
13. Stock Options (continued)
The number, weighted-average exercise price and weighted-average remaining
contractual life of options outstanding as of December 28, 1997, and the number
and weighted average exercise price of options exercisable as of December 28,
1997 follow (number of options in thousands):
Range of Number of Weighted-Average Weighted-Average
Exercise Prices Options Exercise Price Remaining Life
- -----------------------------------------------------------------------------------------
Outstanding options: $ 5.44 - $ 9.99 206 $ 6.33 5.59
10.00 - 19.99 1,168 16.04 7.63
20.00 - 38.50 3,823 29.13 9.23
- -----------------------------------------------------------------------------------------
Total 5,197 $25.28 8.73
=========================================================================================
Exercisable options: $ 5.44 - $ 9.99 160 $ 6.08
10.00 - 19.99 683 16.33
20.00 - 38.50 724 30.79
- -----------------------------------------------------------------------------------------
Total 1,567 $21.96
=========================================================================================
As of December 28, 1997, approximately 75,750 shares were available for future
issuance under the Directors Plan. Contingent upon approval by the Company's
stockholders of the amendment to the Incentive Plan described above, 593,000
shares were available at December 28, 1997 for future issuance under such Plan.
14. Defined Contribution Benefit Plan
The Company has established the Papa John's International, Inc. 401(k) Plan (the
"Plan"), as a defined contribution benefit plan, in accordance with Section
401(k) of the Internal Revenue Code. The Plan is open to all employees who meet
certain eligibility requirements and allows participating employees to defer
receipt of a portion of their compensation and contribute such amount to one or
more investment funds. Administrative costs of the Plan are paid by the Company
and are not significant.
15. Quarterly Data (unaudited, in thousands, except per share data)
Quarter 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues $109,643 $76,726 $126,212 $87,680 $128,252 $92,729 $144,677 $102,917
Operating income 8,382 5,024 9,200 5,801 9,697 6,519 11,915 8,285
Net income 5,693 3,519 6,271 4,232 6,854 4,914 8,035 5,949
Basic earnings per share $ .20 $ .13 $ .22 $ .15 $ .24 $ .17 $ .28 $ .21
Diluted earnings per share $ .19 $ .13 $ .21 $ .15 $ .23 $ .17 $ .27 $ .20
All quarterly information above is presented in 13 week periods.
42
Report of Management
The consolidated financial statements appearing in this Annual Report have been
prepared by management, which is responsible for their preparation, integrity
and fair presentation. The statements have been prepared in accordance with
generally accepted accounting principles and necessarily include some amounts
that are based on management's best estimates and judgments.
Management is responsible for the system of internal controls over financial
reporting at Papa John's International, Inc. and its subsidiaries, a system
designed to provide reasonable assurance regarding the preparation of reliable
published financial statements. This system is augmented by written policies and
procedures and the selection and training of qualified personnel. Management
believes that the Company's system of internal controls over financial reporting
provides reasonable assurance that the financial records are reliable for
preparing financial statements.
The Audit Committee of the Board of Directors meets with the independent
auditors and management periodically to discuss internal controls over financial
reporting and other auditing and financial reporting matters. The Committee
reviews with the independent auditors the scope and results of the audit effort.
The Committee also meets with the independent auditors without management
present to ensure that the independent auditors have free access to the
Committee. The independent auditors are recommended by the Audit Committee of
the Board of Directors and selected by the Board of Directors. Based upon their
audit of the consolidated financial statements, the independent auditors, Ernst
& Young LLP, have issued their Report of Independent Auditors, which follows.
Report of Independent Auditors
The Board of Directors and Stockholders
Papa John's International, Inc.
We have audited the accompanying consolidated balance sheets of Papa John's
International, Inc. and subsidiaries (the "Company") as of December 28, 1997 and
December 29, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 28, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Papa
John's International, Inc. and subsidiaries at December 28, 1997 and December
29, 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 28, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 27, 1998
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners
and Management; and Certain Relationships and Related Transactions.
The information required by these items, other than the information set
forth in this Report under Part I, "Executive Officers of the Registrant," is
omitted because the Company is filing a definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Report which includes the required information. Such information is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements:
The following consolidated financial statements, notes related thereto
and report of independent auditors are included in Item 8 of this Report:
Consolidated Statements of Income for the years ended December 28,
1997, December 29, 1996 and December 31, 1995
Consolidated Balance Sheets as of December 28, 1997 and December 29,
1996
Consolidated Statements of Stockholders' Equity for the years ended
December 28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows for the years ended December 28,
1997, December 29, 1996 and December 31, 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and therefore have been omitted.
(a)(3) Exhibits:
44
3.1 The Company's Amended and Restated Certificate of Incorporation.
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-61366) is incorporated herein by reference.
3.2 The Company's Restated By-Laws. Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-61366) is
incorporated herein by reference.
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Papa John's International, Inc. Exhibit 3 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 29, 1997, is incorporated herein by reference.
4.1 Specimen Common Stock Certificate. Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995
(Commission File No. 0-21660) is incorporated herein by reference.
4.2 Amended and Restated Certificate of Incorporation and Restated By-
Laws (See 3.1, 3.2 and 3.3 above).
*10.1 Consulting Agreement dated March 29, 1991, between the Company and
Richard F. Sherman. Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (Registration No. 33-61366) is incorporated
herein by reference.
10.2 Lease dated November 7, 1990, including amendments I, II and III
thereto, between the Company and CWK #7, a Texas limited partnership,
relating to the Company's corporate offices. Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No. 33-
61366) is incorporated herein by reference.
10.3 Lease dated November 9, 1990, including amendments thereto, between
the Company and Crow-Kessler, a Texas limited partnership, relating
to the Company's commissary and distribution facility in Louisville,
Kentucky. Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (Registration No. 33-61366) is incorporated herein by
reference.
10.4 Lease dated January 15, 1993, between the Company and CWK #7, a Texas
limited partnership, relating to the Company's corporate offices.
Exhibit 10.7 to the Company's Registration Statement on Form S-1
(Registration No. 33-61366) is incorporated herein by reference.
*10.5 Papa John's International, Inc. 1993 Stock Ownership Incentive Plan.
Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the
quarter ended September 29, 1996, is incorporated herein by
reference.
*10.6 Papa John's International, Inc. 1993 Stock Option Plan for Non-
Employee Directors. Exhibit 10.3 to the Company's quarterly report on
Form 10-Q for the quarter ended September 29, 1996, is incorporated
herein by reference.
*10.7 Employment and Non-Competition Agreement dated January 1, 1993,
between the Company and Richard J. Emmett. Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (Registration No. 33-
61366) is incorporated herein by reference.
10.8 The Company's standard Franchise Agreement. Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 1996, is incorporated herein by reference.
45
10.9 Lease dated May 14, 1993, between PJ Food Service, Inc. and Sample
Properties relating to the Company's commissary facility in Raleigh,
North Carolina. Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (Registration No. 33-61366) is incorporated
herein by reference.
10.10 Amendment IV to Lease dated November 7, 1990 (and related leases),
by and between the Company and CWK #7, a Texas limited partnership,
relating to the Company's corporate offices. Exhibit 10.17 to the
Company's Registration Statement on Form S-1 (Registration No. 33-
73530) is incorporated herein by reference.
10.11 Lease dated November 1, 1993, between PJ Food Service, Inc. and
Jackson Developers, LLC, a Missouri limited liability company,
relating to the Company's commissary and distribution facility in
Jackson, Mississippi. Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (Registration No. 33-73530) is incorporated
herein by reference.
10.12 Second Amended and Restated Loan Agreement, and related promissory
note, each dated June 30, 1995, between the Company and PNC Bank,
Kentucky, Inc. Exhibit 10.1 to the Company's quarterly report on
Form 10-Q for the quarterly period ended June 25, 1995 (Commission
File No. 0-21660) is incorporated herein by reference.
10.13 Amendment V to Lease dated November 7, 1990 (and related leases), by
and between the Company and CWK #7, a Texas limited partnership,
relating to the Company's corporate offices. Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (Registration No. 33-
73530) is incorporated herein by reference.
10.14 Loan Agreement among Mississippi Business Finance Corporation
(acting for and on behalf of the State of Mississippi), Bank of
Mississippi (as Servicing Trustee) and PJFS of Mississippi, Inc.
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended March 27, 1994 (Commission File No. 0-21660) is
incorporated herein by reference.
10.15 Amendment VI to Lease dated November 7, 1990 (and related leases),
by and between the Company and CWK #7, a Texas Partnership, relating
to the Company's corporate offices. Exhibit 10.28 to the Company's
Annual Report on From 10-K for the fiscal year ended December 25,
1994 (Commission File No. 0-21660) is incorporated herein by
reference.
10.16 Third Amended and Restated Loan Agreement dated June 30, 1996,
between the Company and PNC Bank, Kentucky, Inc. Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarterly period
ended September 29, 1996, is incorporated herein by reference.
10.17 Agreement and Plan of Merger dated December 1, 1995, by and among
Papa John's International, Inc., Papa John's USA, Inc., Kentuckiana
Pizza, Ltd., Kentuckiana
46
Pizza, Ltd., II (Collectively, "Kentuckiana Pizza") and all of the
stockholders of Kentuckiana Pizza. Exhibit 2.1 to the Company's
Current Report on Form 8-K dated December 1, 1995 (Commission File
No. 0-21660) is incorporated herein by reference.
10.18 Agreement and Plan of Merger dated October 16, 1995 by and among
Papa John's International, Inc., Papa John's USA, Inc., NRG, Inc.
("NRG") and all of the stockholders of NRG. Exhibit 2.2 to the
Company's Current Report on Form 8-K dated December 1, 1995
(Commission File No. 0-21660) is incorporated herein by reference.
*10.19 1996 Papa John's International, Inc. Executive Option Program.
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, is incorporated herein by
reference.
10.20 Lease dated November 29, 1995 between PJ Food Service, Inc. and
Arlington-OP&F, Inc. relating to the Company's distribution
facility in Dallas, Texas. Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, is
incorporated herein by reference.
10.21 Lease dated January 3, 1996, between PJ Food Service, Inc. and
Fraser, L.L.C. relating to the Company's commissary and
distribution facility in Denver, Colorado. Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, is incorporated herein by reference.
10.22 Amendment VII to Lease dated November 7, 1990 (and related leases)
between the Company and CWK #7 Limited Partnership, related to the
Company's corporate offices. Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, is
incorporated herein by reference.
10.23 Lease dated January 23, 1996, between PJ Food Service, Inc. and CWK
#8 relating to commercial and corporate office space in Louisville,
Kentucky. Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, is incorporated herein
by reference.
10.24 Agreement for Purchase and Sale of Real Estate dated February 28,
1996, by and between Papa John's USA, Inc., NTS/Crossings
Corporation and NTS Bluegrass Commonwealth Park, relating to
approximately 6 acres of land in Louisville, Kentucky. Exhibit
10.32 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, is incorporated herein by reference.
10.25 Lease dated September 30, 1996, between PJ Food Service, Inc. and
Opus Southwest corporation relating to the Company's commissary and
distribution facility opened in Tempe, Arizona. Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 1996, is incorporated herein by reference.
47
10.26 Sublease dated January 16, 1997, between PJ Food Service, Inc. and
Distribution Unlimited, Inc. relating to the Company's commissary
and distribution facility opened in Rotterdam, New York.
10.27 Lease dated August 30, 1996, between PJ Food Service, Inc. and A.
Terry Moss and Ira E. White relating to the Company's commissary
and distribution facility opened in Des Moines, Iowa. Exhibit 10.29
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1996, is incorporated herein by reference.
*10.28 Amendment to Papa John's International, Inc. 1993 Stock Ownership
Incentive Plan. Exhibit 10 to the Company's quarterly report on
Form 10-Q for the quarter ended June 29, 1997, is incorporated
herein by reference.
10.29 Discretionary Line of Credit dated June 30, 1997, between the
Company and PNC Bank, Kentucky, Inc. Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended September 28,
1997, is incorporated herein by reference.
*10.30 Amendment to Chief Operating Officer Agreement dated October 9,
1997, by and between the Company and Wade S. Oney. Exhibit 10.2 to
the Company's quarterly report on Form 10-Q for the quarter ended
September 28, 1997, is incorporated herein by reference.
10.31 Lease dated November 27, 1997 by and between the Company and SF
Property Investments, LLC, an Oregon limited liability corporation,
relating to the Company's commissary and distribution facility to
be opened in Portland, Oregon.
10.32 Amendment II to Lease dated November 9, 1990 between the Company
and Crow-Kessler, a Texas limited partnership, relating to the
Company's commissary and distribution facility in Louisville,
Kentucky.
10.33 Amendment VIII to Lease dated November 7, 1990 (and related leases)
between the Company and CWK #7 Limited Partnership, related to the
Company's corporate offices.
10.34 First Lease Modification Agreement to Lease dated May 14, 1993
between PJ Food Service, Inc., and Sample Properties relating to
the Company's commissary and distribution facility in Raleigh,
North Carolina.
10.35 First Amendment to Lease dated November 29, 1995 between PJ Food
Service, Inc. and Arlington-OP&F, Inc. relating to the Company's
distribution facility in Dallas, Texas.
10.36 Amendment IX to Lease dated November 7, 1990 (and related leases)
between the Company and CWK #7 Limited Partnership, related to the
Company's corporate offices.
10.37 Amendment III to Lease dated November 9, 1990 between the Company
and Crow-Kessler, a Texas limited partnership, relating to the
Company's commissary and distribution facility in Louisville,
Kentucky.
21 Subsidiaries of the Company:
(a) PJ Food Service, Inc., a Kentucky corporation
(b) Papa John's USA, Inc., a Kentucky corporation
(c) Printing & Promotions, Inc., a Kentucky corporation
(d) PJFS of Mississippi, Inc., a Mississippi corporation
(e) Risk Services Corp., a Kentucky corporation
(f) Capital Delivery, Ltd., a Kentucky corporation
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information only and not
deemed to be filed with the Commission.
27.2 Restated Financial Data Schedule including columns for the quarters
ended September 28, 1997, June 29, 1997 and March 30, 1997 and
fiscal year ended December 29, 1996. The schedule is submitted
electronically to the Securities and Exchange Commission for
information only and is not deemed to be filed with the Commission.
27.3 Restated Financial Data Schedule including columns for the quarters
ended September 29, 1996, June 30, 1996 and March 31, 1996 and
fiscal year ended December 31, 1995. The schedule is submitted
electronically to the Securities and Exchange Commission for
information only and is not deemed to be filed with the Commission.
99.1 Cautionary Statements.
- ----------------
*Compensatory plan required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the last fiscal quarter of
the period covered by this report.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Consolidated Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and therefore have been
omitted.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 19, 1998 PAPA JOHN'S INTERNATIONAL, INC.
By: /s/ John H. Schnatter
--------------------------------
John H. Schnatter, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
/s/ John H. Schnatter Chairman, Chief Executive Officer March 19, 1998
- -------------------------- and Director (Principal Executive
John H. Schnatter Officer)
/s/ Charles W. Schnatter Senior Vice President, Secretary, March 19, 1998
- -------------------------- General Counsel and Director
Charles W. Schnatter
/s/ Blaine E. Hurst President and Director March 19, 1998
- --------------------------
Blaine E. Hurst
/s/ O. Wayne Gaunce Director March 19, 1998
- --------------------------
O. Wayne Gaunce
/s/ Jack A. Laughery Director March 19, 1998
- --------------------------
Jack A. Laughery
/s/ Michael W. Pierce Director March 19, 1998
- --------------------------
Michael W. Pierce
49
Signature Title Date
- ------------------------------------------------------------------------------------
/s/ Richard F. Sherman Director March 19, 1998
- --------------------------
Richard F. Sherman
/s/ E. Drucilla Milby Chief Financial Officer and Treasurer March 19, 1998
- -------------------------- (Principal Financial Officer)
E. Drucilla Milby
/s/ J. David Flanery Vice President and Corporate March 19, 1998
- -------------------------- Controller (Principal Accounting
J. David Flanery Officer)
50
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- -------------------------------------------------------------------------------------------------------
10.26 Sublease dated January 16, 1997, between PJ Food Service, Inc.
and Distribution Unlimited, Inc. relating to the Company's
Commissary and Distribution Facility opened in Rotterdam, New
York.
10.31 Lease dated November 21, 1997 by and between the Company and SF
Property Investments, LLC, an Oregon limited liability
corporation, relating to the Company's commissary and
distribution facility to be opened in Portland, Oregon.
10.32 Amendment II to Lease dated November 9, 1990 between the Company
and Crow-Kessler, a Texas limited partnership, relating to the
Company's commissary and distribution facility in Louisville,
Kentucky.
10.33 Amendment VIII to Lease dated November 7, 1990 (and related
leases) between the Company and CWK #7 Limited Partnership,
related to the Company's corporate offices.
10.34 First Lease Modification Agreement to Lease dated May 14, 1993
between PJ Food Service, Inc., and Sample Properties relating to
the Company's commissary and distribution facility in Raleigh,
North Carolina.
10.35 First Amendment to Lease dated November 29, 1995 between PJ Food
Service, Inc. and Arlington-OP&F, Inc. relating to the Company's
distribution facility in Dallas, Texas.
10.36 Amendment IX to Lease dated November 7, 1990 (and related
leases) between the Company and CWK #7 Limited Partnership,
related to the Company's corporate offices.
10.37 Amendment III to Lease dated November 9, 1990 between the
Company and Crow-Kessler, a Texas limited partnership, relating
to the Company's commissary and distribution facility in
Louisville, Kentucky.
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is
not deemed to be filed with the Commission.
27.2 Restated Financial Data Schedule including columns for the
quarters ended September 28, 1997, June 29, 1997 and March 30,
1997 and fiscal year ended December 29, 1996. The schedule is
submitted electronically to the Securities and Exchange
Commission for information only and is not deemed to be filed
with the Commission.
27.3 Restated Financial Data Schedule including columns for the
quarters ended September 29, 1996, June 30, 1996 and March 31,
1996 and fiscal year ended December 31, 1995. The schedule is
submitted electronically to the Securities and Exchange
Commission for information only and is not deemed to be filed
with the Commission.
99.1 Cautionary Statements
51