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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 29, 1996
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 61-12033
(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)
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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. [X]
As of March 18, 1997, there were 28,759,997 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 $513,981,333 based on the last sale price of the Common Stock on
March 18, 1997 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 22, 1997.
TABLE OF CONTENTS
PART I
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Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
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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 Supplementary 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
32 states and the District of Columbia, principally in the Midwest,
Mid-Atlantic, South and Southeast. The first Company-owned restaurant opened
in 1985 and the first franchised restaurant opened in 1986. At December 29,
1996, there were 1,160 Papa John's restaurants in operation, consisting of 303
Company-owned and 857 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 concept. The key elements of the Company's
strategy include:
Focused, High Quality Menu. Papa John's restaurants offer a focused
menu of high quality, value-priced pizza, breadsticks and cheesesticks.
Papa John's original crust pizza is prepared using fresh dough (not
frozen), real mozzarella cheese, pizza sauce made from fresh-packed
tomatoes (not concentrate), a proprietary mix of savory spices and a
choice of high quality meat and vegetable toppings in generous portions.
Papa John's "Better Thin" pizza was introduced in 1996 in response to
customer demand. Papa John's "Better Thin" is made with a prepared
crust and the same high quality toppings as the 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 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 employee 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 employees through on-
going training programs, incentive compensation and opportunities for
advancement. Employee training programs for the Company and its
franchisees are conducted at 16 regional training centers. The Company
offers financial and stock incentives to employees 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 employees.
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, local marketing efforts area supplemented with
radio and television advertising.
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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. 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 franchisee is required to purchase
dough and spice mix from the Company and all other supplies either from
the Company or its approved suppliers. The Company devotes significant
resources to provide its franchisees with assistance in employee
training, marketing, site selection and restaurant design.
UNIT ECONOMICS
The Company believes its unit economics are exceptional. The 215
Company-owned restaurants that were open throughout the entire 1996
fiscal year generated average sales of $682,000, average cash flow
(operating income plus depreciation) of $125,000 and average restaurant
operating income of $103,000 (or 15% of average sales). A significant
number of these restaurants were operating in newer markets. Sales and
profitability in the initial months of operations, particularly in new
markets, historically have been lower than for mature restaurants,
although recent trends indicate that new markets are opening with higher
than historical sales volumes.
The average cash investment for the 66 Company-owned restaurants
opened during the 1996 fiscal year, exclusive of land and pre-opening
costs, was approximately $208,000. The Company expects the average cash
investment for restaurants to be opened in 1997 to approximate
$240,000, with the increase from 1996 resulting primarily from an
increase in the percentage of planned free-standing units in 1997.
EXPANSION
A total of 290 restaurants were opened during 1996, consisting of 66
Company-owned and 224 franchised restaurants. The Company plans to open
approximately 70 restaurants in 1997 and anticipates that its
franchisees will open approximately 230 restaurants in 1997. Expansion
is planned for the East Coast, Southwest and Rocky Mountain regions in
addition to building out existing markets in the Midwest, Mid-Atlantic,
South and Southeast. As part of its growth strategy, the Company will
continue to consider acquiring restaurants from its franchisees. The
Company acquired 22 restaurants from its franchisees during the 1996
fiscal year. See "Note 4 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 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. To accelerate penetration of larger markets, the
Company has co-developed markets with franchisees or divided markets
among franchisees, and will continue to utilize market co-development in
the future where appropriate. 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.
3
MENU
Papa John's restaurants offer a focused menu of high quality, value-
priced 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, "Better Thin," uses a
prepared crust which simplifies store-level operations. All Papa John's
pizzas are made from high protein wheat flour, real mozzarella cheese,
pizza sauce made with fresh packed tomatoes (not concentrate), 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 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 carry-out customer
area. The counters are designed to allow customers to watch the
employees 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 focuses on
trade area demographics, target population density, household income
levels and competitive factors. Management 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 free-standing and prototype units will approximate 15-20%
of total Company-owned restaurants.
COMMISSARY SYSTEM; PURCHASING
The Company's commissary system supplies pizza dough, food products,
paper products, smallwares and cleaning supplies twice weekly to each
restaurant in the system. 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
Dallas, Texas in the first quarter of 1996 and a full-service commissary
in Denver, Colorado in the second quarter of 1996. In the first quarter
of 1997, the Company opened a distribution center in Phoenix, Arizona
and a full-service commissary in Rotterdam, New York to support
restaurant expansion plans. A full-service commissary in Des Moines,
Iowa is planned for mid-1997. The Company's other full-service
commissaries are in Orlando, Florida; Louisville, Kentucky; Raleigh,
North Carolina; and Jackson, Mississippi.
4
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 result in volume discounts to the
Company, allowing it to sell the products to franchisees at prices below those
which franchisees can normally obtain independently. Products are distributed to
restaurants by refrigerated trucks leased and operated by the Company or
transported by common carrier.
All of the equipment, counters 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. Where appropriate, the Company supplements local marketing
efforts with radio and television advertising.
In addition to extensive local store marketing, all Company-owned and
franchised Papa John's restaurants within a co-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 is 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 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 .5%). The required contribution can be increased above
1.5% only upon approval of not less than 60% of Marketing Fund members.
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 hourly
employees, most of whom work part-time. The manager is responsible for the day-
to-day operation of the restaurant and for the maintenance of 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 employees are also eligible to
earn performance-based financial and stock incentives.
5
Training. The Company has 54 employees dedicated to training and 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
restaurant. Each regional vice president, district manager, area
supervisor and restaurant manager is required to complete the Company's
two-week training program in which instruction is given on all aspects
of the Company's systems and operations. The program includes classroom
instruction and hands-on training at an operating Papa John's
restaurant. The programs are conducted at the Company's 16 regional
training centers located within operating Company-owned restaurants.
The Company's training also includes an education and safety program for
its delivery drivers.
Point of Sale Technology. Point of sale technology was in place in
all Company-owned restaurants and 641 franchised restaurants at the end
of 1996. 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.
All Company-owned stores are using a proprietary point of sale system,
The Papa John's PROFIT System, which will also be installed in
substantially all franchised restaurants by the end of 1998. The
Company believes the PROFIT System will further enhance 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 will 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 prepare 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 profit and loss statements for
each of the restaurants under their supervision. The Company's Chief
Operating Officer meets on a monthly basis with regional vice
presidents, district managers and area supervisors to discuss restaurant
sales and operations, personnel needs and product quality.
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 with its franchisees is excellent. At
December 29, 1996, there were 857 franchised restaurants operating in 32
states and the Company has development agreements for approximately 675
additional franchised restaurants committed to open through 2000. 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 1996 fiscal year, 224 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 that 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 franchisees for the opening of a
specified number of restaurants over 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
6
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.
The Company's current standard franchise agreement provides for a term of 10
years (with one five-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
five 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 any 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 considers, and has entered into, development and franchise
agreements for non-traditional restaurant units. These agreements generally
cover 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 furnishes each franchisee with
assistance 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, counters and equipment for most
franchisee locations at competitive prices.
Franchisee Loan Program. At the beginning of the second 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. Under the program, loans will typically bear
interest at fixed or floating rates (ranging from 5.5% to 9.25% at December 29,
1996), and will be secured by the fixtures, equipment and signage (and where
applicable, the land) of each restaurant and the ownership interests in the
franchisee. In some instances, the Company may obtain a purchase option with
respect to the financed restaurants. 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.
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 employees 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.
7
Franchise Advisory Board. The Company has established 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 experienced management and
hourly employees 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.
8
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 registration 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.
Papa John's restaurant operations are also subject to federal and
state laws governing such matters as wages, working conditions,
citizenship requirements and overtime. A significant number of the
Company's hourly personnel are paid at rates related to the federal
minimum wage. In 1996, pursuant to the Fair Labor Standards Act, the
federal minimum wage was increased to $4.75 and will be further
increased to $5.15 in 1997. The Company does not believe that these
increases will significantly impact 1997 or future years' operating
results. 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. 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.
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!"
and "Pizza Papa John's Print Network."
The Company has applied for the registration of "Better Ingredients.
Better Pizza." and "Perfect Original" and design as trademarks and
service marks. 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 29, 1996, the Company employed 9,544 persons, of whom
approximately 8,277 were restaurant employees, 398 were restaurant
management and supervisory personnel, 354 were corporate personnel and
515 were commissary and support services personnel. Most restaurant
employees work part-time and are paid on an hourly basis. None of the
Company's employees 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. 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 forwarding
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
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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.
ITEM 2. PROPERTIES
At December 29, 1996, the Company and its franchisees operated 1,160
Papa John's restaurants.
COMPANY-OWNED RESTAURANTS
-------------------------
NUMBER OF
RESTAURANTS
-----------
Colorado . . . . . . . . . . . . . . . . . . 8
Washington, D.C. . . . . . . . . . . . . . . 3
Florida . . . . . . . . . . . . . . . . . . 38
Georgia . . . . . . . . . . . . . . . . . . 53
Illinois . . . . . . . . . . . . . . . . . . 1
Indiana . . . . . . . . . . . . . . . . . . 25
Kentucky . . . . . . . . . . . . . . . . . . 27
Maryland . . . . . . . . . . . . . . . . . . 38
Missouri . . . . . . . . . . . . . . . . . . 12
North Carolina . . . . . . . . . . . . . . . 22
South Carolina . . . . . . . . . . . . . . . 2
Tennessee . . . . . . . . . . . . . . . . . 26
Texas . . . . . . . . . . . . . . . . . . . 36
Virginia . . . . . . . . . . . . . . . . . . 12
------
Total Company-owned Restaurants . . 303
======
10
FRANCHISED RESTAURANTS
----------------------
NUMBER OF
RESTAURANTS
-----------
Alabama . . . . . . . . . . . . . . . . . . 36
Arkansas . . . . . . . . . . . . . . . . . . 11
Colorado . . . . . . . . . . . . . . . . . . 6
Connecticut . . . . . . . . . . . . . . . . 1
Florida . . . . . . . . . . . . . . . . . . 113
Georgia . . . . . . . . . . . . . . . . . . 36
Illinois . . . . . . . . . . . . . . . . . . 41
Indiana . . . . . . . . . . . . . . . . . . 58
Iowa . . . . . . . . . . . . . . . . . . . . 6
Kansas . . . . . . . . . . . . . . . . . . . 5
Kentucky . . . . . . . . . . . . . . . . . . 43
Louisiana . . . . . . . . . . . . . . . . . 24
Maryland . . . . . . . . . . . . . . . . . . 9
Michigan . . . . . . . . . . . . . . . . . . 14
Minnesota . . . . . . . . . . . . . . . . . 15
Mississippi . . . . . . . . . . . . . . . . 13
Missouri . . . . . . . . . . . . . . . . . . 19
Nebraska . . . . . . . . . . . . . . . . . . 3
New Jersey . . . . . . . . . . . . . . . . . 5
New York . . . . . . . . . . . . . . . . . . 1
North Carolina . . . . . . . . . . . . . . . 40
Ohio . . . . . . . . . . . . . . . . . . . . 121
Oklahoma . . . . . . . . . . . . . . . . . . 7
Pennsylvania . . . . . . . . . . . . . . . . 24
South Carolina . . . . . . . . . . . . . . . 26
Tennessee . . . . . . . . . . . . . . . . . 36
Texas . . . . . . . . . . . . . . . . . . . 58
Utah . . . . . . . . . . . . . . . . . . . . 1
Virginia . . . . . . . . . . . . . . . . . . 56
West Virginia . . . . . . . . . . . . . . . 14
Wisconsin . . . . . . . . . . . . . . . . . 14
Wyoming . . . . . . . . . . . . . . . . . . 1
------
Total Franchised Restaurants . . . 857
======
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.
11
Information with respect to the Company's leased commissaries and
other facilities is set out below.
Facility Square Footage
-------- --------------
Louisville, KY Corporate Headquarters 31,000
Louisville, KY Commissary 35,000
Jackson, MS Commissary 30,000
Raleigh, NC Commissary 23,000
Dallas, TX Distribution Center 12,000
Denver, CO Commissary 21,000
Phoenix, AZ Distribution Center 26,000
Des Moines, IA Commissary 31,000
Rotterdam, NY Commissary 40,000
In addition, the Company owns approximately five acres in Orlando
on which it constructed a 63,000 square foot full-service commissary to
replace its former Orlando dough production facility. The Company
believes that it will continue to need additional office and commissary
space.
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 plans to begin
construction of an additional facility on the land in 1997 of
approximately 250,000 square feet, approximately 50% 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 mid-1998.
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.
12
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
Executive
Name Age Position Officer
---- --- -------- ---------
John H. Schnatter 35 Founder, Chairman and 1985
Chief Executive Officer
Charles W. Schnatter 34 Senior Vice President, 1991
General Counsel and Secretary
Blaine E. Hurst 40 President 1995
E. Drucilla Milby 43 Chief Financial Officer 1991
and Treasurer
Wade S. Oney 36 Chief Operating Officer 1995
Robert J. Wadell 41 President - PJ Food 1990
Service, Inc.
Richard J. Emmett 41 Senior Vice President - 1992
Development
J. David Flanery 40 Vice President and 1994
Corporate Controller
Syl J. Sosnowski 55 Vice President 1995
Marketing and 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 has been a franchisee of the
Company since 1989.
Blaine Hurst has served as President since October 1996 and from
October 1995 to October 1996 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 was appointed Chief Financial Officer in October 1995
and has served as Treasurer since 1993. Ms. Milby was the Company's
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.
Wade Oney was appointed Chief Operating Officer in April 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
13
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 was appointed President of PJ Food Service, Inc. in
October 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 has been Senior Vice President Development since August
1996. From 1992 to 1996, Mr. Emmett was 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 has been
a franchisee of the Company since 1992.
David Flanery has served as Vice President since July 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 joined the Company in August 1995 and became Vice
President of Marketing in October 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.
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. At March 18, 1997, there were
approximately 568 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.
1996 HIGH LOW
First Quarter $ 29.83 $ 16.80
Second Quarter 35.33 25.67
Third Quarter 35.00 26.00
Fourth Quarter 37.33 29.50
1995 HIGH LOW
First Quarter $ 14.89 $ 12.00
Second Quarter 17.00 13.89
Third Quarter 22.22 15.22
Fourth Quarter 21.17 15.78
14
Since its initial public offering of common stock in June 1993, the Company
has not paid dividends on its common stock, and has no plans to do so in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below for each of the years in
the five year period ended December 29, 1996 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.29, Dec.31, Dec.25, Dec.26, Dec.27,
1996 1995 1994 1993 1992
---------------------------------------------------------
System-wide Sales
Company-owned $167,982 $111,747 $ 66,267 $ 32,505 $ 20,033
Franchised 451,214 347,003 231,343 133,846 62,025
---------------------------------------------------------
Total $619,196 $458,750 $297,610 $166,351 $ 82,058
=========================================================
Income Statement Data
Revenues:
Restaurant sales $167,982 $111,747 $ 66,267 $ 32,505 $ 20,033
Franchise royalties 17,827 13,561 9,163 5,290 2,481
Franchise and development fees 4,286 3,508 3,274 2,379 1,374
Commissary sales 142,998 105,874 67,515 41,013 20,684
Equipment and other sales 26,959 18,665 15,316 8,046 5,056
---------------------------------------------------------
Total revenues 360,052 253,355 161,535 89,233 49,628
Operating income (2) 25,629 15,819 10,064 6,221 3,999
Other income (expense) 3,917 1,910 1,318 247 (14)
---------------------------------------------------------
Income before income taxes(2) 29,546 17,729 11,382 6,468 3,985
Income tax expense(2) 10,932 6,525 4,182 2,393 1,475
---------------------------------------------------------
Net income(2) $ 18,614 $ 11,204 $ 7,200 $ 4,075 $ 2,510
=========================================================
Net income per share(2) (3) $ .66 $ .45 $ .31 $ .20 $ .13
=========================================================
Weighted average shares
outstanding(3) 28,010 25,139 23,525 20,191 18,788
=========================================================
Balance Sheet Data
Total assets $212,061 $128,819 $ 76,173 $ 27,789 $ 7,852
Long-term debt 1,680 2,510 1,279 - 1,161
Stockholders' equity 180,643 106,282 62,609 19,269 2,418
(1) The Company operates on a 52-53 week fiscal year ending on the last
Sunday of December of each year. The 1995 fiscal year consisted of 53
weeks and the 1996, 1994, 1993 and 1992 fiscal years consisted of 52
weeks.
(2) Information for 1993 and 1992 reflects pro forma adjustments
assuming that the Company had been treated as a C Corporation rather
than an S Corporation for income tax purposes, 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 both years
which would have reduced compensation expense by $154,000 for 1993 and
$837,000 for 1992.
15
(3) Adjusted to reflect 3-for-2 stock splits effected in the form of a 50%
stock dividend to stockholders of record on March 12, 1996 and November
8, 1996.
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 29, 1996, there were 1,160 Papa
John's restaurants in operation, consisting of 303 Company-owned and
857 franchised restaurants. The Company's revenues are principally
derived from sales by Company-owned restaurants, franchise royalties,
franchise and development fees, sales of food and paper products to
franchisees, sales of restaurant equipment and printing and
promotional items principally to franchisees and information systems
sales and related services provided to franchisees.
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 11.9% in 1996, 9.0% in
1995 and 13.8% in 1994. The Company anticipates that future comparable
sales increases, if any, will be at a lesser rate than in recent
periods. Average sales for Company-owned restaurants open a full year
increased to $682,000 for 1996 from $657,000 for 1995. This increase
is attributable to continuing strong sales of maturing stores and to
the fact that several new markets were entered in 1994, with generally
lower sales volumes throughout 1995 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 47% of the Company's revenues for 1996 and 49% for 1995
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 1995 and 1996,
the Company pursued a greater number of free-standing locations and
expects to continue this strategy in 1997.
The average cash investment for the 66 Company-owned restaurants opened
during 1996, exclusive of land and pre-opening costs, increased to
approximately $208,000 from $205,000 for the 61 units opened in 1995.
This increase was primarily due to higher average costs of free-
standing units and increased signage and leasehold improvement costs.
The Company expects the average cash investment for restaurants opening
in 1997 to approximate $240,000, although there can be no assurance
that actual costs will not exceed this amount. The primary reason for
the projected increase in average cash investment for 1997 restaurant
openings is an increase in the percentage of planned free-standing
units in 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. The Company does not expect the adoption of
proposed
16
new accounting guidance requiring that pre-opening costs be expensed as incurred
to significantly impact future operating income due to the relative consistency
of new facility openings and length of the current amortization period. 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
1996 and 1994 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.29, Dec.31, Dec.25,
1996 1995 1994
-------------------------------
Income Statement Data:
Revenues:
Restaurant sales 46.7% 44.1% 41.0%
Franchise royalties 4.9 5.3 5.7
Franchise and development fees 1.2 1.4 2.0
Commissary sales 39.7 41.8 41.8
Equipment and other sales 7.5 7.4 9.5
-------------------------------
Total revenues 100.0 100.0 100.0
Costs and expenses:
Restaurant cost of sales(1) 28.0 28.4 28.8
Restaurant operating expenses(1) 54.9 54.8 56.5
Commissary, equipment and other expenses(2) 91.1 93.1 93.7
General and administrative expenses 7.4 7.9 7.6
Depreciation and amortization 3.8 3.4 3.2
Total costs and expenses 92.9 93.8 93.8
-------------------------------
Operating income 7.1 6.2 6.2
Other income:
Investment income 1.0 0.7 0.7
Other 0.1 0.1 0.1
-------------------------------
Income before income taxes 8.2 7.0 7.0
Income tax expense 3.0 2.6 2.5
-------------------------------
Net income 5.2% 4.4% 4.5%
===============================
(1) As a percenntage of Restaurant sales.
(2) As a percentage of Commissary sales and Equipment and other sales on
a combined basis.
17
Year Ended
-------------------------------------------
Dec.29, Dec.31, Dec.25,
1996 1995 1994
-------------------------------------------
Restaurant Data:
Percentage increase in comparable Company-owned
restaurant sales(3) 11.9% 9.0% 13.8%
Average sales for Company-owned restaurants
open full year $ 682,000 $ 657,000 $ 663,000
Number of Company-owned restaurants:
Beginning of period 217 133 76
Opened 66 61 53
Closed (2) - -
Acquired(4) 22 23 4
-------------------------------------------
End of period 303 217 133
Number of franchised restaurants:
Beginning of period 661 499 324
Opened 224 190 180
Closed (6) (5) (1)
Sold to Company (4) (22) (23) (4)
-------------------------------------------
End of period 857 661 499
-------------------------------------------
Total restaurants - end of period 1,160 878 632
===========================================
(3) Includes only Company-owned restaurants open throughout the periods
being compared.
(4) The number for 1994 is reduced by one restaurant sold by the Company
to a franchisee.
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.
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
18
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
rollout 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. Other operating expenses
include all other restaurant-level operating costs, the material components
of which are automobile mileage reimbursement for delivery drivers,
telephone costs, training costs and workers compensation insurance. Other
operating expenses also 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. 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 have been 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
19
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 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.
1995 COMPARED TO 1994
Revenues. Total revenues increased 56.8% to $253.4 million in 1995, from
$161.5 million in 1994.
Restaurant sales increased 68.6% to $111.7 million in 1995, from $66.3
million in 1994. This increase was primarily due to a 58.3% increase in the
number of equivalent Company- owned restaurants open during 1995 as
compared to 1994. Also, comparable sales increased 9.0% in 1995 over 1994,
for Company-owned restaurants open throughout both years.
Franchise royalties increased 48.0% to $13.6 million in 1995, from $9.2
million in 1994. This increase was primarily due to a 44.7% increase in the
number of equivalent franchised restaurants open during 1995 as compared to
1994. Also, comparable sales increased 7.8% in 1995 over 1994, for
franchised restaurants open throughout both years.
Franchise and development fees increased 7.2% to $3.5 million in 1995, from
$3.3 million in 1994. This increase was primarily due to the 190 franchised
restaurants opened during 1995, as compared to 180 opened during 1994, an
increase of 5.6%.
Commissary sales increased 56.8% to $105.9 million in 1995, from $67.5
million in 1994. 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 1995 as compared to 1994 due to its conversion from a dough
production facility to a full-service commissary in August 1995.
Equipment and other sales increased 21.9% to $18.7 million in 1995, from
$15.3 million in 1994. This increase was primarily due to the increase in
equivalent franchised restaurants open during 1995 as compared to 1994, the
increase in franchised restaurants opened during 1995 as compared to 1994
and a full year of operations in 1995 by the Company's Printing and
20
Promotions, Inc. subsidiary. This subsidiary was established in March 1994,
following the Company's purchase of the assets of QC, Inc., a printing
company which provided printed marketing materials for the Company and many
of its franchisees.
Costs and Expenses. Restaurant cost of sales decreased as a percentage of
restaurant sales to 28.4% in 1995, from 28.8% in 1994. This decrease was
primarily due to lower product costs resulting from increased purchasing
power and the impact of a severe winter storm which disrupted normal
commissary distribution activities for several days during the first
quarter of 1994 and required many of the Company's restaurants to utilize
alternative, higher-cost suppliers during that period.
Advertising and related costs increased as a percentage of restaurant sales
to 9.4% in 1995, from 8.9% in 1994. This increase was primarily due to
increased levels of advertising during 1995, including promotions related
to the Company's 10th Anniversary Celebration and the introduction of thin
crust pizza in test markets, as well as the establishment of local
advertising cooperatives as newer markets matured.
Occupancy costs were relatively consistent as a percentage of restaurant
sales at 5.3% in 1995, as compared to 5.1% in 1994.
Restaurant salaries and benefits decreased as a percentage of restaurant
sales to 26.8% in 1995, from 27.4% in 1994. Other restaurant operating
expenses decreased as a percentage of restaurant sales to 13.4% in 1995,
from 15.1% in 1994. The decreases in restaurant salaries and benefits and
other restaurant operating expenses as a percentage of restaurant sales
were primarily due to a smaller relative number of new restaurants opened
during 1995 compared to 1994. Restaurant operating expenses historically
have been higher as a percentage of restaurant sales in the early months of
operations of new restaurants.
Commissary, equipment and other expenses decreased as a percentage of
combined commissary sales and equipment and other sales to 93.1% in 1995,
from 93.7% in 1994. This decrease was primarily due to increased commissary
volumes and efficiencies (particularly at the Jackson commissary which was
opened in May 1994, and accordingly had relatively higher costs in 1994 as
compared to 1995), partially offset by the relatively higher costs
associated with the start-up of the new Orlando commissary opened in August
1995.
General and administrative expenses increased as a percentage of total
revenues to 7.9% in 1995, from 7.6% in 1994. This increase was primarily
due to the hiring of additional corporate and restaurant management
personnel as the Company continues to develop the infrastructure necessary
to support its planned growth for 1996 and beyond.
Depreciation and amortization increased as a percentage of total revenues
to 3.4% in 1995, from 3.2% in 1994. This increase was primarily due to
additional capital expenditures by the Company, intangibles related to
acquisitions and deferred pre-opening costs for newly- opened restaurants
and commissaries and other deferred expenses. These factors resulting in
increased depreciation and amortization were partially offset 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.
21
Investment Income. Investment income increased to $1.7 million in 1995, from
$1.2 million in 1994. Average investment balances increased during 1995,
compared to 1994, as a result of the investment by the Company of the net
proceeds of public stock offerings in January and November 1994 and August 1995.
Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective income tax rate of 36.8% in 1995, as compared to 36.7% in 1994.
This increase was primarily due to the impact of higher federal and state
statutory income tax rates in 1995 due to higher taxable income levels,
substantially offset by the impact of tax- exempt income generated by the
investment portfolio during 1995.
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 loans to franchisees under a program adopted during the second quarter of
1996. Total capital expenditures for 1996 were approximately $29.3 million. The
total amount funded under the franchise loan program during 1996 was
approximately $7.8 million.
During 1996, the Company purchased the assets of four Papa John's restaurants
from franchisees for a total price of approximately $1.5 million, consisting of
$30,000 in cash and the issuance of 51,800 shares of Company common stock. Also
during 1996, the Company acquired eighteen franchised restaurants in a
transaction accounted for as a pooling of interests. The Company issued 46,593
shares of its common stock valued at approximately $1.5 million and retired
approximately $3.5 million of acquiree debt in connection with the acquisition.
The Company funded its requirements for capital expenditures, franchise loans
and acquisitions principally through cash flow from operations, which was $29.8
million for 1996. Additionally, the Company received $50.6 million in net
proceeds from the public offering of 1.7 million shares of its common stock in
May 1996.
Total 1997 capital expenditures are expected to be approximately $58 million,
primarily for the development of restaurants and the construction of new
commissary facilities. Thus far in 1997, two additional commissary facilities
have been opened-the Phoenix, Arizona distribution center in January and a full-
service commissary in Rotterdam, New York in March. The Company also plans on
opening a commissary in Des Moines, Iowa by mid-1997. Additionally, in mid-1998,
the Company plans to open a 250,000 square foot facility in Louisville,
Kentucky, approximately one-half 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. Capital costs expected to be incurred in
1997 related to this facility are included in the $58 million of planned 1997
capital expenditures.
Additionally, during 1997 the Company expects to fund approximately $8 to $12
million in loans under the franchisee loan program. Approximately $5.1 million
was outstanding under this program as of December 29, 1996. The amounts actually
funded during 1997 may vary as the Company continues to gain experience with the
loan program.
22
Capital resources available at December 29, 1996 include $24.1 million of
cash and cash equivalents, $65.1 million of investments and a $10 million
line of credit expiring in June 1997. 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. During 1997, the
second phase of increases to the federal minimum wage will be
implemented in accordance with the Fair Labor Standards Act of
1996. The Company does not believe that these increases will
significantly impact 1997 or future years' operating results.
23
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended
----------------------------------------
December 29, December 31, December 25,
1996 1995 1994
----------------------------------------
Revenues:
Restaurant sales $167,982 $111,747 $ 66,267
Franchise royalties 17,827 13,561 9,163
Franchise and development fees 4,286 3,508 3,274
Commissary sales 142,998 105,874 67,515
Equipment and other sales 26,959 18,665 15,316
----------------------------------------
Total revenues 360,052 253,355 161,535
Costs and expenses:
Restaurant expenses:
Cost of sales 47,092 31,703 19,095
Salaries and benefits 44,774 29,946 18,168
Advertising and related costs 16,074 10,513 5,887
Occupancy costs 8,527 5,896 3,358
Other operating expenses 22,801 14,913 10,011
----------------------------------------
139,268 92,971 56,519
Commissary, equipment and other expenses:
Cost of sales 134,771 101,342 68,745
Salaries and benefits 9,023 7,072 4,057
Other operating expenses 11,009 7,577 4,780
----------------------------------------
154,803 115,991 77,582
General and administrative expenses 26,694 19,954 12,266
Depreciation 9,063 5,776 3,367
Amortization 4,595 2,844 1,737
----------------------------------------
Total costs and expenses 334,423 237,536 151,471
Operating income 25,629 15,819 10,064
Other income:
Investment income 3,484 1,659 1,156
Other 433 251 162
----------------------------------------
Income before income taxes 29,546 17,729 11,382
Income tax expense 10,932 6,525 4,182
----------------------------------------
Net income 18,614 11,204 7,200
========================================
Net income per share .66 .45 .31
========================================
Weighted average shares outstanding 28,010 25,139 23,525
========================================
Supplemental Data:
Revenues from affiliates $ 47,012 $ 34,673 $ 23,854
========================================
Other income $ 85 $ 48 $ 27
========================================
See accompanying notes.
24
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, December 31,
(Dollars in thousands, except per share amounts) 1996 1995
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 24,063 $ 19,904
Accounts receivable 10,169 8,105
Accounts receivable-affiliates 2,932 2,093
Inventories 6,839 5,188
Deferred pre-opening costs 2,654 1,936
Prepaid expenses and other current assets 1,591 1,092
----------------------------
Total current assets 48,248 38,318
Investments 65,067 24,394
Net property and equipment 80,717 56,699
Notes receivable from franchisees 2,646 109
Notes receivable-affiliates 2,407 728
Other assets 12,976 8,571
----------------------------
Total assets $212,061 $128,819
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 13,105 $ 9,388
Accrued expenses 9,062 6,432
Current maturities of long-term debt 175 830
Deferred income taxes 672 250
----------------------------
Total current liabilities 23,014 16,900
Unearned franchise and development fees 3,378 2,678
Long-term debt, less current maturities 1,505 1,680
Deferred income taxes 3,285 1,034
Other long-term liabilities 236 245
Stockholders' equity:
Preferred stock ($.Ol par value per share;
authorized 5,000,000 shares, no shares issued) - -
Common stock ($.Ol par value per share;
authorized 35,000,000 shares, issued 28,776,348
in 1996 and 26,768,637 in 1995) 288 268
Additional paid-in capital 143,978 88,043
Unrealized gain (loss) on investments 977 (263)
Retained earnings 35,882 18,838
Treasury stock (36,460 shares in 1996 and 45,720
shares in 1995, at cost) (482) (604)
----------------------------
Total stockholders' equity 180,643 106,282
----------------------------
Total liabilities and stockholders' equity $212,061 $128,819
============================
See accompanying notes.
25
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 27,1993 $208 $18,203 $ 9 $ 849 $ - $ 19,269
Issuance of common stock 31 34,967 - - - 34,998
Exercise of stock options 5 285 - - (678) (388)
Tax benefit related to exercise of
non-qualified stock options - 2,039 - - - 2,039
Change in unrealized gain (loss)
on investments - - (660) - - (660)
Net income - - - 7,200 - 7,200
Other - 133 - (47) 65 151
-------------------------------------------------------------------------------
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
nonqualified 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
===============================================================================
See accompanying notes.
26
PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
------------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 18,614 $ 11,204 $ 7,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,063 5,776 3,367
Amortization 5,241 2,960 1,893
Deferred income taxes 1,956 1,249 4
Other 430 239 145
Changes in operating assets and liabilities:
Accounts receivable (2,903) (4,701) (1,644)
Inventories (1,651) (2,671) (947)
Deferred pre-opening costs (4,247) (3,282) (1,680)
Prepaid expenses and other current assets (499) (22) (422)
Other assets (3,253) (2,074) (234)
Accounts payable 3,717 2,626 1,617
Accrued expenses 2,630 2,376 1,749
Unearned franchise and development fees 700 829 (24)
------------------------------------------------
Net cash provided by operating activities 29,798 14,509 11,024
Investing activities
Purchase of property and equipment (28,792) (32,683) (18,581)
Purchase of investments (65,031) (15,247) (64,897)
Proceeds from sale or maturity of investments 26,572 12,387 51,227
Loans to franchisees (7,823) (420) (502)
Deferred systems development costs (2,614) (2,078) -
Acquisitions (30) (673) (1,855)
Other 161 (81) (547)
------------------------------------------------
Net cash used in investing activities (77,557) (38,795) (35,155)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 2,000 -
Payments on long-term debt (1,367) (2,492) (447)
Proceeds from issuance of common stock 50,551 30,000 34,998
Acquisition of treasury stock - - (678)
Proceeds from exercise of stock options 1,431 569 290
Tax benefit related to exercise of non-qualified
stock options 1,315 1,085 2,039
Other (12) 255 (80)
------------------------------------------------
Net cash provided by financing activities 51,918 31,417 36,122
------------------------------------------------
Net increase in cash and cash equivalents 4,159 7,131 11,991
Cash and cash equivalents at beginning of year 19,904 12,773 782
------------------------------------------------
Cash and cash equivalents at end of year $ 24,063 $ 19,904 $ 12,773
================================================
See accompanying notes.
27
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 32 states and the District of Columbia. Substantially all
revenues are derived from retail sales and delivery of pizza to the general
public through Company-owned and franchised restaurants, sales of franchise
and development rights and sales to franchisees of equipment, food
products, supplies, 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 1996 and 1994 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.
Accounts Receivable
28
Substantially all accounts receivable are due from franchisees for
purchases of equipment, food products, supplies, printing and promotional
items, and 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 $4.2 million in 1996, $3.0
million in 1995 and $1.7 million in 1994.
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 29, 1996, 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). 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 $2.6
million in 1996 and $2.1 million in 1995. Such costs incurred prior to
1995 were not material and were expensed as incurred. Unamortized deferred
systems development costs were $3.8 million at December 29, 1996 and $1.9
million at December 31, 1995, and are reported in other assets in the
accompanying balance sheets.
29
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.
Net Income Per Share
Net income per share is based on the weighted average number of shares of common
stock outstanding during the period. The potential dilution attributable to
common stock equivalents is not material.
Prior Year Data
Certain prior year data has been reclassified to conform to the 1996
presentation.
3. STOCK SPLITS
The Board of Directors approved a 3-for-2 stock split in February 1996 to
stockholders of record on March 12, 1996, and an additional 3-for-2 stock split
in October 1996 to stockholders of record on November 8, 1996. Each stock split
was effected in the form of a 50% stock dividend. All share data included in
these consolidated financial statements have been restated to reflect these
stock splits.
4. BUSINESS COMBINATIONS
In February 1996, the Company purchased the assets and assumed certain
liabilities of a Papa John's restaurant in Floyd Knobs, Indiana, from Educators,
Inc., a franchisee, for $60,000. The purchase price consisted of a cash payment
of $30,000 and the issuance of 1,589 shares of Company stock.
In May 1996, the Company purchased the assets and assumed certain liabilities of
three Papa John's restaurants in Indianapolis, Indiana from Acumen, Inc., a
franchisee. The purchase price was approximately $1.4 million consisting solely
of 50,211 shares of Company common stock.
The above business combinations were accounted for by the purchase method of
accounting.
In September 1996, the Company acquired Nortex Pizza, L.P. ("Nortex"), a
franchisee of eighteen Papa John's restaurants in the Dallas, Texas market. The
Company issued 46,593 shares of its common stock (valued at $1.5 million) in
30
exchange for all of the issued and outstanding capital stock of Nortex. In
addition, the Company retired $3.5 million of Nortex debt at the closing (see
Note 7). The transaction was accounted for as a pooling of interests.
The Nortex pooling of interests was not significant for restatement of prior
financial statements. Additionally, the pro forma impact of these 1996
combinations is not material.
During 1995, the Company purchased the assets of eight Papa John's restaurants
from franchisees for total consideration of approximately $2 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 million) and
retired $1.2 million of acquiree debt in connection with these acquisitions.
During 1994, the Company purchased the assets of five Papa John's restaurants
from franchisees for approximately $635,000.
During 1994, the Company purchased the assets of QC, Inc. ("QC"), a printing
company which provided printed marketing materials for the Company and many of
its franchisees. The purchase price was $1.5 million, consisting of cash
payments of $1.2 million (including the retirement of certain indebtedness) and
the assumption of approximately $300,000 in liabilities.
31
5. INVESTMENTS
A summary of the Company's available-for-sale securities as of December 29,
1996 and December 31, 1995 follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
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
===========================================================
December 31, 1995
U.S. Government securities $ 1,005 $ - $ (12) $ 993
Corporate debt securities 500 - (8) 492
Municipal bonds 10,595 9 - 10,604
Mortgage-backed securities 1,532 4 (9) 1,527
Fixed income mutual hinds 10,822 - (251) 10,571
Interest receivable 207 - - 207
-----------------------------------------------------------
Total $24,661 $ 13 $ (280) $ 24,394
===========================================================
The amortized cost and estimated fair value of securities at December 29,
1996, 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 Pair Value
----------------------
Due in one year or less $27,356 $27,405
Due after one year through three years 22,999 23,084
Mortgage-backed securities 1,078 1,077
Fixed income mutual hinds 10,822 10,601
Equity securities - 1,772
Interest receivable 1,128 1,128
===================
$63,383 $65,067
32
6. NET PROPERTY AND EQUIPMENT
Net property and equipment consists of the following (in thousands):
1996 1995
-------------------------
Land $ 10,273 $ 6,456
Buildings and improvements 10,734 8,001
Leasehold improvements 20,169 14,254
Bquipment and other 49,496 38,114
Construction in progress 10,841 1,727
-------------------------
101,513 68,552
Less accumulated depreciation and amortization (20,796) (11,853)
-------------------------
Net property and equipment $ 80,717 $ 56,699
=========================
7. 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. At December 29, 1996, loans outstanding to franchisees
were approximately $5.1 million and commitments to loan up to an additional
$3.7 million had been made. Such loans bear interest at fixed or floating
rates (ranging from 5.5% to 9.25% at December 29, 1996), 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 during 1996 was approximately $153,000, and is
reported in investment income in the accompanying statements of income.
Approximately $3.5 million of franchisee loans issued during 1996 were
retired in connection with the Nortex acquisition (see Note 4).
Approximately $2.4 million of the loans outstanding as of December 29, 1996
were to franchisees in which the Company or certain directors or officers
of the Company had an ownership interest.
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
1996 1995
---------------------
Salaries, wages and bonuses $1,738 $1,339
Taxes other than income 2,857 1,615
Accrued insurance 1,242 955
Income taxes 1,228 531
Other 1,997 1,992
---------------------
Total $9,062 $6,432
=====================
33
9. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following (in thousands):
1996 1995
----------------------
Economic development loan $1,680 $1,845
Other - 665
----------------------
1,680 2,510
Less current maturities (175) (830)
----------------------
Total $1,505 $1,680
======================
The Company entered into non-interest bearing notes payable of $520,000 in
1996, $450,000 in 1995 and $1.7 million in 1994, in connection with the
purchases of land. All such notes payable were fully paid as of December
29, 1996.
In March 1994, the Company entered into an agreement for a $2 million
economic development loan (the "Loan") from the State of Mississippi in
connection with the opening of a commissary in Jackson, Mississippi. The
Loan was funded by a bond issuance under the Mississippi Small Enterprise
Development Finance Act. The Company received the loan proceeds in February
1995. Interest accrues on disbursed proceeds at a decreasing variable rate
(beginning at 6.5%) equal to the coupon rate of the bonds, with an average
effective annual rate of 5.3%. The Company is required to make semi-annual
principal and interest payments to retire the Loan by March 1, 2004. The
Loan is collateralized by a letter of credit issued by PNC Bank, Kentucky,
Inc. Scheduled principal payments on the Loan are as follows: 1997
$175,000; 1998 - $185,000; 1999 - $190,000; 2000 - $205,000; 2001 -
$215,000; and thereafter - $710,000.
The Company has a revolving credit agreement with maximum available
borrowings at December 29, 1996 of approximately $9.7 million. Outstanding
balances accrue interest at 1% below the prime rate or at rates tied to
other interest indices at the election of the Company. The agreement
expires on June 29, 1997, at which time any unpaid balance is due and
payable. In the event of any default, the lender has a security interest in
the Company's cash account balances maintained with the lender.
Interest paid was $96,000 in 1996 and $55,000 in 1995. No interest was
paid in 1994.
34
10. INCOME TAXES
A summary of the provision for income taxes follows (in thousands):
1996 1995 1994
-------------------------------------
Current
Federal $ 7,658 $4,469 $3,691
State and local 1,318 807 517
Deferred (federal and state) 1,956 1,249 4
Other - - (30)
-------------------------------------
Total $10,932 $6,525 $4,182
=====================================
Significant deferred tax assets (liabilities) as of December 29, 1996 and
December 31, 1995 follow (in thousands):
1996 1995
----------------------
Unearned development fees $ 1,055 $ 811
Unrealized loss on investments 91 102
Accrued expenses 263 250
Other 204 178
----------------------
Total deferred tax assets 1,611 1,341
Valuation allowance related to unrealized loss on investments (84) (96)
----------------------
Net deferred tax asset 1,529 1,245
Deferred expenses (2,107) (891)
Accelerated depreciation (2,594) (1,638)
Unrealized gain on warrant (656) -
Other (129) -
----------------------
Total deferred tax liabilities (5,486) (2,529)
----------------------
Net deferred tax liability $ (3,957) $(1,284)
======================
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense for the years ended December 29, 1996,
December 31, 1995 and December 25, 1994 is as follows (in thousands):
1996 1995 1994
-----------------------------------
Tax at U.S. federal statutory rate $ 10,341 $ 6,063 $ 3,869
State and local income taxes 1,011 567 341
Tax exempt investment income (788) (188) -
Other 368 83 (28)
-----------------------------------
Total $ 10,932 $ 6,525 $ 4,182
===================================
Income taxes paid were $6.5 million in 1996, $3.2 million in 1995 and $2.3
million in 1994.
35
11. 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 a warrant to purchase
225,000 shares of its common stock to the Company. The warrant is
exercisable in whole or in part at any time within 5 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 Company is restricted from selling any PJ America common
stock obtained by exercising the warrant for a period of 180 days from the
closing date of the IPO. The warrant was issued by PJ America to the
Company in consideration for the guarantee 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 reported as a separate component of stockholders' equity.
The fair value of the warrant on December 29, 1996, based upon a closing
price per share of $19.125 for PJ America common stock on that date, was
approximately $1.8 million and is reported in investments in the
accompanying balance sheet. 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.
12. 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. Certain
officers and directors of the Company also owned a 19% equity interest in
QC, Inc. ("QC"), which provided printing services to the Company and
franchisees and was acquired by the Company in 1994 (see Note 4). Following
is a summary of transactions and balances with affiliated entities (in
thousands):
36
1996 1995 1994
-------------------------------------------
Revenues from affiliates:
Commissary sales $35,972 $26,180 $17,267
Equipment and other sales 5,628 4,265 3,441
Franchise royalties 4,512 3,518 2,482
Franchise and development fees 900 710 664
------------------------------------------
Total $47,012 $34,673 $23,854
==========================================
Other income $ 85 $ 48 $ 27
==========================================
Accounts receivable-affiliates $ 2,932 $ 2,093 $ 1,492
==========================================
Notes receivable-affiliates $ 2,407 $ 728 $ 500
==========================================
The Company paid $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 $384,000 and $394,000 in 1996 and 1995, respectively,
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 12 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.
13. 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: 1997 - $7.1 million; 1998 - $5.1 million 1999 - $4.2 million; 2000
- - $3.2 million; 2001 - $1.8 million and thereafter - $2.1 million. Total
rent expense was $4.6 million in 1996, $3.2 million in 1995 and $2.1
million in 1994.
37
14. STOCK OPTIONS
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with
SFAS 123, 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 3,487,500
under the Incentive Plan and 270,000 under the Directors Plan. 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.
The Incentive Plan also provides for awards of restricted stock. During 1996,
the Company awarded 9,225 shares of restricted stock under the Incentive Plan
with a weighted-average grant date fair value of $19.24 per share. Total
compensation expense recognized in 1996 related to restricted stock awards was
$158,000.
Prior to the establishment of the Incentive Plan and Directors Plan, the Company
awarded options to acquire 1,086,750 shares of common stock at exercise prices
ranging from $.05 to $1.67 per share, in connection with certain consulting and
employment arrangements.
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 1996
and 1995, respectively: risk-free interest rates of 5.9% and 5.1%; a dividend
yield of 0%; volatility factors of the expected market price of the Company's
common stock of .47 and .48; and a weighted-average expected life of the options
of 3.6 years.
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.
38
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):
1996 1995
---- ----
Pro forma net income $14,772 $10,922
Pro forma earnings per share $0.53 $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 1996, 1995 and 1994 is as follows
(number of options in thousands):
1996 1995 1994
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 1,725 $12.01 1,188 $ 6.46 1,314 $ 1.95
Granted 2,108 27.31 903 17.07 497 11.40
Exercised 180 7.13 240 2.61 486 0.59
Cancelled 121 19.04 128 11.48 137 2.52
----------------------------- --------------------------- -----------------------------
Outstanding-end of year 3,532 $20.98 1,725 12.01 1,188 $ 6.46
============================= =========================== =============================
Exercisable-end of year 870 $13.19 421 $ 3.63
============================= ===========================
Weighted-average fair value
of options granted dunng
the year $ 9.65 $ 5.03
======== ========
The number, weighted-average exercise price and weighted-average remaining
contractual life of options outstanding as of December 29,1996, and the
number and weighted average exercise price of options exercisable as of
December 29, 1996 follow (number of options in thousands):
39
Range of Number of Weighted-Average Weighted-Average
Exercise Prices Options Exercise Price Remaining Life
-----------------------------------------------------------------------------------
Outstanding options: $0.05 - $4.99 157 $ 0.19 0.41
5.00 - 19.99 1,614 14.57 8.31
20.00 - 37.88 1,761 28.73 9.63
-------------------------------------------------------
Total 3,532 $ 20.98 8.62
=======================================================
Exercisable options: $0.05 - $4.99 157 $ 0.19
5.00 - 19.99 613 13.64
20.00 - 37.88 100 30.80
--------------------------------
Total 870 $ 13.19
================================
As of December 29, 1996, approximately 99,000 shares were available for
future issuance under the Incentive Plan and approximately 83,250
shares were available for future issuance under the Directors Plan.
15. 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.
16. QUARTERLY DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter 1st 2nd 3rd 4th
------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
------------------------------------------------------------------------------------------
Total revenues $76,726 $52,009 $87,680 $57,322 $92,729 $62,411 $102,917 $81.613
Operating income 5,024 3,154 5,801 3,553 6,519 3,847 8,285 5,265
Net income 3,519 2,240 4,232 2,457 4,914 2,766 5,949 3,741
Net income per share $ .13 $ .09 $ .15 $ .10 $ .17 $ .11 $ .21 $ .14
All quarterly information above is presented in 13 week periods except for
the fourth quarter of 1995 which is a 14 week period.
40
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 29,
1996 and December 31, 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 29, 1996. 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
29, 1996 and December 31, 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 29, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Louisville, Kentucky
February 28, 1997
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 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
41
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 independant auditors are included in Item 8 of this Report:
Consolidated Statements of Income for the years ended December 29, 1996,
December 31, 1995 and December 25, 1994
Consolidated Balance Sheets as of December 29, 1996 and December 31,
1995
Consolidated Statements of Stockholders' Equity for the years ended
December 29, 1996, December 31, 1995 and December 25, 1994
Consolidated Statements of Cash Flows for the years ended December 29,
1996, December 31, 1995 and December 25, 1994
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:
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.
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, is incorporated herein by reference.
4.2 Amended and Restated Certificate of Incorporation and Restated
By-Laws (See 3.1 and 3.2 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.
42
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.
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 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
43
report on Form 10-Q for the quarterly period ended September
29, 1996, 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 Memorandum of Employment dated March 31, 1995, by and
between the Company and Wade S. Oney. Exhibit 10.2 to the
Company's quarterly report on Form 10-Q for the quarterly period
ended March 26, 1995 (Commission File No. 0-21660) is incorporated
herein by reference.
10.17 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.
10.18 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 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.
10.19 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.
*10.20 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.
*10.21 Amendment to Chief Operating Officer Agreement dated
February 12, 1996, by and between the Company and Wade S. Oney.
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, is incorporated herein by
reference.
44
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 Lease dated September 30, 1996, between PJ Food Service, Inc. and
Opus Southwest corporation relating to the Company's commissary
and distribution facility to be opened in Tempe, Arizona.
10.28 Sublease dated September 4, 1996, between PJ Food Service, Inc.
and Distribution Unlimited, Inc. relating to the Company's
commissary and distribution facility to be opened in Rotterdam,
New York.
10.29 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 to be opened in Des Moines,
Iowa.
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
45
27 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.
99.1 Cautionary Statements. Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 is
incorporated herein by reference.
__________________
*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.
46
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 25, 1997 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 25, 1997
- ------------------------- and Director (Principal Executive
John H. Schnatter Officer)
/s/ Charles W. Schnatter Senior Vice President, Secretary, March 25, 1997
- ------------------------- General Counsel and Director
Charles W. Schnatter
/s/ Blaine E. Hurst President and Director March 25, 1997
- -------------------------
Blaine E. Hurst
/s/ O. Wayne Gaunce Director March 25, 1997
- -------------------------
O. Wayne Gaunce
/s/ Jack A. Laughery Director March 25, 1997
- -------------------------
Jack A. Laughery
/s/ Michael W. Pierce Director March 25, 1997
- -------------------------
Michael W. Pierce
SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------
/s/ Richard F. Sherman Director March 25, 1997
- -------------------------
Richard F. Sherman
/s/ E. Drucilla Milby Chief Financial Officer and March 25, 1997
- ------------------------- Treasurer (Principal Financial
E. Drucilla Milby Officer)
/s/ J. David Flanery Vice President and Corporate March 25, 1997
- ------------------------- Controller (Principal Accounting
J. David Flanery Officer)
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
-----------------------------------------------------------------------------
10.8 The Company's standard Franchise Agreement.
10.27 Lease dated September 30, 1996, between PJ Food
Service, Inc. and Opus Southwest corporation relating
to the Company's commissary and distribution facility
to be opened in Tempe, Arizona.
10.28 Sublease dated September 4, 1996, between PJ Food
Service, Inc. and Distribution Unlimited, Inc.
relating to the Company's commissary and distribution
facility to be opened in Rotterdam, New York.
10.29 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 to
be opened in Des Moines, Iowa.
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27 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.