Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 12, 1997

Documents

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on November 12, 1997



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)

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

For the quarterly period ended September 28, 1997

OR

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


Commission File Number: 0-21660


PAPA JOHN'S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



Delaware 61-1203323
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)


11492 Bluegrass Parkway, Suite 175
Louisville, Kentucky 40299-2334
(Address of principal executive offices)

(502) 266-5200
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes X No
--- ---

At October 31, 1997, there were outstanding 29,035,654 shares of the
registrant's common stock, par value $.01 per share.

INDEX




PART I. FINANCIAL INFORMATION Page No.
--------

Item 1. Financial Statements

Condensed Consolidated Balance Sheets --
September 28, 1997 and December 29, 1996 2

Condensed Consolidated
Statements of Income --
Three Months and Nine
Months Ended September 28,
1997 and September 29, 1996 3

Condensed Consolidated Statements of
Stockholders' Equity -- Nine Months Ended
September 28, 1997 and September 29, 1996 4

Condensed Consolidated Statements of Cash Flows
-- Nine Months Ended September 28, 1997 and
September 29, 1996 5

Notes to Condensed Consolidated Financial
Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 10

Item 6. Exhibits and Reports on Form 8-K 10


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Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets



September 28, 1997 December 29, 1996
(Unaudited) (Note)
------------------ -----------------

(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 19,663 $ 24,063
Accounts receivable 13,547 13,101
Inventories 8,524 6,839
Deferred pre-opening costs 3,925 2,654
Prepaid expenses and other current assets 1,522 1,591
------------------ -----------------
Total current assets 47,181 48,248

Investments 57,247 65,067
Net property and equipment 104,399 80,717
Notes receivable from franchisees 14,853 5,053
Other assets 17,609 12,976
------------------ -----------------

Total assets $ 241,289 $ 212,061
================== =================

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,934 $ 13,105
Accrued expenses 14,143 9,062
Current maturities of long-term debt 185 175
Deferred income taxes 763 672
------------------ -----------------
Total current liabilities 28,025 23,014

Unearned franchise and development fees 4,709 3,378
Long-term debt, less current maturities 1,320 1,505
Deferred income taxes 3,768 3,285
Other long-term liabilities 221 236

Stockholders' equity:
Preferred stock - -
Common stock 290 288
Additional paid-in capital 148,021 143,978
Unrealized gain on investments 695 977
Retained earnings 54,721 35,882
Treasury stock (481) (482)
------------------ -----------------
Total stockholders' equity 203,246 180,643
------------------ -----------------

Total liabilities and stockholders' equity $ 241,289 $ 212,061
================== =================


Note: The balance sheet at December 29, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

See accompanying notes.

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Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)



Three Months Ended Nine Months Ended
September 28, 1997 September 29, 1996 September 28, 1997 September 29, 1996
------------------ ------------------ ------------------ ------------------
(In thousands, except per share amounts)

Revenues:
Restaurant sales $ 63,645 $ 42,311 $ 180,114 $ 118,085
Franchise royalties 5,971 4,506 17,274 12,699
Franchise and development fees 1,149 1,211 3,774 3,032
Commissary sales 46,466 37,153 133,355 104,011
Equipment and other sales 11,021 7,548 29,590 19,308
------------------ ------------------ ------------------ ------------------
Total revenues 128,252 92,729 364,107 257,135

Costs and expenses:
Restaurant expenses:
Cost of sales 16,644 12,170 47,398 33,632
Salaries and benefits 17,016 11,300 48,705 31,467
Advertising and related costs 6,058 4,016 16,759 11,145
Occupancy costs 3,493 2,288 9,200 6,058
Other operating expenses 8,503 5,811 24,408 16,012
------------------ ------------------ ------------------ ------------------
51,714 35,585 146,470 98,314

Commissary, equipment and other expenses:
Cost of sales 44,524 35,474 126,672 98,302
Salaries and benefits 3,248 2,357 9,463 6,607
Other operating expenses 4,611 2,791 13,143 7,820
------------------ ------------------ ------------------ ------------------
52,383 40,622 149,278 112,729

General and administrative expenses 9,160 6,355 26,990 18,865
Depreciation 3,549 2,415 9,455 6,495
Amortization 1,749 1,233 4,635 3,388
------------------ ------------------ ------------------ ------------------
Total costs and expenses 118,855 86,210 336,828 239,791
------------------ ------------------ ------------------ ------------------
Operating income 9,697 6,519 27,279 17,344

Other income (expense):
Investment income 1,175 1,098 3,399 2,445
Other, net 8 183 (808) 315
------------------ ------------------ ------------------ ------------------
Income before income taxes 10,880 7,800 29,870 20,104
Income tax expense 4,026 2,886 11,052 7,439
------------------ ------------------ ------------------ ------------------
Net income $ 6,854 $ 4,914 $ 18,818 $ 12,665
================== ================== ================== ==================
Net income per share $ 0.24 $ 0.17 $ 0.65 $ 0.46
================== ================== ================== ==================
Weighted average shares outstanding 28,972 28,671 28,872 27,776
================== ================== ================== ==================

See accompanying notes.


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Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)



Additional Unrealized Total
Common Paid-In Gain (Loss) on Retained Treasury Stockholders'
Stock Capital Investments Earnings Stock Equity
------ ---------- -------------- -------- --------- -------------

(In thousands)
Balance at January 1, 1996 $ 268 $ 88,043 $ (263) $18,838 $ (604) $ 106,282
Issuance of common stock 17 50,534 - - - 50,551
Exercise of stock options 1 1,191 - - - 1,192
Tax benefit related to exercise of
non-qualified stock options - 1,006 - - - 1,006
Acquisitions 1 1,454 - - - 1,455
Change in unrealized gain (loss)
on investments - - (25) - - (25)
Net income - - - 12,665 - 12,665
Other - 42 - (32) 112 122
------ ---------- -------------- -------- --------- -------------

Balance at September 29, 1996 $ 287 $ 142,270 $ (288) $31,471 $ (492) $ 173,248
====== ========== ============== ======== ========= =============

Balance at December 30, 1996 $ 288 $ 143,978 $ 977 $35,882 $ (482) $ 180,643
Exercise of stock options 2 2,161 - - - 2,163
Tax benefit related to exercise of
non-qualified stock options - 1,882 - - - 1,882
Change in unrealized gain (loss)
on investments - - (282) - - (282)
Net income - - - 18,818 - 18,818
Other - - - 21 1 22
------ ---------- -------------- -------- --------- -------------

Balance at September 28, 1997 $ 290 $ 148,021 $ 695 $54,721 $ (481) $ 203,246
====== ========== ============== ======== ========= =============


See accompanying notes.

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Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)



Nine Months Ended
September 28, 1997 September 29, 1996
------------------ ------------------

(In thousands)
Operating activities
Net cash provided by operating activities $ 32,761 $ 18,108

Investing activities
Purchase of property and equipment (31,163) (21,104)
Purchase of investments (28,482) (52,094)
Proceeds from sale or maturity of investments 35,070 9,225
Loans to franchisees (10,605) (5,502)
Loan repayments from franchisees 805 -
Deferred systems development costs (1,486) (1,247)
Acquisitions (5,448) (30)
Other 293 9
------------------ ------------------
Net cash used in investing activities (41,016) (70,743)

Financing activities
Proceeds from exercise of stock options 2,163 1,192
Payments on long-term debt (175) (837)
Proceeds from issuance of common stock - 50,555
Tax benefit related to exercise of non-qualified
stock options 1,882 1006
Other (15) (16)
------------------ ------------------
Net cash provided by financing activities 3,855 51,900
------------------ ------------------

Net decrease in cash and cash equivalents (4,400) (735)
Cash and cash equivalents at beginning of period 24,063 19,904
------------------ ------------------

Cash and cash equivalents at end of period $ 19,663 $ 19,169
================== ==================


See accompanying notes.

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Papa John's International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 28, 1997

Note 1 -- Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
28, 1997, are not necessarily indicative of the results that may be expected for
the year ended December 28, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Papa
John's International, Inc. Annual Report on Form 10-K for the year ended
December 29, 1996.

Note 2 -- Business Combinations

During the second quarter of 1997, the Company acquired four Papa John's
restaurants in Arlington, Texas for approximately $488,000 in cash and 16 Papa
John's restaurants in North Carolina for $5 million (consisting of $4,960,000 in
cash and a credit of $40,000 towards future development fees), in transactions
accounted for by the purchase method of accounting. A majority ownership
interest in the franchisee of the North Carolina restaurants was held by certain
directors and officers, including the Chief Executive Officer, of the Company.

Note 3 -- Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which is required to be adopted for 1997 year-end financial reporting.
In addition to the Company's current presentation of net income per share, this
Statement will require the Company to present diluted net income per share,
which will include the dilutive effect of stock options. The Company does not
believe the additional disclosure of diluted net income per share will
materially impact the financial statements.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which is required to be adopted for 1998 interim financial reporting. This
Statement will require additional disclosures related to comprehensive income
(which includes items such as unrealized gains and losses on available-for-sale
securities, not included in the income statement) in the Company's financial
statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which is required to be adopted for 1998
year-end financial reporting. This Statement does not have any impact on the
financial results or financial condition of the Company, but will result in
certain changes in required disclosures of segment information.

Note 4 -- Subsequent Events

Subsequent to quarter end, the Company acquired three Papa John's restaurants
near Denver, Colorado for $720,000 in cash in a transaction accounted for by the
purchase method of accounting. These restaurants were owned by the Chief
Executive Officer of the Company and his wife.

Also subsequent to quarter end, the Company acquired a 49% equity ownership
interest in Mountain Pizza Group, L.L.C. ("MPG"), an entity which operates seven
Papa John's restaurants in Denver, Colorado, for $150,000 in cash. The
transaction and subsequent operating results of MPG will be accounted for by the
equity method of accounting. The 49% equity ownership interest was acquired from
the President of the Company, who remains the 51% majority owner of MPG.

-6-


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Restaurant Progression



Three Months Ended Nine Months Ended
September 28, September 29, September 28, September 29,
1997 1996 1997 1996
------------- ------------- ------------- -------------

Company-owned:
Beginning of period 367 248 303 217
Opened 22 20 67 48
Closed - (1) (1) (2)
Acquired - - 20 4
------------- ------------- ------------- -------------
End of period 389 267 389 267
============= ============= ============= =============

Franchised:
Beginning of period 976 752 857 661
Opened 64 62 206 159
Closed (2) (1) (5) (3)
Sold to Company - - (20) (4)
------------- ------------- ------------- -------------
End of Period 1,038 813 1,038 813
============= ============= ============= ============
Total at end of period 1,427 1,080 1,427 1,080
============= ============= ============= ============


Results of Operations

Revenues. Total revenues increased 38.3% to $128.3 million for the three months
ended September 28, 1997, from $92.7 million for the comparable period in 1996,
and 41.6% to $364.1 million for the nine months ended September 28, 1997, from
$257.1 million for the comparable period in 1996.

Restaurant sales increased 50.4% to $63.6 million for the three months ended
September 28, 1997, from $42.3 million for the comparable period in 1996, and
52.5% to $180.1 million for the nine months ended September 28, 1997, from
$118.1 million for the comparable period in 1996. These increases were primarily
due to increases of 45.3% and 44.5% in the number of equivalent Company-owned
restaurants open during the three and nine months ended September 28, 1997,
respectively, compared to the same periods in the prior year. "Equivalent
restaurants" represent 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, sales increased 6.6% for the three months ended
September 28, 1997, over the comparable period in 1996, for Company-owned
restaurants open throughout both periods.

Franchise royalties increased 32.5% to $6.0 million for the three months ended
September 28, 1997, from $4.5 million for the comparable period in 1996, and
36.0% to $17.3 million for the nine months ended September 28, 1997, from $12.7
million for the comparable period in 1996. These increases were primarily due to
increases of 29.4% and 30.2% in the number of equivalent franchised restaurants
open during the three and nine months ended September 28, 1997, respectively,
compared to the same periods in the prior year. Also, sales increased 5.4% for
the three months ended September 28, 1997, over the comparable period in 1996,
for franchised restaurants open throughout both periods.

-7-

Franchise and development fees decreased 5.1% to $1.1 million for the three
months ended September 28, 1997, from $1.2 million for the comparable period in
1996, and increased 24.5% to $3.8 million for the nine months ended September
28, 1997, from $3.0 million for the comparable period in 1996. The decrease for
the three month period was primarily due to a lower average dollar amount of
fees in 1997, which more than offset the impact of two additional restaurant
openings. The increase for the nine month period was primarily due to the 206
franchised restaurants opened during the nine months ended September 28, 1997,
versus the 159 opened during the comparable period in 1996, an increase of
29.6%. The average dollar amount of fees per franchised restaurant may vary from
period to period depending upon the mix of restaurants opened pursuant to
older development agreements and "Hometown restaurants" which generally have
lower required fees than restaurants opened pursuant to standard development
agreements. "Hometown restaurants" are located in smaller markets, generally
markets with less than 9,000 households.

Commissary sales increased 25.1% to $46.5 million for the three months ended
September 28, 1997, from $37.2 million for the comparable period in 1996, and
28.2% to $133.4 million for the nine months ended September 28, 1997, from
$104.0 million for the comparable period in 1996. These increases were primarily
the result of the increases in equivalent franchised restaurants and comparable
sales for franchised restaurants noted above. The impact of these increases was
partially offset by an 18% and 14% decrease in the average cheese block market
price during the three and nine months ended September 28, 1997, respectively,
as compared to the same periods in 1996, which resulted in lower sales prices to
franchisees.

Equipment and other sales increased 46.0% to $11.0 million for the three months
ended September 28, 1997, from $7.5 million for the comparable period in 1996,
and 53.3% to $29.6 million for the nine months ended September 28, 1997, from
$19.3 million for the comparable period in 1996. These increases were primarily
due to the increase in equivalent franchised restaurants open during the three
and nine months ended September 28, 1997, as compared to the same periods in
1996, and the increase in franchised restaurants opened during the three and
nine months ended September 28, 1997, as compared to the same periods in 1996. A
portion of the equipment and other sales increase was attributable to the
increase in sales of the Papa John's PROFIT System, a proprietary point of sale
system, and related PROFIT support services to the franchisees, as well as
increasing insurance commissions from franchisees. The Company initiated an
insurance agency function for franchisees during the fourth quarter of 1996.

Costs and Expenses. Restaurant cost of sales, which consists of food, beverage
and paper costs, decreased as a percentage of restaurant sales to 26.2% for the
three months ended September 28, 1997, from 28.8% for the comparable period in
1996, and decreased as a percentage of restaurant sales to 26.3% for the nine
months ended September 28, 1997, from 28.5% for the comparable period in 1996.
This decrease was primarily due to decreases in the average cheese block market
prices noted above.

Restaurant salaries and benefits as a percentage of restaurant sales were 26.7%
for the three months ended September 28, 1997, and September 29, 1996.
Restaurant salaries and benefits increased as a percentage of sales to 27.0% for
the nine months ended September 28, 1997, from 26.6% for the comparable period
in 1996, primarily due to increased staffing levels during the second quarter of
1997 to ensure quality customer service was delivered during the 12th
Anniversary Promotion.

Advertising and related costs (9.5% vs. 9.5% and 9.3% vs. 9.4%, respectively),
occupancy costs (5.5% vs. 5.4% and 5.1% vs. 5.1%, respectively), and other
restaurant operating expenses (13.4% vs. 13.7% and 13.6% vs. 13.6%,
respectively), were relatively consistent as a percentage of sales for the three
and nine months ended September 28,1997, as compared to the same periods in the
prior year. 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.

Commissary, equipment and other expenses include cost of sales and operating
expenses associated with sales of food, paper, equipment, printing and
promotional items to franchisees and other customers. These costs increased as a
percentage of combined commissary sales and equipment and other sales to 91.1%
for the three months ended September 28, 1997, as compared to 90.9% for the
comparable period in 1996, and to 91.6% for the nine months

-8-

ended September 28, 1997, from 91.4% for the comparable period in 1996. Cost of
sales as a percentage of combined commissary sales and equipment and other sales
decreased to 77.5% and 77.7%, respectively, for the three and nine months ended
September 28, 1997 from 79.4% and 79.7%, respectively, for the comparable
periods in 1996, due to the timing of certain favorable commodity price changes.
The decrease was more than offset by an increase in other operating expenses to
8.0% and 8.1%, respectively, for the three months and nine months ended
September 28,1997, compared to 6.2% and 6.3%, respectively, for the comparable
periods in 1996, due primarily to increased delivery costs resulting from larger
commissary service areas and costs related to the opening of three commissary
facilities in 1997.

General and administrative expenses were relatively consistent as a percentage
of total revenues at 7.1% and 7.4%, respectively, for the three and nine months
ended September 28, 1997, as compared to 6.9% and 7.3%, respectively, for the
comparable periods in 1996.

Depreciation and amortization was relatively consistent as a percentage of total
revenues at 4.1% and 3.9%, respectively, for the three and nine months ended
September 28, 1997, as compared to 3.9% and 3.8%, respectively, for the
comparable periods in 1996.

Investment Income. Investment income increased to $1.2 million for the three
months ended September 28, 1997, from $1.1 for the comparable period in 1996,
and to $3.4 million for the nine months ended September 28, 1997, from $2.4
million for the comparable period in 1996. These increases were primarily the
result of higher investment returns for the three months ended September 28,
1997, and higher average investment balances during the first nine months of
1997 compared to the same periods in 1996, due to the investment of proceeds
from the Company's public offering of common stock in May 1996.

Other Income (Expense). Other income (expense) was relatively consistent for the
three month periods ended September 28, 1997 and September 29, 1996. Other
income (expense) fluctuated from income of $315,000 for the nine months ended
September 29, 1996 to expense of $808,000 for the same period in 1997. This
fluctuation was primarily attributable to the equipment and leasehold write-offs
related to an increasing number of restaurant relocations during the first and
second quarters of the year.

Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective tax rate of 37% for the three and nine months ended September
28, 1997 and September 29,1996.

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 and the enhancement of corporate systems and facilities. Capital
expenditures of $31.2 million, acquisitions of $5.4 million and loans to
franchisees of $10.6 million for the nine months ended September 28, 1997, were
primarily funded by cash flow from operations, available cash and liquidation of
investments.

Cash flow from operations increased to $32.8 million for the nine months ended
September 28, 1997, from $18.1 million for the comparable period in 1996, due
primarily to the higher level of net income for the first nine months of 1997.

In addition to restaurant development and possible acquisitions, significant
capital projects for the next twelve months are expected to include a new
commissary in the Pacific Northwest area. The Company also expects to begin
construction during 1997 of a 221,000 square foot facility in Louisville,
Kentucky, scheduled for completion in late 1998, approximately one-half of which
will accommodate relocation and expansion of the Louisville commissary facility
and Novel Approach promotional division and the remainder of which will
accommodate relocation and consolidation of corporate offices. In addition, the
Company expects to fund an additional $7 million in loans under existing
commitments within the franchisee loan program. The amounts actually funded may
vary as the Company continues to review the growth of the loan program.

-9-

Capital resources available at September 28, 1997, include $19.7 million of cash
and cash equivalents, $57.2 million of investments and a $10 million line of
credit expiring in June 1998. The Company expects to fund planned capital
expenditures and disbursements under the franchise loan program for the next
twelve months from these resources and operating cash flows.

PART II. OTHER INFORMATION

Item 1. 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 6. Exhibits and Reports on Form 8-K.


a. Exhibits

Exhibit
Number Description
------ -----------

10.1 Discretionary Line of Credit Note dated June 30,
1997 between the Company and PNC Bank, Kentucky,
Inc.

10.2 Amendment to Chief Operating Officer Agreement dated
October 9, 1997, by and between the Company and Wade
S. Oney.

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 29, 1996 (Commission File No. 0-21660) is
incorporated herein by reference.

b. Current Reports on Form 8-K.

There were no reports filed on Form 8-K during the quarterly period ended
September 28, 1997.

-10-

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


PAPA JOHN'S INTERNATIONAL, INC.
(Registrant)




Date: November 12, 1997 /s/ E. Drucilla Milby
----------------- ----------------------------------
E. Drucilla Milby, Chief Financial
Officer and Treasurer

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