10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

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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 27, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission File Number: 0-21660

PAPA JOHN'S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

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

11492 Bluegrass Parkway, Suite 175
Louisville, Kentucky 40299-2334
(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
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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 ______
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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, 1999 there were 29,917,074 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 $996,871,361 based on the last sale price of the Common Stock on March 18,
1999 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 20, 1999.


TABLE OF CONTENTS
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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 Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

PART III
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Item 10. Directors and 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
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Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K

1


PART I

Item 1. Business

General

Papa John's International, Inc. (referred to as "the Company", "Papa John's" or
in the first person notations of "we", "us" and "our") operates and franchises
pizza delivery and carry-out restaurants under the trademark "Papa John's"
domestically in 46 states and the District of Columbia and internationally in
Mexico and Puerto Rico. The first Company-owned restaurant opened in 1985 and
the first franchised restaurant opened in 1986. At December 27, 1998, there were
1,885 Papa John's restaurants in operation, consisting of 478 Company-owned and
1,407 franchised restaurants.

Strategy

Our goal is to build the strongest brand loyalty of all pizzerias
internationally. To accomplish this goal, we have developed a strategy designed
to achieve high levels of customer satisfaction and repeat business, as well as
to establish recognition and acceptance of the Papa John's brand. The key
elements of our strategy include:

Focused, High Quality Menu. Papa John's restaurants offer a focused menu of high
quality pizza, breadsticks and cheesesticks. Papa John's original crust pizza is
prepared using fresh dough (never frozen), cheese made from 100% real
mozzarella, fresh-packed pizza sauce made from vine-ripened tomatoes (not
concentrate) and a proprietary mix of savory spices, and a choice of high
quality meat and vegetable toppings. Papa John's thin crust pizza, introduced in
1996, is made with a prepared crust and the same high quality toppings as Papa
John's original crust pizza. We believe our focused menu creates a strong
identity in the marketplace and simplifies operations.

Efficient Operating System. We believe that our operating and distribution
systems, restaurant layout and designated delivery areas result in lower
restaurant operating costs, improved food quality and superior customer service.
Our commissary system takes advantage of volume purchasing of food and supplies,
and provides consistency and efficiencies of scale in dough production. This
eliminates the need for each restaurant to order food from multiple vendors and
commit substantial labor and other resources to dough preparation. Because Papa
John's restaurants have a focused menu and specialize in delivery and carry-out
services, each team member can concentrate on a well-defined function in
preparing and delivering the customer's order.

Commitment to Employee Training and Development. We are committed to the
development and motivation of our team members through on-going training
programs, incentive compensation and opportunities for advancement. Team member
training programs are conducted for us and Papa John's franchisees at training
centers across the United States. We offer performance based financial
incentives and stock option awards to restaurant team members at various levels.
Our growth also provides significant opportunities for advancement. We believe
these factors create an entrepreneurial spirit throughout Papa John's, resulting
in a positive work environment and motivated, customer-oriented team members.

Targeted, Cost-Effective Marketing. Our 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 we or our franchisees
have a significant presence, local marketing efforts are supplemented with radio
and television advertising. Two national television campaigns aired in 1998.

2

Franchise System. We are committed to developing a strong franchise system by
attracting experienced operators, expanding in a controlled manner and ensuring
that our franchisees adhere to our high standards. In 1998, we opened our first
international franchised restaurants in Mexico and Puerto Rico. We seek to
attract franchisees with experience in multi-unit restaurant operations and with
the financial resources and management capability to open multiple locations. To
ensure consistent food quality, each domestic franchisee is required to purchase
dough and spice mix from us and all other supplies either from us or our
approved suppliers. Commissaries outside the U.S. may be operated by franchisees
pursuant to license agreements. We devote significant resources to provide Papa
John's franchisees with assistance in restaurant operations, management
training, team member training, marketing, site selection and restaurant design.

Unit Economics

We believe our unit economics are exceptional. The 383 restaurants that were
Company-owned and are included in the most recent comparable restaurant base
generated average sales of $757,000, average cash flow (operating income plus
depreciation) of $154,000 and average restaurant operating income of $129,000
(or 17.0% of average sales).

The average cash investment for the 60 Company-owned restaurants opened during
the 1998 fiscal year, exclusive of land, was approximately $261,000. We expect
the average cash investment for Company-owned restaurants opening in 1999 not to
exceed the 1998 amount.

Expansion

A total of 372 restaurants were opened during 1998, consisting of 60
Company-owned and 312 franchised restaurants. During 1999, we plan to open
approximately 35 restaurants and acquire an additional 60 restaurants from our
franchisees and expect Papa John's franchisees to open approximately 345
domestic restaurants in 1999. Newer domestic market expansion is planned for the
upper Northeast Coast, West Coast and Rocky Mountain regions, in addition to
building out existing markets throughout the country. We also expect franchisees
to open approximately 20 international Papa John's restaurants in 1999,
primarily in Mexico, Puerto Rico, Venezuela, Costa Rica, Guatemala, and Iceland.

Our ability and the ability of Papa John's franchisees to open new restaurants
is affected by a number of factors, many of which are beyond our control and the
control of our franchisees. These factors include, among other things, selection
and availability of suitable restaurant and commissary locations, negotiation of
suitable lease or financing terms, constraints on permitting and construction of
restaurants and the hiring, training and retention of management and other
personnel. Accordingly, there can be no assurance that we or our franchisees
will be able to meet planned growth targets or open restaurants in markets now
targeted for expansion.

Our expansion strategy is to cluster restaurants in targeted markets, thereby
increasing consumer awareness and enabling us to take advantage of operational,
distribution and advertising efficiencies. Our 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. We have co-developed markets with franchisees or divided markets among
franchisees, and will continue to utilize market co-development in the future.
In determining which new markets to develop, we consider 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, we analyze
detailed information concerning these factors and each market is toured and
evaluated by a member of our Development Department.

3

Menu

Papa John's restaurants offer a focused menu of high quality pizza, breadsticks
and cheesesticks, as well as canned or bottled soft drinks. Papa John's original
crust pizza is prepared using fresh dough (never frozen), and our thin crust
pizza is made with a prepared crust. Papa John's pizzas are made from hard red
spring wheat flour, cheese made from 100% real mozzarella, freshed-packed pizza
sauce made with vine-ripened tomatoes (not concentrate) and a proprietary mix of
savory spices, and a choice of high quality meat and vegetable toppings. Fresh
onions and green peppers are purchased from local produce suppliers and fresh
mushrooms are delivered twice weekly by the commissary system. Each original
crust pizza is served with a container of our special garlic sauce and two
pepperoncinis, and each thin crust pizza is served with a container of special
seasonings and two pepperoncinis. We believe our limited menu helps create a
strong identity among consumers and simplifies operations, resulting in lower
restaurant operating costs, improved food quality and superior customer service.

Restaurant Design and Site Selection

The exterior of most Papa John's restaurants is characterized by backlit
awnings, neon window designs and other visible signage. A typical Papa John's
restaurant averages 1,200 to 1,600 square feet and is designed to facilitate a
smooth flow of food orders through the restaurant. The layout includes specific
areas for order taking, pizza preparation and routing, resulting in simplified
operations, lower training and labor costs, increased efficiency and improved
consistency and quality of food products. The typical interior of a Papa John's
restaurant has a vibrant red and white color scheme with green striping, and
includes a bright menu board, custom counters and a carry-out customer area. The
counters are designed to allow customers to watch the team members slap out the
dough and put sauce and toppings on pizzas.

We consider the location of a restaurant to be important and therefore devote
significant resources to the investigation and evaluation of potential sites.
The site selection process includes a review of trade area demographics, target
population density, household income levels and competitive factors. A member of
our development team inspects each potential Company-owned or franchised
restaurant location and the surrounding market before a site is approved. Our
restaurants are typically located in strip shopping centers or free-standing
buildings that provide visibility, curb appeal and accessibility. Our restaurant
design may be configured to fit a wide variety of building shapes and sizes,
thereby increasing the number of suitable locations for our restaurants.

Since 1994, a greater number of free-standing restaurants have been opened in
the Papa John's system. We seek either existing buildings suitable for
conversion, or locations suitable for the construction of our prototype
restaurant. Free-standing buildings generally provide more signage and better
visibility, accessibility and parking. We believe that these locations improve
Papa John's image and brand awareness. Free-standing units represent
approximately 27% of Company-owned restaurants. We expect this ratio to remain
fairly consistent in future years. During 1997, we constructed our first multi-
bay unit, housing a Company-owned restaurant in addition to third party tenants.
Management believes that improved site selection may result from maintaining
control of the multi-bay development process. We have five multi-bay units open
and this strategy will continue to be evaluated as additional operational and
financial results for these types of units become available for analysis.

4

Commissary System; Purchasing

Our commissary system supplies pizza dough, food products, paper products,
smallwares and cleaning supplies twice weekly to each restaurant. Our system
enables us to closely monitor and control product quality and consistency, while
lowering food costs. We opened a full service commissary in Portland, Oregon in
1998. A full-service commissary is expected to open in Dallas, Texas in the
second quarter of 1999 (to replace our current distribution center) and the
opening of an expanded Louisville, Kentucky commissary is also planned for the
second quarter of 1999 to support restaurant expansion plans. Our other full-
service commissaries are in Orlando, Florida; Raleigh, North Carolina; Jackson,
Mississippi; Denver, Colorado; Rotterdam, New York; and Des Moines, Iowa. We
also operate a distribution center in Phoenix, Arizona. The commissary system
capacity is continually evaluated in relation to planned restaurant growth, and
additional facilities are developed as operational or economic conditions
warrant.

In 1998, two international franchised commissaries were opened in Mexico and
Puerto Rico. We intend for future international commissaries to be licensed to
franchisees; however, we may open Company-owned commissaries at our discretion.

We set quality standards for all products used in our restaurants and designate
approved outside suppliers of food and paper products which must meet our
quality standards. In order to ensure product quality and consistency, all of
our restaurants are required to purchase proprietary spice mix and dough from
our commissaries. Franchisees may purchase other goods directly from approved
suppliers or our commissaries. National purchasing agreements with most of our
suppliers generally result in volume discounts to us, allowing us to sell
products to our restaurants at prices which we believe are below those generally
available in the marketplace. Products are distributed to restaurants by
refrigerated trucks leased and operated by us or transported by a dedicated
logistics company.

All of the equipment, fixtures and smallwares needed to open a Papa John's
restaurant are available for purchase through us. We also provide layout and
design services and recommend subcontractors, signage installers and telephone
systems to Papa John's franchisees. Although not required to do so,
substantially all of Papa John's franchisees purchase most of their equipment
from us.

Marketing Programs

Our restaurant-level marketing programs target the delivery area of each
restaurant, making extensive use of distinctive print materials in direct mail
and store-to-door couponing. The local marketing efforts also include a variety
of community-oriented activities with schools, sports teams and other
organizations. In markets in which we or Papa John's franchisees have a
significant presence, local marketing efforts are supplemented with radio and
television advertising.

In addition to extensive local store marketing, all Company-owned and franchised
Papa John's restaurants within a developed market are required to join an
advertising cooperative ("Co-op"). Each member restaurant contributes a
percentage of sales to the Co-op for market wide programs, such as radio,
television and billboards. The rate of contribution and uses of the monies
collected are determined by a majority vote of the Co-op's members. The
restaurant-level and Co-op marketing efforts are supported by print and
electronic advertising materials that are produced by the Papa John's Marketing
Fund, Inc., a non-profit corporation (the "Marketing Fund"), for use by us and
our franchisees. The Marketing Fund produces and airs Papa John's national
television commercials.

We provide both Company-owned and franchised restaurants with catalogs for the
purchase of uniforms and promotional items and pre-approved print marketing
materials. We also provide direct marketing services to Company-owned and
franchised restaurants utilizing customer information gathered by our
proprietary point-of-sale technology.

5

Company Operations

Restaurant Personnel. A typical Papa John's restaurant employs a restaurant
manager, two assistant managers and approximately 20 - 25 hourly team members,
most of whom work part-time. The manager is responsible for the day-to-day
operation of the restaurant and for maintaining Company-established operating
standards. The operating standards and other resources are contained in a
comprehensive operations manual supplied to each restaurant and updated
regularly. We seek to hire experienced restaurant managers and staff, and
motivate and retain them by providing opportunities for advancement and
performance-based financial incentives and stock option grants. We have a
relatively low managerial turnover rate which we believe results in decreased
training costs and higher productivity.

We employ area supervisors, each of whom has responsibility for overseeing three
to five Company-owned restaurants. We also employ regional vice presidents and
district managers who oversee area supervisors and managers within their
respective markets. These team members are also eligible to earn performance-
based financial incentives, including stock option grants.

Training and Education. We have a department dedicated to training and
developing team members, as well as assisting new restaurant openings. We have
at least one full-time training coordinator in each of our markets and regional
training directors located strategically across the country. We provide an
on-site training team three days before and three days after the opening of any
Company-owned or franchised restaurant requesting assistance. Each regional vice
president, district manager, area supervisor and restaurant manager is required
to complete our management training program and on-going development programs in
which instruction is given on all aspects of our systems and operations. The
programs include classroom instruction and hands-on training at an operating
Papa John's restaurant or at Company-certified training centers. Our training
includes in-store and delivery training, new team member orientation, new
product or program implementation, and other developmental programs.

Point of Sale Technology. Point of sale technology (our proprietary PROFIT
System/TM/) is in place in all Company-owned and substantially all franchised
restaurants. We believe this technology facilitates faster and more accurate
order taking and pricing, reduces paper work and allows the restaurant manager
to better monitor and control food and labor costs. We believe the PROFIT System
enhances restaurant-level marketing capabilities through the development of a
data base containing information on customers and their buying habits with
respect to our products. Polling capabilities allow us to obtain restaurant
operating information, thereby improving the speed, accuracy and efficiency of
restaurant-level reporting.

Reporting. Managers at Company-owned restaurants utilize daily reports of sales,
cash deposits and operating costs. Physical inventories of all food and beverage
items are taken nightly. Our area supervisors prepare weekly operating
projections for each of the restaurants under their supervision.

Hours of Operations. Our 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. We continue to attract many franchisees with significant restaurant
experience. We consider our franchisees to be a vital part of our system's
continued growth and believe our relationship with our franchisees is excellent.
As of December 27, 1998, there were 1,407 franchised restaurants operating in 45
states, the District of Columbia, Mexico, and Puerto Rico and we had development
agreements for approximately 1,055 additional

6

franchised restaurants committed to open through 2008. 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 1998 fiscal
year, 312 (306 domestic and six international) franchised restaurants were
opened.

Approval. Franchisees are approved on the basis of the applicant's business
background, restaurant operating experience and financial resources. We
generally seek franchisees who will enter into development agreements for
multiple restaurants. We seek franchisees who have restaurant experience or, in
the case of franchisees who do not have restaurant experience, we require 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. We enter into development agreements with
our domestic franchisees for the opening of a specified number of restaurants
within a defined period of time and specified geographic area. Under our current
standard development agreement, the franchisee is required to pay, at the time
of signing the agreement, a non-refundable fee of $5,000 per restaurant covered
by the development agreement. This amount is credited against the standard
$20,000 franchise fee payable to us upon signing the franchise agreement for a
specific location. Generally, a franchise agreement is executed when a
franchisee secures a location.

Our current standard domestic franchise agreement provides for a term of 10
years (with one ten-year renewal option) and payment to us of a royalty fee of
4% of sales. The current agreement, as well as substantially all existing
franchise agreements, permit us to increase the royalty fee up to 5% of sales
after the agreement has been in effect for three years. However, the royalty fee
cannot be increased to an amount greater than the percentage royalty fee then in
effect for new franchisees.

We have the right to terminate a franchise agreement for a variety of reasons,
including a franchisee's failure to make payments when due or failure to adhere
to our policies and standards. Many state franchise laws limit the ability of a
franchisor to terminate or refuse to renew a franchise.

In 1997, we began developing an international department and opened our first
franchised restaurant outside the U.S. in July 1998. In international markets,
we enter into either a development agreement or a master license agreement with
a franchisee for the opening of a specified number of restaurants within a
defined period of time and specified geographic area. Under a master license
agreement, the franchisee has the right to subfranchise a portion of the
development to one or more subfranchisees approved by us. Under our current
standard international development agreement, the franchisee is required to pay
total fees of $25,000 per restaurant, $10,000 at the time of signing the
agreement, $10,000 90 days before the scheduled opening date of each restaurant
and $5,000 upon signing the franchise agreement for a specific location. Under
our current master license agreement, the master franchisee is required to pay
total fees of $25,000 per restaurant owned and operated by the master
franchisee, under the same terms as for the development agreement, and $15,000
for each subfranchised restaurant, $10,000 upon signing of the master license
agreement and $5,000 on or prior to the date the subfranchised restaurant opens
for business.

Our current standard international franchise agreement provides for payment to
us of a royalty fee of 5% of sales (including sales by subfranchised
restaurants), with no provision for increase. The remaining terms are
substantially equivalent to the terms of our standard domestic franchise
agreement.

We have entered into a limited number of development and franchise agreements
for non-traditional restaurant units. These agreements generally cover venues or
areas not originally targeted for development and have terms differing from the
standard agreement. Although we expect an increase in the number of franchised
units in non-traditional venues in 1999, we do not believe these contracts will
have a significant impact on 1999 revenues or profits.

7

Franchise Restaurant Development. We provide assistance to Papa John's
franchisees in selecting sites, developing restaurants and evaluating the
physical specifications for typical restaurants. Each franchisee is responsible
for selecting the location for its restaurants but must obtain our 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. We provide design plans, fixtures and equipment for most franchisee
locations at competitive prices.

Franchisee Loan Program. In 1996, we established a program under which selected
franchisees could borrow funds for use in the construction and development of
their restaurants. Loans made under the program typically bear interest at fixed
or floating rates (ranging from 5.5% to 9.8% at December 27, 1998), and are
secured by the fixtures, equipment and signage (and where applicable, the land)
of the restaurant and the ownership interests in the franchisee. In limited
cases, we have obtained a purchase option with respect to the financed
restaurants.

The loan program was generally made available only to franchisees developing 10
or more Papa John's restaurants and who had developed at least 20% of the
scheduled restaurants with their own equity capital. At December 27, 1998, loans
outstanding under the franchise loan program totaled $12.5 million, with
commitments to lend up to an additional $1.1 million. We do not expect to
significantly expand the franchise loan program beyond current commitment
levels.

Franchise Training and Support. Every franchisee is required to have a principal
operator approved by us who satisfactorily completes our required 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 our Company-certified management training program. We
provide an on-site training crew three days before and three days after the
opening of a franchisee's first two restaurants. Ongoing supervision of training
is monitored by the corporate franchise training team. Multi-unit franchisees
are encouraged to hire a full-time training coordinator to train new team
members and management candidates for their restaurants. Our 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 us and franchisees.

Franchise Operations. All franchisees are required to operate their Papa John's
restaurants in compliance with our policies, standards and specifications,
including matters such as menu items, ingredients, materials, supplies,
services, fixtures, furnishings, decor and signs. Each franchisee has full
discretion to determine the prices to be charged to its customers.

Franchise Advisory Board. We have 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. We collect weekly and monthly sales and other operating information
from Papa John's franchisees. We have agreements with most of Papa John's
franchisees permitting us to electronically debit the franchisees' bank accounts
for the payment of royalties, Marketing Fund contributions and purchases of
commissary products from Papa John's. 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."

8

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 Papa John's.
Competitors include a large number of national and regional restaurant chains,
as well as local pizza operators. Some of our competitors have been in existence
for a substantially longer period than us and may be better established in the
markets where our restaurants are, or may be, located. Within the pizza segment
of the restaurant industry, we believe that our 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 our 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 cheese and other commodity costs,
labor and benefits costs and the lack of experienced management and hourly team
members may adversely affect the restaurant industry in general and our
restaurants in particular.

With respect to the sale of franchises, we compete 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 our restaurants.

Government Regulation

We, along with our franchisees, are subject to various federal, state and local
laws affecting the operation of our 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. Our commissary and distribution facilities are licensed and subject to
regulation by state and local health and fire codes, and the operation of our
trucks is subject to Department of Transportation regulations. We are also
subject to federal and state environmental regulations.

We are 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 us to furnish to prospective franchisees a franchise offering circular
containing prescribed information. A number of states in which we might consider
franchising also regulate the sale of franchises and require registration of the
franchise offering circular with state authorities. Substantive state laws that
regulate the franchisor-franchisee relationship presently exist in a substantial
number of states, and bills have been introduced in Congress from time to time
(some of which are now pending) which would provide for federal regulation of
the franchisor-franchisee relationship in certain respects. The state laws often
limit, among other things, the duration and scope of non-competition provisions
and the ability of a franchisor to terminate or refuse to renew a franchise.
Some foreign countries also have disclosure requirements and other laws
regulating franchising and the franchisor-franchisee relationship. As we expand
internationally we will be subject to applicable laws in each jurisdiction where
franchised units are established.

We are also subject to the Americans With Disabilities Act of 1990, which, among
other things, may require renovations to restaurants to meet federally-mandated
requirements. The cost of these renovations is not expected to be material.
Further government initiatives, if enacted, including a proposed system of
mandated health insurance, could adversely affect us and our franchisees as well
as the restaurant industry in general.

9

Trademarks

Our rights in principal trademarks and service marks are a significant part of
our business. We are the owner of the federal registration of the trademark
"Papa John's." We have also registered "Pizza Papa John's and design" (our
logo), "Better Ingredients. Better Pizza." and "Pizza Papa John's Better
Ingredients. Better Pizza. and design" as trademarks and service marks. We also
own federal registrations for several ancillary marks, principally advertising
slogans. We have also applied to register our primary trademark, "Pizza Papa
John's and design," in 76 foreign countries and the European Community. We are
aware of the use by other persons in certain geographical areas of names and
marks which are the same as or similar to our marks. It is our policy to pursue
registration of our marks whenever possible and to oppose vigorously any
infringement of our marks.

On July 23, 1998, Pizza Hut, Inc. filed a petition in the Trademark Trial and
Appeal Board of the United States Department of Commerce Patent and Trademark
Office ("TTAB") for cancellation of our "Better Ingredients. Better Pizza." as a
trademark and service mark. As grounds for cancellation, the petition alleged
that the "Better Ingredients. Better Pizza." mark is deceptive of our goods and
services and is not distinctive of our goods and services. On September 1, 1998,
Pizza Hut, Inc. filed a similar petition against our registration of the "Pizza
Papa John's Better Ingredients. Better Pizza. and design" mark. Both of these
proceedings are pending before the TTAB.

Cancellation of our registrations for the marks featuring the "Better
Ingredients. Better Pizza." slogan would restrict our ability to prevent the use
of the same or similar marks or slogans by other persons but would not preclude
our continued use of the marks. On August 12, 1998, Pizza Hut, Inc. also filed
suit in federal district court seeking, among other things, to enjoin our use of
the phrase "Better Ingredients. Better Pizza." See "Litigation." We believe that
the cancellation petitions and the lawsuit are without merit and we intend to
defend vigorously the claims asserted therein.

Employees

As of December 27, 1998, we employed 14,321 persons, of whom approximately
12,411 were restaurant team members, 611 were restaurant management and
supervisory personnel, 561 were corporate personnel and 738 were commissary and
support services personnel. Most restaurant team members work part-time and are
paid on an hourly basis. None of our team members are covered by a collective
bargaining agreement. We consider our team member relations to be excellent.

Forward Looking Statements

This Form 10-K contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"), including
information within Management's Discussion and Analysis of Financial Condition
and Results of Operations. 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 we believe that
our expectations are based on reasonable assumptions, actual results may differ
materially from those in the forward looking statements as a result of various
factors, including but not limited to, the following:

1. Our ability and the ability of our franchisees to continue to expand
through the opening of new restaurants is affected by a number of factors, many
of which are beyond our control and our franchisees' control. 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 we or the Papa
John's franchisees will be able to meet planned growth targets or open
restaurants in markets now targeted for expansion.

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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 Papa
John's and our franchisees. Some of these competitors have been in existence for
a substantially longer period than us or our franchisees and may be better
established in the markets where restaurants operated by Papa John's or our
franchisees are, or may be, located. A change in the pricing or other marketing
or promotional strategies of one or more of our major competitors could have an
adverse impact on sales and earnings at restaurants operated by us and our
franchisees.

3. An increase in the cost of cheese or other commodities could adversely
affect the profitability of our restaurant business. Cheese, representing
approximately 40% of our food cost, and other commodities are subject to
seasonal fluctuations, weather, demand and other factors that are beyond our
control.

4. Changes in consumer taste, demographic trends, traffic patterns and the
type, number and location of competing restaurants could adversely affect our
restaurant business.

5. Our 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 us and our
franchisees are paid at rates related to the federal minimum wage. Accordingly,
further increases in the minimum wage will increase labor costs for us and our
franchisees.

6. Our international operations are subject to a number of additional factors,
including international economic and political conditions, currency regulations
and fluctuations, differing cultures and consumer preferences, diverse
government regulations and structures, availability and cost of land and
construction, and differing interpretation of the obligations established in
franchise agreements with international franchisees, Accordingly, there can be
no assurance that our international operations will achieve or maintain
profitability or meet planned growth rates.

7. Our operations could be affected by factors related to the year 2000
computer bug. Such factors include, but are not limited to: (1) our ability to
complete the phases of our year 2000 assessment by the dates estimated by
management; (2) our ability to identify information technology (IT) and non IT
systems that are not year 2000 compliant; (3) our ability to implement system
modifications and conversions successfully and timely; (4) the results of year
2000 testing differing from those anticipated; (5) the resolution of year 2000
issues by external companies with which we do business; and (6) our ability to
implement effective contingency plans when deemed necessary. Accordingly, the
effects of the factors identified above could materially impact our business.

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Item 2. Properties

As of December 27, 1998, there were 1,885 Papa John's restaurants systemwide.

Company-owned Restaurants
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