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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.
10
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.
11
Item 2. Properties
As of December 27, 1998, there were 1,885 Papa John's restaurants systemwide.
Company-owned Restaurants
--------------------------
Number of
Restaurants
-----------
Colorado....................................... 43
Delaware....................................... 10
Florida........................................ 45
Georgia........................................ 65
Illinois....................................... 3
Indiana........................................ 29
Kentucky....................................... 30
Maryland....................................... 49
Missouri....................................... 20
New Mexico..................................... 9
North Carolina................................. 47
Pennsylvania................................... 1
South Carolina................................. 2
Tennessee...................................... 24
Texas.......................................... 80
Virginia....................................... 17
Washington, D.C................................ 4
---
Total Company-owned Restaurants........... 478
===
12
Domestic Franchised Restaurants
-------------------------------
Number of
Restaurants
-----------
Alabama..................................... 51
Arkansas.................................... 12
Arizona..................................... 30
California.................................. 54
Colorado.................................... 4
Connecticut................................. 3
Florida..................................... 149
Georgia..................................... 41
Idaho....................................... 4
Illinois.................................... 58
Indiana..................................... 74
Iowa........................................ 13
Kansas...................................... 18
Kentucky.................................... 51
Louisiana................................... 39
Maryland.................................... 17
Massachusetts............................... 8
Michigan.................................... 32
Minnesota................................... 37
Mississippi................................. 17
Missouri.................................... 23
Montana..................................... 2
Nebraska.................................... 9
Nevada...................................... 10
New Hampshire............................... 6
New Jersey.................................. 21
New Mexico.................................. 2
New York.................................... 26
North Carolina.............................. 45
North Dakota................................ 2
Ohio........................................ 143
Oklahoma.................................... 16
Oregon...................................... 4
Pennsylvania................................ 50
Rhode Island................................ 5
South Carolina.............................. 36
South Dakota................................ 2
Tennessee................................... 50
Texas....................................... 96
Utah........................................ 14
Virginia.................................... 78
Washington.................................. 3
West Virginia............................... 16
Wisconsin................................... 25
Wyoming..................................... 4
Washington, D.C............................. 1
-----
Total Domestic Franchised Restaurants.. 1,401
=====
13
International Franchised Restaurants
------------------------------------
Number of
Restaurants
-----------
Mexico .......................................................................................... 4
Puerto Rico...................................................................................... 2
-
Total International Franchised Restaurants.............................................. 6
=
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 our
leases specify a fixed annual rent. Generally, the leases are triple net leases
which require us 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, with a small number of escalations based on changes in the
Consumer Price Index.
Information with respect to our leased commissaries and other facilities as of
December 27, 1998, is set forth below.
Facility Square Footage
- --------------------------------------- --------------
Louisville, KY Corporate Offices 71,000
Louisville, KY Commissary 38,000
Jackson, MS Commissary 30,000
Raleigh, NC Commissary 27,000
Dallas, TX Distribution Center 20,000
Denver, CO Commissary 21,000
Phoenix, AZ Distribution Center 26,000
Des Moines, IA Commissary 31,000
Rotterdam, NY Commissary 40,000
Portland, OR Commissary 37,000
We own approximately five acres in Orlando on which our 63,000 square foot full-
service commissary is located, and eight acres in Dallas on which our 77,500
square foot full-service commissary is under construction. In addition, the
Company owns approximately 37 acres in Louisville, Kentucky with a 42,000 square
foot building on the land consolidating our printing and promotional operations.
We began construction of additional facilities on the land in 1998 of 247,000
square feet, approximately 30-40% of which will accommodate relocation and
expansion of the Louisville commissary operation and Novel Approach promotional
division, and the remainder of which will accommodate relocation and
consolidation of corporate offices. The facility is scheduled for completion in
mid-1999.
Item 3. Legal Proceedings
On August 12, 1998, Pizza Hut, Inc. filed suit in the United States District
Court for the Northern District of Texas under the federal Lanham Act (the
"Lawsuit") claiming, among other things, that we engaged in acts of unfair
competition through dissemination of "false, misleading and disparaging
advertising", including without limitation, the use of our "Better Ingredients.
Better Pizza." Trademark (see "Trademarks"). Pizza Hut is seeking injunctive
relief and damages in an amount of not less than $12.5 million, attorneys' fees,
as well as other relief. We have filed counterclaims against Pizza Hut (the
"Counterclaims") claiming, among other things, that the Lawsuit was
14
filed primarily, if not solely, as a competitive ploy and that Pizza Hut had
engaged in false, misleading and disparaging advertising aimed at us. We have
asked the court for an award of our reasonable attorneys' fees, as well as for
other relief to which we may be entitled. This Lawsuit and Counterclaims are in
the early stages of pleading and discovery. A trial has been scheduled for
October 25, 1999. We do not believe the Lawsuit has merit and intend to
vigorously defend the claims asserted against us. Since the Lawsuit is in the
early stages of pleading and discovery, it is too early to assess the likelihood
of success on the merits of the parties' respective claims.
We are also subject to claims and legal actions in the ordinary course of our
business. We believe that all such claims and actions currently pending against
us are either adequately covered by insurance or would not have a material
adverse effect on us if decided in a manner unfavorable to us.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the current executive officers of Papa John's, together with
their ages, their positions and the years in which they first became an officer:
First Elected
Name Age Position Executive Officer
- -------------------------- ----------- ------------------------------------------ ---------------------
John H. Schnatter 37 Founder, Chairman of the Board and Chief 1985
Executive Officer
Blaine E. Hurst 42 Vice Chairman and President 1995
Charles W. Schnatter 36 Senior Vice President, General 1991
Counsel and Secretary
E. Drucilla Milby 45 Senior Vice President, Chief Financial 1991
Officer and Treasurer
Wade S. Oney 37 Chief Operating Officer 1995
Robert J. Wadell 43 President - PJ Food Service, Inc. 1990
Richard J. Emmett 43 Senior Vice President and Senior Counsel 1992
Lou Difazio, Jr. 41 Vice President - Corporate Operations 1999
J. David Flanery 42 Vice President and Corporate Controller 1994
Thomas C. Kish 33 Vice President - Information and Support 1999
Services
Mary Ann Palmer 41 Vice President - People Department 1999
Syl J. Sosnowski 57 Vice President - Marketing 1995
John Schnatter created the Papa John's concept and founded Papa John's 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 since 1986.
Blaine Hurst has served as Vice Chairman since 1998 and President since 1996.
From 1995 to 1996, Mr. Hurst served as Chief Information Officer after having
joined Papa John's 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 was a franchisee from 1996 to 1998.
Charles Schnatter has served as General Counsel and Secretary since 1991 and has
been a Senior Vice President 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 us. Charles Schnatter was a franchisee from 1989 to
1997.
Dru Milby has served as Senior Vice President since 1996, Chief Financial
Officer since 1995 and Treasurer since 1993. Ms. Milby held the position of Vice
President - Finance from 1991 to 1995. From 1990 to 1991, Ms. Milby was Director
of Financial Planning for American Air Filter. From 1987 to 1990, Ms. Milby was
Manager
16
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 has served as Chief Operating Officer since 1995. From 1992 to 1995,
Mr. Oney served as our Regional Vice President of Southeast Operations. From
1989 to 1992, Mr. Oney held various positions with Domino's Pizza, Inc. as
follows: from 1991 to 1992, Senior Vice President, Northeast; from 1990 to 1991
Senior Vice President, Product Implementation; and from 1989 to 1990, Vice
President of Operations. Mr. Oney has been a franchisee since 1993.
Robert Wadell has served as President of PJ Food Service, Inc. since 1995, after
having served as Vice President of Commissary Operations from 1990 to 1995. From
1988 to 1990, Mr. Wadell was employed with Mr. Gatti's in the position of
Regional Franchise Director, responsible for overseeing the operations of 65
franchised restaurants in an eight-state area. From 1983 to 1988, Mr. Wadell was
an Area Supervisor for Mr. Gatti's, and from 1979 to 1983, was a store operator
for Mr. Gatti's.
Richard Emmett was appointed Senior Vice President and Senior Counsel in March
1997, after having served as Senior Vice President-Development from August 1996
to March 1997. From 1992 to 1996, Mr. Emmett held the position of Vice President
and Senior Counsel. From 1983 to 1992, Mr. Emmett was an attorney with the law
firm of Greenebaum Doll & McDonald PLLC, having become a partner of such firm in
1989. Mr. Emmett was a franchisee from 1992 to 1997.
Lou DiFazio has served as Vice President, Corporate Operations since January
1999. From 1994 to 1999, Mr. DiFazio served as Regional Vice President,
Southeast Region, where he was responsible for the operation of 125 restaurants.
From 1993 to 1994, Mr. DiFazio served as both a district manager and senior
district manager for the Atlanta and Charlotte markets. A pizza industry veteran
for more than twelve years, Mr. DiFazio started his career as a supervisor for a
major competitor. In addition to his experience as a supervisor, he has worked
in various marketing, real estate and store development positions in the pizza
industry.
David Flanery has served as Vice President since 1995 after having joined Papa
John's 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.
Tom Kish has served as Vice President, Information Services since October 1996
and Vice President, Support Services, since March 1998. From 1995 to 1996, Mr.
Kish served as Director of Store Systems. Prior to joining Papa John's, Mr. Kish
held several consulting positions, many of them with Fortune 500 companies.
Mary Ann Palmer has served as Vice President, People Department since the
department was created in January 1999. Ms. Palmer served as Vice President of
Education and Training from 1997 to 1999. From 1996 to 1997, Ms. Palmer held the
position of Senior Counsel in our legal department. Prior to joining Papa
John's, Ms. Palmer practiced law as a partner in the area's largest regional law
firm, Wyatt, Tarrant, and Combs.
Syl Sosnowski has served as Vice President of Marketing since 1995. Mr.
Sosnowski also served as Vice President of Support Services from 1997 to 1998.
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 executive officers and other key personnel.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock trades on the NASDAQ National Market tier of The NASDAQ Stock
Market under the symbol PZZA. As of March 18, 1999, there were approximately 830
record holders of common stock. The following table sets forth for the quarters
indicated the high and low sale prices of our common stock, as reported by The
NASDAQ Stock Market.
1998 High Low
- --------------------------- ---------------- ----------------
First Quarter $38.88 $31.25
Second Quarter 44.00 37.50
Third Quarter 39.91 26.50
Fourth Quarter 42.25 29.25
1997
- ---------------------------
First Quarter $35.13 $23.75
Second Quarter 37.50 22.63
Third Quarter 39.50 30.44
Fourth Quarter 37.75 28.00
Since our initial public offering of common stock in 1993, we have not paid
dividends on our common stock, and have no plans to do so in the foreseeable
future.
18
Item 6. Selected Financial Data
The selected financial data presented below for each of the years in the five-
year period ended December 27, 1998 was derived from our audited consolidated
financial statements. 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 27, Dec. 28, Dec 29, Dec 31, Dec. 25,
1998 1997 1996 1995 1994
----------------------------------------------------------------------
Systemwide Restaurant Sales
Company-owned $ 324,894 $ 251,153 $ 167,982 $ 111,747 $ 66,267
Franchised 831,377 616,456 451,214 347,003 231,343
----------------------------------------------------------------------
Total $1,156,271 $ 867,609 $ 619,196 $ 458,750 $ 297,610
======================================================================
Income Statement Data
Revenues:
Restaurant sales $ 324,894 $ 251,153 $ 167,982 $ 111,747 $ 66,267
Franchise royalties 32,894 24,318 17,827 13,561 9,163
Franchise and development fees 5,605 5,327 4,286 3,508 3,274
Commissary sales 261,009 188,034 142,998 105,874 67,515
Equipment and other sales 45,404 39,952 26,959 18,665 15,316
---------------------------------------------------------------------
Total revenues 669,806 508,784 360,052 253,355 161,535
Operating income (2) 55,517 38,120 26,062 16,070 10,226
Investment income (2) 4,432 4,505 3,484 1,659 1,156
---------------------------------------------------------------------
Income before income taxes and cumulative effect
of a change in accounting principle 59,949 42,625 29,546 17,729 11,382
Income tax expense 22,181 15,772 10,932 6,525 4,182
---------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle 37,768 26,853 18,614 11,204 7,200
Cumulative effect of accounting change, net of Tax (3) (2,603) -- -- -- --
--------------------------------------------------------------------
Net income $ 35,165 $ 28,853 $ 18,614 $ 11,204 $ 7,200
====================================================================
Basic earnings per share:
Income before cumulative effect of a change in
accounting principle $ 1.28 $ .93 $ .66 $ .45 $ .31
Cumulative effect of accounting change, net of tax (3) (.09) -- -- -- --
--------------------------------------------------------------------
Basic earnings per share $ 1.19 $ .93 $ .66 $ .45 $ .31
====================================================================
Diluted earnings per share:
Income before cumulative effect of a change in
acconting principle $ 1.25 $ .91 $ .65 $ .44 $ .30
Cumulative effect of accounting change, net of tax (3) (.09) -- -- -- --
--------------------------------------------------------------------
Diluted earnings per share $ 1.16 $ .91 $ .65 $ .44 $ .30
====================================================================
Basic weighted average shares outstanding 29,409 28,916 28,010 25,139 23,525
====================================================================
Diluted weighted average shares outstanding 30,327 29,592 28,670 25,552 24,033
====================================================================
Balance Sheet Data
Total assets $ 319,297 $ 253,243 $ 212,061 $ 128,819 $ 76,173
Long-term debt 1,320 1,505 1,680 2,510 1,279
Stockholders' equity 262,711 212,733 180,643 106,282 62,609
19
(1) We operate on a 52-53 week fiscal year ending on the last Sunday of December
of each year. The 1998, 1997, 1996, and 1994 fiscal years consisted of 52 weeks
and the 1995 fiscal year consisted of 53 weeks.
(2) Certain financial data for 1997-1994 has been reclassified to conform with
the current year's presentation.
(3) Reflects the cumulative effect on income and earnings per share of a change
in accounting principle, net of tax, as required by Statement of Position 98-5
"Reporting the Costs of Start-Up Activities." See "Note 2" of "Notes to
Consolidated Financial Statements."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Papa John's International, Inc. (referred to as "the Company," "Papa John's" or
in the first person notations of "we," "us" and "our") began operations in 1985
with the opening of the first Papa John's restaurant in Jeffersonville, Indiana.
At December 27, 1998, there were 1,885 Papa John's restaurants in operation,
consisting of 478 Company-owned and 1,407 franchised restaurants. Our revenues
are principally derived from retail sales of pizza to the general public by
Company-owned restaurants, franchise royalties, sales of franchise and
development rights, sales to franchisees of food and paper products, restaurant
equipment, printing and promotional items, risk management services, and
information systems and related services used in their operations.
We intend to continue to expand the number of Company-owned and franchised
restaurants. 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. We believe that our
expansion strategy has contributed to increases in comparable annual sales for
Company-owned restaurants of 8.6% in 1998, 9.3% in 1997, and 11.9% in 1996. We
anticipate that future comparable sales increases, if any, will be at a lesser
rate than in recent years. Average sales for the Company's most recent
comparable base restaurants increased to $757,000 for 1998 from $725,000 for
1997. This increase is attributable to continuing strong sales of maturing
restaurants. Average sales volumes in new markets are generally lower than in
those markets in which we have established a significant market position,
although trends indicate that new markets are opening with stronger than
historical sales volumes.
Approximately 46% of our revenues for 1998 and 45% for 1997 were derived from
the sale to franchisees of food and paper products, restaurant equipment,
printing and promotional items, risk management services and information systems
equipment and software and related services by us, our commissary subsidiary, PJ
Food Service, Inc., and our support services subsidiary, Papa John's Support
Services. We believe that, in addition to supporting both Company and franchised
growth, these subsidiaries contribute to product quality and consistency
throughout the Papa John's system.
We continually strive to obtain high quality sites with greater access and
visibility, and to enhance the appearance and quality of our restaurants. We
believe that these factors improve our image and brand awareness. During 1998
and 1997, we pursued a greater number of free-standing conversion and prototype
locations. As of December 28, 1998, free-standing units represented
approximately 27% of the total Company-owned restaurants. We expect this ratio
to remain fairly consistent in future years.
The average cash investment for the 60 Company-owned restaurants opened during
1998, exclusive of land, increased to approximately $261,000 from $257,000 for
the 76 units opened in 1997. This increase was primarily due to an overall
increase in the equipment and building costs per store, principally for the
free-standing buildings. We expect the average cash investment for restaurants
opening in 1999 not to exceed the 1998 amount.
20
We defer certain costs incurred in connection with the development of our
information systems and amortize such costs over periods of up to five years
from the date of completion.
Our fiscal year ends on the last Sunday in December of each year. All fiscal
years presented consist of 52 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. 27, Dec. 28, Dec. 29,
1998 1997 1996
--------------------------------
Income Statement Data:
Revenues:
Restaurant sales 48.5% 49.4% 46.7%
Franchise royalties 4.9 4.7 4.9
Franchise and development fees 0.8 1.0 1.2
Commissary sales 39.0 37.0 39.7
Equipment and other sales 6.8 7.9 7.5
--------------------------------
Total revenues 100.0 100.0 100.0
Costs and expenses:
Restaurant cost of sales (1) 26.9 26.4 28.0
Restaurant operating expenses (1) 53.5 54.9 54.9
Commissary, equipment and other
expenses (2) 91.5 91.5 91.1
General and administrative
expenses (3) 7.5 7.3 7.4
Pre-opening and other general
expenses (3) 0.4 0.2 (0.1)
Depreciation and amortization (3) 2.9 3.9 3.8
Total costs and expenses 91.7 92.5 92.8
--------------------------------
Operating income 8.3 7.5 7.2
Investment income 0.6 0.9 1.0
--------------------------------
Income before income taxes and cumulative
effect of a change in accounting
principle 8.9 8.4 8.2
Income tax expense 3.3 3.1 3.0
--------------------------------
Income before cumulative effect of a
change in accounting principle 5.6 5.3 5.2
Cumulative effect of accounting change,
net of tax (3) (0.4) - -
--------------------------------
Net income 5.2% 5.3% 5.2%
================================
(1) As a percentage of Restaurant sales.
(2) As a percentage of Commissary sales and Equipment and other sales on a
combined basis.
(3) The 1998 operating results reflect the adoption of a new accounting standard
(see "Note 2" of "Notes to Consolidated Financial Statements") which impacts
the amount of depreciation and amortization, general and administrative
expenses, and pre-opening and other general expenses reflected above.
Year Ended
---------------------------------------
Dec. 27, Dec. 28, Dec. 29,
1998 1997 1996
---------------------------------------
Restaurant Data:
Percentage increase in comparable Company-owned
restaurant sales (4) 8.6% 9.3% 11.9%
Number of Company-owned restaurants included in the
respective years' most recent comparable restaurant base 383 266 182
Average sales for Company-owned restaurants included in the
respective years' most recent comparable restaurant base $ 757,000 $ 725,000 $ 698,000
Number of Company-owned restaurants:
Beginning of period 401 303 217
Opened 60 76 66
Closed (1) (1) (2)
Acquired from franchisees 21 23 22
Sold to franchisees (3) -- --
---------------------------------------
End of period 478 401 303
Number of U.S. franchised restaurants:
Beginning of period 1,116 857 661
Opened 306 288 224
Closed (3) (6) (6)
Sold to Company (21) (23) (22)
Acquired from Company 3 -- --
---------------------------------------
End of period 1,401 1,116 857
Number of international franchised restaurants:
Beginning of period -- -- --
Opened 6 -- --
Closed -- -- --
Sold to Company -- -- --
Acquired from Company -- -- --
---------------------------------------
End of period 6 -- --
---------------------------------------
Total restaurants -- end of period 1,885 1,517 1,160
=======================================
(4) Includes only Company-owned restaurants open throughout the periods being
compared.
1998 Compared to 1997
Revenues. Total revenues increased 31.6% to $669.8 million in 1998, from $508.8
million in 1997.
Restaurant sales increased 29.4% to $324.9 million in 1998, from $251.2 million
in 1997. This increase was primarily due to a 22.5% increase in the number of
equivalent Company-owned restaurants open during 1998 as compared to 1997.
"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 8.6% in
1998 over 1997 for Company-owned restaurants open throughout both years.
Franchise royalties increased 35.3% to $32.9 million in 1998, from $24.3 million
in 1997. This increase was primarily due to a 27.4% increase in the number of
equivalent franchised restaurants open during 1998 as compared to 1997. Also,
comparable sales increased 10.3% in 1998 over 1997 for franchised restaurants
open throughout both years.
22
Franchise and development fees increased 5.2% to $5.6 million in 1998, from $5.3
million in 1997. This increase was primarily due to the 312 franchised
restaurants opened during 1998, as compared to 288 opened during 1997, an
increase of 8.3%. The average dollar amount of fees per franchised restaurant
may vary from period to period, depending on the mix of restaurants opened
pursuant to older development agreements including "Hometown restaurants" which
generally had lower required fees than traditional restaurants opened pursuant
to standard development agreements. Hometown restaurants are located in smaller
markets, generally with less than 9,000 households. Hometown restaurant
development agreements entered into subsequent to March 1998, generally provide
for fees equivalent to those under standard development agreements.
Commissary sales increased 38.8% to $261.0 million in 1998, from $188.0 million
in 1997. This increase was primarily due to the increases in equivalent
franchised restaurants and comparable sales for franchised restaurants noted
above. There was an additional impact of higher cheese prices in 1998 compared
to 1997 in response to increased cheese costs during 1998.
Equipment and other sales increased 13.6% to $45.4 million in 1998, from $40.0
million in 1997. This increase was primarily due to ongoing equipment and
smallwares orders related to the increase in equivalent franchised restaurants
open during 1998 as compared to 1997, and the increase in the number of new
restaurant equipment packages sold to franchisees that opened restaurants in
1998 as compared to 1997. A portion of the equipment and other sales increase
was also attributable to an increase in sales of the Papa John's PROFIT system,
a proprietary point of sale system.
Costs and Expenses. Restaurant cost of sales, which consists of food, beverage
and paper costs, increased as a percentage of restaurant sales to 26.9% in
1998, from 26.4% in 1997. The primary reason for the increase is attributable to
increases in the average cheese block market prices, partially offset by a
decrease in the average cost of certain other commodities. The cost of cheese,
representing approximately 40% of food cost, and other commodities are subject
to seasonal fluctuations, weather, demand and other factors. Most of the factors
affecting the cost of cheese are beyond our control.
Restaurant salaries and benefits decreased as a percentage of restaurant sales
to 26.8% in 1998, from 27.0% in 1997. The decrease is primarily due to increased
efficiencies in relation to higher sales volumes, partially offset by the 1998
full year impact of increases in the federal minimum wage in September 1997.
Occupancy costs decreased as a percentage of restaurant sales to 4.9% in 1998
from 5.1% in 1997 as a result of leveraging against a higher sales base.
Restaurant advertising and related costs decreased as a percentage of restaurant
sales to 8.7% in 1998, from 9.3% in 1997. The decrease in 1998 was primarily the
result of efficiencies related to increased market penetration and higher sales
volume. Also, restaurant level advertising is intentionally managed to higher
levels for new restaurants; therefore, as the ratio of new Company-owned
restaurant openings to existing Company-owned restaurants decreases, the overall
advertising cost percentage also decreases. Our advertising often varies based
on the timing of national or market-level promotions.
Other restaurant operating expenses decreased as a percentage of restaurant
sales to 13.2% for 1998 from 13.5% for 1997. Other operating expenses include an
allocation of commissary operating expenses equal to 3% of Company-owned
restaurant sales in order to assess a portion of the costs of dough production
and food and equipment purchasing and storage to Company-owned restaurants. The
decrease in other operating expenses as a percentage of restaurant sales was
primarily due to a reduction in worker's compensation costs.
Commissary, equipment and other expenses include cost of sales, salaries and
benefits, and other operating expenses associated with sales of food, paper,
equipment, information systems and printing and promotional items
23
to franchisees and other customers. These costs were consistent as a percentage
of combined commissary sales and equipment and other sales at 91.5% in 1998 and
1997. Cost of sales as a percentage of combined commissary sales and equipment
and other sales increased to 78.6% in 1998 from 77.8% in 1997, due to the timing
of certain unfavorable commodity price changes (primarily cheese). The increase
was offset by a decrease in salaries and benefits and other operating expenses
to 12.9% in 1998 compared to 13.7% in 1997, due primarily to efficiencies
related to an increased number of restaurants serviced by the overall commissary
system without significant expansion in 1998.
General and administrative expenses increased slightly as a percentage of total
revenues to 7.5% in 1998 from 7.3% in 1997. This increase is primarily due to
the adoption of the AICPA Statement of Position 98-5 ("SOP") which required the
expensing of certain start-up costs effective in 1998 (see "Note 2" of "Notes to
Consolidated Financial Statements"). Certain of these costs had previously been
deferred and, accordingly, were not previously included in general and
administrative costs. Even though the adoption resulted in significant changes
to the amounts reported on individual line items (general and administrative
expenses, pre-opening and other general expenses, and depreciation and
amortization), the effect of the adoption of the SOP did not have a material
impact on 1998 consolidated net income, excluding the one time cumulative effect
adjustment of $2.6 million, net of taxes of $1.5 million. This increase was
partially offset by the recognition of $2.0 million in incentives under the
Kentucky Jobs Development Act (the "KJDA incentives") related to the development
of a new corporate headquarters facility and associated employment increases.
Pre-opening and other general expenses increased to $2.7 million in 1998,
compared to $1.1 million in 1997. Pre-opening and other general expenses
consisted primarily of relocation costs in 1997 and of both relocation costs and
pre-opening expenses in 1998 as a result of the adoption of the SOP (see "Note
2" of "Notes to Consolidated Financial Statements").
Depreciation and amortization decreased as a percentage of total revenues to
F2.9% in 1998, from 3.9% in 1997. This decrease was due to the elimination of
pre-opening deferrals and related amortization in 1998 as a result of the
adoption of the SOP (see "Note 2" of "Notes to Consolidated Financial
Statements").
Investment Income. Investment income remained relatively consistent at $4.4
million in 1998 and $4.5 million in 1997 as average invested and loaned balances
and yields were also fairly consistent between years.
Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective income tax rate of 37.0% in 1998 and 1997. The combined federal,
state and local effective income tax rate for 1999 is expected to increase to
37.5% as a result of a relative decrease in the level of tax-exempt investment
income to total pre-tax income.
1997 Compared to 1996
Revenues. Total revenues increased 41.3% to $508.8 million in 1997, from $360.1
million in 1996.
Restaurant sales increased 49.5% to $251.2 million in 1997, from $168.0 million
in 1996. This increase was primarily due to a 42.0% increase in the number of
equivalent Company-owned restaurants open during 1997 as compared to 1996. Also,
comparable sales increased 9.3% in 1997 over 1996 for Company-owned restaurants
open throughout both years.
Franchise royalties increased 36.4% to $24.3 million in 1997, from $17.8 million
in 1996. This increase was primarily due to a 30.5% increase in the number of
equivalent franchised restaurants open during 1997 as compared to 1996. Also,
comparable sales increased 7.4% in 1997 over 1996 for franchised restaurants
open throughout both years.
24
Franchise and development fees increased 24.3% to $5.3 million in 1997, from
$4.3 million in 1996. This increase was primarily due to the 288 franchised
restaurants opened during 1997, as compared to 224 opened during 1996, an
increase of 28.6%, partially offset by the lower per unit franchise and
development fees collected on certain non-traditional restaurant units opened in
1997.
Commissary sales increased 31.5% to $188.0 million in 1997, from $143.0 million
in 1996. This increase was primarily due to the increases in equivalent
franchised restaurants and comparable sales for franchised restaurants noted
above, partially offset by the impact of lower average cheese prices in 1997.
Equipment and other sales increased 48.2% to $40.0 million in 1997, from $27.0
million in 1996. This increase was primarily due to the increase in equivalent
franchised restaurants open during 1997 as compared to 1996, and the increase in
franchised restaurants opened during 1997 as compared to 1996. A portion of the
equipment and other sales increase was also attributable to the increase in
sales of the Papa John's PROFIT System, a proprietary point of sale system, and
related PROFIT support services to the franchisees, as well as increasing
insurance commissions from franchisees. We 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 26.4% in 1997,
from 28.0% in 1996. The primary reason for the decrease is attributable to lower
average cheese prices for the year and increased efficiencies at both mature and
newly-opened stores.
Restaurant salaries and benefits increased as a percentage of restaurant sales
to 27.0% in 1997, from 26.7% in 1996. The increase is primarily due to the
impact of increases in the federal minimum wage in October 1996 and September
1997, and increased staffing levels during the second quarter of 1997 to ensure
quality customer service was delivered during the 12th Anniversary Promotion.
Restaurant advertising and related costs decreased as a percentage of restaurant
sales to 9.3% in 1997, from 9.6% in 1996. The decrease in 1997 was primarily the
result of higher 1996 costs related to the fourth quarter rollout of a new thin
crust product. Also, restaurant level advertising is intentionally managed to
higher levels for new restaurants; therefore, as the percentage of new Company-
owned restaurant openings to existing Company-owned restaurants decreases, the
overall advertising cost percentage also decreases.
Other restaurant operating expenses were relatively consistent as a percentage
of restaurant sales at 13.5% for 1997, and 13.6% for 1996.
Commissary, equipment and other expenses include cost of sales and operating
expenses associated with sales of food, paper, equipment, information systems
and printing and promotional items to franchisees and other customers. These
costs increased as a percentage of combined commissary sales and equipment and
other sales to 91.5% in 1997, from 91.1% in 1996. Cost of sales as a percentage
of combined commissary sales and equipment and other sales decreased to 77.8% in
1997 from 79.3% in 1996, due to the timing of certain favorable commodity price
changes. The decrease was offset by an increase in salaries and benefits and
other operating expenses to 13.7% in 1997 compared to 11.8% in 1996, due
primarily to increased delivery costs resulting from larger commissary service
areas and staffing and other costs related to the opening of three commissary
facilities in 1997.
General and administrative expenses declined slightly as a percentage of total
revenues to 7.3% in 1997 from 7.4% in 1996.
25
Pre-opening and other general expenses increased $1.5 million in 1997. This
increase was primarily attributable to equipment and leasehold write-offs
resulting from an increased number of restaurant relocations during the year.
Depreciation and amortization increased as a percentage of total revenues to
3.9% in 1997, from 3.8% in 1996. This increase was primarily due to additional
capital expenditures, intangibles related to acquisitions, deferred pre-opening
costs for newly-opened restaurants and commissaries and other deferred expenses,
primarily systems development costs.
Investment Income. Investment income increased to $4.5 million in 1997, from
$3.5 million in 1996. The increase was the result of higher average amounts
outstanding under the franchise loan program which earn higher average rates of
interest in comparison to the securities held in the investment portfolio.
Amounts receivable under the program increased from $5.1 million at December
1996, to $15.1 million at December 1997.
Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective income tax rate of 37.0% in 1997 and 1996.
Liquidity and Capital Resources
We require capital primarily for the development and acquisition of restaurants,
the addition of new commissary and support services facilities and equipment,
the enhancement of corporate systems and facilities and the funding of
franchisee loans. Capital expenditures of $69.2 million, acquisitions of $1.9
million, and loans to franchisees of $4.8 million for 1998, were primarily
funded by cash flow from operations and cash generated from the exercise of
stock options.
Total 1999 capital expenditures are expected to be approximately $69.0 million,
primarily for the development or relocation of restaurants and construction of
commissary facilities and completion of the Louisville commissary and corporate
offices. During 1999, we plan to open approximately 35 new Company-owned
restaurants, acquire approximately 60 franchised Papa John's restaurants, and
relocate an additional 17 restaurants.
We plan to open a full service commissary in Dallas, Texas by mid-1999. We also
plan to open a 247,000 square foot facility in Louisville, Kentucky, of which
approximately 30-40% will accommodate relocation and expansion of the Louisville
commissary operations and Support Services promotional division, and the
remainder of which will accommodate relocation and consolidation of corporate
offices.
We have been approved to receive up to $21.0 million in incentives under the
Kentucky Jobs Development Act in connection with the relocation of the corporate
offices. Based upon the expected timing of completion of the facility, we expect
to earn approximately $14.0 million of such incentives through 2007.
Additionally, during 1999 we expect to fund up to $1.1 million in additional
loans under existing franchisee loan program commitments. Approximately $12.5
million was outstanding under this program as of December 27, 1998. At this
time, we do not expect to significantly expand the program beyond existing
commitments.
Capital resources available at December 27, 1998 include $34.0 million of cash
and cash equivalents, $47.4 million of investments and $9.6 million under a line
of credit expiring in June 1999. We expect to fund planned capital expenditures,
acquisitions of franchised restaurants and disbursements under the franchise
loan program for the next twelve months from these resources and operating cash
flows.
26
Impact of Year 2000
Some of our older purchased software programs were written using two digits
rather than four to define the applicable year. As a result, time-sensitive
software or hardware recognizes a date using "00" as the year 1900 rather than
the year 2000. This could cause a system failure or miscalculations resulting in
disruptions of important administrative processes, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Our year 2000 evaluation has been ongoing since late 1997 and became more
formalized in January 1999 with the formation of a committee comprised of senior
management from various departments within the Company. The primary goal of the
committee is to assess and mitigate risk associated with year 2000 issues by
September 1999. The committee developed a three phased approach to accomplish
this goal consisting of the following: (1) identifying and documenting the
business components impacted by the year 2000, both internally and externally,
assigning priority to those components identified based on the level of risk,
and determining year 2000 compliance; (2) performing tests for year 2000
compliance; and (3) developing contingency plans based upon the results of the
risk analysis and testing phases. We are currently in the first phase and expect
this phase to be complete by April 1999. The second and third phases are
targeted for completion in July 1999 and September 1999, respectively.
As part of phase I, we have substantially completed an assessment of our
internal information technology and will have to modify or replace certain
software and hardware so that they will function properly in the year 2000 and
thereafter. Based on our assessment or representations from software suppliers,
or both, we believe the total year 2000 project cost is immaterial to our
financial position, net income and liquidity. Much of the cost related to year
2000 coincides with existing management plans to replace certain systems which
include the financial accounting and payroll/human resource systems in order to
accommodate our planned growth. About 70% of the new financial accounting system
has been implemented and the remaining portion is expected to be implemented by
June 1999. The payroll/human resource system implementation was complete in
January 1999. Based upon the representations from the manufacturers of both
systems, we believe the systems are year 2000 compliant. The timing of
implementation was not materially affected by year 2000 concerns.
We have taken action to ensure that our restaurant system is year 2000 compliant
by implementing a single point of sale operating system (Papa John's PROFIT
System) in all of our Company-owned and substantially all of our franchised-
owned restaurants. Additionally, we have notified our franchisees of our year
2000 process and have requested their assistance in ensuring year 2000
compliance with regard to their business.
We believe that with the planned modifications to existing software and/or
conversions to new software and hardware as described above, the year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed timely, the year 2000 issue
could have a material impact on certain administrative processes.
We are in the process of querying our significant vendors with respect to year
2000 issues. Based on the responses received from approximately 75% of the
vendors, including our cheese and tomato sauce vendors, we are not aware of any
vendors with a year 2000 issue that would materially impact results of
operations, liquidity, or capital resources. However, we have no means of
ensuring that vendors will be year 2000 ready. The inability of vendors to
complete their year 2000 resolution process in a timely fashion could materially
impact us, although the actual impact of non-compliance by vendors is not
determinable.
There can be no assurance that we will be completely successful in our efforts
to address year 2000 issues. We have no contingency plans in place in the event
we do not complete all phases of the year 2000 program. We plan
27
to evaluate the status of completion in July 1999 to determine whether such
contingency plans are necessary, although at this time we know of no reason our
year 2000 program will not be completed in a timely manner.
Impact of Inflation
We do 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 us.
Forward Looking Statements
Certain information contained in this annual report, particularly information
regarding future financial performance and plans and objectives of management,
is forward looking. Certain factors could cause actual results to differ
materially from those expressed in forward looking statements. These factors
include, but are not limited to, our ability and the ability of our franchisees
to obtain suitable locations and financing for new restaurant development; the
hiring, training, and retention of management and other personnel; competition
in the industry with respect to price, service, location, and food quality; an
increase in food cost due to seasonal fluctuations, weather, and demand; changes
in consumer tastes and demographic trends; changes in federal and state laws,
such as increases in minimum wage; risks inherent to international development;
and factors associated with the Year 2000 evaluation and modifications.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We had no holdings of derivative financial or commodity instruments at December
27, 1998. Our principal exposure to financial market risks is the impact that
interest rate changes could have on the income from our investment portfolio.
All borrowings under our revolving credit agreement (none at December 27, 1998)
bear interest at a variable rate based on the prime rate, the London Interbank
Offered Rate, or certain alternative short-term rates. A change in interest
rates of 100 basis points would not significantly affect our net income.
Substantially all of our business is transacted in U.S. dollars. Accordingly,
foreign exchange rate fluctuations have never had a significant impact on us,
and are not expected to in the foreseeable future.
28
Item 8. 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 27, December 28, December 29,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Revenues:
Restaurant sales $324,894 $251,153 $167,982
Franchise royalties 32,894 24,318 17,827
Franchise and development fees 5,605 5,327 4,286
Commissary sales 261,009 188,034 142,998
Equipment and other sales 45,404 39,952 26,959
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 669,806 508,784 360,052
Costs and expenses:
Restaurant expenses:
Cost of sales 87,487 66,417 47,092
Salaries and benefits 86,992 67,830 44,774
Advertising and related costs 28,358 23,298 16,074
Occupancy costs 15,765 12,785 8,527
Other operating expenses 42,759 33,882 22,801
- ----------------------------------------------------------------------------------------------------------------------
261,361 204,212 139,268
Commissary equipment and other expenses:
Cost of sales 240,717 177,263 134,771
Salaries and benefits 16,981 13,091 9,023
Other operating expenses 22,560 18,181 11,009
- ----------------------------------------------------------------------------------------------------------------------
280,258 208,535 154,803
General and administrative expenses 50,537 37,051 26,694
Pre-opening and other general expenses (income) 2,729 1,074 (433)
Depreciation and amortization 19,404 19,792 13,658
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 614,289 470,664 333,990
- ----------------------------------------------------------------------------------------------------------------------
Operating income 55,517 38,120 26,062
Investment income 4,432 4,505 3,484
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 59,949 42,625 29,546
Income tax expense 22,181 15,772 10,932
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effective of a change in accounting principle 37,768 26,853 18,614
Cumulative effect of accounting change, net of tax (2,603) - -
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 35,165 $ 26,853 $ 18,614
======================================================================================================================
Basic earnings per share:
Income before cumulative effect of a change in accounting principle $ 1.28 $ .93 $ .66
Cumulative effect of accounting change, net of tax (.09) - -
- ----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.19 $ .93 $ .66
======================================================================================================================
Diluted earnings per share:
Income before cumulative effect of a change in accounting principle $ 1.25 $ .91 $ .65
Cumulative effect of accounting change, net of tax (.09) - -
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.16 $ .91 $ .65
======================================================================================================================
Basic weighted average shares outstanding 29,409 28,916 28,010
======================================================================================================================
Diluted weighted average shares outstanding 30,327 29,592 28,670
======================================================================================================================
Supplemental data:
Revenues - affiliates $ 85,137 $ 62,986 $ 47,012
Other income - affiliates 570 514 85
See accompanying notes.
29
Papa John's International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 27, December 28,
(Dollars in thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 33,984 $ 18,692
Accounts receivable 15,019 12,678
Accounts receivable-affiliates 2,273 2,454
Inventories 9,653 9,091
Deferred pre-opening costs - 3,827
Prepaid expenses and other current assets 4,815 2,434
Deferred income taxes 2,090 -
- --------------------------------------------------------------------------------
Total current assets 67,834 49,176
Investments 47,355 57,933
Net property and equipment 169,203 112,601
Notes receivable-franchisees 7,749 7,083
Notes receivable-affiliates 4,741 7,997
Other assets 22,415 18,453
- --------------------------------------------------------------------------------
Total assets $319,297 $253,243
================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 18,149 $ 15,148
Accrued expenses 25,477 15,132
Deferred income taxes - 102
- --------------------------------------------------------------------------------
Total current liabilities 43,626 30,382
Unearned franchise and development fees 6,561 4,613
Deferred income taxes 5,066 3,987
Other long-term liabilities 1,333 1,528
Stockholders' equity:
Preferred stock ($.01 par value per share;
authorized 5,000,000 shares, no shares
issued) - -
Common stock ($.01 par value per share;
authorized 50,000,000 shares, issued
29,738,713 in 1998 and 29,127,717 in 1997) 297 291
Additional paid-in capital 164,710 149,850
Accumulated other comprehensive income
(unrealized gain on investments, net of tax) 688 321
Retained earnings 97,497 62,752
Treasury stock (36,572 shares in 1998 and
36,644 shares in 1997, at cost) (481) (481)
- --------------------------------------------------------------------------------
Total stockholders' equity 262,711 212,733
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $319,297 $253,243
================================================================================
See accompanying notes.
30
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Other Total
Common Paid-In Comprehensive Retained Treasury Stockholders'
(In thousands) Stock Capital Income (Loss) Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 268 $ 88,043 $ (263) $ 18,838 $ (604) $ 106,282
Comprehensive income:
Net income -- -- -- 18,614 -- 18,614
Unrealized gain on investments,
net of tax of $714 -- -- 1,240 -- -- 1,240
-------------
Comprehensive income 19,854
Issuance of common stock 17 50,534 -- -- -- 50,551
Exercise of stock options 2 1,429 -- -- -- 1,431
Tax benefit related to exercise of
non-qualified stock options -- 1,315 -- -- -- 1,315
Acquisitions 1 2,602 -- (1,542) -- 1,061
Other -- 55 -- (28) 122 149
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 288 143,978 977 35,882 (482) 180,643
Comprehensive income:
Net income -- -- -- 26,853 -- 26,853
Unrealized loss on investments,
net of tax of $424 -- -- (656) -- -- (656)
-------------
Comprehensive income 26,197
Exercise of stock options 3 3,533 -- -- 1 3,537
Tax benefit related to exercise of
non-qualified stock options -- 2,339 -- -- -- 2,339
Other -- -- -- 17 -- 17
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 291 149,850 321 62,752 (481) 212,733
Comprehensive income:
Net income -- -- -- 35,165 -- 35,165
Unrealized gain on investments,
net of tax of $354 -- -- 367 -- -- 367
-------------
Comprehensive income 35,532
Exercise of stock options 5 11,668 -- -- -- 11,673
Tax benefit related to exercise of
non-qualified stock options -- 2,953 -- -- -- 2,953
Other 1 239 -- (420) -- (180)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 27, 1998 $ 297 $ 164,710 $ 688 $ 97,497 $ (481) $ 262,711
========================================================================================================================
See accompanying notes.
31
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands) Year Ended
- ------------------------------------------------------------------------------------------------------------
December 27, December 28, December 29,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 35,165 $ 26,853 $ 18,614
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,925 20,522 14,304
Deferred income taxes (1,443) 528 1,956
Other 903 (601) 430
Changes in operating assets and liabilities:
Accounts receivable (2,218) (2,017) (2,903)
Inventories (507) (2,234) (1,651)
Deferred pre-opening costs 3,827 (5,823) (4,247)
Prepaid expenses and other current assets (2,356) (817) (499)
Other assets (1,259) (827) (3,253)
Accounts payable 2,861 2,043 3,717
Accrued expenses 6,674 5,885 2,630
Unearned franchise and development fees 1,873 1,195 700
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 63,445 44,707 29,798
Investing activities
Purchase of property and equipment (69,248) (43,135) (28,792)
Purchase of investments (34,107) (41,445) (65,031)
Proceeds from sale or maturity of investments 44,289 46,696 26,572
Loans to franchisees (4,834) (12,348) (7,823)
Loan repayments from franchisees 5,265 2,321 -
Deferred systems development costs (1,208) (1,989) (2,614)
Acquisitions (1,902) (6,168) (30)
Other 402 316 161
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (61,343) (55,752) (77,557)
Financing activities
Payments on long-term debt (1,430) (175) (1,367)
Proceeds from issuance of common stock - - 50,551
Proceeds from exercise of stock options 11,673 3,537 1,431
Tax benefit related to exercise of non-qualified
stock options 2,953 2,339 1,315
Other (6) (27) (12)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,190 5,674 51,918
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 15,292 (5,371) 4,159
Cash and cash equivalents at beginning of year 18,692 24,063 19,904
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 33,984 $ 18,692 $ 24,063
============================================================================================================
See accompanying notes.
32
Papa John's International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business
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,"
currently in 46 states, the District of Columbia, Mexico, and Puerto Rico.
Substantially all revenues are derived from retail sales of pizza to the general
public by Company-owned restaurants, franchise royalties, sales of franchise and
development rights, and sales to franchisees of food and paper products,
restaurant equipment, printing and promotional items, risk management services,
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 Papa
John's and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fiscal Year
Our fiscal year ends on the last Sunday in December of each year. All fiscal
years presented consist of 52 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 we have performed our 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.
33
2. Significant Accounting Policies (continued)
Accounts Receivable
Substantially all accounts receivable are due from franchisees for purchases of
food and paper products, restaurant equipment, printing and promotional items,
risk management services, 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. We
consider 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
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities" (the
"SOP"), which requires that costs related to start-up activities be expensed as
incurred. Prior to 1998, we capitalized our start-up costs incurred primarily in
connection with opening new restaurant and commissary locations and amortized
these costs on a straight line basis over a period of one year from the
facility's opening date. We adopted the provisions of the SOP in our financial
statements for the year ended December 27, 1998. The adoption resulted in a
charge in the first quarter of 1998 for the cumulative effect of an accounting
change of $2.6 million, net of taxes of $1.5 million, to expense costs that had
been previously capitalized prior to 1998. Excluding the one-time cumulative
effect, the adoption of the new accounting standard did not have a material
impact on 1998 operating results.
Investments
We determine the appropriate classification of investment securities at the time
of purchase and reevaluate such designation as of each balance sheet date. All
investment securities held at December 27, 1998, 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 and are
included in comprehensive income (see the discussion of comprehensive income
below). 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 40
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).
Depreciation expense was $17.5 million in 1998, $13.3 million in 1997 and $9.1
million in 1996.
34
2. Significant Accounting Policies (continued)
Impairment of Long-lived Assets
Impairment losses are recorded on long-lived assets used in operations when
impairment indicators are present and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying value of such assets.
Systems Development Costs
We defer 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 $1.2 million in 1998, $2.0 million in
1997, and $2.6 million in 1996. Unamortized deferred systems development costs
were $4.3 million at December 27, 1998 and December 28, 1997, and are reported
in other assets in the accompanying consolidated balance sheets.
Advertising and Related Costs
Advertising and related costs include the costs of Company-owned restaurant
activities such as mail coupons, door hangers and promotional items and
contributions to the Papa John's Marketing Fund, Inc. (the "Marketing Fund") and
local market cooperative advertising funds. Through December 28, 1997, Company-
owned restaurant contributions to the Marketing Fund and local market
cooperative advertising funds were 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 developing and
conducting marketing and advertising for 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 our consolidated financial
statements, except as described below beginning with the first quarter of 1998.
Effective December 29, 1997, we began recognizing Company-owned restaurant
contributions to the Marketing Fund and to those local market cooperative
advertising funds deemed to be controlled by us (collectively, the "Controlled
Funds"), as advertising and related costs at the time the Controlled Funds
actually incurred such expenses. Through December 28, 1997, the Controlled Funds
generally incurred expenses as contributions were received; therefore, the
impact of this change was not material.
35
2. Significant Accounting Policies (continued)
Earnings per Share
The calculations of basic and diluted earnings per share before the cumulative
effect of a change in accounting principle for the years ended December 27,
1998, December 28, 1997 and December 29, 1996 are as follows (in thousands,
except per share data):
1998 1997 1996
- -------------------------------------------------------------------------------------------
Basic earnings per share:
Income before cumulative effect of a change in
accounting principle $ 37,768 $ 26,853 $ 18,614
Weighted average shares outstanding 29,409 28,916 28,010
- -------------------------------------------------------------------------------------------
Basic earnings per share $ 1.28 $ .93 $ .66
===========================================================================================
Diluted earnings per share:
Income before cumulative effect of a change in
accounting principle $ 37,768 $ 26,853 $ 18,614
Weighted average shares outstanding 29,409 28,916 28,010
Dilutive effect of outstanding common stock options 918 676 660
- -------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 30,327 29,592 28,670
- -------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.25 $ .91 $ .65
===========================================================================================
Options to purchase common stock with an exercise price greater than the average
market price were not included in the computation of the dilutive effect of
common stock options because the effect would have been antidilutive. The number
of antidilutive options was 213,000 in 1998, 695,000 in 1997 and 217,000 in
1996.
Comprehensive Income
We adopted Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," in our 1998 interim financial reporting as
required by the Financial Accounting Standards Board. SFAS No. 130 established
new rules for the reporting of comprehensive income and its components. The
adoption of this statement had no impact on our net income or stockholders'
equity and was therefore not material to our 1998 financial statements. SFAS No.
130 requires the unrealized gains and losses on our available-for-sale
securities to be included in other comprehensive income.
Prior Year Data
Certain prior year data has been reclassified to conform to the 1998
presentation.
36
3. Investments
A summary of our available-for-sale securities as of December 27, 1998 and
December 28, 1997 follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 27,1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Corporate debt securities $ 500 $ -- $ (1) $ 499
Municipal bonds 32,011 158 -- 32,169
Mortgage-backed securities 239 8 -- 247
Fixed income mutual funds 10,822 -- (375) 10,447
Equity securities 1,998 1,549 -- 3,547
Interest receivable 446 -- -- 446
- --------------------------------------------------------------------------------
Total $ 46,016 $ 1,715 $ (376) $ 47,355
================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 28, 1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Government securities $ 1,001 $ -- $ (4) $ 997
Corporate debt securities 500 -- (1) 499
Municipal bonds 40,073 125 (1) 40,197
Mortgage-backed securities 556 5 -- 561
Fixed income mutual funds 10,822 -- (217) 10,605
Equity securities 3,320 736 -- 4,056
Interest reeivable 1,018 -- -- 1,018
- --------------------------------------------------------------------------------
Total $ 57,290 $ 866 $ (223) $ 57,933
================================================================================
37
3. Investments (continued)
The amortized cost and estimated fair value of securities at December 27, 1998,
by contractual maturity, are shown below (in thousands). Expected maturities
will differ from contractual maturities because the issuers of securities may
have the right to prepay obligations without prepayment penalties.
Amortized Estimated
Cost Fair Value
- -------------------------------------------------------------------------------
Due in one year or less $ 18,463 $ 18,577
Due after one year through three years 14,048 14,091
Mortgage-backed securties 239 247
Fixed income mutual funds 10,822 10,447
Equity securties 1,998 3,547
Interest receivable 446 446
- -------------------------------------------------------------------------------
Total $ 46,016 $ 47,355
================================================================================
4. Net Property and Equipment
Net property and equipment consists of the following (in thousands):
1998 1997
- --------------------------------------------------------------------------------
Land $ 17,891 $ 14,219
Buildings and improvements 18,871 13,478
Leasehold improvements 47,322 35,406
Equipment and other 86,893 70,419
Construction in progress 46,430 11,790
- --------------------------------------------------------------------------------
217,407 145,312
Less accumulated depreciation and amortization (48,204) (32,711)
- --------------------------------------------------------------------------------
Net property and equipment $ 169,203 $ 112,601
================================================================================
5. Franchisee Loan Program
During 1996, we established a program under which selected franchisees may
borrow funds for use in the construction and development of their restaurants.
Loans outstanding to franchisees were approximately $12.5 million as of December
27, 1998 and $15.1 million as of December 28, 1997. As of December 27, 1998,
commitments to lend up to an additional $1.1 million had been made. Such loans
bear interest at fixed or floating rates (ranging from 5.5% to 9.8% at December
27, 1998), and are generally secured by the fixtures, equipment, signage and,
where applicable, land of each restaurant and the ownership interests in the
franchisee. Interest earned on franchisee loans was approximately $1.3 million
in 1998, $1.1 million in 1997 and $153,000 in 1996, and is reported in
investment income in the accompanying consolidated statements of income.
Approximately $4.7 million of the loans outstanding as of December 27, 1998 and
$8.0 million as of December 28, 1997 were to franchisees in which we or certain
of our directors or officers had an ownership interest.
38
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
1998 1997
- --------------------------------------------------------
Salaries, wages and bonuses $ 2,556 $ 2,124
Taxes other than income 4,946 4,045
Insurance 3,727 3,520
Income taxes 5,027 2,495
Facility costs 3,494 -
Other 5,727 2,948
- --------------------------------------------------------
Total $25,477 $15,132
========================================================
7. Long-Term Debt and Credit Arrangements
Long-term debt consists of a $2.0 million economic development loan (the "Loan")
from the State of Mississippi in connection with the opening of a commissary in
Jackson, Mississippi. The balance of the loan was $1.3 million as of December
27, 1998 and $1.5 million as of December 28, 1997, and is classified in accrued
expenses and other long-term liabilities in the accompanying consolidated
balance sheets.
We have a $10.0 million revolving credit agreement that expires on June 29,
1999. Outstanding balances accrue interest at 1% below the prime rate or at
rates tied to other interest indices at our election. In the event of any
default, the lender has a security interest in our cash account balances
maintained with the lender. Letters of credit in the amount of $400,000 have
been issued under the agreement on our behalf, reducing the remaining borrowing
capacity to $9.6 million at December 27, 1998.
8. Income Taxes
A summary of the provision for income taxes (exclusive of the tax effect related
to the cumulative effect of accounting change) follows (in thousands):
1998 1997 1996
- -----------------------------------------------------------------
Current
Federal $18,849 $13,061 $ 7,658
State and local 3,247 2,183 1,318
Deferred (federal and state) 85 528 1,956
- -----------------------------------------------------------------
Total $22,181 $15,772 $10,932
=================================================================
39
8. Income Taxes (continued)
Significant deferred tax assets (liabilities) follow (in thousands):
1998 1997
-------------------------------------------------------------------------------
Unearned development fees $ 2,387 $ 1,630
Unrealized loss on investments 142 82
Accrued expenses 2,485 1,405
Other 304 270
-------------------------------------------------------------------------------
Total deferred tax assets 5,318 3,387
Valuation allowance related to unrealized loss
on investments (142) (82)
-------------------------------------------------------------------------------
Net deferred tax asset 5,176 3,305
Deferred expenses (1,976) (3,158)
Accelerated depreciation (5,101) (3,833)
Unrealized gain on warrant (588) (270)
Other (487) (133)
-------------------------------------------------------------------------------
Total deferred tax liabilities (8,152) (7,394)
-------------------------------------------------------------------------------
Net deferred tax liability $ (2,976) $ (4,089)
===============================================================================
The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense (exclusive of the tax effect related to the cumulative effect
of accounting change) for the years ended December 27, 1998, December 28, 1997
and December 29, 1996 is as follows (in thousands):
1998 1997 1996
-------------------------------------------------------------------------------
Tax at U.S. federal statutory rate $ 20,982 $ 14,919 $ 10,341
State and local income taxes 1,901 1,459 1,011
Tax exempt investment income (761) (783) (788)
Other 59 177 368
-------------------------------------------------------------------------------
Total $ 22,181 $ 15,772 $ 10,932
===============================================================================
Income taxes paid were $15.9 million in 1998, $11.0 million in 1997 and $6.5
million in 1996.
9. PJ America, Inc. Stock Warrant
PJ America, Inc. ("PJ America"), a franchisee of Papa John's, 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 us to purchase
225,000 shares of its common stock. The warrant is exercisable in whole or in
part at any time within five years from the closing date of the IPO, and the
purchase price of each share of common stock pursuant to the warrant is $11.25
per share (90% of the IPO price of $12.50 per share). The warrant was issued by
PJ America to Papa John's in consideration for the grant of rights to enter into
development agreements for certain specified territories and the waiver by us of
certain market transfer fees. Our agreement with PJ America anticipates that PJ
America will pay standard development and franchise fees in connection with
opening restaurants in the specified territories.
We 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 consolidated balance sheets, with unrealized gains,
net of tax, reported within comprehensive income.
40
9. PJ America, Inc. Stock Warrant (continued)
The fair value of the warrant was $1.5 million on December 27, 1998 and $731,250
on December 28, 1997, based upon the closing price per share of $18.13 and
$14.50 for PJ America common stock on those respective dates, and is reported in
investments in the accompanying consolidated balance sheets. The intrinsic value
of the warrant (market value of PJ America common stock less the exercise price
of the warrant) is considered a reasonable approximation of the fair value of
the warrant.
Certain of our officers and/or directors are also officers and/or directors of
PJ America.
10. Related Party Transactions
Certain of our officers and directors own equity interests in entities that
operate and/or have rights to develop franchised restaurants. Certain of these
affiliated entities have agreements to acquire area development rights at
reduced development fees and also pay reduced initial franchise fees when
restaurants are opened. All such entities pay royalties at the same rate as
other franchisees. Following is a summary of transactions and balances with
affiliated entities (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Revenues from affiliates:
Commissary sales $ 64,977 $ 47,153 $ 35,972
Equipment and other sales 10,721 8,187 5,628
Franchise royalties 8,067 6,265 4,512
Franchise and development fees 1,372 1,381 900
- --------------------------------------------------------------------------------
Total $ 85,137 $ 62,986 $ 47,012
================================================================================
Other income from affiliates $ 570 $ 514 $ 85
================================================================================
Accounts receivable-affiliates $ 2,273 $ 2,454 $ 2,932
================================================================================
Notes receivable-affiliates $ 4,741 $ 7,997 $ 2,407
================================================================================
We paid $966,000 in 1998, $689,000 in 1997 and $515,000 in 1996 for charter
aircraft services provided by entities owned by certain directors and officers,
including the Chief Executive Officer of Papa John's.
We advanced $183,000 in 1998, $197,000 in 1997 and $384,000 in 1996, in premiums
for split-dollar life insurance coverage on the Chief Executive Officer for the
purpose of funding estate tax obligations. Papa John's and the officer share the
cost of the premiums. The premiums advanced by us will be repaid out of the cash
value or proceeds of the policies.
During the fourth quarter of 1997, we acquired a 49% equity ownership interest
in Mountain Pizza Group, L.L.C. ("MPG"), for $150,000 in cash. In July 1998, we
acquired the remaining 51% for $565,000 in cash. In connection with the 1998
acquisition, we also assumed $2.4 million in MPG debt. MPG, an entity which
operated seven Papa John's restaurants in Denver, Colorado, was owned by our
President. The operating results of MPG were accounted for by the equity method
until the remaining 51% was acquired in 1998. Also during the fourth quarter of
1997, we acquired three Papa John's restaurants near Denver, Colorado for
$720,000 in cash. These restaurants were owned by our Chief Executive Officer
and his wife.
41
10. Related Party Transactions (continued)
During the second quarter of 1997, we acquired 16 Papa John's restaurants in
North Carolina for $5.0 million (consisting of $4,960,000 in cash and a credit
of $40,000 towards future development fees). A majority ownership interest in
the franchisee of the North Carolina restaurants was held by certain of our
directors and officers, including our Chief Executive Officer.
The above acquisitions were accounted for by the purchase method of accounting,
whereby operating results subsequent to the acquisition date are included in our
financial statements.
In December 1996, we sold our 10% ownership interest in L-N-W Pizza, Inc. ("L-N-
W"), a franchisee that operates Papa John's restaurants in Florida, back to L-N-
W. Our Chief Operating Officer was the 90% owner of L-N-W prior to the sale and
is now the sole owner. We sold our 10% interest for total consideration of
$411,000, which represented a gross value of approximately $400,000 per
restaurant.
11. Lease Commitments
We lease 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. We also lease certain equipment
under operating leases with terms ranging from three to seven years. Future
minimum lease payments are as follows: 1999 - $11.0 million; 2000 - $8.9
million; 2001 - $7.2 million; 2002 - $5.2 million; 2003 - $3.7 million; and
thereafter - $8.0 million. Total rent expense was $10.3 million in 1998, $7.9
million in 1997, and $4.6 million in 1996.
12. Stock Options
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", we
have elected to follow Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for our employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, because the exercise price of our
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
We award 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 6,000,000
under the Incentive Plan and 270,000 under the Directors Plan. On February 25,
1999, the Board of Directors amended the Incentive Plan to increase the number
of shares available for issuance to 6,400,000 shares and amended the Directors
Plan to increase the number of shares available for issuance to 370,000 shares.
These amendments will be submitted for stockholder approval at the Annual
Meeting of Stockholders scheduled for May 20, 1999. Options granted under both
plans generally expire ten years from the date of grant and vest over one to
five year periods, except for certain options awarded under a multi-year
operations compensation program which vest immediately upon grant.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if we
have accounted for our 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 1998 and 1997,
respectively: risk-free interest rates of 4.8% and 5.7%; a dividend yield of 0%;
42
12. Stock Options (continued)
volatility factors of the expected market price of our common stock of .47; and
a weighted-average expected life of the options of 4.0 and 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
our 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 our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information follows (in thousands, except per share amounts):
1998 1997 1996
- --------------------------------------------------------------------------------
Pro forma net income before cumulative effect
of a change in accounting principle $ 29,011 $ 19,754 $14,772
Pro forma earnings per share:
Basic $ .99 $ .68 $ .53
Diluted $ .96 $ .67 $ .52
Because SFAS No. 123 is applicable only to options granted subsequent to
December 25, 1994, our 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 1998, 1997 and 1996 is as follows (number
of options in thousands):
1998 1997 1996
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 5,197 $ 25.28 3,532 $ 20.98 1,725 $12.01
Granted 1,535 37.90 2,259 29.30 2,108 27.31
Exercised 545 21.41 351 10.09 180 7.13
Cancelled 405 29.53 243 25.91 121 19.04
------------------------------- ------------------------------- -----------------------------
Outstanding-end of year 5,782 $ 28.54 5,197 $ 25.28 3,532 $ 20.98
=============================== =============================== =============================
Exercisable-end of year 2,232 $ 25.64 1,567 $ 21.96 870 $ 13.19
=============================== =============================== =============================
Weighted-average fair value
of options granted during
the year $ 13.43 $ 10.22 $ 9.65
=========== =========== ===========
43
12. Stock Options (continued)
The number, weighted-average exercise price and weighted-average remaining
contractual life of options outstanding as of December 27, 1998, and the number
and weighted average exercise price of options exercisable as of December 27,
1998 follow (number of options in thousands):
Range of Number of Weighted-Average Weighted-Average
Exercise Prices Options Exercise Price Remaining Life
- ------------------------------------------------------------------------------------------------
Outstanding options: $5.78 - $9.99 143 $ 6.24 4.56
10.00 - 19.99 916 16.17 6.67
20.00 - 29.99 1,700 26.44 7.96
30.00 - 44.00 3,023 34.53 9.08
- ------------------------------------------------------------------------------------------------
Total 5,782 28.54 8.26
================================================================================================
Exercisable options: $5.78 - $9.99 135 $ 6.06
10.00 - 19.99 604 16.12
20.00 - 29.99 552 27.19
30.00 - 44.00 941 33.65
- ---------------------------------------------------------------------------
Total 2,232 25.64
===========================================================================
As of December 27, 1998, contingent upon approval by our stockholders of the
amendments to the Incentive Plan and Directors Plan described above, 50,000
shares were available for future issuance under the Incentive Plan, and 106,750
shares were available for future issuance under the Directors Plan.
13. Defined Contribution Benefit Plan
We have 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 us and are
not significant.
14. Segment Information
Effective at the beginning of 1998, we adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which superseded SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way we report information about operating segments
in our financial statements and for related disclosures about products and
services, geographical areas, and major customers. The adoption did not affect
our results of operations or financial position, but did affect the disclosure
of segment information.
We have defined three reportable segments: restaurants, commissaries, and
franchising. The restaurant segment consists of the operations of all Company-
owned restaurants and derives its revenues from retail sales of pizza,
breadsticks, cheesesticks and soft drinks to the general public. The commissary
segment consists of the operations of our regional dough production and product
distribution centers and derives its revenues from the sale and distribution of
food and paper products to Company-owned and franchised restaurants. The
franchising segment consists of our franchise sales and support activities and
derives its revenues from sales of franchise and development rights and
collection of royalties from our franchisees. All other business units that do
not meet the quantitative thresholds for determining reportable segments consist
of operations that derive revenues from the sale
44
14. Segment Information (continued)
of restaurant equipment, printing and promotional items, risk management
services, and information systems and related services used in restaurant
operations principally to Company-owned and franchised restaurants.
Generally, we evaluate performance and allocate resources based on profit or
loss from operations before income taxes and eliminations. Certain
administrative and capital costs are allocated to segments based upon
predetermined rates or actual estimated resource usage. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies. We account for intercompany sales and transfers as if the
sales or transfers were to third parties and eliminate the related profit in
consolidation.
Our reportable segments are business units that provide different products or
services. Separate management of each segment is required because each business
unit is subject to different operational issues and strategies. Through December
27, 1998, substantially all revenues for each business segment were derived from
business activities conducted with customers located in the United States. No
single external customer accounted for 10% or more of our consolidated revenues.
45
14. Segment Information (continued)
Segment information is as follows:
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Revenues from external customers:
Restaurants $324,894 $251,153 $167,982
Commissaries 261,009 188,034 142,998
Franchising 38,499 29,645 22,113
All others 45,404 39,952 26,959
- ------------------------------------------------------------------------------
Total revenues from external customers $669,806 $508,784 $360,052
==============================================================================
Intersegment revenues:
Commissaries $102,292 $ 77,596 $ 54,619
Franchising 128 107 183
All others 15,570 14,869 12,354
- ------------------------------------------------------------------------------
Total intersegment revenues $117,990 $ 92,572 $ 67,156
==============================================================================
Depreciation and amortization:
Restaurants $ 10,915 $ 8,294 $ 5,454
Commissaries 3,296 3,199 2,234
Franchising 44 26 -
All others 839 783 841
Unallocated corporate expenses 4,310 7,490 5,129
- ------------------------------------------------------------------------------
Total depreciation and amortization $ 19,404 $ 19,792 $ 13,658
==============================================================================
Income before income taxes:
Restaurants $ 11,430 $ 5,316 $ 2,427
Commissaries 17,893 14,260 8,598
Franchising 33,066 25,297 19,569
All others 5,033 3,422 426
Unallocated corporate expenses (7,191) (5,405) (1,269)
Elimination of intersegment profits (282) (265) (205)
- ------------------------------------------------------------------------------
Total income before income taxes $ 59,949(1) $ 42,625 $ 29,546
==============================================================================
Gross fixed assets:
Restaurants $118,939 $ 91,237 $ 60,625
Commissaries 42,503 27,673 19,854
All others 4,368 4,110 3,906
Unallocated corporate assets 51,597 22,292 17,128
Accumulated depreciation (48,204) (32,711) (20,796)
- ------------------------------------------------------------------------------
Net fixed assets $169,203 $112,601 $ 80,717
==============================================================================
Expenditures for fixed assets:
Restaurants $ 28,788 $ 29,068 $ 20,740
Commissaries 14,873 7,877 4,470
All others 290 269 578
Corporate 25,297 5,921 3,004
- ------------------------------------------------------------------------------
Total expenditures for fixed assets $ 69,248 $ 43,135 $ 28,792
==============================================================================
(1) Excludes the cumulative effect of a change in accounting principle.
46
15. Quarterly Data (unaudited, in thousands, except per share data)
Quarter 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues $152,928 $109,643 $162,273 $126,212 $166,428 $128,252 $188,177 $144,677
Operating income:
As previously reported 12,559 8,382 14,066 9,200 13,835 9,697 15,841 11,915
As restated 12,024 7,934 13,418 8,832 14,234 9,705 15,841 11,649
Income before cumulative effect of
a change in accounting principle 8,243 5,693 9,197 6,271 9,675 6,854 10,653 8,035
Net Income:
As previously reported 8,280 5,693 9,392 6,271 9,591 6,854 10,653 8,035
As restated 5,640 5,693 9,197 6,271 9,675 6,854 10,653 8,035
Basic earnings per share:
Income before cumulative effect of
a change in accounting principle $ .28 $ .20 $ .31 $ .22 $ .33 $ .24 $ .36 $ .28
Net income:
As previously reported .28 .20 .32 .22 .33 .24 .36 .28
As restated .19 .20 .31 .22 .33 .24 .36 .28
Diluted earnings per share:
Income before cumulative effect of
a change in accounting principle $ .28 $ .19 $ .30 $ .21 $ .32 $ .23 $ .35 $ .27
Net income:
As previously reported .28 .19 .31 .21 .32 .23 .35 .27
As restated .19 .19 .30 .21 .32 .23 .35 .27
All quarterly information above is presented in 13 week periods. Quarterly
amounts for 1998 previously reported have been restated to reflect the adoption
of SOP 98-5. Operating income amounts for 1998 and 1997 previously reported have
also been restated to conform with certain reclassifications made for 1998 year
end presentation.
47
Report of Management
The consolidated financial statements appearing in this Annual Report have been
prepared by management, which is responsible for their preparation, integrity
and fair presentation. The statements have been prepared in accordance with
generally accepted accounting principles and necessarily include some amounts
that are based on management's best estimates and judgments.
Management is responsible for the system of internal controls over financial
reporting at Papa John's International, Inc. and its subsidiaries, a system
designed to provide reasonable assurance regarding the preparation of reliable
published financial statements. This system is augmented by written policies and
procedures and the selection and training of qualified personnel. Management
believes that its system of internal controls over financial reporting provides
reasonable assurance that the financial records are reliable for preparing
financial statements.
The Audit Committee of the Board of Directors meets with the independent
auditors and management periodically to discuss internal controls over financial
reporting and other auditing and financial reporting matters. The Committee
reviews with the independent auditors the scope and results of the audit effort.
The Committee also meets with the independent auditors without management
present to ensure that the independent auditors have free access to the
Committee. The independent auditors are recommended by the Audit Committee of
the Board of Directors and selected by the Board of Directors. Based upon their
audit of the consolidated financial statements, the independent auditors, Ernst
& Young LLP, have issued their Report of Independent Auditors, which follows.
Report of Independent Auditors
The Board of Directors and Stockholders
Papa John's International, Inc.
We have audited the accompanying consolidated balance sheets of Papa John's
International, Inc. and subsidiaries (the "Company") as of December 27, 1998 and
December 28, 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for the three years in the period ended
December 27, 1998. 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 27, 1998 and December
28, 1997, and the consolidated results of their operations and their cash flows
for the three years in the period ended December 27, 1998, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective for
the fiscal year 1998, the Company adopted SOP 98-5, "Reporting on the Costs of
Start-Up Activities."
/s/ Ernst & Young LLP
Louisville, Kentucky
February 26, 1999
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13. Directors and Officers of the Registrant; Executive
Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions:
The information required by these items, other than the information set
forth in this Report under Part I, "Executive Officers of the Registrant," is
omitted because we are filing a definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Report which includes the required information. Such information is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements:
The following consolidated financial statements, notes related thereto and
report of independent auditors are included in Item 8 of this Report:
Consolidated Statements of Income for the years ended December 27, 1998,
December 28, 1997 and December 29, 1996
Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 27, 1998, December 28, 1997 and December 29, 1996
Consolidated Statements of Cash Flows for the years ended December 27,
1998, December 28, 1997 and December 29, 1996
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 Our Amended and Restated Certificate of Incorporation. Exhibit 3.1 to
our Registration Statement on Form S-1 (Registration No. 33-61366) is
incorporated herein by reference.
49
3.2 Our Restated By-Laws. Exhibit 3.2 to our Registration Statement on
Form S-1 (Registration No. 33-61366) is incorporated herein by
reference.
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Papa John's International, Inc. Exhibit 3 to our
Quarterly Report on Form 10-Q for the quarterly period ended June
29, 1997, is incorporated herein by reference.
4.1 Specimen Common Stock Certificate. Exhibit 4.1 to our Annual Report
on Form 10-K for the fiscal year ended December 31, 1995 (Commission
File No. 0-21660) is incorporated herein by reference.
4.2 Amended and Restated Certificate of Incorporation and Restated By-
Laws (See 3.1, 3.2 and 3.3 above) is incorporated herein by
reference.
*10.1 Consulting Agreement dated March 29, 1991, between Papa John's and
Richard F. Sherman. Exhibit 10.4 to our Registration Statement on
Form S-1 (Registration No. 33-61366) is incorporated herein by
reference.
10.2 Lease dated November 7, 1990, including amendments I, II and III
thereto, between Papa John's and CWK #7, a Texas limited
partnership, relating to our corporate offices. Exhibit 10.5 to our
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
Papa John's and Crow-Kessler, a Texas limited partnership, relating
to our commissary and distribution facility in Louisville, Kentucky.
Exhibit 10.6 to our Registration Statement on Form S-1 (Registration
No. 33-61366) is incorporated herein by reference.
10.4 Lease dated January 15, 1993, between Papa John's and CWK #7, a
Texas limited partnership, relating to our 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 our 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 our 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 Papa John's and Richard J. Emmett. Exhibit 10.14 to our
Registration Statement on Form S-1 (Registration No. 33-61366) is
incorporated herein by reference.
10.8 Our standard Franchise Agreement. Exhibit 10.8 to our annual report
on Form 10-K for the fiscal year ended December 29, 1996, is
incorporated herein by reference.
10.9 Lease dated May 14, 1993, between PJ Food Service, Inc. and Sample
Properties relating to our commissary facility in Raleigh, North
Carolina. Exhibit 10.16 to our Registration Statement on Form S-1
(Registration No. 33-61366) is incorporated herein by reference.
50
10.10 Amendment IV to Lease dated November 7, 1990 (and related leases),
by and between Papa John's and CWK #7, a Texas limited partnership,
relating to our corporate offices. Exhibit 10.17 to our 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 our commissary and distribution facility in Jackson,
Mississippi. Exhibit 10.18 to our Registration Statement on Form S-1
(Registration No. 33-73530) is incorporated herein by reference.
10.12 Second Amended and Restated Loan Agreement, and related promissory
note, each dated June 30,1995, between Papa John's and PNC Bank,
Kentucky, Inc. Exhibit 10.1 to our quarterly report on Form 10-Q for
the quarterly period ended June 25, 1995 is incorporated herein by
reference.
10.13 Amendment V to Lease dated November 7, 1990 (and related leases), by
and between Papa John's and CWK #7, a Texas limited partnership,
relating to our corporate offices. Exhibit 10.22 to our 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 our quarterly report on Form 10-Q for the quarter
ended March 27, 1994 is incorporated herein by reference.
10.15 Amendment VI to Lease dated November 7, 1990 (and related leases),
by and between Papa John's 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 is incorporated herein by reference.
10.16 Third Amended and Restated Loan Agreement dated June 30, 1996,
between Papa John's and PNC Bank, Kentucky, Inc. Exhibit 10.1 to our
quarterly report on Form 10-Q for the quarterly period ended
September 29, 1996 is incorporated herein by reference.
10.17 Agreement and Plan of Merger dated December 1, 1995, by and among
Papa John's International, Inc., Papa John's USA, Inc., Kentuckiana
Pizza, Ltd., Kentuckiana 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 is incorporated herein by reference.
10.18 Agreement and Plan of Merger dated October 16, 1995 by and among
Papa John's International, Inc., Papa John's USA, Inc., NRG, Inc.
("NRG") and all of the stockholders of NRG. Exhibit 2.2 to our
Current Report on Form 8-K dated December 1, 1995 is incorporated
herein by reference.
*10.19 1996 Papa John's International, Inc. Executive Option Program.
Exhibit 10.26 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 is incorporated herein by reference.
10.20 Lease dated November 29, 1995 between PJ Food Service, Inc. and
Arlington-OP&F, Inc. relating to our distribution facility in
Dallas, Texas. Exhibit 10.28 to our Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 is incorporated herein by
reference.
10.21 Lease dated January 3, 1996, between PJ Food Service, Inc. and
Fraser, L.L.C. relating to the Company's commissary and distribution
facility in Denver, Colorado. Exhibit 10.29 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 is
incorporated herein by reference.
51
10.22 Amendment VII to Lease dated November 7, 1990 (and related leases)
between Papa John's and CWK #7 Limited Partnership, related to our
corporate offices. Exhibit 10.30 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 is incorporated herein
by reference.
10.23 Lease dated January 23, 1996, between PJ Food Service, Inc. and CWK
#8 relating to commercial and corporate office space in Louisville,
Kentucky. Exhibit 10.31 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 is incorporated herein by
reference.
10.24 Agreement for Purchase and Sale of Real Estate dated February 28,
1996, by and between Papa John's USA, Inc., NTS/Crossings
Corporation and NTS Bluegrass Commonwealth Park, relating to
approximately 6 acres of land in Louisville, Kentucky. Exhibit 10.32
to our Annual Report on Form 10-K for the fiscal year ended December
31, 1995 is incorporated herein by reference.
10.25 Lease dated September 30, 1996, between PJ Food Service, Inc. and
Opus Southwest Corporation relating to our commissary and
distribution facility opened in Tempe, Arizona. Exhibit 10.27 to our
annual report on Form 10-K for the fiscal year ended December 29,
1996 is incorporated herein by reference.
10.26 Sublease dated January 16, 1997, between PJ Food Service, Inc. and
Distribution Unlimited, Inc. relating to the Company's commissary
and distribution facility opened in Rotterdam, New York. Exhibit
10.26 to our annual report on Form 10-K for the fiscal year ended
December 28, 1997 is incorporated herein by reference.
10.27 Lease dated August 30, 1996, between PJ Food Service, Inc. and A.
Terry Moss and Ira E. White relating to the Company's commissary and
distribution facility opened in Des Moines, Iowa. Exhibit 10.29 to
our annual report on Form 10-K for the fiscal year ended December
29, 1996 is incorporated herein by reference.
*10.28 Amendment to Papa John's International, Inc. 1993 Stock Ownership
Incentive Plan. Exhibit 10 to our quarterly report on Form 10-Q for
the quarter ended June 29, 1997 is incorporated herein by
reference.
10.29 Discretionary Line of Credit dated June 30, 1997, between the
Company and PNC Bank, Kentucky, Inc. Exhibit 10.1 to our quarterly
report on Form 10-Q for the quarter ended September 28, 1997 is
incorporated herein by reference.
*10.30 Amended and Restated Chief Operating Officer Agreement dated
October 9, 1997, by and between Papa John's and Wade S. Oney.
Exhibit 10.2 to our quarterly report on Form 10-Q for the quarter
ended September 28, 1997 is incorporated herein by reference.
10.31 Lease dated November 27, 1997 by and between Papa John's and SF
Property Investments, LLC, an Oregon limited liability corporation,
relating to our commissary and distribution facility in Portland,
Oregon. Exhibit 10.31 to our annual report on Form 10-K for the
fiscal year ended December 28, 1997 is incorporated herein by
reference.
10.32 Amendment II to Lease dated November 9, 1990 between the Company and
Crow-Kessler, a Texas limited partnership, relating to our
commissary and distribution facility in Louisville, Kentucky.
Exhibit 10.32 to our annual report on Form 10-K for the fiscal year
ended December 28, 1997 is incorporated herein by reference.
52
10.33 Amendment VIII to Lease dated November 7, 1990 (and related leases)
between Papa John's and CWK #7 Limited Partnership, related to our
corporate offices. Exhibit 10.33 to our annual report on Form 10-K
for the fiscal year ended December 28, 1997 is incorporated herein
by reference.
10.34 First Lease Modification Agreement to Lease dated May 14, 1993
between PJ Food Service, Inc., and Sample Properties relating to our
commissary and distribution facility in Raleigh, North Carolina.
Exhibit 10.34 to our annual report on Form 10-K for the fiscal year
ended December 28, 1997 is incorporated herein by reference.
10.35 First Amendment to Lease dated November 29, 1995 between PJ Food
Service, Inc. and Arlington-OP&F, Inc. relating to the Company's
distribution facility in Dallas, Texas. Exhibit 10.35 to our annual
report on Form 10-K for the fiscal year ended December 28, 1997 is
incorporated herein by reference.
10.36 Amendment IX to Lease dated November 7, 1990 (and related leases)
between Papa John's and CWK #7 Limited Partnership, related to our
corporate offices. Exhibit 10.36 to our annual report on Form 10-K
for the fiscal year ended December 28, 1997 is incorporated herein
by reference.
10.37 Amendment III to Lease dated November 9, 1990 between Papa John's
and Crow-Kessler, a Texas limited partnership, relating to our
commissary and distribution facility in Louisville, Kentucky.
Exhibit 10.37 to our annual report on Form 10-K for the fiscal year
ended December 28, 1997 is incorporated herein by reference.
10.38 Lease dated December 6, 1998, between PJ Food Service, Inc. and The
Buncher Company relating to our commissary and distribution facility
to be opened in Pittsburgh, Pennsylvania.
10.39 Amendment to Papa John's International, Inc. 1993 Stock Ownership
Incentive Plan. Exhibit 10 to our quarterly report on Form 10-Q for
the quarter ended June 28, 1998 is incorporated herein by reference.
21 Subsidiaries of the Company:
(a) PJ Food Service, Inc., a Kentucky corporation
(b) Papa John's USA, Inc., a Kentucky corporation
(c) Papa John's Support Services, 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
53
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information only and not deemed
to be filed with the Commission.
27.2 Restated Financial Data Schedule including columns for the quarters
ended September 27, 1998, June 28, 1998 and March 29, 1998. The
schedule is submitted electronically to the Securities and Exchange
Commission for information only and is not deemed to be filed with the
Commission.
99.1 Cautionary Statements.
__________________
*Compensatory plan required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the last fiscal quarter of
the period covered by this report.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Consolidated Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and therefore have been
omitted.
54
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 24, 1999 PAPA JOHN'S INTERNATIONAL, INC.
By: /s/ John H. Schnatter
-------------------------
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 24, 1999
- --------------------- and Director (Principal Executive
John H. Schnatter Officer)
/s/ Blaine E. Hurst Vice Chairman, President and March 24, 1999
- ------------------- Director
Blaine E. Hurst
/s/ Charles W. Schnatter Senior Vice President, Secretary, March 24, 1999
- ------------------------ General Counsel and Director
Charles W. Schnatter
/s/ O. Wayne Gaunce Director March 24, 1999
- -------------------
O. Wayne Gaunce
/s/ Jack A. Laughery Director March 24, 1999
- --------------------
Jack A. Laughery
/s/ Michael W. Pierce Director March 24, 1999
- ---------------------
Michael W. Pierce
55
Signature Title Date
- --------- ----- ----
/s/ Richard F. Sherman Director March 24, 1999
- ------------------------
Richard F. Sherman
/s/ E. Drucilla Milby Senior Vice President,
- ---------------------- Chief Financial Officer March 24, 1999
E.Drucilla Milby and Treasurer(Principal
Financial Officer)
/s/ J. David Flanery Vice President and Corporate March 24, 1999
- ------------------------ Controller(Principal
J. David Flanery Accounting Officer)
56
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
------------------------------------------------------------------------------
10.38 Lease dated December 6, 1998, between PJ Food Service, Inc. and The
Buncher Company relating to our commissary and distribution facility
to be opened in Pittsburgh, Pennsylvania.
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
deemed to be filed with the Commission.
27.2 Restated Financial Data Schedule including columns for the quarters
ended September 27, 1998, June 28, 1998 and March 29, 1998. The schedule
is submitted electronically to the Securities and Exchange Commission
for information only and is not deemed to be filed with the Commission
99.1 Cautionary Statements
57
EXHIBIT 10.38
Printed in U.S.A
AGREEMENT OF LEASE
AGREEMENT OF LEASE made this 6th day of December 1998 by and between THE
BUNCHER COMPANY (hereinafter called "Landlord"), a Pennsylvania corporation
having its principal place of business in the Allegheny County, Pennsylvania and
P J FOOD SERVICE, INC. (hereinafter called "Tenant"), a corporation having its
principal place of business in the City of Louisville, Jefferson County,
Kentucky.
WHEREAS, Landlord has full right and power to lease pursuant hereto a
certain parcel of land (the "Premises") more particularly described in and/or
shown outlined in red on Exhibit A attached hereto, upon which is erected a
portion of a building and other improvements incidental thereto (which building
portion and other incidential improvements are hereinafter called the
"Improvements"); and
WHEREAS, Landlord desires to lease to Tenant and Tenant desires to take and
hire from Landlord the Premises and the improvements. (The Premises and the
Improvements are sometimes hereinafter collectively called the "Leased
Premises".)
NOW, THEREFORE, WITNESSETH, That Landlord hereby demises and leases unto
Tenant, and Tenant hereby takes and hires from Landlord the Leased Premises,
subject to the terms and conditions hereof.
TERM TO HAVE AND TO HOLD the Leased Premises unto Tenant for a term of five (5)
years and two (2) months commencing at 12:01 A.M. on March 1, 1999 (the
"Commencement Date") and ending at 11:59 P.M. on April 30, 2004; subject
nevertheless, to the following covenants and conditions which Landlord and
Tenant respectively covenant and agree to keep and perform.
RENT
See Rider
Paragraph #2
TAXES 2. Tenant will pay to Landlord on demand and as additional
See Rider rental hereunder all real estate taxes (including taxes
Paragraph #5 levied or assessed in lieu of or as a substitution for real
estate taxes) imposed, assessed or levied upon or against the
Leased Premises during the term of this Lease.
In addition, Tenant will pay to Landlord on demand as
additional rental hereunder, each and every item of expense
in the nature of a tax or imposition for the payment of which
Landlord is or shall become liable by reason by Landlord's
estate or interest in the Leased Premises, or any portion
thereof, including without limiting the generality thereof
all personal property taxes, sales taxes, excise taxes, use
and occupancy taxes, whether or not the same are now
customarily levied or enacted and regardless of whether the
same shall be general or special, foreseen or unforeseen,
provided the same shall be (i) levied or assessed against
Landlord or Tenant in connection with the Leased Premises, or
any portion thereof, or (ii) levied, assessed or imposed
upon, or against, or which shall be measured by, any rents or
rental income, as such, payable to Landlord, provided,
however, that Tenant shall not be obligated hereunder to pay
any of the following:
a. any estate, inheritance, devolution, succession,
transfer, legacy or gift tax which may be imposed
upon or with respect to any transfer of Landlord's
interest in the Leased Premises; or
b. any net income tax levied upon or against Landlord's
income from all sources.
USE 3. Tenant will use and occupy the Leased Premises only for
operating a food and dry goods commissary distribution center
for the manufacture and distribution of dough and related
products, and will not create, permit or maintain any
nuisance thereon. Tenant will not use or occupy or suffer or
permit the Leased Premises or any part thereof to be used or
occupied for (a) any purpose contrary to law or the rules or
regulations of any governmental authority having jurisdiction
over the Leased Premises (b) any purpose which in the
judgment of Landlord is hazardous or detrimental to persons
or property.
MAINTENANCE 4. Tenant will at Tenant's sole cost and expense keep the Leased
AND REPAIR Premises and all equipment and personal property of Landlord
See Rider therein in good order, condition and repair, damage by
Paragraph #3 insured casualty excepted. If Tenant fails or refuses to
keep the Leased Premises in good order, condition and repair
as aforesaid, Landlord may do so, and charge the cost thereof
to Tenant to be collected as additional rental hereunder.
Landlord shall, during the term of this Lease, at its
sole cost and expense and as promptly as is reasonable under
the circumstances, make all needed structural repairs
(exclusive of painting) to the Improvements upon receipt of
notice from Tenant of the need for such repairs, unless the
need for such repairs was caused by the wrongful act or
negligence of Tenant, in which event Tenant shall promptly
make such repairs at Tenant's sole cost and expense.
Structural repairs shall mean only repairs to the roof,
exterior walls, floors, foundations and steel frame of the
Improvements. Structural repairs shall be deemed to be needed
when the failure to make same will result in a hazard to
persons or property and/or cause a major impairment to
Tenant's use of the Leased Premises for the purpose set forth
in section 3 hereof.
ALTERATIONS 5. Tenant will not make or permit to be made any alterations,
improvements and additions to the Leased Premises or any part
thereof except by and with the prior written consent of
Landlord, which consent shall not be unreasonably withheld.
All alterations, improvements and additions to the Leased
Premises shall be made in accordance with all applicable laws
and shall at once when made or installed be deemed to have
attached to the freehold and to have become the property of
Landlord and shall remain for the benefit of Landlord at the
end of the term of this Lease or other expiration of this
Lease in as good order and condition as they were when
installed, reasonable wear and tear and damage insured
casualty excepted; provided, however, if prior to the
termination of this Lease, or within fifteen (15) days
thereafter Landlord so directs by written notice to Tenant.
Tenant shall at Tenant's sole cost and expense promptly
remove the alterations, improvements and additions which were
placed in the Leased Premises by Tenant and which are
designated in said notice and repair any damage occasioned
by such removal and restore the Leased Premises to the
condition in which they were prior to such alterations,
improvements or additions and in default thereof Landlord may
effect said removals and repairs at Tenant's expense. In the
event of making such alterations, improvements and additions
as herein provided. Tenant further will indemnify and save
harmless Landlord form all expense, liens, claims or damages
or injuries to either persons or property arising out of, or
resulting from the undertaking, making or removal of said
alterations, additions and improvements.
ASSIGNMENT 6. Tenant shall not assign this Lease or sublet the whole or any
TO SUB- part of the Leased Premises or permit any other persons to
LETTING occupy same without the prior written consent of Landlord.
Landlord shall not unreasonably withhold such consent. Any
such assignment or subletting, even with the consent of
Landlord, shall not relieve Tenant from liability for payment
of rent or other sums herein provided or from the obligation
to keep and be bound by the terms, conditions and covenants
of this Lease. The acceptance by Landlord of rent from any
other person shall not be deemed to be a waiver of any of the
provisions of this Lease or to be a consent to the assignment
of this Lease or subletting of the Leased Premises.
Any transfer of this Lease from Tenant by merger,
consolidation or liquidation shall constitute an assignment
of this Lease and shall require the prior written consent of
Landlord, which consent shall not be unreasonably withheld.
An assignment for the benefit of creditors or by operation of
law shall not be effective to transfer any rights to an
assigne without the prior written consent of the Landlord
first having been obtained.
UTILITIES 7. Tenant will pay for all public and private utility
services, including water and sewer rentals, used or consumed
on or in connection with the Leased Premises. Electric and
gas to be separately metered; water and sewer will be
submetered and charges will be billed by Landlord based upon
useage.
INSURANCE 8. During the term of this Lease, Tenant will at Tenant's
sole cost and expense maintain with insurance companies
satisfactory to Landlord comprehensive public liability and
property damage insurance with respect to the Leased
Premises, with minimum limit of $1,000,000 with respect to
the death or injury of one person, and $2,000,000 with
respect to the death or injury of two or more persons and
$250,000 with respect to property damage. Such insurance
coverage shall be endorsed to include the contractual
liability assumed by Tenant under section 9 hereof.
See Rider Prior to the Commencement Date, Tenant shall furnish
Paragraph #4 to Landlord certificates evidencing the comprehensive public
liability insurance and property damage coverage as provided
in this section 8 above, said certificates and policies to
contain the standard 10 day notification clause to Landlord
and Landlord's mortgagee in the event of change of
cancellation of insurance coverage and shall name Landlord as
an additional insured.
INDEMNITY 9. Tenant will protect and save and keep Landlord forever
harmless and indemnified against and from any penalty or
damage or charges imposed for any violation of any law or
ordinance, whether occasioned by the neglect of Tenant or
those holding under Tenant, and Tenant will at all times
protect, indemnify and save and keep harmless Landlord
against and from all claims, loss, cost, damage or expense
arising out of or from any accident or other occurrence on
or about the Leased Premises causing injury to any person
or property whomsoever or whatsoever, and will protect,
indemnify, save and keep harmless Landlord against and from
any and all claims and against and from any and all loss,
cost, damage, or expense arising out of any failure of
Tenant in any respect to comply with and perform all the
requirements and provisions of this Lease.
SURRENDER 10. Tenant will deliver up and surrender to Landlord
possession of the Leased Premises upon expiration of the
term of this Lease or upon the earlier termination of this
Lease, broom clean and in as good condition and repair as
the same shall be at the commencement of the term of this
Lease, ordinary wear and tear and damage by insured casualty
excepted. Tenant hereby waives any notice now or hereafter
required by law with respect to vacating at the termination
of any tenancy.
ACCESS TO 11. Tenant will permit Landlord or Landlord's agent to
LEASED inspect or examine the Leased Premises at any reasonable time
PREMISES and upon reasonable notice (immediately in case of an
emergency) and permit Landlord to make such repairs to the
Leased Premises as Landlord may deem necessary for
preservation of the Leased Premises and which Tenant has
failed so to make without the same being construed as an
eviction of Tenant in whole or in part, and the rent shall in
no wise abate while such repairs, alterations, improvements
or additions are being made by reason of loss or interruption
of the business of Tenant because of the prosecution of such
work.
Landlord shall have the right to enter upon the
Leased Premises at any reasonable time upon reasonable notice
and from time to time during the term of this Lease for the
purpose of exhibiting the same to prospective purchasers and
for a period commencing 180 days prior to the end of the
term of this Lease for the purpose of exhibiting the same to
prospective tenants. During said 180-day period Landlord
may place signs in or upon the Leased Premises to indicate
that same are for rent or sale, which signs shall not be
removed, obliterated or hidden by Tenant.
TENANTS 12. All fixtures, equipment, including equipment that
PROPERTY may be bolted or attached to the Leased Premises and other
property placed or installed in or on the Leased Premises by
Tenant and designed for and used in the conduct of Tenant's
business in the Leased Premises, shall at all times be and
remain the property of Tenant. Tenant will at Tenant's sole
cost and expense remove all such equipment, fixtures and
other property form the Leased Premises prior to the
termination of this Lease and Tenant will at Tenant's cost
and expense repair any and all damage to the Leased Premises
caused or occasioned by the installation or removal of said
fixtures, equipment or other property. Any and all such
equipment, fixtures and other property which shall remain
on the Leased Premises for more than five (5) days after the
termination of this Lease, shall at Landlord's option be
deemed abandoned by Tenant and become the sole property of
Landlord, or may be removed by Landlord in which case Tenant
shall pay or reimburse Landlord for the cost of such removal
and of repairing any and all damage to the Leased Premises
caused thereby.
SIGNS 13. Tenant may install at Tenant's own cost and expense
an appropriate sign or signs on the Leased Premises
referring to Tenant's business or services; provided,
however, that the size, type and location of any such sign
shall comply with all applicable laws and governmental
rules, regulations and restrictions and shall be subject to
Landlord's approval, which approval shall not be unreasonably
withheld.
CONDEMNATION 14. If the Leased Premises or any part thereof shall be
OF THE LEASED taken or condemned either permanently or temporarily for
PREMISES any public use or purpose by any competent authority in
condemnation proceedings or by any right of eminent domain,
the entire compensation award thereof, both leasehold and
reversion, shall belong to the Landlord without any
deduction therefrom for any present or future estate of
Tenant, and Tenant hereby assigns to Landlord all its right,
title and interest to any such award. Tenant, shall,
however, be entitled to claim, prove and receive in such
condemnation proceedings such award as may be allowed for
fixtures and other equipment installed by Tenant and for lost
business or increased cost incurred, but only if such award
shall be in addition to the award for the Leased Premises.
If substantially all of the Leased Premises shall be
taken as aforesaid or if any such taking shall render the
Leased Premises unfit for the conduct of Tenant's business,
then this Lease shall terminate and shall become null and
void from the time possession thereof is required for public
use, and from that date the parties hereto shall be released
from all further obligations hereunder.
If only a portion of the Leased Premises shall be so
taken or condemned, which taking shall not render the Leased
Premises substantially unfit for the conduct of Tenant's
business, then Landlord at its own expense shall repair and
restore the portion not affected by the taking and this
Lease shall continue in full force and effect except that
the rental shall be equitably and proportionately reduced.
DAMAGE OR 15. If, during the term of this Lease, the Improvements
DESTRUCTION are so damaged or destroyed by insured casualty so as to
render the Improvements unfit for occupancy by Tenant for the
purposes set forth in section 3 of this Lease, and if the
Improvements cannot in the sole judgment of Landlord be
repaired, restored or rebuilt within five (5) months from the
happening of such damage or destruction, then Landlord may
terminate this Lease as of the date of such damage by giving
Tenant notice in writing with respect thereto within thirty
(30) days from the date of such happening. In such case,
rental hereunder shall abate as of the date of such damage or
destruction and Landlord shall be entitled to retain all
insurance proceeds resulting from such damage or destruction.
Landlord shall refund to Tenant any unearned rent paid in
advance and Tenant shall as expeditiously as is reasonable
under the circumstances remove such of its property as it is
required to remove under the provisions of section 12 hereof
and shall surrender the Leased Premises to Landlord who may
enter upon and repossess the same, and all further liability
Tenant and Landlord hereunder shall thereupon cease.
In the event any such damage to or destruction of
the Improvements can in the sole judgment of Landlord be
repaired within a period of five (5) months after the
happening thereof, Landlord shall repair, restore or
rebuild the Improvements with all reasonable dispatch, and
this Lease shall not be affected in any manner, except that
the liability of Tenant for rent shall be suspended for the
period during which such repair, restoration or rebuilding
is being made. However, if the damage is such as not to
render the
Improvements totally unfit for the occupancy by Tenant for
the purposes set forth in section 3 of this Lease, Landlord
shall repair the Improvements with reasonable promptness and
rentals hereunder shall abate pro rata to the extent that
portions of the Leased Premises are not available for use by
Tenant. In either situation provided for in this paragraph,
Landlord shall be entitled to receive and retain all
insurance proceeds resulting from such damage or destruction.
(3)
Notwithstanding the foregoing provisions of this
section 15, if the Improvements shall be destroyed or in the
judgment of Landlord substantially damaged by insured
casualty during the last three years of the term of this
Lease, Landlord may within 30 days after the occurrence of
such damage or destruction, cancel and terminate this Lease
by giving written notice to Tenant, and if such notice is
given, this Lease shall expire as of the date of such
destruction with the same effect as though that date was the
date of the expiration of the term of this Lease, rental
hereunder shall abate as of the date of such damage or
destruction, Landlord shall be entitled to retain all
insurance proceeds resulting from such damage or destruction.
Landlord shall refund to Tenant any unearned rent paid in
advance, and Tenant shall as expeditiously as is reasonable
under the circumstances remove such of its property as it is
required to remove under the provisions of section 12 hereof
and shall surrender the Leased Premises to Landlord who may
enter upon and repossess the same, and all further liability
Tenant and Landlord hereunder shall thereupon cease. If this
Lease is not so cancelled and terminated, the provisions of
the foregoing paragraphs of this section 15 shall control.
DEFAULT AND 16. All rights and remedies of Landlord herein
REMEDIES enumerated shall be cumulative, and none shall exclude any
other rights or remedies allowed by law. Tenant covenants and
agrees that if any of the following events of default occur,
that is, if:
a. Tenant shall fail, neglect or refuse to pay any
rent or sums payable hereunder as rent at the times and in
the amount as herein provided, or to pay any other monies
agreed by it to be paid promptly when and as the same shall
become due and payable under the terms hereof, or if Tenant
shall fail to keep and maintain in full force and effect the
insurance required under section 8 of this Lease, and if any
such default should continue for a period of more than 10
days after notice thereof by Landlord to Tenant: or
b. Tenant shall abandon or vacate the Leased
Premises or commit waste thereon, or any execution be issued
against a substantial part of Tenant's assets or bankruptcy,
receivership or in solvency proceedings be instituted by or
against Tenant or an assignment made by Tenant for the
benefit of creditors, or Tenant shall fail, neglect or refuse
to keep and perform any of the other covenants, conditions,
stipulations or agreements herein contained and covenanted
and agreed to be kept and performed by it, and in the event
any such failure, neglect or refusal shall continue for a
period of more than 30 days after notice thereof is given in
writing to Tenant by Landlord, provided, however, that if the
cause for giving such notice involves the making of repairs
or other matters reasonably requiring a longer period of time
than the period of such notice. Tenant shall be deemed to
have complied with such notice so long as it has commenced to
comply with said notice within the period set forth in the
notice and is diligently prosecuting compliance of said
notice or has taken the proper steps or proceedings under the
circumstances to prevent the seizure, destruction, alteration
or other interference with said Leased Premises by reason of
non-compliance with the requirements of any law or ordinance
or with the rules, regulations or directions of any
governmental authority, as the case may be,
then the entire rental for the balance of the
term of this Lease shall at the option of Landlord at once
become due and payable as if by the terms of this Lease it is
payable in advance, and the Tenant does hereby authorize and
fully empower Landlord to cancel or annul this Lease at once
and to re-enter and take possession of the Leased Premises
immediately, without any previous notice of intention to
re-enter, and to remove all persons and their property
therefrom, and to use such assists in effecting and
perfecting such removal of Tenant as may be necessary and
advisable to recover at once first and exclusive possession
of the Leased Premises, without being deemed guilty of any
manner of trespass and without prejudice to any remedies
which might otherwise be used by Landlord, in which event
this Lease shall terminate and Tenant shall indemnify
Landlord against all unavoidable loss of rent which Landlord
may incur by reason of such termination during the residue of
the term of this Lease.
Landlord may, however, at its option at any time and
after such default or violation of condition or covenant,
re-enter and take possession of the Leased Premises without
such re-entry working a forfeiture of the rents to be paid
and the covenants, agreements and conditions to be kept and
performed by Tenant for the term of this Lease. In such event
Landlord shall have the right, but not the obligation, to
divide or subdivide the Leased Premises in any manner
Landlord may determine and to lease or let the same or
portions hereof for such periods of time and at such rentals
and for such use and upon such covenants and conditions as
Landlord may elect, applying the net rentals from such
letting first to the payment of Landlord's expenses incurred
in dispossessing Tenant and the cost and expense of making
such improvements in the Leased Premises as may be necessary
in order to enable Landlord to re-let the same, and to the
payment of any brokerage commissions or other necessary
expenses of Landlord in connection with such re-letting. The
balance, if any, shall be applied by Landlord from time to
time on account of the payments due or payable by Tenant
hereunder, with the right reserved to Landlord to bring such
action or proceedings for the recovery of any deficits
remaining unpaid as Landlord may deem desirable from time to
time, without being obligated to await the end of the Term
for the final determination of Tenant's account. Any balance
remaining, however, after full payment and liquidation of
Landlord's account as aforesaid shall be paid to Tenant, with
the right reserved to Landlord at any time to give notice in
writing to Tenant of Landlord's election to cancel and
terminate this Lease and the simultaneous payment by Landlord
to Tenant of any credit balance in Tenant's favor that may at
the time be owing to Tenant shall constitute final and
effective cancellation and termination of the Lease and the
obligation hereunder on the part of either party to the
other.
CONFESSION OF 17. For value received and forthwith on every default
JUDGMENT hereunder or on any and every breach of covenant herein.
Tenant hereby empowers any attorney of any court of record
within the United States or elsewhere to appear for Tenant
and with or without declaration filed, confess judgment or a
series of judgments against Tenant and in favor of Landlord,
its successors or assigns of any term in ejectment and/or for
the full sum due by reason of any default hereunder,
including unpaid rent for the balance of the term of this
Lease together with costs of suit and attorney's commission
of $200 for collection. Tenant further authorizes the
issuance of such possessory writs or writs of execution as
Landlord may elect upon any such judgement or judgments, with
release of all errors and without stay of execution and
inquisition, and extension upon any levy of real estate is
hereby waived and condemnation agreed to and the exemption of
any and all property from levy or sale by virtue of any law
now in force or hereinafter enacted is also expressly waived.
HOLD OVER 18. If Tenant with the prior written consent of
Landlord, shall remain in possession of the Leased Premises
after the expiration of the term of this Lease, then Tenant
shall be deemed a tenant of the Leased Premises from month to
month at the same rental and subject to all of the terms and
provisions hereof, except only as to the term of this Lease.
QUIET ENJOY- 19. If Tenant pays rental and other charges herein
MENT provided and shall perform all of the covenants and
agreements herein stipulated to be performed on the Tenant's
part. Tenant shall, at all times during the term of this
Lease, have the peaceable and quiet enjoyment and possession
of the Leased Premises without any manner of hindrance from
Landlord or any persons lawfully claiming through Landlord,
except as to any portion of the Leased Premises as may be
taken under the power of eminent domain.
NOTICES 20. All notices, demands and requests which may be or
are required to be given hereunder shall be given in writing
and shall be deemed to have been duly given as of the date of
mailing if sent by postage prepaid, first class. United
States registered or certified mail, return receipt
requested, to each of the parties at the following places, or
to such other places as either party hereto may for itself
designate in writing from time to time for the purpose of
receiving notices hereunder:
P J Food Service, Inc.
THE BUNCHER COMPANY -------------------------------
c/o Buncher Management Agency, Inc. P. O. Box 99900
- ------------------------------------- -------------------------------
5600 Forward Avenue/P. O. Box 81930 Louisville, KY 40269-0900
- ------------------------------------- -------------------------------
Pittsburgh, PA 15217-0930
- ------------------------------------- -------------------------------
MARGINAL 21. Marginal notes used herein are for the purpose of
NOTES convenience only and shall not be used in construing this
Lease.
ENTIRE 22. This Lease constitutes and contains the entire and only
AGREEMENT agreement between the parties, and supersedes and cancels any
and all pre-existing agreements and understandings between the
parties, relating to the subject matter hereof. No
representation inducement, promise, condition or warranty not
set forth herein has been made or relied upon by either party.
SUBORDINATION 23. This Lease is subject and subordinate to all ground or
underlying leases and to all mortgages which may now or
hereafter affect the Leased Premises, and to all renewals,
modifications, consolidations, replacements and extensions
thereof. This clause shall be self-operative and no further
instrument of subordination shall be required; however, in
confirmation of such subordination Tenant shall execute
promptly any certificate to that effect upon request by
Landlord. Tenant hereby constitutes and appoints Landlord as
Tenant's attorney-in-fact to execute any such certificate or
certificates for and on behalf of Tenant.
LIMITATION OF 24. Notwithstanding the provisions hereof, the term "Landlord"
LANDLORD as used in this Lease means only the holder, for the time
being, of Landlord's interest under this Lease so that in the
event of any transfer of title to the Leased Premises to a
party assuming Landlord's obligations hereunder Landlord shall
be and hereby is entirely freed and relieved of all obligations
of Landlord hereunder accruing after such transfer, and it
shall be deemed without further agreement between the parties
that such grantee, transferee or assignee has assumed and
agreed to observe and perform all obligations of Landlord
hereunder arising during the period it is the holder of
Landlord's interest hereunder.
FORCE 25. Landlord shall not be liable to Tenant and shall not be in
MAJEURE default under this Lease in any manner by reason of delay in
performance of any covenant or condition in this Lease, if any
such delay is caused by present or future governmental
regulations, restrictions, strikes, lockouts, unusual
unavailability of materials or labor, severe adverse weather
conditions, or by any other reason or reasons, whether similar
or not to foregoing, which delays are beyond the reasonable
control of Landlord, provided that Landlord shall use
Landlord's best efforts to overcome the same.
ATTACHMENTS 26. Attached to this Lease and made a part hereof, and
initialed on behalf of both parties simultaneously with the
execution of this Lease, are Exhibits A through B inclusive,
and Rider pages 1 through 16 inclusive.
GOVERNING 27. This Lease shall be construed, governed and enforced in
LAW accordance with the laws of the Commonwealth of Pennsylvania.
SEPARABILITY 28. If any term or provision of this Lease, or the application
thereof to any party or circumstance, shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to parties or
circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and be enforced to the
fullest extent permitted by law.
CUMULATIVE 29. The specified remedies to which Landlord or Tenant may
REMEDIES resort under the terms of this Lease are cumulative and are not
intended to be exclusive of any other remedies or means or
redress to which Landlord or Tenant may be lawfully entitled in
case of any breach by Landlord or Tenant of any provision of
this Lease. Failure of Landlord or Tenant to insist in any one
or more cases upon the strict performance of any of the
covenants of this Lease shall not be construed as a waiver or a
relinquishment for the future of such covenant. A receipt by
Landlord of rent with knowledge of the breach of any covenant
hereof shall not be deemed a waiver of such breach, and no
waiver by Landlord or any provision of this Lease shall be
deemed to have been made unless expressed in writing and signed
by Landlord. In addition to the other remedies in this Lease
provided, Landlord or Tenant shall be entitled to the restraint
by injunction of the violation, or attempted or threatened
violation, of any of the covenants, conditions or provisions
of this Lease. Nothing in this Lease shall give either party
the right to terminate this Lease except as otherwise
specifically set forth in this Lease.
AMENDMENTS 30. This Lease may be amended, modified, renewed, extended,
cancelled or terminated only by a written instrument duly
executed by both of the parties hereto.
PROVISIONS 31. All the provisions of this Lease, insofar as they are
CONSTRUED AS applicable to either or both of the parties hereto, shall be
COVENANTS taken and construed as the covenant or covenants of such party
or parties respectively to do or perform the thing or act
specified or not to do the act or thing inhibited.
BINDING 32. The provisions of this Lease shall be binding upon and
EFFECT shall inure to the benefit of the parties hereto and their
respective successors and assigns: subject, nevertheless, to
the restrictions on assignment by Tenant as set forth in
section 6 hereof and to the provisions of section 24 hereof.
RESERVATIONS 33. Landlord reserves for itself and all tenants, the use of
ROADS AND access roads and of utilities, and the right to make additional
UTILITIES connections, as Landlord may deem necessary, without
unreasonable interference with the operations of Tenant.
34. Acceptance of possession of the Leased Premises or opening
the same for business shall be conclusive evidence that the
Leased Premises are and were in good order and condition on the
Commencement Date.
35. Tenant shall have the non-exclusive right to the use of
the driveway area shaded in yellow on Exhibit A attached hereto
which driveway may be used in common with Landlord, Tenant and
other tenants and their employees, invitees and business
visitors for pedestrian and vehicular traffic.
This Lease is made by virtue and in pursuance of a resolution
of the Board of Directors of Tenant, adopted at a meeting
thereof duly called and held on the ____ day of
_________________, 19__, a full quorum of said Board being
present and acting throughout, authorizing and directing the
same to be made and done.
WITNESS the due execution hereof.
ATTEST: THE BUNCHER COMPANY
/s/ Kenneth Buncher By /s/ J. Balister
---------------------------- ----------------------------
Exec. V.P. and Secretary President
[Corporate Seal]
ATTEST: P. J. FOOD SERVICE, INC.
By /s/ Robert J. Wadell 9/17/98
---------------------------- ----------------------------
RIDER TO
AGREEMENT OF LEASE DATED
DECEMBER 6, 1998 BY AND BETWEEN
THE BUNCHER COMPANY, AS LANDLORD, AND
P J FOOD SERVICE, INC., AS TENANT
This Rider is attached to and made a part of the Agreement of Lease
referred to above. To the extent any inconsistencies exist between the
provisions of this Rider and the foregoing printed portions of the Agreement of
Lease referred to above, the provisions of this Rider shall govern. All terms
defined in the foregoing printed provisions of the Agreement of Lease shall have
the same meaning herein as in the foregoing printed provisions unless otherwise
set forth herein. The term "this Lease" shall mean the foregoing printed
provisions as modified, amended and/or supplemented by this Rider.
1. COMPLETION: (A). Landlord shall use Landlord's best efforts to
substantially complete, at Landlord's cost and expense, the tenant improvements
described on Exhibit B attached hereto and made a part hereof (the "Tenant
Improvements") prior to the Commencement Date. If the Tenant Improvements are
not so completed, this Lease shall remain in full force and effect except that
rental, tax, insurance and utility payments for water and sewage and other sums
due as additional rental under this Lease shall not commence until the seventh
(7th) day (hereinafter known as the "Beginning Date") after Landlord has
provided written notice to Tenant ("Letter Amendment") setting forth (i) that
the Tenant Improvements are substantially completed and the Leased Premises are
ready for occupancy, (ii) that a certificate of occupancy has been issued by New
Sewickley Township, (iii) the actual Beginning Date, the actual Commencement
Date and expiration date of the term of this Lease, and (iv) subject to
paragraph 2 of this Rider, the dates and amounts of the rental payments due
hereunder. The Letter Amendment when issued as provided herein shall be
incorporated into and made a part of this Lease. If the Beginning Date is other
than the first day of a month, Tenant shall pay to Landlord as rental the sum
of $649.42 for each day from the Beginning Date to the first day of the month
following the Beginning Date, and the initial term shall run for a full sixty-
two (62) months from the first day of the month following the Beginning Date so
as to end on the last day of the sixty-second (62nd) full month after the
Beginning Date.
(B). If the Tenant Improvements are substantially completed more than
seven (7) days prior to the scheduled Commencement Date, the Beginning Date
shall be the seventh (7th) day after Tenant has been notified that the Tenant
Improvements are so completed and there shall be no change in the Commencement
Date or the expiration date as set forth in the printed portion of this Lease.
Tenant shall pay to Landlord as rental for the Leased Premises the sum of
$649.42 for each day from the Beginning Date to the Commencement Date.
All terms and conditions of this Lease shall be effective from the
Beginning Date as though the term of this Lease had commenced on the
Beginning Date except that the expiration date of the initial term shall
be as provided above in this paragraph.
2. RENTAL: Tenant shall pay to Landlord as rental for the Leased
Premises the following amounts at the following times:
A. On the first day of the first full calendar month of the
initial term of this Lease following the Beginning Date, if
applicable, Tenant shall pay to Landlord as rental for the
Leased Premises the per diem rental, if any, as set forth in
paragraphs 1 (A) or 1 (B) of this Rider.
B. Except for the payment of Tenant's pro rata share of real
estate taxes, insurance premiums, utility charges for water and
sewage and other sums due as additional rental, the first and
second full months of the term of this Lease shall be rent
free.
C. Beginning on May 1, 1999, or on the first day of the third
(3rd) full calendar month of the initial term of this Lease
(i.e., the third (3rd) full calendar month following the
Beginning Date), if applicable, and on the first day of each
calendar month thereafter until the first day of the
twenty-seventh (27th) full calendar month of the initial term
of this Lease, Tenant shall pay to Landlord as monthly rental
for the Leased Premises the amount of $19,753.17.
D. Beginning on the first day of the twenty-seventh (27th) full
calendar month of the initial term of this Lease and on the
first day of each calendar month thereafter until the first day
of the thirty-ninth (39th) full calendar month of the initial
term of this Lease, Tenant shall pay to Landlord as monthly
rental for the Leased Premises the amount of $20,826.71.
E. Beginning on the first day of the thirty-ninth (39th) full
calendar month of the initial term of this lease and on the
first day of each calendar month thereafter during the
remaining balance of the initial term, Tenant shall pay to
Landlord as monthly rental for the Leased premises the amount
of $21,900.25.
The rentals under paragraphs 2 C, D and E above shall be payable in
advance, without demand, deduction or set off. All rentals and other sums
payable hereunder shall be paid to Landlord's agent, Buncher Management
Agency, Inc., 5600 Forward
-2-
Avenue, P. O. Box #81930, Pittsburgh, Pennsylvania 15217-0930 or at such other
place or to such other person as may be designated by Landlord in writing.
3. MAINTENANCE AND REPAIR: During the term of this Lease, Tenant, at its
sole cost and expense, shall procure a satisfactory maintenance contract with
an authorized service company for the HVAC equipment serving the Leased
Premises and keep records of service to the HVAC system for Landlord's review.
Landlord will assign to Tenant at the commencement of the term of this
Lease, the benefits of all assignable manufacturer's warranties, if any,
covering the equipment serving the Leased Premises and will grant to Tenant a
one (1) year warranty of the workmanship and materials for work in the Leased
Premises performed by Landlord from any defects unless caused by lack of
maintenance by Tenant or any act or negligence of Tenant or those acting under
Tenant.
Tenant understands and acknowledges that the Leased Premises is a part of
a commerce park being developed by Landlord. Landlord reserves the right to
institute reasonable rules and regulations governing the maintenance of the
Leased Premises and the commerce park which Tenant agrees to observe.
In addition to Tenant's obligation for maintenance and repair of the
Leased Premises as set forth in the first paragraph of section 4 of the printed
portion of this Lease, Tenant shall, at Tenant's sole cost and expense, comply
with all governmental laws and regulations, including but not limited to local,
state, federal administrative requirements and regulations, relating to
Tenant's use and occupancy of the Leased Premises and the business conducted
therein and thereon including without limitations compliance with laws relating
to accessibility to, usability by and discrimination against disabled
individuals.
4. INSURANCE: Tenant and Landlord agree that the Leased Premises is a
portion of Landlord's building (the "Building"), more particularly shown on
Exhibit A attached hereto.
Landlord shall maintain fire and extended coverage insurance on the
Building for its replacement value in such amounts as Landlord may from time to
time reasonably determine. Within ten (10) days after Landlord provides to
Tenant supporting documentation of the reasonable cost of insuring the Building,
Tenant will pay to Landlord as additional rental hereunder, Tenant's pro rata
share of the insurance premium paid or payable by Landlord for so insuring the
Building. Tenant's pro rata share of such insurance premium shall be based on
the number of square feet of space in the Building portion of the Leased
Premises to the number of square feet of space in the Building as the same may
exist from time to time. As currently calculated, Tenant's pro
-3 -
rata share is determined as follows: i.e., 51,530 square feet divided by 113,082
square feet or 45.60%. In addition, Tenant shall be liable for any increase in
such insurance premiums resulting from Tenant's use of the Leased Premises.
Tenant shall be responsible for insuring against any loss to Tenant's own
fixtures and contents in or about the Leased Premises. If the Leased Premises is
damaged as a result of an insured risk, Tenant shall be responsible for its
proportionate share of the deductible portion of Landlord's insurance coverage
which deductible is currently $1,000.00.
In addition to the insurance requirements set forth in section 8 of the
printed portion of this Lease, Tenant shall maintain during the term of this
Lease or any extension thereof worker's compensation and employer's liability
insurance at the statutory limits on its employees at the Leased Premises and
shall indemnify and hold harmless Landlord from and against any and all expenses
connected with claims made by Tenant's employees for injuries incurred at the
Leased Premises.
5. TAXES: The parties hereto acknowledge that the assessment for real
estate taxes for the Leased Premises is included in the assessment for all
buildings and the entire land area (collectively hereinafter called the
"Property") of which the Leased Premises is a part. The Property is more
particularly identified on the tax records as Parcel Number 69-165-0155-000.
Tenant shall pay to Landlord its allocated share of the real estate taxes
on the Property as the same shall be determined by Landlord from time to time
during the term of the Lease. Landlord shall provide Tenant at the time of
invoice, supporting documentation of Tenant's allocable share of the real estate
taxes.
Upon the execution of this Lease by the parties hereto, Landlord shall
make application to Beaver County and to the Freedom Area School District for an
abatement of real estate taxes under the existing regulations of each named body
pursuant to the Local Economic Revitalization Tax Assistance Act. Tenant may
terminate this Lease if Landlord has not received a letter by January 1, 1999
from the solicitor or other officials of Beaver County and Freedom Area School
District notifying Landlord that the Leased Premises qualifies for the said tax
abatement; provided however, Landlord may elect, at its option to pay the amount
of real estate tax that would have abated if the abatement for the Leased
Premises has been granted. As used herein the tax abatement percentage allocable
to the Leased Premised shall be as set forth in Buncher Management Agency,
Inc.'s letter to Tenant dated June 18, 1998.
6. HAZARDOUS SUBSTANCES: Tenant shall not cause, permit or allow any
Hazardous Substance to be generated, emitted, discharged, released or disposed
of, on, in or from the Leased premises by Tenant, Tenant's agents, employees,
contractors, invitees or those
-4 -
holding under Tenant. Tenant shall comply with all Environmental Laws governing
or relating to the generation, transportation, use, storage, emission,
discharge, release, threatened release or disposal of Hazardous Substances with
respect to the use and occupancy of the Leased Premises or the condition
thereof. Without limitation of the foregoing, if Tenant causes, permits or
allows the emission, discharge, release, threatened release or disposal of any
Hazardous Substance from, on or in the Leased Premises (hereinafter called the
"Contamination") in violation of any Environmental Laws, Tenant shall promptly,
at its sole cost and expense, take any and all actions necessary to remediate
and/or remove Contamination and to comply with the Environmental Laws.
Tenant shall defend, indemnify and hold Landlord harmless from and against
all claims, damages, remedial or removal actions or obligations, fines,
judgments, liens, penalties, costs, expenses, diminished property value, lost
or diminished rental revenue, liabilities or losses of any kind asserted
against, or suffered or incurred by, Tenant and/or Landlord resulting directly
or indirectly from the presence, generation, transportation, use, storage,
emission, discharge, release, threatened release or disposal of Hazardous
Substances on, in or from the Leased Premises, provided, however, that Tenant's
indemnity hereunder shall not extend to Contamination existing on the Leased
Premises prior to the date of this Lease and for Contamination of the Leased
Premises directly attributable to or Contamination caused by Landlord or any
unrelated third party without the consent or knowledge of Tenant or under
Tenant's control. The provisions of the foregoing sentence shall survive the
termination of this Lease.
As used herein, the term "Hazardous Substance" or "Hazardous Substances",
shall mean any and all substances or materials which are defined as or listed
as "hazardous materials", "toxic substances", "hazardous air pollutants",
"toxic pollutants", "pollutants", and/or "contaminants" as those terms are
used, defined or listed under any Environmental Laws. As used herein the term
"Hazardous Substance" shall also include any petroleum product, including
gasoline, diesel fuel, motor oil and waste oil.
As used herein the term "Environmental Laws" shall mean any federal, state
or local law, statute, ordinance, rule, order, regulation, injunction, writ or
decree now or hereafter existing which governs or otherwise relates to the
generation, transportation, use, storage, emission, discharge, release,
threatened release or disposal of Hazardous Substances including, without
limitation, the Resource, Conservation and Recovery Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substances Control Act, the Clean Air Act and the
Clean Water Act.
Landlord represents and warrants that to Landlord's best knowledge and
belief, the Leased Premises contains no Hazardous
-5-
Substance.
7. ROLL OVER TERM: Unless Tenant notifies Landlord more than six (6)
months prior to the expiration of the initial term, that it does not desire to
extend the term of this Lease for a Roll Over Term, (as defined herein) the term
of this Lease will automatically extend for an additional term of five (5) years
(the "Roll Over Term"). The Roll Over Term shall be on the same terms and
conditions set forth in this Lease except that the monthly rental for the Roll
Over Term shall be determined pursuant to the following formulas:
Monthly rental for the Roll Over Term shall equal $20,826.71 times a
fraction the numerator of which is the CPI in effect on February 1, 1999
plus 75% of the amount by which the CPI in effect on the expiration of the
initial term exceeds the CPI for February 1, 1999 and the denominator of
which is the CPI for February 1, 1999.
Notwithstanding the result of the above calculation, the monthly rental
for the Roll over Term shall not be less than $21,900.25.
The CPI, as referred to herein, means the Consumer Price Index for all
Urban Consumers 1993-95=100 relating to the United States City Average for All
Items, as issued by the Bureau of Labor Statistics of the United States
Department of Labor, or any successor to the function thereof. In the event of
the conversion of the CPI to a different standard reference base or any other
revision thereof, the determination hereunder shall be made with the use of such
Bureau of Labor Statistics or successor to the functions thereof or in the
absence of the publication of such conversion factor, such formula or table as
the parties shall mutually designate.
Notwithstanding the above, if PJ Food Service Inc., itself is not in full
possession of the Leased Premises at the commencement of the Roll Over Term,
Landlord may, at its option, terminate this Lease as of the last day of the
initial term.
8. BROKERAGE: Except as provided below, Landlord and Tenant each hereby
warrants to the other that no real estate broker has been involved in this
transaction on its behalf and that no finder's fees or real estate commissions
have been earned by any third party. Tenant agrees to indemnify Landlord and
Landlord hereby agrees to indemnify Tenant for any liability or claims for
commissions or fees arising from a breach of this warranty. The only real estate
broker involved in this transaction is Oxford Realty Services, Inc. whose
commissions or fees with respect to the this transaction, shall be paid by
Landlord in accordance with that certain letter dated September 23, 1998.
-6-
9. PARKING: Tenant shall have the exclusive right to the use of
the parking areas located within the Leased Premises as shown outlined
in red on Exhibit A attached hereto. Tenant shall have the non-
exclusive right to such additional parking, if available as determined
by Landlord, in the Common Area Parking, as defined herein and shown
shaded in orange on Exhibit A attached hereto, located on the
Property.
10. COMMON AREA MAINTENANCE: A. Landlord shall, at its sole cost
and expense (i) maintain in reasonably good condition and repair, when
necessary as determined by Landlord, the driveway shown shaded in
yellow on Exhibit A and the parking lots shown shaded in orange on
Exhibit A (the "Common Area Parking") attached hereto (ii) snow plow
and/or salt the aforementioned driveways and Common Area Parking when
necessary as determined by Landlord and (iii) maintain the landscape
areas located within the Property, within Tenant's Leased Premises and
in the leased premises of other tenants in the Building. The driveway,
the Common Area Parking and the landscape areas are collectively
hereinafter called the "Common Areas".
Tenant shall pay to Landlord a monthly charge (the "CAM Charge"),
as reasonably determined from time to time by Landlord, being Tenant's
allocable share of the Common Area Expense, as hereinafter defined. As
used herein, "Common Area Expenses" shall mean all reasonable costs
and expenses incurred by Landlord of whatever nature for maintaining
the Common Area including but not limited to a reasonable reserve for
the replacement of the asphalt surfaces of the Common Areas. All
capital repairs and replacements shall be amortized in accordance with
GAAP and as so amortized shall be considered a Common Area Expense.
Beginning on the Commencement Date, Tenant shall pay to Landlord,
as additional rental, a CAM Charge of $644.13 per month (said amount
being Landlord's estimate of the monthly Common Area Expenses
allocable to Tenant for the year 1999). The CAM Charge shall be
subject to adjustment at the end of each calendar year during the term
of the Lease based upon the actual Common Area Expenses incurred by
Landlord during the previous calendar year and an estimate of Common
Area Expenses for the ensuing calendar year.
Landlord shall provide Tenant within sixty (60) days after each
calendar year proper documentation to support said CAM Charge and the
Common Area Expenses.
B. ADJUSTMENT MECHANISM: During each calendar year following the
first calendar year, but no later than sixty (60) days following each
calendar year, Landlord shall submit a statement supported by
reasonable documentation setting forth the amount of the Common Area
Expenses and Tenant's allocable share of the Common Area Expenses and
the difference if any between the amount actually owed by Tenant and
the amount actually paid by Tenant in accordance
-7-
with this paragraph 10. Landlord agrees to keep books and records documenting
Common Area Expenses. Tenant shall have the right for a period of one (1) year
after Landlord has submitted said statements, at Tenant's cost, to inspect
Landlord's statement of Common Area Expenses after reasonable notice during
normal operating hours. If Tenant owes Landlord the difference, Tenant shall
pay the difference as additional rental within thirty (30) days of billing by
Landlord. If Landlord owes Tenant the difference, Landlord shall pay Tenant the
difference. Tenant's covenant to pay Tenant's allocable share of the Common
Area Expenses for the term of this Lease or any extension thereof shall survive
the expiration or early termination of this Lease.
11. CONDITION PRECEDENT: A. As a condition precedent to the effectiveness
of this Lease, Tenant shall at or prior to the execution and delivery of this
Lease to Landlord by Tenant, deliver to Landlord an irrevocable and
unconditional Letter of Credit from a financial institution acceptable to
Landlord in the amount of $150,000 as security for Tenant's obligations under
this Lease. Provided Tenant is not in default under this Lease, the amount of
the Letter of Credit may be reduced by $50,000 on each anniversary date of the
term of this Lease. Landlord shall have the right to draw upon said Letter of
Credit to cover any default in the payment of monthly rental or additional
rental due Landlord under this Lease.
WITNESS the due execution hereof as of the date of the foregoing Agreement
of Lease.
ATTEST: THE BUNCHER COMPANY
Kenneth Buncher J. Balister
------------------------------- ------------------------------
Exec. V.P. and Secretary President
(Corporate Seal)
ATTEST: P J FOOD SERVICE, INC.
Robert J. Wadell 9-17-98
------------------------------- ------------------------------
(Corporate Seal)
-8-
Exhibit 21
Subsidiaries of the Company
(a) PJ Food Service, Inc., a Kentucky corporation
(b) Papa John's USA, Inc., a Kentucky corporation
(c) Papa John's Support Services, 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
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in (i) the Registration Statements
(Forms S-8 No. 333-27823, No. 333-16447 and No. 33-67472) pertaining to the Papa
John's International, Inc. 1993 Stock Ownership Incentive Plan, (ii) the
Registration Statement (Form S-8 No. 33-67470) pertaining to the Papa John's
International, Inc. 1993 Stock Option Plan for Non-Employee Directors, (iii) the
Registration Statement (Form S-8 No. 333-48999) pertaining to the Papa John's
International, Inc. 401(k) Plan, (iv) the Registration Statement (Form S-8 No.
333-66985) pertaining to the Papa John's International, Inc. Wade S. Oney
Employment Agreement, and (v) the Registration Statement (Form S-4 No. 33-96552)
of Papa John's International, Inc. of our report dated February 26, 1999, with
respect to the consolidated financial statements of Papa John's International,
Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year
ended December 27, 1998.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 19, 1999
5
1,000
12-MOS
DEC-27-1998
DEC-29-1997
DEC-27-1998
33,984
47,355
17,292
0
9,653
67,834
218,378
49,175
319,297
43,626
1,130
0
0
297
262,414
319,297
631,307
669,806
328,204
541,619
72,670
0
0
59,949
22,181
37,768
0
0
(2,603)
35,165
1.19
1.16
5
1,000
9-MOS 6-MOS 3-MOS
DEC-27-1998 DEC-27-1998 DEC-27-1998
DEC-29-1997 DEC-29-1997 DEC-29-1997
SEP-27-1998 JUN-28-1998 MAR-29-1998
29,663 24,075 26,502
51,013 59,940 58,778
15,966 14,353 15,252
0 0 0
9,105 9,071 10,697
57,361 49,967 55,179
202,204 176,720 161,529
44,717 40,423 37,184
300,133 283,312 273,090
41,916 35,547 30,057
1,130 1,130 1,130
0 0 0
0 0 0
295 295 293
246,663 236,264 222,047
300,133 283,312 273,090
454,143 297,343 144,409
481,629 315,201 152,928
232,922 151,177 73,790
388,152 253,350 123,508
53,801 36,409 17,396
0 0 0
0 0 0
43,040 27,683 13,084
15,925 10,243 4,841
27,115 17,440 8,243
0 0 0
0 0 0
(2,603) (2,603) (2,603)
24,512 14,837 5,640
0.84 0.51 0.19
0.81 0.49 0.19
Exhibit 99.1 - Cautionary Statements
Information provided herein by Papa John's contains, and from time to time we
may disseminate materials and make statements which contain "forward looking"
information 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.
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.
