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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 29, 1996
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-21587
PJ AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1308435
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9109 Parkway East
Birmingham, Alabama 35206
(Address of principal executive offices)
(205) 836-1212
(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 ___
--
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 of this form 10-K. [_]
As of March 21, 1997, there were 4,755,000 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 43,089,469 based on the last sale price of the Common Stock on March 18,
1997 as reported by the Nasdaq Stock Market. For purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III are incorporated by reference from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held June 4, 1997.
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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 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 Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
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Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
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PART I
Item 1. Business
General
PJ America, Inc. (the "Company") is the largest franchisee of "Papa
John's" pizza delivery and carry-out restaurants based upon the number of
restaurants currently in operation. At December 29, 1996, the Company owned and
operated 46 Papa John's restaurants in Birmingham, Alabama and the surrounding
area; in Norfolk, Richmond and Virginia Beach, Virginia and the surrounding
areas; and in East Texas. In addition to its existing territories, the Company
has been granted by Papa John's International, Inc. (PJI) the rights to enter
into development agreements to open Papa John's restaurants in Ventura, Kern,
San Luis Obispo and Santa Barbara Counties of California (the "California
Counties"); Vancouver, Canada and the surrounding area; and Puerto Rico. In
addition, the Company has an option, exercisable during 1998, to acquire the
operations and development rights for Papa John's restaurants in Utah from an
affiliate of the Company. At December 29, 1996, PJI and its franchisees
(including the Company) operated 1,160 Papa John's restaurants in 32 states and
the District of Columbia.
Strategy
The Company's objective is to become the leading chain of pizza delivery
restaurants in each of its targeted markets. To accomplish this objective, the
Company has developed a strategy designed to achieve high levels of customer
satisfaction and repeat business, as well as to establish recognition and
acceptance of the Papa John's concept. The key elements of the Company's
strategy include:
Focused High Quality Menu. Papa John's restaurants offer a focused menu
of high quality, value-priced pizza, breadsticks and cheesesticks. Papa John's
original, medium thick crust is made from fresh dough (never frozen) produced in
PJI's regional commissaries. Every pizza is prepared using real mozzarella
cheese, pizza sauce made from fresh-packed tomatoes (not concentrate), a
proprietary mix of savory spices and a choice of high quality meat and vegetable
toppings in generous portions. In October, 1996 the Company began offering thin
crust pizza in all of its markets.
Purchasing and Distribution. PJI's commissary system supplies pizza
dough and other food and paper products twice weekly to each of its franchised
restaurants. PJI currently operates six regional commissaries in Louisville,
Kentucky; Garner, North Carolina; Orlando, Florida; Jackson, Mississippi;
Denver, Colorado; and Phoenix, Arizona. PJI also operates one distribution
center in Dallas, Texas. PJI expects to open new commissaries and distribution
centers as PJI and its franchisees expand into new territories. Specifically,
PJI has announced that it plans to open up to two additional commissaries by
year-end 1997. PJI's commissary system enables it to closely monitor and
control product quality and consistency, while lowering food and operating costs
for its franchisees. All Papa John's restaurants are required to purchase a
proprietary mix of savory spices and dough from PJI. Franchisees may purchase
other goods from approved suppliers or PJI, which has negotiated purchasing
agreements with most of its suppliers. The Company
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believes that these agreements enable it to benefit from volume discounts which
result in prices the Company believes are below those which it could otherwise
obtain. In addition, all the equipment, counters and smallwares required to
open a Papa John's restaurant are available from PJI. PJI also provides layout
and design services and recommends subcontractors, signage installers and
telephone systems to its franchisees. Although not required to do so, the
Company purchases substantially all of its food products and restaurant
equipment from PJI.
Commitment to Employee Training and Development. The Company is
committed to the development and motivation of its employees through on-going
training programs, incentive compensation and opportunities for advancement.
The Company offers financial and stock incentives to employees at various levels
based on the achievement of performance goals. The Company's growth also
provides significant opportunities for advancement. The Company believes these
factors create an entrepreneurial spirit throughout the organization, resulting
in a positive work environment and motivated, customer-oriented employees.
Marketing Programs. The Company's restaurant-level marketing programs
target the delivery area of each restaurant, making extensive use of distinctive
print materials in direct mail and store-to-door couponing. Local marketing
efforts also include a variety of community-oriented activities with schools,
sports teams and other organizations. In markets in which the Company has a
significant presence, local marketing efforts are supplemented with radio and
television advertising. The Company anticipates expanding television
advertising in 1997, as the market penetration in all of its markets has
increased.
Unit Economics
The Company believes its unit economics are exceptional. The 39
restaurants that were open throughout the entire 1996 fiscal year generated
average sales of $721,000, average cash flow (operating income plus
depreciation) of $128,000 and average restaurant operating income of $107,000
(or 14.8% of average sales). Sales and profitability in the initial months of
operations, historically have been lower than for mature restaurants.
The average cash investment, including franchise fees for the seven
restaurants opened during the 1996 fiscal year, was approximately $184,000,
exclusive of land and pre-opening costs. The Company expects the average cash
investment for restaurants to be opened in 1997 to be approximately $210,000.
The Company anticipates that the new restaurants to be opened in 1997 will be in
the Company's existing markets.
Expansion and Site Selection
The Company's growth strategy will focus on further developing the Papa
John's concept through (i) building out its existing markets; (ii) acquiring and
developing new territories; and (iii) strategically acquiring existing Papa
John's franchisee groups and territories, if available. The Company's objective
is to become the leading chain of pizza delivery restaurants in each of its
targeted markets. Through a market-by-market expansion strategy focused on
clustering restaurants, the Company seeks to increase consumer awareness and
take advantage of operational and advertising efficiencies. During fiscal 1996,
the Company opened seven restaurants. In 1997,
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the Company expects to open approximately ten additional restaurants. As part
of its overall growth strategy, the Company intends to supplement its new
restaurant development through acquisition of existing Papa John's franchisees.
In addition to developing its existing territories, the Company has been
granted by PJI the rights to enter into development agreements to open Papa
John's restaurants in the California Counties; Vancouver, Canada and the
surrounding area; and Puerto Rico. The Company estimates that these territories
could support approximately 90 to 100 Papa John's restaurants. In addition, the
Company has an option, exercisable during 1998, to acquire the operations and
development rights for Papa John's restaurants in Utah from an affiliated party,
in which three restaurants are currently open. The development rights with
respect to the Utah territory provide for six Papa John's restaurants to be
opened in each of 1997, 1998 and 1999. There can be no assurance that the
Company will exercise the option for the Utah territory or that, if exercised,
such restaurants will be developed. Currently, the Company does not have any
Papa John's restaurants open in California, Canada, or Puerto Rico. PJI has
waived its right of first refusal with respect to the Company's possible
acquisition of the Utah territory.
The Company also has a right of first refusal with a term of five years
beginning September 1, 1996 to acquire from an affiliated party the operations
and development rights for Papa John's restaurants in (i) Iowa, including the
Moline and Rock Island, Illinois areas (but excluding the Council Bluffs area of
Iowa), in which seven restaurants are currently open, and (ii) in the Baton
Rouge, Lafayette and Lake Charles, Louisiana areas, in which four restaurants
are currently open. The development rights with respect to such territories
provide that a total of 27 additional Papa John's restaurants will be opened
through 2002. There are no agreements, however, with respect to the Company's
acquisition of such territories, and there can be no assurance that such
territories will be acquired. PJI has waived its right of first refusal with
respect to the Company's possible acquisition of the Iowa and Louisiana
territories described above. In addition, certain officers, directors and
stockholders of the Company own interests in Papa John's franchisees that
operate in certain areas in Michigan, Ohio and South Carolina. PJI has waived
its right of first refusal with respect to the Company's possible acquisition of
such franchisees.
The Company devotes significant resources to the investigation and
evaluation of potential sites. The site selection process focuses on trade area
demographics, target population density, household income levels and competitive
factors. Management inspects each potential Company restaurant location and the
surrounding market before a site is approved. The Company's restaurants are
typically located in strip shopping centers or free-standing buildings that
provide visibility, curb appeal and accessibility. All site selections must be
approved by PJI. Papa John's restaurant design may be configured to fit a wide
variety of building shapes and sizes, thereby increasing the number of suitable
locations for Papa John's restaurants.
Menu
Papa John's restaurants offer a focused menu of high quality, value-
priced pizza, breadsticks and cheesesticks, as well as canned soft drinks. All
Papa John's original crust pizzas are prepared using fresh dough (not frozen)
made from high protein wheat flour, real mozzarella cheese, pizza sauce made
with fresh-packed tomatoes (not concentrate), a proprietary mix of
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savory spices and a choice of high quality meat and vegetable toppings in
generous portions. Fresh onions and green peppers are chopped daily at all
restaurants and are purchased from local produce suppliers. Each pizza is
complemented by a container of Papa John's special garlic sauce and two
pepperoncinis. The Company believes its limited menu helps create a strong
identity among consumers and simplifies operations, resulting in lower operating
costs, improved food quality and superior customer service. In October, 1996,
the Company began offering a thin crust pizza in all of their markets.
Marketing Programs
The Company's franchise agreements require that not less than 6.0% of
sales be spent on advertising programs approved by PJI. The Company has
restaurant-level marketing programs which target the delivery area of each
restaurant, making extensive use of distinctive print materials in direct mail
and store-to-door couponing. The Company tailors its store-to-door coupons
according to customer buying habits as tracked by the Company's point-of-sale
computer systems used in each restaurant. Local marketing efforts also include
a variety of community-oriented activities with schools, sports teams and other
organizations. The Company currently supplements its local marketing efforts
with a limited amount of radio and television advertising. The Company believes
that its marketing programs are cost-effective and significantly increase Papa
John's visibility among potential customers. The Company's advertising
expenditures as a percentage of restaurant sales for 1996 were 6.6% on a pro
forma basis.
The Company's restaurant-level marketing efforts are supported by print
and electronic advertising materials that are produced by the Papa John's
Marketing Fund, Inc. (the "Marketing Fund") for use by both PJI and its
franchisees. The required Marketing Fund contribution is established from time
to time by the governing board of the Marketing Fund and is currently 0.50% of
restaurant sales. The maximum required contribution for PJI franchisees is 1.5%
of restaurant sales and can be increased above 1.5% only upon approval by not
less than 60.0% of Marketing Fund members. In addition, PJI may require the
Company to participate in an advertising cooperative for its designated market
area and to contribute a minimum amount of restaurant sales for local
advertising. PJI also provides each of its franchisees with catalogs for
uniforms and promotional items and pre-approved, print marketing materials that
can be ordered from PJI.
Restaurant Operations
Management and Employees. A typical Company restaurant employs a
restaurant manager, two or three assistant managers and approximately 25 hourly
employees, most of whom work part-time. The restaurant manager is responsible
for the day-to-day operation of the restaurant and for the maintenance of
Company established operating standards. The Company seeks to hire experienced
restaurant managers and staff and motivate and retain them by providing
opportunities for advancement and performance-based financial incentives. In
addition, the Company established the 1996 Stock Ownership Incentive Plan, which
will enable the Company to provide long-term equity-based incentives for
corporate and restaurant management personnel. The Company believes that it has
a low managerial turnover rate in comparison to the quick service restaurant
industry and that this low turnover rate results in decreased training costs and
higher productivity.
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The Company employs area supervisors, each of whom has responsibility for
overseeing four to seven Company restaurants. The Company also employs regional
operations directors who oversee area supervisors and managers within their
respective markets.
Training. The Company has full-time training coordinators in the Alabama
and Virginia markets. In addition, PJI provides an on-site training team as
needed. Each regional area supervisor and restaurant manager is required to
complete PJI's two-week training program in which instruction is given on all
aspects of PJI's systems and operations. The program includes classroom
instruction and hands-on training at an operating Papa John's restaurant. In
addition, the Company has developed a specific education and safety program for
its delivery drivers.
Point-of-Sale System. All of the Company's existing restaurants are
equipped with point-of-sale equipment. The Company believes that this
technology increases speed and accuracy in order taking and pricing, reduces
paperwork and allows the restaurant manager to better monitor and control food
and labor costs. The point-of-sale system enhances restaurant-level marketing
capabilities through a database that provides information on customers and their
buying habits with respect to the Company's products. The Company anticipates
that in 1997, polling capabilities will allow the Company to obtain current
restaurant reporting information, thereby improving the speed, accuracy and
efficiency of restaurant-level reporting. Pursuant to its franchise agreements,
the Company is required to upgrade its point-of-sale systems to the Papa John's
PROFIT System in all of the Company's restaurants by March 1998. All new
restaurants are required to be opened with the Papa John's PROFIT System. This
new system will, among other things, enable the Company and PJI to communicate
with each other more effectively with respect to overall operations and delivery
of food supplies.
Reporting. Managers at restaurants prepare daily reports of sales, cash
deposits and operating costs. Physical inventories of all food and beverage
items are taken weekly. The Company's area supervisors prepare weekly profit
and loss statements for each of the restaurants. The Company believes that the
PROFIT System, when installed, will simplify and accelerate many of these
reporting functions.
Hours of Operation. The Company's restaurants are open seven days a week,
typically from 11:00 a.m. to 12:00 midnight Sunday through Thursday, and from
11:00 a.m. to 1:30 a.m. on Friday and Saturday.
Franchise and Development Agreements
Franchise and Development Agreements. The Company has entered into
development agreements with PJI for the right to construct one or more Papa
John's restaurants pursuant to a development schedule within specified
geographic areas. The Company's existing territories consist of Birmingham,
Alabama and the surrounding area; Norfolk, Richmond and Virginia Beach, Virginia
and the surrounding areas; and East Texas. In addition, the Company has been
granted by PJI the rights to enter into development agreements for Papa John's
restaurants in three new territories: the California Counties; Vancouver, Canada
and the surrounding area; and Puerto Rico.
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The Company has entered into two development agreements with respect to
its Alabama territory. At the time of execution of the first Alabama
development agreement, the Company paid a one-time non-refundable, development
fee of $16,700 to PJI. Under the second Alabama development agreement and under
the development agreement for its Texas territory, the Company paid a non-
refundable fee of $3,500 for each of the restaurants covered by the development
agreements. Under the Virginia development agreement, the Company paid
development fees of $87,500. With respect to the Company's California,
Vancouver and Puerto Rico territories, the Company is required to pay a non-
refundable development fee based on the number of restaurants to be covered by
the development agreements. The current development fee per restaurant is
$5,000.
Generally, a franchise agreement is executed when the Company secures a
restaurant location. Each per restaurant development fee is typically credited
against PJI's franchise fee, which is payable to PJI upon signing the franchise
agreement for a specific location. The franchise fees paid with respect to the
Company's restaurants range between $10,000 and $18,500, depending upon the date
of execution of the development agreement. With respect to the California
Counties and the Vancouver and Puerto Rico territories, the Company expects to
pay PJI's standard franchisee fee at the time the development agreement is
entered into, which is currently $20,000. Any development fee paid earlier is
credited against the franchise fee.
Under each of the Company's franchise agreements, the Company pays to PJI
a royalty fee of 4.0% of restaurant sales. Under such agreements, PJI may
increase the royalty fee to 5.0% of restaurant sales after the agreement has
been in effect for between three to five years. In no event may the royalty fee
be increased to an amount greater than the royalty fee in effect for new PJI
franchisees.
The franchise agreements executed under the first Alabama development
agreement provide for a term of five years. These franchise agreements renew
automatically for an additional five-year term if the Company is in compliance
with the franchise agreement and can secure the premises for such term.
Furthermore, the franchises granted pursuant to this development agreement may
be renewed for four additional five-year terms, provided that the Company meets
certain conditions, including, but not limited to, agreeing to execute the form
of PJI franchise agreement then being offered to new franchisees. The franchise
agreements executed under the second Alabama development agreement and under the
Virginia and Texas development agreements provide for an initial term of ten
years and can be renewed for additional terms of five to ten years, subject to
the same conditions contained in the franchise agreements described above.
PJI's franchise agreements authorize the Company to use its trade names,
trademarks and service marks with respect to specific Papa John's restaurants.
PJI also provides general construction specifications, designs, color schemes,
signs, equipment, preparation methods for food and beverages, marketing
concepts, operations and financial control methods, management training,
technical assistance and materials. Each franchise agreement prohibits the
Company from transferring a franchise without the prior approval of PJI. PJI has
the contractual 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 PJI's policies and standards. Many state franchise laws limit the
ability of a franchisor to terminate or refuse to renew a franchise.
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The development agreements, and each of the franchise agreements,
prohibit the Company, during the term of the agreements and for a two-year
period following their termination or expiration, from owning or operating any
other pizza delivery or take-out restaurant within ten to fifty miles of the
franchise granted or any other Papa John's franchise. In addition, the Company
and its senior executive officers have agreed for a period of three years not to
operate any restaurant concepts other than Papa John's without PJI's approval.
Also, the Company's directors (other than Messrs. Sherman, Schnatter and Hart)
have agreed not to be actively involved in the management of other restaurant
concepts during such period without PJI's consent.
Existing Territories. In order for the Company to maintain its
development rights under the agreements relating to Birmingham, Alabama and the
surrounding area; Norfolk, Richmond and Virginia Beach, Virginia and the
surrounding areas; and East Texas, the Company is required to open an aggregate
of nine and five restaurants in fiscal 1997 and 1998, respectively. Once the
Company completes this development schedule, it may open additional restaurants
in these territories subject to PJI's consent.
Franchise Restaurant Development. PJI assists the Company in selecting
sites and developing restaurants. PJI provides the Company with the physical
specifications for typical restaurants, both for free-standing restaurants and
restaurants located in strip shopping centers. The Company procures virtually
all of the design plans, counters and equipment for its restaurants from PJI at
prices the Company believes are favorable. The Company is responsible for
selecting the location for its restaurants but must obtain PJI's approval of
each restaurant design and each location based on accessibility and visibility
of the site and targeted demographic factors, including population, density,
income, age and traffic. The Company is responsible for all costs and expenses
incurred in locating, acquiring and developing restaurant sites.
Franchise Training and Support. Each regional operations director and
area supervisor must satisfactorily complete PJI's two-week training program and
must also devote his or her full business time and efforts to the operation of
the Company's restaurants. Each of the Company's restaurant managers report to
an area supervisor and are also required to complete PJI's two-week training
program.
Franchise Operations. All franchisees are required to operate their Papa
John's restaurants in compliance with PJI's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. The Company has
full discretion to determine the prices to be charged to its customers.
Reporting. PJI collects weekly and monthly sales and other operating
information from the Company. All of the Company's restaurants are equipped
with point-of-sale technology. The Company has agreements with PJI permitting
PJI to electronically debit the Company's bank accounts for the payment of
royalties, Marketing Fund contributions and purchases from PJI. This system
significantly reduces the resources needed to process Company payables.
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
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and other resources than the Company. Such competitors include a large number of
national and regional restaurant chains. Some of the Company's competitors have
been in existence for a substantially longer period than the Company and may be
better established in the markets where the Company's restaurants are, or may
be, located. Within the pizza segment of the restaurant industry, the Company
believes that its primary competitors are the national pizza chains, including
Pizza Hut, Domino's and Little Caesar's. A change in the pricing, marketing or
promotional strategies or product mix of one or more of these competitors could
have a material adverse impact on the Company's sales and earnings. In general,
there is also active competition for management personnel and real estate sites
suitable for Papa John's restaurants.
The restaurant industry is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of experienced management and hourly employees may adversely affect
the restaurant industry in general and the Company's restaurants in particular.
Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants 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 failures to
obtain required licenses or approvals can delay or prevent the opening of a new
restaurant in a particular area. The Company is also subject to federal and
state environmental regulations, but these have not had a material effect on the
Company's operations.
The Company's relationship with PJI is governed by the laws of several
states which regulate substantive aspects of the franchisor-franchisee
relationship. Substantive state laws that regulate the franchisor-franchisee
relationship presently exist or are being considered in a substantial number of
states and bills have been introduced in Congress (one of which is now pending)
which would provide for Federal regulation of substantive aspects of the
franchisor-franchisee relationship. These current and proposed franchise
relationship laws limit, among other things, the duration and scope of non-
competition provisions, the ability of a franchisor to terminate or refuse to
renew a franchise and the ability of a franchisor to designate sources of
supply.
The Company's restaurant operations are also subject to federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage requirements higher
than the federal level, and the federal government recently increased the
federal minimum wage. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
With Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
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The Company has been granted by PJI the rights to enter into development
agreements for Papa John's restaurants in the California Counties, Vancouver,
Canada and the surrounding area, and Puerto Rico. The Company's ability to
establish international operations is subject to various risks, including
changing political and economic conditions, currency fluctuations, trade
barriers, adverse tax consequences, and government regulations relating to,
among other things, the preparation and sale of food, building and zoning
requirements, wages, working conditions, and the Company's relationship with its
employees. There can be no assurance that the Company will be successful in
establishing its international operations or that such risks will not have a
material adverse effect on the Company in the future.
Trademarks
The Company's rights to use PJI's trademarks and service marks are
significant to the Company's business. PJI is the owner of the federal
registration of the trademark "Papa John's." PJI has also registered "Pizza
Papa John's" and design as a trademark and a service mark. PJI owns federal
registrations for the marks "Pizza Papa John's Delivering the Perfect Pizza!"
and design, "Call Your Papa" and "Perfect Pizza Perfect Price." PJI has applied
for the registration of "Pizza Papa John's Better Ingredients, Better Pizza" and
design, "Better Ingredients, Better Pizza," "Delivering the Perfect Pizza!,"
"We Deliver Perfection," "The Official Pizza of Summer," and "Pizza Papa John's
Print Network" and design as trademarks and service marks. PJI is aware of the
use by other persons in certain geographic areas of names and marks which are
the same as or similar to the Company's marks. It is PJI's policy to pursue
registration of its marks whenever possible and to vigorously oppose any
infringement of its marks.
Employees
As of December 29, 1996, the Company employed 1,287 persons, of whom
approximately 1,070 were restaurant employees, 200 were restaurant management
and supervisory personnel, and 17 were corporate personnel. Most restaurant
employees are paid on an hourly basis. None of the Company's employees is
currently represented by a labor union, and the Company is not aware of any
union organizing activity among its employees. The Company believes that its
relationship with its employees is good.
Cautionary Statements
Information provided in this Form 10-K under the captions "Business -
Strategy," "- Expansion and Site Selection," "- Franchise and Development
Agreements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains, and from time to time the Company may
disseminate materials and make statements which may contain "forward-looking"
information, as that term is defined by the Private Securities Litigation Reform
Act of 1995 (the "Act"). These 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. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to: (i) the ability to upgrade the Company's infrastructure to support
its operations and development plans,
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(ii) the ability of the Company, PJI and PJI's franchisees to expand through the
opening of new restaurants which may be affected by the selection and
availability of suitable restaurant locations, negotiation of suitable leases or
financing terms, constraints on permitting and construction of restaurants, and
the hiring, training and retention of management and other personnel, (iii) the
Company's ability to acquire existing PJI's franchisees may be hindered by
competition from PJI, which has a right to approve and a right of first refusal
with respect to the sale of all Papa John's restaurants, (iv) the entering into
development agreements with PJI on terms acceptable to the Company for Papa
John's restaurants in the California Counties; Vancouver, Canada and the
surrounding area; and Puerto Rico, (v) the overall success of PJI, (vi) the
restaurant industry is intensely competitive with respect to price, service,
location and food quality, and there are many well established competitors with
substantially greater financial and other resources than the Company, PJI and
PJI's franchisees and some of these competitors have been in existence for a
substantially longer period than the Company, PJI and PJI's franchisees and may
be better established in the markets where restaurants operated by the Company,
PJI or PJI's franchisees are, or may be, located (vii) a change in the pricing
or other marketing or impact on sales and earnings at restaurants operated by
the Company, PJI and PJI's franchisees, (viii) increases in operating cost such
as inflation, increased food costs, increased labor and employee benefit costs
and the availability of qualified management and hourly employees, (ix) the
availability of capital to the Company, PJI and PJI's franchisees and (x)
changes in governmental regulations, including further increases in the minimum
wage.
Item 2. Properties
At December 29, 1996, the Company operated 46 Papa John's restaurants.
Restaurants in Alabama, Virginia and Texas were 15, 26, and 5, respectively.
All but one of the Company's restaurants are located in leased space.
The initial terms of most of the Company's leases are three to five years and
provide for one or more options to renew for at least one additional term. The
Company's leases generally specify a fixed annual rent with fixed increases, or
increases based on changes in the Consumer Price Index, at various intervals
during the lease term. Generally, the leases are net leases which require the
Company to pay all or a portion of the cost of insurance, maintenance and
utilities.
The Company leases approximately 6,000 square feet of corporate office
space collectively in Alabama, Virginia and Kentucky.
Item 3. Legal Proceedings
The Company is involved in lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these lawsuits and claims are uncertain, in the aggregate they will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
10
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the current executive officers of the Company, together
with their ages, their positions with the Company and the year in which they
first became an officer of the Company:
<TABLE>
<CAPTION>
First Elected
Name Age Position Executive Officer
- ---- --- -------- -----------------
<S> <C> <C> <C>
Richard F. Sherman 53 Chairman of the Board 1991
Douglas S. Stephens 33 President, Chief Executive Officer 1991
Ross Davison 35 Vice President--Chief Financial 1996
Officer and Treasurer
James S. Riekel 37 Vice President--Operations 1993
</TABLE>
Richard F. Sherman has served as a director of the Company since August
1996. Mr. Sherman has served as a director of Extra Cheese, Inc., Textra Cheese
Corp., Twice the Cheese, Inc., PJVA, Inc. and PJV, Inc. since 1996, 1994, 1995,
1992 and 1993, respectively. Mr. Sherman is a private investor who has been a
franchisee and a consultant to PJI since 1991. From 1993 to present, Mr. Sherman
has been a director of PJI. From 1987 to 1991, Mr. Sherman was Chairman of the
Board and President of Rally's Hamburgers, Inc. From 1984 to 1987, Mr. Sherman
was President and a director of Church's Chicken, Inc. From 1971 to 1984, Mr.
Sherman was Group Executive Vice President and director of Hardee's Food
Systems, Inc. and its parent, Imasco USA, Inc. Mr. Sherman serves on the board
of directors of Taco Cabana, Inc., Hartz Restaurants, Inc. and Reed's Jewelers,
Inc.
Douglas S. Stephens has served as a director, President and Chief
Executive Officer of the Company since August 1996. Mr. Stephens has served as
a director and the President of Extra Cheese, Inc., Textra Cheese Corp. and
Twice the Cheese, Inc. since 1991, 1994 and 1995, respectively. From 1989 to
1991, Mr. Stephens was the Vice President of Information Systems for the
Kentucky Lottery Corporation. From 1986 to 1989, Mr. Stephens was a systems
consultant for Andersen Consulting, a division of Arthur Andersen, LLP, an
international professional services firm.
D. Ross Davison has served as Vice President--Chief Financial Officer,
Treasurer, and Assistant Secretary of the Company since August 1996. From 1985
to 1996, Mr. Davison was with Arthur Andersen, LLP, an international
professional services firm, and his most recent position was Senior Manager.
From 1983 to 1985, Mr. Davison was with Cotton and Allen, P.S.C., a certified
public accounting firm. Mr. Davison is a licensed Certified Public Accountant.
James S. Riekel has served as Vice President--Operations of the Company
since August 1996. Mr. Riekel has served as a Vice President and Operations
Director of PJVA, Inc. and of PJV, Inc. since 1993. From 1983 to 1992, Mr.
Riekel was with Domino's Pizza, Inc., where his most recent position was
Regional Operations Director.
11
<PAGE>
PART II
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 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Items 10 - 13. Directors and Executive Officers of the Registrant; Executive
Compensation; Security Ownership of Certain Beneficial
Owners and Management; and Certain Relationships and
Related Transactions
The information required by these items, other than the information
set forth in this Report under Part I, "Executive Officers of Registrant," is
omitted because the Company is filing a definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Report which includes the required information. Such information is
incorporated herein by reference.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock has traded on the Nasdaq National Market
System under the trading symbol "PJAM" since October 25, 1996. At March 18,
1997, there were approximately 58 record holders of the Company's common stock.
The following table sets forth the high and low sales prices of the Company's
common stock for the quarters indicated, as reported by the Nasdaq National
Market System:
1996
Quarter Ended High Low
------------- ---- ---
Fourth Quarter (from October 25, 1996) $22.25 $15.50
13
<PAGE>
Item 6. Selected Financial Data (In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
-------------------------------------------------------------
(2) (2) (2) (2) (2) (3)
Dec. 28, Dec. 26, Dec. 25, Dec. 31, Dec. 29, Dec. 29,
1992 1993 1994 1995 1996 1996
(Pro forma)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Restaurant sales $1,318 $3,127 $6,415 $10,457 $16,846 $30,264
Cost and expenses:
Cost of sales 433 1,054 2,098 3,511 5,537 10,116
Salaries and benefits 406 888 1,677 2,647 4,243 7,461
Other operating expenses 344 772 1,481 2,393 3,922 7,468
General and administrative expenses 131 229 433 557 1,017 1,634
Depreciation and amortization 50 79 172 275 465 905
-----------------------------------------------------------
Total costs and expenses 1,364 3,022 5,861 9,383 15,184 27,584
-----------------------------------------------------------
Operating income (loss) (46) 105 554 1,074 1,662 2,680
Other income (expense), net - (6) (22 ) (65) 8 (127)
-----------------------------------------------------------
Income (loss) before income taxes (46) 99 532 1,009 1,670 2,553
Provision for income taxes - - - - 229 229
-----------------------------------------------------------
Net income (loss) ($46) $99 $532 $1,009 $1,441 $2,324
======= ======= ====== = ======= ======== ==========
Pro forma income statement data (4):
Income before income taxes $1,009 $1,670 $2,553
Provision for income taxes 368 592 912
-----------------------------
Net income $ 641 $1,078 $1,641
============================
Net income per share $ 0.36 $ 0.47 $ 0.48
============================
Weighted average shares outstanding 2,289,667 3,429,896
=====================
Balance sheet data (end of period): $432 $823 $1,655 $2,491 $22,373 $22,373
Total debt, including current maturities - 300 427 1,066 - -
Stockholders' equity 314 435 995 1,073 20,578 20,578
</TABLE>
(1) The Company operates on a 52-53 week year ending on the last Sunday in
December each year. Fiscal 1995 was a 53 week year.
(2) Includes the Alabama Group for the entire period presented. Fiscal 1996
also includes the Virginia Group from the date of acquisition (October 30,
1996), which was simultaneous with the closing of the Initial Public
Offering (IPO).
(3) Includes all restaurants included in the IPO, as if they were operated by
the Company for the entire period presented (i.e. both the Alabama Group
and the Virginia Group).
(4) Reflects the effect on historical net income data assuming the Company was
a C Corporation rather than an S Corporation, with assumed federal, state
and local tax rates aggregating 36.5%.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company began operations in 1991, and is the largest franchisee of
Papa John's pizza delivery and carry-out restaurants based on the number of
restaurants currently in operation. At December 29, 1996, the Company had 46
Papa John's restaurants in Birmingham, Alabama and the surrounding area; in
Norfolk, Richmond and Virginia Beach, Virginia and the surrounding areas; and in
East Texas.
The Company was formed in August, 1996 to be the successor of five
separate Papa John's franchisees (the Predecessor Companies). Three of the
Predecessor Companies operated under common control, and thus comprised the
Alabama Group. The remaining two Predecessor Companies comprised the Virginia
Group. Simultaneous with the closing of the IPO (October 30, 1996), the Alabama
Group acquired the Virginia Group. Thus, the following discussion addresses the
full periods presented for the Alabama Group, plus the Virginia Group activity
from October 30, 1996.
The Company's restaurants operate under separate franchise agreements,
which generally have terms between five and ten years (with renewal options
between five and ten years) and require payment of monthly royalties equal to
4.0% of restaurant sales. The Company also has entered into development
agreements with PJI to open a certain number of restaurants over a defined
period of time within specific geographic areas. The Company's development
agreements generally require it to pay a non-refundable fee per restaurant
covered by the respective agreements. This amount is generally credited against
the initial franchise fee that the Company is required to pay for each new
restaurant opened. The Company amortizes development and franchise fees over a
20 year period, beginning with the opening of a restaurant.
The Company's growth strategy will focus on further developing the Papa
John's concept through (i) building out its existing markets; (ii) acquiring and
developing new territories; and (iii) strategically acquiring existing Papa
John's franchise groups and territories, if available. The Company's market-by-
market expansion strategy focuses on clustering restaurants, thereby increasing
consumer awareness and enabling the Company to take advantage of operational and
advertising efficiencies. To date, the Company believes that this strategy has
contributed to increases in comparable restaurant sales, although there can be
no assurance that comparable restaurant sales will continue to be positive.
The average cash investment for the seven restaurants opened during 1996
(six by the Company and one by the Virginia Group) was $184,000, exclusive of
land and pre-opening costs, but including franchise fees. The Company expects
the cash investment for restaurants opened in 1997 to approximate $210,000. Pre-
opening costs are expensed as incurred.
The Company believes its expansion strategy has contributed to obtaining
higher average restaurant sales than the Papa John's franchise system. Average
sales in 1996 were $721,000, which was less than 1995 average sales of $727,000;
however, 1995 was a 53 week year.
The Predecessor Companies operated as S corporations until October 29,
1996. As such, the earnings of the Predecessor Companies were taxed for federal
and state income tax purposes directly to the Predecessor Companies'
stockholders. Beginning October 30, 1996, the Company became subject to
corporate level income taxes.
15
<PAGE>
1996 Compared to 1995
Restaurant Sales. Restaurant sales increased 61.1% to $16.8 million in
1996 from $10.5 million in 1995. The increase in restaurant sales was
attributable to sales from six new restaurants opened in 1996, a full year of
operations for the five restaurants opened in 1995, a 2.8% increase in
comparable restaurant sales for the 10 restaurants open throughout both fiscal
years, and the acquisition of 25 Virginia restaurants on October 30, 1996.
Comparable restaurant sales for the 27 restaurants (10-Alabama Group and 17-
Virginia Group) open throughout both fiscal years increased 4.7% in 1996. The
increase in comparable restaurant sales was primarily attributable to continued
market penetration, partially offset by the impact of inclement weather in the
first quarter of 1996.
Costs and Expenses. Cost of sales, which consists of food, beverage, and
paper costs, increased $2.0 million, but decreased as a percentage of restaurant
sales to 32.9% in 1996 from 33.6% in 1995. This percentage decrease is primarily
attributable to the acquisition of the Virginia restaurants on October 30, 1996,
when cheese costs were below the average for all of 1996. Average cheese costs
throughout the first three quarters of 1996 were higher than the comparable
periods in 1995.
Salaries and benefits, which consist of all store level employee wages,
taxes and benefits, increased $1.6 million, but decreased slightly as a
percentage of restaurant sales to 25.2% in 1996 from 25.3% in 1995.
Other operating expenses include other restaurant level operating costs,
the material components of which are automobile mileage reimbursement for
delivery drivers, rent, royalties, utility expenses, and advertising expenses.
Other operating expenses increased $1.5 million, and increased as a percentage
of restaurant sales to 23.3% in 1996 compared to 22.9% in 1995. This percentage
increase is primarily due to the acquisition of the Virginia restaurants, which
historically have had higher other operating expenses as a percentage of
restaurant sales.
General and administrative expenses increased $460,000, and increased as
a percentage of restaurant sales to 6.0% in 1996 from 5.3% in 1995. The dollar
and percentage increases were primarily due to relocation expenses of $120,000
for two new executives relocating to the Company's offices in Birmingham,
Alabama, and the addition of restaurant supervisory and corporate support
personnel.
Depreciation and amortization increased by $190,000, and increased as a
percentage of restaurant sales to 2.8% in 1996 from 2.6% in 1995. The dollar
increase was primarily due to the addition of new and acquired restaurants. The
percentage increase was primarily due to 1995 being a 53 week year.
Other income (expense), which consists primarily of interest income and
interest expense, decreased $73,000 to $8,000 of income in 1996 from $65,000
expense in 1995. The decrease in other expense was primarily due to the payoff
of Company debt, plus interest income earned on investments as a result of the
Company's initial public offering.
Income taxes increased $228,000 in 1996. The increase was due to the
conversion from an S Corporation to a C Corporation at October 30, 1996, at
which time the Company became subject to corporate level income taxes.
16
<PAGE>
1995 Compared to 1994
Restaurant Sales. Restaurant sales increased 63.0% to $10.5 million in
1995 from $6.4 million in 1994. The increase in restaurant sales was
attributable to sales from the five new restaurants opened in 1995, a full year
of operations for the four restaurants opened during 1994, and a 6.6% increase
in comparable restaurant sales for the six restaurants open throughout both
fiscal years. The increase in comparable restaurant sales was primarily
attributable to increased market penetration in Birmingham, Alabama and the
surrounding areas.
Costs and Expenses. Cost of sales increased $1.4 million, and increased
as a percentage of restaurant sales to 33.6% in 1995 from 32.7% in 1994. This
percentage increase resulted from an increase in topping portions on pizzas and
more aggressive cost discounting.
Salaries and benefits increased $970,000, but decreased as a percentage
of restaurant sales to 25.3% in 1995 from 26.1% in 1994. The decrease in
salaries and benefits as a percentage of restaurant sales was primarily due to
better labor utilization and a smaller percentage of new restaurants opened in
1995 as compared to 1994.
Other operating expenses increased $911,000, but decreased as a
percentage of restaurant sales to 22.9% in 1995 from 23.1% in 1994. The decrease
was attributable to decreases in other operating expenses as a percentage of
restaurant sales in Birmingham, Alabama and the surrounding area, partially
offset by higher other operating expenses for new restaurants opened in Texas.
General and administrative expenses increased $124,000 in 1995 to
$557,000 from $433,000 in 1994, but declined as a percentage of restaurant sales
to 5.3% in 1995 from 6.8% in 1994. The dollar increase was the result of the
addition of restaurant supervisory and corporate support personnel. The
percentage decrease was primarily due to an increase in restaurant sales without
a proportionate increase in general and administrative expenses.
Depreciation and amortization increased $103,000 in 1995 to $275,000 from
$172,000 in 1994, but decreased slightly as a percentage of restaurant sales to
2.6% in 1995 from 2.7% in 1994. The dollar increase was primarily related to the
opening of additional restaurants.
Other expense increased to $65,000 in 1995 from $22,000 in 1994,
primarily due to increased interest expense on borrowings.
17
<PAGE>
Liquidity
The Company will not have significant receivables or inventory, and
therefore it will require capital primarily for the development of new
restaurants. Total capital expenditures for 1996 were approximately $1.1
million, primarily for the opening of restaurants. In addition, the Company
acquired 25 restaurants from the Virginia Group at historical cost in a non-
monetary transaction. The Virginia acquisition was consummated on October 30,
1996, simultaneous with the closing of the Company's IPO.
Cash provided by operating activities was $2.7 million, $1.2 million,
and $.7 million in 1996, 1995, and 1994 respectively. The increase in cash
generated from operating activities is primarily the result of higher net income
and accrued expenses.
The Company has financed its operations principally from cash provided
by operating activities and proceeds from bank borrowings and stockholder loans.
The Company received $19.2 million in net cash proceeds from its initial public
offering in October, 1996. As a result of the Offering, the Company used
approximately $2.0 million of the initial public offering proceeds to fund final
S corporation distributions to stockholders, $1.6 million to retire stockholder
indebtedness, and $2.0 million to retire bank indebtedness. The remaining net
proceeds were used to fund capital expenditures in 1996 or were held in various
investments.
Capital expenditures are expected to be approximately $2.8 million for
1997, primarily for restaurant development and existing restaurant improvements.
The Company also may acquire the operations of other Papa John's franchisees if
such operations become available on terms satisfactory to the Company. Capital
resources at December 29, 1996 include $15.7 million of cash and investments.
The Company plans to fund its capital expenditures through 1997 from available
cash and cash generated from operations. The Company has not sought and does
not have any commitments for any credit facilities.
Impact of Inflation
The Company does not believe inflation has materially affected
earnings during the past three years. Substantial increases in costs,
particularly labor, employee benefits or food costs, could have a significant
impact on the Company in the future.
18
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the percentage relationship to restaurant sales
for certain income statement data for the Company:
For the Years Ended
---------------------------
(1) (1) (1)
Dec. 25, Dec. 31, Dec. 29,
1994 1995 1996
---------------------------
<S> <C> <C> <C>
Restaurant sales 100.0 % 100.0 % 100.0 %
Cost and expenses:
Cost of sales 32.7 33.6 32.9
Salaries and benefits 26.1 25.3 25.2
Other operating expenses 23.1 22.9 23.3
General and administrative expenses 6.8 5.3 6.0
Depreciation and amortization 2.7 2.6 2.8
---------------------------
Total costs and expenses 91.4 89.7 90.2
---------------------------
Operating income 8.6 10.3 9.8
Other income (expense), net (0.3) (0.7) 0.1
---------------------------
Income before income taxes 8.3 9.6 9.9
Provision for income taxes - - 1.3
---------------------------
Net income 8.3 % 9.6 % 9.9 %
===========================
Restaurant data - the Company (2): 1994 1995 1996
---------------------------
Percentage change in comparable restaurant sales (3) 24.1 % 3.3 % 4.7 %
Average sales for restaurants open for full year
(in thousands) $ 731 $ 727 $ 721
Number of restaurants open at end of period 27 39 46
</TABLE>
(1) Includes the Alabama Group for the entire period presented. Fiscal 1996
also includes the Virginia Group from the date of acquisition (October 30,
1996), which was simultaneous with the closing of the IPO.
(2) Includes all restaurants included in the IPO as if they were operated by
the Company for the entire period presented.
(3) Includes restaurants open throughout the years being compared. Fiscal 1995
comparable restaurant sales have been adjusted to reflect a 52 week
period versus a 53 week period.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
Audited Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 31, 1995, and December 29, 1996................... 21
Consolidated Statements of Income for the Years Ended December 25, 1994,
December 31, 1995, and December 29, 1996............................................ 22
Consolidated Statements of Stockholders' Equity for the Years Ended December 25, 1994,
December 31, 1995, and December 29, 1996............................................ 23
Consolidated Statements of Cash Flows for the Years Ended December 25, 1994,
December 31, 1995, and December 29, 1996............................................ 24
Notes to Consolidated Financial Statements.................................................... 25
Report of Independent Auditors................................................................ 38
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PJ AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, December 29,
1995 1996
-----------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 224,379 $ 3,660,843
Accounts receivable 24,010 20,624
Inventories 58,288 189,078
Advances to related parties 132,725 119,773
Prepaid expenses and other 5,183 186,294
Investments - 12,057,972
Deferred income taxes - 104,203
-----------------------------
Total current assets 444,585 16,338,787
Net property and equipment 1,820,828 5,244,050
Deferred franchise and development costs, net of
accumulated amortization of $17,424 in 1995 and
$91,420 in 1996 225,194 706,795
Other assets - 83,689
-----------------------------
Total assets $2,490,607 $ 22,373,321
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,481 153,376
Accrued expenses 343,656 1,571,225
Current maturities of bank debt 148,887 -
Notes payable to stockholders 742,846 -
-----------------------------
Total current liabilities 1,243,870 1,724,601
Note payable to bank, less current maturities 174,138 -
Deferred income taxes - 71,180
Stockholders' equity:
Preferred stock ($1.00 par value per share; authorized
1,000,000 shares, no shares issued and outstanding) - -
Common stock ($.01 par value per share; authorized
20,000,000 shares; issued and outstanding shares of
1,109.5 in 1995 and 4,755,000 in 1996) 3,085 47,550
Additional paid-in capital 446,260 20,031,411
Retained earnings 623,254 498,579
-----------------------------
Total stockholders' equity 1,072,599 20,577,540
-----------------------------
Total liabilities and stockholders' equity $2,490,607 $ 22,373,321
============================
</TABLE>
(See accompanying notes)
21
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------------
December 25, December 31, December 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Restaurant sales $6,414,651 $10,456,893 $16,845,711
Restaurant operating expenses:
Cost of sales 2,097,613 3,511,245 5,536,846
Salaries and benefits 1,676,627 2,646,602 4,243,285
Other operating expenses 1,481,175 2,392,575 3,922,091
Depreciation and amortization 172,230 274,875 465,193
---------- ----------- -----------
5,427,645 8,825,297 14,167,415
---------- ----------- -----------
Restaurant operating income 987,006 1,631,596 2,678,296
General and administrative expenses 433,222 557,143 1,016,291
---------- ----------- -----------
Operating income 553,784 1,074,453 1,662,005
Interest expense (related party) (34,036) (47,000) (39,275)
Interest expense (other) - (31,846) (47,448)
Interest income - - 87,778
Other income 12,115 13,242 6,740
---------- ----------- -----------
Income before income taxes 531,863 1,008,849 1,669,800
Income tax expense - - 228,340
---------- ----------- -----------
Net income $ 531,863 $ 1,008,849 $ 1,441,460
========== =========== ===========
Pro forma income data (unaudited) (Note 4)
Historical income before income tax expense $ 1,008,849 $ 1,669,800
Pro forma income tax expense 368,230 591,713
----------- -----------
Pro forma net income $ 640,619 $ 1,078,087
=========== ===========
Pro forma net income per share $ 0.36 $ 0.47
=========== ===========
Weighted average shares outstanding 1,796,689 2,289,667
=========== ===========
</TABLE>
(See accompanying notes)
22
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Total
Shares Paid-In Retained Stockholders'
Issued Amount Capital Earnings Equity
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 26, 1993 100 $ 28,500 $ 383,415 $ 23,438 $ 435,353
Net income - - - 531,863 531,863
Reverse stock split - (27,500) 27,500 - -
S corporation distributions - - - (8,662) (8,662)
Capital contributions:
Incorporation of Textra Cheese 1 1,000 - - 1,000
Issue additional shares to officer 8.5 85 35,345 - 35,430
-------------------------------------------------------------------
Balance, December 25, 1994 109.5 2,085 446,260 546,639 994,984
Net income - - - 1,008,849 1,008,849
S corporation distributions - - - (932,234) (932,234)
Incorporation of Twice the Cheese 1,000 1,000 - - 1,000
-------------------------------------------------------------------
Balance, December 31, 1995 1,109.5 3,085 446,260 623,254 1,072,599
Net income - - - 1,441,460 1,441,460
S Corporation distributions - - - (3,398,312) (3,398,312)
Stock splits and changes in par value
and authorized shares 1,768,890.5 14,615 (14,615) - -
Issuance of common stock (net of
issuance costs) 1,755,000 17,550 19,224,691 - 19,242,241
Acquisition of Virginia group 1,230,000 12,300 290,700 1,832,177 2,135,177
Issuance of warrant to PJI - - 84,375 - 84,375
-------------------------------------------------------------------
Balance, December 29, 1996 4,755,000 $ 47,550 $20,031,411 $ 498,579 $20,577,540
===================================================================
</TABLE>
(See accompanying notes)
23
<PAGE>
<TABLE>
<CAPTION>
PJ AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended
--------------------------------------
December 25, December 31, December 29,
1994 1995 1996
--------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 531,863 $ 1,008,849 $ 1,441,460
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 172,230 274,875 465,193
Deferred income taxes - - (33,023)
Changes in operating assets and liabilities:
Accounts receivable (7,357) (9,869) 59,370
Inventories (29,851) 57 (63,128)
Advances to related parties - (132,725) 28,693
Prepaid expenses and other 27,370 2,307 63,224
Accounts payable 1,143 5,353 (18,225)
Accrued expenses 99,312 113,866 843,335
Other assets - - (5,737)
Deferred franchise and development costs (75,771) (104,147) (90,000)
------------------------------------
Net cash provided by operating activities 718,939 1,158,566 2,691,162
Investing Activities:
Purchases of property and equipment (738,660) (797,513) (1,106,954)
Other (8,961) 596 -
Purchases of investments - - (12,057,972)
Purchase of Virginia Group, net of cash acquired - - 985,170
------------------------------------
Net cash used in investing activities (747,621) (796,917) (12,179,756)
Financing Activities:
Proceeds from bank borrowings - 450,000 1,000,000
Proceeds from issuance of common stock - - 19,242,241
Payments on bank borrowings - (126,975) (2,423,025)
Issuance of (payments on) stockholder notes 127,200 315,646 (1,495,846)
Distributions paid (8,662) (932,234) (3,398,312)
Capital contributions 36,430 1,000 -
------------------------------------
Net cash provided (used) by financing activities 154,968 (292,563) 12,925,058
------------------------------------
Net increase in cash and cash equivalents 126,286 69,086 3,436,464
Cash and cash equivalents at beginning of year 29,007 155,293 224,379
------------------------------------
Cash and cash equivalents at end of year $ 155,293 $ 224,379 $ 3,660,843
====================================
</TABLE>
(See accompanying notes)
24
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Description of Business, and Reorganization
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of PJ America, Inc. and its wholly-owned subsidiary, PJ Cheese, Inc. (the
"Company"). All significant inter-company transactions between the consolidated
companies have been eliminated. Prior to the Company's initial public offering
(the "Offering") and reorganization, the Company's financial statements
represented the combined financial position, results of operations and cash
flows of Extra Cheese, Inc. (Extra Cheese), Textra Cheese Corp. (Textra) and
Twice the Cheese, Inc. (Twice), collectively referred to herein as the "Alabama
Group." Those financial statements excluded the combined financial position of
PJVA, Inc. and PJV, Inc., collectively referred to as the "Virginia Group" prior
to their acquisition on October 30, 1996 (See Note 3).
Extra Cheese, Textra, and Twice operated as S Corporations through
October 30, 1996, when their S Corporation elections were terminated. As a
result, they were not subject to federal or state income tax before October 30,
1996.
Pro forma information for the years ended December 31, 1995 and December
29, 1996 have been presented as if the Company had been treated as a C
Corporation rather than an S Corporation, with an assumed effective income tax
rate of 36.5%.
Description of Business
The Company operates pizza delivery and carry-out restaurants under the
trademark "Papa John's" in Birmingham, Alabama and the surrounding area;
Norfolk, Richmond, and Virginia Beach, Virginia and surrounding areas; and in
East Texas. At December 29, 1996, the Company operated 46 restaurants. In
addition to the areas the Company currently has restaurants, the Company also
holds franchise and development rights for Ventura, Kern, San Luis Obispo and
Santa Barbara counties in California; Vancouver, Canada and the surrounding
area; and Puerto Rico.
Reorganization
The Company was formed in August, 1996 to succeed to the businesses of
five Papa John's International, Inc. (PJI) franchisees. Extra Cheese entered
into an Agreement dated June 10, 1996, as amended on July 10, 1996, and a Plan
of Merger with Twice, Textra, PJVA, Inc. and PJV, Inc., pursuant to which all
such corporations agreed to be merged into PJ Cheese, Inc. (PJ Cheese), a
wholly-owned subsidiary of Extra Cheese, in exchange for shares of common stock
of Extra Cheese. On October 30, 1996, concurrent with the completion of the
Offering (i) all such corporations merged into PJ Cheese; (ii) Extra Cheese
contributed to PJ Cheese all of the assets of Extra Cheese relating to its
restaurants, with PJ Cheese assuming all of Extra Cheese's liabilities relating
thereto; and (iii) Extra Cheese merged into the
25
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Description of Business, and Reorganization
(continued)
Company with the stockholders of Extra Cheese receiving an aggregate of
3,000,000 shares of common stock of the Company (the "Reorganization").
Accordingly, the Company is the parent of PJ Cheese, and PJ Cheese owns all of
the Papa John's restaurants which were owned by Extra Cheese, Textra, Twice,
PJVA, Inc. and PJV, Inc. (collectively, the "Predecessor Companies").
The Reorganization was an exchange of non-monetary assets by stockholders
and has been accounted for at historical cost.
2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the last Sunday in December of each
year. The 1996 and 1994 fiscal years consisted of 52 weeks. The 1995 fiscal year
consisted of 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash Equivalents
Cash equivalents consist of 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.
Inventories
Inventories consist of food products, paper goods and supplies and are
stated at the lower of cost, determined under the first-in, first-out (FIFO)
method, or market. Virtually all of the Company's food products and supplies are
purchased from PJI.
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, which
range from three to seven years for restaurant and other equipment, and up to 20
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). Normal repair and maintenance costs are expensed
as incurred.
26
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (continued)
Investments
The Company determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. All investment securities held by the Company at December
29, 1996, have been classified as held-to-maturity. Held-to-maturity investment
securities are stated at amortized cost with any amortization of premiums and
accretion of discounts included in interest income.
Development and Franchise Fees
Development fees paid by the Company to PJI for the right to open a
certain number of restaurants in a geographic area are deferred and amortized to
expense on a pro rata basis as each restaurant is opened. Franchise fees are
generally paid when each restaurant is opened and are deferred and amortized.
Deferred development and franchise fees are amortized over a 20 year period
using the straight-line method beginning with the opening of each restaurant.
Advertising and Related Costs
Advertising and related costs include restaurant activities such as mail
coupons, doorhangers, promotional items, and required contributions to PJI's
production fund (0.50% to 0.75% of restaurant sales). Such amounts are expensed
as incurred and were approximately $347,000 in 1994, $583,000 in 1995 and $1
million in 1996, and are included in other operating expenses in the
consolidated statements of income.
Stock-Based Compensation
The Company follows the provisions of Accounting Principles Board Opinion
(APB) No. 25 for its stock-based compensation awards (see Note 13).
Income Taxes
On October 29, 1996, the Predecessor Company terminated their status as S
Corporations and the Company became subject to federal and state income taxes.
Concurrently, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," and accordingly, there was no
cumulative effect of adopting SFAS No. 109, and prior year financial statements
were not restated. In accordance with the provisions of SFAS No. 109, deferred
income taxes reflect the temporary tax consequences on future years of
differences between the tax and financial statement basis of assets and
liabilities.
27
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (continued)
Pre-Opening Costs
Pre-opening costs, which represent certain expenses incurred before a
restaurant opens, are expensed as incurred.
Net Income Per Share
Net income per share information is not presented because such data is
not meaningful (See Notes 4 and 5).
Accounting Changes
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
Of." The adoption of SFAS 121 had no impact on the Company.
3. Initial Public Offering
The Company completed the offering of its common stock on October 30,
1996, pursuant to which the Company sold 1,755,000 shares of its common stock,
including 135,000 shares exercised to cover underwriter over-allotments, at an
initial public offering price of $12.50 per share. Net proceeds from the
Offering (after deducting the underwriting discount of $1.5 million and expenses
of $1.2 million) were $19.2 million. Such proceeds were partially used to fully
retire the outstanding balance owed to banks and shareholders, pay S Corporation
distributions, and for general corporate purposes.
4. Pro Forma Information (Unaudited)
The Company terminated its status as an S Corporation on October 29,
1996. Pro forma income taxes have been presented to reflect a provision for
federal, state, and local income taxes at an assumed effective rate of 36.5%.
28
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Pro Forma Information (Unaudited) (continued)
Pro forma net income per share is based on the weighted averaged number
of shares of common stock and common stock equivalents outstanding during the
period. The pro forma net income per share amounts were calculated assuming that
the number of shares of common stock in the Offering necessary to generate
sufficient proceeds to fund the payment of the Company's undistributed S
Corporation earnings. A summary of the components of the weighted average shares
of common stock and equivalents outstanding during the years ended December 31,
1995 and December 29, 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
----------------------
Total number of common shares outstanding throughout the period 1,770,000 1,770,000
Weighted average number of common shares issued in connection with
the Offering - 492,116
Shares issuable upon net exercise of outstanding stock options - 26,498
Adjustment to reflect shares issued to pay S Corporation distributions 26,689 1,053
----------------------
Total weighted average shares and equivalents outstanding 1,796,689 2,289,667
======================
</TABLE>
29
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Acquisition of Virginia Group - Pro Forma Information (Unaudited)
Concurrent with the Reorganization, the Company acquired PJVA, Inc. and
PJV, Inc. (See Note 1). The acquisition was accounted for at historical cost,
with the shareholders of PJVA, Inc. and PJV, Inc. receiving an aggregate of
1,230,000 shares of common stock of the Company.
The following represents the unaudited pro forma results of operations
for the years ended December 31, 1995 and December 29, 1996 as if the
Reorganization occurred at the beginning of the Company's fiscal year. Pro forma
net income reflects an assumed corporate income tax rate of 36.5%.
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
------------------------
Restaurant sales $23,099,050 $30,264,352
Restaurant operating expenses:
Cost of sales 7,827,113 10,115,854
Salaries and benefits 5,794,983 7,460,499
Other operating expenses 5,742,900 7,468,389
Depreciation and amortization 656,632 905,178
------------------------
20,021,628 25,949,920
------------------------
Restaurant operating income 3,077,422 4,314,432
General and administrative expenses 1,042,714 1,633,812
------------------------
Operating income 2,034,708 2,680,620
Other expense, net 221,466 127,305
------------------------
Income before income taxes 1,813,242 2,553,315
Pro forma income tax expense 661,833 912,514
------------------------
Pro forma net income $ 1,151,409 $ 1,640,801
========================
Pro forma net income per share $ 0.37 $ 0.48
========================
Weighted average shares outstanding 3,111,828 3,429,896
========================
</TABLE>
The pro forma information is not indicative of the results of operations that
actually would have been obtained if the transactions had occurred at the
beginning of the Company's fiscal year. Additionally, the pro forma information
is not intended to be a projection of future results.
30
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investments
A summary of the Company's held-to-maturity securities as of December 29,
1996 follows:
<TABLE>
<CAPTION>
Gross Gains
Amortized Unrealized Unrealized Estimated
Cost Holding Holding Fair Value
Gains Losses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government securities $ 8,980,113 $ - $(1,849) $ 8,978,264
Municipal bonds 3,077,859 2,686 (665) 3,079,880
- --------------------------------------------------------------------------------
Total $12,057,972 $2,686 $(2,514) $12,058,144
================================================================================
</TABLE>
All investment securities have a contractual maturity of one year or less.
7. Net Property and Equipment
Net property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
===========================
<S> <C> <C>
Land $ 114,079 $ 114,079
Building and improvements 567,794 1,235,075
Leasehold improvements 267,266 2,247,597
Restaurant equipment 1,163,859 3,676,972
Other 246,138 31,465
---------------------------
2,359,136 7,305,188
Less accumulated depreciation (538,308) (2,061,138)
---------------------------
Net property and equipment $1,820,828 $ 5,244,050
===========================
8. Accrued Expenses
Accrued expenses consists of the following:
December 31, December 29,
1995 1996
===========================
Salaries and wages $ 79,979 $ 376,492
Taxes, other than income 93,585 260,503
Advertising and royalties 55,593 179,915
Reserve for relocation - 116,002
Accrued Offering expenses - 276,256
Other 114,499 362,057
---------------------------
$ 343,656 $ 1,571,225
===========================
</TABLE>
31
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Note Payable to Bank
Note payable to bank consists of the following:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
---------------------------
<S> <C> <C>
Note payable to bank $ 323,025 $ -
Less current maturities of bank debt (148,887) -
---------------------------
$ 174,138 $ -
===========================
</TABLE>
Note payable to bank with interest rates of 8.9% and 8.0% in 1995 and 1996,
respectively, were retired during 1996 with proceeds from the Offering. The
interest payments on the notes payable were approximately $36,000 and $7,000 in
1995 and 1996, respectively (none in 1994).
10. Income Taxes
Concurrent with the Reorganization on October 30, 1996, the Predecessor
Companies (See Note 1) terminated their status as S Corporations. Accordingly,
the Company is now subject to federal and state income taxes. At the date of
termination of S Corporation status, the Company recorded a net deferred tax
asset and corresponding credit to income tax expense for cumulative temporary
differences between the tax basis and the reported amounts of the Company's
assets and liabilities in the consolidated financial statements. These
differences consisted primarily of deferred expenses and accumulated
depreciation on property and equipment. At the date of termination of S
Corporation status, the net differences equaled approximately $109,000,
resulting in a net deferred tax asset and corresponding credit to income tax
expense of approximately $40,000.
Additionally, in connection with the termination of the Predecessor
Companies' S Corporation status, distributions were made to their stockholders
of approximately $2.0 million, representing substantially all undistributed S
Corporation earnings (as determined for tax reporting purposes) at the time of
termination. Prior to the termination of the Company's S Corporation status,
distributions paid to stockholders in 1996 were approximately $1.4 million.
A summary of income tax expense for 1996 is as follows:
<TABLE>
<S> <C>
Current
Federal $241,340
State and local 20,023
Deferred (federal and state) 6,934
Deferred tax credit resulting from change in tax status (39,957)
--------
Income tax expense $228,340
========
</TABLE>
32
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes (continued)
Net deferred tax assets are comprised of the following at December 29, 1996:
<TABLE>
<S> <C>
Deferred tax assets - miscellaneous reserves and accruals $104,203
Deferred tax liabilities - accelerated depreciation 71,180
--------
Net deferred tax assets $ 33,023
========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense for the year ended December 29, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Income tax expense at U.S. federal statutory rate (attributable to
income before income taxes from operations for the period
October 30, 1996 through December 29, 1996) $264,408
State and local income taxes - net 13,187
Tax exempt interest income (9,978)
Deferred tax credit resulting from change in tax status (39,957)
Other 680
--------
Income tax expense $228,340
========
</TABLE>
Income tax payments amounted to $225,000 in 1996.
11. Related Party Transactions
Franchisor
Under the terms of area development agreements between the Company and
PJI, the Company paid development fees ranging from $1,700 to $5,000 per
restaurant. Franchise fees ranging from $10,000 to $15,000 have been paid as
each new restaurant was opened. Royalties in the amount of 4% of restaurant
sales are paid monthly to PJI, and a monthly contribution of 0.50% to 0.75% of
sales is paid to the Marketing fund of PJI. The Company is required to buy
certain proprietary food products from PJI's commissary subsidiary and have
elected to buy substantially all other food products, supplies, marketing
materials and equipment from PJI or its subsidiaries.
The Company's franchise and development agreements with PJI contain
certain requirements regarding the number of units to be opened in the future.
Should the Company fail to comply with the required development schedule or with
the requirements of the agreements for restaurants within areas covered by the
development agreements, PJI has the right to terminate the exclusive nature of
the Company franchises. The franchise agreements also provide PJI with
significant rights regarding the business and operations of the Company.
33
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Related Party Transactions (continued)
In connection with the Company's Offering, the Company issued a warrant
to PJ USA (a subsidiary of PJI) to purchase 225,000 shares of common stock at
$11.25 per share. The warrant was issued in consideration for, among other
things, the rights to enter into development agreements for certain counties in
California; Vancouver, Canada and the surrounding area; and Puerto Rico. The
Company expects to pay all standard development and franchise fees in connection
with operating restaurants in these territories. The warrant is exercisable in
whole or in part at any time until October 30, 2001. The portion of the warrant
discount attributable to the granting of the various development rights,
approximately $84,000, has been capitalized into deferred franchise and
development costs.
Affiliate Markets
Certain officers and directors of the Company own equity interests in
other entities that franchise Papa John's restaurants. The Company also provides
management and operational supervision services to three related entities; PJ
Utah, LLC, PJ Louisiana, Inc., and PJ Iowa, LLC. Currently, the Company receives
monthly management fees of $20,000 from PJ Utah, $5,000 from PJ Louisiana, and
$5,000 from PJ Iowa. During 1996, the Company received $100,000 from PJ Utah,
$20,000 from PJ Louisiana, and $10,000 from PJ Iowa. Management fee income is
netted against general and administrative expenses in the consolidated
statements of income.
PJ Utah, LLC holds the development and franchise rights for Papa John's
restaurants in Utah. The Company and PJ Utah, LLC have entered into an option
agreement granting the Company the option to acquire for cash the operations and
development rights for the franchised Papa John's restaurants in Utah. The
option is exercisable at any time during 1998, but expires December 31, 1998.
The purchase price of the option is equal to the aggregate amount invested in
the Papa John's restaurants, operations (including operating losses, if any) and
related matters in Utah by PJ Utah, LLC, including interest paid to a third
party and/or its members on any loans, an imputed yield on all equity invested
in PJ Utah, LLC equal to the "prime rate," as published in The Wall Street
Journal, plus $10,000 for each store that is open at the time the option is
exercised. The Company expects, but is not obligated, to exercise such option in
1998.
The Company has obtained a right of first refusal to acquire franchise
and development rights for PJ Louisiana, Inc. and PJ Iowa, L.C. However, there
is no agreement or understanding between the Company and these entities or
stockholders to acquire such entities or their assets.
34
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Related Party Transactions (continued)
Stockholders
Notes payable to stockholders were due on demand and carried interest at
7.0%. The notes payable were fully paid at the closing of the Offering. Interest
expense related to these notes was approximately $34,000 in 1994, $47,000 in
1995 and $39,000 in 1996. Interest payments were approximately $18,000 in 1994,
$4,000 in 1995 and $98,000 in 1996.
In connection with the Company's Offering, certain officers, directors
and former employees received approximately $250,000 for consulting services
provided to the Company with respect to the structuring, organization and
implementation of the Offering.
12. Leases
The Company leases office and retail 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. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997.............................. $ 512,160
1998.............................. 459,385
1999.............................. 307,210
2000.............................. 214,505
2001.............................. 101,046
Thereafter........................ 44,038
----------
$1,638,344
==========
</TABLE>
Rent expense was approximately $96,000 in 1994, $150,000 in 1995, and
$271,000 in 1996.
13. Stock Options
In August, 1996, the Company adopted the 1996 Stock Ownership Incentive
Plan (the "1996 Plan") and a Non-Employee Directors 1996 Stock Incentive Plan
(the "Director's Plan"). The 1996 Plan reserves 600,000 shares of common stock
for future issuance, for either stock options, performance units, or restricted
stock (which is limited to 120,000 of the total 600,000 shares reserved). All
options granted pursuant to the 1996 Plan must have an exercise price equal to
at least 100% of the fair market value of the underlying shares on the date of
grant, and incentive stock options granted to any employee owning more than
10.0% of the combined voting power of all classes of stock must be granted at an
exercise price at least equal to 110 % of such fair market value. A compensation
committee established by the Board of Directors selects employees to receive
awards under the 1996 Plan and determines terms, conditions, and
35
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Stock Options (continued)
limitations applicable to each award. On October 24, 1996, the Company granted
266,500 stock options under the 1996 Plan, which had an exercise price of
$12.50, the market price of the Company's stock on the date of grant. Options
granted to date under the 1996 Plan will become exercisable in four equal annual
installments, beginning on the first anniversary of such option's date of grant.
The Director's Plan reserves 160,000 shares of common stock for future
issuance. Each non-employee director received options to purchase 12,000 shares
on the initial grant date (the "Initial Grants"). Each new non-employee director
will be granted options to purchase 12,000 shares of common stock on the date of
his or her election. The Company will thereafter annually issue, beginning on
the first anniversary of the initial grant date, to each of the Company's non-
employee directors, options to purchase 4,000 shares of common stock.
Thereafter, all options will be granted at the fair market value of the common
stock on the date of grant. All options granted under the Director's Plan will
become exercisable in four equal annual installments, beginning on the first
anniversary of such option's date of grant. On October 24, 1996, the Company
granted 72,000 stock options under the Director's Plan, which had an exercise
price of $12.50, the market price of the Company's common stock at the date of
the grant.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the 1996 Plan and the
Director's Plan (the "Plans"). Accordingly, no compensation cost has been
recognized for its Plans. Had compensation cost for the Company's plans been
determined based on the fair value at the grant date consistent with the method
prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996
----------
<S> <C> <C>
Pro forma Net income Unaudited Pro forma $1,078,087
Pro forma 1,021,782
Primary earnings per share Unaudited Pro forma $ 0.47
Pro forma 0.45
</TABLE>
The weighted average fair value of the stock options granted during the
year was $5.63. The fair value of each stock option award is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 49.1%, risk-free interest
rate of 6.0%, and an expected life of 4 years.
As of December 29, 1996, 333,500 and 88,000 shares were available for
future issuance under the 1996 Plan and Director's Plan, respectively.
36
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Pro forma Quarterly Data (Unaudited) in thousands, except per share data
<TABLE>
<CAPTION>
1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
------------- ------------- ------------- -------------
1995 1996 1995 1996 1995 1996 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant sales $4,801 $6,605 $5,395 $7,492 $5,764 $7,627 $7,139 $8,540
Operating income 425 516 495 587 537 669 578 908
Income before income taxes 384 458 440 521 479 602 510 972
Pro forma net income 244 291 280 331 304 382 323 637
Pro forma net income per share .08 .09 .09 .11 .10 .12 .10 .15
</TABLE>
All quarterly information presented above is as if the Reorganization
(i.e., acquisition of the Virginia Group) occurred at the beginning of the
Company's 1995 fiscal year. Additionally all quarterly information is presented
in 13 week periods, except the fourth quarter of 1995, which is 14 weeks.
37
<PAGE>
ERNST & YOUNG LLP,
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
PJ America, Inc.
We have audited the accompanying consolidated balance sheets of PJ
America, Inc. and Subsidiary as of December 31, 1995 and December 29, 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years ended December 25, 1994, December 31, 1995 and December 29,
1996. These financial statements are the responsibility of the Companies'
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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PJ
America, Inc. and Subsidiary, at December 31, 1995 and December 29, 1996, and
the consolidated results of their operations and their cash flows for the years
ended December 25, 1994, December 31, 1995 and December 29, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
February 4, 1997
38
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial
Owners and Management; and Certain Relationships and Related
Transactions.
The information required by these items, other than information set forth
in this Form 10-K under Item I, "Executive Officers of Registrant," is omitted
because the Company is filing a definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K which includes the required information. The required
information contained in the Company's proxy statement is incorporated herein by
reference.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following consolidated financial statements of PJ America, Inc. and
Subsidiary and the report of independent auditors are included in
Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors.............................................. 38
Consolidated Balance Sheets as of December 31, 1995 and December 29, 1996... 21
Consolidated Statements of Income for the years ended December 25, 1994,
December 31, 1995, and December 29, 1996............................. 22
Consolidated Statements of Stockholders' Equity for the years ended
December 25, 1994, December 31, 1995, and December 29, 1996.......... 23
Consolidated Statements of Cash Flows for the years ended December 25, 1994,
December 31, 1995, and December 29, 1996............................. 24
Notes to Consolidated Financial Statements.................................. 25
</TABLE>
(a)(2) Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and therefore have been omitted.
(a)(3) Exhibits:
3.1 The Company's Certificate of Incorporation. Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-11253) is
incorporated herein by reference.
3.2 The Company's By-laws. Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-11253) is incorporated herein
by reference.
4 Specimen Stock Certificate. Exhibit 4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-11253) is incorporated herein
by reference.
10.1 Form of Registration Rights Agreement. Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-11253) is
incorporated herein by reference.
10.2 Form of 1996 Stock Ownership Incentive Plan. Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No. 333-11253)
is incorporated herein by reference.
10.3 Form of Non-Employee Directors 1996 Stock Incentive Plan. Exhibit 10.3 to
the Company's Registration Statement on Form S-1 (Registration No.
333-11253) is incorporated herein by reference.
10.4 Agreement relating to the Reorganization. Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-11253) is
incorporated herein by reference.
40
<PAGE>
10.5 Plan of Merger. Exhibit 10.5 to the Company's Registration Statement on
Form S-1 (Registration No. 333-11253) is incorporated herein by
reference.
10.6 Indemnification Agreement. Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (Registration No. 333-11253) is incorporated herein
by reference.
10.7 Escrow Agreement. Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (Registration No. 333-11253) is incorporated herein by
reference.
10.8 Warrant issued to PJI. Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Registration No. 333-11253) is incorporated herein
by reference.
10.9 Agreement between PJI and Extra Cheese, Inc. relating to certain Southern
California counties; Puerto Rico; Vancouver, Canada; consent for this
offering from PJI; the issuance of the warrant; and certain other
matters. Exhibit 10.9 to the Company's Registration Statement on Form S-1
(Registration No. 333-11253) is incorporated herein by reference.
10.10 Development Agreement relating to the Utah territory. Exhibit 10.10 to
the Company's Registration Statement on Form S-1 (Registration No.
333-11253) is incorporated herein by reference.
10.11 Development Agreement relating to the development of an aggregate of ten
restaurants in Birmingham, Tuscaloosa and Auburn, Alabama. Exhibit 10.11
to the Company's Registration Statement on Form S-1 (Registration No.
333-11253) is incorporated herein by reference.
10.12 Form of Franchise Agreement relating to the Birmingham, Tuscaloosa and
Auburn, Alabama restaurants (e.g., Franchise Agreement dated February 18,
1992, by and between Extra Cheese, Inc. and PJI at 2503 McFarland Blvd.
W., Northport, Alabama 35476). Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No. 333-11253) is
incorporated herein by reference.
10.13 Development Agreement relating to the development of an aggregate of four
restaurants in Cullman, Jasper, Sylacauga and Talladega, Alabama. Exhibit
10.13 to the Company's Registration Statement on Form S-1 (Registration
No. 333-11253) is incorporated herein by reference.
10.14 Form of Franchise Agreement relating to the Cullman, Jasper, Sylacauga
and Talladega, Alabama restaurants (e.g., Franchise Agreement dated
August 14, 1995, by and between Extra Cheese, Inc. and PJI at 680 Highway
78 West, Jasper, Alabama 35501). Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (Registration No. 333-11253) is
incorporated herein by reference.
10.15 Development Agreement relating to the development of an aggregate of five
restaurants in Longview, Lufkin and Nacogdoches, Texas. Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (Registration No.
333-11253) is incorporated herein by reference.
41
<PAGE>
10.16 Form of Franchise Agreement relating to the East Texas restaurants (e.g.,
Franchise Agreement dated September 20, 1994, by and between Textra
Cheese Corp. and PJI at 2702 North Street, Nacogdoches, Texas 75961).
Exhibit 10.16 to the Company's Registration Statement on Form S-1
(Registration No. 333-11253) is incorporated herein by reference.
10.17 Development Agreement relating to the Virginia development of an
aggregate of 47 restaurants in Virginia Beach, Richmond and Norfolk,
Virginia. Exhibit 10.17 to the Company's Registration Statement on Form
S-1 (Registration No. 333-11253) is incorporated herein by reference.
10.18 Form of Franchise Agreement relating to the Virginia restaurants (e.g.
Franchise Agreement dated March, 31, 1994, by and between PJVA and PJI at
10054 Robious Road, Richmond, Virginia 23235). Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (Registration No. 333-11253)
is incorporated herein by reference.
10.19 PJI's Waiver of Right of First Refusal (certain Utah, Iowa markets and
other markets). Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (Registration No. 333-11253) is incorporated herein by
reference.
10.20 The Company's Right of First Refusal relating to certain Iowa
territories. Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (Registration No. 333-11253) is incorporated herein by
reference.
10.21 The Company's Right of First Refusal relating to certain Louisiana
territories. Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (Registration No. 333-11253) is incorporated herein by
reference.
10.22 Option Agreement relating to the Utah territories. Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (Registration No. 333-11253)
is incorporated herein by reference.
10.23 Employment Agreement with Mr. Davison. Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (Registration No. 333-11253) is
incorporated herein by reference.
10.24 Agreement between PJI and PJ Utah, LLC relating to development rights to
be granted with respect to the Utah territory. Exhibit 10.26 to the
Company's Registration Statement on Form S-1 (Registration No. 333-11253)
is incorporated herein by reference.
21 Subsidiaries of the Company:
(a) PJ Cheese, Inc. an Alabama corporation
42
<PAGE>
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 20, 1997 PJ AMERICA, INC.
By: _____________________________________
Douglas S. Stephens
Chief Executive Officer and President
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
- --------- ----- -----
________________________________ Chairman of the Board March 24, 1997
Richard F. Sherman
________________________________ Chief Executive Officer, March 24, 1997
Douglas S. Stephens President and Director
________________________________ Vice President--Chief Financial March 24, 1997
D. Ross Davison Officer and Treasurer (Chief
Financial and Accounting
Officer)
________________________________ Director March 24, 1997
Michael M. Fleishman
________________________________ Director March 24, 1997
Martin T. Hart
________________________________ Director March 24, 1997
Frank O. Keener
________________________________ Director March 24, 1997
Stephen P. Langford
________________________________ Director March 24, 1997
Charles W. Schnatter
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
PJ America's proforma combined financial statements for the years ended December
29, 1996 and December 31, 1995 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-29-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 DEC-26-1994
<PERIOD-END> DEC-29-1996 DEC-31-1995
<CASH> 3,660,843 478,459
<SECURITIES> 12,057,972 0
<RECEIVABLES> 20,624 33,188
<ALLOWANCES> 0 0
<INVENTORY> 189,078 136,357
<CURRENT-ASSETS> 16,338,787 937,280
<PP&E> 7,305,188 5,984,999
<DEPRECIATION> (2,061,138) (1,195,583)
<TOTAL-ASSETS> 22,373,321 6,344,722
<CURRENT-LIABILITIES> 1,724,601 863,601
<BONDS> 0 1,708,739
0 0
0 0
<COMMON> 47,550 5,085
<OTHER-SE> 20,529,990 2,271,451
<TOTAL-LIABILITY-AND-EQUITY> 22,373,321 6,344,722
<SALES> 30,264,352 23,099,050
<TOTAL-REVENUES> 30,264,352 23,099,050
<CGS> 10,115,854 7,827,113
<TOTAL-COSTS> 15,834,066 12,194,515
<OTHER-EXPENSES> 1,633,812 1,042,714
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 86,723 234,798
<INCOME-PRETAX> 2,553,315 1,813,242
<INCOME-TAX> 912,514 661,833
<INCOME-CONTINUING> 1,640,801 1,151,409
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,640,801 1,151,409
<EPS-PRIMARY> 0.48 0.37
<EPS-DILUTED> 0.48 0.37
</TABLE>
