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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 27, 1999
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)
2300 Resource Drive
Birmingham, Alabama 35242
(Address of principal executive offices)
(205) 981-2800
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
At July 16, 1999, there were 5,847,835 shares of the registrant's common
stock, par value $.01 per share.
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PJ AMERICA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
June 27, 1999 and December 27, 1998 2
Condensed Consolidated Statements of Income (Unaudited) -
Three Months and Six Months Ended June 27, 1999 and
June 28, 1998 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 27, 1999 and June 28, 1998 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 6. Exhibits and Reports on Form 8-K 9
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PJ AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
(Unaudited) (Note)
-------------- --------------
<S> <C> <C>
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 5,751 $ 5,026
Inventories 551 549
Prepaid expenses and other 831 264
Investments 6,861 8,305
Deferred income taxes 151 151
-------------- --------------
Total current assets 14,145 14,295
Investments 4,636 5,041
Net property and equipment 25,425 21,146
Deferred franchise and development costs,
net of accumulated amortization 3,699 3,546
Goodwill, net of accumulated amortization 4,491 4,576
Other assets 263 209
-------------- --------------
Total assets $ 52,659 $ 48,813
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 406 $ 508
Accounts payable - PJI - 1,345
Accrued expenses 5,189 4,263
-------------- --------------
Total current liabilities 5,595 6,116
Deferred income taxes 1,330 951
Stockholders' equity:
Common stock 58 58
Additional paid-in-capital 33,639 32,565
Retained earnings 12,037 9,123
-------------- --------------
Total stockholders' equity 45,734 41,746
-------------- --------------
Total liabilities and stockholders' equity $ 52,659 $ 48,813
============== ==============
</TABLE>
Note: The condensed consolidated balance sheet at December 27, 1998 has been
derived from the audited financial statements at that date but does not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
2
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PJ AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Restaurant sales $ 24,001 $ 16,499 $45,857 $ 30,717
Restaurant operating expenses:
Cost of sales 7,318 5,222 13,937 9,707
Salaries and benefits 6,760 4,390 12,841 8,173
Other operating expenses 5,668 3,877 10,910 7,236
Depreciation and amortization 787 471 1,497 871
-------- -------- ------- --------
20,533 13,960 39,185 25,987
-------- -------- ------- --------
Restaurant operating income 3,468 2,539 6,672 4,730
General and administrative expenses 1,169 855 2,306 1,575
-------- -------- ------- --------
Operating income 2,299 1,684 4,366 3,155
Other income 156 241 324 513
-------- -------- ------- --------
Income before income taxes and cumulative
effect of change in accounting principle 2,455 1,925 4,690 3,668
Income tax expense 835 635 1,595 1,210
-------- -------- ------- --------
Income before cumulative effect of
change in accounting principle 1,620 1,290 3,095 2,458
Cumulative effect of change in
accounting principle, net of taxes - - (181) -
-------- -------- ------- --------
Net income $ 1,620 $ 1,290 $ 2,914 $ 2,458
======== ======== ======= ========
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.28 $ 0.22 $ 0.53 $ 0.42
Cumulative effect of accounting
change, net of taxes - - (0.03) -
-------- -------- ------- --------
Net income per share - Basic $ 0.28 $ 0.22 $ 0.50 $ 0.42
======== ======== ======= ========
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.27 $ 0.22 $ 0.51 $ 0.41
Cumulative effect of accounting
change, net of taxes - - (0.03) -
-------- -------- ------- --------
Net income per share - Diluted $ 0.27 $ 0.22 $ 0.48 $ 0.41
======== ======== ======= ========
Weighted average shares outstanding
- Basic 5,814 5,787 5,797 5,785
======== ======== ======= ========
Weighted average shares outstanding
- Diluted 6,042 5,957 6,019 5,933
======== ======== ======= ========
</TABLE>
3
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PJ AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 27, June 28,
1999 1998
-------- --------
<S> <C> <C>
(In thousands)
Cash Flows from Operating Activities
Net cash provided by operating activities $ 4,360 $ 4,196
Cash Flows from Investing Activities
Acquisitions - (5,734)
Purchases of property, equipment, franchise and
and development fees (5,213) (3,448)
Maturity of investments 1,849 6,070
-------- --------
Net cash used in investing activities (3,364) (3,112)
Cash Flows from Financing Activities
Proceeds from exercise of stock options 1,074 135
Payments on acquisition financing (1,345) -
Proceeds from issuance of debt - 1,000
Payments on borrowings - (400)
-------- --------
Net cash (used in) provided by financing activities (271) 735
Net increase in cash 725 1,819
Cash and cash equivalents at beginning of year 5,026 6,674
-------- --------
Cash and cash equivalents at end of period $ 5,751 $ 8,493
======== ========
</TABLE>
See accompanying notes.
4
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PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 27, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three months and six months ended June
27, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 26, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the PJ
America, Inc. Annual Report on Form 10-K for the year ended December 27, 1998.
The accompanying unaudited condensed consolidated financial statements
include the accounts of PJ America, Inc. and its wholly-owned subsidiaries, (the
"Company"). All significant inter-company transactions between the consolidated
companies have been eliminated.
The preparation of unaudited condensed consolidated financial statements
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.
Note 2 - Change in Accounting for Deferred Commissary Start-Up Costs
In the first quarter of 1999, the Company adopted the American Institute of
CPAs Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," which requires entities to expense all start-up and pre-opening
costs as they are incurred. The Company previously deferred commissary start-up
costs and amortized them over a period of one year from the facility's opening
date. The cumulative effect of this change in accounting principle, net of tax,
was $181 thousand or $.03 per share and has been recorded in the first quarter
of 1999 as required by the SOP.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following:
competition; successful implementation of the Company's expansion strategy;
dependence on the success of the Papa John's system; success of operating
initiatives; advertising and promotional efforts; adverse publicity; acceptance
of new product offerings; availability, locations and terms of sites for store
development; changes in business strategy or development plans; availability and
terms of capital; food, labor and employee benefit costs; changes in government
regulations; regional weather conditions; and other factors referenced in this
Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Restaurant Sales. Restaurant sales increased 45% to $24.0 million for the
three months ended June 27, 1999, from $16.5 million for the comparable period
in 1998, and 49% to $45.9 million for the six months ended June 27, 1999 from
$30.7 million for the comparable period in 1998. These increases were primarily
due to a 61% and 63% increase in the number of equivalent restaurants open
during the three and six months ended June 27, 1999, respectively, as compared
to 1998. "Equivalent restaurants" represents the number of restaurants open at
the beginning of a given period, adjusted for restaurants opened, acquired or
sold during the period on a weighted average basis. Also, comparable sales
increased 1.8% and 2.6% in the three and six months ended June 27, 1999
respectively, from the comparable periods in 1998. The total average unit sales
decreased 9% and 8% in the three and six months ended June 27, 1999 respectively
from the comparable periods in 1998 due to the significant increase in new and
acquired restaurants in the Company's "New Markets", which primarily are
restaurants located in Utah, California, Oregon, and Puerto Rico.
Costs and Expenses. Cost of sales, which consists of food, beverage and
paper costs, decreased as a percentage of restaurant sales to 30.5% and 30.4%
for the three and six months ended June 27, 1999 respectively, from 31.6% for
the comparable periods in 1998. These decreases are primarily attributable to a
slight shallowing of discounts, lower meat and box prices, and a higher
proportion of restaurants in New Markets. All of the Company's restaurants in
the domestic United States receive product from PJI, and each restaurant is
charged the same price for product, regardless of the location of the
restaurant. The Company's selling prices are higher in California, Oregon, and
Puerto Rico, thus cost of sales as a percentage of restaurant sales is lower.
Salaries and benefits, which consist of all store level employee wages,
taxes, and benefits increased as a percentage of restaurant sales to 28.2% and
28.0% for the three and six months ended June 27, 1999 respectively, from 26.6%
for the comparable periods in 1998. The increase in salaries and benefits as a
percentage of restaurant sales was primarily due to the increase in the
proportion of new and acquired restaurants in New Markets, and also a higher
minimum wage in California and Oregon.
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, pre-opening expenses and
advertising expenses. Other operating expenses increased as a percentage of
restaurant sales to 23.6% and 23.8% for the three and six months ended June 27,
1999 respectively, from 23.5% and 23.6% for the comparable periods in 1998.
These increases are primarily attributable to a higher proportion of newer
6
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restaurants (thus lower sales) and higher occupancy costs in New Markets,
partially offset by increased leverage of expenses as a result of comparable
store sales increases and increased purchasing power for various expenses.
Depreciation and amortization increased as a percentage of restaurant sales
to 3.3% for the three and six months ended June 27, 1999 respectively, from 2.9%
and 2.8% for the comparable periods in 1998. This increase is primarily
attributable to amortization of goodwill of acquired businesses in 1998 and a
higher proportion of newer restaurants in New Markets.
General and administrative expenses decreased slightly as a percentage of
restaurant sales to 4.9% and 5.0% for the three and six months ended June 27,
1999 respectively, from 5.2% and 5.1% for the comparable periods in 1998. This
decrease was primarily due to the leveraging of general and administrative
expenses as a result of increased sales, partially offset by additional
corporate infrastructure necessary to support current and future growth.
Other Income. Other income which consists primarily of investment income
decreased $.1 million and $.2 million for the three and six months ended June
27, 1999 respectively. The decrease in investment income is a result of a lower
investment balance due to the acquired businesses in 1998. Investment balances
are considered available to fund growth and acquisitions.
Liquidity and Capital Resources
The Company requires capital primarily for the development and acquisition
of new restaurants. Capital expenditures of approximately $5.2 million for the
six months ended June 27, 1999, were funded by maturity of investments and cash
flow from operations.
Cash flow from operations increased to $4.4 million for the six months
ended June 27, 1999 from $4.2 million for the comparable period in 1998.
Capital expenditures are expected to be approximately $9 million for 1999,
all of which is expected to be 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 June 27, 1999 include $17.2
million of cash and investments. The Company plans to fund its capital
expenditures through 1999 from available cash, investments, and cash generated
from operations. The Company has not sought and does not have any commitments
for any credit facilities.
Impact of Year 2000
Some of the Company's older purchased software programs were written using
two digits rather than four to define the applicable year. As a result, time-
sensitive software or hardware recognizes a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
resulting in disruptions of important administrative processes, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company has completed an
assessment of its computer systems and will have to modify or replace certain
software and hardware so that they will function properly in the year 2000 and
thereafter. Based on the Company's assessment or representations from software
suppliers, or both, the Company believes the total Year 2000 project cost will
be less than $25,000 and costs incurred to date have been less than $5,000.
Much of the cost related to Year 2000 coincides with existing management plans
to replace certain systems (principally the financial accounting system) in
order to accommodate the Company's planned growth. The Company expects
7
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the new accounting system to be implemented by September 1999. The timing of
implementation was not materially affected by Year 2000 concerns.
The Company believes that with the planned modifications to existing
software and/or conversions to new software and hardware as described above, the
Year 2000 issue will not pose significant operational problems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 issue could have a material impact on certain administrative
processes, but would not be expected to have a material impact on restaurant
operating processes.
The Company's payroll system interfaces directly with a significant third
party vendor. The Company has completed the testing and implementation of the
Year 2000 compliant software utilized to interface directly with this third
party vendor. The Company is in the process of querying its significant vendors
with respect to Year 2000 issues. Based on the responses received from vendors,
the Company is not aware of any vendors with a Year 2000 issue that would
materially impact results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that vendors will be Year 2000
ready. The inability of vendors to complete their Year 2000 resolution process
in a timely fashion could materially impact the Company, although the actual
impact of non-compliance by vendors is not determinable.
The Company has no contingency plans in place in the event it does not
complete all phases of its Year 2000 program. The Company plans to evaluate the
status of completion in August 1999 to determine whether such contingency plans
are necessary, although at this time the Company knows of no reason its Year
2000 program will not be completed in a timely manner.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 25, 1999 at
the Hyatt Regency, 320 West Jefferson Street, Louisville, Kentucky at 11:00 am
(EDT).
At the meeting, the Company's stockholders elected Michael M. Fleishman and
Martin T. Hart to serve as directors until the 2002 Annual Meeting of
Stockholders. Mr. Fleishman and Mr. Hart both received affirmative votes of 5.4
million and abstained votes of 123 thousand. The Company's other directors
continue to serve in accordance with their previous elections: through 2000 -
Stephen P. Langford and Charles W. Schnatter; and through 2001 - Richard F.
Sherman, Frank O. Keener and Douglas S. Stephens.
The Company's stockholders also ratified an amendment to the Company's 1996
Stock Ownership Incentive Plan by a vote of 4.1 million affirmative votes to 504
thousand negative and 4 thousand abstention votes.
The Company's stockholders also ratified the selection of Ernst & Young LLP
as the Company's independent auditors for the year ending December 26, 1999, by
a vote of 5.5 million affirmative votes to 3,200 abstention votes.
8
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11 Statement regarding Computation of Earnings per
Common Share
27 Financial Data Schedule which is submitted
electronically to the Securities and Exchange
Commission for information only and not deemed
to be filed with the Commission
</TABLE>
(b) Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarterly period
ended June 27, 1999.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PJ AMERICA, INC.
Date: July 23, 1999 /s/ D. Ross Davison
------------------------------------
D. Ross Davison
Vice President Administration, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
10
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EXHIBIT 11
Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Weighted average shares outstanding -
Basic 5,814 5,787 5,797 5,785
Shares issuable upon the exercise of
outstanding stock options and warrants 228 170 222 148
------ ------ ------ ------
Weighted average shares outstanding -
Diluted 6,042 5,957 6,019 5,933
====== ====== ====== ======
Income before cumulative effect of
change in accounting principle $1,620 $1,290 $3,095 $2,458
Cumulative effect of change in
accounting principle, net of taxes - - (181) -
------ ------ ------ ------
Net income $1,620 $1,290 $2,914 $2,458
====== ====== ====== ======
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.28 $ 0.22 $ 0.53 $ 0.42
Cumulative effect of accounting
change, net of taxes - - (0.03) -
------ ------ ------ ------
Net income per share - Basic $ 0.28 $ 0.22 $ 0.50 $ 0.42
====== ====== ====== ======
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.27 $ 0.22 $ 0.51 $ 0.41
Cumulative effect of accounting
change, net of taxes - - (0.03) -
------ ------ ------ ------
Net income per share - Diluted $ 0.27 $ 0.22 $ 0.48 $ 0.41
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
PJ America's consolidated financial statements for the three months ended June
27, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> MAR-29-1999
<PERIOD-END> JUN-27-1999
<CASH> 5,751
<SECURITIES> 11,497
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 551
<CURRENT-ASSETS> 14,145
<PP&E> 31,884
<DEPRECIATION> (6,459)
<TOTAL-ASSETS> 52,659
<CURRENT-LIABILITIES> 5,595
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 45,676
<TOTAL-LIABILITY-AND-EQUITY> 52,659
<SALES> 24,001
<TOTAL-REVENUES> 24,001
<CGS> 7,318
<TOTAL-COSTS> 20,533
<OTHER-EXPENSES> 1,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (156)
<INCOME-PRETAX> 2,455
<INCOME-TAX> 835
<INCOME-CONTINUING> 1,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,620
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>
