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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 26, 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)
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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
- --------------------------------------------------------------------------------
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. [ X ]
As of February 11, 2000, there were 5,420,961 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 $41,858,305 based on the last sale price of the Common Stock on February 11,
2000 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 20, 2000.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
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 7a. Qualitative and Quantitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
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
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. At December 26, 1999, the Company
operated 152 Papa John's restaurants in nine states and Puerto Rico. In late
1998, the Company opened its first restaurants in California, Oregon, Washington
and Puerto Rico, and acquired restaurants in Utah ("New Markets"). The Company
also opened a commissary in Puerto Rico in December 1998. The Company also has
restaurants in Alabama, Louisiana, Ohio, Texas and Virginia ("Core Markets"). In
1999, the Company opened 29 of its 35 restaurants in the New Markets. At
December 26, 1999, Papa John's International, Inc. ("PJI") and its franchisees
(including the Company) operated 2,278 Papa John's restaurants in 47 states, the
District of Columbia and internationally.
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, as well as soft
drinks. 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. The Company offers 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 ten regional commissaries across the United
States. 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. 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 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.
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In December 1998, the Company opened its own commissary in Puerto Rico to
service its Puerto Rico restaurants. The Company has been purchasing and
expects to be able to continue to purchase product from PJI suppliers under the
same terms and prices as PJI's commissaries.
The Company is leasing the building for the commissary, and the capital
investment for improvements and equipment was approximately $1.0 million.
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 2000, as the market penetration in its existing markets
(primarily New Markets) has increased.
Unit Economics
The Company believes its unit economics are exceptional. The 117
restaurants that were open throughout the entire 1999 fiscal year generated
average sales of $731,000, average cash flow (operating income plus
depreciation) of $142,000 (or 19.4% of average sales) and average restaurant
operating income of $119,000 (or 16.3% 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 35
restaurants opened during the 1999 fiscal year was approximately $275,000,
exclusive of land and pre-opening costs. The Company expects the average cash
investment for restaurants to be opened in 2000 to be similar to 1999 and
anticipates that the new restaurants to be opened in 2000 will primarily be in
the New Markets which are all less mature markets for Papa John's Pizza.
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
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efficiencies. During fiscal 1999, the Company opened 35 restaurants and sold
two restaurants. In 2000, the Company expects to open approximately 28-32
additional restaurants primarily in California, Oregon, Utah, and Puerto Rico.
As part of its overall growth strategy, the Company intends to supplement its
new restaurant development through acquisitions of existing Papa John's
franchisees.
The Company has entered into development agreements for all of its existing
markets. Pursuant to such agreements, the Company is required to open 21 and 26
restaurants in 2000 and 2001, respectively.
The Company also has a right of first refusal with a term of five years
beginning September 1, 1996 to acquire from an affiliate of the Company, the
operations and development rights for Papa John's restaurants in Iowa, including
the Moline and Rock Island, Illinois areas (but excluding the Council Bluffs
area of Iowa), in which 21 restaurants were open at December 26, 1999 and
development rights with respect to such territory provide that a total of 9
additional Papa John's restaurants will be opened through 2002. There are no
agreements, however, with respect to the Company's acquisition of such
territory, 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 territory 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 soft drinks. All Papa John's
original medium thick 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 savory spices
and a choice of high quality meat and vegetable toppings in generous portions.
Fresh onions, green peppers and mushrooms 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 focused menu helps create a strong identity among consumers
and simplifies operations, resulting in lower operating costs, improved food
quality and superior customer service. The Company offers a thin crust pizza in
all of its markets.
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Marketing Programs
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 anticipates expanding television advertising in 2000,
as the market penetration in its existing markets (primarily new markets) has
increased. 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 1999
were 7.4%. Advertising expenditures as a percentage of sales are higher in the
New Markets, primarily due to lower average sales volumes while brand awareness
and market penetration are being generated.
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 in 1999 was 1.0% of restaurant sales.
The Marketing Fund contribution in 2000 is currently 1.25% 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% 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 who 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.
The Company employs area supervisors, each of whom has responsibility for
overseeing four to six Company restaurants. The Company also employs regional
operations directors who oversee area supervisors and managers within their
respective markets.
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Training. The Company has full-time training coordinators in several of
it's Core and New 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 the Papa John's PROFIT System. 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 is able to
obtain current restaurant reporting information, thereby improving the speed,
accuracy and efficiency of restaurant-level reporting.
Reporting. Managers at restaurants prepare daily reports of sales, cash
deposits and operating costs. Physical inventories of all food and beverage
items are taken daily. The Company's area supervisors prepare weekly profit and
loss statements for each of the restaurants. The Company believes that the
PROFIT System helps 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.
Development and Franchise 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 in nine states and Puerto Rico.
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 payable with respect to
the Company's restaurants range between $10,000 and $20,000, depending upon the
date of execution of the development agreement. With respect to the Company's
recent executed development agreements (California, Oregon, Puerto Rico and
Utah), the Company expects to pay PJI's standard franchise fee (currently
$20,000) at the time the franchise agreement is entered into.
Under each of the Company's franchise agreements, the Company pays PJI a
royalty fee of 4% of sales, PJI's current standard royalty fee. Under such
agreements, PJI may increase the royalty fee to 5% of 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 currently in effect
for new PJI franchisees.
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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.
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.
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 Company restaurants are required to operate 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 daily, weekly and monthly sales and other operating
information from the Company. 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 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 and other
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resources than the Company. Such competitors include a large number of national
and regional restaurant chains, as well as local pizza restaurant operators.
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 business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased 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 Papa John's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or 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. The Federal government increased the Federal minimum
wage in September 1997. And, there is also current proposed legislation to
increase the Federal minimum wage by $1.00. The Company has restaurants in
California, Oregon and Washington that have higher minimum wages than the
Federal level. 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 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
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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.
The Company has entered into a development agreement for Papa John's
restaurants in 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," "Perfect Pizza Perfect Price," "Delivering the
Perfect Pizza!", "We Deliver Perfection," "The Official Pizza of Summer," and
"Pizza Papa John's Print Network." 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
At February 1, 2000, the Company had approximately 5,000 employees of which
approximately 4,200 were restaurant employees, approximately 770 were restaurant
management and supervisory personnel and approximately 30 were corporate
personnel. Most restaurant employees are part-time and are paid on an hourly
basis. None of the Company's employees are 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," "- Development and Franchise
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
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Company's infrastructure to support its operations and development plans, (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 overall
success of PJI, (v) 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 (vi) 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, (vii) increases
in operating costs such as inflation, increased food costs, increased labor and
employee benefit costs and the availability of qualified management and hourly
employees, (viii) the availability of capital to the Company, PJI and PJI's
franchisees and (ix) changes in governmental regulations, including further
increases in the minimum wage.
Item 2. Properties
At December 26, 1999, the Company operated 152 Papa John's restaurants.
<TABLE>
Number of
Restaurants
<S> <C>
Alabama 23
Louisiana 18
Ohio 9
Texas 8
Virginia 40
---
Core Markets 98
---
California 16
Oregon 11
Puerto Rico 4
Utah 21
Washington 2
---
New Markets 54
---
Total 152
===
</TABLE>
All but eight 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.
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The Company leases approximately 7,000 square feet of corporate and
operations support space collectively in various states. In December 1998, the
Company completed the construction of an office building in Alabama, which it
owns.
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.
The Company has estimated that it could incur costs of up to $1 million in
fiscal 2000 for the deployment and implementation of a new slogan, resulting
from the Pizza Hut litigation against Papa John's International, Inc. These
charges will be expensed as incurred, however the timing and magnitude of the
costs will depend on the outcome of the outstanding litigation, which is
currently under appeal.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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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 56 Chairman of the Board 1991
Douglas S. Stephens 36 President, Chief Executive Officer 1991
D. Ross Davison 38 Vice President Administration - Chief 1996
Financial Officer and Treasurer
James S. Riekel 40 Vice President - Regional Operations 1993
Robert W. Curtis, Jr. 35 Vice President - Regional Operations 1998
John D. Rose 46 Vice President - Real Estate & Development 1998
J. David Walker 30 Corporate Controller - Assistant Treasurer 1999
</TABLE>
Richard F. Sherman has served as a director and Chairman of the Board of
the Company or certain predecessors since 1991 and in 1999 he was elected a
member of the Executive Committee. 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., and Reed's Jewelers, Inc.
Douglas S. Stephens has served as a director, President and Chief Executive
Officer of the Company or certain predecessors since 1991 and in 1999 he was
elected a member of the Executive Committee. 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 Administration - Chief
Financial Officer and Treasurer of the Company since 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 - Regional Operations of the
Company or certain predecessors since 1992. From 1983 to 1992, Mr. Riekel was
with Domino's Pizza, Inc., where his most recent position was Regional
Operations Director.
Robert W. Curtis, Jr. was elected Vice President - Regional Operations of
the Company in 1998. Mr. Curtis served as Senior Operations Director of Alabama
from 1993 to 1998. Mr. Curtis has worked for Domino's Pizza (8 years) and Papa
John's International, Inc. (2 years).
11
<PAGE>
John D. Rose has served as Vice President - Real Estate and Development
since August 1998. From 1996 to 1998, Mr. Rose was Vice President of Real Estate
for Famous Dave's of America. From 1992 to 1996 Mr. Rose held various positions
in the real estate department of PJI.
J. David Walker has served as Corporate Controller since October, 1996. Mr.
Walker was elected Assistant Treasurer in 1999. From 1991 to 1996 Mr. Walker was
with Ernst & Young LLP. Mr. Walker is a licensed Certified Public Accountant.
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 February 7, 2000,
there were approximately 70 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:
<TABLE>
<CAPTION>
1999
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
First Quarter $23.50 $16.00
Second Quarter $25.00 $19.38
Third Quarter $25.63 $18.13
Fourth Quarter $21.63 $12.00
1998
Quarter Ended High Low
------------- ---- ---
First Quarter $18.63 $14.50
Second Quarter $21.50 $17.50
Third Quarter $21.38 $13.25
Fourth Quarter $20.50 $13.25
</TABLE>
Since its initial public offering of common stock in October 1996, the Company
has not paid dividends on its common stock, and has no plans to do so in the
foreseeable future.
13
<PAGE>
Item 6. Selected Financial Data (In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED (1)
-----------------------------------------------------------
(2)(3) (2)(3) (3)
Dec. 31, Dec. 29, Dec. 28, Dec. 27 Dec. 26,
1995 1996 1997 1998 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restraunt sales $ 16,744 $ 24,550 $ 48,128 $ 68,586 $ 95,489
Cost and expenses:
Cost of sales 5,630 8,064 15,251 22,153 29,285
Salaries and benefits 4,158 6,113 12,508 18,272 26,649
Other operating expenses 3,820 5,833 11,535 15,971 22,871
General and administrative expenses 887 1,402 2,558 3,466 4,811
Depreciation and amortization 393 628 1,302 2,078 3,243
Litigation compliance and asset impairment (4) - - - - 690
------------------------------------------------------------
Total costs and expenses 14,888 22,040 43,154 61,940 87,549
------------------------------------------------------------
Operating income 1,856 2,510 4,974 6,646 7,940
Other income (expense), net (78) 11 864 916 617
------------------------------------------------------------
Income before income taxes 1,778 2,521 5,838 7,562 8,557
Provision for income taxes 684 941 2,040 2,495 2,909
------------------------------------------------------------
Income before cumulative effect of change in
accounting principle $ 1,094 $ 1,580 $ 3,798 $ 5,067 $ 5,648
Cumulative effect of change in accounting
principle, net of tax - - - - (181)
------------------------------------------------------------
Net income $ 1,094 $ 1,580 $ 3,798 $ 5,067 $ 5,467
============================================================
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $ 0.52 $ 0.61 $ 0.71 $ 0.88 $ 0.98
Cumulative effect of accounting change, net of tax - - - - (0.03)
------------------------------------------------------------
Basic earnings per share $ 0.52 $ 0.61 $ 0.71 $ 0.88 $ 0.95
============================================================
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle $ 0.52 $ 0.61 $ 0.69 $ 0.86 $ 0.95
Cumulative effect of accounting change, net of tax - - - - (0.03)
------------------------------------------------------------
Diluted earnings per share $ 0.52 $ 0.61 $ 0.69 $ 0.86 $ 0.92
============================================================
Weighted average shares outstanding - Basic 2,120 2,583 $ 5,369 $ 5,777 $ 5,744
============================================================
Weighted average shares outstanding - Diluted 2,120 2,610 5,483 5,919 5,942
============================================================
Balance sheet data (end of period):
Total assets $ 3,628 $ 23,614 $ 40,283 $ 48,813 $ 47,937
Total debt, including current maturities 1,071 70 - - -
Stockholders' equity 1,885 21,518 36,807 41,746 41,538
</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 IPO.
(3) Net income reflects a pro forma provision for income taxes assuming the
Company's predecessors and OPD were C corporations rather than S
corporations.
(4) Litigation compliance and asset impairment relate to signage impairment for
re-imaging and reserve for asset impairment for restaurants. The charge net
of tax is $455,000, which is equivalent to 8 cents per share.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company is the largest franchisee of Papa John's pizza delivery and
carry-out restaurants. At December 26, 1999, the Company operated 152 Papa
John's restaurants in nine states and Puerto Rico.
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%
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 and which fee is typically 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 focuses 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 market-by-
market expansion 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 including franchise fees for the 35 restaurants
opened or acquired during 1999 was approximately $275,000, exclusive of land and
pre-opening costs. The Company expects the average cash investment for
restaurants opened in 2000 to be similar to 1999. The unit openings in 2000 will
primarily be in the New Markets.
The Company believes its expansion strategy has contributed to obtaining
higher average restaurant sales than the Papa John's franchise system. For
restaurants open throughout 1999, average sales were $731,000, compared to
average sales in 1998 of $774,000, with the restaurant base increasing 60% (from
73 restaurants to 117 restaurants).
15
<PAGE>
1999 Compared to 1998
Restaurant Sales. Restaurant sales increased 39% to $95.5 million in 1999,
from $68.6 million in 1998. This increase was primarily due to a 50.5% increase
in the number of equivalent restaurants open during 1999 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
2.3% in 1999 over 1998, for restaurants open throughout both years. The total
average unit sales decreased 7.2% from the comparable periods in 1998 due to the
significant increase in new and acquired restaurants in the Company's "New
Markets".
Costs and Expenses. Cost of sales, which consists of food, beverage, and
paper costs, increased $7.1 million, and decreased as a percentage of restaurant
sales to 30.7% in 1999 from 32.3% in 1998. This percentage decrease is primarily
attributable to significantly lower average cheese costs in the last quarter of
1999, partially offset by a slight shallowing of discounts, and a higher
proportion of units in New Markets. For fiscal 2000, the Company anticipates
cheese costs, the most volatile food cost, to be less volatile based on the
Company's participation in a franchisee-owned cheese cooperative. 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. In 1999, the Company's selling prices were higher
in California, Oregon, and Puerto Rico, thus cost of sales as a percentage of
restaurant sales was lower.
Salaries and benefits, which consist of all store level employee wages,
taxes and benefits, increased $8.4 million, and increased as a percentage of
restaurant sales to 27.9% in 1999 from 26.6% 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, Oregon and Washington.
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 $6.9 million, and increased as a percentage
of restaurant sales to 24.0% in 1999 compared to 23.3% in 1998. This percentage
increase is primarily attributable to a higher proportion of newer restaurants
(thus lower sales and less leverage) and higher occupancy costs in New Markets.
General and administrative expenses increased $1.4 million and decreased as
a percentage of restaurant sales to 5.0% in 1999 from 5.1% in 1998.
Depreciation and amortization increased by $1.2 million, and increased as a
percentage of restaurant sales to 3.4% in 1999 from 3.0% in 1998. The dollar
and percentage increases were primarily attributable to a higher proportion of
newer restaurants in New Markets (thus lower sales and less leverage), and
amortization of goodwill of acquired businesses in 1998.
Litigation compliance and asset impairment costs consists of $.3 million
related to signage and other costs for the re-imaging of the Papa John's slogan
and $.4 million related to asset impairment of restaurants. The Company has
estimated that the impact on fiscal 2000 related to the re-imaging of the Papa
John's slogan to be approximately $1 million; however the ultimate amount, if
any, is dependent
16
<PAGE>
on the outstanding litigation, which is under appeal. The Company does not
anticipate any changes in fiscal 2000 related to the assumptions used in
determining the asset impairment charge.
Other Income. Other income which consists primarily of investment income
decreased $.3 million from 1998. The decrease in investment income is a result
of a lower investment balance due to the acquired businesses in 1998 and the
Company's stock repurchases in 1999.
1998 Compared to 1997
Restaurant Sales. Restaurant sales increased 43% to $68.6 million in 1998,
from $48.1 million in 1997. This increase was primarily due to a 47% increase
in the number of equivalent restaurants open during 1998 as compared to 1997.
Also, comparable sales increased 4.5% in 1998 over 1997, for restaurants open
throughout both years.
Costs and Expenses. Cost of sales, which consists of food, beverage, and
paper costs, increased $6.9 million, and increased as a percentage of restaurant
sales to 32.3% in 1998 from 31.7% in 1997. This percentage increase is
primarily attributable to significantly higher average cheese costs in the
second half of 1998, partially offset by a slight shallowing of discounts.
Salaries and benefits, which consist of all store level employee wages,
taxes and benefits, increased $5.8 million, and increased as a percentage of
restaurant sales to 26.6% in 1998 from 26.0% in 1997. The percentage increase
was primarily due to the increase in the minimum wage in September 1997, and a
higher proportion of new restaurant openings in 1998.
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 $4.4 million, and decreased as a percentage
of restaurant sales to 23.3% in 1998 compared to 24.0% in 1997. This percentage
decrease is primarily due to increased leverage of advertising expenses, mileage
reimbursement and insurance expense, partially offset by higher occupancy and
other operating expenses for newer restaurants.
General and administrative expenses increased $.9 million and decreased as
a percentage of restaurant sales to 5.1% in 1998 from 5.3% in 1997.
Depreciation and amortization increased by $.8 million, and increased
slightly as a percentage of restaurant sales to 3.0% in 1998 from 2.7% in 1997.
The dollar and percentage increases were primarily due to goodwill amortization
of acquired restaurants in late 1997 and 1998, and the higher proportion of new
restaurant openings.
Other Income. Other income, consisting primarily of investment income, was
consistent at $.9 million.
17
<PAGE>
Liquidity and Capital Resources
The Company requires capital primarily for the development and acquisition
of new restaurants. Total capital expenditures (which include franchise and
development fees) for 1999 were approximately $11.1 million, primarily for the
opening of restaurants and existing restaurant improvements.
Cash provided by operating activities was $9.5 million, $8.1 million, and
$6.5 million in 1999, 1998, and 1997, respectively. The increases are primarily
the result of higher net income and depreciation and amortization.
The Company has financed its operations principally from cash provided by
operating activities and proceeds from stock offerings. The Company received net
proceeds of $12.2 million from a stock offering in July 1997, which were used to
fund capital expenditures or were held in various investments.
The Company also may repurchase its common stock from time to time. In
November 1999, the Company's Board authorized an additional $5.0 million stock
buyback, for a total authorization of $10 million. Through 1999, the Company had
repurchased 527,000 shares for a total of $8.3 million. At December 26, 1999,
approximately $1.7 million remained on the buyback authorization.
In January 2000, the Company's Board authorized an additional $5.0 million
stock buyback, bringing the total authorization to date to $15 million.
Capital expenditures are expected to be approximately $9.0 million for
2000, 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 December 26, 1999 include $9.6
million of cash and investments. The Company plans to fund its capital
expenditures through 2000 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 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.
Impact of Year 2000
The Company is now Year 2000 compliant and there were no adverse events that
occurred and no contingency plans were required to be implemented relating to
the Year 2000 problem at year-end 1999. The Company spent approximately $10,000
in the year 1999 for its year 2000 readiness efforts. These expenses included
replacing some outdated, non-compliant hardware and non-compliant software as
well as identifying and remediating known Year 2000 problems. The Company does
not anticipate any future exposure related to the year 2000 issue.
18
<PAGE>
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to market risks relating to fluctuations in commodity
prices. The Company's objective of financial risk management is to minimize the
negative impact of commodity price fluctuations on earnings, cash flows and
equity. To manage these risks, the Company uses derivative financial instruments
consisting of commodity futures contracts. The Company strictly uses commonly
traded instruments entered into with reputable institutions on national
exchanges, thereby minimizing the risk of credit loss.
The availability and price of dairy products, such as cheese, is subject to wide
fluctuations due to unpredictable factors such as weather conditions,
governmental regulations, economic climate or other unforeseen circumstances. To
reduce price risk caused by market fluctuations, the Company enters into BFP
milk futures contracts to hedge prices on varying proportions of its cheese
needs, thereby minimizing the risk of decreased margins from cheese price
increases. The fair value of the Company's position is the fair value calculated
by valuing its net position at quoted future prices. Market risk is estimated as
the potential loss in fair value resulting from a hypothetical 10% adverse
change in such prices. The potential loss in fair value of the Company's futures
contracts position at December 26, 1999 from a hypothetical 10% decrease in BFP
milk futures prices was $100,000.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following table sets forth the percentage relationship to restaurant sales
for certain income statement data for the Company:
<TABLE>
<CAPTION>
For the Years Ended (1)
----------------------------------------
Dec. 28, Dec. 27, Dec. 26,
1997(2) 1998 1999
---------------------------------------
<S> <C> <C> <C>
Restaurant sales 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales 31.7 32.3 30.7
Salaries and benefits 26.0 26.6 27.9
Other operating expenses 24.0 23.3 24.0
General and administrative expenses 5.3 5.1 5.0
Depreciation and amortization 2.7 3.0 3.4
Litigation compliance and asset impairment - - 0.7
--------------------------------------
Total costs and expenses 89.7 90.3 91.7
--------------------------------------
Operating income 10.3 9.7 8.3
Other income 1.8 1.3 0.7
--------------------------------------
Income before income taxes and cumulative effect of
change in accounting principle 12.1 11.0 9.0
Income tax expense 4.2 3.6 3.1
--------------------------------------
Income before cumulative effect of change in
accounting principle 7.9 7.4 5.9
Cumulative effect of accounting change, net of tax - - (0.2)
--------------------------------------
Net income 7.9% 7.4% 5.7%
======================================
Restaurant data - the Company: 1997 1998 1999
--------------------------------------
Percentage change in comparable restaurant sales 6.9% 4.5% 2.3%
Average sales for restaurants open for
full year (in thousands) $ 773 $ 774 $ 731
======================================
Number of restaurants:
Beginning of year 46 73 119
Opened 11 25 35
Acquired 16 21 -
Sold - - (2)
--------------------------------------
End of year 73 119 152
======================================
</TABLE>
(1) The Company operates on a 52-53 week year ending on the last Sunday in
December each year. All years presented are 52 week years.
(2) Net income reflects a pro forma provision for income taxes assuming the
Company's predecessors and OPD were C corporations rather than S
corporations for each period.
20
<PAGE>
Index to Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
Audited Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 27, 1998 and December 26, 1999............. 22
Consolidated Statements of Income for the Years Ended December 28, 1997,
December 27, 1998 and December 26, 1999 ............................................ 23
Consolidated Statements of Stockholders' Equity for the Years Ended
December 28, 1997, December 27, 1998 and December 26, 1999.......................... 24
Consolidated Statements of Cash Flows for the Years Ended December 28, 1997,
December 27, 1998 and December 26, 1999............................................. 25
Notes to Consolidated Financial Statements............................................ 26
Report of Management.................................................................. 40
Report of Independent Auditors........................................................ 41
</TABLE>
21
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dec. 27, Dec. 26,
(In thousands, except per share data) 1998 1999
--------------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 5,026 $ 2,648
Inventories 549 910
Prepaid expenses and other 264 420
Investments 8,305 2,879
Deferred income taxes 151 294
--------------------------
Total current assets 14,295 7,151
Investments 5,041 4,050
Net property and equipment 21,146 28,187
Deferred franchise and development costs, net of
accumulated amortization of $248 in 1998 and
$410 in 1999 3,546 3,854
Goodwill, net of accumulated amortization of
$132 in 1998 and $295 in 1999 4,576 4,413
Other assets 209 282
--------------------------
Total assets $48,813 $47,937
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 508 $ 583
Accounts payable - PJI 1,345 -
Accrued expenses 4,263 4,325
--------------------------
Total current liabilities 6,116 4,908
Deferred income taxes 951 1,491
Stockholders' equity:
Preferred stock ($1.00 par value per share;
authorized 1,000 shares, no shares issued
and outstanding) - -
Common stock ($.01 par value per share; authorized
20,000 shares; issued and outstanding shares of
5,772 in 1998 and 5,416 in 1999) 58 54
Additional paid-in-capital 32,565 31,675
Retained earnings 9,123 9,809
--------------------------
Total stockholders' equity 41,746 41,538
--------------------------
Total liabilities and stockholders' equity $48,813 $47,937
==========================
(See accompanying notes)
22
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------
Dec. 28, Dec. 27, Dec. 26,
1997 1998 1999
---------------------------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Restaurant sales $ 48,128 $ 68,586 $ 95,489
Restaurant operating expenses:
Cost of sales 15,251 22,153 29,285
Salaries and benefits 12,508 18,272 26,649
Other operating expenses 11,535 15,971 22,871
Depreciation and amortization 1,302 2,078 3,243
---------------------------------
40,596 58,474 82,048
---------------------------------
Restaurant operating income 7,532 10,112 13,441
General and administrative expenses 2,558 3,466 4,811
Litigation compliance and asset impairment - - 690
---------------------------------
Operating income 4,974 6,646 7,940
Other income 864 916 617
---------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 5,838 7,562 8,557
Income tax expense 1,943 2,495 2,909
---------------------------------
Income before cumulative effect of change
in accounting principle 3,895 5,067 5,648
Cumulative effect of change in accounting
principle, net of taxes - - (181)
---------------------------------
Net income $ 3,895 $ 5,067 $ 5,467
=================================
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.71 $ 0.88 $ 0.98
Cumulative effect of accounting change,
net of taxes - - (.03)
---------------------------------
Net income per share - Basic $ 0.71 $ 0.88 $ 0.95
=================================
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ 0.69 $ 0.86 $ 0.95
Cumulative effect of accounting change
net of taxes - - (.03)
---------------------------------
Net income per share - Diluted $ 0.69 $ 0.86 $ 0.92
=================================
Weighted average shares outstanding - Basic 5,369 5,777 5,744
=================================
Weighted average shares outstanding - Diluted 5,483 5,919 5,942
=================================
</TABLE>
23
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------- Additional Total
Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance, December 29, 1996 5,032 $ 50 $ 20,029 $ 1,439 $ 21,518
Net income - - - 3,895 3,895
S corporation distributions - OPD - - - (782) (782)
Issuance of common stock
(net of issuance costs) 750 8 12,168 - 12,176
---------------------------------------------------------
Balance, December 28, 1997 5,782 58 32,197 4,552 36,807
Net income - - - 5,067 5,067
Proceeds from exercise of stock options 45 - 675 - 675
Repurchases of common stock (retired) (55) - (307) (496) (803)
---------------------------------------------------------
Balance, December 27, 1998 5,772 58 32,565 9,123 41,746
Net income - - - 5,467 5,467
Proceeds from exercise of stock options 116 1 1,841 - 1,842
Repurchases of common stock (retired) (472) (5) (2,731) (4,781) (7,517)
---------------------------------------------------------
Balance, December 26, 1999 5,416 $ 54 $ 31,675 $ 9,809 $ 41,538
=========================================================
</TABLE>
(See accompanying notes)
24
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the Years Ended
----------------------------------
Dec 28, Dec 27, Dec 26,
1997 1998 1999
----------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,895 $ 5,067 $ 5,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,302 2,078 3,243
Litigation compliance and asset impairment - - 690
Deferred income taxes 453 380 397
Changes in operating assets and liabilities:
Inventories (82) (140) (361)
Prepaid expenses and other 8 31 (156)
Accounts payable 336 (127) 75
Accrued expenses 654 402 259
Other - 362 -
Other assets (35) 53 (73)
--------------------------------
Net cash provided by operating activities 6,531 8,106 9,541
Investing Activities:
Purchases of property, equipment, franchise and
development fees (4,462) (10,005) (11,119)
Purchase of investments (50,550) (36,154) (45,130)
Proceeds from maturity of investments 41,376 44,040 51,547
Acquisitions (1,621) (9,049) -
--------------------------------
Net cash used in investing activities (15,257) (11,168) (4,702)
Financing Activities:
Proceeds from (payments on) PJI borrowings - 1,345 (1,345)
Proceeds from issuance of common stock 12,176 - -
Proceeds from exercise of stock options - 675 1,842
Repurchases of common stock - (803) (7,517)
Payments on bank borrowings (70) - -
Issuance of stockholder notes - 197 (197)
Distributions paid - S Corporation (782) - -
--------------------------------
Net cash provided by (used in) financing activities 11,324 1,414 (7,217)
--------------------------------
Net increase (decrease) in cash and cash equivalents 2,598 (1,648) (2,378)
Cash and cash equivalents at beginning of year 4,076 6,674 5,026
--------------------------------
Cash and cash equivalents at end of year $ 6,674 $ 5,026 $ 2,648
================================
</TABLE>
(See accompanying notes)
25
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
Basis of Presentation
The accompanying 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.
Description of Business
The Company operates pizza delivery and carry-out restaurants under the
trademark "Papa John's" in nine states and Puerto Rico. At December 26, 1999,
the Company operated 152 restaurants.
2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the last Sunday in December of each year.
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.
26
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Significant Accounting Policies (continued)
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 ten years for restaurant, commissary, and other equipment,
20 to 25 years for restaurant buildings and improvements, and 40 years for the
Company's office building. 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.
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 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 other income.
Development and Franchise Fees
Development fees paid by the Company to PJI (or for the acquisition of
another franchisee territory) 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 (0.80% to 1.0% of restaurant sales). Such amounts are expensed
as incurred and were approximately $3.5 million, $4.6 million and $7.1 million
in 1997, 1998 and 1999, respectively, and are included in other operating
expenses in the consolidated statements of income.
27
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of cost over fair value of assets acquired
and is being amortized over 20-30 years using the straight-line method. The
Company reviews the carrying value of goodwill if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable based upon the undiscounted expected future cash flows over the
remaining amortization periods, the Company's carrying value of goodwill is
reduced by the excess of the carrying value over the fair value of the entity
acquired.
Stock-Based Compensation
The Company follows the provisions of Accounting Principles Board Opinion
(APB) No. 25 for its stock-based compensation awards (see Note 12).
Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." 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.
Pre-Opening Costs - Restaurants
Restaurant pre-opening costs, which represent certain expenses incurred
before a restaurant opens, are expensed as incurred.
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.
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding (Basic) and common stock equivalents during the period
(Diluted).
28
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Significant Accounting Policies (continued)
Reclassifications
Certain amounts in the 1997 and 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation.
Hedging Policy
In the third quarter of 1999, the Company began to hedge its exposure to
fluctuations in cheese costs by purchasing commodity futures contracts. Cheese
costs represent approximately 40% of the Company's cost of sales and has been
extremely volatile over the past two years. All positions the Company has taken
in derivative contracts have qualified for hedge accounting in accordance with
the criteria established by FAS Statement 80, "Accounting for Futures
Contracts." Upon entering a derivative contract, the Company uses this criteria
to evaluate the correlation of risk protection provided by a derivative contract
to the risk created by market fluctuations to ensure hedge accounting is
appropriate for the contract. Accordingly, gains and losses related to
qualifying hedges of anticipated transactions are deferred and recognized as an
adjustment to the carrying amount of the underlying asset or liability when the
anticipated transaction occurs.
Any resulting gains or losses from early termination of a derivative
designated as a hedge are deferred and recognized in income or as an adjustment
of the carrying amount of the underlying asset or liability when the hedged
transaction occurs. Any gains or losses that result when the designated item is
extinguished, such as maturity, sale, or termination, or when the hedged
transaction is no longer likely to occur, are included in income in the period
in which the extinguishment takes place or it is known that the hedged
anticipated transaction will not occur.
Long-Lived Assets
In accordance with Financial Accounting Standards Board (FASB) Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, impairment losses are to be recorded on long-lived
assets used in operations and intangible assets when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of.
3. Stock Offerings and Repurchases
In July 1997, the Company completed an offering of its common stock,
pursuant to which the Company sold 750,000 shares of its common stock at $17.75
per share. Net proceeds of the offering (after deducting the underwriting
discount of $.7 million and expenses of $.4 million) were $12.2 million.
29
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Stock Offerings and Repurchases (continued)
In November 1999, the Board of Directors authorized the Company to purchase
an additional $5 million of its common stock in both open market purchases as
well as private transactions. This brought the total authorization to $10
million. As of December 26, 1999, the Company had repurchased and immediately
retired 527,000 shares at various prices totaling $8.3 million.
4. Business Combinations
In May 1998, the Company acquired a 22-restaurant Papa John's territory in
Southern Louisiana, which included nine existing restaurants, five restaurants
under development, and development rights for eight additional restaurants. The
purchase price was $4.3 million in cash and a short term note payable to
sellers, plus the assumption of $1.4 million of debt, which was immediately
retired. The above acquisition was with certain Company directors and officers,
including the Chairman of the Board and Chief Executive Officer.
In September 1998, the Company acquired a 30-restaurant Papa John's
territory in Utah, which included 12 existing restaurants and development rights
for 18 additional restaurants. The purchase price was $.8 million in cash plus
the assumption of $2.5 million of debt, which was immediately retired. The above
acquisition was with certain Company directors and officers, including the
Chairman of the Board and Chief Executive Officer.
The above business combinations were accounted for by the purchase method
of accounting, whereby operating results subsequent to the acquisition date have
been included in the Company's consolidated financial statements.
The following represents the unaudited pro forma results of operations for
the years ended December 28, 1997 and December 27, 1998 as if the acquisitions
had occurred at the beginning of fiscal 1997.
<TABLE>
<CAPTION>
(In Thousands, except per share amounts)
1997 1998
<S> <C> <C>
Restaurant sales $55,495 $74,534
=======================
Income before income taxes $ 5,113 $ 7,220
=======================
Pro forma net income $ 3,435 $ 4,850
=======================
Pro forma net income per share:
Basic $ .64 $ .84
=======================
Diluted $ .63 $ .82
=======================
Weighted average shares outstanding:
Basic 5,369 5,777
=======================
Diluted 5,483 5,919
=======================
</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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Business Combinations (continued)
On June 5, 1997, PJAM Acquisition Subsidiary, a subsidiary of PJ America,
Inc., merged with OPD, based in Akron, Ohio, in a transaction accounted for as a
pooling of interests. Pursuant to the Agreement and Plan of Merger, dated as of
May 30, 1997, PJAM Acquisition Subsidiary was merged into OPD, with OPD
surviving the merger as a wholly-owned subsidiary of PJ America, Inc. Pursuant
to a fixed formula price, the OPD shareholders received 276,610 shares of the
Company's common stock in exchange for 100% of the common stock of OPD. The
total value of the transaction was approximately $4.6 million, based upon the
conversion value of $16.50 per common share agreed upon on May 20, 1997.
Pro forma information for the year ended December 28, 1997 has been
presented as if OPD had been treated as a C corporation rather than a S
corporation, with assumed effective income tax rates of 41%.
During 1997, the Company purchased the assets of eight Papa John's
restaurants from other franchisees for total cash consideration of $1.6 million.
5. Investments
A summary of the Company's held-to-maturity securities, principally
corporate debt securities and municipal bonds, as of December 26, 1999 and
December 27, 1998 follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Holding Gains Holding Losses Fair Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $ 6,929 $ - $(49) $ 6,880
=================================================================
1998 $13,346 $106 $ - $13,452
=================================================================
</TABLE>
Approximately 40% of the Company's held-to-maturity securities at December 26,
1999 will mature within one year with the remainder maturing between one and
three years.
6. Net Property and Equipment
<TABLE>
<CAPTION>
Net property and equipment consists of the following (in thousands):
December 27, December 26,
1998 1999
--------------------------------
<S> <C> <C>
Land $ 1,276 $ 1,276
Building and leasehold improvements 12,776 18,066
Commissary and restaurant equipment 11,991 16,691
Construction in process 167 648
--------------------------------
26,210 36,681
(5,064) (8,494)
Less accumulated depreciation --------------------------------
Net property and equipment $21,146 $28,187
================================
</TABLE>
31
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Net Property and Equipment (continued)
Based on a review of the Company's restaurants which had incurred operating
losses or had negative cash flow during 1999, the Company determined that two of
its restaurants had assets which were impaired. In accordance with SFAS 121, the
Company has written down these assets to their salvage value.
The asset impairment charge related to restaurants to be sold or closed was
$.4 million and is included under the caption litigation compliance and asset
impairment in the consolidated statements of income. The Company intends to
close or sell these restaurants and the underlying assets during fiscal 2000.
For fiscal 1999, these restaurants had revenues of $.7 million and reported
operating losses before interest and taxes of approximately $.2 million.
7. Accrued Expenses
<TABLE>
<CAPTION>
Accrued expenses consists of the following (in thousands):
1998 1999
-------------------------
<S> <C> <C>
Salaries and wages $ 854 $ 782
Taxes, other than income 668 655
Advertising and royalties 400 396
Shareholder notes payable 197 -
Other 2,144 2,492
-------------------------
$4,263 $4,325
=========================
</TABLE>
8. Income Taxes
<TABLE>
<CAPTION>
A summary of income tax expense is as follows (in thousands):
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current
Federal $1,372 $1,925 $2,283
State and local 118 190 229
Deferred (federal and state) 453 380 397
---------------------------------
Income tax expense $1,943 $2,495 $2,909
=================================
</TABLE>
32
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Income Taxes (continued)
Net deferred tax assets (liabilities) as of December 27, 1998 and December
26, 1999 are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets - nondeductible reserves
and accruals $ 151 $ 294
NOL carry forward - international and state - 176
Deferred tax liabilities - accelerated
depreciation (951) (1,667)
-------------------
Net deferred tax liabilities (800) $(1,197)
===================
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax expense at U.S. federal statutory rates $1,985 $2,571 $2,909
Increases (decreases) resulting from:
Income tax expense from operations of OPD prior to
termination of S corporation status (125) - -
State and local income taxes - net 129 125 151
Tax exempt interest income (115) (242) (135)
Other 69 41 (16)
------------------------------------
Income tax expense $1,943 $2,495 $2,909
====================================
</TABLE>
Income tax payments amounted to $1.5 million, $1.8 million and $1.8 million in
1997, 1998, and 1999, respectively.
Concurrent with the acquisition of OPD (See Note 4), OPD terminated their
status as an S corporation on June 5, 1997. OPD was previously only subject to
local income taxes. The differences between OPD's tax basis and financial
reporting basis were immaterial.
33
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Related Party Transactions
Franchisor
Under the terms of area development agreements between the Company and PJI,
the Company paid development fees ranging from $3,500 to $5,000 per restaurant.
Franchise fees ranging from $1,150 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 1.0% 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 has 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.
In connection with the Company's Initial Public 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 and the
waiver of rights of first refusal of certain affiliated franchisees. 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.
Affiliate Market
Certain officers and directors of the Company own equity interests in other
entities that franchise Papa John's restaurants. The Company has obtained a
right of first refusal to acquire franchise and development rights for PJ Iowa,
LLC. However, there is no agreement or understanding between the Company and
these entities or stockholders to acquire such entities or their assets.
Stockholders
Notes payable to shareholders at December 27, 1998, of approximately
$200,000 relates to the acquisition of the Southern Louisiana market, and
carried interest at 5.5%. This note was paid in full during 1999.
As noted in Note 4, certain acquisitions have been made between the Company
and certain Company directors and officers.
34
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Leases
The Company primarily leases restaurant 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 (in thousands):
2000 3,015
2001 2,651
2002 2,310
2003 1,768
2004 967
Thereafter 1,649
----------
$12,360
==========
Rent expense was approximately $.9 million, $1.5 million and $2.4 million
in 1997, 1998, and 1999, respectively.
12. Stock Options
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance
with SFAS 123, the Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company awards stock options under the PJ America, Inc. 1996 Stock
Ownership Incentive Plan (the "Incentive Plan") and the PJ America, Inc. 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Shares of
common stock authorized for issuance are 1,000,000 under the Incentive Plan and
160,000 under the Directors' Plan. In October 1999, the Board of Directors'
amended the Directors' Plan to 240,000 shares. The amendment will be submitted
for stockholder approval at the Annual Meeting of Shareholders on June 20, 2000.
Options granted under both plans generally expire ten years from the date of
grant and vest over one to four year periods.
The Incentive Plan also provides for awards of restricted stock, however
the Company has not granted any such awards.
35
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Stock Options (continued)
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options granted subsequent
to December 25, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998, and 1997, respectively: risk-free interest rates of 6.0%; a dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of .93, .49, and .48, respectively; and a weighted-average expected life
of the options of 3.5, 4.0 and 4.0 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair market value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands, except per share amounts):
1997 1998 1999
- ----------------------------------------------------------------
Pro forma net income $3,440 $4,475 $4,464
Pro forma earnings per share - Basic 0.64 0.77 0.78
Pro forma earnings per share - Diluted 0.63 0.75 0.75
36
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Stock Options (continued)
Information pertaining to options for 1997, 1998 and 1999 is as follows
(number of options in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Outstanding - beginning
of year 336 $12.50 540 $13.15 858 $13.50
Granted 223 14.18 429 13.95 266 16.38
Exercised - - (45) 13.21 (116) 13.39
Cancelled (19) 15.42 (66) 13.82 (42) 13.82
- --------------------------------------------------------------------------------------------------------------
Outstanding - end of year 540 $13.15 858 $13.50 966 $14.27
==============================================================================================================
Exercisable - end of year 83 $12.50 229 $13.47 342 $13.41
==============================================================================================================
Weighted-average fair value of
options granted during the
year $6.29 $6.24 $10.35
==============================================================================================================
Weighted-average contractual
life 9.4 8.2 8.7
==============================================================================================================
</TABLE>
At December 26, 1999, approximately 47,000 shares were available for future
issuance under the Incentive Plan. Contingent upon approval by the Company's
stockholders of the amendment to the Directors' Plan described above, 66,000
shares were available at December 26, 1999 for future issuance under the
Directors' Plan.
The following table sets forth the reconciliation of basic and diluted
weighted average shares outstanding for 1997 through 1999:
<TABLE>
<CAPTION>
(In thousands) 1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Weighted-average shares outstanding - Basic 5,369 5,777 5,744
Shares issuable upon the exercise of outstanding
stock options and warrants 114 142 198
==========================================
Weighted-average shares outstanding - Diluted 5,483 5,919 5,942
==========================================
</TABLE>
37
<PAGE>
PJ AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Quarterly Data (Unaudited) in thousands, except per share data
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------------------------------
1998 1999 1998 1999 1998 1999 1998 1999(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant sales $14,218 $21,855 $16,499 $24,001 $17,789 $24,425 $20,080 $25,207
Operating income 1,471 2,066 1,684 2,299 1,685 1,960 1,807 1,614
Income before cumulative
effect of change in
accounting principle 1,168 1,475 1,290 1,620 1,270 1,403 1,339 1,150
Cumulative effect of
accounting change,
net of tax - (181) - - - - - -
-------------------------------------------------------------------------
Net income 1,168 1,294 1,290 1,620 1,270 1,403 1,339 1,150
=========================================================================
Income per share before
cumulative effect of
accounting change -
Basic .20 .26 .22 .28 .22 .24 .23 .20
Cumulative effect of
accounting change, net
of tax - (.03) - - - - - -
-------------------------------------------------------------------------
Net income per share -
Basic .20 (.23) .22 .28 .22 .24 .23 .20
=========================================================================
Income per share before
cumulative effect of
accounting change -
Diluted .20 .25 .22 .27 .22 .23 .23 .20
Cumulative effect of
accounting change, net
of taxes - (.03) - - - - - -
-------------------------------------------------------------------------
Net income .20 .22 .22 .27 .22 .23 .23 .20
=========================================================================
</TABLE>
(1) The fourth quarter of 1999 includes a non-recurring charge of $690,000
pretax, and $455,000 net of tax, which is equivalent to 8 cents per share.
14. Derivative Financial Instruments
The Company periodically uses futures contracts, which are common
derivative financial instruments, to hedge its exposure to fluctuations in
cheese costs. In using these instruments, the Company is subject to the off-
balance-sheet credit risk that the counterparties of the transactions will fail
to perform as contracted. The Company manages this risk by only entering into
contracts with highly rated institutions and listed exchanges. The Company does
not hold or issue derivative financial instruments for the purpose of trading.
38
<PAGE>
The Company recognized losses related to futures contracts of $.3 million during
fiscal 1999. These losses are included in cost of sales in the consolidated
statements of income. The Company had open futures contracts at December 26,
1999, with notional amounts of approximately $1 million to hedge anticipated
cheese purchases in 2000. These futures contracts were in a net unrealized loss
position of approximately $.1 million at December 26, 1999.
39
<PAGE>
Report of Management
The consolidated financial statements appearing in this Annual Report have
been prepared by management, which is responsible for their preparation,
integrity and fair presentation. The statements have been prepared in accordance
with generally accepted accounting principles and necessarily include some
amounts that are based on management's best estimates and judgments.
Management is responsible for the system of internal controls over
financial reporting at PJ America, Inc. and its subsidiaries, a system designed
to provide reasonable assurance regarding the preparation of reliable published
financial statements. This system is augmented by written policies and
procedures and the selection and training of qualified personnel. Management
believes that the Company's system of internal controls over financial reporting
provides reasonable assurance that the financial records are reliable for
preparing financial statements.
The Audit Committee of the Board of Directors meets with the independent
auditors and management periodically to discuss internal controls over financial
reporting and other auditing and financial reporting matters. The Committee
reviews with the independent auditors the scope and results of the audit effort.
The Committee also meets with the independent auditors without management
present to ensure that the independent auditors have free access to the
Committee. The independent auditors are recommended by the Audit Committee of
the Board of Directors and selected by the Board of Directors. Based upon their
audit of the consolidated financial statements, the independent auditors, Ernst
& Young LLP, have issued their Report of Independent Auditors, which follows.
/s/ Douglas S. Stephens /s/ D. Ross Davison
- --------------------------- -------------------------------------
Douglas S. Stephens D. Ross Davison
President and C.E.O. Vice President Administration, C.F.O.
and Treasurer
40
<PAGE>
ERNST & YOUNG LLP,
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PJ America, Inc.
We have audited the accompanying consolidated balance sheets of PJ America,
Inc. and Subsidiaries as of December 27, 1998 and December 26, 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 28, 1997, December 27, 1998 and December 26, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Subsidiaries, at December 27, 1998 and December 26, 1999, and the
consolidated results of their operations and their cash flows for the years
ended December 28, 1997, December 27, 1998 and December 26, 1999 in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 1999
the Company changed its method of accounting for the costs of start-up
activities.
/s/ Ernst & Young LLP
_____________________
Birmingham, Alabama
February 3, 2000
41
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
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.
42
<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
Subsidiaries and the reports of management and independent auditors are
included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of December 27, 1998 and
December 26, 1999................................................ 22
Consolidated Statements of Income for the Years Ended
December 28, 1997 December 27, 1998 and December 26, 1999........ 23
Consolidated Statements of Stockholders' Equity for the Years Ended
December 28, 1997, December 27, 1998 and December 26, 1999....... 24
Consolidated Statements of Cash Flows for the Years Ended
December 28, 1997 December 27, 1998 and December 26, 1999........ 25
Notes to Consolidated Financial Statements............................ 26
Report of Management.................................................. 40
Report of Independent Auditors........................................ 41
</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 Statements 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.
43
<PAGE>
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.
10.10 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.
10.11(a) First Amendment to the Alabama Development Agreement. Exhibit 10.11(a)
to the Company's Registration Statement on Form S-1 (Commission File
No. 333-11253) is hereby incorporated by reference.
10.11(b) Second Amendment to the Alabama Development Agreement. Exhibit
10.11(b) to the Company's Registration Statement on Form S-1
(Commission File No. 333-11253) is hereby incorporated by reference.
10.11(c) Third Amendment to the Alabama Development Agreement. Exhibit 10.11(c)
to the Company's Registration Statement on Form S-1 (Commission File
No. 333-11253) is hereby incorporated 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.
10.17(a) First Amendment to the Virginia Development Agreement. Exhibit
10.17(a) to the Company's Registration Statement on Form S-1
(Commission File No. 333-11253) is hereby incorporated by reference.
10.17(b) Second Amendment to the Virginia Development Agreement. Exhibit
10.17(b) to the Company's Registration Statement on Form S-1
(Commission File No. 333-11253) is hereby incorporated by reference.
10.17(c) Third Amendment to the Virginia Development Agreement. Exhibit
10.17(c) to the Company's Registration Statement on Form S-1
(Commission File No. 333-11253) is hereby incorporated by reference.
10.17(d) Fourth Amendment to the Virginia Development Agreement. Exhibit
10.17(d) to the Company's Registration Statement on Form S-1
(Commission File No. 333-11253) is hereby incorporated 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.
44
<PAGE>
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.
10.25 Agreement and Plan of Merger among PJ America, Inc., PJAM Acquisition
Subsidiary, Inc., OPD Co., Roger P. Tennyson, Mary Ann Tennyson, Brian
J. Tennyson, Jeanne K. Tennyson, John H. Schnatter, Charles Schnatter
and Dan Holland dated May 30, 1997. Exhibit 2.1 to the Company's Form
8-K dated June 19, 1997, is hereby incorporated by reference.
10.26 PJ America, Inc. Registration Rights Agreement dated June 5, 1997
relating to the Agreement and Plan of Merger (OPD transaction).
Exhibit 10.1 to the Company's Form 8-K dated June 19, 1997, is hereby
incorporated by reference.
10.30 Development Agreement relating to development of 60 restaurants in
California.
10.31 Commissary License Agreement relating to the Company's agreement to
operate a commissary in Puerto Rico.
10.32 Development Agreement relating to development of 20 restaurants in
Puerto Rico.
10.33 Development Agreement relating to development of 36 restaurants in
Portland, Oregon, and surrounding areas.
10.34 Stock Purchase Agreement among PJ America, Inc., PJ Louisiana, Inc.
and Douglas S. Stephens, Robert W. Curtis, Jr., Michael M. Fleishman,
Merida Sherman, Nicholas Sherman, Richard F. Sherman, Frank O. Keener,
and Stephen P. Langford dated May 13, 1998.
10.35 Purchase Agreement among PJ America, Inc., Ohio Pizza Delivery Co.,
Inc., PJ Utah, LLC, and Members dated September 3, 1998.
21 Subsidiaries of the Company:
(a) PJ Cheese, Inc. an Alabama corporation
(b) Ohio Pizza Delivery Co., Inc. an Ohio corporation
(c) PJ Louisiana, LLC, a Louisiana limited liability corporation
(d) PJ Utah, LLC, a Utah limited liability corporation
(e) Pizza Caribe, Inc. a Puerto Rico corporation
23 Consent of Ernst & Young LLP, Independent Auditors
45
<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: February 18, 2000 PJ AMERICA, INC.
By: /s/ Douglas S. Stephens
------------------------------
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
- --------- -----
/s/ Richard F. Sherman Chairman of the Board February 18, 2000
- -------------------------
Richard F. Sherman
/s/ Douglas S. Stephens Chief Executive Officer, February 18, 2000
- ------------------------- President and Director
Douglas S. Stephens
/s/ D. Ross Davison Vice President Administration February 18, 2000
- ------------------------- Chief Financial Officer and
D. Ross Davison Treasurer (Chief Financial and
Accounting Officer)
/s/ Michael M. Fleishman Director February 18, 2000
- -------------------------
Michael M. Fleishman
/s/ Martin T. Hart Director February 18, 2000
- -------------------------
Martin T. Hart
/s/ Frank O. Keener Director February 18, 2000
- -------------------------
Frank O. Keener
/s/ Stephen P. Langford Director February 18, 2000
- -------------------------
Stephen P. Langford
/s/ Charles W. Schnatter Director February 18, 2000
- -------------------------
Charles W. Schnatter
46
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-32055 and 333-32057) pertaining to the PJ America, Inc., 1996
Stock Ownership Incentive Plan and Non-Employee Directors 1996 Incentive Plan of
our report dated February 3, 2000, with respect to the consolidated financial
statements of PJ America, Inc. included in the Annual Report (Form 10-K) for the
fiscal year ended December 26, 1999.
/s/ Ernst & Young LLP
---------------------
Birmingham, Alabama
February 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from PJ
America's consolidated financial statements for the year ended December 26, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 2,648
<SECURITIES> 6,929
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 910
<CURRENT-ASSETS> 7,151
<PP&E> 36,681
<DEPRECIATION> (8,494)
<TOTAL-ASSETS> 47,937
<CURRENT-LIABILITIES> 4,908
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 41,484
<TOTAL-LIABILITY-AND-EQUITY> 47,937
<SALES> 95,489
<TOTAL-REVENUES> 95,489
<CGS> 29,285
<TOTAL-COSTS> 82,048
<OTHER-EXPENSES> 4,811
<LOSS-PROVISION> 690
<INTEREST-EXPENSE> (617)
<INCOME-PRETAX> 8,557
<INCOME-TAX> 2,909
<INCOME-CONTINUING> 5,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (181)
<NET-INCOME> 5,467
<EPS-BASIC> .95
<EPS-DILUTED> .92
</TABLE>
