<PAGE>
File Pursuant to Rule 424(b)(1)
Registration No. 333-02729
1,000,000 SHARES
LOGO
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Papa
John's International, Inc. (the "Company"). The Common Stock is traded on the
Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol
"PZZA." On May 1, 1996, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $47.25 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $47.25 $2.48 $44.77
Total(3)................................... $47,250,000 $2,480,000 $44,770,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $200,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 138,500 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $53,794,125, the Underwriting Discount will
total $2,823,480 and the Proceeds to Company will total $50,970,645. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters named herein when,
as and if delivered to and accepted by the Underwriters and subject to their
right to reject any order in whole or in part. It is expected that delivery of
certificates representing the shares will be made against payment therefor at
the office of Montgomery Securities on or about May 7, 1996.
----------------
Montgomery Securities Alex. Brown & Sons
Incorporated
May 1, 1996
<PAGE>
[PHOTO OF "FREE-STANDING PAPA JOHN'S RESTAURANT"]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company with the Commission can be inspected and
copied, at the prescribed rates, at the public reference facilities of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Commission at prescribed rates by addressing written
requests to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Company's Common Stock is traded on the
Nasdaq National Market. Reports, proxy statements and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form S-
3 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. The Registration Statement may be inspected, and copied at
prescribed rates, at the Commission's public reference facilities at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each
contract, agreement or other document, reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference into this Prospectus:
(1) Annual Report on Form 10-K for the fiscal year ended December 31,
1995;
(2) Form 10-C dated March 27, 1996; and
(3) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, effective as of June 8, 1993,
including any amendment filed for the purpose of updating such information.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
respective dates of the filing of such documents. See "Available Information."
Any statement or information contained in a document incorporated or deemed to
be incorporated herein by reference shall be deemed modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this Prospectus
is delivered, upon written or oral request, a copy of any or all of the
documents incorporated herein by reference (other than exhibits to such
documents not specifically incorporated by reference). Requests should be
directed to Papa John's International, Inc., P.O. Box 99900, Louisville,
Kentucky 40269-9990, (502) 266-5200, Attention: E. Drucilla Milby, Senior Vice
President, Chief Financial Officer and Treasurer.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements and financial data appearing elsewhere in
this Prospectus or incorporated by reference herein. Unless otherwise noted,
all information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. Unless the context requires otherwise, all references to
the "Company" in this Prospectus include Papa John's International, Inc. and
its subsidiaries. All share and per share data in this Prospectus have been
adjusted to reflect a 3-for-2 stock split effected in the form of a 50% stock
dividend effective March 25, 1996 for stockholders of record on March 12, 1996.
THE COMPANY
The Company operates and franchises pizza delivery and carry-out restaurants
under its primary trademark "Papa John's" in 25 states, principally in the
Midwest, Mid-Atlantic, South and Southeast. The first Company-owned restaurant
opened in 1985 and the first franchised restaurant opened in 1986. The Papa
John's system has grown from 110 restaurants at the end of fiscal 1991 to 932
restaurants at March 31, 1996, consisting of 230 Company-owned and 702
franchised restaurants.
Papa John's restaurants offer a focused menu of high quality, value-priced
pizza, breadsticks and cheesesticks. Papa John's original, medium thick crust
is made from fresh dough (never frozen) produced in the Company'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. This focused menu and use of quality ingredients enables Papa John's
to concentrate on consistently "Delivering the Perfect Pizza!"(TM). Papa John's
restaurants are typically 1,200 to 1,500 square feet in size and are located in
strip shopping centers or free-standing buildings which provide visibility,
curb appeal and accessibility.
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. The key elements of this strategy include a
focused menu of high quality pizza and related items, an efficient operating
and distribution system, a commitment to employee training and development,
targeted, cost-effective marketing and the development of a strong franchise
system.
The Company believes its unit economics have been significantly better than
most restaurant concepts. During the 53 weeks ended December 31, 1995, the 133
Company-owned restaurants that were open throughout the year generated average
revenues of $657,000, average cash flow (operating income plus depreciation) of
$114,000 and average restaurant operating income of $93,000 (or 14.1% of
revenues). A significant number of these restaurants were opened in new
markets. Sales and profitability in the initial months of operations at the
Company's restaurants, particularly in new markets, historically have been
lower than mature restaurants. The average cash investment for the 61 Company-
owned restaurants opened during the year ended December 31, 1995 was
approximately $205,000, exclusive of land and pre-opening costs. The Company
opened a greater number of free-standing restaurants with increased signage
during 1994 and 1995 and expects to continue this strategy. The Company expects
the average cash investment for its restaurants opened in 1996 to approximate
1995 costs, although there can be no assurance that these costs will not
increase. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Restaurant Design and Site Selection."
The Company's commissary system supplies pizza dough, food products and paper
products twice weekly to each Company-owned and franchised restaurant in the
system. This commissary system enables the Company to closely monitor and
control product quality and consistency, while lowering food costs. The Company
operates full-service commissaries in Louisville, Kentucky, Raleigh, North
Carolina, Jackson, Mississippi and Orlando, Florida. The Company opened a
distribution center in Dallas, Texas during the first quarter of 1996 and
expects to open an additional full-service commissary in Denver, Colorado
during the second quarter of 1996. The Company also intends to open either a
distribution center or full-service commissary in Phoenix, Arizona during the
first quarter of 1997. In addition, the Company expects to begin construction
in mid-1996 of a new full-service commissary with additional dough capacity and
corporate office space in Louisville, Kentucky, for occupancy in mid-1997. The
Company provides its franchisees assistance with restaurant design and a
complete equipment package for new restaurants. This provides franchisees with
a convenient, cost-effective means of opening restaurants while ensuring a
consistent restaurant appearance throughout the system.
The Company's expansion strategy focuses on clustering restaurants in
targeted markets, thereby increasing consumer awareness and enabling the
Company to take advantage of operational, distribution and advertising
efficiencies. The Company believes these factors have contributed to increases
in comparable annual sales for Company-owned restaurants of 10.9%, 13.8% and
9.0% during 1993, 1994 and 1995, respectively. During 1995, the Company opened
61 restaurants and acquired 23 restaurants from its franchisees, and its
franchisees opened 190 restaurants. The Company plans to open 60 restaurants
and anticipates that its franchisees will open 215 restaurants in 1996, of
which 13 Company-owned and 43 franchised restaurants were opened during the
first quarter ending March 31, 1996.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company. 1,000,000 shares
Common Stock to be outstanding after 18,875,322 shares(1)
the offering.......................
Use of proceeds..................... To fund restaurant and commissary
expansion, construct office facilities, to
fund a franchise loan program and for
general corporate purposes.
Nasdaq National Market Symbol....... PZZA
</TABLE>
- -------
(1) Excludes 1,238,844 shares of Common Stock issuable upon the exercise of
stock options as of March 31, 1996.
SUMMARY CONSOLIDATED FINANCIAL AND RESTAURANT DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
------------------------------------------------
DEC. 31, DEC. 27, DEC. 26, DEC. 25, DEC. 31,
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues................. $23,735 $49,628 $89,233 $161,535 $253,355
Operating income............... 853 3,126 6,067 10,064 15,819
Income before income taxes..... 768 3,112 6,314 11,382 17,729
Net income..................... 742 3,072 4,919 7,200 11,204
Net income per share........... $ 0.46 $ 0.67
Weighted average shares
outstanding................... 15,683 16,759
PRO FORMA INCOME STATEMENT
DATA(2):
Operating income............... $ 3,999 $ 6,222
Income before income taxes..... 3,985 6,468
Net income..................... 2,510 4,075
Net income per share........... $ 0.20 $ 0.30
Weighted average shares
outstanding................... 12,525 13,461
RESTAURANT DATA:
Percentage change in
comparable Company-owned
restaurant sales(3)........... 23.3% 11.9% 10.9% 13.8% 9.0%
Average sales for Company-
owned restaurants open for
full period................... $ 548 $ 607 $ 653 $ 663 $ 657
Number of restaurants open at
end of period:
Company-owned................. 26 39 76 133 217
Franchised.................... 84 181 324 499 661
------- ------- ------- -------- --------
Total........................ 110 220 400 632 878
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $128,819 $173,389
Total debt, including current maturities.............. 2,510 2,510
Stockholders' equity.................................. 106,282 150,851
</TABLE>
- -------
(1) Effective January 1, 1992, the Company adopted a change in accounting
period from a 12-month fiscal year ending December 31 of each year to a 52-
53 week fiscal year ending on the last Sunday of December of each year. The
1995 fiscal year consisted of 53 weeks, and the 1994, 1993 and 1992 fiscal
years consisted of 52 weeks.
(2) Reflects the effect on the historical income statement data for the fiscal
years ended December 27, 1992 and December 26, 1993, assuming that (i) the
Company had been treated as a C corporation rather than an S corporation
for income tax purposes, with assumed combined federal, state and local
effective income tax rates aggregating 37% and (ii) the Company's
compensation program for the top three executive officers that was adopted
during 1993 had been in effect for all relevant periods which would have
reduced compensation expense by $872,788 and $154,412 for the fiscal years
ended December 27, 1992 and December 26, 1993, respectively. Information
for years prior to 1992 is not meaningful.
(3) Includes only Company-owned restaurants open throughout the periods being
compared.
(4) Adjusted to reflect the sale of the 1,000,000 shares of Common Stock by the
Company in this offering and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
UNAUDITED FIRST QUARTER 1996 RESULTS
Total revenues for the quarter ended March 31, 1996 were $76.7 million,
representing a 47.5% increase over revenues of $52.0 million for the same
period in 1995. Net income for the quarter ended March 31, 1996 was $3.5
million, or $0.20 per share, as compared to $2.2 million, or $0.14 per share,
for the first quarter of 1995.
Comparable store sales for the quarter ended March 31, 1996 reflected
increases of 8.6% for Company-owned restaurants and 5.1% for franchised
restaurants. During the quarter, 13 Company-owned and 43 franchised restaurants
were opened.
5
<PAGE>
THE COMPANY
The Company operates and franchises pizza delivery and carry-out restaurants
under the trademark "Papa John's" in 25 states, principally in the Midwest,
Mid-Atlantic, South and Southeast. The first Company-owned restaurant opened in
1985 and the first franchised restaurant opened in 1986. The Papa John's system
has grown from 110 restaurants at the end of fiscal 1991 to 932 restaurants at
March 31, 1996, consisting of 230 Company-owned and 702 franchised restaurants.
The Company was organized as an Indiana corporation in 1985 and was
reincorporated in Delaware in November 1991. The Company's principal executive
offices are located at 11492 Bluegrass Parkway, Suite 175, Louisville, Kentucky
40299-2334, and its telephone number is (502) 266-5200.
RISK FACTORS
In addition to the other information contained elsewhere in this Prospectus,
or incorporated herein by reference, prospective investors should consider the
following factors in evaluating an investment in the Common Stock offered
hereby:
EXPANSION
The Company has grown rapidly in recent periods and intends to continue to
pursue an aggressive growth strategy. The 60 Company-owned and 215 franchised
restaurants expected to be opened in the fiscal year ended December 31, 1996
(of which 13 Company-owned and 43 franchised restaurants had been opened
through March 31, 1996) represent the largest number of restaurants opened in
any fiscal year. The Company plans to open 65 to 70 restaurants and anticipates
that its franchisees will open 220 to 230 restaurants in 1997. There can be no
assurance that either the Company or its franchisees will be able to open the
number of restaurants planned to be opened by them or that such restaurants
will be opened on schedule. In the course of its expansion, the Company will
enter new geographic regions in which it has no previous operating experience.
The Company's continued growth will depend upon the ability of the Company
and its franchisees to open and operate additional restaurants profitably and
the Company's continued ability to attract and retain qualified franchisees.
The opening of new restaurants, both by the Company and franchisees, will
depend on a number of factors, many of which are beyond the control of the
Company and its franchisees. These factors include, among other things,
selection and availability of suitable locations, negotiation of acceptable
lease or financing terms, timely construction of restaurants, securing of
required governmental permits and approvals and employment and training of
qualified personnel. Opening of additional franchised restaurants will depend,
in part, upon the ability of existing and future franchisees to obtain
financing or investment capital adequate to meet their market development
obligations. The Company opened a distribution center in Dallas, Texas during
the first quarter of 1996 and expects to open an additional full-service
commissary in Denver, Colorado during the second quarter of 1996. The Company
also intends to open either a distribution center or full-service commissary in
Phoenix, Arizona during the first quarter of 1997. The ability of the Company
and its franchisees to expand into new geographic regions is dependent upon the
Company's ability to open and successfully operate additional commissaries and
distribution centers. There can be no assurance that the Company or its
franchisees will be successful in maintaining their levels of recent growth in
opening the number of restaurants anticipated, or that new restaurants opened
by the Company or its franchisees will be operated profitably. See "Business--
Expansion."
RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is highly competitive and is affected by changes in
consumer tastes, as well as national, regional and local economic conditions
and demographic trends. The performance of individual restaurants can be
affected by changes in traffic patterns, demographics and the type, number and
location of competing restaurants. The quick-service restaurant industry is
extremely competitive with respect to price, service, location and food
quality. The Company and its franchisees compete with a variety of other
restaurants in the quick-service restaurant industry, including those that
offer dine-in, carry-out and delivery services. These competitors include
national and regional chains, franchisees of other restaurant chains and
6
<PAGE>
local owner-operated restaurants. Many competitors have been in existence
longer and have a more established market presence and substantially greater
financial, marketing and other resources than the Company and its franchisees.
The Company competes for qualified franchisees with many other business
concepts, including national and regional restaurant chains. See "Business--
Competition."
A risk to the Company, as with other companies which offer delivery services,
is the potential for claims resulting from traffic accidents involving its
delivery personnel. The Company does not have, and has not in the past offered,
guaranteed delivery times nor does the Company penalize its drivers for late
deliveries. In addition, the Company believes that it promotes safety among its
delivery personnel through various measures, including conducting an education
and safety program for delivery personnel, checking driving records of delivery
personnel, limiting store delivery areas and offering safe driving awards. The
Company maintains excess liability coverage on its delivery drivers in an
amount believed by management to be adequate. However, a change in the cost or
availability of such insurance, or the incurrence of a significant number of
claims or liability in excess of policy limits, could adversely affect the
Company.
LIMITED OPERATING HISTORY
The Company opened its first restaurant in 1985 and has experienced rapid
growth in Company-owned and franchised restaurant openings, revenues and level
of operations. At December 31, 1995, 120 of the 217 Company-owned restaurants
(55.3%) and 359 of the 661 franchised restaurants (54.3%) had been open less
than two years. Consequently, operating results achieved to date may not be
indicative of the results that may be achieved by any existing or new
restaurants in the future. The Company has a limited operating history upon
which investors may evaluate the Company's performance and, although the
Company has been profitable since 1988, there can be no assurance that the
Company will be able to sustain profitability in the future.
DEPENDENCE UPON KEY PERSONNEL
Management of the Company is dependent on the continuing services of John
Schnatter, the Company's Founder, Chairman and Chief Executive Officer, and
other key personnel. The loss of the services of Mr. Schnatter or other key
personnel could have a material adverse effect on the Company's business.
INCREASES IN OPERATING COSTS; AVAILABILITY OF SUPPLIES
An increase in operating costs could adversely affect profitability of the
Company. Factors such as inflation, increased food costs, increased labor and
employee benefit costs and the availability of qualified management and hourly
employees may adversely affect operating costs. The Company currently purchases
all of its cheese, which represents approximately 40% of food costs, from one
supplier. However, the Company believes that alternative sources for the supply
of cheese are readily available. Cheese, as well as other commodities, are
subject to seasonal fluctuations, weather, demand and other factors. Most of
the factors affecting costs are beyond the control of the Company. The Company
maintains property, casualty and liability insurance on its business and
employees, including excess liability coverage on its delivery drivers.
Management believes its insurance coverages are adequate; however, a change in
the cost or availability of such insurance, or the incurrence of a significant
number of claims or liability in excess of policy limits, could adversely
affect the Company. In addition, the dependence on frequent deliveries of food
supplies, such as dough, cheese, pizza sauce and other products, to Company-
owned and franchised restaurants could subject those restaurants to shortages
or interruptions which could also adversely affect the Company.
CONTROL BY OFFICERS AND DIRECTORS
John Schnatter, the Company's Founder, Chairman and Chief Executive Officer,
will own 33.3% of the outstanding Common Stock after this offering. As a
result, Mr. Schnatter will have substantial control over matters requiring
approval by the stockholders of the Company, including the election of
directors. The Company's officers and directors will, in the aggregate,
beneficially own approximately 36.0% of the outstanding Common Stock after this
offering, including shares subject to currently exercisable options.
7
<PAGE>
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation ("Restated
Certificate") authorizes the issuance of one or more series of Preferred Stock,
the terms of which may be fixed by the Board of Directors. Additionally, the
Restated Certificate provides for a classified Board of Directors and limits
the ability of stockholders to call special meetings or to amend the Company's
Restated Certificate or By-Laws. The Restated Certificate also requires, among
other things, that certain business combinations be approved by either a
majority of the continuing directors or disinterested stockholders holding 75%
of the voting securities of the Company. Each of these provisions, as well as
the Delaware business combination statute to which the Company is subject,
could have the effect of delaying or preventing a change in control of the
Company.
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and building and zoning requirements. Also, the Company and its
franchisees are subject to laws governing their relationship with employees,
including minimum wage requirements, overtime, working conditions and
citizenship requirements. The Company is also subject to federal regulation and
certain state laws which govern the offer and sale of franchises. Many state
franchise laws impose substantive requirements on the franchise agreement,
including limitations on non-competition provisions and termination or non-
renewal of a franchise. Some states require that certain materials be
registered before franchises can be offered or sold in that state. Bills have
been introduced in Congress (one of which is now pending) which provide for
federal regulation of substantive aspects of the franchisor-franchisee
relationship. As proposed, such legislation would 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 failure to obtain or retain food
licenses or approvals to sell franchises, or an increase in the minimum wage
rate, employee benefit costs or other costs associated with employees, could
adversely affect the Company and its franchisees. Some states have set minimum
wage requirements higher than the federal level, and there are currently bi-
partisan proposals in Congress to increase the federal minimum wage. At the
federal level, there have also been proposals to introduce a system of mandated
health insurance. These and other initiatives, if implemented, could adversely
affect the Company as well as the restaurant industry in general. See
"Business--Government Regulation."
STOCK PRICE VOLATILITY
The Company's Common Stock has been quoted on the Nasdaq National Market tier
of the Nasdaq Stock Market since June 8, 1993, and has experienced significant
price volatility since such date. Quarterly operating results of the Company or
other restaurant companies, changes in general conditions in the economy, the
restaurant industry, or the financial markets, or other developments affecting
the Company, its competitors or the financial markets, could cause the market
price of the Common Stock to fluctuate significantly. In addition, the stock
market has recently experienced extreme price and volume fluctuations. These
broad market fluctuations may adversely affect the market price of the Common
Stock. See "Price Range of Common Stock."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered hereby at a public offering price of $47.25 per share are
estimated to be $44,570,000 ($50,770,645 if the Underwriters' over-allotment
option is exercised in full). The net proceeds of the offering will be used
primarily for the development of additional Company-owned restaurants,
commissaries and distribution centers, the construction of corporate office
facilities and to fund the implementation of a loan program for franchisees.
The Company plans to open 47 restaurants during the final three quarters of
1996 and 65 to 70 restaurants in 1997. The Company expects to open a full-
service commissary in Denver, Colorado during the second quarter of 1996 and
either a distribution center or full-service commissary in Phoenix, Arizona
during the first quarter of 1997. The Company expects to begin construction in
mid-1996 of a new full-service commissary with additional dough capacity and
corporate office space in Louisville, Kentucky. During each of 1996 and 1997,
the Company expects to fund approximately $6 to $8 million in loans to selected
franchisees under a recently adopted loan program. However, the amounts
actually provided during 1996 and 1997 may vary as the Company gains experience
with the loan program. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Properties" and "Business--Franchise Program--Franchisee Loan
Program."
A portion of the net proceeds of the offering also may be used to acquire
restaurants from franchisees. Although the Company considers acquiring
franchised restaurants from time to time, the Company does not have any pending
agreements or arrangements for such acquisitions at the date of this
Prospectus. The remaining net proceeds will be used for general corporate
purposes. Pending such uses, the Company plans to invest the net proceeds in
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company intends to retain any future earnings for use in its business and
does not intend to pay cash dividends on the Common Stock in the foreseeable
future. The payment of future dividends, if any, will be at the discretion of
the Company's Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements, restrictions in future
financing agreements, the general financial condition of the Company and
general business conditions.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq National Market tier
of The Nasdaq Stock Market on June 8, 1993 under the trading symbol "PZZA." As
of March 31, 1996, there were approximately 450 record holders of Common Stock,
although the Company believes that the number of beneficial owners of its
Common Stock is substantially greater. The table below sets forth for the
calendar quarters indicated the reported high and low sale prices of the
Company's Common Stock, as reported on the Nasdaq National Market. All sale
prices have been adjusted to reflect a 3-for-2 stock split, effected in the
form of a 50% stock dividend, effective March 25, 1996 for stockholders of
record on March 12, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1994
First quarter............................................. $ 22.17 $16.50
Second quarter............................................ 20.00 14.00
Third quarter............................................. 19.67 15.83
Fourth quarter............................................ 21.67 16.00
1995
First quarter............................................. $ 25.00 $18.33
Second quarter............................................ 25.50 21.00
Third quarter............................................. 33.34 23.00
Fourth quarter............................................ 31.75 23.67
1996
First quarter............................................. $ 44.75 $25.21
Second quarter (through May 1, 1996)...................... $ 50.00 38.50
</TABLE>
9
<PAGE>
On May 1, 1996, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $47.25.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as of
December 31, 1995, and as adjusted to give effect to the issuance and sale by
the Company of 1,000,000 shares of Common Stock in this offering at a public
offering price of $47.25 per share and the application of the net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
the financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus or incorporated by reference herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term debt.......................................... $ -- $ --
======== ========
Long-term debt, including current maturities............. $ 2,510 $ 2,510
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 authorized;
no shares outstanding................................. -- --
Common stock, $.01 par value, 35,000,000 shares
authorized; 17,845,758 shares outstanding; 18,845,758
shares outstanding, as adjusted(1).................... 178 188
Additional paid-in capital............................. 88,133 132,692
Unrealized loss on investments (net)................... (263) (263)
Deferred compensation (net)............................ (4) (4)
Retained earnings...................................... 18,842 18,842
Reacquired treasury stock.............................. (604) (604)
-------- --------
Total stockholders' equity............................. 106,282 150,851
-------- --------
Total capitalization................................. $108,792 $153,361
======== ========
</TABLE>
- --------
(1) Excludes at December 31, 1995 (a) options to purchase 1,150,205 shares of
Common Stock, (b) 1,349,636 shares available for issuance under the
Company's 1993 Stock Ownership Incentive Plan (subject to stockholder
approval of an amendment increasing the number of shares reserved for
issuance under the plan to 2,325,000) and (c) 91,500 shares available for
issuance under the Company's 1993 Stock Option Plan for Non-Employee
Directors.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected consolidated financial data of Papa
John's International, Inc. and its subsidiaries. The selected consolidated
income statement and balance sheet data of the Company are derived from the
Company's Consolidated Financial Statements which have been audited by Ernst &
Young LLP, independent auditors. The pro forma consolidated income statement
data for the fiscal years ended December 27, 1992 and December 26, 1993, set
forth below, are unaudited.
The Selected Consolidated Financial Data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and related Notes and other financial information included
elsewhere in this Prospectus or incorporated by reference herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-----------------------------------------------
DEC. 31, DEC. 27, DEC. 26, DEC. 25, DEC. 31,
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales................. $11,916 $20,033 $32,505 $ 66,267 $111,747
Franchise royalties.............. 891 2,481 5,290 9,163 13,561
Franchise and development fees... 659 1,374 2,379 3,274 3,508
Commissary sales................. 7,608 20,684 41,013 67,515 105,874
Equipment and other sales........ 2,661 5,056 8,046 15,316 18,665
------- ------- ------- -------- --------
Total revenues................. 23,735 49,628 89,233 161,535 253,355
Costs and expenses:
Restaurant expenses:
Cost of sales.................... 3,209 5,561 9,334 19,095 31,703
Salaries and benefits............ 3,266 5,321 8,855 18,168 29,946
Advertising and related costs.... 941 1,559 2,452 5,887 10,513
Occupancy costs.................. 461 766 1,357 3,358 5,896
Other operating expenses......... 1,734 2,617 4,872 10,011 14,913
------- ------- ------- -------- --------
9,611 15,824 26,870 56,519 92,971
Commissary, equipment and other
expenses:
Cost of sales.................... 8,621 21,702 41,571 68,745 101,342
Salaries and benefits............ 570 884 1,966 3,956 7,072
Other operating expenses......... 673 1,836 3,307 4,881 7,577
------- ------- ------- -------- --------
9,864 24,422 46,844 77,582 115,991
General and administrative
expenses......................... 3,034 5,494 7,601 12,266 19,954
Depreciation...................... 316 721 1,435 3,367 5,776
Amortization...................... 57 41 416 1,737 2,844
------- ------- ------- -------- --------
Total costs and expenses....... 22,882 46,502 83,166 151,471 237,536
------- ------- ------- -------- --------
Operating income.................. 853 3,126 6,067 10,064 15,819
Other income (expense):
Investment income................ 13 67 247 1,156 1,659
Interest expense................. (112) (100) (35) -- --
Other, net....................... 14 19 35 162 251
------- ------- ------- -------- --------
Income before income taxes........ 768 3,112 6,314 11,382 17,729
Income tax expense................ 26 40 1,395 4,182 6,525
------- ------- ------- -------- --------
Net income........................ $ 742 $ 3,072 $ 4,919 $ 7,200 $ 11,204
======= ======= ======= ======== ========
Net income per share.............. $ 0.46 $ 0.67
Weighted average shares
outstanding...................... 15,683 16,759
PRO FORMA INCOME STATEMENT
DATA(2):
Operating income.................. $ 3,999 $ 6,222
Income before income taxes........ 3,985 6,468
Income tax expense................ 1,475 2,393
------- -------
Net income........................ $ 2,510 $ 4,075
======= =======
Net income per share.............. $ 0.20 $ 0.30
Weighted average shares
outstanding...................... 12,525 13,461
BALANCE SHEET DATA (END OF
PERIOD):
Total assets...................... $ 5,291 $ 7,852 $27,789 $ 76,173 $128,819
Total debt, including current
maturities....................... 1,431 1,161 0 1,279 2,510
Stockholders' equity.............. 1,045 2,418 19,269 62,609 106,282
</TABLE>
Notes on following page.
11
<PAGE>
- --------
(1) Effective January 1, 1992, the Company adopted a change in accounting
period from a 12-month fiscal year ending December 31 of each year to a 52-
53 week fiscal year ending on the last Sunday of December of each year. The
1995 fiscal year consisted of 53 weeks, and the 1994, 1993 and 1992 fiscal
years consisted of 52 weeks.
(2) Reflects the effect on the historical income statement data for the fiscal
years ended December 27, 1992 and December 26, 1993, assuming that (i) the
Company had been treated as a C corporation rather than an S corporation
for income tax purposes, with assumed combined federal, state and local
effective income tax rates aggregating 37% and (ii) the Company's
compensation program for the top three executive officers that was adopted
during 1993 had been in effect for all relevant periods which would have
reduced compensation expense by $872,788 and $154,412 for the fiscal years
ended December 27, 1992 and December 26, 1993, respectively. Information
for years prior to 1992 is not meaningful.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company began operations in 1985 with the opening of its first Papa
John's restaurant in Jeffersonville, Indiana. At March 31, 1996, there were 932
Papa John's restaurants in operation, consisting of 230 Company-owned and 702
franchised restaurants. The Company's revenues are derived from sales by
Company-owned restaurants, franchise royalties, franchise and development fees,
sales of food and paper products to franchisees, and sales of restaurant
equipment and printing and promotional items principally to franchisees.
The Company intends to continue to expand the number of Company-owned and
franchised restaurants. The Company's expansion strategy is to cluster
restaurants in targeted markets, thereby increasing consumer awareness and
enabling the Company to take advantage of operational, distribution and
advertising efficiencies. The Company believes that its expansion strategy has
contributed to increases in comparable annual sales for Company-owned
restaurants of 9.0% in 1995, 13.8% in 1994 and 10.9% in 1993. The Company
anticipates that future comparable sales increases, if any, will be at a lesser
rate than in recent periods. Average sales for Company-owned restaurants open a
full year decreased to $657,000 for 1995 from $663,000 for 1994, principally
due to the Company's entry into several new markets beginning in 1994. Average
sales volumes in new markets are generally lower than those markets in which
the Company has established a significant market position.
Approximately 49% of the Company's revenues for 1995 and 51% for 1994 were
derived from the sale of food and paper products, restaurant equipment and
printing and promotional items to franchisees by the Company's commissary
subsidiary, PJ Food Service, Inc., and the Company's support services
subsidiary, Printing & Promotions, Inc. The Company believes that, in addition
to supporting both Company and franchised growth, these subsidiaries contribute
to product quality and consistency throughout the Papa John's system.
The Company continually strives to obtain high quality sites with greater
access and visibility, and to enhance the appearance and quality of its
restaurants. The Company believes that these factors improve Papa John's image
and brand awareness. During 1994 and 1995, the Company pursued a greater number
of free-standing locations and expects to continue this strategy in 1996.
The average cash investment for the 61 restaurants opened during 1995,
exclusive of land and pre-opening costs, increased to approximately $205,000
from $146,000 for the 53 units opened in 1994. This increase was primarily due
to higher average costs of free-standing units, increased signage and leasehold
improvement costs and hardware and related costs associated with point of sale
technology installed in substantially all Company-owned restaurants opened in
1995. Sales at free-standing restaurants generally exceed sales at in-line
restaurants. During their first 13 weeks of operations, the 20 free-standing
restaurants opened by the Company during 1995 had average weekly sales of
approximately $12,300, 27.5% higher than average weekly sales at the 41 in-line
restaurants opened by the Company during the same period. The Company expects
the average cash investment for its restaurants opened in 1996 to approximate
1995 costs, although there can be no assurance that these costs will not
increase.
Pre-opening costs are capitalized and amortized on a straight-line basis over
a period of one year from the opening date of the restaurant or commissary
facility. The Company defers certain costs incurred in connection with the
development of its information systems, and amortizes such costs over periods
of up to five years from the date of completion.
This Prospectus contains forward-looking statements which involve risks and
uncertainties relating to future events. Prospective investors are cautioned
that the Company's actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
actual
13
<PAGE>
results to differ materially from those indicated by such forward-looking
statements include the matters set forth under the caption "Risk Factors."
The Company operated as a Subchapter S Corporation through June 6, 1993. As
such, the earnings of the Company were taxed for federal and certain state
income tax purposes directly to the Company's stockholders. Beginning June 7,
1993, the Company became subject to state and federal income taxes. The
Company's fiscal year ends on the last Sunday in December of each year. The
1995 fiscal year consisted of 53 weeks and the 1994 and 1993 fiscal years
consisted of 52 weeks.
UNAUDITED FIRST QUARTER 1996 RESULTS
Total revenues for the quarter ended March 31, 1996 were $76.7 million,
representing a 47.5% increase over revenues of $52.0 million for the same
period in 1995. Net income for the quarter ended March 31, 1996 was $3.5
million, or $0.20 per share, as compared to $2.2 million, or $0.14 per share,
for the first quarter of 1995.
Comparable store sales for the quarter ended March 31, 1996 reflected
increases of 8.6% for Company-owned restaurants and 5.1% for franchised
restaurants. During the quarter, 13 Company-owned and 43 franchised restaurants
were opened.
RESULTS OF OPERATIONS
The following tables set forth the percentage relationship to total revenues,
unless otherwise indicated, of certain income statement data and certain
restaurant data for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
DEC. 26, DEC. 25, DEC. 31,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales................................... 36.4% 41.0% 44.1%
Franchise royalties................................ 5.9 5.7 5.3
Franchise and development fees..................... 2.7 2.0 1.4
Commissary sales................................... 46.0 41.8 41.8
Equipment and other sales.......................... 9.0 9.5 7.4
----- ----- -----
Total revenues................................... 100.0 100.0 100.0
Costs and expenses:
Restaurant cost of sales(1)........................ 28.7 28.8 28.4
Restaurant operating expenses(1)................... 53.9 56.5 54.8
Commissary, equipment and other expenses(2)........ 95.5 93.7 93.1
General and administrative expenses(3)............. 8.3 7.6 7.9
Depreciation and amortization...................... 2.1 3.2 3.4
Total costs and expenses(3)...................... 93.0 93.8 93.8
----- ----- -----
Operating income(3).................................. 7.0 6.2 6.2
Other income:
Investment income.................................. 0.3 0.7 0.7
Other.............................................. 0.0 0.1 0.1
----- ----- -----
Income before income taxes(3)........................ 7.3 7.0 7.0
Income tax expense(3)................................ 2.7 2.5 2.6
----- ----- -----
Net income(3)...................................... 4.6% 4.5% 4.4%
===== ===== =====
</TABLE>
Notes on following page.
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DEC. 26, DEC. 25, DEC. 31,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
RESTAURANT DATA:
Percentage increase in comparable Company-owned
restaurant sales(4)............................. 10.9% 13.8% 9.0%
Average sales for Company-owned restaurants open
full year....................................... $653,000 $663,000 $657,000
Number of Company-owned restaurants:
Beginning of period............................ 39 76 133
Opened......................................... 32 53 61
Acquired(5).................................... 5 4 23
-------- -------- --------
End of period.................................. 76 133 217
-------- -------- --------
Number of franchised restaurants:
Beginning of period............................ 181 324 499
Opened......................................... 148 180 190
Closed......................................... 0 (1) (5)
Sold to Company(5)............................. (5) (4) (23)
-------- -------- --------
End of period.................................. 324 499 661
-------- -------- --------
Total restaurants--end of period................. 400 632 878
======== ======== ========
</TABLE>
- --------
(1) As a percentage of restaurant sales.
(2) As a percentage of commissary sales and equipment and other sales on a
combined basis.
(3) Percentages for 1993 are presented on a pro forma basis, assuming that the
Company had been treated as a C Corporation rather than an S Corporation
for income tax purposes, and the Company's compensation program for the top
three executive officers that was adopted during 1993 had been in effect
for the entire year.
(4) Includes only Company-owned restaurants open throughout the periods being
compared.
(5) The number for 1994 is reduced by one restaurant sold by the Company to a
franchisee.
1995 COMPARED TO 1994
Revenues. Total revenues increased 56.8% to $253.4 million in 1995, from
$161.5 million in 1994.
Restaurant sales increased 68.6% to $111.7 million in 1995, from $66.3
million in 1994. This increase was primarily due to a 58.3% increase in the
number of equivalent Company-owned restaurants open during 1995 as compared to
1994. "Equivalent restaurants" represent the number of restaurants open at the
beginning of a given period, adjusted for restaurants opened or acquired during
the period on a weighted average basis. Also, comparable sales increased 9.0%
in 1995 over 1994, for Company-owned restaurants open throughout both years.
Franchise royalties increased 48.0% to $13.6 million in 1995, from $9.2
million in 1994. This increase was primarily due to a 44.7% increase in the
number of equivalent franchised restaurants open during 1995 as compared to
1994. Also, comparable sales increased 7.8% in 1995 over 1994, for franchised
restaurants open throughout both years.
Franchise and development fees increased 7.2% to $3.5 million in 1995, from
$3.3 million in 1994. This increase was primarily due to the 190 franchised
restaurants opened during 1995, as compared to 180 opened during 1994, an
increase of 5.6%.
Commissary sales increased 56.8% to $105.9 million in 1995, from $67.5
million in 1994. This increase was primarily due to the increase in equivalent
franchised restaurants and comparable sales for franchised restaurants noted
above. Additionally, sales for the Orlando commissary increased in 1995 as
compared to 1994 due to its conversion from a dough production facility to a
full-service commissary in August 1995.
15
<PAGE>
Equipment and other sales increased 21.9% to $18.7 million in 1995, from
$15.3 million in 1994. This increase was primarily due to the increase in
equivalent franchised restaurants open during 1995 as compared to 1994, the
increase in franchised restaurants opened during 1995 as compared to 1994 and a
full year of operations in 1995 by the Company's Printing & Promotions, Inc.
subsidiary. This subsidiary was established in March 1994, following the
Company's purchase of the assets of QC, Inc., a printing company which provided
printed marketing materials for the Company and many of its franchisees.
Costs and Expenses. Restaurant cost of sales, which consist of food, beverage
and paper costs, decreased as a percentage of restaurant sales to 28.4% in
1995, from 28.8% in 1994. This decrease was primarily due to lower product
costs resulting from increased purchasing power and the impact of a severe
winter storm which disrupted normal commissary distribution activities for
several days during the first quarter of 1994 and required many of the
Company's restaurants to utilize alternative, higher-cost suppliers during that
period.
Advertising and related costs increased as a percentage of restaurant sales
to 9.4% in 1995, from 8.9% in 1994. This increase was primarily due to
increased levels of advertising during 1995, including promotions related to
the Company's 10th Anniversary Celebration and the introduction of thin crust
pizza in test markets, as well as the establishment of local advertising
cooperatives as newer markets matured.
Occupancy costs were relatively consistent as a percentage of restaurant
sales at 5.3% in 1995, as compared to 5.1% in 1994.
Restaurant salaries and benefits decreased as a percentage of restaurant
sales to 26.8% in 1995, from 27.4% in 1994. Other restaurant operating expenses
decreased as a percentage of restaurant sales to 13.4% in 1995, from 15.1% in
1994. Other operating expenses include all other restaurant-level operating
costs, the material components of which are automobile mileage reimbursement
for delivery drivers, telephone costs, training costs and workers compensation
insurance. Other operating expenses also include an allocation of commissary
operating expenses equal to 3% of Company-owned restaurant sales in order to
assess a portion of the costs of dough production and food and equipment
purchasing and storage to Company-owned restaurants.
The decreases in restaurant salaries and benefits and other restaurant
operating expenses as a percentage of restaurant sales were primarily due to a
smaller relative number of new restaurants opened during 1995 (61 new
restaurants in relation to 133 existing restaurants, or 45.9%) compared to 1994
(53 new restaurants in relation to 76 existing restaurants, or 69.7%).
Restaurant operating expenses historically have been higher as a percentage of
restaurant sales in the early months of operations of new restaurants.
Commissary, equipment and other expenses include cost of sales and operating
expenses associated with sales of food, paper, equipment, printing and
promotional items to franchisees and other customers. These costs decreased as
a percentage of combined commissary sales and equipment and other sales to
93.1% in 1995, from 93.7% in 1994. This decrease was primarily due to increased
commissary volumes and efficiencies (particularly at the Jackson commissary
which was opened in May 1994, and accordingly had relatively higher costs in
1994 as compared to 1995), partially offset by the relatively higher costs
associated with the start-up of the new Orlando commissary opened in August
1995.
General and administrative expenses increased as a percentage of total
revenues to 7.9% in 1995, from 7.6% in 1994. This increase was primarily due to
the hiring of additional corporate and restaurant management personnel as the
Company continues to develop the infrastructure necessary to support its
planned growth for 1996 and beyond.
Depreciation and amortization increased as a percentage of total revenues to
3.4% in 1995, from 3.2% in 1994. This increase was primarily due to additional
capital expenditures by the Company, the amortization of intangibles related to
acquisitions and the amortization of deferred pre-opening costs for newly-
opened restaurants and commissaries and other deferred expenses, partially
offset by the impact of a change in the
16
<PAGE>
depreciable lives of certain restaurant equipment and signage effective at the
beginning of the third quarter of 1995 to more accurately reflect the economic
lives of such assets. The estimated useful life for ovens and certain other
restaurant equipment was extended from five to seven years, and the estimated
useful life for restaurant signage was extended from five to ten years.
Investment Income. Investment income increased to $1.7 million in 1995, from
$1.2 million in 1994. Average investment balances increased during 1995,
compared to 1994, as a result of the investment by the Company of the net
proceeds of public stock offerings in January and November 1994 and August
1995.
Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective income tax rate of 36.8% in 1995, as compared to 36.7% in 1994.
This increase was primarily due to the impact of higher federal and state
statutory income tax rates in 1995 due to higher taxable income levels,
substantially offset by the impact of tax-exempt income generated by the
investment portfolio during 1995.
1994 COMPARED TO 1993
Revenues. Total revenues increased 81.0% to $161.5 million in 1994, from
$89.2 million in 1993.
Restaurant sales increased 103.9% to $66.3 million in 1994, from $32.5
million in 1993. This increase was primarily due to a 106.7% increase in the
number of equivalent Company-owned restaurants open during 1994 as compared to
1993. Also, comparable sales increased 13.8% in 1994 over 1993, for Company-
owned restaurants open throughout both years.
Franchise royalties increased 73.2% to $9.2 million in 1994, from $5.3
million in 1993. This increase was primarily due to a 63.9% increase in the
number of equivalent franchised restaurants open during 1994 as compared to
1993. Also, comparable sales increased 12.3% in 1994 over 1993, for franchised
restaurants open throughout both years.
Franchise and development fees increased 37.6% to $3.3 million in 1994, from
$2.4 million in 1993. This increase was primarily due to the 180 franchised
restaurants opened during 1994, as compared to 148 opened during 1993, an
increase of 21.6%, and an increase in the per unit franchise and development
fees related to franchised restaurants opened during 1994.
Commissary sales increased 64.6% to $67.5 million in 1994, from $41.0 million
in 1993. This increase was primarily due to the increases in equivalent
franchised restaurants and comparable sales for franchised restaurants noted
above. Equipment and other sales increased 90.4% to $15.3 million in 1994, from
$8.0 million in 1993. This increase was primarily due to the increase in
equivalent franchised restaurants open during 1994 as compared to 1993, the
increase in franchised restaurants opened during 1994 as compared to 1993 and
sales of $4.2 million generated by the Company's Printing & Promotions, Inc.
subsidiary in 1994.
Costs and Expenses. Restaurant cost of sales increased slightly as a
percentage of restaurant sales to 28.8% in 1994, from 28.7% in 1993. These
costs were somewhat higher in early 1994 due to a severe winter storm during
the first quarter which disrupted normal commissary distribution activities for
several days and required many of the Company's restaurants to utilize
alternative, higher-cost suppliers during this period.
Advertising and related costs increased as a percentage of restaurant sales
to 8.9% in 1994, from 7.5% in 1993. This increase was primarily due to
increased levels of advertising during 1994, as local advertising cooperatives
were established in maturing markets.
Occupancy costs increased as a percentage of restaurant sales to 5.1% in
1994, from 4.2% in 1993. This increase was primarily due to the majority of
restaurants opened during 1994 being in newer markets where rent and other
occupancy costs were higher than existing markets.
17
<PAGE>
Restaurant salaries and benefits increased as a percentage of restaurant
sales to 27.4% in 1994, from 27.2% in 1993. Other restaurant operating expenses
increased as a percentage of restaurant sales to 15.1% in 1994, from 15.0% in
1993. The increases in restaurant salaries and benefits and other restaurant
operating expenses as a percentage of restaurant sales were primarily due to an
increased percentage of Company-owned restaurants opening in new markets during
1994, as compared to 1993. Restaurant operating expenses historically have been
higher as a percentage of restaurant sales in the early months of operations of
new restaurants, particularly as new markets are being developed. Of the 53
Company-owned restaurants opened during 1994, only five were in the Company's
most mature markets of Louisville, Lexington and Nashville. The remainder were
in new markets, including Baltimore and St. Louis, or emerging markets such as
Atlanta and Charlotte.
Commissary, equipment and other expenses decreased as a percentage of
combined commissary sales and equipment and other sales to 93.7% in 1994, from
95.5% in 1993. This decrease was primarily due to increased operating
efficiencies in the Louisville commissary and the addition of relatively higher
margin sales of printing and promotional items during 1994, partially offset by
relatively higher costs during the early months of operations of the
commissaries in Raleigh, North Carolina and Jackson, Mississippi.
General and administrative expenses decreased as a percentage of total
revenues to 7.6% during 1994, from 8.3% (pro forma) during 1993. This decrease
was primarily due to the use of existing organizational infrastructure in 1994
while new Company-owned and franchised restaurants were opened.
Depreciation and amortization increased as a percentage of total revenues to
3.2% during 1994, from 2.1% during 1993. This increase was primarily due to
additional capital expenditures by the Company, the amortization of intangibles
related to acquisitions and the amortization of deferred pre-opening costs for
newly-opened restaurants and commissaries.
Investment Income. Investment income increased to $1.2 million in 1994, from
$247,000 in 1993. Average investment balances increased significantly during
1994, compared to 1993, as a result of the investment by the Company of the net
proceeds of its three public offerings of Common Stock in June 1993, January
1994 and November 1994.
Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective tax rate of approximately 36.7% in 1994, as compared to a pro
forma rate of 37.0% in 1993. Actual income tax expense for 1993 reflects a
combined effective tax rate of only 22.1% due to the Company's conversion from
an S Corporation to a C Corporation in June 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development and acquisition of
restaurants, the addition of new commissary and support services facilities and
equipment and the enhancement of corporate systems and facilities. Total
capital expenditures for 1995 were approximately $33.1 million, including
approximately $11.3 million for the opening of Company-owned restaurants, $7.3
million for development of a new commissary in Orlando, Florida, $3.5 million
for equipment and leasehold improvements at existing commissaries and
restaurants, $3.2 million for installing point of sale technology in existing
restaurants, $2.3 million for printing and other equipment for the Company's
Printing & Promotions, Inc. subsidiary, $1.5 million for completion of the
support services building, $1.5 million for land and improvements for
development of restaurants and other facilities and $2.5 million for corporate
office and other purposes.
During 1995, the Company acquired eight franchised restaurants in purchase
transactions for a total acquisition price of approximately $2.0 million,
consisting of $773,000 in cash, $574,000 in credits toward future development
and franchise fees and $650,000 in common stock of the Company (36,113 shares
valued as of the date the purchase price was fixed). Also during 1995, the
Company acquired fifteen franchised restaurants in transactions accounted for
as poolings-of-interests, with a total value of approximately $6.0
18
<PAGE>
million (230,720 shares of Company common stock were exchanged, valued as of
the dates the exchange ratios were fixed). Approximately $1.2 million of long-
term debt was retired by the Company in connection with these pooling
transactions.
The Company has funded its requirements for capital principally through
internally generated funds and the proceeds from four public offerings of
Common Stock. Cash provided by operating activities was $12.0 million in 1995.
The Company received $30.0 million in net proceeds from the sale of Common
Stock in a public offering in August 1995.
Capital expenditures are expected to be approximately $34 million for fiscal
1996 and $35 to $45 million for fiscal 1997. Capital expenditures for 1996 will
be primarily for the development of restaurants and the construction of new
commissary and distribution facilities in Dallas, Texas (opened in March 1996),
Denver, Colorado and Phoenix, Arizona. The Company also expects to begin
construction during mid-1996 of a 150,000 to 200,000 square foot facility in
Louisville, Kentucky, scheduled for completion in mid-1997, approximately one-
half of which will accommodate relocation and expansion of the Louisville
commissary facility and the remainder of which will accommodate relocation and
consolidation of corporate offices. In addition, during each of 1996 and 1997
the Company expects to provide approximately $6 to $8 million in loans to
selected franchisees under a loan program recently adopted by the Company.
However, the amounts actually provided during 1996 and 1997 may vary as the
Company gains experience with the loan program. See "Business--Franchise
Program--Franchisee Loan Program." Capital resources available at December 31,
1995 include $44.3 million of cash and investments and $7.6 million available
under a line of credit expiring June 29, 1996. The Company expects to fund its
planned capital expenditures through 1997 from these resources, the net
proceeds to the Company from this offering and cash generated from operations.
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.
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BUSINESS
The Company operates and franchises pizza delivery and carry-out restaurants
under the trademark "Papa John's" in 25 states, principally in the Midwest,
Mid-Atlantic, South and Southeast. The first Company-owned restaurant opened in
1985 and the first franchised restaurant opened in 1986. The Papa John's system
has grown from 110 restaurants at the end of fiscal 1991 to 932 restaurants at
March 31, 1996, consisting of 230 Company-owned and 702 franchised restaurants.
STRATEGY
The Company's objective is to become the leading chain of pizza delivery
restaurants in each of its targeted markets. To accomplish this objective, the
Company has developed a strategy designed to achieve high levels of customer
satisfaction and repeat business, as well as to establish recognition and
acceptance of the Papa John's concept. The key elements of the Company's
strategy include:
Focused, High Quality Menu. Papa John's restaurants offer a focused menu of
high quality, value-priced pizza, breadsticks and cheesesticks. Papa John's
original, medium thick crust is made from fresh dough (never frozen) produced
in the Company's four 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 believes its
focused menu creates a strong identity in the marketplace and simplifies
operations.
Efficient Operating System. The Company believes that its operating and
distribution systems, restaurant layout and designated delivery areas result in
lower operating costs, improved food quality and superior customer service. The
Company's commissary and distribution system takes advantage of volume
purchasing of food and supplies, and provides consistency and efficiencies of
scale in dough production. This eliminates the need for each restaurant to
order food from multiple vendors and commit substantial labor and other
resources to dough preparation. Because Papa John's restaurants have a focused
menu and specialize in delivery and carry-out services, each employee can
concentrate on a well-defined function in preparing and delivering the
customer's order.
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. Employee
training programs for the Company and its franchisees are conducted at ten
regional training centers. 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 through the
organization, resulting in a positive work environment and motivated, customer-
oriented employees.
Targeted, Cost-Effective Marketing. 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 an increasing number of
markets in which the Company or its franchisees have a significant presence,
local marketing efforts are supplemented with radio and television advertising.
Management believes that its marketing programs are cost-effective and
significantly increase consumer awareness of Papa John's restaurants.
Franchise System. The Company is committed to developing a strong franchise
system by attracting experienced operators, expanding in a controlled manner
and ensuring that each franchisee adheres to the Company's high standards. The
Company seeks to attract franchisees with experience in multi-unit restaurant
operations and with the financial resources and management capability to open
and operate multiple restaurants. To ensure consistent food quality, each
franchisee is required to purchase dough and spice mix from the Company and all
other supplies either from the Company or its approved suppliers. The Company
devotes significant resources to provide its franchisees with assistance in
employee training, marketing, site selection and store design.
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UNIT ECONOMICS
The Company believes its unit economics have been significantly better than
most restaurant concepts. During the 53 weeks ended December 31, 1995, the 133
Company-owned restaurants that were open throughout the year generated average
revenues of $657,000, average cash flow (operating income plus depreciation) of
$114,000 and average restaurant operating income of $93,000 (or 14.1% of
revenues). A significant number of these restaurants were opened in new
markets. Sales and profitability in the initial months of operations at the
Company's restaurants, particularly in new markets, historically have been
lower than mature restaurants. The average cash investment for the 61 Company-
owned restaurants opened during the year ended December 31, 1995 was
approximately $205,000. This cash investment includes equipment, leasehold
improvements, fixtures and signage, but excludes land and pre-opening costs.
The Company opened a greater number of free-standing restaurants with increased
signage during 1994 and 1995 and expects to continue this strategy. Sales at
free-standing restaurants generally exceed sales at in-line restaurants. During
their first 13 weeks of operations, the 20 free-standing restaurants opened by
the Company during 1995 had average weekly sales of approximately $12,300,
27.5% higher than average weekly sales at the 41 in-line restaurants opened by
the Company during the same period. The Company expects the average cash
investment for restaurants opened in 1996 to approximate 1995 costs, although
there can be no assurance that these costs will not increase. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Restaurant Design and Site Selection." The Company leases the
majority of its properties and expects to continue to lease, rather than own,
most of its properties. Most leases are for five years or less and contain
renewal options.
EXPANSION
A total of 251 restaurants were opened during 1995, consisting of 61 Company-
owned and 190 franchised restaurants. In addition, the Company acquired 23
restaurants from its franchisees in 1995. The Company plans to open 60
restaurants and anticipates that its franchisees will open 215 restaurants in
1996, of which 13 Company-owned and 43 franchised restaurants were opened
during the first quarter ending March 31, 1996. The Company plans to open 65 to
70 restaurants and anticipates that its franchisees will open 220 to 230
restaurants in 1997. There can be no assurance that either the Company or its
franchisees will be able to open the number of restaurants planned to be opened
by them or that such restaurants will be opened on schedule. The Company
intends to open additional restaurants in Florida, Georgia, Indiana, Maryland,
Missouri, North Carolina, Texas and northern Virginia/Washington, D.C., as well
as to begin opening restaurants in Colorado during 1996. In addition, as part
of its growth strategy, the Company will continue to consider acquiring
franchised restaurants. Franchise expansion during 1996 and 1997 will be
directed primarily east of the Rockies (excluding the upper Northeast) and in
the Southwest.
The Company's expansion strategy is to cluster restaurants in targeted
markets, thereby increasing consumer awareness and enabling the Company to take
advantage of operational, distribution and advertising efficiencies. The
Company's experience in developing markets indicates that market penetration
through the opening of multiple restaurants within a particular market results
in increased average restaurant sales in that market. To accelerate penetration
of larger markets, the Company has co-developed markets with franchisees or
divided markets among franchisees, and will continue to utilize market co-
development in the future where appropriate. In determining which new markets
to develop, the Company considers many factors, including the size of the
market, demographics and population trends, competition, and real estate
availability and pricing. Before entering any market with Company-owned or
franchised restaurants, the Company analyzes detailed information of these
factors and each market is toured and evaluated by senior management.
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RESTAURANT LOCATIONS
Company-owned Restaurants. The following table sets forth the location and
number of Company-owned restaurants as of March 31, 1996 (exclusive of ten
restaurants under construction at such date):
<TABLE>
<CAPTION>
NUMBER OF
LOCATION RESTAURANTS
-------- -----------
<S> <C>
Atlanta, Georgia.............................................. 47
Baltimore, Maryland........................................... 31
Nashville, Tennessee.......................................... 27
Louisville, Kentucky.......................................... 21
Charlotte, North Carolina..................................... 21
Orlando/Central Florida....................................... 15
Indianapolis, Indiana......................................... 13
St. Louis/Columbia, Missouri.................................. 11
Lexington, Kentucky........................................... 11
Ft. Lauderdale/Miami, Florida................................. 12
Austin/Fort Worth, Texas...................................... 9
Northern Virginia............................................. 8
Tallahassee, Florida.......................................... 4
---
Total Company-owned Restaurants........................... 230
===
</TABLE>
Franchised Restaurants. The following table sets forth the number of
franchised restaurants open in each state as of March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION RESTAURANTS
-------- -----------
<S> <C>
Alabama....................................................... 31
Arkansas...................................................... 12
Florida....................................................... 98
Georgia....................................................... 32
Illinois...................................................... 29
Indiana....................................................... 53
Iowa.......................................................... 1
Kansas........................................................ 3
Kentucky...................................................... 42
Louisiana..................................................... 19
Maryland...................................................... 5
Michigan...................................................... 8
Minnesota..................................................... 6
Mississippi................................................... 9
Missouri...................................................... 12
Nebraska...................................................... 1
North Carolina................................................ 33
Ohio.......................................................... 113
Pennsylvania.................................................. 18
South Carolina................................................ 23
Tennessee..................................................... 35
Texas......................................................... 47
Virginia...................................................... 53
West Virginia................................................. 13
Wisconsin..................................................... 6
---
Total Franchised Restaurants.............................. 702
===
</TABLE>
22
<PAGE>
MENU
Papa John's restaurants offer a focused menu of high quality, value-priced
pizza, breadsticks and cheesesticks, as well as canned soft drinks. Papa John's
original, medium thick crust is made from fresh dough (never frozen) produced
in the Company's regional commissaries. Every Papa John's 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. Fresh onions and green
peppers are chopped daily at all restaurants and are purchased from local
produce suppliers. Each pizza is complemented by the addition of a container of
Papa John's special garlic sauce (for dipping the crust) 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. During the second half of
1995, the Company began testing a thin crust product in certain Company-owned
and franchised markets. The Company is continuing to test this product while
completing additional consumer research.
RESTAURANT DESIGN AND SITE SELECTION
The exterior of a Papa John's restaurant is generally characterized by
backlighted awnings, neon window designs and other visible signage. A typical
Papa John's restaurant ranges from 1,200 to 1,500 square feet and is designed
to facilitate a smooth flow of food orders through the restaurant. The layout
includes specific areas for order taking, pizza preparation and routing,
resulting in simplified operations, lower training and labor costs, increased
efficiency and improved consistency and quality of food products. The interior
of a Papa John's restaurant has a vibrant red and white color scheme with green
striping, and includes a bright menu board, custom counters and carry-out
customer area. The counters are designed to allow customers to watch the
employees slap out the dough and put sauce and toppings on pizzas.
The Company considers the location of a restaurant to be important and
therefore 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-owned or franchised restaurant
location and the surrounding market before a site is approved. Papa John's
restaurants are typically located in strip shopping centers or free-standing
buildings that provide visibility, curb appeal and accessibility. The Company'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.
During 1994 and 1995, the Company opened a greater number of free-standing
locations than in prior years. The Company seeks either existing buildings
suitable for conversion, or land suitable for the construction of its prototype
restaurant. Free-standing buildings generally provide more signage and better
visibility, accessibility and parking. The Company believes that these
locations improve Papa John's image and brand awareness and expects free-
standing and prototype units to approximate 15-20% of all Company-owned
restaurants. Sales at free-standing restaurants generally exceed sales at in-
line restaurants. During their first 13 weeks of operations, the 20 free-
standing restaurants opened by the Company during 1995 had average weekly sales
of approximately $12,300, 27.5% higher than average weekly sales at the 41 in-
line restaurants opened by the Company during the same period.
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 an increasing number of markets in which the Company or its
franchisees have a significant presence, local marketing efforts are
supplemented with radio and television advertising. The Company believes that
its marketing programs are cost-effective and significantly increase Papa
John's visibility among potential customers.
In addition to extensive local store marketing, all Company-owned and
franchised Papa John's restaurants within a co-developed market are required to
join an advertising cooperative ("Co-op"). Each
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<PAGE>
member restaurant contributes a percentage of sales to the Co-op for market-
wide programs, such as radio, television and billboards. The rate of
contribution and uses of the monies collected is determined by a majority vote
of the Co-op's members. The restaurant-level and Co-op marketing efforts are
supported by print and electronic advertising materials that are produced by
the Papa John's Marketing Fund, Inc. (the "Marketing Fund") for use by both the
Company and its franchisees. The required Marketing Fund contribution can be up
to 1.5% of revenues as established from time to time by the governing board of
the Marketing Fund (currently .75%). The required contribution can be increased
above 1.5% only upon approval of not less than 60% of Marketing Fund members.
The Company provides every Papa John's restaurant with catalogs for (i)
uniforms and promotional items, and (ii) pre-approved, print marketing
materials. These products and services can be ordered from the Company through
toll-free "800" numbers.
PURCHASING
The Company sets quality standards for all products used in Papa John's
restaurants and designates approved outside suppliers of food and paper
products which meet the Company's quality standards. Produce is purchased
locally by both Company-owned and franchised restaurants to ensure freshness.
In order to ensure product quality and consistency, all Papa John's restaurants
are required to purchase proprietary spice mix and dough from the Company.
Franchisees may purchase other goods directly from approved suppliers or the
Company, which has negotiated purchasing agreements with most of its suppliers.
These agreements result in volume discounts to the Company, allowing it to sell
the products to franchisees at prices it believes are below those which
franchisees can normally obtain independently. Products are distributed to
restaurants by refrigerated trucks leased and operated by the Company or
transported by common carrier.
The Company operates full-service commissaries in Louisville, Kentucky,
Raleigh, North Carolina, Jackson, Mississippi and Orlando, Florida. The Company
opened a distribution center in Dallas, Texas during March 1996. The Company
expects to open a full-service commissary in Denver, Colorado during the second
quarter of 1996 and either a distribution center or full-service commissary in
Phoenix, Arizona during the first quarter of 1997.
All of the equipment, counters and smallwares needed to open a Papa John's
restaurant are supplied by the Company. The Company also provides layout and
design services and recommends subcontractors, signage installers and telephone
systems to its franchisees. Although not required to do so, substantially all
of the Company's franchisees purchase most of their equipment from the Company.
COMPANY OPERATIONS
Restaurant Personnel. A typical Papa John's restaurant employs a restaurant
manager, an assistant manager and approximately 20 hourly employees, most of
whom work part-time. The 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 and stock incentives. The Company has a low
managerial turnover rate which it believes results in decreased training costs
and higher productivity.
The Company employs area supervisors, each of whom has responsibility for
overseeing three to five Company-owned restaurants. The Company also employs
regional vice presidents and district managers who oversee area supervisors and
managers within their respective markets. The Company's training and
compensation programs are intended to instill each restaurant manager and area
supervisor with a sense of ownership and pride in their restaurants and the
Company.
Training. The Company has 34 employees dedicated to training and new
restaurant openings, including a full-time coordinator in each of its markets.
The Company provides an on-site training team three days
24
<PAGE>
before and three days after the opening of each Company-owned restaurant. Each
regional vice president, district manager, area supervisor and restaurant
manager is required to complete the Company's two-week training program in
which instruction is given on all aspects of the Company's systems and
operations. The program includes classroom instruction and hands-on training at
an operating Papa John's restaurant. The programs are conducted at the
Company's ten regional training centers located within operating Company-owned
restaurants. The Company's training also includes an education and safety
program for its delivery drivers.
Point of Sale Technology. Point of sale technology was in place in 200
Company-owned restaurants and 327 franchised restaurants at March 31, 1996. The
Company believes that this technology increases speed and accuracy in order
taking and pricing, reduces paper work and allows the restaurant manager to
better monitor and control food and labor costs. During 1995, the Company
finalized development of a new proprietary point of sale system, The Papa
John's PROFIT SystemSM (the "PROFIT System") that will be installed in
substantially all Company-owned restaurants during 1996 and 1997. The Company
believes the PROFIT System will further enhance restaurant-level marketing
capabilities through the development of a data base with information on
customers and their buying habits with respect to the Company's products.
Polling capabilities will allow the Company to obtain current restaurant
reporting information, thereby improving the speed, accuracy and efficiency of
restaurant-level reporting.
Reporting. Managers at Company-owned restaurants prepare daily reports of
sales, cash deposits and operating costs. Physical inventories of all food and
beverage items are taken weekly. The Company's area supervisors prepare weekly
profit and loss statements for each of the restaurants under their supervision.
The Company's Chief Operating Officer meets on a monthly basis with regional
vice presidents, district managers and area supervisors to discuss restaurant
sales and operating personnel needs and product quality. The Company believe
that the PROFIT System will simplify and accelerate many of these reporting
functions.
Hours of Operations. Papa John's restaurants are open seven days a week,
typically from 11:00 a.m. to 12:00 midnight Sunday through Thursday, and from
11:00 a.m. to 1:30 a.m. on Friday and Saturday.
FRANCHISE PROGRAM
General. The success of the Company's concept, together with the relatively
low initial capital investment per restaurant, has allowed the Company to
attract a large number of franchisees with significant restaurant experience.
The Company considers its franchisees to be a vital part of the Company's
continued growth and believes its relationship with its franchisees is
excellent. At March 31, 1996, there were 702 franchised restaurants operating
in 25 states and the Company has development agreements which contemplate the
opening of approximately 510 additional franchised restaurants through 1998.
There can be no assurance that all of these restaurants will be opened or that
the development schedule set forth in the development agreements will be
achieved. During the 1995 fiscal year and the three months ended March 31,
1996, franchisees opened 190 and 43 restaurants, respectively.
Approval. Franchisees are approved on the basis of the applicant's business
background, restaurant operating experience and financial resources. The
Company generally seeks franchisees who will enter into development agreements
for multiple restaurants. The Company seeks franchisees that have restaurant
experience and who will be actively involved in managing their restaurants or,
in the case of franchisees who do not have restaurant experience, the Company
requires the franchisee to hire a full-time operator who has an equity interest
in the franchise operation.
Development and Franchise Agreements. The Company enters into development
agreements with its franchisees for the construction of one or more restaurants
over a defined period of time within a specified geographic area. Under the
Company's current standard development agreement, the franchisee is required to
pay, at the time of signing the agreement, a non-refundable fee of $5,000 per
restaurant covered by the development agreement. This amount is credited
against the Company's standard $20,000 franchise fee which
25
<PAGE>
is payable to the Company upon signing the franchise agreement for a specific
location. Generally, a franchise agreement is executed when a franchisee
secures a location.
The Company's current standard franchise agreement provides for a term of ten
years (with one ten-year renewal option) and payment to the Company of a
royalty fee of 4% of sales. The current standard franchise agreement, as well
as substantially all existing franchise agreements, permit the Company to
increase the royalty fee up to 5% of sales after the agreement has been in
effect for five years. However, the royalty fee cannot be increased to an
amount greater than the percentage royalty fee then in effect for new
franchisees.
The Company 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 the Company's policies and standards. Many state
franchise laws limit the ability of a franchisor to terminate or refuse to
renew a franchise. See "Business--Government Regulation."
The Company is considering opening, or granting franchises for, new
restaurants in markets or locations different from traditional Papa John's
restaurants. For example, the Company has recently entered into development and
franchise agreements for Papa John's restaurants in smaller markets and intends
to pursue this strategy in the future. Such agreements generally cover areas or
locations not originally targeted for development and may have terms differing
from the standard franchise agreement, including different initial franchise
fees, equipment requirements and royalty fees.
Franchise Restaurant Development. The Company furnishes each franchisee with
assistance in selecting sites and developing restaurants. The Company provides
its franchisees with the physical specifications for typical restaurants, both
for free-standing restaurants and restaurants located in strip shopping
centers. Each franchisee is responsible for selecting the location for its
restaurants but must obtain Company 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 provides design plans, counters and equipment for most franchisee
locations at competitive prices.
Franchisee Loan Program. At the beginning of the second quarter of 1996, the
Company established a program under which selected franchisees developing ten
or more Papa John's restaurants may borrow funds for use in the construction
and development of their restaurants. Under the program, loans will typically
bear interest at the prevailing prime rate plus 1 1/2% and will be secured by
the fixtures, equipment and signage (and where applicable, the land) of each
restaurant and the ownership interests in the franchisee. In some instances,
the Company may obtain a purchase option with respect to the financed
restaurants. A franchisee utilizing the loan program must open at least 20% of
the restaurants covered by the franchisee's development agreement with its own
equity capital (with no amounts borrowed from any other source) prior to
receiving funds from the Company under the program.
Franchise Training and Support. Every franchisee is required to have a
principal operator approved by the Company who satisfactorily completes the
Company's two-week training program and who devotes his or her full business
time and efforts to the operation of the franchisee's restaurants. Each manager
of a franchised restaurant is also required to complete the Company's two-week
training program. In addition to this program, the Company provides an on-site
training crew three days before and after the opening of a franchisee's first
two restaurants and ongoing supervision thereafter. See "Business--Company
Operations--Training." Multi-unit franchisees are encouraged to hire a full-
time training coordinator to train new employees for their restaurants. The
Company's franchise consultants, reporting to the Vice President of Franchise
Operations, maintain constant communication with the franchise community,
relaying operating and marketing information and new ideas between the Company
and franchisees.
Franchise Operations. All franchisees are required to operate their Papa
John's restaurants in compliance with the Company's policies, standards and
specifications, including matters such as menu items, ingredients,
26
<PAGE>
materials, supplies, services, fixtures, furnishings, decor and signs. Each
franchisee has full discretion to determine the prices to be charged to its
customers.
Franchise Advisory Board. The Company has established a Franchise Advisory
Board that consists of Company and franchisee representatives. The Advisory
Board holds quarterly meetings to discuss new marketing ideas, operations,
growth and other relevant issues.
Reporting. The Company collects weekly and monthly sales and other operating
information from its franchisees. As of March 31, 1996, point of sale
technology was in place in 327 franchised restaurants of which 50 were the
Company's proprietary PROFIT System. In 1995, the Company implemented a
requirement that new and existing franchisees purchase and install the PROFIT
System in their restaurants. See "Company Operations--Point of Sale
Technology." The Company has agreements with most of its franchisees permitting
the Company to electronically debit the franchisees' bank accounts for the
payment of royalties, Marketing Fund contributions and purchases of products
from the Company's commissaries and equipment, printing and promotional
operations. This system significantly reduces the resources needed to process
receivables, improves cash flow and virtually eliminates past-due accounts
receivables.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well established
competitors with substantially greater financial and other resources than the
Company. Such competitors include a large number of national and regional
restaurant chains, as well as local pizza 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 an adverse impact on the Company's sales and
earnings.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased 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.
With respect to the sale of franchises, the Company competes with many
franchisors of restaurants and other business concepts. In general, there is
also active competition for management personnel, capital and attractive
commercial real estate sites suitable for Papa John's restaurants.
GOVERNMENT REGULATION
The Company and its franchisees are subject to various federal, state and
local laws affecting their businesses. Each Papa John's restaurant is subject
to licensing and regulation by a number of governmental authorities, which
include health, safety, sanitation, building and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain required licenses or approvals can delay or prevent the
opening of a new restaurant in a particular area. The Company's commissary and
distribution facilities are licensed and subject to regulation by state and
local health and fire codes, and the operation of its trucks is subject to
Department of Transportation regulations. 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 is subject to Federal Trade Commission ("FTC") regulation and
various state laws which regulate the offer and sale of franchises. Several
state laws also regulate substantive aspects of the franchisor-
27
<PAGE>
franchisee relationship. The FTC requires the Company to furnish to prospective
franchisees a franchise offering circular containing prescribed information. A
number of states in which the Company is currently franchising or may consider
franchising also regulate the sale of franchises and require registration of
the franchise offering circular with state authorities. Substantive state laws
that regulate the franchisor-franchisee relationship presently exist or are
being considered in a substantial number of states, and bills have been
introduced in Congress (one of which is now pending) which 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.
Papa John's restaurant operations are also subject to federal and state laws
governing such matters as wages, working conditions, citizenship requirements
and overtime. Some states have set minimum wage requirements higher than the
federal level, and there are currently bi-partisan proposals in Congress to
increase the federal minimum wage. Significant numbers of hourly personnel at
Company and franchised restaurants are paid at rates related to the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase labor costs at Company and franchised restaurants. Proposals to
increase the minimum wage, introduce a system of mandated health insurance or
other government initiatives, if implemented, could adversely affect the
Company and its franchisees as well as the restaurant industry in general. The
Company is also subject to the Americans With Disabilities Act of 1990, which,
among other things, may require certain minor renovations to its restaurants to
meet federally-mandated requirements. The cost of these renovations is not
expected to be material to the Company.
TRADEMARKS
The Company's rights in its trademarks and service marks are a significant
part of its business. The Company is the owner of the federal registration of
the trademark "Papa John's." The Company has also registered "Pizza Papa
John's" and design as a trademark and a service mark. The Company owns federal
registrations for the marks "Pizza Papa John's Delivering the Perfect Pizza!"
and design, "Call your Papa" and "Perfect Pizza Perfect Price." The Company has
applied for the registration of "Delivering the Perfect Pizza!", "Perfect
Pizza", "We Deliver Perfection", "Indoor Tailgate Party", "The Official Pizza
of Summer", and "Pizza Papa John's Print Network" and design as trademarks and
service marks. The Company 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 the Company's policy to pursue registration of its marks
whenever possible and to vigorously oppose any infringement of its marks.
EMPLOYEES
As of March 31, 1996, the Company employed 7,322 persons, of whom
approximately 6,325 were restaurant employees, 302 were restaurant management
and supervisory personnel, 267 were corporate personnel and 428 were commissary
and support services personnel. Most restaurant employees work part-time and
are paid on an hourly basis. None of the Company's employees is covered by a
collective bargaining agreement. The Company considers its employee relations
to be excellent.
PROPERTIES
Most of the Company's restaurants are located in leased space. The initial
terms of most of the Company's leases are three to seven years and provide for
one or more options to renew for at least one additional term. Virtually all of
the Company's leases specify a fixed annual rent, although certain of the
leases provide for fixed increases, or increases based on changes in the
Consumer Price Index, at various intervals during the lease term. Generally,
the leases are net leases which require the Company to pay all or a portion of
the cost of insurance, taxes, maintenance and utilities.
28
<PAGE>
The Company leases approximately 31,000 square feet of corporate office space
and approximately 35,000 square feet of adjacent warehouse space for a full-
service commissary in Louisville, Kentucky. The leases for these spaces expire
in December 1997. The Company leases approximately 30,000 square feet for its
commissary in Jackson, Mississippi and approximately 23,000 square feet for its
commissary in Raleigh, North Carolina. In addition, the Company has entered
into leases for approximately 12,000 square feet for the distribution center in
Dallas, Texas and approximately 21,000 square feet for its planned commissary
in Denver, Colorado. The Company's 63,000 square foot full-service commissary
in Orlando, Florida is located on approximately five acres owned by the
Company. The Company believes that it will continue to need additional office
and commissary space.
The Company owns approximately 31 acres in Louisville, Kentucky, and has
entered into a contract to purchase an additional six acres of adjoining land.
The Company has constructed a 40,000 square foot building on the land
consolidating its printing and promotional operations. The Company plans to
begin construction of an additional 150,000 to 200,000 square foot facility on
the land in 1996, approximately 50% of which will accommodate relocation and
expansion of the Louisville commissary operation and the remaining 50% will
accommodate relocation and consolidation of corporate offices. The facility is
scheduled for completion in mid-1997.
LITIGATION
The Company is a party to routine contract, negligence and employment-related
litigation matters in the ordinary course of business. No such pending matters,
individually or in the aggregate, are believed by management to be material to
the business or financial condition of the Company.
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John H. 34 Founder, Chairman and Chief Executive Officer
Schnatter
Charles W. 33 Senior Vice President, General Counsel,
Schnatter Secretary and Director
Blaine E. 39 Executive Vice President and Chief Administrative Officer
Hurst
E. 42 Senior Vice President, Chief Financial Officer and Treasurer
Drucilla
Milby
Wade S. 34 Chief Operating Officer
Oney
Robert J. 40 President--PJ Food Service, Inc.
Wadell
Richard J. 40 Vice President and Senior Counsel
Emmett
Philip C. 56 Senior Vice President--Development
deMena,
Jr.
J. David 39 Vice President and Corporate Controller
Flanery
Sylvester 54 Vice President--Marketing and Support Services
J.
Sosnowski
O. Wayne 63 Director
Gaunce
Jack A. 61 Director
Laughery
Michael W. 44 Director
Pierce
Richard F. 52 Director
Sherman
</TABLE>
29
<PAGE>
UNDERWRITING
Montgomery Securities and Alex. Brown & Sons Incorporated (the
"Underwriters") have severally agreed, subject to the terms and conditions
contained in the underwriting agreement (the "Underwriting Agreement"), to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Montgomery Securities.............................................. 500,000
Alex. Brown & Sons Incorporated.................................... 500,000
---------
Total.......................................................... 1,000,000
=========
</TABLE>
The Company has been advised that the Underwriters propose initially to offer
the Common Stock to the public on the terms set forth on the cover page of this
Prospectus. The Underwriters may allow a concession of not more than $1.44 per
share to selected dealers, and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $0.10 per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Underwriters. No reduction in such terms shall change the amount
of proceeds to be received by the Company as set forth on the cover page of
this Prospectus. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject an order in whole or in part.
In connection with this offering, the Underwriters and selling group members
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market immediately prior to the commencement of sales in this
offering, in accordance with Rule 10b-6A under the Exchange Act. Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers and purchases limited by such prices
and effected in response to order flow. Net purchases by a passive market maker
on each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified prior
period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
The Company has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
138,500 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial 1,000,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments made in connection with this offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriters may be required to make in respect thereof.
The Company and its executive officers and directors, who will beneficially
own in the aggregate 6,867,713 shares of Common Stock after the closing of this
Offering, have agreed, subject to certain limited exceptions, not to offer,
sell or otherwise dispose of any shares of Common Stock of the Company for a
period of 90 days after the date of this Prospectus without the prior written
consent of Montgomery Securities.
30
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Greenebaum Doll & McDonald PLLC, Louisville, Kentucky, and
for the Underwriters by Locke Purnell Rain Harrell (A Professional
Corporation), Dallas, Texas. A member of Greenebaum Doll & McDonald PLLC
participating in the preparation of the Registration Statement beneficially
owns 2,250 shares of Common Stock of the Company.
EXPERTS
The Company's consolidated financial statements incorporated by reference in
its annual report on Form 10-K for the fiscal year ended December 31, 1995 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements have been incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
31
<PAGE>
[PHOTO OF "PIZZA AND INGREDIENTS"]
<PAGE>
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No dealer, salesperson or other person has been authorized to give any in-
formation to or make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such infor-
mation or representation must not be relied upon as having been authorized by
the Company or any Underwriter. This Prospectus does not constitute an offer
to sell, or solicitation of an offer to buy, any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that the information herein is correct as of any time subsequent to the date
hereof or that there has been no change in the affairs of the Company since
such date.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...................................................... 3
Incorporation of Certain Documents by
Reference................................................................. 3
Prospectus Summary......................................................... 4
The Company................................................................ 6
Risk Factors............................................................... 6
Use of Proceeds............................................................ 9
Dividend Policy............................................................ 9
Price Range of Common Stock................................................ 9
Capitalization............................................................. 10
Selected Consolidated Financial Data....................................... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 13
Business................................................................... 20
Management................................................................. 29
Underwriting............................................................... 30
Legal Matters.............................................................. 31
Experts.................................................................... 31
</TABLE>
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1,000,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
Montgomery Securities
Alex. Brown & Sons
Incorporated
May 1, 1996
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