<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 29, 1998
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-21660
PAPA JOHN'S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1203323
(State or other jurisdiction of (I.R.S. Employer Identifica
incorporation or organization) number)
11492 Bluegrass Parkway, Suite 175
Louisville, Kentucky 40299-2334
(Address of principal executive offices)
(502) 266-5200
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
Yes X No _____
-----
At May 8, 1998, there were outstanding 29,330,700 shares of the
registrant's common stock, par value $.01 per share.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
March 29, 1998 and December 28, 1997 2
Condensed Consolidated Statements of Income --
Three Months Ended March 29, 1998 and
March 30, 1997 3
Condensed Consolidated Statements of
Stockholders' Equity -- Three Months Ended
March 29, 1998 and March 30, 1997 4
Condensed Consolidated Statements of Cash Flows
-- Three Months Ended March 29, 1998 and
March 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on 8-K 10
</TABLE>
1
<PAGE>
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 29, 1998 December 28, 1997
(In thousands) (Unaudited) (Note)
- --------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 26,502 $ 18,692
Accounts receivable 15,252 15,132
Inventories 10,697 9,091
Deferred pre-opening costs 3,263 3,827
Prepaid expenses and other current assets 2,728 2,434
- --------------------------------------------------------------------------------------------------
Total current assets 58,442 49,176
Investments 58,778 57,933
Net property and equipment 124,345 112,601
Notes receivable 15,860 15,080
Other assets 19,856 18,453
- --------------------------------------------------------------------------------------------------
Total assets $277,281 $253,243
==================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 16,568 $ 15,148
Accrued expenses 24,789 15,132
Deferred income taxes 252 102
- --------------------------------------------------------------------------------------------------
Total current liabilities 41,609 30,382
Unearned franchise and development fees 5,788 4,613
Deferred income taxes 3,569 3,987
Other long-term liabilities 1,335 1,528
Stockholders' equity:
Preferred stock - -
Common stock 293 291
Additional paid-in capital 153,328 149,850
Accumulated other comprehensive income (unrealized
gain on investments, net of tax) 807 321
Retained earnings 71,033 62,752
Treasury stock (481) (481)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 224,980 212,733
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $277,281 $253,243
==================================================================================================
</TABLE>
Note: The balance sheet at December 28, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
2
<PAGE>
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except per share amounts) March 29, 1998 March 30, 1997
- --------------------------------------------------------------------------------
Revenues:
<S> <C> <C>
Restaurant sales $ 75,918 $ 52,882
Franchise royalties 7,372 5,330
Franchise and development fees 1,147 1,241
Commissary sales 57,557 41,290
Equipment and other sales 10,934 8,900
- --------------------------------------------------------------------------------
Total revenues 152,928 109,643
Costs and expenses:
Restaurant expenses:
Cost of sales 20,120 14,006
Salaries and benefits 20,178 14,264
Advertising and related costs 6,791 4,733
Occupancy costs 3,520 2,667
Other operating expenses 10,115 7,471
- --------------------------------------------------------------------------------
60,724 43,141
Commissary, equipment and other expenses:
Cost of sales 53,670 38,561
Salaries and benefits 3,882 3,002
Other operating expenses 5,232 4,061
- --------------------------------------------------------------------------------
62,784 45,624
General and administrative expenses 11,009 8,444
Depreciation 3,982 2,770
Amortization 1,870 1,282
- --------------------------------------------------------------------------------
Total costs and expenses 140,369 101,261
- --------------------------------------------------------------------------------
Operating income 12,559 8,382
Other income (expense):
Investment income 1,060 1,102
Other, net (476) (448)
- --------------------------------------------------------------------------------
Income before income taxes 13,143 9,036
Income tax expense 4,863 3,343
- --------------------------------------------------------------------------------
Net income $ 8,280 $ 5,693
================================================================================
Basic earnings per share $0.28 $0.20
================================================================================
Diluted earnings per share $0.28 $0.19
================================================================================
Basic weighted average shares outstanding 29,162 28,756
================================================================================
Diluted weighted average shares outstanding 29,983 29,373
================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Comprehensive Retained Treasury Stockholders'
(In thousands) Stock Capital Income Earnings Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1996 $288 $143,978 $ 977 $35,882 $(482) $180,643
Comprehensive income:
Net income - - - 5,693 - 5,693
Unrealized loss on investments,
net of tax of $495 - - (614) - - (614)
--------
Comprehensive income 5,079
Exercise of stock options - 339 - - - 339
Tax benefit related to exercise of
non-qualified stock options - 59 - - - 59
Other - 1 - 18 - 19
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at March 30, 1997 $288 $144,377 $ 363 $41,593 $(482) $186,139
=================================================================================================================================
Balance at December 29, 1997 $291 $149,850 $ 321 $62,752 $(481) $212,733
Comprehensive income:
Net income - - - 8,280 - 8,280
Unrealized gain on investments,
net of tax of $314 - - 486 - - 486
--------
Comprehensive income 8,766
Exercise of stock options 2 2,915 - - - 2,917
Tax benefit related to exercise of
non-qualified stock options - 563 - - - 563
Other - - - 1 - 1
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at March 29, 1998 $293 $153,328 $ 807 $71,033 $(481) $224,980
=================================================================================================================================
</TABLE>
See accompanying notes
4
<PAGE>
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 29, 1998 March 30, 1997
- -------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C>
Net cash provided by operating activities $ 18,226 $ 8,599
Investing activities
Purchase of property and equipment (12,098) (11,015)
Purchase of investments (4,924) (8,484)
Proceeds from sale or maturity of investments 4,584 8,150
Loans to franchisees (2,444) (5,228)
Loan repayments from franchisees 1,664 -
Deferred systems development costs (274) (550)
Acquisitions (228) -
Other 12 318
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (13,708) (16,809)
Financing activities
Payments on long-term debt (185) (175)
Proceeds from exercise of stock options 2,917 339
Tax benefit related to exercise of non-qualified
stock options 563 59
Other (3) (10)
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,292 213
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,810 (7,997)
Cash and cash equivalents at beginning of period 18,692 24,063
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,502 $ 16,066
===========================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Papa John's International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 29, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S - X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three months ended March 29, 1998, are
not necessarily indicative of the results that may be expected for the year
ended December 27, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Papa John's
International, Inc. Annual Report on Form 10-K for the year ended December 28,
1997.
2. Advertising and Related Costs
Advertising and related costs include the costs of Company-owned restaurant
activities such as mail coupons, door hangers and promotional items and, through
December 28, 1997, Company-owned restaurant contributions to the Papa John's
Marketing Fund, Inc. (the "Marketing Fund") and local market cooperative
advertising funds as incurred. Contributions by Company-owned and franchised
restaurants to the Marketing Fund and the cooperative advertising funds are
based on an established percentage of monthly restaurant revenues. The Marketing
Fund is responsible for developing and conducting marketing and advertising for
the Papa John's system. The local market cooperative advertising funds are
responsible for developing and conducting advertising activities in a specific
market, including the placement of electronic and print materials developed by
the Marketing Fund. Such funds are accounted for separately and are not included
in the consolidated financial statements of the Company, except as described
below beginning with the first quarter of 1998.
Effective December 29, 1997, the Company began recognizing Company-owned
restaurant contributions to the Marketing Fund and to those local market
cooperative advertising funds deemed to be controlled by the Company
(collectively, the "Controlled Funds"), as advertising and related costs at the
time the Controlled Funds actually incurred such expenses. Through December 28,
1997, the Controlled Funds generally incurred expenses as contributions were
received; therefore, the impact of this change was not material to the Company's
first quarter 1998 financial statements.
3. Accounting Pronouncement
As of December 29, 1997, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes
new rules for the reporting of comprehensive income and its components. The
adoption of this statement had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains and losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been restated to conform to the
requirements of SFAS 130.
Total comprehensive income amounted to $8.8 million during the first quarter of
1998 and $5.1 million during the first quarter of 1997.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Restaurant Progression
<TABLE>
<CAPTION>
Three Months Ended
March 29, March 30,
1998 1997
- ------------------------------------------------------------
Company-owned:
<S> <C> <C>
Beginning of period 401 303
Opened 16 22
Acquired 1 -
- ------------------------------------------------------------
End of Period 418 325
- ------------------------------------------------------------
Franchised:
Beginning of period 1,116 857
Opened 65 68
Sold to Company (1) -
- ------------------------------------------------------------
End of period 1,180 925
- ------------------------------------------------------------
Total at end of period 1,598 1,250
============================================================
</TABLE>
Results of Operations
Revenues. Total revenues increased 39.5% to $152.9 million for the three months
ended March 29, 1998, from $109.6 million for the comparable period in 1997.
Restaurant sales increased 43.6% to $75.9 million for the three months ended
March 29, 1998, from $52.9 million for the comparable period in 1997. This
increase was primarily due to an increase of 31.0% in the number of equivalent
Company-owned restaurants open during the three months ended March 29, 1998,
compared to the same period in the prior year. "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, sales increased 12.6% for the three months ended March 29,
1998, over the comparable period in 1997, for Company-owned restaurants open
throughout both periods.
Franchise royalties increased 38.3% to $7.4 million for the three months ended
March 29, 1998, from $5.3 million for the comparable period in 1997. This
increase was primarily due to an increase of 29.2% in the number of equivalent
franchised restaurants open during the three months ended March 29, 1998,
compared to the same period in the prior year. Also, sales increased 10.4% for
the three months ended March 29, 1998, over the comparable period in 1997, for
franchised restaurants open throughout both periods.
Franchise and development fees decreased 7.6% to $1.1 million for the three
months ended March 29, 1998, from $1.2 million for the comparable period in
1997. This decrease was primarily due to the 65 franchised restaurants opened
during the three months ended March 29, 1998, versus the 68 opened during the
comparable period in 1997 and the mix of development agreements under which the
restaurants were opened. The average dollar amount of fees per franchised
restaurant opening may vary from period to period, as restaurants opened
pursuant to older development agreements and "Hometown restaurants" generally
have lower required fees than restaurants opened pursuant to more recent
development agreements. "Hometown restaurants" are located in smaller markets,
generally markets with less than 9,000 households.
7
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Commissary sales increased 39.4% to $57.6 million for the three months ended
March 29, 1998, from $41.3 million for the comparable period in 1997. This
increase was primarily the result of the increases in equivalent franchised
restaurants and comparable sales for franchised restaurants previously noted.
Equipment and other sales increased 22.9% to $10.9 million for the three months
ended March 29, 1998, from $8.9 million for the comparable period in 1997. This
increase was primarily the result of the previously noted increase in equivalent
franchised restaurants, partially offset by the decrease in franchised
restaurants opened during the first quarter of 1998 as compared to the same
period in 1997. A portion of the equipment and other sales increase was also
attributable to the increase in sales of the Papa John's PROFIT System, a
proprietary point of sale system.
Costs and Expenses. Restaurant cost of sales, which consists of food, beverage
and paper costs, remained consistent as a percentage of restaurant sales at
26.5% for the three months ended March 29, 1998 and the comparable period in
1997.
Restaurant salaries and benefits as a percentage of restaurant sales decreased
to 26.6% for the three months ended March 29, 1998, from 27.0% for the
comparable period in 1997, as a result of certain efficiencies gained on a
higher sales base, partially offset by an increase in the federal minimum wage
in September 1997. Occupancy costs decreased to 4.6% for the three months ended
March 29, 1998, from 5.0% for the comparable period in 1997, as certain
efficiencies were gained on higher sales. Advertising and related costs were
relatively consistent at 8.9% for the three months ended March 29, 1998, as
compared to 9.0% for the same period in 1997.
Other restaurant operating expenses decreased as a percentage of restaurant
sales to 13.3% for the three months ended March 29, 1998, from 14.1% for the
comparable period in 1997. Other operating expenses include an allocation of
commissary operating expenses equal to 3% of Company-owned restaurant sales in
order to assess a portion of the costs of dough production and food and
equipment purchasing and storage to Company-owned restaurants. The decrease in
other operating expenses as a percentage of restaurant sales was primarily due
to training efficiencies and lower worker's compensation costs.
Commissary, equipment and other expenses include cost of sales and operating
expenses associated with sales of food, paper, equipment, information systems,
and printing and promotional items to franchisees and other customers. These
costs increased as a percentage of combined commissary sales and equipment and
other sales to 91.7% for the three months ended March 29, 1998, as compared to
90.9% for the same period in 1997. Cost of sales as a percentage of combined
commissary sales and equipment and other sales increased to 78.4% for the three
months ended March 29, 1998, from 76.8% from the comparable period in 1997, due
primarily to the timing of certain unfavorable commodity price changes. The
increase in cost of sales was partially offset by decreases in salaries and
benefits to 5.7% for the three months ended March 29, 1998, from 6.0% for the
comparable period in 1997, and other operating expenses to 7.6% for the three
months ended March 29, 1998, from 8.1% for the comparable period in 1997, due
primarily to higher costs related to the opening of two commissary facilities
during the first quarter of 1997.
General and administrative expenses as a percentage of total revenues decreased
to 7.2% for the three months ended March 29, 1998, from 7.7% for the comparable
period in 1997 due to leveraging expenses on a higher sales base and the receipt
of incentives under the Kentucky Jobs Development Act related to certain
corporate employment increases.
Depreciation and amortization were relatively consistent as a percentage of
total revenues at 3.8% for the three months ended March 29, 1998, compared to
3.7% for the same period in 1997.
Investment Income. Investment income remained consistent at $1.1 million for
the three months ended March 29, 1998 and the comparable period in 1997.
Income Tax Expense. Income tax expense reflects a combined federal, state and
local effective tax rate of 37% for the three months ended March 29, 1998 and
March 30, 1997, representing statutory rates applied to pre-tax income as
adjusted by the impact of tax-exempt investment income and other items.
8
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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, the enhancement of corporate systems and facilities, and the funding
of franchisee loans. Capital expenditures of $12.1 million and loans to
franchisees of $780,000 (net of repayments) for the three months ended March 29,
1998, were funded by cash flow from operations.
Cash flow from operations increased to $18.2 million for the three months ended
March 29, 1998, from $8.6 million for the comparable period in 1997, due
primarily to the higher level of net income for the first quarter of 1998 and
the timing of income tax payments and other changes in working capital, a
portion of which is expected to reverse during the second quarter of 1998.
In addition to restaurant development and potential acquisitions, significant
capital projects for the next 12 months are expected to include a full-service
commissary in Portland, Oregon by mid-1998. In late-1998 or early-1999, the
Company also expects to open a 242,000 square foot facility in Louisville,
Kentucky, approximately 30-40% of which will accommodate relocation and
expansion of the Louisville commissary operations and Novel Approach promotional
division and the remainder of which will accommodate relocation and
consolidation of corporate offices.
The Company has been approved to receive up to $21.0 million in incentives under
the Kentucky Jobs Development Act in connection with the relocation of the
corporate offices. Based upon the expected timing of completion of the
facility, the Company expects to earn approximately $14.0 million of such
incentives through 2007.
Additionally, during the remainder of 1998 the Company expects to fund up to
$3.0 million in additional loans under existing franchisee loan program
commitments. Approximately $15.9 million was outstanding under this program as
of March 29, 1998. At this time, the Company does not expect to significantly
expand the program beyond existing commitments.
Capital resources available at March 29, 1998, include $26.5 million of cash and
cash equivalents, $58.8 million of investments and $8.2 million under a line of
credit expiring in June 1998. The Company expects to fund planned capital
expenditures for the next twelve months from these resources and operating cash
flows.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to claims and legal actions in the ordinary course of its
business. The Company believes that all such claims and actions currently
pending against it are either adequately covered by insurance or would not have
a material adverse effect on the Company if decided in a manner unfavorable to
the Company.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit
Number Description
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27 Financial Data Schedule which is submitted
electronically to the Securities and Exchange
Commission for information only and not deemed to be
filed with the Commission.
99.1 Cautionary Statements. Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 28, 1997 (Commission File No. 0-
21660) is incorporated herein by reference.
b. Current Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarterly period ended
March 29, 1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAPA JOHN'S INTERNATIONAL, INC.
(Registrant)
Date: May 13, 1998 /s/ E. Drucilla Milby
------------ ----------------------------------
E. Drucilla Milby, Chief Financial
Officer and Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 26,502
<SECURITIES> 58,778
<RECEIVABLES> 15,252
<ALLOWANCES> 0
<INVENTORY> 10,697
<CURRENT-ASSETS> 58,442
<PP&E> 161,529
<DEPRECIATION> 37,184
<TOTAL-ASSETS> 277,281
<CURRENT-LIABILITIES> 41,609
<BONDS> 1,130
0
0
<COMMON> 293
<OTHER-SE> 224,687
<TOTAL-LIABILITY-AND-EQUITY> 277,281
<SALES> 144,409
<TOTAL-REVENUES> 152,928
<CGS> 73,790
<TOTAL-COSTS> 123,508
<OTHER-EXPENSES> 16,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,143
<INCOME-TAX> 4,863
<INCOME-CONTINUING> 8,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,280
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
