<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 September 26, 1999
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 Identification
incorporation or organization) number)
2002 Papa John's Boulevard
Louisville, Kentucky 40299-2334
(Address of principal executive offices)
(502) 261-7272
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
Yes X No
--- ---
At November 1, 1999, there were outstanding 30,443,572 shares of the
registrant's common stock, par value $.01 per share.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
September 26, 1999 and December 27, 1998 2
Condensed Consolidated Statements of Income --
Three Months and Nine Months Ended September 26, 1999
and September 27, 1998 3
Condensed Consolidated Statements of Stockholders'
Equity -- Nine Months Ended September 26, 1999
and September 27, 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 26, 1999 and
September 27, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands) September 26, 1999 December 27, 1998
- ----------------------------------------------------------------------------------------
(Unaudited) (Restated - see note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 45,529 $ 33,814
Accounts receivable 15,862 17,420
Inventories 10,431 9,808
Prepaid expenses and other current assets 5,562 4,891
Deferred income taxes 2,090 2,090
- ---------------------------------------------------------------------------------------
Total current assets 79,474 68,023
Investments 39,841 47,355
Net property and equipment 214,698 172,872
Notes receivable from franchisees 10,574 8,990
Other assets 30,186 22,484
- ----------------------------------------------------------------------------------------
Total assets $374,773 $319,724
========================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 21,300 $ 18,389
Accrued expenses 28,491 26,916
Current portion of long-term debt 5,233 190
- ----------------------------------------------------------------------------------------
Total current liabilities 55,024 45,495
Unearned franchise and development fees 5,906 6,561
Long-term debt, net of current portion 925 8,230
Deferred income taxes 709 5,066
Other long-term liabilities 956 202
Stockholders' equity:
Preferred stock - -
Common stock 304 298
Additional paid-in capital 187,487 166,209
Accumulated other comprehensive income
(unrealized gain on investments, net of tax) 881 688
Retained earnings 123,062 87,456
Treasury stock (481) (481)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 311,253 254,170
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $374,773 $319,724
========================================================================================
</TABLE>
Note: The Condensed Consolidated Balance Sheet at December 27, 1998 has been
derived from the audited financial statements at that date restated to
reflect the acquisition of Minnesota Pizza Company, LLC, a business
combination accounted for as a pooling of interests (see Note 3 of Notes
to Condensed Consolidated Financial Statements).
2
<PAGE>
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) Sept. 26, 1999 Sept. 27, 1998 Sept. 26, 1999 Sept. 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(Restated - (Restated -
see note) see note)
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 96,538 $ 85,165 $289,216 $249,544
Franchise royalties 10,261 7,899 29,783 23,005
Franchise and development fees 1,775 1,530 5,020 3,822
Commissary sales 81,002 63,162 227,090 180,162
Equipment and other sales 12,504 11,676 38,706 33,596
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 202,080 169,432 589,815 490,129
Costs and expenses:
Restaurant expenses:
Cost of sales 26,449 22,876 74,031 65,950
Salaries and benefits 25,746 22,942 78,150 67,259
Advertising and related costs 7,972 7,131 25,245 21,680
Occupancy costs 5,127 4,630 14,377 12,615
Other operating expenses 12,994 11,051 38,865 32,464
- -----------------------------------------------------------------------------------------------------------------------------------
78,288 68,630 230,668 199,968
Commissary, equipment and other expenses:
Cost of sales 72,066 58,945 202,839 167,222
Salaries and benefits 6,135 4,328 17,691 12,300
Other operating expenses 6,659 5,590 20,839 16,080
- -----------------------------------------------------------------------------------------------------------------------------------
84,860 68,863 241,369 195,602
General and administrative expenses 13,768 12,853 42,193 39,301
Pre-opening and other general expenses (43) 369 2,703 2,645
Depreciation and amortization expense 6,252 5,375 17,529 14,962
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 183,125 156,090 534,462 452,478
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 18,955 13,342 55,353 37,651
Investment income 831 1,039 2,459 3,112
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 19,786 14,381 57,812 40,763
Income tax expense 7,420 5,682 21,729 15,924
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 12,366 8,699 36,083 24,839
Cumulative effect of accounting change, net of tax - - - (2,603)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,366 $ 8,699 $ 36,083 $ 22,236
===================================================================================================================================
Basic earnings per share:
Income before cumulative effect of a change in accounting
principle $ 0.41 $ 0.29 $ 1.20 $ 0.84
Cumulative effect of accounting change, net of tax - - - (0.09)
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.41 $ 0.29 $ 1.20 $ 0.75
===================================================================================================================================
Diluted earnings per share:
Income before cumulative effect of a change
in accounting principle $ 0.40 $ 0.29 $ 1.16 $ 0.82
Cumulative effect of accounting change, net of tax - - - (0.09)
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.40 $ 0.29 $ 1.16 $ 0.73
===================================================================================================================================
Basic weighted average shares outstanding 30,335 29,635 30,156 29,473
===================================================================================================================================
Diluted weighted average shares outstanding 31,228 30,388 31,131 30,395
===================================================================================================================================
</TABLE>
Note: The Condensed Consolidated Statements of Income for the three and nine
months ended September 27, 1998 have been restated to reflect the adoption
of SOP 98-5 and the acquisition of Minnesota Pizza Company, LLC, a
business combination accounted for as a pooling of interests (see Notes 2
and 3 of Notes to Condensed Consolidated Financial Statements).
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 28, 1997
as restated (see note) $292 $151,349 $321 $ 55,515 $(481) $206,996
Comprehensive income:
Net income - - - 22,236 - 22,236
Unrealized gain on investments,
net of tax of $202 - - 210 - - 210
--------------
Comprehensive income 22,446
Exercise of stock options 4 7,785 - - - 7,789
Tax benefit related to exercise of
non-qualified stock options - 1,886 - - - 1,886
Other 1 239 - (414) - (174)
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 27, 1998 $297 $161,259 $531 $ 77,337 $(481) $238,943
======================================================================================================================
Balance at December 27, 1998
as restated (see note) $298 $166,209 $688 $ 87,456 $(481) $254,170
Comprehensive income:
Net income - - - 36,083 - 36,083
Unrealized gain on investments,
net of tax of $88 - - 193 - - 193
--------------
Comprehensive income 36,276
Exercise of stock options 6 12,524 - - - 12,530
Tax benefit related to exercise of
non-qualified stock options - 3,440 - - - 3,440
Deferred tax asset - acquisition - 5,245 - - - 5,245
Other - 69 - (477) - (408)
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 $304 $187,487 $881 $123,062 $(481) $311,253
======================================================================================================================
</TABLE>
Note: The Condensed Consolidated Statements of Stockholders' Equity for all
prior periods presented have been restated to reflect the adoption of SOP
98-5 and the acquisition of Minnesota Pizza Company, LLC, a business
combination accounted for as a pooling of interests (see Notes 2 and 3 of
Notes to Condensed Consolidated Financial Statements).
See accompanying notes.
4
<PAGE>
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) September 26, 1999 September 27, 1998
- ------------------------------------------------------------------------------------------------------------------
(Restated - see note)
<S> <C> <C>
Operating activities
Net cash provided by operating activities $ 63,365 $ 49,114
Investing activities
Purchase of property and equipment (62,323) (53,502)
Purchase of investments (22,165) (30,018)
Proceeds from sale or maturity of investments 29,703 36,547
Loans to franchisees (5,236) (4,139)
Loan repayments from franchisees 2,752 4,505
Deferred systems development costs (979) (846)
Acquisitions (2,397) (1,902)
Other 262 391
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (60,383) (48,964)
Financing activities
Payments on long-term debt (9,815) (4,480)
Proceeds from issuance of long-term debt 2,510 5,510
Proceeds from exercise of stock options 12,530 7,789
Tax benefit related to exercise of non-qualified
stock options 3,440 1,886
Other 68 2
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,733 10,707
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,715 10,857
Cash and cash equivalents at beginning of period 33,814 18,835
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 45,529 $ 29,692
==================================================================================================================
</TABLE>
Note: The Condensed Consolidated Statement of Cash Flows for the nine months
ended September 27, 1998, has been restated to reflect the adoption of SOP
98-5 and the acquisition of Minnesota Pizza Company, LLC, a business
combination accounted for as a pooling of interests (see Notes 2 and 3 of
Notes to Condensed Consolidated Financial Statements).
See accompanying notes.
5
<PAGE>
Papa John's International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 26, 1999
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 and nine months ended September
26, 1999, are not necessarily indicative of the results that may be expected for
the year ended December 26, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Annual
Report on Form 10-K for Papa John's International, Inc. (referred to as the
"Company," "Papa John's" or in the first person notations of "we," "us" and
"our"), for the year ended December 27, 1998.
2. Accounting Change
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities" (the
"SOP"), which requires that costs related to start-up activities be expensed as
incurred. Prior to 1998, we capitalized our start-up costs incurred primarily in
connection with opening new restaurant and commissary locations and amortized
these costs on a straight line basis over a period of one year from the
facility's opening date. We adopted the provisions of the SOP at the time we
issued our financial statements for the year ended December 27, 1998 and have
restated all previously reported interim financial statements. The adoption
resulted in a charge in the first quarter of 1998 for the cumulative effect of
an accounting change of $2.6 million, net of taxes of $1.5 million, to expense
costs that had been previously capitalized prior to 1998. Excluding the one-time
cumulative effect, the adoption of the new accounting standard did not have a
material impact on 1998 operating results.
3. Business Combinations
On March 28, 1999, we acquired Minnesota Pizza Company, LLC ("Minnesota Pizza"),
a franchisee which operated 37 Papa John's restaurants in the Minneapolis/St.
Paul, Minnesota market. We issued 128,119 shares of our common stock valued at
$5.4 million in exchange for all of the issued and outstanding ownership
interests of Minnesota Pizza. The transaction was accounted for as a pooling of
interests. Our previously reported results of operations and balance sheets have
been restated to include Minnesota Pizza. Intercompany transactions between the
Company and Minnesota Pizza have been eliminated in the accompanying condensed
consolidated financial statements. The operating results previously reported by
the Company and Minnesota Pizza separately are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 27, 1998 September 27, 1998
(In thousands) Papa John's Minnesota Pizza Papa John's Minnesota Pizza
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $166,428 $4,615 $481,629 $13,127
Eliminations (1,611) - (4,627) -
------------------------------------------------------------------------------------------------
Net combined revenue 164,817 4,615 477,002 13,127
Net income (loss) 9,675 (976) 24,512 (2,276)
Pro forma net income (loss) 9,675 (605) 24,512 (1,411)
</TABLE>
The Minnesota Pizza pro forma net income (loss) includes an income tax benefit
for the treatment of Minnesota Pizza as a C Corporation rather than a limited
liability company taxed as a partnership, with an assumed effective income tax
rate of 38%.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
4. Segment Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands) Sept. 26, 1999 Sept. 27, 1998 Sept. 26, 1999 Sept. 27, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Restated (1) Restated (1)
<S> <C> <C> <C> <C>
Revenues from external customers:
Restaurants $ 96,538 $ 85,165 $289,216 $249,544
Commissaries 81,002 63,162 227,090 180,162
Franchising 12,036 9,429 34,803 26,827
All others 12,504 11,676 38,706 33,596
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues from external customers $202,080 $169,432 $589,815 $490,129
=============================================================================================================================
Intersegment revenues:
Commissaries $ 30,490 $ 26,687 $ 87,350 $ 76,717
Franchising 34 32 102 95
All others 3,644 4,426 10,519 12,154
- -----------------------------------------------------------------------------------------------------------------------------
Total intersegment revenues $ 34,168 $ 31,145 $ 97,971 $ 88,966
=============================================================================================================================
Income before income taxes:
Restaurants $ 3,022 $ 2,192 $ 11,910 $ 7,576 (2)
Commissaries 6,696 4,113 19,303 12,295
Franchising 10,350 7,975 30,005 22,863
All others 1,014 1,406 3,574 3,835
Unallocated corporate expenses (1,239) (1,228) (6,865) (5,622) (2)
Elimination of intersegment profits (57) (77) (115) (184)
- -----------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 19,786 $ 14,381 $ 57,812 $ 40,763 (3)
=============================================================================================================================
Gross fixed assets:
Restaurants $138,512
Commissaries 53,110
All others 5,050
Unallocated corporate assets 79,751
Accumulated depreciation (61,725)
- ------------------------------------------------------------
Net fixed assets $214,698
============================================================
</TABLE>
(1) See Notes 2 and 3 of Notes to Condensed Consolidated Financial Statements.
(2) Certain 1998 data from prior quarters has been reclassified between segments
to more appropriately reflect the accounting for the Minnesota Pizza
acquisition.
(3) Excludes the cumulative effect of a change in accounting principle.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Restaurant Progression (1)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Company-owned:
Beginning of period 519 474 514 427
Opened 9 18 19 57
Closed - - (1) (1)
Sold to franchisees - (2) (6) (3)
Acquired from franchisees 20 11 22 21
- ----------------------------------------------------------------------------------------------------------------------------
End of period 548 501 548 501
- ----------------------------------------------------------------------------------------------------------------------------
U.S. franchised:
Beginning of period 1,523 1,212 1,365 1,090
Opened 88 74 248 207
Closed (2) - (8) (2)
Sold to Company (20) (11) (22) (21)
Acquired from Company - 2 6 3
- ----------------------------------------------------------------------------------------------------------------------------
End of period 1,589 1,277 1,589 1,277
- ----------------------------------------------------------------------------------------------------------------------------
International franchised:
Beginning of period 15 - 6 -
Opened 7 2 16 2
- ----------------------------------------------------------------------------------------------------------------------------
End of period 22 2 22 2
- ----------------------------------------------------------------------------------------------------------------------------
Total at end of period 2,159 1,780 2,159 1,780
============================================================================================================================
</TABLE>
(1) Restated for the acquisition of Minnesota Pizza (see Note 3 of Notes to
Condensed Consolidated Financial Statements).
Results of Operations
On March 28, 1999, we acquired Minnesota Pizza Company, LLC ("Minnesota Pizza"),
a franchisee which operated 37 Papa John's restaurants in the Minneapolis/St.
Paul, Minnesota market. The transaction was accounted for as a pooling of
interests. Our operating results for the first quarter of 1999 and previously
reported results of operations and balance sheets have been restated to include
Minnesota Pizza.
Revenues. Total revenues increased 19.3% to $202.1 million for the three months
ended September 26, 1999, from $169.4 million for the comparable period in 1998,
and 20.3% to $589.8 million for the nine months ended September 26, 1999, from
$490.1 million for the comparable period in 1998.
Restaurant sales increased 13.4% to $96.5 million for the three months ended
September 26, 1999, from $85.2 million for the comparable period in 1998, and
15.9% to $289.2 million for the nine months ended September 26, 1999, from
$249.5 million for the comparable period in 1998. These increases were primarily
due to increases of 9.6% and 13.4% in the number of equivalent Company-owned
restaurants open during the three and nine months ended September 26, 1999,
respectively, 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 4.5% for the three months ended
September 26, 1999, over the comparable period in 1998, and 3.9% for the nine
months ended September 26, 1999,
8
<PAGE>
over the comparable period in 1998, for Company-owned restaurants open
throughout both periods due to reduced price discounting during 1999.
Franchise royalties increased 29.9% to $10.3 million for the three months ended
September 26, 1999, from $7.9 million for the comparable period in 1998, and
29.5% to $29.8 million for the nine months ended September 26, 1999, from $23.0
million for the comparable period in 1998. These increases were primarily due to
increases of 26.5% and 25.8% in the number of equivalent franchised restaurants
open during the three and nine months ended September 26, 1999, compared to the
same periods in 1998. Also, sales increased 6.9% for the three months ended
September 26, 1999, over the comparable period in 1998, and 7.5% for the nine
months ended September 26, 1999, over the comparable period in 1998, for
franchised restaurants open throughout both periods.
Franchise and development fees increased 16.0% to $1.8 million for the three
months ended September 26, 1999, from $1.5 million for the comparable period in
1998, and 31.3% to $5.0 million for the nine months ended September 26, 1999,
from $3.8 million for the comparable period in 1998. These increases were
primarily due to the 264 franchised restaurants opened during the nine months
ended September 26, 1999, versus the 209 opened during the comparable period in
1998, 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 certain "Hometown restaurants" generally have lower required fees
than restaurants opened pursuant to more recent development agreements.
"Hometown restaurants" are generally located in smaller markets with fewer than
9,000 households. Hometown restaurant development agreements entered into
subsequent to March 1998, generally provide for fees equivalent to those under
standard development agreements.
Commissary sales increased 28.2% to $81.0 million for the three months ended
September 26, 1999, from $63.2 million for the comparable period in 1998, and
26.0% to $227.1 million for the nine months ended September 26, 1999, from
$180.2 million for the comparable period in 1998. These increases were primarily
the result of the increases in equivalent franchised restaurants previously
noted.
Equipment and other sales increased 7.1% to $12.5 million for the three months
ended September 26, 1999, from $11.7 million for the comparable period in 1998,
and 15.2% to $38.7 million for the nine months ended September 26, 1999, from
$33.6 million for the comparable period in 1998. These increases were due to
ongoing equipment and smallwares orders related to the previously noted increase
in equivalent franchised restaurants and an increase in sales and support fees
of the Papa John's PROFIT System, a proprietary point of sale system. The nine-
month increase is also due to increases in the number of new restaurant
equipment packages sold to franchisees that opened restaurants during the nine
months ended September 26, 1999 as compared to the same period in 1998,
partially offset by the decrease in sales of the Papa John's PROFIT System.
Substantially all franchisees had installed the Papa John's PROFIT System in
their existing restaurants by March 29, 1998.
Costs and Expenses. Restaurant cost of sales, which consists of food, beverage
and paper costs, increased as a percentage of restaurant sales to 27.4% for the
three months ended September 26, 1999, from 26.9% for the comparable period in
1998, and decreased to 25.6% for the nine months ended September 26, 1999, from
26.4% for the comparable period in 1998. The increase for the three-month period
is primarily due to an increase in the average cheese block market price. Cheese
represents approximately 40% of food cost and is subject to significant price
fluctuations caused by weather, demand and other factors. The decrease for the
nine-month period is primarily attributable to reduced restaurant menu price
discounting, partially offset by an increase in the average cheese block market
price.
Restaurant salaries and benefits as a percentage of restaurant sales decreased
to 26.7% for the three months ended September 26, 1999, from 26.9% for the
comparable period in 1998, and remained consistent at 27.0% for the nine months
ended September 26, 1999 and September 27, 1998. The decrease for the three
months was the result of labor efficiencies. For the nine-month period, this
decrease was offset by higher staffing levels after the 14th Anniversary
promotion to support the demands of new customers. Occupancy costs were
relatively consistent as a percentage of restaurant sales at 5.3% for the three
months ended September 26, 1999, compared to 5.4% for the comparable period in
1998, and 5.0% for the nine months ended September 26, 1999, compared to 5.1%
for the comparable period in 1998.
9
<PAGE>
Advertising and related costs were relatively consistent as a percentage of
restaurant sales at 8.3% for the three months ended September 26, 1999, compared
to 8.4% for the comparable period in 1998 and 8.7% for the nine months ended
September 26, 1999 and September 27, 1998.
Other restaurant operating expenses increased as a percentage of restaurant
sales to 13.5% for the three months ended September 26, 1999, from 13.0% for the
comparable period in 1998, and increased as a percentage of restaurant sales to
13.4% for the nine months ended September 26, 1999, from 13.0% for the
comparable period in 1998. These increases were due to increased repair and
maintenance costs. The nine-month increase is also attributed to increased costs
associated with the 14th Anniversary promotion. 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,
food, equipment purchases and storage to Company-owned restaurants.
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 decreased as a percentage of combined commissary sales and equipment and
other sales to 90.8% for the three months ended September 26, 1999, as compared
to 92.0% for the same period in 1998, and decreased to 90.8% for the nine months
ended September 26, 1999, from 91.5% for the same period in 1998. Cost of sales
as a percentage of combined commissary sales and equipment and other sales
decreased to 77.1% for the three months ended September 26, 1999, from 78.8% for
the comparable period in 1998, and decreased to 76.3% for the nine months ended
September 26, 1999, from 78.2% for the comparable period in 1998. These
decreases were due primarily to the timing of certain commodity price changes
and the change in classification of certain expenses to salaries and benefits
previously reported as cost of sales. Salaries and benefits increased to 6.6%
for the three months ended September 26, 1999, from 5.8% for the comparable
period in 1998, and increased to 6.7% for the nine months ended September 26,
1999, from 5.8% for the comparable period in 1998 due primarily to the change in
classification of certain expenses previously reported in cost of sales and
general and administrative expenses. Other operating expenses decreased to 7.1%
for the three months ended September 26, 1999, from 7.5% for the comparable
period in 1998, and increased to 7.8% for the nine months ended September 26,
1999, from 7.5% for the comparable period in 1998. The decrease for the three
months ended September 26, 1999 is primarily attributed to a reduction in
commissary rent expense due to the opening of the Dallas, Texas and Louisville,
Kentucky commissaries that were previously operated in leased facilities. The
increase for the nine months ended September 26, 1999 is attributed to higher
delivery costs related to the transition to a new distribution vendor and higher
costs related to the 14th Anniversary promotion, partially offset by a reduction
in commissary rent expense as noted above.
General and administrative expenses as a percentage of total revenues decreased
to 6.8% for the three months ended September 26, 1999, from 7.6% for the
comparable period in 1998, and decreased to 7.2% for the nine months ended
September 26, 1999, from 8.0% for the comparable period in 1998. The decreases
were due to leveraging expenses on a higher sales base, the resolution of
certain tax incentives related to the construction of the new corporate
headquarters facility, and the change in classification of certain expenses to
commissary, equipment and other salaries and benefits previously reported as
general and administrative expenses. The change in classification represented
approximately 0.2% of the total improvement in both the three and nine month
periods. The overall decrease in general and administrative expenses for both
periods was partially offset by an increase in legal costs (see Part II, Item 1.
Legal Proceedings).
Pre-opening and other general expenses decreased to ($43,000) for the three
months ended September 26, 1999, from $369,000 for the comparable period in
1998, and increased to $2.7 million for the nine months ended September 26,
1999, from $2.6 million for the comparable period in 1998. The decrease for the
three months is due to reduced write-offs for restaurant relocations and lower
restaurant pre-opening expenses. The increase for the nine months was due to
increased equipment and leasehold write-offs resulting from an increased number
of restaurant relocations and divestitures, partially offset by lower restaurant
pre-opening expenses. Restaurant pre-opening costs decreased due to a lower
number of corporate restaurant openings during the three and nine months ended
September 26, 1999 compared to the same periods in 1998.
Depreciation and amortization were relatively consistent as a percentage of
total revenues at 3.1% and 3.0% for the three and nine months ended September
26, 1999, as compared to 3.2% and 3.1% for the comparable periods in 1998.
Investment Income. Investment income decreased to $831,000 for the three months
ended September 26, 1999, from $1.0 million for the comparable period in 1998,
and decreased to $2.5 million for the nine months ended
10
<PAGE>
September 26, 1999, from $3.1 million for the comparable period in 1998. These
decreases were primarily due to a lower average balance of franchise loans and
changes in the composition of our investments during the three and nine months
ended September 26, 1999 compared to the same periods in 1998.
Income Tax Expense. Income tax expense, exclusive of Minnesota Pizza operating
results, reflects a combined federal, state and local effective tax rate of
37.5% for the three and nine months ended September 26, 1999, compared to 37.0%
for the comparable periods in 1998 (see Note 3 of Notes to Condensed
Consolidated Financial Statements). The effective tax rate in 1999 increased as
a result of a relative decrease in the level of tax-exempt investment income to
total pre-tax income.
Liquidity and Capital Resources
Cash flow from operations increased to $63.4 million for the nine months ended
September 26, 1999, from $49.1 million for the comparable period in 1998, due
primarily to the higher level of net income for the first nine months of 1999
partially offset by increases in other components of working capital.
We require 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 $62.3 million for the nine months
ended September 26, 1999, were funded by cash flow from operations and cash
generated from the exercise of stock options.
In addition to restaurant development and potential acquisitions, significant
capital projects for the next 12 months are expected to include the completion
of the 247,000 square foot facility in Louisville, Kentucky. In mid-1999, the
Louisville commissary operations and the majority of the team members in the
corporate offices were relocated to the new facility which is expected to be
completed in late-1999. In early-2000, we expect to open a full-service
commissary in Pittsburgh, Pennsylvania and complete the expansion and relocation
of the Phoenix, Arizona distribution center to a full-service commissary by mid-
2000.
We have been approved to receive up to $21.0 million in incentives under the
Kentucky Jobs Development Act in connection with the relocation of our corporate
offices. Based upon the expected timing of completion of the facility and its
final design, we expect to earn approximately $13.0 million of such incentives
through 2007.
Capital resources available at September 26, 1999, include $45.5 million of cash
and cash equivalents, $39.8 million of investments, and $19.5 million under a
line of credit expiring in June 2000. We expect to fund planned capital
expenditures for the next twelve months from these resources and operating cash
flows.
Impact of Year 2000
Some of our older purchased software programs were written using two digits
rather than four to define the applicable year. As a result, time-sensitive
software or hardware recognizes a date using "00" as the year 1900 rather than
the year 2000. This could cause a system failure or miscalculations resulting in
disruptions of important administrative and operational processes, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
Our year 2000 evaluation has been ongoing since late 1997 and became more
formalized in January 1999 with the formation of a committee comprised of senior
management from various departments within the Company. The primary goal of the
committee was to assess and mitigate risk associated with year 2000 issues by
September 1999. The committee developed a three-phased approach to accomplish
this goal consisting of the following: (1) identifying and documenting the
business components impacted by the year 2000, both internally and externally,
assigning priority to those components identified based on the level of risk,
and determining year 2000 compliance; (2) performing tests for year 2000
compliance; and (3) developing contingency plans based upon the results of the
risk analysis and testing phases.
As required by this three-phased approach, we completed an assessment of our
internal information technology and have modified or replaced certain software
and hardware to function properly in the year 2000 and thereafter. The total
year 2000 project cost is immaterial to our financial position, net income and
liquidity. Much of the cost related to year 2000 changes coincides with company
plans to replace certain systems, including the financial accounting and
payroll/human
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resource systems, which were upgraded in January 1999, in order to accommodate
our planned growth. About 95% of the new financial accounting system has been
implemented and the remaining portion is expected to be implemented in December
1999. Based upon the representations from the manufacturers of these systems,
and our internal testing, we believe the systems are year 2000 compliant. The
timing of implementation was not materially affected by year 2000 concerns.
We have taken action to ensure that our restaurant system is year 2000 compliant
by implementing a single point of sale operating system (Papa John's PROFIT
System) in all Company-owned and substantially all franchised restaurants.
Additionally, we have notified our franchisees of our year 2000 process and have
requested their assistance in ensuring year 2000 compliance with regard to their
business.
We believe that with the planned modifications to existing software and/or
conversions to new software and hardware as described above, the year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed timely, the year 2000 issue
could have a material impact on certain administrative and operational
processes.
We have queried our significant vendors with respect to year 2000 issues and
have received responses from these vendors, including our cheese and tomato
sauce vendors. We are not aware of any vendors with a year 2000 issue that would
materially impact our results of operations, liquidity, or capital resources.
However, we have no means of ensuring that vendors will be year 2000 ready. The
inability of vendors to complete their year 2000 resolution process in a timely
fashion could materially impact us, although the actual impact of non-compliance
by vendors is not determinable.
There can be no assurance that we will be completely successful in our efforts
to address year 2000 issues. We have evaluated contingency plans in the event we
do not complete all phases of the year 2000 program, but do not believe any such
contingency plans need to be enacted at this time.
Forward Looking Statements
Certain information contained in this quarterly report, particularly information
regarding future financial performance and plans and objectives of management,
is forward looking. Certain factors could cause actual results to differ
materially from those expressed in forward looking statements. These factors
include, but are not limited to, our ability and the ability of our franchisees
to obtain suitable locations and financing for new restaurant development; the
hiring, training, and retention of management and other personnel; competition
in the industry with respect to price, service, location and food quality; an
increase in food cost due to seasonal fluctuations, weather or demand; changes
in consumer tastes or demographic trends; changes in federal or state laws, such
as increases in minimum wage; risks inherent to international development; and
factors associated with the year 2000 evaluation and modifications. See "Forward
Looking Statements" in Part I, Item I - Business Section of the Form 10-K for
the fiscal year ended December 27, 1998 for additional factors.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 12, 1998, Pizza Hut, Inc. filed suit against us in the United States
District Court for the Northern District of Texas under the federal Lanham Act
(the "Lawsuit") claiming, among other things, that we engaged in acts of unfair
competition through dissemination of "false, misleading and disparaging
advertising", including without limitation, the use of our "Better Ingredients.
Better Pizza." trademark. Pizza Hut is seeking injunctive relief and damages in
an amount of not less than $12.5 million, attorneys' fees, and other relief. We
have filed counterclaims against Pizza Hut claiming, among other things, that
the Lawsuit was filed primarily, if not solely, as a competitive ploy and that
Pizza Hut had engaged in false, misleading and disparaging advertising aimed at
us. We have asked the court for an award of our reasonable attorneys' fees, as
well as for other relief to which we may be entitled. The trial in this case
began October 25, 1999, and is currently in process. We continue to believe the
Lawsuit has no merit and intend to vigorously defend the claims asserted against
us.
We are also subject to claims and legal actions in the ordinary course of our
business. We believe that all such claims and actions currently pending against
us are either adequately covered by insurance or would not have a material
adverse effect on us if decided in a manner unfavorable to us.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit
Number Description
10.1 Committed Line of Credit Note with PNC Bank.
11 Calculation of Earnings per Share
27 Financial Data Schedule for the nine months ended
September 26, 1999, 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 our Annual
Report on Form 10-K for the fiscal year ended December
27, 1998 (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
September 26, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAPA JOHN'S INTERNATIONAL, INC.
(Registrant)
Date: November 9, 1999 /s/ E. Drucilla Milby
-------------------- ------------------------------
E. Drucilla Milby, Senior Vice
President, Chief Financial
Officer and Treasurer
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Exhibit 10.1
COMMITTED LINE OF CREDIT NOTE
(MULTI-RATE OPTIONS)
$20,000,000 July 1, 1999
FOR VALUE RECEIVED, PAPA JOHN'S INTERNATIONAL, INC., a Delaware corporation (the
"Borrower"), with an address at 2002 Papa John's Boulevard, Louisville, Kentucky
40299, promises to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the
"Bank"), in lawful money of the United States of America in immediately
available funds at its offices located at 500 West Jefferson Street, Second
Floor, Louisville, KY 40202, or at such other locations as the Bank may
designate from time to time, the principal sum of TWENTY MILLION DOLLARS
($20,000,000) (the "Facility") or such lesser amount as may be advanced to or
for the benefit of the Borrower hereunder, together with interest accruing on
the outstanding principal balance from the date hereof, all as provided below:
1. Advances. This is a committed line of credit pursuant to which the
Borrower may borrow, repay and reborrow, and the Bank, subject to the terms and
conditions of this Note and the Loan Documents (as hereinafter defined), will
make advances to the Borrower and issue letters of credit for the account of the
Borrower (the "Letters of Credit") until the Expiration Date (as hereinafter
defined), provided however, that the total amount of outstanding Letters of
Credit issued hereunder (in the Bank's sole discretion and subject to
documentation satisfactory to the Bank) shall not exceed $3,000,000. Each
payment by the Bank under a Letter of Credit shall in the Bank's discretion
constitute an advance of principal hereunder and shall be evidenced by this
Note. (This is not a pre-advice for the issuance of a letter of credit and is
not irrevocable.) The "Expiration Date" shall mean June 30, 2000, or such later
date as may be designated by the Bank by written notice from the Bank and the
Borrower. The Borrower acknowledges and agrees that in no event will the Bank be
under any obligation to extend or renew the Facility or this Note beyond the
Expiration Date. The Borrower may request advances hereunder upon giving oral or
written notice to the Bank by 11:00 a.m. (Louisville, Kentucky time) (a) on the
day of the proposed advance, in the case of advances to bear interest under the
Base Rate Option (as hereinafter defined) or the As Offered Rate Option (as
hereinafter defined) and (b) three (3) Business Days prior to the proposed
advance, in the case of advances to bear interest under the Euro-Rate Option (as
hereinafter defined), followed promptly thereafter by the Borrower's written
confirmation to the Bank on any oral notice. The aggregate unpaid principal
amount of advances under this Note shall not exceed the face amount of this
Note.
2. Rate of Interest. Each advance outstanding under this Note will bear
interest at a rate or rates per annum as may be selected by the Borrower from
the interest options set forth below (each, an "Option"):
(i) Base Rate Option. A rate of interest per annum which is at all times
equal to the Prime Rate ("Base Rate"). For purposes hereof, the term "Prime
Rate" shall mean the rate
<PAGE>
publicly announced by the Bank from time to time as its prime rate. The Prime
Rate is determined from time to time by the Bank as a means of pricing some
loans to its borrowers. The Prime Rate is not tied to any external rate of
interest or index, and does not necessarily reflect the lowest rate of interest
actually charged by the Bank to any particular class or category of customers.
If and when the Prime Rate changes, the rate of interest with respect to any
advance to which the Base Rate Option applies will change automatically without
notice to the Borrower, effective on the date of any such change. There are no
required minimum interest periods for advances bearing interest under the Base
Rate Option.
(ii) Euro-Rate Option. A rate per annum equal to the sum of (A) the
Euro-Rate plus (B) Fifty (50) basis points (.50%), for the applicable Euro-Rate
Interest Period.
(iii) As Offered Rate Option. A rate of interest per annum, as offered from
time to time by the Bank to the Borrower in its sole discretion, as the daily
rate at which the Bank would advance funds to the Borrower (the "As Offered Rate
Interest Period") in the principal amount requested.
For purposes hereof, the following terms shall have the following meanings:
"Business Day" shall mean any day other than a Saturday or Sunday or a
legal holiday on which commercial banks are authorized or required to be
closed for business in Louisville, Kentucky.
"Euro-Rate" shall mean, with respect to any advance to which the Euro-Rate
Option applies for the applicable Euro-Rate Interest Period, the interest
rate per annum determined by the Bank by dividing (the resulting quotient
rounded upwards, if necessary, to the nearest 1/100th of 1%) (i) the rate
of interest determined by the Bank in accordance with its usual procedures
(which determination shall be conclusive absent manifest error) to be the
eurodollar rate two (2) Business Days prior to the first day of such Euro-
Rate Interest Period for an amount comparable to such advance and having a
borrowing date and a maturity comparable to such Euro-Rate Interest Period
by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage.
"Euro-Rate Interest Period" shall mean the period of one (1), two (2),
three (3) or six (6) months selected by the Borrower commencing on the date
of disbursement of an advance (or the date of conversion of an advance to
the Euro-Rate Option, as the case may be) and each successive period
selected by the Borrower thereafter; provided, that if a Euro-Rate Interest
Period would end on a day which is not a Business Day, it shall end on the
next succeeding Business Day, unless such day falls in the succeeding
calendar month in which case the Euro-Rate Interest Period shall end on the
next preceding Business Day. In no event shall any Euro-Rate Interest
Period end on a day after the Expiration Date.
"Euro-Rate Reserve Percentage" shall mean the maximum effective percentage
in effect on such day as prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for determining the reserve
requirements (including, without limitation,
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supplemental, marginal and emergency reserve requirements) with respect to
eurocurrency funding (currently referred to as "Eurocurrency liabilities").
The Euro-Rate shall be adjusted with respect to any advance to which the
Euro-Rate Option applies on and as of the effective date of any change in the
Euro-Rate Reserve Percentage. The Bank shall give prompt notice to the Borrower
of the Euro-Rate as determined or adjusted in accordance herewith, which
determination shall be conclusive absent manifest error.
If the Bank determines (which determination shall be final and conclusive) that,
by reason of circumstances affecting the eurodollar market generally, deposits
in dollars (in the applicable amounts) are not being offered to banks in the
eurodollar market for the selected term, or adequate means do not exist for
ascertaining the Euro-Rate, then the Bank shall give notice thereof to the
Borrower. Thereafter, until the Bank notifies the Borrower that the
circumstances giving rise to such suspension no longer exist, (a) the
availability of the Euro-Rate Option shall be suspended, and (b) the interest
rate for all advances then bearing interest under the Euro-Rate Option shall be
converted at the expiration of the then current Euro-Rate Interest Period(s) to
the Base Rate Option.
In addition, if, after the date of this Note, the Bank shall determine (which
determination shall be final and conclusive) that any enactment, promulgation or
adoption of or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by a governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline, request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency shall make it unlawful or impossible for the
Bank to make or maintain or fund loans under the Euro-Rate Option, the Bank
shall notify the Borrower. Upon receipt of such notice, until the Bank notifies
the Borrower that the circumstances giving rise to such determination no longer
apply, (a) the availability of the Euro-Rate Option shall be suspended, and (b)
the interest rate on all advances then bearing interest under the Euro-Rate
Option shall be converted to the Base Rate Option either (i) on the last day of
the then current Euro-Rate Interest Period(s) if the Bank may lawfully continue
to maintain advances under the Euro-Rate Option to such day, or (ii) immediately
if the Bank may not lawfully continue to maintain advances under the Euro-Rate
Option.
The foregoing notwithstanding, it is understood that the Borrower may select
different Options to apply simultaneously to different portions of the advances
and may select up to four (4) different interest periods to apply simultaneously
to different portions of the advances bearing interest under the Euro-Rate
Option. Interest hereunder will be calculated on the basis of a year of 360 days
for the actual number of days elapsed. In no event will the rate of interest
hereunder exceed the maximum rate allowed by law.
3. Interest Rate Election. Subject to the terms and conditions of this Note, at
the end of each interest period applicable to any advance, the Borrower may
renew the Option applicable to such advance or convert such advance to a
different Option; provided that, during any period in which any Event of Default
(as hereinafter defined) has occurred and is continuing, any advances
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<PAGE>
bearing interest under the Euro-Rate Option shall, at the Bank's sole
discretion, be converted at the end of the applicable Euro-Rate Interest Period
to the Base Rate Option and the Euro-Rate Option will not be available to
Borrower with respect to any new advances until such Event of Default has been
cured by the Borrower or waived by the Bank. The Borrower shall notify the Bank
of each election of an Option, each conversion from one Option to another, the
amount of the advances then outstanding to be allocated to each Option and where
relevant the interest periods therefor. In the case of converting to the
Euro-Rate Option, such notice shall be given at least three (3) Business Days
prior to the commencement of any Euro-Rate Interest Period. If no notice of
conversion or renewal is timely received by the Bank, the Borrower shall be
deemed to have converted such advance to the Base Rate Option. Any such election
shall be promptly confirmed in writing by such method as the Bank may require.
4. Advance Procedures. A request for advance made by telephone must be promptly
confirmed in writing by such method as the Bank may require. The Borrower
authorizes the Bank to accept telephonic requests for advances, and the Bank
shall be entitled to rely upon the authority of any person providing such
instructions. The Borrower hereby indemnifies and holds the Bank harmless from
and against any and all damages, losses, liabilities, costs and expenses
(including reasonable attorneys' fees and expenses) which may arise or be
created by the acceptance of such telephone requests or making such advances.
The Bank will enter on its books and records, which entry when made will be
presumed correct, the date and amount of each advance, the interest rate and
interest period applicable thereto, as well as the date and amount of each
payment.
5. Payment Terms. The Borrower shall pay accrued interest on the unpaid
principal balance of this Note in arrears: (a) for the portion of advances
bearing interest under the Base Rate Option, on the first day of each month
during the term hereof, (b) for the portion of advances bearing interest under
the Euro-Rate Option, on the last day of the respective Euro-Rate Interest
Period for such advance, (c) for the portion of advances bearing interest under
the As Offered Rate Option, on the last day of each As Offered Interest Period,
(d) if any Euro-Rate Interest Period or As Offered Rate Interest Period is
longer than three (3) months, then also on the three (3) month anniversary of
such interest period and every three (3) months thereafter, and (e) for all
advances, at maturity, whether by acceleration of this Note or otherwise, and
after maturity, on demand until paid in full. All outstanding principal and
accrued interest hereunder shall be due and payable in full on the Expiration
Date.
If any payment under this Note shall become due on a Saturday, Sunday or public
holiday under the laws of the State where the Bank's office indicated above is
located, such payment shall be made on the next succeeding business day and such
extension of time shall be included in computing interest in connection with
such payment. The Borrower hereby authorizes the Bank to charge the Borrower's
deposit account at the Bank for any payment when due hereunder. Payments
received will be applied to charges, fees and expenses (including attorneys'
fees), accrued interest and principal in any order the Bank may choose, in its
sole discretion.
6. Late Payments; Default Rate. If the Borrower fails to make any payment of
principal, interest or other amount coming due pursuant to the provisions of
this Note within 15 calendar
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<PAGE>
days of the date due and payable, the Borrower also shall pay to the Bank a late
charge equal to the lesser of five percent (5%) of the amount of such payment or
$100.00 (the "Late Charge"). Such 15-day period shall not be construed in any
way to extend the due date of any such payment. Upon maturity, whether by
acceleration, demand or otherwise, and at the Bank's option upon the occurrence
of any Event of Default (as hereinafter defined) and during the continuance
thereof, this Note shall bear interest at a rate per annum (based on a year of
360 days and actual days elapsed) which shall be two percentage points (2%) in
excess of the interest rate in effect from time to time under this Note but not
more than the maximum rate allowed by the law (the "Default Rate"). The Default
Rate shall continue to apply whether or not judgment shall be entered on this
Note. Both the Late Charge and the Default Rate are imposed as liquidated
damages for the purposes of defraying the Bank's expenses incident to the
handling of delinquent payments, but are in addition to, and not in lieu of, the
Bank's exercise of any rights and remedies hereunder, under the other Loan
Documents or under applicable law, and any fees and expenses of any agents or
attorneys which the Bank may employ. In addition, the Default Rate reflects the
increased credit risk to the Bank of carrying a loan that is in default. The
Borrower agrees that the Late Charge and Default Rate are reasonable forecasts
of just compensation for anticipated and actual harm incurred by the Bank, and
that the actual harm incurred by the Bank cannot be estimated with certainty and
without difficulty.
7. Prepayment. The Borrower shall have the right to prepay at any time and
from time to time, in whole or in part, without penalty, any advance hereunder
which is accruing interest under the Base Rate Option or the As Offered Rate
Option. If the Borrower prepays (whether voluntary, on default or otherwise) all
or any part of any advance which is accruing interest under the Euro-Rate Option
on other than the last day of the applicable Euro-Rate Interest Period, the
Borrower shall pay to the Bank, on demand therefor, all amounts due pursuant to
paragraph 8 below, including the Cost of Prepayment, if any.
8. Yield Protection. The Borrower shall pay to the Bank, on written demand
therefor, together with the written evidence of the justification therefor, all
direct costs incurred, losses suffered or payments made by Bank by reason of any
change in law or regulation or its interpretation imposing any reserve, deposit,
allocation of capital, or similar requirement (including without limitation,
Regulation D of the Board of Governors of the Federal Reserve System) on the
Bank, its holding company or any of their respective assets. In addition, the
Borrower agrees to indemnify the Bank against any liabilities, losses or
expenses (including loss of margin, any loss or expense sustained or incurred in
liquidating or employing deposits from third parties, and any loss or expense
incurred in connection with funds acquired to effect, fund or maintain any
advance (or any part thereof) bearing interest under the Euro-Rate Option which
the Bank sustains or incurs as a consequence of either (i) the Borrower's
failure to make a payment on the due date thereof, (ii) the Borrower's
revocation (expressly, by later inconsistent notices or otherwise) in whole or
in part of any notice given to Bank to request, convert, renew or prepay any
advance, or (iii) the Borrower's payment, prepayment or conversion of any
advance bearing interest under the Euro-Rate Option on a day other than the last
day of the applicable Euro-Rate Interest Period, including but not limited to
the Cost of Prepayment. "Cost of Prepayment" means an amount equal to the
present value, if positive, of the product of (a) the difference between (i) the
yield, on the beginning date of the applicable interest period, of a U.S.
Treasury
- 5 -
<PAGE>
obligation with a maturity similar to the applicable interest period minus (ii)
the yield, on the prepayment date, of a U.S. Treasury obligation with a maturity
similar to the remaining maturity of the applicable interest period, and (b) the
principal amount to be prepaid, and (c) the number of years, including
fractional years from the prepayment date to the end of the applicable interest
period. The yield on any U.S. Treasury obligation shall be determined by
reference to Federal Reserve Statistical Release H. 15(519) "Selected Interest
Rates". For purposes of making present value calculations, the yield to maturity
of a similar maturity U.S. Treasury obligation on the prepayment date shall be
deemed the discount rate. The Cost of Prepayment shall also apply to any
payments made after acceleration of the maturity of this Note. The Bank's
determination of an amount payable under this paragraph shall, in the absence of
manifest error, be conclusive and shall be payable on demand.
9. Other Loan Documents. This Note is issued in connection with a letter
agreement or loan agreement between the Borrower and the Bank dated on or before
the date hereof, and the other agreements and documents executed in connection
therewith or referred to therein, the terms of which are incorporated herein by
reference (as amended, modified or renewed from time to time, collectively the
"Loan Documents"), and is secured by the property described in the Loan
Documents (if any) and by such other collateral as previously may have been or
may in the future be granted to the Bank to secure this Note.
10. Events of Default. The occurrence of any of the following events will be
deemed to be an "Event of Default" under this Note: (i) the nonpayment of any
principal, interest or other indebtedness under this Note within five (5) days
after it becomes due, (ii) the occurrence of any event of default or default and
the lapse of any notice or cure period under any Loan Document or any other
debt, liability or obligation to the Bank of any Obligor, (iii) the filing by or
against any Obligor or any Affiliate of any proceeding in bankruptcy,
receivership, insolvency, reorganization, liquidation, conservatorship or
similar proceeding (and, in the case of any such proceeding instituted against
any Obligor or any Affiliate, such proceeding is not dismissed or stayed within
30 days of the commencement thereof); (iv) any assignment by any Obligor or any
Affiliate for the benefit of creditors, or any levy, garnishment, attachment or
similar proceeding is instituted against any property of any Obligor or any
Affiliate held by or deposited with the Bank; (v) a default with respect to any
other indebtedness of any Obligor or any Affiliate for borrowed money in excess
of $100,000.00, if the effect of such default is to cause or permit the
acceleration of such debt; (vi) the entry of a final judgment in excess of
$1,000,000.00 against any Obligor or any Affiliate and the failure of such
Obligor or any Affiliate either to discharge the judgment or obtain a stay
thereof within thirty (30) days; )vii) any material adverse change in the
business, assets, operations, financial condition or results of operations of
any Obligor or any Affiliate; {viii) the revocation or attempted revocation, in
whole or in part, of any guarantee by any Guarantor; (ix) any representation or
warranty made by any Obligor or any Affiliate to the Bank in any
document,including bit not limited to the Loan Documents is false, erroneous or
misleading in any material respect; (x) the failure of any Obligor or any
Affiliate to observe or perform any covenant or other agreement with the Bank
contained in any Loan Document or any other documents now or in the future
securing the obligations of any Obligor or any Affiliate to the Bank and such
failure is not cured within 30 days after notice from the Bank; or (xi) the
occurrence of any event of default or
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<PAGE>
default and the lapse of any notice or cure period under any debt, liability or
obligation to the Bank of any Affiliate.
As used herein, the term "Obligor" means any Borrower and any Guarantor, the
term "Guarantor" means any guarantor of the Borrower's obligations to the Bank
existing on the date of this Note or arising in the future, and the
term "Affiliate" means each of PJ Food Service, Inc. and PJFS of Mississippi,
Inc.
Upon the occurrence of an Event of Default: (a) the Bank shall be under no
further obligation to make advances hereunder; (b) if an Event of Default
specified in clause (iii) or (iv) above shall occur, the outstanding principal
balance and accrued interest hereunder together with any additional amounts
payable hereunder shall be immediately due and payable without demand or notice
of any kind; (c) if any other Event of Default shall occur, the outstanding
principal balance and accrued interest hereunder together with any additional
amounts payable hereunder, at the Bank's option and without demand or notice of
any kind, may be accelerated and become immediately due and payable; (d) at the
Bank's option, this Note will bear interest at the Default Rate from the date of
the occurrence of the Event of Default; and (e) the Bank may exercise from time
to time any of the rights and remedies available under the Loan Documents or
under applicable law.
11. Right of Setoff. In addition to all liens upon and rights of setoff against
the Borrower's money, securities or other property given to the Bank by law, the
Bank shall have, with respect to the Borrower's obligations to the Bank under
this Note and to the extent permitted by law, a contractual possessory security
interest in and a contractual right of setoff against, and the Borrower hereby
assigns, conveys, delivers, pledges and transfers to the Bank all of the
Borrower's right, title and interest in and to, all of the Borrower's deposits,
moneys, securities and other property now or hereafter in the possession of or
on deposit with, or in transit to, the Bank or any other direct or indirect
subsidiary of PNC Bank Corp., whether held in a general or special account or
deposit, whether held jointly with someone else, or whether held for safekeeping
or otherwise, excluding, however, all IRA, Keogh, and trust accounts. Every such
security interest and right of setoff may be exercised without demand upon or
notice to the Borrower. Every such right of setoff shall be deemed to have been
exercised immediately upon the occurrence of an Event of Default hereunder
without any action of the Bank, although the Bank may enter such setoff on its
books and records at a later time.
12. Miscellaneous. All notices, demands, requests, consents, approvals and
other communications required or permitted hereunder must be in writing (except
as may be agreed otherwise above with respect to borrowing requests) and will be
effective upon receipt. Such notices and other communications may be
hand-delivered, sent by facsimile transmission with confirmation of delivery and
a copy sent by first-class mail, or sent by nationally recognized overnight
courier service, to the addresses for the Bank and the Borrower set forth above
or to such other address as either may give to the other in writing for such
purpose. No delay or omission on the Bank's part to exercise any right or power
arising hereunder will impair any such right or power or be considered a waiver
of any such right or power, nor will the Bank's action or inaction impair any
such right or power. No modification, amendment or waiver of any provision
-7-
<PAGE>
of this Note nor consent to any departure by the Borrower therefrom will be
effective unless made in a writing signed by the Bank. The Borrower agrees to
pay on demand, to the extent permitted by law, all costs and expenses incurred
by the Bank in the enforcement of its rights in this Note and in any security
therefor, including without limitation reasonable fees and expenses of the
Bank's counsel. If any provision of this Note is found to be invalid by a court,
all the other provisions of this Note will remain in full force and effect. The
Borrower and all other makers and indorsers of this Note hereby forever waive
presentment, protest, notice of dishonor and notice of non-payment. The Borrower
also waives all defenses based on suretyship or impairment of collateral. If
this Note is executed by more than one Borrower, the obligations of such persons
or entities hereunder will be joint and several. This Note shall bind the
Borrower and its heirs, executors, administrators, successors and assigns, and
the benefits hereof shall inure to the benefit of the Bank and its successors
and assigns; provided, however, that the Borrower may not assign this Note in
whole or in part without the Bank's written consent and the Bank at any time may
assign this Note in whole or in part.
This Note has been delivered to and accepted by the Bank and will be deemed to
be made in the State where the Bank's office indicated above is located. This
Note will be interpreted and the rights and liabilities of the Bank and the
Borrower determined in accordance with the laws of the State where the Bank's
office indicated above is located, excluding its conflict of laws rules. The
Borrower hereby irrevocably consents to the exclusive jurisdiction of any state
or federal court in the county or judicial district where the Bank's office
indicated above is located; provided that nothing contained in this Note will
prevent the Bank from bringing any action, enforcing any award or judgment or
exercising any rights against the Borrower individually, against any security or
against any property of the Borrower within any other county, state or other
foreign or domestic jurisdiction. The Borrower acknowledges and agrees that the
venue provided above is the most convenient forum for both the Bank and the
Borrower. The Borrower waives any objection to venue and any objection based on
a more convenient forum in any action instituted under this Note.
13. WAIVER OF JURY TRIAL. The Borrower irrevocably waives any and all rights
the Borrower may have to trial by jury in any action, proceeding or claim of any
nature relating to this Note, any documents executed in connection with this
Note or any transaction contemplated in any of such documents. The Borrower
acknowledges that the foregoing waiver is knowing and voluntary.
The Borrower acknowledges that it has read and understood all the provisions of
this Note, including the waiver of jury trial, and has been advised by counsel
as necessary or appropriate.
-8-
<PAGE>
WITNESS The due execution hereof as a document under seal, as of the date first
written above, with the intent to be legally bound hereby.
WITNESS/ATTEST: PAPA JOHN'S INTERNATIONAL,
INC., a Delaware Corporation
By: /s/ Ralph Bowman By: /s/ E. Drucilla Milby
------------------------------ ---------------------------
Ralph Bowman, Vice President Print Name: E. Drucilla Milby
---------------------
Title: CFO & Treasurer
---------------------------
-9-
<PAGE>
Exhibit 11 - Calculation of Earnings per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 26, 1999 September 27, 1998 September 26, 1999 September 27, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Earnings per Share:
Income before cumulative effect of a change
in accounting principle $12,366 $ 8,699 $36,083 $24,839
Weighted average shares outstanding 30,335 29,635 30,156 29,473
----------------------------- -----------------------------
Basic earnings per share $ 0.41 $ 0.29 $ 1.20 $ 0.84
============================= =============================
Diluted Earnings per Share:
Income before cumulative effect of a change
in accounting principle $12,366 $ 8,699 $36,083 $24,839
Weighted average shares outstanding 30,335 29,635 30,156 29,473
Dilutive effect of outstanding common stock options 893 753 975 922
----------------------------- -----------------------------
Diluted weighted average shares outstanding 31,228 30,388 31,131 30,395
----------------------------- -----------------------------
Diluted earnings per share $ 0.40 $ 0.29 $ 1.16 $ 0.82
============================= =============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> SEP-26-1999
<CASH> 45,529
<SECURITIES> 39,841
<RECEIVABLES> 15,862
<ALLOWANCES> 0
<INVENTORY> 10,431
<CURRENT-ASSETS> 79,474
<PP&E> 276,423
<DEPRECIATION> 61,725
<TOTAL-ASSETS> 374,773
<CURRENT-LIABILITIES> 55,024
<BONDS> 925
0
0
<COMMON> 304
<OTHER-SE> 310,949
<TOTAL-LIABILITY-AND-EQUITY> 374,773
<SALES> 555,012
<TOTAL-REVENUES> 589,815
<CGS> 276,870
<TOTAL-COSTS> 472,037
<OTHER-EXPENSES> 62,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 57,812
<INCOME-TAX> 21,729
<INCOME-CONTINUING> 36,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,083
<EPS-BASIC> 1.20
<EPS-DILUTED> 1.16
</TABLE>
