Papa Johns 1998 Annual Report Download - page 44

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During the fourth quarter of 1997, we acquired a 49% equity ownership interest in Mountain Pizza
Group, L.L.C. (“MPG”), for $150,000 in cash. In July 1998, we acquired the remaining 51% for $565,000
in cash. In connection with the 1998 acquisition, we also assumed $2.4 million in MPG debt. MPG, an
entity which operates seven Papa John’s restaurants in Denver, Colorado, was owned by our President.
The operating results of MPG were accounted for by the equity method until the remaining 51% was
acquired in 1998. Also during the fourth quarter of 1997, we acquired three Papa John’s restaurants near
Denver, Colorado, for $720,000 in cash. These restaurants were owned by the Chief Executive Officer of
Papa John’s and his wife.
During the second quarter of 1997, we acquired 16 Papa John’s restaurants in North Carolina for $5.0
million (consisting of $4,960,000 in cash and a credit of $40,000 towards future development fees). A
majority ownership interest in the franchisee of the North Carolina restaurants was held by certain of
our directors and officers, including our Chief Executive Officer.
The above acquisitions were accounted for by the purchase method of accounting, whereby operating
results subsequent to the acquisition date are included in our financial statements.
In December 1996, we sold our 10% ownership interest in L-N-W Pizza, Inc. (“L-N-W”), a franchisee
that operates Papa John’s restaurants in Florida, back to L-N-W. Our Chief Operating Officer was the
90% owner of L-N-W prior to the sale and is now the sole owner. We sold our 10% interest for total
consideration of $411,000, which represented a gross value of approximately $400,000 per restaurant.
11. Lease Commitments
We lease office, retail and commissary space under operating leases with terms generally ranging from
three to five years and providing for at least one renewal. Certain leases further provide that the lease
payments may be increased annually based on the Consumer Price Index. We also lease certain
equipment under operating leases with terms ranging from three to seven years. Future minimum lease
payments are as follows: 1999 - $11.0 million; 2000 - $8.9 million; 2001 - $7.2 million; 2002 - $5.2 million;
2003 - $3.7 million; and thereafter - $8.0 million. Total rent expense was $10.3 million in 1998, $7.9 million
in 1997, and $4.6 million in 1996.
12. Stock Options
In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” we have elected to
follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations in accounting for our employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires the
use of option valuation models that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of our employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation expense is recognized.
We award stock options under the Papa John’s International, Inc. 1993 Stock Ownership Incentive Plan
(the “Incentive Plan”) and the Papa John’s International, Inc. 1993 Non-Employee Directors Stock Option
Plan (the “Directors Plan”). Shares of common stock authorized for issuance are 6,000,000 under the
Incentive Plan and 270,000 under the Directors Plan. On February 25, 1999, the Board of Directors
amended the Incentive Plan to increase the number of shares available for issuance to 6,400,000 shares
and amended the Directors Plan to increase the number of shares available for issuance to 370,000 shares.
These amendments will be submitted for stockholder approval at the Annual Meeting of Stockholders
scheduled for May 20, 1999. Options granted under both plans generally expire ten years from the date
of grant and vest over one to five year periods, except for certain options awarded under a multi-year
operations compensation program which vest immediately upon grant.