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Papa John’s International, Inc. 1999 Annual Report
Thinking
INSIDE
the Box!

Table of contents

  • Page 1
    g n i k n i Th E D I S ! IN the x o B Papa John's International, Inc. 1999 Annual Report

  • Page 2
    1999 American Customer Satisfaction Index # 1 All Fast Food Restaurants Score Papa John's Wendy's Group average Pizza Hut Domino's Pizza Burger King KFC Taco Bell McDonald's 76 71 69 68 67 66 64 64 61 Source: National Quality Research Center at the University of Michigan Business School, as ...

  • Page 3

  • Page 4
    to our SHAREHOLDERS, and Team Members Franchise Family 2

  • Page 5
    ...making Papa John's the third largest pizza company in the world. â- We opened a record 401 new restaurants, ending the year with nearly 2,300 restaurants throughout the U.S. and five international markets. â- We grew systemwide comparable sales by 5.5%. â- We experienced record earnings per share...

  • Page 6
    ... number one among national pizza chains in both quality and overall customer satisfaction in the prestigious Restaurants and Institutions' Choice in Chains survey. And in our first year of being included in the survey, Papa John's earned the highest rating among all fast food companies in the 1999...

  • Page 7
    ...1999 and wish to extend my thanks to the 65,000+ Papa John's team members and our entire franchise family. It is because of you that I am able to report our outstanding results and our continued wins in the marketplace... support. Sincerely, John H. Schnatter Founder and Chief Executive Officer 5

  • Page 8
    A PROMISE Kept The pizza business seems to get more competitive every year - 1999 was no exception. In addition to several national and regional chains fighting for a bigger slice of the $22 billion-a-year pie, virtually every community in America now boasts an impressive independent local pizzeria...

  • Page 9
    ... ways to measure success in the pizza business - comparable sales growth, increasing market share, best pizza awards - and we're proud to share a few of our 1999 achievements with you. But when you cut through all the nonsense, and get right to the heart of what Papa John's is about, you always come...

  • Page 10
    A SLICE Above One of the most important indicators of our success is a repeat order from a loyal Papa John's customer. Many folks still buy pizza based entirely on whose coupon is stuck on their refrigerator. We're trying to change that mindset by consistently exceeding our customers' expectations...

  • Page 11
    ... to patronize Papa John's. Our momentum in the marketplace is confirmed by CREST industry sales and traffic numbers. CREST is the leading independent marketing research firm in the restaurant industry. For the twelve months ended August 1999, our sales were up 34 percent, while the pizza category...

  • Page 12
    ... sales and traffic are going up or down. Restaurants and Institutions' Choice in Chains consumer survey tells you why. Measuring attributes like quality, service, value and convenience, the Choice in Chains survey has become an important industry barometer in the pizza category. This year, Papa John...

  • Page 13
    ...chain in America. This marks the fourth consecutive year Papa John's has been ranked number one in quality and customer satisfaction among national pizza chains in this prestigious survey. In addition, in its first year of being included in the American Customer Satisfaction Index (1999), Papa John...

  • Page 14
    ... is our Bottom Line At Papa John's, we try to hire the most passionate pizza people in the industry. Why? Because research tells us that 80% of brand loyalty comes from the customer experience. It is the front line that makes or breaks the customer experience - so they are the bottom line of our...

  • Page 15
    ...no substitute for outstanding front line operations; great advertising can make a pizza sound good, but it will never make the pizza taste good. Our industry leading restaurant sales averages are directly attributable to the efforts of our front line team members. Papa John's team members - focused...

  • Page 16
    we keep GROWING and and GROWING GROWING...1999 was again a year of record-breaking growth for Papa John's. We opened 401 new restaurants (36 corporate and 365 franchised) compared with the previous year's record of 372 openings. We acquired a record 65 domestic restaurants from our franchisees ...

  • Page 17
    ... so secret anymore). To continue to support our restaurant growth, in 1999 we converted our Dallas distribution center into a full-service facility and, in January 2000, we opened a new center in Pittsburgh. Papa John's restaurants currently operate in 47 states, the District of Columbia and five...

  • Page 18
    think GLOBALLY, compete LOCALLY 16

  • Page 19
    In 1999 we opened 20 new international restaurants in Guatemala, Costa Rica and Venezuela. Combined with our restaurants in Mexico and Puerto Rico, we ended the year with 26 restaurants in five international markets. A very exciting growth opportunity for Papa John's came with our purchase in ...

  • Page 20
    ii wa Ha ska Ala tes Sta d ite Un â- Quality Control Centers 18

  • Page 21
    Canada Mex Cen ico t Sout ral Ame h Am rica erica t as eE dl id /M pe ro Eu â-² Restaurant Locations â- Existing Development Areas â- Committed Development Areas 19

  • Page 22
    COMMUNITY 20 INVOLVEMENT

  • Page 23
    ... brand awareness through national electronic media, we know there is no substitute for building consumer trust and loyalty in each of our individual markets. With so many good competitors out there, our restaurant operators must think and operate like the successful corner store entrepreneur who is...

  • Page 24
    ..., Papa John's increased its commitment to The V Foundation and partnered with Vitale on several promotions to raise money for cancer research and treatment. In 2000, we hope to raise half a million dollars for The V Foundation through promotions with our restaurants. Papa John's Olives - Ripe black...

  • Page 25
    ... the first time in its 70-year history, in 1999 the national FFA convention was held in our hometown of Louisville, Kentucky. Papa John's served as the national sponsor for the FFA Creed Speaking Event, which for years has fostered the personal development of tens of thousands of America's future...

  • Page 26
    the YEARS Ahead The pizza business is highly competitive. It's especially tough if you don't know what you stand for. We do. Fifteen years ago, Papa John's stood for quality. Today, Papa John's stands for quality. And fifteen years from now, Papa John's will still stand for quality. We've found ...

  • Page 27
    25

  • Page 28
    Sales Average Annual Sales - Comparable Company-owned Restaurants (in thousands) $ 750 $ 754 $ 717 1997 1998 1999 Comps Comparable Store Sales Increases â- Corporate â- Franchise â- Systemwide 10.1% 9.3 % 7.4 % 7.9 % 9.0 % 9.8 % 6.4 % 5.5 % 3.5 % 1997 1998 1999 26

  • Page 29
    ... sale to franchisees of food and paper products, restaurant equipment, printing and promotional items, risk management services and information systems equipment and software and related services by us, our commissary subsidiary, PJ Food Service, Inc., and our support services subsidiary, Papa John...

  • Page 30
    ... units. We expect the average cash investment for restaurants opening in 2000 to be approximately $244,000. We defer certain costs incurred in connection with the development of our information systems and amortize such costs over periods of up to five years from the date of completion. Our fiscal...

  • Page 31
    Year Ended Dec. 26, 1999 Income Statement Data: Revenues: Restaurant sales Franchise royalties Franchise and development fees Commissary sales Equipment and other sales Total revenues Costs and expenses: Restaurant cost of sales (2) Restaurant operating expenses (2) Commissary, equipment and other ...

  • Page 32
    ...1999 acquisition of Minnesota Pizza (see "Note 3" of "Notes to Consolidated Financial Statements"). (2) As a percentage of Restaurant sales. (3) As a percentage of Commissary sales and Equipment and other sales on a combined basis. (4) The 1998 operating results reflect the adoption of an accounting...

  • Page 33
    ... to 1998 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 market (see "Note 3" of "Notes to Consolidated Financial Statements"). The transaction was accounted for as a pooling of...

  • Page 34
    ... as compared to 1998, and the increase in the number of new restaurant equipment packages sold to franchisees that opened restaurants in 1999 as compared to 1998. Costs and Expenses. Restaurant cost of sales, which consists of food, beverage and paper costs, decreased as a percentage of restaurant...

  • Page 35
    ... reported in cost of sales and general and administrative expenses. Other operating expenses increased to 7.7% in 1999 compared to 7.5% in 1998 due primarily to higher delivery costs related to the transition to a new distribution vendor and higher costs related to the 14th Anniversary promotion...

  • Page 36
    ... tax rate for 1998, including an income tax benefit for the treatment of Minnesota Pizza as a C Corporation (see "Note 3" of "Notes to Consolidated Financial Statements"), was 37.0%. The effective tax rate in 1999 increased as compared to the 1998 pro forma rate as a result of a continued relative...

  • Page 37
    ... the number of new restaurant equipment packages sold to franchisees that opened restaurants in 1998 as compared to 1997. A portion of the equipment and other sales increase was also attributable to an increase in sales of the Papa John's PROFIT system, a proprietary point of sale system. Costs and...

  • Page 38
    ..., net of taxes of $1.5 million. This increase was partially offset by the recognition of $2.0 million in incentives under the Kentucky Jobs Development Act (the "KJDA incentives") related to the development of a new corporate headquarters facility and associated employment increases. Pre-opening...

  • Page 39
    ...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. Additionally, we began a share repurchase program in...

  • Page 40
    ... the past three years. Substantial increases in costs, particularly labor, benefits, food, and fuel costs, could have a significant impact on us. Forward Looking Statements Certain information contained in this annual report, particularly information regarding future financial performance and plans...

  • Page 41
    ... at a price approximating the actual average market price, but with more predictability and less volatility than the previous purchasing method. Selected Consolidated Financial Data The selected financial data presented below for each of the years in the five-year period ended December 26, 1999 was...

  • Page 42
    ... year consisted of 53 weeks. (2) Reflects the cumulative effect on income and earnings per share of a change in accounting principle, net of tax, as required by Statement of Position 98-5 "Reporting the Costs of Start-Up Activities" (see "Note 2" of "Notes to Consolidated Financial Statements").

  • Page 43
    ... and development fees Commissary sales Equipment and other sales Total 1997 $ 262.3 23.9 5.1 184.4 40.0 $ 515.7 1998 $ 344.1 32.1 5.5 255.1 45.4 $ 682.2 Millions 1999 $ 395.1 41.3 6.9 309.0 53.0 $ 805.3 $ 805.3 $ 682.2 $ 515.7 1997 1998 1999 Sales Systemwide Restaurant Sales â- Company...

  • Page 44
    Papa John's International, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts) December 26, 1999 Revenues: Restaurant sales Franchise royalties Franchise and development fees Commissary sales Equipment and other sales Total revenues Costs and expenses: ...

  • Page 45
    ... Statements of Income for the years ended December 27, 1998 and December 28, 1997 have been restated to reflect the acquistion of Minnesota Pizza Company, LLC, a business combination accounted for as a pooling of interests (see "Note 3" of "Notes to Consolidated Financial Statements"). See...

  • Page 46
    Papa John's International, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except per share amounts) December 26, 1999 December 27, 1998 (Restated - see Note) Assets Current assets: Cash and cash equivalents Accounts receivable Accounts receivable-affiliates Inventories ...

  • Page 47
    Papa John's Restaurant Counts 1,885 1997 â- Company-owned restaurants â- Franchised restaurants Total 427 1,090 1,517 2,280 1998 514 1,371 1,885 1999 573 1,707 2,280 1,517 Number at End of Year 1997 1998 1999 Highlights Balance Sheet Highlights (in millions) â- Cash and investments â- ...

  • Page 48
    ...' Equity for the years ended December 27, 1998 and December 28, 1997 have been restated to reflect the acquistion of Minnesota Pizza Company, LLC, a business combination accounted for as a pooling of interests (see "Note 3" of "Notes to Consolidated Financial Statements"). 46 See accompanying...

  • Page 49
    ... Purchase of property and equipment Purchase of investments Proceeds from sale or maturity of investments Loans to franchisees Loan repayments from franchisees Deferred systems development costs Acquisitions Other Net cash used in investing activities Financing activities Payments on long-term debt...

  • Page 50
    ...printing and promotional items, risk management services, and information systems and related services used in their operations. 2. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Papa John's and its subsidiaries...

  • Page 51
    ... food products, paper goods and supplies, smallwares, store equipment and printing and promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method, or market. Investments We determine the appropriate classification of investment securities at the time...

  • Page 52
    ...are written down to current fair value which is generally determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale). Systems Development Costs We defer certain systems development and related costs which meet established criteria...

  • Page 53
    ...Related Costs Advertising and related costs include the costs of Company-owned restaurant activities such as mail coupons, door hangers and promotional items and contributions to the Papa John's Marketing Fund, Inc. (the "Marketing Fund") and local market cooperative advertising funds. Contributions...

  • Page 54
    ... to Consolidated Financial Statements (continued) 1999 Diluted earnings per share: Income before cumulative effect of a change in accounting principle Weighted-average shares outstanding Dilutive effect of outstanding common stock options Diluted weighted-average shares outstanding Diluted earnings...

  • Page 55
    ... consolidated financial statements. The operating results previously reported by the Company and Minnesota Pizza separately are summarized below: Year Ended December 27, 1998 (In thousands) Total revenues Eliminations Net combined revenue Net income (loss) Pro forma net income (loss) $ Papa John...

  • Page 56
    ... to year-end, we acquired PJNJ Foods, Inc., a franchisee of 19 Papa John's restaurants in New Jersey for $7.9 million ($6.6 million in cash and $1.3 million of assumed net liabilities). The business combinations in the previous four paragraphs were each accounted for by the purchase method of...

  • Page 57
    ... Fixed income mutual funds Equity securities Other Interest receivable Total $ 7,490 7,697 83 5,712 442 233 21,657 Estimated Fair Value $ 7,412 7,586 91 5,366 956 442 233 22,086 $ $ 5. Net Property and Equipment Net property and equipment consists of the following (in thousands): 1999 Land...

  • Page 58
    ..., and is reported in investment income in the accompanying consolidated statements of income. Approximately $3.6 million of the loans outstanding as of December 26, 1999 and $4.7 million as of December 27, 1998 were to franchisees in which we or certain of our directors or officers had an ownership...

  • Page 59
    ... cost of cheese to Papa John's restaurants to be established on a quarterly basis. An independent franchisee-owned corporation, BIBP Commodities, Inc. ("BIBP"), was established effective December 27, 1999 through which the program will be administered. BIBP will purchase cheese at the market price...

  • Page 60
    ... Financial Statements (continued) market prices. PJFS in turn sells cheese to Papa John's restaurants (Company-owned and franchised) at a set quarterly price. Gains or losses incurred by BIBP due to differences in the actual market price of cheese purchased and the established quarterly sales price...

  • Page 61
    ...is $11.25 per share (90% of the IPO price of $12.50 per share). The warrant was issued by PJ America to Papa John's in consideration for the grant of rights to enter into development agreements for certain specified territories and the waiver by us of certain market transfer fees. Our agreement with...

  • Page 62
    ...Executive Officer for the purpose of funding estate tax obligations. Papa John's and the officer share the cost of the premiums. The premiums advanced by us will be repaid out of the cash value or proceeds of the policies. During the fourth quarter of 1999, we sold five restaurants to Capital Pizza...

  • Page 63
    ...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 our Chief Executive Officer...

  • Page 64
    ..., Pizza Hut, Inc. filed suit against us in the United States District Court for the Northern District of Texas, claiming that our "Better Ingredients. Better Pizza." slogan constitutes false and deceptive advertising in violation of the Lanham Trademark Act. The trial began on October 25, 1999. On...

  • Page 65
    ... Papa John's International, Inc. 1999 Team Member Stock Ownership Plan (the "1999 Plan"). Shares of common stock authorized for issuance are 6,400,000 under the 1993 Plan, 370,000 under the Directors Plan and 1,000,000 under the 1999 Plan. Options granted under all plans generally expire ten years...

  • Page 66
    Notes to Consolidated Financial Statements (continued) Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if we have accounted for our employee stock options granted subsequent to December 25, 1994 ...

  • Page 67
    ... of options in thousands): 1999 Number of Options Outstanding-beginning of year Granted Exercised Cancelled Outstanding-end of year Exercisable-end of year Weighted-average fair value of options granted during the year 5,782 1,216 636 622 5,740 2,638 WeightedAverage Exercise Price $ 28.54 26.68...

  • Page 68
    ... and promotional items, risk management services, and information systems and related services used in restaurant operations principally to Company-owned and franchised restaurants. Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes...

  • Page 69
    ... and amortization Net fixed assets Expenditures for fixed assets: Restaurants Commissaries All others Corporate Total expenditures for fixed assets (1) Restated for the March 1999 acquisition of Minnesota Pizza (see Note 3). (2) Excludes the cumulative effect of a change in accounting principle...

  • Page 70
    ... Consolidated Financial Statements (continued) 20. Quarterly Data (unaudited, in thousands, except per share data) Quarter 1999 Total revenues: As previously reported As restated Operating income: As previously reported As restated Income before cumulative effect of a change in accounting principle...

  • Page 71
    ...Quarter 1999 Total revenues: As previously reported As restated Operating income: As previously reported As restated Income before cumulative effect of a change in accounting principle: As previously reported As restated Net income: As previously reported As restated Basic earnings per share: Income...

  • Page 72
    ... the system of internal controls over financial reporting at Papa John's International, Inc. and its subsidiaries, a system designed to provide reasonable assurance regarding the preparation of reliable published financial statements. This system is augmented by written policies and procedures and...

  • Page 73
    ... balance sheets of Papa John's International, Inc. and subsidiaries as of December 26, 1999 and December 27, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 26, 1999. These financial statements are...

  • Page 74
    ... Box 99900 • • Senior Vice President, Chief Financial Officer and Treasurer Louisville, Kentucky 40269-0900 • (502) 261-7272 • Papa John's International, Inc. Stock Transfer Agent National City Bank • Corporate Trust Administration • P. O. Box 94915 • Cleveland, Ohio 44101-4915...

  • Page 75
    ... Market tier of The NASDAQ Stock Market under the symbol PZZA. As of March 13, 2000, there were approximately 932 record holders of common stock. The following table sets forth for the quarters indicated the high and low sale prices of our common stock, as reported by The NASDAQ Stock Market. 1999...

  • Page 76
    ... Franchise Sales and Operations Charles W. Schnatter Senior Vice President, Secretary and General Counsel Mary Ann Palmer Vice President, People Department Thomas C. Kish Vice President, Information Systems and Support Services E. Drucilla Milby Senior Vice President, Chief Financial Officer and...

  • Page 77
    ... Regional Vice President Debra C. Gmelin Vice President, Marketing Sales and Development Jerry R. Owens Vice President, Commissary Operations, PJ Food Service Gary R. Glielmi Regional Vice President Arjun Sen Vice President, Marketing and Operations Services Julie Larner Vice President, Finance...

  • Page 78
    ... Papa John's Franchise Advisory Council Blaine E. Hurst Vice Chairman and President O. Wayne Gaunce Principal, Gaunce Management Charles W. Schnatter Senior Vice President, General Counsel and Secretary Jack A. Laughery Restaurant Investor and Consultant Richard F. Sherman Chairman, PJ America...

  • Page 79