Papa Johns 2001 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... Team Papa John's lives up to this standard, our senior management team has set forth the following goals for 2002: • Grow the Business • Improve Operating Unit Profitability • Better Control G& A/ Corporate Spending • Build the People who Build the Business In the early years of Papa John...

  • Page 3
    ... American Customer Satisfaction Index conducted by the National Quality Control Center at the University of Michigan Business School, in partnership with T he American Society for Quality. As reported in The Wall Street Journal in February 2000, 2001 and 2002, results are based on telephone surveys...

  • Page 4
    ...) 2002 Papa John's Boulevard Louisville, Kentucky 40299-2334 (Address of principal executive offices) (502) 261-7272 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Title of Each Class) (Name of each exchange on which registered...

  • Page 5
    Portions of Part III are incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 16, 2002. 1

  • Page 6
    ... 8. Item 9. Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders Market for Registrant's Common Equity and Related Stockholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and...

  • Page 7
    ... throughout Papa John's, resulting in a positive work environment and motivated, customer-oriented team members. Marketing. Our restaurant-level marketing programs target the delivery area of each restaurant, making extensive use of targeted print materials in direct mail and store-to-door couponing...

  • Page 8
    ... resources to provide Papa John's franchisees with assistance in restaurant operations, management training and team member training, marketing, site selection and restaurant design. Unit Economics We believe our unit economics are exceptional. In 2001, the 573 domestic Company-owned restaurants...

  • Page 9
    ... operating costs, improved food quality and consistency and superior customer service. Additionally, we may from time to time test product variations or new products. Ice cream and chicken wings are two such products tested in various markets during 2001. Restaurant Design and Site Selection...

  • Page 10
    ... design services and recommendations for subcontractors, signage installers and telephone systems to Papa John's franchisees. Although not required to do so, substantially all Papa John's franchisees purchase most of their equipment from us. Quality Control Centers; Strategic Supply Chain Management...

  • Page 11
    ...sales, from domestic franchisees for this service. Company Operations Restaurant Personnel. A typical Papa John's restaurant employs a restaurant manager, one or two assistant managers and approximately 20 to 25 hourly team members, most of whom work part-time. The manager is responsible for the day...

  • Page 12
    ... an operating Papa John's restaurant or at Company-certified training centers. Our training includes new team member orientation, in-store and delivery training, core management skills training, new product or program implementation and ongoing developmental programs. Point of Sale Technology. Point...

  • Page 13
    ... location. executed when a franchisee secures a location. Generally, a franchise agreement is Our current standard domestic franchise agreement provides for a term of ten years (with one ten-year renewal option) and payment to us of a royalty fee of 4% of sales. The current agreement, as well...

  • Page 14
    ...-time training coordinator certified to deliver Company-approved programs in order to train new team members and management candidates for their restaurants. Our area franchise directors maintain open communication with the franchise community, relaying operating and marketing information and new...

  • Page 15
    ...labor and benefits costs, utility costs and the lack of experienced management and hourly team members may adversely affect the restaurant industry in general and our restaurants in particular. With respect to the sale of franchises, we compete with many franchisors of restaurants and other business...

  • Page 16
    ... that system-wide, Papa John's will be able to meet planned growth targets, open restaurants in markets now targeted for expansion, or continue to operate in existing markets. 2. The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there...

  • Page 17
    ... years represents the first time we have attempted to expand the Papa John's brand in this manner. There can be no assurance that all conversion issues will be identified and successfully addressed in a timely, cost-effective manner or that the existing Perfect Pizza market share can be successfully...

  • Page 18
    ..., there were 2,729 Papa John's restaurants and 193 Perfect Pizza restaurants system-wide. Company-owned Papa John's Restaurants Number of Restaurants Colorado...Florida...Georgia...Illinois ...Indiana ...Kentucky...Maryland...Minnesota...Missouri ...New Jersey...New Mexico...North Carolina ...Ohio...

  • Page 19
    ... ...New Mexico ...New York ...North Carolina...North Dakota...Ohio...Oklahoma ...Oregon...Pennsylvania ...Rhode Island...South Carolina...South Dakota...Tennessee ...Texas ...Utah...Virginia ...Washington ...West Virginia ...Wisconsin...Wyoming...Washington, D.C...Total Domestic Franchised Papa John...

  • Page 20
    ... franchisee subleases are generally five to ten years. Information with respect to our leased QC Centers and other facilities as of December 30, 2001 is set forth below. Facility Jackson, MS Raleigh, NC Denver, CO Phoenix, AZ Des Moines, IA Rotterdam, NY Portland, OR Pittsburgh, PA Square Footage 30...

  • Page 21
    ... the Louisville QC Center operation and promotional division. The remainder of the building houses our corporate offices. The Papa John's UK management team is located in 6,000 square feet of leased office space in London with a remaining lease term of 14 years. Papa John's UK owns a distribution...

  • Page 22
    ... as President of PJ Food Service, Inc. since 1995, after having served as Vice President of our QC Center Operations from 1990 to 1995. Charles Schnatter has served as Chief Development Officer since February 2001 and Secretary since 1991. Mr. Schnatter also held the position of General Counsel from...

  • Page 23
    ...position of Senior Counsel in our legal department. Prior to joining Papa John's, Ms. Palmer practiced law as a partner with the law firm, Wyatt, Tarrant & Combs. Julie Larner has served as Senior Vice President, Chief Administrative Officer and Treasurer since February 2001, responsible for Finance...

  • Page 24
    ...the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol PZZA. As of March 15, 2002, there were approximately 904 record holders of common stock. The following table sets forth for the quarters indicated the high and low closing sales prices of our common stock, as reported by The...

  • Page 25
    ... revenues: Royalties and franchise and development fees Restaurant and commissary sales (2) T otal revenues Operating income (3) Investment income Interest expense Income before income taxes and cumulative effect of a change in accounting principle Income tax expense Income before cumulative effect...

  • Page 26
    ... derived from retail sales of pizza to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, restaurant equipment, printing and promotional items, risk management services, and information...

  • Page 27
    ...the future, we may be required to record initial or increased impairment charges for these assets. The Company's insurance programs for worker's compensation, general liability, owned and non-owned automobiles and health insurance coverage provided to our employees, and the captive insurance program...

  • Page 28
    ... of approximately $2.8 million in amortization expense beginning in 2002. Proforma earnings per common share, assuming dilution, for 2001 will be reported as $2.15 effective with the adoption of SFAS 142. Management does not expect the results of the impairment review, which is to be performed in...

  • Page 29
    ... expens es Special charges (4) Provis ion for uncollectible notes receivable (5) Pre-opening and other general expens es Depreciation and amortization Total cos ts and expens es Operating income Other (expens e) income Income before income taxes Income tax expens e Net income 45.9% 5.2 0.3 39...

  • Page 30
    ... of p eriod Op ened Closed Acquired from Comp any Sold to Comp any Restated (8) Reclassification (10) End of p eriod International franchised: Beginning of p eriod Op ened Op ened - UK Closed Converted (9) Reclassification (10) End of p eriod Total restaurants - end of p eriod Year Ended Dec. 31...

  • Page 31
    ... weeks), partially offset by a 4.0% increase in equivalent units. "Equivalent units" represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis. Domestic franchise sales...

  • Page 32
    ... (see "Item 1. Business - Quality Control Centers: Strategic Supply Chain Management" and "Note 11" of "Notes to Consolidated Financial Statements"). Salaries and benefits were 1.5% higher in 2001 due primarily to increased wage rates. Advertising and related costs were 1.2% lower ($6.4 million...

  • Page 33
    ... improved cost controls in mileage reimbursement and bad debt expense. Other operating expenses include an allocation of the QC Centers' operating expenses equal to 3.0% of Company-owned restaurant sales in order to assess a portion of the costs of dough production and food and equipment purchasing...

  • Page 34
    ... Perfect Pizza Holdings Limited, which, at the time of acquisition, operated and franchised 206 restaurants in the United Kingdom (see "Note 3" of "Notes to Consolidated Financial Statements"). The Consolidated Statements of Income contain financial results for Papa John's UK for the full year in...

  • Page 35
    ... in revenues in 2000 as compared to 1999 is due to 1999 operations reflecting one month of Papa John's UK financial results compared to a full year in 2000. Costs and Expenses. The restaurant-operating margin for domestic Company-owned units was 19.2% in 2000 compared to 19.9% in 1999, consisting...

  • Page 36
    ... due to the cost of additional support services, such as field marketing, training and international development, required for our expanded operations as well as the addition of Papa John's UK. As previously discussed, during 2000, the Company incurred $20.9 million of special charges, which...

  • Page 37
    ... in tax benefits related to the exercise of non-qualified stock options. We require capital primarily for the development, acquisition and maintenance of restaurants, new or replacement QC Centers and Support Services facilities and equipment, the enhancement of corporate systems and facilities...

  • Page 38
    the Kentucky Jobs Development Act in connection with the relocation of the corporate offices. We expect to earn the remaining $5.9 million of such incentives through 2007. Contractual obligations and payments as of December 30, 2001 due by year are as follows (in thousands): Less than 1 Year ...

  • Page 39
    ... 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...

  • Page 40
    ... sales Salaries and benefits Other operating expenses International operating expenses General and administrative expenses Special charges Provision for uncollectible notes receivable Pre-opening and other general expenses Depreciation and amortization Total costs and e xpe nse s O pe rating income...

  • Page 41
    ... Accounts payable Income and other taxes Accrued expenses Current portion of debt Total current liabilities Unearned franchise and development fees Long-term debt, net of current portion Deferred income taxes Other long-term liabilities Stockholders' equity: Preferred stock ($.01 par value per share...

  • Page 42
    ... ive income Exercise of stock options Tax benefit related to exercis e of non-qualified stock options Acquis ition of treasury stock (6,356,984 shares ) Common equity put options Other Balance at December 31, 2000 Comprehens ive income: Net income Cumulative effect of accounting change, net of...

  • Page 43
    ... Tax benefit related to exercise of non-qualified stock options Other Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Other assets and liabilities Accounts payable Accrued expenses Unearned franchise and development fees Net cash...

  • Page 44
    ... derived from retail sales of pizza to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, and sales to franchisees of food and paper products, restaurant equipment, printing and promotional items, risk management services, and information...

  • Page 45
    ... of income. The cost of securities sold is based on the specific identification method. Accounts Receivable Substantially all accounts receivable are due from franchisees for purchases of food and paper products, restaurant equipment, printing and promotional items, risk management services...

  • Page 46
    ... the costs of domestic 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 by domestic Company-owned and franchised...

  • Page 47
    ...currency is the functional currency for our foreign subsidiary, Papa John's UK. Earnings are translated into U.S. dollars using monthly average exchange rates, while balance sheet accounts are translated using year-end exchange rates. The resulting translation adjustments are included as a component...

  • Page 48
    ... market price were not included in the computation of the dilutive effect of common stock options because the effect would have been antidilutive. The number of antidilutive options was 3.0 million in 2001, 3.7 million in 2000 and 986,000 in 1999. Accounting Changes In June 2001, the FASB issued...

  • Page 49
    ..., we acquired Minnesota Pizza Company, LLC ("Minnesota Pizza"), a franchisee that operated 37 Papa John's restaurants in the Minneapolis/St. Paul, Minnesota market. We issued 128,119 shares of our common stock having a value of $5.4 million in exchange for all of the issued and outstanding ownership...

  • Page 50
    ... of 2000, the Company decided to close 20 field offices to reduce future costs and to allow our operations area supervisors and district managers to spend more time in our restaurants. We also eliminated certain positions in the fourth quarter to reduce future administrative costs. These actions...

  • Page 51
    ... announced its judgment, awarding Pizza Hut $468,000 in damages and ordering us to cease all use of the "Better Ingredients. Better Pizza." slogan. Under the judge's order, we were to cease using the slogan in print and broadcast advertising, phase out printed promotional materials and other items...

  • Page 52
    ... of a common stock share repurchase program (see Note 13), we entered into a $200.0 million revolving line of credit facility with an expiration date of March 17, 2003. Outstanding balances for this facility accrue interest at 50.0 to 87.5 basis points over LIBOR or other bank developed rates at our...

  • Page 53
    ...2000, net of allowance for doubtful accounts. The outstanding franchisee loan balance as of December 31, 2000 includes a loan of $3.4 million to the Marketing Fund... December 30, 2001), and are generally secured by the fixtures, equipment, signage and, where applicable, land of each restaurant and the...

  • Page 54
    ... subsidiary, RSC Insurance Services, Ltd., began providing insurance coverage to franchisees who elect to participate. The insurance provided by the captive insurance subsidiary is principally workers compensation, general liability, property and owned and non-owned automobile programs. The Company...

  • Page 55
    ...Total deferred tax assets Deferred expenses Accelerated depreciation Other Total deferred tax liabilities Net deferred tax assets (liabilities) $ $ $ The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the years ended December 30, 2001, December...

  • Page 56
    ... are opened. Following is a summary of transactions and balances with affiliated entities (in thousands): 2001 Revenues from affiliates: Commissary sales Equipment and other sales Franchise royalties Franchise and development fees Total Other income from affiliates Accounts receivable-affiliates...

  • Page 57
    ... at the market price and sells it to our distribution subsidiary, PJ Food Service, Inc. ("PJFS"), at a fixed quarterly price based in part upon historical average market prices. PJFS in turn sells cheese to Papa John's restaurants (Company-owned and franchised) at a set quarterly price. The purchase...

  • Page 58
    ... terms of the Rights Plan, one preferred stock purchase right was distributed as a dividend on each outstanding share of Papa John's common stock held of record as of the close of business on March 1, 2000. The rights generally will not become exercisable until a person or group acquires beneficial...

  • Page 59
    ... a previous, multi-year operations compensation program that vested immediately upon grant. 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...

  • Page 60
    ...,000 shares under the Directors Plan. 16. Defined Contribution Benefit Plan We have established the Papa John's International, Inc. 401(k) Plan (the "Plan"), as a defined contribution benefit plan, in accordance with Section 401(k) of the Internal Revenue Code. The Plan is open to all employees who...

  • Page 61
    ... and franchised restaurants, of restaurant equipment, printing and promotional items, risk management services, and information systems and related services used in restaurant operations. Generally, we evaluate performance and allocate resources based on profit or loss from operations before income...

  • Page 62
    ... franchising International All others Unallocated corporate expenses (2) Elimination of intersegment profits Total income before income taxes Fixed assets: Domestic restaurants Domestic commissaries International All others Unallocated corporate assets Accumulated depreciation and amortization Net...

  • Page 63
    ... in net interest expense of $9.3 million, $2.8 million in depreciation and amortization and $5.4 million related to the special charges and the provision for uncollectible notes receivable. 18. Quarterly Data (unaudited, in thousands, except per share data) Quarter 1st 2001 Total revenues Operating...

  • Page 64
    ... 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 the selection and...

  • Page 65
    ...the Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; and Certain Relationships and Related Transactions: The information required by these items, other than the information set forth in this Report under Part I, "Executive Officers of the Registrant...

  • Page 66
    ...Papa John's International, Inc. Executive Option Program. Exhibit 10.26 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1995 is incorporated herein by reference. Papa John's International, Inc. 1993 Stock Ownership Incentive Plan. Exhibit 10.2 to our quarterly report on Form...

  • Page 67
    ... facility opened in Des Moines, Iowa. Exhibit 10.29 to our Annual Report on Form 10-K for the fiscal year ended December 29, 1996 is incorporated herein by reference. Lease dated November 27, 1997 by and between Papa John's and SF Property Investments, LLC, an Oregon limited liability corporation...

  • Page 68
    ... Capital Delivery, Ltd., a Kentucky corporation (h) RSC Insurance Services Ltd., a Bermuda corporation (i) Papa John's Online LLC, a Kentucky limited liability company (j) Colonel's Ltd., a Virginia limited liability company (k) Papa John's (U.K.) Ltd., a United Kingdom corporation (l) Perfect Pizza...

  • Page 69
    ... LLP. 99.1 Cautionary Statements. _____ *Compensatory plan required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the last fiscal quarter of the period covered by this report. (c) Exhibits The response to this...

  • Page 70
    ... 22, 2002 PAPA JOHN'S INTERNATIONAL, INC. By: /s/ John H. Schnatter John H. Schnatter, Founder, Chairman of the Board, Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 71
    ..., Master Agreement dated February 7, 2000. Resolutions for Adoption by the Board of Directors of Papa John's International, Inc. the Amendment to 1993 Stock Option Plan for Non-Employee Directors Subsidiaries of the Company Consent of Ernst & Young LLP Cautionary Statements 10.2 21 23 99.1 67

  • Page 72
    ... receivable Reserve for franchisee notes receivable - affiliates Reserves included in liability accounts: Reserve for special charges (1) Uncollectible accounts written off, net of recoveries. Balance at Beginning of Year Charged to Costs and Expenses Additions / (Deductions) Balance at End of...

  • Page 73
    69

  • Page 74
    The Exhibits to this Annual Report on Form 10-K are not contained herein. The Company will furnish a copy of any of the Exhibits to a stockholder upon written request to Investor Relations, Papa John's International, Inc., P.O. Box 99900, Louisville, KY 40269-0900.

  • Page 75
    ...Charles W. Schnatter Senior Vice President and Chief Development Officer Mike Cortino Senior Vice President of Corporate Operations Tim O'Hern Vice President of Global Development J. David Flanery Vice President of Finance and Corporate Controller 2002 Papa John's Blvd. Louisville, KY 40299 502...