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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 29, 2002
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
incorporation or organization) Identification 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)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class) (Name of each exchange on which registered)
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value The NASDAQ Stock Market
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).
Yes X
No___
As of March 14, 2003 there were 17,898,252 shares of the Registrant’s Common Stock outstanding. The
aggregate market value of the shares of Registrant’s Common Stock held by non-affiliates of the Registrant at such
date was $252,528,750 based on the last sale price of the Common Stock on March 14, 2003 as reported by The
NASDAQ Stock Market. For purposes of the foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE

Table of contents

  • Page 1
    ... incorporation or organization) 61-1203323 (I.R.S. Employer Identification 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) Securities registered pursuant to Section 12...

  • Page 2
    Portions of Part III are incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 15, 2003. 1

  • Page 3
    ...Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Controls and Procedures Exhibits, Financial Statement Schedules and Reports on Form...

  • Page 4
    ... menu mix (toppings and side items) is adapted to local tastes. Efficient Operating System. We believe our operating and distribution systems, restaurant layout and designated delivery areas result in lower restaurant operating costs and improved food quality, and promote superior customer service...

  • Page 5
    ... to provide Papa John's franchisees with assistance in restaurant operations, management training, team member training, marketing, site selection and restaurant design. We also provide significant assistance to licensed international QC Centers in sourcing high-quality ingredients in-country...

  • Page 6
    ... restaurant sites, increases in food, paper or labor costs, negotiation of suitable lease or financing terms, constraints on permitting and construction of restaurants, cost of equipment, increased cost of fuel and utilities, rising costs of health, liability and workers compensation insurance, and...

  • Page 7
    ... John's restaurant from us. Beginning in December 2002, complete new store equipment packages could be purchased through an approved third party supplier under a commission arrangement with the Company. We continue to sell smallwares and related items to our franchisees through our Support Services...

  • Page 8
    ...on-line sales, from domestic franchisees, in addition to royalties, 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...

  • Page 9
    ...provide an on-site training team three days before and three days after the opening of any Company-owned or franchised restaurant requesting assistance. Operations personnel, both corporate and franchise, complete our management training program and on-going development programs in which instruction...

  • Page 10
    ...000 at the time of signing the agreement, and $20,000 when the restaurant opens or the agreed-upon development date, whichever comes first. Under our current standard master franchise agreement, the master franchisee is required to pay total fees of $25,000 per restaurant owned and operated by the...

  • Page 11
    ...store general managers or hire a full-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...

  • Page 12
    ... these items. Franchisees generally are required to purchase and install the Papa John's PROFIT System in their restaurants (see Company Operations - Point of Sale Technology). Industry and Competition The restaurant industry is intensely competitive with respect to price, service, location and food...

  • Page 13
    ... 29, 2002, we employed 15,327 persons, of whom approximately 13,224 were restaurant team members, 725 were restaurant management and supervisory personnel, 588 were corporate personnel and 790 were QC Center and support services personnel. Most restaurant team members work part-time and are paid on...

  • Page 14
    ... period than Papa John's and may be better established in the markets where restaurants operated by us or our franchisees are, or may be, located. A change in the pricing or other marketing or promotional strategies of one or more of our major competitors could have an adverse impact on sales and...

  • Page 15
    Item 2. Properties As of December 29, 2002, there were 2,792 Papa John's restaurants and 144 Perfect Pizza restaurants system-wide. Company-owned Papa John's Restaurants Number of Restaurants Colorado...Florida...Georgia...Illinois ...Indiana ...Kentucky...Maryland...Minnesota...Missouri ...New ...

  • Page 16
    Domestic Franchised Papa John's Restaurants Number of Restaurants Alabama ...Arizona...Arkansas...California ...Colorado...Connecticut ...Delaware...Florida ...Georgia...Idaho...Illinois ...Indiana...Iowa...Kansas ...Kentucky ...Louisiana ...Maine ...Maryland ...Massachusetts...Michigan ...Minnesota...

  • Page 17
    ...require us to pay all, or a portion of the cost of insurance, taxes and utilities. Certain leases further provide that the lease payments may be increased annually, with a small number of escalations based on changes in the Consumer Price Index. Approximately 56 Company-owned restaurants are located...

  • Page 18
    ...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 13 years. In addition, Papa John's UK leases a distribution center...

  • Page 19
    ... First Elected Executive Officer 1985 1990 Name John H. Schnatter Robert J. Wadell Age 41 47 Position Founder, Chairman of the Board, Chief Executive Officer and President President of PJ Food Service, Inc. and Chief Operating Officer Senior Vice President, Chief Development Officer and Secretary...

  • Page 20
    ... to joining Papa John's, Mr. Cortino served five years as Vice President of Corporate Operations for AFC Enterprises - Church's Chicken Brand and ten years as a market manager and other positions with Taco Bell. David Flanery has served as Senior Vice President of Finance since August 2002 and is...

  • Page 21
    ...of The NASDAQ Stock Market under the symbol PZZA. As of March 14, 2003, there were approximately 897 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 NASDAQ Stock Market. 2002 First...

  • Page 22
    ... per common share - assuming dilution: Income before cumulative effect of a change in accounting principle Cumulative effect of accounting change, net of tax (5) Earnings per common share - assuming dilution Basic weighted average shares outstanding Diluted weighted average shares outstanding Balan...

  • Page 23
    ... 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". Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Papa John's International...

  • Page 24
    ... by combining the area supervisor and district manager positions into a director of operations position. A director of operations is responsible for seven restaurants on average, thus providing higher-quality direct support to our general managers and their teams. The cost savings from the field...

  • Page 25
    ...general public by Companyowned 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 and related services used in their operations...

  • Page 26
    ... or close facilities, and costs to relocate employees. We do not expect the adoption of SFAS No. 146 to have a significant impact on our results of operations or our consolidated financial statement disclosures. SFAS No. 148 In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based...

  • Page 27
    ...method on reported results in both interim and annual financial statements. The Company adopted the required disclosures in fiscal 2002. SFAS No. 123 Effective at the beginning of fiscal 2002, we elected to expense the cost of employee stock options in accordance with the fair value method contained...

  • Page 28
    The following are summarized financial statements of BIBP: Summarized Statements of Operations (in thousands): 2002 Sales to PJFS Cost of sales Administrative expense Investment income (expense) Income (loss) before income taxes Income tax (expense) benefit Net income 147,685 (128,718) (118) 35 18,...

  • Page 29
    ..., equipment and other expens es (2) International operating expens es (3) General and adminis trative 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 Net...

  • Page 30
    ... recent quarter's comp arable restaurant base Average sales for Comp any -owned restaurants included in the y ear's most recent comp arable restaurant base (7) Papa John's Restaurant Progression: U.S. Comp any -owned: Beginning of p eriod Op ened Closed Acquired from franchisees Sold to franchisees...

  • Page 31
    ...10" of "Notes to Consolidated Financial Statements." Includes only Company-owned restaurants open throughout the periods being compared. Year 2002 and 2001 are 52-week years and 2000 is based on a 53-week year. Represents Perfect Pizza restaurants converted to Papa John's restaurants. Represents the...

  • Page 32
    ... and meats and a higher average sales price point. Salaries and benefits were 0.2% lower in 2002 due to the higher average sales price point, partially offset by the impact of the across-the-board increase in base pay for general managers and assistant managers implemented during the third quarter...

  • Page 33
    ...support initiatives. As noted above, we incurred approximately $900,000 of costs during 2002 in connection with a refurbishment plan developed by the supplier of our heated delivery bag system, expected to reduce the failure rate of such systems currently in use at substantially all domestic Company...

  • Page 34
    ...1999, we began a repurchase program for our common stock. Through December 29, 2002, an aggregate of $345.7 million had been repurchased (representing 13.4 million shares, or approximately 43.9% of shares outstanding at the time the repurchase program was initiated, at an average price of $25.87 per...

  • Page 35
    ... the cost of cheese are beyond our control (see "Item 1. Business - Quality Control Centers: Strategic Supply Chain Management" and "Note 3" of "Notes to Consolidated Financial Statements"). Salaries and benefits were 1.5% higher in 2001 due primarily to increased wage rates. Advertising and...

  • Page 36
    ... Financial Statements"). The special charges resulted in a write-down of asset carrying value of $16.0 million and the establishment of accrued liabilities for cash payments of $4.9 million, including $1.0 million of litigation costs associated with the "Better Ingredients. Better Pizza" lawsuit...

  • Page 37
    ... equipment, and about one-half of which is for QC Centers, Support Services and corporate requirements. During 2003, we plan to open approximately 10 new domestic Company-owned restaurants. As of December 29, 2002, we had loans to franchisees of $14.1 million, net of allowance for doubtful accounts...

  • Page 38
    ... in costs, particularly commodities, labor, benefits, utilities and fuel, 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 and objectives of management, is...

  • Page 39
    ... Pizza restaurants to Papa John's restaurants. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Our debt at December 29, 2002 is principally comprised of a $139.6 million outstanding principal balance on the $200.0 million unsecured revolving line of credit. The interest rate...

  • Page 40
    volatility. The average quarterly block market price and the equivalent block market price paid by Papa John's by quarter for 2002, 2001 and 2000 are as follows: Block Market Price 2002 2001 2000 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year $ 1.254 1.205 1.129 1.155 1.186 $ 1.192 1.536 1.697 ...

  • Page 41
    ...costs Occupancy costs Other operating expenses Domestic commissary, equipment and other expenses: Cost of sales Salaries and benefits Other operating expenses International operating expenses General and administrative expenses Special charges Provision for uncollectible notes receivable Pre-opening...

  • Page 42
    ... of debt Total current liabilities Unearned franchise and development fees Long-term debt, net of current portion Deferred income taxes Other long-term liabilities S tockholders' equity: Preferred stock ($.01 par value per share; authorized 5,000,000 shares, no shares issued) Common stock ($.01 par...

  • Page 43
    ... 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 tax of $646 (see Note 2) Change in valuation of interest rate collar and s wap agreements, net of tax of...

  • Page 44
    ... 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 45
    ..., 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 systems and related services used in their operations. 2. Significant Accounting Policies Principles...

  • Page 46
    ... known financial difficulties. Inventories Inventories, which consist of 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. Property and Equipment...

  • Page 47
    ..., as required by Statement of Financial Accounting Standards (SFAS) No. 146, generally expected to be at the time the closing occurs. Systems Development Costs We defer certain systems development and related costs that meet established criteria. Amounts deferred, which are included in property and...

  • Page 48
    ...$2.1 million ($1.3 million after tax) in accumulated other comprehensive income (loss) in 2002 and 2001, respectively, for the net change in fair value of our interest rate collar and interest rate swap. Fair value is based on a quoted market price. The Collar and Swap are deemed effective hedges in...

  • Page 49
    ... than the average 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 1.8 million in 2002, 3.0 million in 2001 and 3.7 million in 2000. Accounting Changes In June...

  • Page 50
    ... compensation and the effect of the method on reported results in both interim and annual financial statements. The Company adopted the required disclosures in fiscal 2002. Effective at the beginning of fiscal 2002, we elected to expense the cost of employee stock options in accordance with the fair...

  • Page 51
    ... 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 of cheese by PJFS from BIBP is not guaranteed. PJFS...

  • Page 52
    ...We are currently reviewing Interpretation No. 46 and the organizational structure of BIBP to determine the impact, if any, on our consolidated financial statements. 4. Acquisitions During 2002, our 70% owned and consolidated subsidiary, Colonel's Limited, LLC, acquired three Papa John's restaurants...

  • Page 53
    ... million, net of tax) or $0.09 per common share on a fully diluted basis in 2002 due to the adoption of SFAS No. 142. The following reconciles earnings for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, reported in the accompanying consolidated statements of income to...

  • Page 54
    ... the sale of restaurants, domestic restaurant closures, restaurant longlived asset impairment and other asset disposals and valuations are included in pre-opening and other general expenses in the accompanying consolidated statements of income. See Note 7 for impairment charges included in special...

  • Page 55
    ... of 2000, we 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 resulted in...

  • Page 56
    ... financial covenants requiring the maintenance of specified fixed charge and leverage ratios and minimum levels of net worth. At December 29, 2002, we were in compliance with these covenants. In connection with the line of credit facility, Papa John's entered into a no-fee interest rate collar...

  • Page 57
    ... as of December 29, 2002 and $661,000 of the loans outstanding as of December 30, 2001, were to franchisees in which certain of our directors or officers had an ownership interest. 11. Insurance Reserves The Company's insurance programs for workers compensation, general liability, owned and non...

  • Page 58
    ... by the captive insurance subsidiary is principally workers compensation, general liability, property and owned and non-owned automobile programs. The Company's estimated liability for losses associated with the franchise insurance program are $8.3 million at December 29, 2002 and $3.9 million at...

  • Page 59
    13. Income Taxes A summary of the provision for income taxes follows (in thousands): 2002 2001 2000 Current: Federal...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 29, 2002...

  • Page 60
    ...electronic and print advertisements. The CEO earned $60,000 in 2001 and $169,000 in 2000 for these services (none in 2002). The Company and two directors are parties to consulting or employment agreements under which $219,000 in both 2002 and 2001 and $203,000 in 2000 were paid to the directors. See...

  • Page 61
    ...We lease office, retail and commissary space under operating leases with an average term of 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. Papa John's UK, our subsidiary located in...

  • Page 62
    ... of Directors of the Company adopted a Stockholder Protection Rights Agreement (the "Rights Plan"). Under the 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...

  • Page 63
    ... assumptions used: 2002 Net income as reported (in thousands) Pro forma stock-based compensation expense, net of tax (in thousands) Pro forma net income (in thousands) Pro forma earnings per share: Basic Assuming dilution Assumptions (weighted average): Risk-free interest rate Expected dividend...

  • Page 64
    .... Employee Benefit Plans We have established the Papa John's International, Inc. 401(k) Plan (the "401(k) Plan"), as a defined contribution benefit plan, in accordance with Section 401(k) of the Internal Revenue Code. The 401(k) Plan is open to all employees who meet certain eligibility requirements...

  • Page 65
    ... that derive revenues from the sale, principally to Company-owned 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...

  • Page 66
    ... franchising International All others Unallocated corporate expenses (4) 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 67
    ...$ (3) The increase in domestic restaurants income before income taxes in 2002 as compared to 2001 is primarily due to operating margin improvements resulting from favorable commodity costs (primarily boxes and meats) and a higher average sales price point in 2002. The increase in 2001 as compared...

  • Page 68
    ... of income, stockholders' equity and cash flows for each of the three years in the period ended December 29, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management...

  • Page 69
    .... Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table provides information as of December 29, 2002 regarding the number of shares of the Company's common stock that may be issued under the Company's equity compensation plans...

  • Page 70
    ... Financial Statements Report of Independent Auditors (a)(2) Consolidated Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required...

  • Page 71
    ...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 72
    ...* Papa John's International, Inc. 1999 Team Member Stock Ownership Plan Amended and Restated as of October 20, 1999. Exhibit 10.9 to our Annual Report on Form 10-K for the fiscal year ended December 26, 1999 is incorporated herein by reference. 10.14 Loan Agreement among Mississippi Business Finance...

  • Page 73
    ... for the Sale and Purchase of the Entire Issued Share Capital of Perfect Pizza Holdings Limited Between Geoffrey Street and Others and Papa John's (UK) Limited and Papa John's International, Inc. dated November 29, 1999. Exhibit 10.24 to our Annual Report on Form 10-K for the fiscal year ended...

  • Page 74
    ... Company's repurchase of outstanding shares to acquire up to an additional 1% of the outstanding shares without triggering the Agreement's dilution provisions. (c) Exhibits The response to this portion of Item 15 is submitted as a separate section of this report. (d) Consolidated Financial Statement...

  • Page 75
    ... Date: March 21, 2003 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...

  • Page 76
    ...H. Schnatter, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Papa John's International, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of...

  • Page 77
    ... Flanery, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Papa John's International, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 78
    EXHIBIT INDEX Exhibit Number 10.1 Description of Exhibit $175,000,000 Revolving Credit Facility arranged by Banc One Capital Markets, Inc. for Papa John's International, Inc. and provided by Bank One, Kentucky, NA for itself as a Lender and as Agent for PNC Bank, National Association, Bank of ...

  • Page 79
    Schedule II - Valuation and Qualifying Accounts Papa John's International, Inc. and Subsidiaries (In thousands) Classification Fiscal year ended December 29, 2002: Deducted from asset accounts: Reserve for uncollectible accounts Reserve for uncollectible accounts - affiliates Reserve for franchisee...

  • Page 80
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