Papa John’s Pizza

by

Michael Suchy &

Eric Utne

How We Found Papa John’s

• Taking a bottom-up approach, we ran a stock screen using a minimum 15% ROE, 1 year and 5 year 15% earnings growth and a maximum market cap of $5 billion.

• Papa John’s fits the client’s portfolio objectives like a glove. It is a growth company with a market capitalization of only $750 million.

Company Background

• In 1985 current CEO John Schnatter opened opened the first Papa John’s restaurant in Jeffersonville, IN.

• In 1986, the first Papa John’s franchise was opened.• The company went public in 1993.• In 1997 Frank Carney, co-founder of Pizza Hut,

teams with Papa John’s to become a major franchisee of the company.

Background Continued

• In 1999 Papa John’s had operations in 47 states, the District of Columbia, and five international markets such as Mexico and Puerto Rico.

• At 1999 fiscal year end, there were 2,280 Papa John’s restaurants in operation; of these, 573 were company owned.

• Through the acquisition of Perfect Pizza Holdings Limited in the U.K., Papa John’s increased its international presence by an additional 206 stores, 12 of which are company owned.

Background Continued

• Papa John’s Board of Directors has authorized the repurchase of $150 million worth of common stock through December 31, 2000. The share repurchase will be funded through existing cash and investments, operating cash flows, and a $100 million line of credit. The Board feels that Papa John’s shares are currently trading at a deep discount.

How Papa John’s Makes Money

• Roughly 50% of all Papa John’s revenue comes from sales of menu items at company owned restaurants.

• About 6% of revenues come from franchise royalties, franchise fees, and development fees.

• 40% of Papa John’s revenues come through commissary sales to both company and franchised stores.

• The remaining revenues come from equipment and other sales.

The Secret to Their Success• Papa John’s has experienced phenomenal success by doing

what they do best: Making Pizza.• The only items Papa John’s offers on its menu are pizza, bread

sticks and cheese sticks.• The company prides itself on the use of only the finest

ingredients including fresh dough (not frozen), 100% real cheese, and canned, vine-ripened tomato sauce (not concentrate).

• The company only offers carry-out and delivery service, allowing the focus of each store to be solely concentrated on making their products.

American Customer Satisfaction Index

All Fast Food Restaurants Score

Papa John's 76

Wendy's 71

Group Average 69

Pizza Hut 68

Domino's Pizza 67

2000 R&I CHOICE IN CHAINSPizza

CategoryOverallScore

FoodQuality Value Service Cleanliness

PapaJohn's

36 56 38 37 33

Pizza Hut 35 54 29 31 29

Domino'sPizza

32 42 33 33 27

Don’t Fear Pizza the HutDon’t Fear Pizza the Hut• On August 12, 1998, Papa John’s was sued by its largest

competitor, Pizza Hut, Inc.• Pizza Hut claimed that the slogan “Better Ingredients. Better

Pizza.” constitutes false and deceptive advertising, a violation of the Lanham Trademark Act.

• On January 3, 2000 the United states District Court for the Northern District of Texas found Papa John’s guilty as charged and ordered Papa John’s to cease use of the slogan in all its advertising.

• The costs incurred during litigation and complying with the court order are estimated at $12 - $15 million, of which $6.1 million was charged against 1999 pre-tax earnings.

However….

• Papa John’s has appealed the decision, and oral arguments pertaining to the appeal have begun this month.

• If the appeal is successful, costs due to the trial should be impacted favorably.

• We believe that Pizza Hut’s suit was a defensive tactic to combat Papa John’s astonishing growth.

• We also believe that Papa John’s chance for a positive outcome in the appellate court is likely because the slogan is merely puffery, and doesn’t constitute a violation of any laws.

Where Does the Papa Go From Here?

• Papa John’s is a growth company, and it plans on living up to its classification.

• The company plans to open 35 more company restaurants this year and acquire from 60 from existing franchisees.

• Additionally, the company expects franchisees to open nearly 375 restaurants new restaurants this year.

• Domestic market expansion is planned for the upper Northeast Coast, West Coast and Rocky Mountain regions.

• The company also plans on further penetration of existing markets in the U.S.

• Internationally, Papa John’s is focused on Mexico, Puerto Rico, Venezuela, Costa Rica, Guatemala, Saudi Arabia, Canada, Iceland and the United Kingdom.

• Regarding expansion in the U.K., restaurants may be opened under the name of either Papa John’s or Perfect Pizza, but within three years all of the Perfect Pizzas will converted to Papa John’s stores.

Balance Sheet

12/26/99 12/27/98 12/28/97 12/29/96

ASSETS CURRENT ASSETS: Cash and cash equivalents 3,698.00 33,814.00 18,692.00 24,063.00 Accounts receivable 18,113.00 15,147.00 12,678.00 10,169.00 Accounts receivable-affiliates 3,302.00 2,273.00 2,454.00 2,932.00 Inventories 10,637.00 9,808.00 9,091.00 6,839.00 Prepaid expenses and other current assets7,378.00 4,891.00 6,261.00 4,245.00 Deferred income taxes 2,977.00 2,090.00 -- -- TOTAL CURRENT ASSETS 46,105.00 68,023.00 49,176.00 48,248.00 Investments 22,086.00 47,355.00 57,933.00 65,067.00 Net property and equipment 227,813.00 172,872.00 112,601.00 80,717.00 Notes receivable-franchisees 8,153.00 4,249.00 7,083.00 2,646.00 Notes receivable-affiliates 3,590.00 4,741.00 7,997.00 2,407.00 Intangibles 47,669.00 9,397.00 -- -- Other assets 16,635.00 13,087.00 18,453.00 12,976.00 TOTAL ASSETS 372,051.00 319,724.00 253,243.00 212,061.00

Common Size Balance Sheet

12/26/99 12/27/98 12/28/97 12/29/96

ASSETS CURRENT ASSETS: Cash and cash equivalents 1.0% 10.6% 7.4% 11.3% Accounts receivable 4.9% 4.7% 5.0% 4.8% Accounts receivable-affiliates 0.9% 0.7% 1.0% 1.4% Inventories 2.9% 3.1% 3.6% 3.2% Prepaid expenses and other current assets2.0% 1.5% 2.5% 2.0% Deferred income taxes 0.8% 0.7% 0.0% 0.0% TOTAL CURRENT ASSETS 12.4% 21.3% 19.4% 22.8% Investments 5.9% 14.8% 22.9% 30.7% Net property and equipment 61.2% 54.1% 44.5% 38.1% Notes receivable-franchisees 2.2% 1.3% 2.8% 1.2% Notes receivable-affiliates 1.0% 1.5% 3.2% 1.1% Intangibles 12.8% 2.9% 0.0% 0.0% Other assets 4.5% 4.1% 7.3% 6.1%TOTAL ASSETS 100.0% 100.0% 100.0% 100.0%

Balance Sheet

12/26/99 12/27/98 12/28/97 12/29/96

LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 24,947 18,389 15,148 13,105 Accrued expenses 38,516 26,916 15,132 9,237 Current portion of debt 5,308 190 -- -- Deferred income taxes -- -- 102 672 TOTAL CURRENT LIABILITIES 68,771 45,495 30,382 23,014 Unearned franchise and development fees 6,222 6,561 4,613 3,378 Long-term debt, net of current portion 925 8,230 -- -- Deferred income taxes 2,109 5,066 3,987 3,285 Other long-term liabilities 1,891 202 1,528 1,741 TOTAL LIABILITIES 79,918 65,554 40,510 31,418 STOCKHOLDERS' EQUITY: Preferred stock -- -- -- -- Common stock 305 298 291 288 Additional paid-in capital 189,920 166,209 149,850 143,978 Accumulated other comprehensive income (loss)(390) 688 321 977 Retained earnings 134,492 87,456 62,752 35,882 Treasury stock (32,194) (481) (481) (482) TOTAL STOCKHOLDERS' EQUITY 292,133 254,170 212,733 180,643 TOTAL LIABILITIES AND EQUITY 372,051 319,724 253,243 212,061

Common Size Balance Sheet

12/26/99 12/27/98 12/28/97 12/29/96

LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 6.7% 5.8% 6.0% 6.2% Accrued expenses 10.4% 8.4% 6.0% 4.4% Current portion of debt 1.4% 0.1% 0.0% 0.0% Deferred income taxes 0.0% 0.0% 0.0% 0.3% TOTAL CURRENT LIABILITIES 18.5% 14.2% 12.0% 10.9% Unearned franchise and development fees 1.7% 2.1% 1.8% 1.6% Long-term debt, net of current portion 0.2% 2.6% 0.0% 0.0% Deferred income taxes 0.6% 1.6% 1.6% 1.5% Other long-term liabilities 0.5% 0.1% 0.6% 0.8% TOTAL LIABILITIES 21.5% 20.5% 16.0% 14.8% STOCKHOLDERS' EQUITY: Preferred stock Common stock 0.1% 0.1% 0.1% 0.1% Additional paid-in capital 51.0% 52.0% 59.2% 67.9% Accumulated other comprehensive income (loss)-0.1% 0.2% 0.1% 0.5% Retained earnings 36.1% 27.4% 24.8% 16.9% Treasury stock -8.7% -0.2% -0.2% -0.2% TOTAL STOCKHOLDERS' EQUITY 78.5% 79.5% 84.0% 85.2% TOTAL LIABILITIES AND EQUITY 100.0% 100.0% 100.0% 100.0%

Income Statement12/26/99 12/27/98 12/28/97 12/29/96

REVENUES: Restaurant sales $395,091 $344,089 $251,153 $167,982 Franchise royalties 41,270 32,126 24,318 17,827 Franchise and development fees 6,871 5,450 5,327 4,286 Commissary sales 309,015 255,083 188,034 142,998 Equipment and other sales 53,078 45,404 39,952 26,959TOTAL REVENUES $805,325 $682,152 $508,784 $360,052

COSTS AND EXPENSES: Restaurant expenses: Cost of sales $100,412 $92,612 $66,417 $47,092 Salaries and benefits 106,851 92,372 67,830 44,774 Advertising and related costs 36,014 29,846 23,298 16,074 Occupancy costs 19,560 17,138 12,785 8,527 Other operating expenses 53,591 44,685 33,882 22,801Total: $316,428 $276,653 $204,212 $139,268

Commissary, equipment and other expenses: Cost of sales $276,079 $235,934 $177,263 $134,771 Salaries and benefits 23,794 16,981 13,091 9,023 Other operating expenses 27,809 22,560 18,181 11,009Total: $327,682 $275,475 $208,535 $154,803

Common Size Income Statement

12/26/99 12/27/98 12/28/97 12/29/96

REVENUES: Restaurant sales 49.1% 50.4% 49.4% 46.7% Franchise royalties 5.1% 4.7% 4.8% 5.0% Franchise and development fees 0.9% 0.8% 1.0% 1.2% Commissary sales 38.4% 37.4% 37.0% 39.7% Equipment and other sales 6.6% 6.7% 7.9% 7.5%TOTAL REVENUES 100.0% 100.0% 100.0% 100.0%

COSTS AND EXPENSES: Restaurant expenses: Cost of sales 12.5% 13.6% 13.1% 13.1% Salaries and benefits 13.3% 13.5% 13.3% 12.4% Advertising and related costs 4.5% 4.4% 4.6% 4.5% Occupancy costs 2.4% 2.5% 2.5% 2.4% Other operating expenses 6.7% 6.6% 6.7% 6.3%Total: 39.3% 40.6% 40.1% 38.7%

Commissary, equipment and other expenses: Cost of sales 34.3% 34.6% 34.8% 37.4% Salaries and benefits 3.0% 2.5% 2.6% 2.5% Other operating expenses 3.5% 3.3% 3.6% 3.1%Total: 13.3% 13.5% 13.3% 12.4%

Income Statement1999 1998 1997 1996

General and administrative expenses $54,386 $53,008 $37,051 $26,694 Advertising litigation expense 6,104 -- Pre-opening and other general expenses 3,565 3,481 Depreciation and amortization 24,827 20,490 19,792 13,658TOTAL COSTS AND EXPENSES $732,992 $629,107 $469,590 $334,423

OPERATING INCOME $72,333 $53,045 $39,194 $25,629 Investment income 3,384 4,100 4,505 3,484 Income before income taxes and a cumulative change in accounting principle 75,717 57,145 42,625 29,546 Other, net (1,074) 433 Income before income taxes 42,625 29,546 Income tax expense 28,431 22,181 15,772 10,932 Income before cumulative effect of a change in accounting principle 47,286 34,964 Cumulative effect of accounting change, net of tax-- (2,603)NET INCOME $47,286 $32,361 $26,853 $18,614

Common Size Income Statement

1999 1998 1997 1996 General and administrative expenses 6.8% 7.8% 7.3% 7.4% Advertising litigation expense 0.8% 0.0% 0.0% 0.0% Pre-opening and other general expenses 0.4% 0.5% 0.0% 0.0% Depreciation and amortization 3.1% 3.0% 3.9% 3.8%TOTAL COSTS AND EXPENSES 91.0% 92.2% 92.3% 92.9%

OPERATING INCOME 9.0% 7.8% 7.7% 7.1% Investment income 0.4% 0.6% 0.9% 1.0% Income before income taxes and a cumulative change in accounting principle 9.4% 8.4% 8.4% 8.2% Other, net 0.0% 0.0% -0.2% 0.1% Income before income taxes 0.0% 0.0% 8.4% 8.2% Income tax expense 3.5% 3.3% 3.1% 3.0% Income before cumulative effect of a change in accounting principle 5.9% 5.1% 0.0% 0.0% Cumulative effect of accounting change, net of tax0.0% -0.4% 0.0% 0.0%NET INCOME 5.9% 4.7% 5.3% 5.2%

Income Statement EPS Info.

1999 1998 1997 1996BASIC EARNINGS PER SHARE: Income before cumulative effect of a change in accounting principle $1.57 $1.18 Cumulative effect of accounting change, net of tax-- (0.09)Basic earnings per share $1.57 $1.09 $0.93 $0.66

DILUTED EARNINGS PER SHARE: Income before cumulative effect of a change in accounting principle $1.52 $1.15 Cumulative effect of accounting change, net of tax-- (0.09)Diluted earnings per share $1.52 $1.06 $0.91 $0.65

Basic weighted average shares outstanding 30,195 29,537 28,916 28,010 Diluted weighted average shares oustanding 31,080 30,455 29,592 28,670

Supplemental data: Revenues - affiliates $102,863 $85,137 $62,986 $47,012 Other income - affiliates $314 $570 $514 $85

Statement of Cash Flows

1999 1998 1997 1996

OPERATING ACTIVITIES Net income $47,286 $32,361 26,853$ $18,614 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,156 21,009 20,522 14,304 Deferred income taxes 1,757 (1,443) 528 1,956 Other 2,580 903 (601) 430 Changes in operating assets and liabilities: Accounts receivable (1,802) (2,125) (2,017) (2,903) Inventories (275) (551) (2,234) (1,651) Deferred pre-opening costs -- 3,827 (5,823) (4,247) Prepaid expenses and other current assets (2,343) (2,382) (817) (499) Other assets and liabilities (1,574) (1,324) (827) (3,253) Accounts payable 4,784 2,265 2,043 3,717 Accrued expenses 10,406 7,632 5,885 2,630 Unearned franchise and development fees (339) 1,873 1,195 700Net cash provided by operating activities $85,636 $62,045 $44,707 $29,798

Statement of Cash Flows

1999 1998 1997 1996

INVESTING ACTIVITIES Purchase of property and equipment ($81,161) ($70,861) ($43,135) ($28,792) Purchase of investments (22,908) (34,107) (41,445) (65,031) Proceeds from sale or maturity of investments46,632 44,289 46,696 26,572 Loans to franchisees (6,614) (4,834) (12,348) (7,823) Loan repayments from franchisees 2,955 5,265 2,321 -- Deferred systems development costs (1,399) (1,208) (1,989) (2,614) Acquisitions (32,703) (1,902) (6,168) (30) Other (19) 403 316 161Net cash used in investing activities ($95,217) ($62,955) ($55,752) ($77,557)

Statement of Cash Flows

1999 1998 1997 1996

FINANCING ACTIVITIES Payments on long-term debt ($9,815) ($6,450) ($175) ($1,367) Proceeds from issuance of long-term debt 2,510 7,720 -- Proceeds from exercise of stock options 14,459 11,673 3,537 1,431 Tax benefit related to exercise of non-qualified stock options3,945 2,953 2,339 1,315 Acquisition of treasury stock (31,713) -- -- Other 79 (7) (27) (12)Proceeds from issuance of common stock 50,551Net cash provided by (used in) financingactivities ($20,535) $15,889 $5,674 $51,918

Net increase (decrease) in cash and cashequivalents($30,116) $14,979 ($5,371) $4,159Cash and cash equivalents at beginning of year 33,814 18,835 24,063 19,904Cash and cash equivalents at end of year $3,698 $33,814 $18,692 $24,063

Ratio Analysis1999 1998 1997 1996

Internal Liquidity Ratios:Current Ratio 0.67 1.50 1.62 2.10Quick Ratio 0.37 1.13 1.11 1.61Cash Conversion Cycle (4.17) (0.21) 1.78 0.71Operating Efficiency Ratios:Total Asset Turnover 2.16 2.13 2.01 1.70Fixed Asset Turnover 3.54 3.95 4.52 4.46Operating Profitability Ratios:Gross Profit Margin 53.2% 51.8% 52.1% 49.5%Operating Profit Margin 9.0% 7.8% 7.7% 7.1%Net Profit Margin 5.9% 4.7% 5.3% 5.2%Return on Equity 16.2% 12.7% 12.6% 10.3%Financial Risk Analysis:Debt to Equity Ratio 0.02 0.03 0.00 0.00DuPont Analysis:Reurn on Equity 16.2% 12.7% 12.6% 10.3%Net Profit Margin 5.9% 4.7% 5.3% 5.2%Total Asset Turnover 2.16 2.13 2.01 1.70Leverage Multiplier 1.27 1.26 1.19 1.17

Key Ratio ComparisonPapa John's Tricon S&P

Current Ratio 0.67 0.37 1.61Quick Ratio 0.37 0.23 1.14Total Asset Turnover 2.16 1.81 1.05Gross Profit Margin 53.2% 23.9% 49.7%Operating Profit Margin 9.0% 15.9% 18.5%Net Profit Margin 5.9% 8.0% 11.8%Return on Equity 16.2% NM 24.1%Debt to Equity Ratio 0.02 NM 0.921 Year Sales Growth 18.06% -7.75% 22%1 Year Earnings Growth 32.61% 37.97% 31.13%P/E 18.74 8.19 37.01Market Cap $750M $4.8B NA

Recent Stock Info

• Last Trade: $29• 52 Week High: $45• 52 Week Low: $21• P/E Ratio: 18.74• Beta: 1.00• Market Cap: $734.4M

In Conclusion…..

• Papa John’s is a relatively small growth company that fits the investment policy statement like a glove.

• The company has a superior product and more focused strategy than its competition.

• The company has been reporting positive financial results since its inception, yet is currently undervalued.

So we recommend….

• Buying 400 shares at the market.• This strategy gives us the opportunity to get

are feet wet with the company without committing the maximum dollar amount.