Papa Johns 2008 Annual Report Download - page 16

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sales on all marketing activities, consisting of contributions to both the national Marketing Fund and
local marketing cooperatives, as well as local store marketing initiatives.
Online Ordering System Fees - The Negotiated Agreement limits the fee charged for online transactions
to 3% of the amount of the transaction. Additionally, once we have recovered a certain portion of our
initial investment in the development of the online system via net operating profits of the system, the
online business unit will be operated at a break-even level through either a reduction in the fee
percentage or a contribution of any net operating profits into the National Marketing Fund.
The Negotiated Agreement also addressed several other issues, including sharing of profits from
partnership marketing or alternative sales channels activities, development of a process for defining trade
areas for alternative ordering methodologies and marketing contribution requirements for non-traditional
units.
The financial implications of this Negotiated Agreement for the Company are as follows:
• We collected franchise fees of approximately $2.0 million in the fourth quarter of 2007 due to
the renewal program.
• The royalty rate increased to 4.25% effective December 31, 2007 (beginning of fiscal 2008) for
domestic franchisees. The annual impact of a one-quarter percent royalty increase is
approximately $3.5 to $4.0 million. However, during 2008, the Company contributed a portion of
this incremental royalty increase to increased marketing support for the domestic system.
• Given the current economic climate, the Company recently elected to defer an increase in the
royalty rate of 0.25% (i.e. increase the rate to 4.50%) for six months in 2009 (the royalty rate will
remain at 4.25% for the first six months of 2009 with the Company deciding whether to continue
to suspend collection of the royalty rate increase at mid-year). Currently, the Company has the
ability to increase the royalty rate to 4.75% in 2010 and 5.00% in 2011, in accordance with the
terms of the Negotiated Agreement. Facts and circumstances existing at such future dates may
impact the Company's final determination as to whether to implement such royalty rate increases
or defer them for the benefit of the system.
• The Company recognized approximately $3.0 million of operating income from the online
ordering system business unit in 2008 and 2007. This business unit will be operated at a break-
even level in 2009 and future years. Accordingly, the amount of operating income recognized by
the Company related to this business unit is expected to be approximately $3.0 million less in
2009 than in 2008.
Franchise Support Initiatives
In late 2008, the Company announced a comprehensive package of domestic franchise system support
initiatives in response to the current economic and consumer climate. The initiatives included:
• Providing cheese cost relief to our system in late 2008 and 2009 by modifying the cheese pricing
formula used by BIBP Commodities, Inc.;
• Providing additional system-wide national marketing support for 2009;
• Providing expanded targeted royalty relief and local marketing support for struggling franchisees
or markets;
• Convening a lender summit, principally of regional banks and other lenders, to educate them on
the Papa John’s model with the goal of expanding credit availability to franchisees;
• Providing financing on a selected basis to assist new or existing franchisees with the acquisition
of troubled franchise restaurants; and