Papa Johns 2002 Annual Report Download - page 10

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development agreements for multiple restaurants. We seek franchisees who have restaurant or retail
experience. In the case of franchisees who do not have restaurant experience, we require the franchisee to
either complete our training program or to hire a full-time operator who completes the training and has
either an equity interest or the right to acquire an equity interest in the franchise operation.
Development and Franchise Agreements. We enter into development agreements with our domestic
franchisees for the opening of a specified number of restaurants within a defined period of time and
specified geographic area. Under our current standard development agreement, the franchisee is required
to pay, at the time of signing the agreement, a non-refundable fee of $5,000 per restaurant covered by the
development agreement. This amount is credited against the standard $20,000 franchise fee payable to us
upon signing the franchise agreement for a specific location. Generally, a franchise agreement is
executed when a franchisee secures a location.
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 as
substantially all existing franchise agreements, permit us to increase the royalty fee up to 5% of sales after
the agreement has been in effect for three years. The royalty fee cannot be increased to an amount greater
than the percentage royalty fee then in effect for new franchisees.
We have the right to terminate a franchise agreement for a variety of reasons, including a franchisee’s
failure to make payments when due or failure to adhere to our policies and standards. Many state
franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise.
We opened our first franchised restaurant outside the United States in 1998. Beginning in 2001, we
changed the definition of international markets to be all markets outside the contiguous United States. In
international markets, we enter into either a development agreement or a master franchise agreement with
a franchisee for the opening of a specified number of restaurants within a defined period of time and
specified geographic area. Under a master franchise agreement, the franchisee has the right to
subfranchise a portion of the development to one or more subfranchisees approved by us. Under our
current standard international development agreement (except for Hawaii and Alaska in which the initial
fees are the same as domestic restaurants), the franchisee is required to pay total fees of $25,000 per
restaurant, $5,000 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 master franchisee, under the same terms as the development agreement, and $15,000 for
each subfranchised restaurant, $5,000 at the time of signing the agreement and $10,000 when the
restaurant opens or the agreed-upon development date, whichever comes first.
Our current standard international master franchise and development agreements provide for payment to
us of a royalty fee of 5% of sales (including sales by subfranchised restaurants), with no provision for
increase. The remaining terms applicable to the operation of individual restaurants are substantially
equivalent to the terms of our standard domestic franchise agreement.
We franchise restaurants in the United Kingdom under Perfect Pizza franchise agreements, which were in
effect at the time of our acquisition in 1999. These franchise agreements differ from our standard
international franchise agreements in many respects, although with few material differences. A principal
difference is the term of the agreement, which is five years. The franchisee fee is £18,500 (approximately
$30,000 at an exchange rate of $1.60 as of December 29, 2002), and the royalty rate of 5% is the same as
in our standard international agreements. The Perfect Pizza system has been developed principally
through franchising of individual restaurants to single location franchisees. Thus, the system has no
equivalent to our development agreements or master franchise agreements.