Papa Johns 2004 Annual Report Download - page 10

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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 franchise fee is £18,500 (approximately
$35,500 at an exchange rate of $1.92 as of December 26, 2004), 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 historically
had no equivalent to our development agreements or master franchise agreements.
We have entered into a limited number of development and franchise agreements for non-traditional
restaurant units and continue to analyze opportunities to expand these types of units. These agreements
generally cover venues or areas not originally targeted for development and have terms differing from the
standard agreement. These agreements have not had a significant impact on our revenues or earnings.
Franchise Restaurant Development. We provide assistance to Papa John’s franchisees in selecting sites,
developing restaurants and evaluating the physical specifications for typical restaurants. Each franchisee
is responsible for selecting the location for its restaurants but must obtain our approval of restaurant
design and location based on accessibility and visibility of the site and targeted demographic factors,
including population, density, income, age and traffic. Our domestic franchisees may purchase complete
new store equipment packages through an approved third party supplier under a commission arrangement
with the Company. Internationally, our franchisees buy their equipment from approved third party
suppliers.
Franchisee Loans. Selected franchisees have borrowed funds from our subsidiary, Capital Delivery, Ltd.,
principally for use in the construction and development of their restaurants. We have also entered into
loan agreements with certain franchisees that purchased restaurants from us or other franchisees. Loans
made to franchisees typically bear interest at fixed or floating rates (with a stated average interest rate of
5.6% at December 26, 2004) and in most cases are secured by the fixtures, equipment and signage (and
where applicable, the land) of the restaurant and the ownership interests in the franchisee. At December
26, 2004, franchisee loans outstanding totaled $6.8 million ($3.6 million of net loans were eliminated
upon consolidating franchisee variable interest entities or “VIEs”), net of a $1.3 million reserve for
uncollectible amounts. See “Note 10” of “Notes to Consolidated Financial Statements” for additional
information.
We have a commitment to lend up to $17.6 million to BIBP, a franchisee-owned corporation. We have an
outstanding loan of $10.0 million to BIBP at December 26, 2004, which is eliminated in consolidation.
See “Note 10” of “Notes to Consolidated Financial Statements” for additional information.
Franchise Insurance Program. Our franchisees have the opportunity to purchase various insurance
policies, such as non-owned automobile and workers’ compensation, through our insurance agency, Risk
Services Corp. (“Risk Services”). In October 2000, we established a captive insurance company located
in Bermuda, RSC Insurance Services, Ltd., to accommodate this business. Beginning in October 2004, a
third-party commercial insurance company began providing fully-insured coverage to franchisees
participating in the franchise insurance program. Accordingly, this new agreement eliminates our risk of
loss for franchise insurance coverage written after September 2004. As of December 26, 2004,
approximately 49% of domestic franchise restaurants had obtained insurance coverage through Risk
Services. See “Note 11” of “Notes to Consolidated Financial Statements” for additional information.
Franchise Training and Support. Every franchisee is required to have a principal operator approved by
us who satisfactorily completes our required training program and who devotes his or her full business
time and efforts to the operation of the franchisee’s restaurants. Each franchise restaurant manager is also
required to complete our Company-certified management training program. We provide an on-site
training crew three days before and three days after the opening of a franchisee’s first two restaurants.