Papa Johns 2005 Annual Report Download - page 11

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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 (3% of 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. From time to time, development
agreements will be negotiated at other than standard terms for fees and royalties.
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
5.8% at December 25, 2005) 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
25, 2005, franchisee loans outstanding totaled $7.7 million ($1.5 million of net loans were eliminated
upon consolidating franchisee variable interest entities or “VIEs”), net of a $1.5 million reserve for
uncollectible amounts. See “Note 11” 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 $13.1 million to BIBP at December 25, 2005, which is eliminated in consolidation.
See “Note 11” 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
(“Captive”) 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 25, 2005,
approximately 50% of domestic franchise restaurants had obtained insurance coverage through Risk
Services. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.