Papa Johns 2006 Annual Report Download - page 11

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franchised restaurants to open through January 2016. There can be no assurance that all of these
restaurants will be opened or that the development schedule set forth in the development agreements will
be achieved. During 2006, 191 (105 domestic and 86 international) franchised Papa John’s restaurants
were opened. Our franchisees converted 62 Perfect Pizza restaurants to Papa John’s restaurants from
2000 until March 2006, the date of the sale of Perfect Pizza.
Approval. Franchisees are approved on the basis of the applicant’s business background, restaurant
operating experience and financial resources. We seek franchisees to enter into development agreements
for single or multiple restaurants. We require the franchisee either to 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 $25,000 for the first restaurant and
$5,000 for any additional restaurants. The non-refundable fee is credited against the standard $25,000
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 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. Substantially all existing franchise agreements
permit us to increase the royalty fee up to 5% of sales. 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. We define “international” to
be all markets outside the contiguous United States in which we have 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 for 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 agreement provides 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
restaurants. During 2006, we added internal resources in order to expand these types of restaurants. As