Papa Johns 2007 Annual Report Download - page 22

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15
increase labor costs for our system-wide operations. Additionally, labor shortages in various markets
could result in higher required wage rates. Local government agencies have also implemented
ordinances, which restrict the sale of certain food products. Additional local government ordinances
could be harmful to system-wide restaurant sales.
7. Our growth strategy depends in large part on our ability and the ability of our franchisees to expand
or open new restaurants and to operate those restaurants on a profitable basis. Delays or failures in
opening new restaurants could materially and adversely affect our planned growth. In recent months,
the credit markets have experienced instability, resulting in declining real estate values, credit and
liquidity concerns and increased loan default rates. Many lenders have subsequently reduced their
willingness to make new loans and have tightened their credit requirements. Our franchisees depend
on the availability of financing to expand existing locations or construct and open new restaurants. If
our franchisees experience difficulty in obtaining adequate financing for these purposes, our growth
strategy and franchise revenues may be adversely affected.
8. Any or all of the risks listed above potentially adversely impacting restaurant sales or costs could be
especially harmful to the financial viability of franchisees in under-penetrated or emerging markets.
A decline in or failure to improve financial performance for this group of franchisees could lead to
unit closings at greater than anticipated levels and therefore impact contributions to marketing funds,
our royalty stream, PJFS and support services efficiencies and other system-wide results.
9. Impairment charges for Company-owned operations are possible if PJUK or recently acquired
restaurants perform below our expectations. In addition, we remain contingently liable for payment
under approximately 74 lease arrangements with a total value of $10.3 million associated with the
sold Perfect Pizza operations.
10. Domestically, we are dependent on sole suppliers for our cheese, flour, and thin and pan crust dough
products. Alternative sources for these ingredients may not be available on a timely basis to supply
these key ingredients or be available on terms as favorable to us as under our current arrangements.
Domestic restaurants purchase substantially all food and related products from our QC Centers.
Accordingly, both our corporate and franchised restaurants could be harmed by any prolonged
disruption in the supply of products from our QC Centers.
11. Domestic franchisees are only required to purchase seasoned sauce and dough from our QC Centers
and changes in purchasing practices by domestic franchisees could adversely affect the financial
results of our QC Centers.
12. Beginning in October 2004, a third-party commercial insurance company began providing fully-
insured coverage to franchisees participating in our franchise insurance program, thus eliminating
our risk of loss for franchise insurance coverage written after September 2004. However, with
respect to self-insurance coverage by our captive insurance company prior to October 2004, the
Captive’s relatively immature claims history limits the predictive value of estimating the costs of
incurred and future claims; accordingly, our operating income is subject to potential significant
adjustments for changes in estimated insurance reserves for policies written from the Captive’s
inception in October 2000 through September 2004.
13. Our domestic and international operations could be negatively impacted by significant changes in
international economic, political and health conditions in the countries in which the Company or its
franchisees operate. In addition, our international operations are subject to additional factors,
including compliance with foreign laws, currency regulations and fluctuations, differing business and
social cultures and consumer preferences, diverse government regulations and structures, availability