Papa Johns 2009 Annual Report Download - page 15

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agreements for approximately 1,200 additional international franchised restaurants, the substantial
majority of which are scheduled to open over the next eight years. 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 2009, 207 (79 domestic and 128 international) franchised Papa
John’s restaurants were opened.
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 each franchisee 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.
Domestic 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. Substantially all existing franchise agreements have an initial 10-year term
with a 10-year renewal option. 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.
Under our current standard domestic 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 current standard development agreement
requires the franchisee to pay a royalty fee of 5% of sales; however, the majority of our franchised
restaurants have an effective royalty rate below 5% as negotiated under prior agreements (see below for
the current domestic royalty fee).
In 2009, we initiated a 25
th
Anniversary Development Incentive Program for domestic restaurants that ran
from March 3, 2009 through December 27, 2009. The program provided for a waiver of the $25,000
franchise fee, waived royalties for 12 months after the opening date and provided a $10,000 cash
incentive paid to franchisees for opening the restaurant on or before the scheduled opening date.
Additionally, in December 2009, we announced a 2010 Development Incentive Program, which runs
from November 23, 2009 through November 21, 2010 and allows for a waiver of the $25,000 franchise
fee, reduced royalties for 12 months (waiver of 2.0% to 5.0% depending on the opening date) and a 24-
month no-payment lease on two ovens with the option to purchase the ovens for $50 per oven at the end
of the 24-month lease.
Franchise Support Initiatives. During 2009, the Company provided domestic franchise system support
initiatives in response to the declining economic and consumer climate. The initiatives included:
• Providing cheese cost relief by modifying the cheese pricing formula used by BIBP
Commodities, Inc.;
• Providing food cost relief by lowering the commissary margin on certain commodities sold by
PJFS to the franchise system;
• Providing additional system-wide national marketing contributions that amounted to $7.7 million
in 2009;
• Providing additional system-wide local print marketing contributions and certain system-wide
incentives totaling $1.9 million;