Papa Johns 2009 Annual Report Download - page 16

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• Providing targeted royalty relief and local marketing support to assist certain identified
franchisees or markets, which amounted to $4.7 million in 2009;
• Providing financing on a selected basis to assist new or existing franchisees with the acquisition
of troubled franchise restaurants; and
• Suspending for the first eight months of 2009 the collection of the 0.25% royalty rate increase
that was scheduled for January 2009 (the royalty rate remained at 4.25% of sales until September
2009 at which point the rate was increased to 4.5%).
For 2010, we plan to continue certain domestic franchise support initiatives such as additional
contributions to the Marketing Fund and providing targeted royalty relief and local marketing support to
assist certain identified franchisees or markets, although our expectation is that the amount of such
support initiatives will be reduced from 2009 levels. We also announced that at the beginning of 2010,
the domestic royalty rate will be increased to 4.75% of sales for those franchisees whose royalty rate is
below the standard 5% due to negotiations under prior agreements. We expect to contribute the value of
the 0.25% increase into the Marketing Fund for 2010.
We believe the support program will mitigate potential unit closures and strengthen our brand during this
challenging economic environment. In addition to reducing unit closures, other important objectives of
the support program include growing market share in a consolidating category and stabilizing transaction
levels.
International Development and Franchise Agreements. 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 during the initial term. The remaining terms applicable to the operation of individual restaurants
are substantially equivalent to the terms of our domestic franchise agreement. From time to time,
development agreements will be negotiated at other than standard terms for fees and royalties.
Non-traditional Restaurant Development. We have entered into a limited number of development and
franchise agreements for non-traditional restaurants. For example, a total of 17 franchised net units
operate in Six Flags theme parks as part of a five-year marketing and partnership agreement. These
agreements generally cover venues or areas not originally targeted for traditional unit development and
have terms differing from the standard agreement. To date, these agreements have not had a significant,
direct impact on our pre-tax earnings.