Edgar Filing: PAPA JOHNS INTERNATIONAL INC

a50600379.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 25, 2011

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____________________ to _______________________

Commission File Number: 0-21660

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	61-1203323 (I.R.S. Employer Identification No.)

2002 Papa Johns Boulevard Louisville, Kentucky (Address of principal executive offices)	40299-2367 (Zip Code)

(502) 261-7272

(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class) Common Stock, $.01 par value	(Name of each exchange on which registered) The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]	Accelerated filer [ ]

Non-accelerated filer [ ]	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing sale price on The NASDAQ Stock Market as of the last business day of the Registrant’s most recently completed second fiscal quarter, June 26, 2011, was approximately $633,919,944.

As of February 14, 2012, there were 24,242,254 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Part III are incorporated by reference to the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 26, 2012.

TABLE OF CONTENTS

			Page

Explanatory Note			2

PART II
	Item 6.	Selected Financial Data	3
	Item 7.	Management’s Discussion and Analysis of
		Financial Condition and Results of Operations	4
	Item 8.	Financial Statements and Supplementary Data	30
	Item 9A.	Controls and Procedures	71

PART IV
	Item 15.	Exhibits, Financial Statement Schedules	73

EXPLANATORY NOTE

As described in Papa John’s International, Inc.’s (the “Company”) Current Report on Form 8-K filed on February 26, 2013 and Form 10-K for the fiscal year ended December 30, 2012 filed on February 28, 2013, in connection with the evaluation of the accounting for newly formed joint ventures, the Company reviewed the accounting for its previously existing joint venture arrangements. As a result of the review, the Company determined an error occurred in the accounting for one joint venture agreement, which contained a mandatorily redeemable feature added through a contract amendment in the third quarter of 2009. This provision contained in the 2009 contract amendment was not previously considered in determining the classification and measurement of the noncontrolling interest. In addition, the Company determined that an additional redeemable noncontrolling interest was incorrectly classified in shareholders’ equity and should be classified as temporary equity. As a result, the Company is filing this amendment to its Form 10-K for the fiscal year ended December 25, 2011, to amend and restate the financial statements and other financial information contained herein to correct the errors.

This Form 10-K/A amends the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2011 as originally filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2012 (the “Original Filing”). This Form 10-K/A amends the Original Filing solely to correct the Company’s accounting for noncontrolling interests related to our joint ventures as more fully described in Note 1 to the consolidated financial statements. Revisions to the Original Filing have been made to the following items solely as a result of and to reflect the restatements and no other information in the Original Filing is amended herein:

Item 6–Selected Financial Data

Item 7–Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 8–Financial Statements and Supplementary Data

Item 9A–Controls and Procedures

Item 15–Exhibits, Financial Statement Schedules

The restatements resulted in decreases in diluted earnings per share of $0.04 and $0.13 for the fiscal years ended December 25, 2011 and December 27, 2009, respectively, and an increase in diluted earnings per share of $0.03 for the fiscal year ended December 26, 2010. The corrections had no impact on total revenues, operating income or operating cash flows and had no impact on the Company’s compliance with debt covenants in any period presented.

The Company has also determined that a control deficiency related to the process of accounting for certain redemption features of the noncontrolling interests of our joint venture agreements, which gave rise to these restatements, constituted a material weakness in its internal controls over financial reporting. As a result, the Company has reviewed all existing joint venture agreements to ensure the accounting for any such redemption features was in compliance with U.S. generally accepted accounting principles. In addition, we are in the process of developing enhanced control procedures designed to ensure proper accounting for any future non-routine contracts or contract amendments. The material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. See “Item 9A–Controls and Procedures.”

Except for the amended information referred to above, no other information in the Original Filing is amended, and is therefore not included herein. This Form 10-K/A continues to describe conditions as of the date of the Original Filing and the Company has not modified or updated other disclosures presented in the Original Filing. This Form 10-K/A does not reflect events occurring after the date of the Original Filing nor does it modify or update disclosures affected by subsequent events. Accordingly, this Form 10-K/A should be read in conjunction with the Company’s Form 10-K for the fiscal year ended December 30, 2012, and subsequent filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934.

PART II

Item 6. Selected Financial Data

The selected financial data presented for each of the fiscal years in the five-year period ended December 25, 2011, was derived from our audited consolidated financial statements. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” and Notes thereto included in Item 7 and Item 8, respectively, of this Form 10-K/A. See “Note 1” of “Notes to Consolidated Financial Statements” for information concerning the restatement of certain financial data to correct errors in our accounting for noncontrolling interests related to our joint ventures.

(In thousands, except per share data)	Year Ended (1)
	Dec. 25,			Dec. 26,			Dec. 27,			Dec. 28,			Dec. 30,
	2011			2010			2009			2008			2007
	(As Restated)			(As Restated)			(As Restated)
Income Statement Data
North America revenues:
Domestic Company-owned restaurant sales	$	525,841		$	503,272		$	503,818		$	533,255		$	504,330
Franchise royalties (2) (3)		73,694			69,631			62,083			60,592			56,278
Franchise and development fees (2)		722			610			912			1,722			4,767
Domestic commissary sales		508,155			454,506			417,689			431,650			401,081
Other sales		50,912			51,951			54,045			61,415			61,820
International revenues:
Royalties and franchise and development fees (2) (4)		16,327			13,265			11,780			11,858			9,310
Restaurant and commissary sales (5)		42,231			33,162			28,223			25,849			20,860
Total revenues		1,217,882			1,126,397			1,078,550			1,126,341			1,058,446
Operating income (6)		87,017			86,744			95,218			65,486			53,072
Investment income		755			875			629			848			1,446
Interest expense		(2,981	)		(4,309	)		(11,660	)		(7,536	)		(7,465	)
Income before income taxes		84,791			83,310			84,187			58,798			47,053
Income tax expense		26,324			27,247			26,702			19,980			13,293
Net income, including redeemable noncontrolling interests		58,467			56,063			57,485			38,818			33,760
Income attributable to redeemable noncontrolling interests (7)		(3,732	)		(3,485	)		(3,756	)		(2,022	)		(1,025	)
Net income, net of redeemable noncontrolling interests	$	54,735		$	52,578		$	53,729		$	36,796		$	32,735
Basic earnings per common share	$	2.19		$	2.00		$	1.94		$	1.31		$	1.10
Earnings per common share - assuming dilution	$	2.16		$	1.99		$	1.93		$	1.30		$	1.09
Basic weighted average shares outstanding		25,043			26,328			27,738			28,124			29,666
Diluted weighted average shares outstanding		25,310			26,468			27,909			28,264			30,017

Balance Sheet Data
Total assets	$	390,382		$	417,492		$	396,009		$	385,464		$	400,885
Total debt		51,489			99,017			99,050			130,654			142,706
Mandatorily redeemable noncontrolling interest (8)		11,065			9,972			10,960			-			-
Redeemable noncontrolling interests		3,965			3,512			3,215			3,414			2,885
Total stockholders’ equity		205,647			195,608			173,145			134,824			132,053

(1)	We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. All fiscal years presented consisted of 52 weeks.

(2)	Prior years’ financial data has been adjusted to reclassify revenues for restaurants operating in Hawaii, Alaska and Canada from international to North America franchising in order to conform to the current year presentation.

(3)	North America franchise royalties were derived from franchised restaurant sales of $1.71 billion in 2011, $1.62 billion in 2010, $1.58 billion in 2009, $1.53 billion in 2008 and $1.49 billion in 2007.

(4)	International royalties were derived from franchised restaurant sales of $320.0 million in 2011, $258.8 million in 2010, $222.2 million in 2009, $196.5 million in 2008 and $152.5 million in 2007.

(5)	Restaurant sales for international Company-owned restaurants were $12.4 million in 2011, $11.0 million in 2010, $10.3 million in 2009, $8.1 million in 2008 and $4.0 million in 2007.

(6)

The operating results include the consolidation of BIBP, which increased operating income approximately $21.4 million in 2010 (including a reduction in BIBP’s cost of sales of $14.2 million associated with PJFS’s agreement to pay to BIBP for past cheese purchases an amount equal to its accumulated deficit). BIBP increased operating income by $23.3 million in 2009 and reduced operating income by $8.6 million in 2008 and $31.0 million in 2007 (breakeven results in 2011). Operating income includes domestic and international restaurant closure, impairment and disposition gains of $86,000 in 2011 and losses of $253,000 in 2010, $657,000 in 2009, $8.8 million in 2008 and $1.8 million in 2007. See “Notes 3 and 6” of “Notes to Consolidated Financial Statements” for additional information.

(7)	Represents the redeemable noncontrolling interests’ allocation of income for our joint venture arrangements.

(8)	Manditorily redeemable noncontrolling interest is included in other long-term liabilities in the consolidated balance sheets.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1985 with the opening of the first Papa John’s restaurant in Jeffersonville, Indiana. At December 25, 2011, there were 3,883 Papa John’s restaurants in operation, consisting of 628 Company-owned and 3,255 franchised restaurants. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, risk management services, and information systems and related services used in their operations.

New unit openings in 2011 were 321 as compared to 325 in 2010 and 216 in 2009 and unit closings in 2011 were 84 as compared to 148 in 2010 and 127 in 2009. We expect net unit growth of approximately 240 to 280 units during 2012.

We have continued to produce strong average sales from our domestic Company-owned restaurants even in a very competitive market environment. Our expansion strategy is to cluster restaurants in targeted markets, thereby increasing consumer awareness and enabling us to take advantage of operational, distribution and advertising efficiencies. Average annual Company-owned sales for our most recent comparable restaurant base were $897,000 for 2011, compared to $863,000 for 2010 and $869,000 for 2009. Average sales volumes in new markets are generally lower than in those markets in which we have established a significant market position. The comparable sales for domestic Company-owned restaurants increased 4.1% in 2011, decreased 0.6% in 2010, and decreased 0.5% in 2009. The comparable sales for North America franchised units increased 3.1% in 2011, 0.3% in 2010 and 0.1% in 2009. “Comparable sales” represents sales generated by restaurants open for the entire twelve-month period reported.

We strive to obtain high-quality restaurant sites with good access and visibility, and to enhance the appearance and quality of our restaurants. We believe that these factors improve our image and brand awareness. The average cash investment for the eight domestic Company-owned restaurants opened during 2011 was approximately $260,000, compared to the $250,000 investment for the five units opened in 2010, exclusive of land and any tenant improvement allowances that we received in both years.

Approximately 47% of our revenues for 2011, compared to 45% of our revenues for 2010 and 40% of our revenues for 2009, were derived from the sale to our domestic and international franchisees of food and paper products, printing and promotional items, risk management services and information systems equipment and software and related services by us. We believe that, in addition to supporting both Company and franchised growth, these activities contribute to product quality and consistency and restaurant profitability throughout the Papa John’s system.

Critical Accounting Policies and Estimates

The results of operations are based on our consolidated financial statements, which were prepared in conformity with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas as well as estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company’s significant accounting policies are more fully described in “Note 2” of “Notes to Consolidated Financial Statements.” Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. We have identified the following accounting policies and related judgments as critical to understanding the results of our operations.

Accounting Policies

Allowance for Doubtful Accounts and Notes Receivable

We establish reserves for uncollectible accounts and notes receivable based on overall receivable aging levels and a specific evaluation of accounts and notes for franchisees and other customers with known financial difficulties.

Intangible Assets - Goodwill

In September 2011, the Financial Accounting Standards Board (“FASB”) approved Accounting Standards Update 2011-08, “Testing Goodwill for Impairment,” (“ASU 2011-08”) which is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, however, early adoption is permitted. We elected to early adopt the provisions of ASU 2011-08 in 2011.

ASU 2011-08 permits us to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the two-step quantitative goodwill impairment test, the fair value of the reporting unit is compared to its respective carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed to assess impairment. Because market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the estimated fair values of our reporting units. The estimated fair value is based on an income approach, with an appropriate risk adjusted discount rate, and a market approach where appropriate. Significant assumptions inherent in the methodologies are employed and include such estimates as discount rates, growth rates and certain market transaction multiples.

In accordance with ASU 2011-08, we evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units. Events or circumstances that might indicate an interim evaluation is warranted include, among other factors, unexpected adverse business conditions, macro and reporting unit specific economic factors (for example, worsening results in comparison to projections, commodity inflation, or loss of key personnel), unanticipated competitive activities, and acts by governments or courts.

As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. During 2011, in connection with a restructuring of our components in our domestic Company-owned restaurant segment, changes were made in the discrete financial information that was made available to the segment manager of our domestic Company-owned restaurant segment, which resulted in the identification of new components in 2011. Additionally, because components meet the aggregation provision of Accounting Standards Codification 280, “Segment Reporting,” we now aggregate the components of our domestic Company-owned restaurant segment into one reporting unit. Prior to 2011, the components were treated as individual reporting units.

Under ASU 2011-08, companies can bypass the qualitative assessment and move directly to the quantitative assessment for any reporting unit in any period if management believes that it is more efficient or there is a risk of impairment. All companies can elect to resume performing the qualitative assessment in any subsequent period. We applied the qualitative assessment for our domestic Company-owned restaurants and China reporting units, which is included in our international reporting segment. As a result of our qualitative analysis, we determined that it was more-likely-than-not that the fair value of our domestic Company-owned restaurants and China reporting units was greater than the carrying amounts.

With respect to our PJUK reporting unit (which represents $14.8 million of goodwill as of December 25, 2011), we bypassed the qualitative assessment and performed the two-step quantitative goodwill impairment test, which indicated the fair value exceeded the carrying amount by 7%. The fair value was calculated using an income approach that projected net cash flow over a 10-year discrete period and a terminal value, which were discounted using appropriate rates. The selected discount rate considers the risk and nature of our PJUK reporting unit’s cash flow and the rates of return market participants would require to invest their capital in the PJUK reporting unit. We believe our PJUK reporting unit will continue to improve its operating results through ongoing growth initiatives, by increasing Papa John’s brand awareness in the United Kingdom, improving sales and profitability for individual franchised restaurants and increasing PJUK franchised net unit openings over the next several years. Future impairment charges could be required if adverse economic events occur in the United Kingdom.

Subsequent to completing our annual qualitative and quantitative goodwill impairment tests, no indications of impairment were identified.

Insurance Reserves

Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles and health insurance coverage provided to our employees are funded by the Company up to certain retention levels. Losses are accrued based upon undiscounted estimates of the aggregate retained liability for claims incurred using certain third-party actuarial projections and our claims loss experience. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves recorded by the Company.

Deferred Income Tax Accounts and Tax Reserves

Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. Discrete income tax items are recorded in the quarter in which they occur.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of December 25, 2011, we had a net deferred income tax asset of $944,000.

Tax authorities periodically audit the Company. We record reserves for identified exposures. We evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements, which may impact our ultimate payment for such exposures. We recognized reductions of $1.9 million, $550,000 and $1.2 million in our income tax expense associated with the finalization of certain income tax issues in 2011, 2010 and 2009, respectively (see “Note 13” of “Notes to Consolidated Financial Statements”).

Consolidation of BIBP Commodities, Inc. (“BIBP”) as a Variable Interest Entity

BIBP was a franchisee-owned corporation that conducted a cheese-purchasing program on behalf of Company-owned and franchised restaurants operating in the United States through February 2011. As the primary beneficiary, we consolidated the operating results of BIBP. BIBP operated at breakeven for the first two months of 2011 and recognized income before income taxes of $21.0 million in 2010 and $22.5 million in 2009. Income before income taxes in 2010 included a reduction in BIBP’s cost of sales of $14.2 million associated with PJFS’s agreement to pay to BIBP for past cheese purchases an amount equal to its accumulated deficit (“BIBP Settlement”). Accordingly, BIBP recorded a decrease of $14.2 million in cost of sales and PJFS recorded a corresponding increase in cost of sales in 2010. This transaction did not have any impact on the Company’s 2010 consolidated income statement results since both PJFS and BIBP are fully consolidated.

Consolidation accounting required the net impact from the consolidation of BIBP to be reflected primarily in three separate components of our statement of income. The first component was the portion of BIBP operating income or loss attributable to the amount of cheese purchased by Company-owned restaurants during the period. This portion of BIBP operating income was reflected as a reduction in the “Domestic Company-owned restaurant expenses - cost of sales” line item. This approach effectively reported cost of sales for Company-owned restaurants as if the purchasing agreement with BIBP did not exist and such restaurants were purchasing cheese at the spot market prices (i.e., the impact of BIBP is eliminated in consolidation).

The second component of the net impact from the consolidation of BIBP was reflected in the caption “Loss (income) from the franchise cheese-purchasing program, net of noncontrolling interest.” This line item represented BIBP’s income or loss from purchasing cheese at the spot market price and selling to franchised restaurants at a fixed monthly price, net of any income or loss attributable to the noncontrolling interest BIBP shareholders. The amount of income or loss attributable to the BIBP shareholders depended on its cumulative shareholders’ equity balance and the change in such balance during the reporting period. The third component was reflected as interest expense, when BIBP was in a net borrowing position during the reporting period.

In February 2011, we terminated the purchasing arrangement with BIBP and BIBP no longer has operating activities. Over 99% of our domestic franchisees have entered into a cheese purchasing agreement with PJFS. The cheese purchasing agreement requires participating domestic franchisees to purchase cheese through PJFS, or to pay the franchisee’s portion of any accumulated cheese liability upon ceasing to purchase cheese from PJFS when a liability exists. The cheese purchasing agreement specifies that PJFS will charge the franchisees a predetermined price for cheese on a monthly basis. Any difference between the amount charged to franchisees and the actual price paid by PJFS for cheese will be recorded as a receivable from or a payable to the franchisees, to be repaid based upon a predetermined formula outlined in the agreement.

Restatement of Previously Issued Financial Statements

In connection with the evaluation of the accounting for newly formed joint ventures, we reviewed our accounting for our previously existing joint venture arrangements. As a result of our review, we determined an error occurred in the accounting for one joint venture agreement, which contained a mandatorily redeemable feature added through a contract amendment in the third quarter of 2009. This provision contained in the 2009 contract amendment was not previously considered in determining the classification and measurement of the noncontrolling interest. In addition, we determined an additional redeemable noncontrolling interest was incorrectly classified in shareholders' equity and should be classified as temporary equity, which impacted the consolidated balance sheets and statements of stockholders' equity. As such, we are restating our previously issued consolidated financial statements for the fiscal years 2011, 2010, and 2009. The correction of the error related to the mandatorily redeemable noncontrolling interest had an impact on our Consolidated Statements of Income, interest expense, income tax expense, and net income. The restatements resulted in decreases in diluted earnings per share of $0.04 and $0.13 for the fiscal years ended December 25, 2011 and December 27, 2009, respectively, and an increase in diluted earnings per share of $0.03 for the fiscal year ended December 26, 2010. The corrections were recorded to our “Unallocated Corporate Expenses” segment. The corrections had no impact on total revenues, operating income, or operating cash flows and had no impact on our compliance with debt covenants in any periods presented. See “Note 1” and “Note 2” of “Notes to Consolidated Financial Statements” for additional information.

Non-GAAP Measures

The financial measures we present in this report excluding the impact of the consolidation of BIBP are not measures defined within accounting principles generally accepted in the United States (“GAAP”). These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. We believe the financial information excluding the impact of the consolidation of BIBP is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. We analyze our business performance and trends excluding the impact of the consolidation of BIBP because the results of BIBP are not indicative of the principal operating activities of the Company. In addition, annual cash bonuses and certain long-term incentive programs for various levels of management were based on financial measures that exclude BIBP. The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

In addition, we present free cash flow in this report, which is not a term defined by GAAP. Free cash flow is defined as net cash provided by operating activities (from the consolidated statements of cash flows) excluding the impact of BIBP, less the purchases of property and equipment. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP and as a result our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of our performance than the Company’s GAAP measures.

Segment Reporting Change

In 2011, we realigned management responsibility and financial reporting for Hawaii, Alaska and Canada from our international business segment to our domestic franchising segment in order to better leverage existing infrastructure and systems. As a result, we renamed the domestic franchising segment “North America franchising” in the first quarter of 2011. Certain prior year amounts have been reclassified in our consolidated statements of income, segment information, and restaurant unit progression to conform to the current year presentation.

Fiscal Year

The Company follows a fiscal year ending on the last Sunday of December, generally consisting of 52 weeks made up of four 13-week quarters. The 13-week quarters consist of two four-week periods followed by one five-week period.

Percentage Relationships and Restaurant Data and Unit Progression

The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of certain income statement data, and certain restaurant data for the years indicated:

	Year Ended (1)
	Dec. 25,			Dec. 26,			Dec. 27,
	2011			2010			2009
	(As Restated)			(As Restated)			(As Restated)

Income Statement Data:
North America revenues:
Domestic Company-owned restaurant sales		43.2	%		44.7	%		46.7	%
Franchise royalties		6.1			6.2			5.8
Franchise and development fees		0.1			0.0			0.1
Domestic commissary sales		41.7			40.4			38.7
Other sales		4.2			4.6			5.0
International revenues:
Royalties and franchise and development fees		1.3			1.2			1.1
Restaurant and commissary sales		3.4			2.9			2.6
Total revenues		100.0			100.0			100.0
Costs and expenses:
Domestic Company-owned restaurant cost of sales (2)		24.1			22.1			20.0
Domestic Company-owned restaurant operating expenses (2)		56.9			57.7			58.2
Domestic commissary and other expenses (3)		92.2			91.4			90.2
Income from the franchise cheese purchasing
program, net of minority interest (4)		0.0			(0.5	)		(1.7	)
International operating expenses (5)		84.5			88.7			86.3
General and administrative expenses		9.2			9.8			10.3
Other general expenses		0.8			0.8			1.3
Depreciation and amortization		2.7			2.9			2.9
Total costs and expenses		92.9			92.3			91.2
Operating income		7.1			7.7			8.8
Net interest expense		(0.1	)		(0.3	)		(1.0	)
Income before income taxes		7.0			7.4			7.8
Income tax expense		2.2			2.4			2.5
Net income, including redeemable noncontrolling interests		4.8			5.0			5.3
Income attributable to redeemable noncontrolling interests		(0.3	)		(0.3	)		(0.3	)
Net income, net of redeemable noncontrolling interests		4.5	%		4.7	%		5.0	%

	Year Ended (1)
	Dec. 25,			Dec. 26,			Dec. 27,
	2011			2010			2009

Restaurant Data:
Percentage increase (decrease) in comparable domestic
Company-owned restaurant sales (6)		4.1	%		(0.6	%)		(0.5	%)
Number of Company-owned restaurants included in the
most recent full year's comparable restaurant base		582			578			559
Average sales for Company-owned restaurants included
in the most recent comparable restaurant base	$	897,000		$	863,000		$	869,000

Papa John's Restaurant Progression:
North America Company-owned:
Beginning of period		591			588			592
Opened		8			5			5
Closed		(1	)		(2	)		(8	)
Acquired from franchisees		-			-			11
Sold to franchisees		-			-			(12	)
End of period		598			591			588
International Company-owned:
Beginning of period		21			26			23
Opened		9			8			4
Closed		-			(2	)		(1	)
Acquired from franchisees		-			1			-
Sold to franchisees		-			(12	)		-
End of period		30			21			26
North America franchised (7):
Beginning of period		2,346			2,246			2,243
Opened		166			182			93
Closed		(49	)		(82	)		(91	)
Acquired from Company		-			-			12
Sold to Company		-			-			(11	)
End of period		2,463			2,346			2,246
International franchised (7):
Beginning of period		688			609			522
Opened		138			130			114
Closed		(34	)		(62	)		(27	)
Acquired from Company		-			12			-
Sold to Company		-			(1	)		-
End of period		792			688			609
Total Papa John's restaurants - end of period		3,883			3,646			3,469

(1)	We operate on a fiscal year ending on the last Sunday of December of each year.

(2)	As a percentage of domestic Company-owned restaurant sales.

(3)	As a percentage of domestic commissary sales and other sales on a combined basis.

(4)	As a percentage of total Company revenues; the income is a result of the consolidation of BIBP, a VIE. The sales reported by BIBP are eliminated in consolidation.

(5)	As a percentage of international restaurant and commissary sales.

(6)	Includes only Company-owned restaurants open throughout the periods being compared.

(7)	Restaurant unit data for 2010 and 2009 has been adjusted to reflect the reclassification of restaurants operating in Hawaii, Alaska and Canada from international franchised to North America franchised in order to conform to the current year presentation.

Results of Operations

2011 Compared to 2010

Discussion of Revenues

Consolidated revenues increased 8.1% to $1.22 billion in 2011 compared to $1.13 billion in 2010, primarily consisting of the following:

Domestic Company-owned restaurant sales increased $22.6 million, or 4.5%, in 2011 primarily due to an increase in comparable sales of 4.1%.

North America franchise royalty revenues increased approximately $4.1 million, or 5.8% in 2011 due to an increase in comparable sales of 3.1%, and an increase in the number of franchised restaurants.

Domestic commissary sales increased $53.6 million, or 11.8% in 2011 primarily due to an increase in the prices of certain commodities, most notably cheese, and an increase in sales volumes.

International revenues increased $12.1 million, or 26.1% in 2011, primarily due to an increase in the number of restaurants and an increase in comparable sales of 5.1%, calculated on a constant dollar basis. In 2010, the international segment included revenues from Company-owned restaurants located in the United Kingdom, which were sold in the third quarter of 2010.

Discussion of Operating Results

Our income before income taxes totaled $84.8 million in 2011, as compared to $83.3 million in 2010, an increase of approximately $1.5 million. Excluding the impact of BIBP (income before income taxes of $6.8 million, excluding the BIBP Settlement), our income before income taxes increased approximately $8.3 million, or 10.8%. Income before income taxes is summarized in the following table on an operating segment basis (in thousands):

							Increase
	2011			2010			(Decrease)
	(As Restated)			(As Restated)

Domestic Company-owned restaurants	$	28,980		$	31,619		$	(2,639	)
Domestic commissaries *		30,532			14,188			16,344
North America franchising		66,222			62,229			3,993
International		(165	)		(4,771	)		4,606
All others		(441	)		1,847			(2,288	)
Unallocated corporate expenses		(39,727	)		(42,237	)		2,510
Elimination of intersegment profits		(610	)		(519	)		(91	)
Income before income taxes, excluding BIBP		84,791			62,356			22,435
BIBP, a variable interest entity *		-			20,954			(20,954	)
Total income before income taxes	$	84,791		$	83,310		$	1,481

The full-year 2010 results for domestic commissaries were reduced by the BIBP Settlement and the full-year 2010 results for BIBP were increased by the BIBP Settlement. There was no impact on the consolidated results of operations since PJFS and BIBP are fully consolidated into the Company’s results.

Changes in income before income taxes for 2011, excluding the impact of BIBP (income before income taxes of $6.8 million, excluding the BIBP Settlement), are summarized on a segment basis as follows:

Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes decreased $2.6 million from the prior comparable period. The decrease was due to increased commodity costs, primarily cheese, partially offset by incremental profits from higher comparable sales.

Domestic Commissary Segment. Domestic commissaries’ income before income taxes increased $16.3 million in 2011 over the comparable 2010 period comprised of the following (in thousands):

	Year Ended December 25, 2011		Year Ended December 26, 2010			Increase

Income before income taxes, excluding the
BIBP Settlement	$	30,532	$	28,338		$	2,194
BIBP Settlement		-		(14,150	)		14,150
Total segment income before income taxes	$	30,532	$	14,188		$	16,344

Domestic commissaries’ income before income taxes, excluding the BIBP Settlement, increased $2.2 million over the prior year. The increase was due to a higher operating income dollar margin attributable to higher sales volumes, partially offset by increased costs attributable to higher fuel prices.

North America Franchising Segment. North America franchising income before income taxes increased approximately $4.0 million in 2011 as compared to the comparable 2010 period. The increase was due to the previously mentioned royalty revenue increase.

International Segment. The international segment reported operating losses of $165,000 in 2011 and approximately $4.8 million in 2010. The improvement in operating results of $4.6 million was primarily due to increased royalties due to growth in the number of units and a comparable sales increase of 5.1%, and improved operating results in our Beijing and North China restaurants as well as our United Kingdom commissary. Additionally, the prior year results included start-up costs associated with our Company-owned commissary in the United Kingdom that opened in 2010.

All Others Segment. The “All others” segment reported an operating loss of approximately $400,000 in 2011, representing a decrease of approximately $2.3 million, as compared to the corresponding 2010 period. The decrease was primarily due to a decline in the operating results of our online and mobile ordering (“eCommerce”) business, partially offset by improvements in operating income at our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions (“Preferred”). The decline in the operating results of our eCommerce business was primarily due to an increase in infrastructure and support costs attributable to the new online ordering system. Additionally, online revenues decreased in 2011 due to lower online and mobile fees charged.

Unallocated Corporate Segment. Unallocated corporate expenses decreased $2.5 million in 2011, as compared to prior year. The components of unallocated corporate expenses were as follows (in thousands):

	Year Ended		Year Ended
	December 25,		December 26,			Increase
	2011		2010			(Decrease)
	(As Restated)		(As Restated)

General and administrative (a)	$	24,807	$	25,823		$	(1,016	)
Net interest (b)		2,300		3,091			(791	)
Depreciation		8,021		8,873			(852	)
Franchise incentives and initiatives (c)		3,234		6,489			(3,255	)
Perfect Pizza lease obligation (d)		832		-			832
Other expense (income) (e)		533		(2,039	)		2,572
Total unallocated corporate expenses	$	39,727	$	42,237		$	(2,510	)

(a)

The decrease in unallocated corporate general and administrative costs for 2011 was due to lower short- and long-term incentive compensation costs, and lower sponsorship fees, partially offset by increased travel costs.

(b)

The decrease in net interest expense reflects the decrease in our average outstanding debt balance and lower interest rates. This was somewhat offset by the increased interest expense in 2011 associated with an increase in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture. See “Notes 1, 2, and 20” of the “Notes to Consolidated Financial Statements” for additional information.

(c)

In 2010, we provided discretionary contributions to the Marketing Fund and other local advertising cooperatives. In 2011, we offered incentives to domestic franchisees for meeting certain sales targets, including driving comparable sales, transactions and online sales.

(d)

The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former Perfect Pizza operations in the United Kingdom. See the notes to the consolidated financial statements for additional information.

(e)

The increase in other expense (income) is primarily due to increases in our online customer loyalty program costs and disposition and valuation-related costs.

Variable Interest Entities. BIBP generated income before income taxes of $21.0 million in 2010, which primarily consisted of the BIBP Settlement and income associated with cheese sold to domestic Company-owned and franchise restaurants of $1.7 million and $5.6 million, respectively. BIBP reported breakeven results for the first two months of 2011, at which time we terminated the purchasing arrangement with BIBP.

The following table summarizes the impact of BIBP prior to the required consolidating eliminations on our consolidated statements of income for the years ended December 25, 2011 and December 26, 2010 (in thousands):

	Year Ended
	December 25, 2011		December 26, 2010

BIBP sales	$	25,117	$	153,014

Cost of sales		25,100		131,549
General and administrative expenses		17		91
Total costs and expenses		25,117		131,640
Operating income		-		21,374
Interest expense		-		(420	)
Income before income taxes (a)	$	-	$	20,954

(a)

BIBP’s income before income taxes for the year ended December 26, 2010, was $6.8 million, excluding the BIBP Settlement.

Diluted earnings per share were $2.16 in 2011, compared to $1.99 per diluted share in 2010 (including a $0.16 per share gain from the consolidation of BIBP). Excluding the impact of BIBP in 2010, diluted earnings per share increased $0.33, or 18.0% ($2.16 in 2011 compared to $1.83 in 2010). Diluted weighted average shares outstanding decreased 4.4% in 2011 from the prior year period. Diluted earnings per share increased $0.09 due to the reduction in shares outstanding.

Review of Consolidated Operating Results

Revenues. Domestic Company-owned restaurant sales were $525.8 million for 2011 compared to $503.3 million for 2010. The 4.5% increase was primarily due to a 4.1% increase in comparable sales.

North America franchise sales increased 6.1% to $1.71 billion, from $1.62 billion in 2010, as domestic franchise comparable sales increased 3.1% and equivalent units increased 4.5%. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis. North America franchise sales are not included in our consolidated statements of income; however, our North America franchise royalty revenue is derived from these sales. North America franchise royalties were $73.7 million, representing an increase of 5.8% from the comparable period. The increase in royalties was primarily due to the previously noted increase in franchise sales. The impact of the royalty rate increase to 5.0% (0.25% increase over 2010) was substantially offset by the franchisees’ ability to earn up to a 0.25% royalty rebate by meeting certain sales growth targets and an additional 0.20% royalty rebate by making specified re-imaging restaurant lobby investments.

Average weekly sales for comparable units include restaurants that were open throughout the periods presented below. The comparable sales base for domestic Company-owned and North America franchised restaurants, respectively, includes restaurants acquired by the Company or divested to franchisees during the previous twelve months. Average weekly sales for non-comparable units include restaurants that were not open throughout the periods presented below and include non-traditional sites. Average weekly sales for non-traditional units not subject to continuous operation are calculated based upon actual days open.

The comparable sales base and average weekly sales for 2011 and 2010 for domestic Company-owned and North America franchised restaurants consisted of the following:

	Year Ended						Year Ended
	December 25, 2011						December 26, 2010
	Domestic Company-owned			North America Franchised			Domestic Company-owned			North America Franchised

Total domestic units (end of period)		598			2,463			591			2,346
Equivalent units		589			2,332			586			2,231
Comparable sales base units		581			2,135			577			2,074
Comparable sales base percentage		98.6	%		91.6	%		98.5	%		93.0	%
Average weekly sales - comparable units	$	17,248		$	14,459		$	16,599		$	14,057
Average weekly sales - total non-comparable units	$	11,218		$	10,708		$	11,562		$	12,177
Average weekly sales - all units	$	17,164		$	14,142		$	16,521		$	13,924

North America franchise and development fees were approximately $700,000 in 2011 or an increase of approximately $100,000 from 2010. The increase was due to an increase in transfer and cancellation fees, partially offset by a decrease in opening fees as there were a greater number of restaurants opening with no fee in 2011 in accordance with our development incentive programs.

Domestic commissary sales increased 11.8% to $508.2 million in 2011 from $454.5 million in the prior comparable period. The increase was primarily due to an increase in the prices of certain commodities, most notably cheese, and an increase in sales volumes. Our commissaries charge a fixed dollar mark-up on the cost of cheese. Cheese prices are based upon the block price, which increased to an average price of $1.80 per pound in 2011 from the $1.59 BIBP block price in 2010.

Other sales decreased $1.0 million to $50.9 million in 2011. The decrease primarily resulted from a decline in sales at Preferred, and a reduction in the online fee charged to our domestic franchisees.

International franchise sales were $320.0 million in 2011, compared to $258.8 million in 2010. International franchise sales are not included in our consolidated statements of income; however, our international royalty revenue is derived from these sales. Total international revenues were $58.6 million for 2011 compared to $46.4 million in 2010, reflecting an increase in the number of restaurants in addition to the 5.1% increase in comparable sales, calculated on a constant dollar basis. These increases were partially offset by the prior year’s inclusion of revenues from Company-owned restaurants located in the United Kingdom, which were sold in the third quarter of 2010. Our PJUK operations represented 51% of international revenues in both 2011 and 2010.

Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 19.0% in 2011 compared to 20.2% (19.9% excluding BIBP) in 2010. Excluding the impact of consolidating BIBP, restaurant operating margin decreased 0.9% in 2011 as compared to the corresponding period in 2010, consisting of the following differences:

Cost of sales were 1.7% higher as a percentage of sales in 2011 as compared to 2010 due to the impact of higher commodities costs, principally cheese, wheat and meats.

Salaries and benefits were 0.4% lower as a percentage of sales in 2011 compared to 2010, reflecting the benefit of increased sales.

Advertising and related costs as a percentage of sales were relatively flat year-over-year.

Occupancy costs and other operating costs, on a combined basis, as a percentage of sales, were 0.4% lower in 2011 reflecting the benefit of increased sales.

Domestic commissary and other operating margin was 7.8% in 2011, compared to 8.6% in 2010. Domestic commissary and other operating margin decreased 0.8% in 2011, consisting of the following differences:

Cost of sales was 0.9% higher as a percentage of revenues in 2011, as compared to 2010. Cost of sales increased primarily due to the impact of higher commodities costs, primarily cheese, wheat and meats. In addition, a reduction in online fee revenue from franchisees and an increase in eCommerce support costs contributed to the increases in cost of sales.

Salaries and benefits were 0.4% lower as a percentage of revenues in 2011, as compared to the same period of 2010, reflecting the benefit of increased sales.

Other operating expenses were 0.3% higher as a percentage of revenues in 2011, as compared to 2010, primarily due to an increase in distribution costs from increased fuel prices.

We recorded income before income taxes from the franchise cheese-purchasing program, net of noncontrolling interest, of $5.6 million in 2010 (no impact in 2011 through February, at which time the purchasing agreement with BIBP was terminated). The results in 2010 only represented the portion of BIBP’s operating income related to the proportion of BIBP cheese sales to franchisees. The total impact of the consolidation of BIBP on Papa John’s income before income taxes was $21.0 million in 2010 (including the BIBP Settlement). See the summary of BIBP’s operating results in the Variable Interest Entities caption for additional information on BIBP’s 2011 and 2010 results.

International operating expenses in 2011 were 84.5% of international restaurant and commissary sales as compared to 88.7% in 2010. The improvement in operating expenses, as a percentage of sales, was due to both improvements in operating results in our Beijing and North China restaurants and our PJUK commissary. Our 2010 results also included start-up costs associated with our PJUK commissary.

General and administrative expenses were $111.6 million, or 9.2% of revenues for 2011, as compared to $110.0 million, or 9.8% of revenues for 2010. The increase in general and administrative expenses is due to an increase in travel costs, payroll and other taxes, and employee incentives, partially offset by lower short- and long-term incentive compensation costs and lower sponsorship fees.

Other general expenses reflected net expense of $9.8 million in 2011, as compared to $9.0 million in 2010 as detailed below (in thousands):

						Increase
	2011		2010			(Decrease)

Impairment and disposition losses (a)	$	1,745	$	894		$	851
Provision (credit) for uncollectible accounts and notes receivable		379		(27	)		406
Pre-opening restaurant costs		273		149			124
Franchise and development incentives and initiatives (b)		4,921		7,533			(2,612	)
Perfect Pizza lease obligation (c)		832		-			832
Other expense (d)		1,617		481			1,136
Total other general expenses	$	9,767	$	9,030		$	737

(a)	Disposition and impairment losses include costs associated with the disposition of certain systems and other equipment.

(b)

The 2010 amounts include discretionary contributions to the Marketing Fund and other local advertising cooperatives of $6.5 million and incentives to franchisees for opening new restaurants of $1.0 million. The 2011 amounts include approximately $3.2 million in incentives offered to domestic franchisees for meeting certain sales targets, including driving comparable sales, transactions and online sales in 2011 and $1.7 million in incentives to franchisees for opening new restaurants.

(c)	The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former Perfect Pizza operations in the United Kingdom.

(d)	Other expense increased primarily due to costs associated with our online customer loyalty program.

Depreciation and amortization was $32.7 million, or 2.7% of revenues, for 2011 as compared to $32.4 million, or 2.9% of revenues, for 2010.

Net interest. Net interest expense was approximately $2.2 million in 2011, compared to $3.4 million in 2010. The decrease in net interest costs reflects a lower average outstanding debt balance and lower effective interest rates. This was somewhat offset by the increased interest expense in 2011 associated with an increase in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture. See “Notes 1, 2, and 20” of the “Notes to Consolidated Financial Statements” for additional information.

Income Tax Expense. Our effective income tax rate was 31.0% in 2011 compared to 32.7% in 2010 (32.4% in 2010, excluding BIBP). Our effective income tax rate may fluctuate for various reasons, including the settlement or resolution of specific federal and state issues. We recognized reductions of $1.9 million and $550,000 in our income tax expense associated with the finalization of certain income tax issues in 2011 and 2010, respectively.

2010 Compared to 2009

Discussion of Revenues

Total revenues, which increased 4.4% to $1.13 billion in 2010 compared to $1.08 billion in 2009, primarily consisted of the following:

Franchise royalties revenue increased $7.5 million primarily due to an increase in the royalty rate (the standard royalty rate for the majority of domestic franchise restaurants increased from 4.25% at the beginning of 2009 to 4.50% in September 2009 and increased to 4.75% in the first quarter of 2010).

Domestic commissary sales increased $36.8 million primarily due to an increase in sales volumes.

International revenues increased $6.4 million primarily due to an increase in the number of our franchised international restaurants.

The increases noted above were partially offset by a $2.1 million decline in domestic other sales primarily due to a decline in sales at Preferred. Additionally, domestic Company-owned restaurant sales decreased approximately $550,000 primarily due to a decrease of 0.6% in comparable sales for domestic Company-owned restaurants for the year.

Discussion of Operating Results

Our income before income taxes totaled $83.3 million in 2010, as compared to $84.2 million in 2009 as summarized in the following table on an operating segment basis (in thousands):

							Increase
	2010			2009			(Decrease)
	(As Restated)			(As Restated)

Domestic Company-owned restaurants	$	31,619		$	34,894		$	(3,275	)
Domestic commissaries *		14,188			29,393			(15,205	)
North America franchising		62,229			55,008			7,221
International		(4,771	)		(4,368	)		(403	)
All others		1,847			2,697			(850	)
Unallocated corporate expenses		(42,237	)		(55,762	)		13,525
Elimination of intersegment profits		(519	)		(218	)		(301	)
Income before income taxes, excluding BIBP		62,356			61,644			712
BIBP, a variable interest entity *		20,954			22,543			(1,589	)
Total income before income taxes	$	83,310		$	84,187		$	(877	)

Excluding the impact of the consolidation of BIBP (income before income taxes of $6.8 million, excluding the BIBP Settlement, or $0.16 per diluted share in 2010, and income before income taxes of $22.5 million or $0.52 per diluted share in 2009), 2010 income before income taxes was $76.5 million (6.8% of total revenues), compared to $61.6 million (5.7% of total revenues) in 2009. The $14.9 million increase in income before income taxes, excluding the consolidation of BIBP, was principally due to the following:

Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes decreased $3.3 million from the prior comparable period. The decrease was primarily due to a decline in operating margin from lower average ticket prices due to increased levels of discounting, partially offset by increased customer traffic and reductions in labor costs as a result of labor efficiencies from implemented initiatives. The 2009 period included restaurant closure costs of approximately $700,000. There were no significant closure costs in 2010.

Domestic Commissary Segment. Domestic commissaries’ income before income taxes decreased $15.2 million in 2010 over the prior year, comprised of the following (in thousands):

	Year Ended December 26, 2010			Year Ended December 27, 2009		Decrease

Income before income taxes, excluding the
BIBP Settlement	$	28,338		$	29,393	$	(1,055	)
BIBP Settlement		(14,150	)		-		(14,150	)
Total segment income before income taxes	$	14,188		$	29,393	$	(15,205	)

Domestic commissaries’ income before income taxes, excluding the BIBP Settlement, was $28.3 million in 2010, as compared to $29.4 million in 2009. The decrease of $1.1 million in income before income taxes was primarily due to increased fuel costs, partially offset by an increase in sales volumes, although at a lower gross margin percentage. The full-year 2010 gross margin percentage included the impact of commodities cost increases we absorbed for certain vegetable products resulting from harsh Florida winter weather and various rebate programs available to restaurants for achieving certain sales improvement targets. Full-year 2009 included approximately $800,000 of management transition costs and $400,000 of costs associated with the closure of one of our commissaries.

North America Franchising Segment. North America franchising income before income taxes increased approximately $7.2 million to $62.2 million in 2010, from $55.0 million in 2009. The increase was primarily due to an increase in franchise royalties (the standard royalty rate increased from 4.25% to 4.50% in September 2009, and increased to 4.75% in the first quarter of 2010). The impact of the royalty rate increase was partially offset by the impact of development incentive programs offered by the Company in 2009 and 2010. Franchise and development fees were approximately $200,000 lower in 2010 than in the corresponding period, despite an increase of 90 domestic unit openings during 2010 due to development incentive programs in place. Additionally, we incurred incentive costs of $1.0 million in 2010, compared to $440,000 in 2009.

International Segment. The international segment reported operating losses of approximately $4.8 million in 2010 and $4.4 million in 2009. The increase in operating losses was due to increased personnel and franchise support costs as well as from costs associated with the opening of our new commissary in the United Kingdom, partially offset by increased revenues due to growth in the number of international units.

All Others Segment. Income before income taxes for the “All others” reporting segment decreased approximately $850,000 in 2010 as compared to 2009. The decrease was primarily due to increased costs in our online ordering business due to increased infrastructure and support attributable to the new online ordering system introduced in October 2010. This decline was partially offset by an improvement in operating results at Preferred, primarily due to cost reductions implemented in 2009 and 2010.

Unallocated Corporate Segment. Unallocated corporate expenses decreased approximately $6.5 million in 2010 as compared to 2009. The components of unallocated corporate expenses were as follows (in thousands):

	Year Ended			Year Ended
	December 26, 2010			December 27, 2009			Increase (Decrease)
	(As Restated)			(As Restated)

General and administrative (a)	$	25,823		$	26,893		$	(1,070	)
Net interest (b)		3,091			10,258			(7,167	)
Depreciation		8,873			8,684			189
Franchise support initiatives (c)		6,489			9,556			(3,067	)
Provision (credit) for uncollectible
accounts and notes receivable (d)		(340	)		1,172			(1,512	)
Other income (e)		(1,699	)		(801	)		(898	)
Total unallocated corporate expenses	$	42,237		$	55,762		$	(13,525	)

(a)

Unallocated general and administrative costs decreased in 2010 due to lower salaries and benefits, resulting from fewer employees and the fact that the prior year included $800,000 in litigation settlement costs. Severance costs, net of forfeitures of unvested stock awards, were also approximately $400,000 lower in 2010. These reductions were partially offset by an increase in short-term incentive compensation expense.

(b)

The decrease in net interest expense in 2010 was primarily due to a decrease of approximately $1.0 million in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture. In addition, net interest expense in 2009 reflects the impact of the addition of a mandatory redemption feature through a contract amendment in the third quarter of 2009 for one of our noncontrolling interests and the associated remeasurement to its redemption value, which was $6.0 million of additional interest expense in 2009. See “Notes 1, 2 and 20” of the “Notes to Consolidated Financial Statements” for additional information.

(c)

Franchise support initiatives primarily consist of discretionary contributions to the Marketing Fund and other local advertising cooperatives.

(d)

The reduction in the provision for uncollectible accounts and notes receivable was primarily due to the collection of certain accounts that were previously reserved.

(e)

The increase in other income was primarily due to sales of point-of-sale systems associated with additional domestic openings.

Variable Interest Entities. BIBP generated income before income taxes of $21.0 million in 2010, compared to $22.5 million in 2009. The following table summarizes the impact of BIBP prior to the required consolidating eliminations on our consolidated statements of income for the years ended December 26, 2010 and December 27, 2009 (in thousands):

	Year Ended
	December 26, 2010			December 27, 2009

BIBP sales	$	153,014		$	142,407

Cost of sales		131,549			118,825
General and administrative expenses		91			233
Total costs and expenses		131,640			119,058
Operating income		21,374			23,349
Interest expense		(420	)		(806	)
Income before income taxes (a)	$	20,954		$	22,543

(a)

Income before income taxes for the year ended December 26, 2010, was $6.8 million, excluding the BIBP Settlement.

Diluted earnings per share were $1.99 in 2010 (including a $0.16 per share gain from the consolidation of BIBP, excluding the BIBP Settlement), compared to $1.93 per diluted share in 2009 (including a $0.52 gain from the consolidation of BIBP and a $0.04 gain from the finalization of certain income tax issues). Diluted weighted average shares outstanding decreased 5.2% in 2010 from the prior year period. Diluted earnings per share, excluding BIBP, increased $0.10 due to the reduction in shares outstanding.

Review of Consolidated Operating Results

Revenues. Domestic Company-owned restaurant sales were $503.3 million for 2010 compared to $503.8 million for 2009. The 0.1% decrease was primarily due to a 0.6% decrease in comparable sales.

North America franchise sales increased 2.1% to $1.62 billion, from $1.58 billion in 2009, as comparable sales increased 0.3% and equivalent units increased 4.3%. North America franchise royalties were $69.6 million, representing an increase of 12.2% from the comparable period. The increase in royalties was primarily due to the previously mentioned increase in the standard royalty rate.

The comparable sales base and average weekly sales for 2010 and 2009 for domestic Company-owned and North America franchised restaurants consisted of the following:

	Year Ended						Year Ended
	December 26, 2010						December 27, 2009
	Domestic Company-owned			North America Franchised			Domestic Company-owned			North America Franchised

Total domestic units (end of period)		591			2,346			588			2,193
Equivalent units		586			2,231			585			2,140
Comparable sales base units		577			2,074			569			2,026
Comparable sales base percentage		98.5	%		93.0	%		97.3	%		94.7	%
Average weekly sales - comparable units	$	16,599		$	14,057		$	16,628		$	13,948
Average weekly sales - total non-comparable units	$	11,562		$	12,177		$	13,902		$	14,234
Average weekly sales - all units	$	16,521		$	13,924		$	16,551		$	13,963

Domestic franchise and development fees were approximately $600,000 in 2010, or a decrease of approximately $300,000 from 2009. The decrease was primarily due to a greater number of restaurants opening with no opening fees in accordance with our development incentive programs.

Domestic commissary sales increased 8.8% to $454.5 million in 2010 from $417.7 million in the prior comparable period. The increase was primarily due to an increase in sales volumes. Our commissaries charge a fixed dollar mark-up on the cost of cheese. Cheese cost based upon the BIBP block price increased from $1.55 per pound in 2009 to $1.59 per pound in 2010, or a 2.6% increase.

Other sales decreased $2.1 million to $52.0 million. The decrease was primarily due to a decline in sales at Preferred.

International revenues increased 16.1% to $46.4 million in 2010, from $40.0 million in 2009, reflecting the increase in the number of franchised restaurants over the past year.

Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 20.2% in 2010 compared to 21.8% in 2009. Excluding the impact of consolidating BIBP, restaurant operating margin decreased 0.8% to 19.9% for the year ended December 26, 2010 as compared to the corresponding period in 2009, consisting of the following differences:

Cost of sales were 1.3% higher (excluding the consolidation of BIBP) in 2010 as compared to 2009 due to increased discounting of prices to customers.

Salaries and benefits were 1.6% lower as a percentage of sales in 2010 compared to 2009, primarily due to labor efficiencies from implemented initiatives, and a change in pay practices for certain team members.

Advertising and related costs as a percentage of sales were 0.3% higher in 2010 due to an increase in local marketing initiatives.

Occupancy costs and other operating costs, on a combined basis, as a percentage of sales, were 0.8% higher in 2010 primarily due to increased reimbursement rates for certain team members, in connection with previously noted labor initiatives.

Domestic commissary and other margin was 8.6% in 2010, compared to 9.8% in 2009. Cost of sales was 75.5% of revenues in 2010, compared to 73.8% in 2009. Cost of sales increased primarily due to our commissaries’ absorbing an increase in prices of certain commodities, including increases in vegetable products due to the impact from harsh Florida winter weather during 2010. Salaries and benefits were relatively consistent for both periods at $34.1 million and $33.9 million for 2010 and 2009, respectively. Other operating expenses increased approximately $3.3 million in 2010 as compared to 2009, primarily due to higher distribution costs, reflecting increased volumes and an increase in fuel costs.

We recorded income before income taxes from the franchise cheese-purchasing program, net of noncontrolling interest, of $5.6 million and $18.1 million in 2010 and 2009, respectively. These results only represent the portion of BIBP’s operating income or loss related to the proportion of BIBP cheese sales to franchisees. The total impact of the consolidation of BIBP on Papa John’s income before income taxes was income of $21.0 million in 2010 (including the BIBP Settlement) and $22.5 million in 2009.

International operating expenses in 2010 were 88.7% of international restaurant and commissary sales as compared to 86.3% in 2009. The increase in operating expenses as a percentage of sales is primarily due to the start-up costs associated with our PJUK commissary.

General and administrative expenses were $110.0 million, or 9.8% of revenues for 2010, as compared to $111.4 million, or 10.3% of revenues for 2009. The decrease is primarily due to the items noted as comprising the decreases in unallocated general and administrative expenses for the Unallocated Corporate Segment in the Discussion of Operating Results section, as well as 2009 including certain management transition costs recorded by our domestic commissaries segment.

Other general expenses reflected net expense of $9.0 million in 2010, as compared to $14.3 million in 2009 as detailed below (in thousands):

						Increase
	2010			2009		(Decrease)

Impairment and disposition losses	$	894		$	1,829	$	(935	)
Provision (credit) for uncollectible accounts and notes receivable (a)		(27	)		1,378		(1,405	)
Pre-opening restaurant costs		149			75		74
Franchise support initiatives (b)		6,489			9,556		(3,067	)
Franchise incentives (c)		1,044			440		604
Commissary closing costs		-			369		(369	)
Other		481			699		(218	)
Total other general expenses	$	9,030		$	14,346	$	(5,316	)

(a)	The reduction in provision (credit) for uncollectible accounts and notes receivable was primarily due to the collection of certain accounts that were previously reserved.

(b)	Franchise support initiatives primarily consist of discretionary contributions to the Marketing Fund and other local advertising cooperatives.

(c)	Franchise incentives include incentives to franchisees for opening new restaurants.

Depreciation and amortization was $32.4 million, or 2.9% of revenues, for 2010 as compared to $31.4 million, or 2.9% of revenues, for 2009.

Net interest. Net interest expense was $3.4 million in 2010, compared to $11.0 million in 2009. The interest expense for 2009 includes approximately $169,000 related to BIBP’s debt with a third-party bank (none in 2010). The decrease in net interest expense in 2010 was primarily due to a decrease of approximately $1.0 million in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture. In addition, net interest expense in 2009 reflects the impact of the addition of a mandatory redemption feature through a contract amendment in the third quarter of 2009 for one of our noncontrolling interests and the associated remeasurement to its redemption value, which was $6.0 million of additional interest expense in 2009. See “Notes 1, 2 and 20” of the “Notes to Consolidated Financial Statements” for additional information.

Income Tax Expense. We recognized reductions of $550,000 and $1.2 million in our income tax expense associated with the finalization of certain income tax issues in 2010 and 2009, respectively. Our effective income tax rates were 32.7% in 2010 compared to 31.7% in 2009 (32.4% in 2010 and 30.4% in 2009, excluding BIBP).

Liquidity and Capital Resources

Debt and credit arrangements consist of the following (in thousands):

	2011		2010

Revolving line of credit	$	51,489	$	99,000
Other		-		17
Total long-term debt	$	51,489	$	99,017

In September 2010, we entered into a five-year, $175.0 million unsecured Revolving Credit Facility (“New Credit Facility”) that replaced a $175.0 million unsecured Revolving Credit Facility (“Old Credit Facility”). The New Credit Facility was amended in November 2011 (the “Amended Credit Facility”), which extended the maturity date of the New Credit Facility to November 30, 2016. Under the Amended Credit Facility, outstanding balances are charged interest at 75 basis points to 150 basis points over LIBOR or other bank developed rates at our option (previously charged 100 basis points to 175 basis points above LIBOR). Outstanding balances under the Old Credit Facility were charged interest at 50 to 100 basis points over LIBOR or other bank developed rates, at our option.

We have used interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our revolving credit facility. We currently have a swap with a fixed rate of 0.53%, as compared to LIBOR, with a notional amount of $50.0 million. See “Note 7” of “Notes to Consolidated Financial Statements” for additional information.

The New Credit Facility, as amended, contains customary affirmative and negative covenants, including the following financial covenants, as defined by the New Credit Facility (the covenants exclude the impact of consolidating BIBP’s operations):

	Permitted Ratio	Actual Ratio for the Year Ended December 25, 2011

Leverage Ratio	Not to exceed 2.5 to 1.0	0.5 to 1.0

Interest Coverage Ratio	Not less than 3.5 to 1.0	5.4 to 1.0

Our leverage ratio is defined as outstanding debt divided by consolidated EBITDA for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all covenants at December 25, 2011.

Cash flow provided by operating activities was $101.0 million for the full-year 2011 as compared to $92.6 million in 2010. The consolidation of BIBP increased cash flow from operations by approximately $6.8 million in 2010. Excluding the impact of the consolidation of BIBP, cash flow from operations was $101.0 million in 2011, as compared to $85.8 million in 2010, primarily due to higher net income and favorable working capital changes, including deferred income taxes.

Cash flow provided by operating activities decreased to $92.6 million in 2010 from $103.8 million in 2009. The consolidation of BIBP increased cash flow from operations by approximately $6.8 million in 2010 and $22.5 million in 2009. Excluding the impact of the consolidation of BIBP, cash flow was $85.8 million in 2010 as compared to $81.3 million in 2009, primarily due to higher net income.

The Company’s free cash flow for the last three years was as follows (in thousands):

	Year Ended
	Dec. 25,			Dec. 26,			Dec. 27,
	2011			2010			2009

Net cash provided by operating activities	$	101,008		$	92,581		$	103,826
Gain from BIBP cheese purchasing entity		-			(6,804	)		(22,543	)
Purchase of property and equipment		(29,319	)		(31,125	)		(33,538	)
Free cash flow (a)	$	71,689		$	54,652		$	47,745

(a)

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) excluding the impact of BIBP, less the purchases of property and equipment. See “Non-GAAP Measures” above for more information about this non-GAAP measure, its limitations and why we present free cash flow alongside the most directly comparable GAAP measure.

We require capital primarily for the development, acquisition, renovation and maintenance of restaurants, the development, renovation and maintenance of commissary and print and promotions facilities and equipment and the enhancement of corporate systems and facilities. Purchases of property and equipment amounted to $29.3 million, $31.1 million, and $33.5 million in 2011, 2010, and 2009, respectively, and are summarized by operating segment in “Note 19” of “Notes to Consolidated Financial Statements.”

Our Board of Directors has authorized the repurchase of our common stock through December 31, 2012. The following is a summary of our common share repurchases for the last three years (in thousands, except average price per share):

Fiscal Year	Number of Shares Repurchased		Total Cash Paid		Average Price Per Share
2009		1,319		$28,477		$21.59
2010		1,881		$46,936		$24.95
2011		2,084		$65,323		$31.35

Subsequent to year-end (through February 14, 2012), we acquired an additional 60,000 shares at an aggregate cost of $2.2 million. As of February 14, 2012, approximately $69.3 million remained available for repurchase of common stock under this authorization.

The outstanding principal balance under our revolving line of credit was $99.0 million in 2009 and 2010 and decreased to $51.5 million in 2011, as we used cash on hand and cash from operations to reduce the outstanding debt.

Contractual obligations and payments as of December 25, 2011 due by year are as follows (in thousands):

	Payments Due by Period
	Less than 1 Year		1-3 Years		3-5 Years		After 5 Years		Total

Contractual Obligations:

Revolving line of credit (1)	$	-	$	-	$	51,489	$	-	$	51,489
Interest payments (2)		667		1,149		1,029		-		2,845
Total debt		667		1,149		52,518		-		54,334
Operating leases		29,760		48,824		30,556		29,703		138,843
Total contractual obligations	$	30,427	$	49,973	$	83,074	$	29,703	$	193,177

(1)	We utilize an interest rate swap to hedge against rising interest rates. The value of our interest rate swap was $11,000 at December 25, 2011 and was recorded in other long-term assets in the consolidated balance sheet.

(2)

Represents estimated interest payments on our revolving line of credit balance outstanding as of December 25, 2011. The interest payments assume the outstanding balance on our $175.0 million unsecured revolving line of credit will remain at $51.5 million until the maturity date of November, 2016. Interest payments are calculated based on LIBOR plus the applicable margin in effect at December 25, 2011, after considering the interest rate swap agreement in effect until August, 2013. The actual interest rates on the variable indebtedness incurred and the amount of our indebtedness could vary from those used to compute the above interest payments. See “Note 7” of “Notes to Consolidated Financial Statements” for additional information concerning our debt and credit arrangements.

The above table does not include $3.0 million of unrecognized tax benefits since we are not able to make reasonable estimates of the period of cash settlement with respect to the taxing authority. Additionally, the above table does not include $15.0 million of redeemable and mandatorily redeemable noncontrolling interests as we are not able to predict the timing of the redemptions.

Off-Balance Sheet Arrangements

The off-balance sheet arrangements that are reasonably likely to have a current or future effect on the Company’s financial condition are leases of Company-owned restaurant sites, QC Centers, office space and transportation equipment.

In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we remain contingently liable for payment under approximately 40 lease arrangements, primarily associated with Perfect Pizza restaurant sites for which the Perfect Pizza franchisor is primarily liable. The leases have varying terms, the latest of which expires in 2017, with most expiring by the end of 2014. As of December 25, 2011, the estimated maximum amount of undiscounted rental payments we would be required to make in the event of non-payment under all such leases was approximately $2.5 million, excluding the $832,000 charge discussed below.

On August 1, 2011 the High Court of Justice Chancery Division, Birmingham District Registry entered an order placing Perfect Pizza in administration, thereby providing Perfect Pizza with protection from its creditors in accordance with UK insolvency law. On the same date, the administrators entered into an agreement to sell substantially all of the business and assets of Perfect Pizza. In accordance with the terms of the agreement, the buyer has an option period up to nine months to determine which Perfect Pizza leases they will assume.

The buyer is continuing to assess most restaurant leases but has identified certain leases that will likely not be assumed. Accordingly, for the year ended December 25, 2011, we recorded an expense of approximately $832,000 in other general expenses in the accompanying consolidated statements of income, representing the remaining rentals, taxes and insurance related to these specific leases. Given the uncertainty of the remaining restaurant locations, we are unable to reasonably estimate any potential additional liability for those locations and therefore, no amount has been recorded in the consolidated financial statements as of December 25, 2011 with respect to the remaining restaurant locations.

We have certain other commercial commitments where payment is contingent upon the occurrence of certain events. Such commitments include the following by year (in thousands):

	Amount of Commitment Expiration Per Period
	Less than		1-3		3-5		After
	1 Year		Years		Years		5 Years		Total

Other Commercial Commitments:

Standby letters of credit	$	1,078	$	13,439	$	0	$	0	$	14,517

See “Notes 7, 10 and 15” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.

Forward-Looking Statements

Certain matters discussed in this report, including information within Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other Company communications constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such statements may relate to projections concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, margins, unit growth, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

aggressive changes in pricing or other marketing or promotional strategies by competitors which may adversely affect sales; and new product and concept developments by food industry competitors;

changes in consumer preferences and adverse general economic and political conditions, including increasing tax rates, and their resulting impact on consumer buying habits;

the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants;

failure to maintain our brand strength and quality reputation;

the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, which could be impacted by challenges securing financing, finding suitable store locations or securing required domestic or foreign government permits and approvals;

increases in or sustained high costs of food ingredients and other commodities;

disruption of our supply chain due to sole or limited source of suppliers or weather, drought, disease or other disruption beyond our control;

increased risks associated with our international operations, including economic and political conditions in our international markets and difficulty in meeting planned sales targets and new store growth for our international operations;

increased employee compensation, benefits, insurance, regulatory compliance and similar costs, including increased costs resulting from federal health care legislation;

the credit performance of our franchise loan program;

the impact of the resolution of current or future claims and litigation, and current or proposed legislation impacting our business;

currency exchange and interest rates;

failure to effectively execute succession planning, and our reliance on the services of our Founder and CEO, who also serves as our brand spokesperson;

credit risk associated with parties to leases of restaurants and commissaries, including those Perfect Pizza locations formerly operated by us, for which we remain contractually liable; and

disruption of critical business or information technology systems, and risks associated with security breaches, including theft of company and customer information.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2012, our Report on Form 8-K filed on February 26, 2013 concerning our restated financial statements, and all subsequent filings. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Papa John’s International, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Papa John’s International, Inc. and Subsidiaries as of December 25, 2011 and December 26, 2010, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 25, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Papa John’s International, Inc. and Subsidiaries at December 25, 2011 and December 26, 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 25, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the 2009, 2010 and 2011 consolidated financial statements have been restated to correct for errors in the accounting for certain redemption features of the noncontrolling interests of joint venture agreements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting as of December 25, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2012, except for the effects of the material weakness identified in the sixth paragraph of our report as to which the date is April 16, 2013, expressed an adverse opinion thereon.

/s/ Ernst & Young LLP

Louisville, Kentucky

February 21, 2012, except for the error corrections discussed in Note 1 and the retrospective presentation of the statement of comprehensive income discussed in Note 2, as to which the date is April 16, 2013

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Papa John’s International, Inc. and Subsidiaries

We have audited Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting as of December 25, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Papa John’s International, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on our Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our report dated February 21, 2012, we expressed an unqualified opinion that Papa John’s International, Inc. and Subsidiaries’ maintained, in all material respects, effective internal control over financial reporting as of December 25, 2011, based on the COSO criteria. Management has subsequently determined that a deficiency existed in review controls over non-routine contractual changes or amendments to noncontrolling interests of joint venture agreements and has further concluded that such deficiency represented a material weakness as of December 25, 2011. As a result, management has revised its assessment, as presented in the accompanying Management's Report on Internal Control Over Financial Reporting, to conclude that Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting was not effective as of December 25, 2011. Accordingly, our present opinion on the effectiveness of Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting as of December 25, 2011 as expressed herein, is different from that expressed in our previous report.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified a material weakness in internal controls over the accounting for noncontrolling interests of joint venture agreements. Specifically, the review controls in place with respect to non-routine contractual changes or amendments related to these agreements were not effective. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Papa John’s International, Inc. and Subsidiaries as of December 25, 2011 and December 26, 2010, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 25, 2011. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of those financial statements, and this report does not affect our report dated February 21, 2012, except for the error corrections discussed in Note 1 and the retrospective presentation of the statement of comprehensive income discussed in Note 2, as to which the date is April 16, 2013, which expressed an unqualified opinion on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Papa John’s International, Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 25, 2011, based on the COSO criteria.

/s/ Ernst & Young LLP

Louisville, Kentucky

February 21, 2012, except for the effects of the material weakness described in the sixth paragraph above as to which the date is April 16, 2013

Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Income

(In thousands, except per share amounts)	Years Ended
	December 25,			December 26,			December 27,
	2011			2010			2009
	(As Restated)			(As Restated)			(As Restated)
North America revenues:
Domestic Company-owned restaurant sales	$	525,841		$	503,272		$	503,818
Franchise royalties		73,694			69,631			62,083
Franchise and development fees		722			610			912
Domestic commissary sales		508,155			454,506			417,689
Other sales		50,912			51,951			54,045
International revenues:
Royalties and franchise and development fees		16,327			13,265			11,780
Restaurant and commissary sales		42,231			33,162			28,223
Total revenues		1,217,882			1,126,397			1,078,550
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales		126,887			111,010			100,863
Salaries and benefits		142,093			137,840			146,116
Advertising and related costs		49,035			47,174			45,593
Occupancy costs		32,278			32,343			31,685
Other operating expenses		75,558			72,997			69,946
Total domestic Company-owned restaurant expenses		425,851			401,364			394,203
Domestic commissary and other expenses:
Cost of sales		426,955			382,150			348,265
Salaries and benefits		35,141			34,063			33,839
Other operating expenses		53,188			46,890			43,595
Total domestic commissary and other expenses		515,284			463,103			425,699
Income from the franchise cheese-purchasing program,
net of noncontrolling interest		-			(5,634	)		(18,079	)
International operating expenses		35,674			29,429			24,356
General and administrative expenses		111,608			109,954			111,361
Other general expenses		9,767			9,030			14,346
Depreciation and amortization		32,681			32,407			31,446
Total costs and expenses		1,130,865			1,039,653			983,332
Operating income		87,017			86,744			95,218
Investment income		755			875			629
Interest expense		(2,981	)		(4,309	)		(11,660	)
Income before income taxes		84,791			83,310			84,187
Income tax expense		26,324			27,247			26,702
Net income, including redeemable noncontrolling interests		58,467			56,063			57,485
Income attributable to redeemable noncontrolling interests		(3,732	)		(3,485	)		(3,756	)
Net income, net of redeemable noncontrolling interests	$	54,735		$	52,578		$	53,729


Basic earnings per common share	$	2.19		$	2.00		$	1.94
Earnings per common share - assuming dilution	$	2.16		$	1.99		$	1.93


Basic weighted average shares outstanding		25,043			26,328			27,738
Diluted weighted average shares outstanding		25,310			26,468			27,909


Supplemental data (see Note 14):
Revenues - affiliates	$	28,078		$	24,290		$	22,473
Other income - affiliates		-			-			57

See accompanying notes.

Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income

(In thousands)	Years Ended
	December 25,			December 26,			December 27,
	2011			2010			2009
	(As Restated)			(As Restated)			(As Restated)

Net income, including redeemable noncontrolling interests	$	58,467		$	56,063		$	57,485
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		864			(523	)		1,310
Interest rate swaps		258			3,756			2,169
Defined benefit pension plan		(45	)		83			58
Other comprehensive income, before tax		1,077			3,316			3,537
Income tax effect:
Interest rate swaps		(93	)		(1,352	)		(781	)
Defined benefit pension plan		16			(31	)		(22	)
Income tax effect		(77	)		(1,383	)		(803	)
Other comprehensive income, net of tax		1,000			1,933			2,734
Comprehensive income, including redeemable noncontrolling interests		59,467			57,996			60,219
Comprehensive income, redeemable noncontrolling interests		(3,732	)		(3,485	)		(3,756	)
Comprehensive income, net of redeemable noncontrolling interests	$	55,735		$	54,511		$	56,463