Edgar Filing: PAPA JOHNS INTERNATIONAL INC

a50597577.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)
[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 24, 2012

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

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

number)

2002 Papa Johns Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

(502) 261-7272

(Registrant's telephone number, including area code)

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 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 Exchange Act).

Yes [ ] No [X]

At July 26, 2012, there were outstanding 23,439,820 shares of the registrant’s common stock, par value $0.01 per share.

INDEX

PART I.	FINANCIAL INFORMATION	Page No.

	Explanatory Note	2

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets –
	June 24, 2012 and December 25, 2011	3

	Condensed Consolidated Statements of Comprehensive
	Income – Three and Six Months Ended June 24, 2012 and June 26, 2011	4

	Consolidated Statements of Stockholders' Equity – Six Months
	Ended June 24, 2012 and June 26, 2011	5

	Consolidated Statements of Cash Flows – Six Months
	Ended June 24, 2012 and June 26, 2011	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6.	Exhibits	29

PART 1. FINANCIAL INFORMATION

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-Q for the three and six months ended June 24, 2012, to amend and restate the financial statements and other financial information contained herein to correct the errors.

This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 24, 2012 as originally filed with the Securities and Exchange Commission (the “SEC”) on July 31, 2012 (the “Original Filing”). This Form 10-Q/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 condensed 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 1 – Financial Statements

●	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

●	Item 4 – Controls and Procedures

●	Item 6 – Exhibits

The restatements resulted in decreases in diluted earnings per share of $0.02 and $0.01 for the three and six months ended June 24, 2012, respectively, and a decrease in diluted earnings per share of $0.02 for the six months ended June 26, 2011 (no impact for the three-month period ended June 26, 2011). 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 4 – Controls and Procedures.”

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. Except for the amended information referred to above, no other information in the Original Filing is amended and this Form 10-Q/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-Q/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-Q/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.

Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)	June 24, 2012			December 25, 2011
	(As Restated)			(As Restated)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	33,625		$	18,942
Accounts receivable, net		27,693			28,169
Notes receivable, net		4,447			4,221
Inventories		19,695			20,091
Deferred income taxes		6,240			7,636
Prepaid expenses		10,548			10,210
Other current assets		2,880			5,555
Total current assets		105,128			94,824
Property and equipment, net		186,567			181,910
Notes receivable, less current portion, net		10,572			11,502
Goodwill		78,342			75,085
Other assets		26,828			27,061
Total assets	$	407,437		$	390,382

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	32,379		$	32,966
Income and other taxes payable		4,044			3,969
Accrued expenses and other current liabilities		49,666			44,198
Total current liabilities		86,089			81,133
Deferred revenue		8,592			4,780
Long-term debt		50,000			51,489
Deferred income taxes		7,044			6,692
Other long-term liabilities		39,094			36,676
Total liabilities		190,819			180,770

Redeemable noncontrolling interests		4,458			3,965

Stockholders’ equity:
Preferred stock		-			-
Common stock		371			367
Additional paid-in capital		274,863			262,456
Accumulated other comprehensive income		1,609			1,849
Retained earnings		326,071			294,801
Treasury stock		(390,754	)		(353,826	)
Total stockholders’ equity		212,160			205,647
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	407,437		$	390,382

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended						Six Months Ended
(In thousands, except per share amounts)	June 24, 2012			June 26, 2011			June 24, 2012			June 26, 2011
	(As Restated)			(As Restated)			(As Restated)			(As Restated)
North America revenues:
Domestic Company-owned restaurant sales	$	143,527		$	127,641		$	287,342		$	266,312
Franchise royalties		19,101			18,103			39,619			37,834
Franchise and development fees		206			124			428			309
Domestic commissary sales		126,593			121,027			264,203			248,699
Other sales		11,771			12,370			24,029			25,817
International revenues:
Royalties and franchise and development fees		4,701			4,049			9,187			7,811
Restaurant and commissary sales		12,680			10,220			25,047			19,219
Total revenues		318,579			293,534			649,855			606,001
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales		32,881			30,162			65,337			62,262
Salaries and benefits		39,839			34,367			78,652			72,016
Advertising and related costs		13,278			11,898			25,977			24,687
Occupancy costs		8,619			7,939			16,517			15,808
Other operating expenses		20,830			18,492			41,248			38,407
Total domestic Company-owned restaurant expenses		115,447			102,858			227,731			213,180
Domestic commissary and other expenses:
Cost of sales		104,412			103,529			217,250			209,972
Salaries and benefits		9,218			8,651			18,221			17,662
Other operating expenses		13,498			13,084			27,804			26,669
Total domestic commissary and other expenses		127,128			125,264			263,275			254,303
International operating expenses		10,975			8,756			21,367			16,484
General and administrative expenses		31,463			27,617			63,059			56,691
Other general expenses		1,135			1,459			6,809			2,240
Depreciation and amortization		8,104			8,425			16,031			16,737
Total costs and expenses		294,252			274,379			598,272			559,635
Operating income		24,327			19,155			51,583			46,366
Investment income		195			205			365			382
Interest expense		(1,056	)		(383	)		(962	)		(1,718	)
Income before income taxes		23,466			18,977			50,986			45,030
Income tax expense		8,005			5,980			17,218			14,935
Net income, including redeemable noncontrolling interests		15,461			12,997			33,768			30,095
Income attributable to redeemable noncontrolling interests		(1,172	)		(929	)		(2,498	)		(2,051	)
Net income, net of redeemable noncontrolling interests	$	14,289		$	12,068		$	31,270		$	28,044

Basic earnings per common share	$	0.60		$	0.47		$	1.31		$	1.10
Earnings per common share - assuming dilution	$	0.59		$	0.47		$	1.29		$	1.09

Basic weighted average shares outstanding		23,733			25,464			23,893			25,474
Diluted weighted average shares outstanding		24,112			25,685			24,270			25,713

Comprehensive income, including redeemable noncontrolling interests	$	15,010		$	12,483		$	33,528		$	30,854
Comprehensive income, redeemable noncontrolling interests		(1,172	)		(929	)		(2,498	)		(2,051	)
Comprehensive income, net of redeemable noncontrolling interests	$	13,838		$	11,554		$	31,030		$	28,803

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

	Common								Accumulated
	Stock					Additional			Other								Total
	Shares			Common		Paid-In			Comprehensive			Retained		Treasury			Stockholders'
(In thousands)	Outstanding			Stock		Capital			Income (Loss)			Earnings		Stock			Equity
												(As Restated)					(As Restated)

Balance at December 26, 2010		25,439		$	361	$	245,380		$	849		$	240,066	$	(291,048	)	$	195,608
Comprehensive income:
Net income, net of redeemable
noncontrolling interests (1)		-			-		-			-			28,044		-			28,044
Other comprehensive income		-			-		-			759			-		-			759
Comprehensive income																		28,803
Exercise of stock options		444			4		10,659			-			-		-			10,663
Tax effect of equity awards		-			-		(1,295	)		-			-		-			(1,295	)
Acquisition of Company
common stock		(817	)		-		-			-			-		(26,162	)		(26,162	)
Stock-based compensation expense		-			-		3,903			-			-		-			3,903
Issuance of restricted stock		76			-		(1,884	)		-			-		1,884			-
Other		-			-		(58	)		-			-		218			160
Balance at June 26, 2011		25,142		$	365	$	256,705		$	1,608		$	268,110	$	(315,108	)	$	211,680

Balance at December 25, 2011		24,019		$	367	$	262,456		$	1,849		$	294,801	$	(353,826	)	$	205,647
Comprehensive income:
Net income, net of redeemable
noncontrolling interests (1)		-			-		-			-			31,270		-			31,270
Other comprehensive loss		-			-		-			(240	)		-		-			(240	)
Comprehensive income																		31,030
Exercise of stock options		361			4		10,396			-			-		-			10,400
Tax effect of equity awards		-			-		468			-			-		-			468
Acquisition of Company
common stock		(957	)		-		-			-			-		(38,728	)		(38,728	)
Stock-based compensation expense		-			-		3,218			-			-		-			3,218
Issuance of restricted stock		34			-		(1,541	)		-			-		1,541			-
Other		-			-		(134	)		-			-		259			125
Balance at June 24, 2012		23,457		$	371	$	274,863		$	1,609		$	326,071	$	(390,754	)	$	212,160

(1) Net income at June 24, 2012 and June 26, 2011 is net of $2,498 and $2,051, respectively, allocable to the redeemable noncontrolling interests for our
joint venture arrangements.

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
(In thousands)	June 24, 2012			June 26, 2011
	(As Restated)			(As Restated)
Operating activities
Net income, including redeemable noncontrolling interests	$	33,768		$	30,095
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable		719			(7	)
Depreciation and amortization		16,031			16,737
Deferred income taxes		1,797			4,022
Stock-based compensation expense		3,218			3,903
Excess tax benefit on equity awards		(1,471	)		(403	)
Other		2,872			1,133
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(75	)		(1,167	)
Inventories		533			1,819
Prepaid expenses		(338	)		(268	)
Other current assets		755			22
Other assets and liabilities		756			1,219
Accounts payable		(587	)		(1,970	)
Income and other taxes payable		75			325
Accrued expenses and other current liabilities		3,297			(1,611	)
Deferred revenue		3,812			(924	)
Net cash provided by operating activities		65,162			52,925

Investing activities
Purchases of property and equipment		(15,046	)		(12,422	)
Loans issued		(1,206	)		(1,684	)
Repayments of loans issued		1,730			3,920
Acquisitions, net of cash acquired		(5,908	)		-
Proceeds from divestitures of restaurants		948			-
Other		(4	)		51
Net cash used in investing activities		(19,486	)		(10,135	)

Financing activities
Net repayments on line of credit facility		(1,489	)		(51,000	)
Excess tax benefit on equity awards		1,471			403
Tax payments for restricted stock issuances		(822	)		(798	)
Proceeds from exercise of stock options		10,400			10,663
Acquisition of Company common stock		(38,728	)		(26,162	)
Distributions to redeemable noncontrolling interest holders		(1,930	)		(2,029	)
Other		125			42
Net cash used in financing activities		(30,973	)		(68,881	)
Effect of exchange rate changes on cash and cash equivalents		(20	)		82
Change in cash and cash equivalents		14,683			(26,009	)
Cash and cash equivalents at beginning of period		18,942			47,829
Cash and cash equivalents at end of period	$	33,625		$	21,820

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 24, 2012

1.	Restatement of Previously Issued Financial Statements

We are restating our condensed consolidated financial statements for the three- and six-month periods ended June 24, 2012 and June 26, 2011. 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 that an additional redeemable noncontrolling interest was incorrectly classified in shareholders’ equity and should be classified as temporary equity.

To correctly reflect the appropriate measurement of the mandatorily redeemable noncontrolling interests, we recorded a $3.1 million adjustment, net of income taxes, to ending 2010 retained earnings in our Consolidated Statements of Stockholders’ Equity to adjust the previously reported balance sheet to its redemption value as of December 26, 2010. Additionally, we also corrected the classification errors of the redeemable noncontrolling interests from stockholders’ equity to either other long-term liabilities or redeemable noncontrolling interests in our consolidated balance sheets. The impact of the restatements on the financial statements is outlined in the tables below (in thousands, except per share data). 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 period presented.

	Three Months Ended
	June 24, 2012
	As Previously Reported		Adjustments			As Restated
Condensed Consolidated Statement of Comprehensive Income
Interest expense	$	282	$	774		$	1,056
Income before income taxes		24,240		(774	)		23,466
Income tax expense		8,299		(294	)		8,005
Net income, including noncontrolling interests		15,941		(480	)		15,461
Net income, net of noncontrolling interests		14,769		(480	)		14,289
Comprehensive income		15,490		(480	)		15,010
Basic earnings per common share		0.62		(0.02	)		0.60
Earnings per common share - assuming dilution		0.61		(0.02	)		0.59

	As of and For The
	Six Months Ended
	June 24, 2012
	As Previously Reported		Reclassifications *			Adjustments			As Restated
Condensed Consolidated Balance Sheet
Noncurrent deferred income tax liabilities	$	9,648	$	-		$	(2,604	)	$	7,044
Long-term accrued income taxes		3,924		(3,924	)		-			-
Other long-term liabilities		23,638		3,924			11,532			39,094
Redeemable noncontrolling interests		-		-			4,458			4,458
Retained earnings		330,320		-			(4,249	)		326,071
Noncontrolling interests in subsidiaries		9,137		-			(9,137	)		-
Total stockholders' equity		225,546		-			(13,386	)		212,160
Condensed Consolidated Statement of Comprehensive Income
Interest expense	$	570	$	-		$	392		$	962
Income before income taxes		51,378		-			(392	)		50,986
Income tax expense		17,367		-			(149	)		17,218
Net income, including noncontrolling interests		34,011		-			(243	)		33,768
Net income, net of noncontrolling interests		31,513		-			(243	)		31,270
Comprehensive income		33,771		-			(243	)		33,528
Basic earnings per common share		1.32		-			(0.01	)		1.31
Earnings per common share - assuming dilution		1.30		-			(0.01	)		1.29
Consolidated Statement of Cash Flows
Net income, including noncontrolling interests	$	34,011	$	-		$	(243	)	$	33,768
Deferred income taxes		1,946		-			(149	)		1,797
Other		2,480		-			392			2,872
Net cash provided by operating activities		65,162		-			-			65,162

*	Amounts have been reclassified from the originally filed presentation in order to conform to the presentation included in the Form 10-K for the fiscal year ended December 30, 2012, and are not associated with the restatement adjustments.

	Three Months Ended
	June 26, 2011
	As Previously Reported		Adjustments			As Restated
Condensed Consolidated Statement of Comprehensive Income
Interest expense	$	293	$	90		$	383
Income before income taxes		19,067		(90	)		18,977
Income tax expense		6,014		(34	)		5,980
Net income, including noncontrolling interests		13,053		(56	)		12,997
Net income, net of noncontrolling interests		12,124		(56	)		12,068
Comprehensive income		12,539		(56	)		12,483
Basic earnings per common share		0.48		(0.01	)		0.47
Earnings per common share - assuming dilution		0.47		-			0.47

	As of and For The
	Six Months Ended
	June 26, 2011
	As Previously Reported		Adjustments			As Restated
Condensed Consolidated Balance Sheet
Noncurrent deferred income tax liabilities	$	3,485	$	(2,202	)	$	1,283
Other long-term liabilities		12,478		10,675			23,153
Redeemable noncontrolling interests		-		3,648			3,648
Retained earnings		271,703		(3,593	)		268,110
Noncontrolling interests in subsidiaries		8,528		(8,528	)		-
Total stockholders' equity		223,801		(12,121	)		211,680
Condensed Consolidated Statement of Comprehensive Income
Interest expense	$	901	$	817		$	1,718
Income before income taxes		45,847		(817	)		45,030
Income tax expense		15,245		(310	)		14,935
Net income, including noncontrolling interests		30,602		(507	)		30,095
Net income, net of noncontrolling interests		28,551		(507	)		28,044
Comprehensive income		31,361		(507	)		30,854
Basic earnings per common share		1.12		(0.02	)		1.10
Earnings per common share - assuming dilution		1.11		(0.02	)		1.09
Consolidated Statement of Cash Flows
Net income, including noncontrolling interests	$	30,602	$	(507	)	$	30,095
Deferred income taxes		4,332		(310	)		4,022
Other		316		817			1,133
Net cash provided by operating activities		52,925		-			52,925

	December 25, 2011
	As Previously Reported		Adjustments			As Restated
Condensed Consolidated Balance Sheet
Noncurrent deferred income tax liabilities	$	9,147	$	(2,455	)	$	6,692
Other long-term liabilities		25,611		11,065			36,676
Redeemable noncontrolling interests		-		3,965			3,965
Retained earnings		298,807		(4,006	)		294,801
Noncontrolling interests in subsidiaries		8,569		(8,569	)		-
Total stockholders' equity		218,222		(12,575	)		205,647

	December 26, 2010
	As Previously Reported		Adjustments			As Restated
Consolidated Statement of Stockholders' Equity
Retained earnings	$	243,152	$	(3,086	)	$	240,066
Noncontrolling interests in subsidiaries		8,506		(8,506	)		-
Total stockholders' equity		207,200		(11,592	)		195,608

2.	Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 24, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ended December 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K/A for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) for the year ended December 25, 2011.

Significant Accounting Policies

Comprehensive Income

The Company adopted the required Accounting Standards Updates (“ASU”) Nos. 2011-05 and 2011-12, Comprehensive Income: Presentation of Comprehensive Income in the first quarter of 2012 on a retrospective basis. The updated guidance does not change the components of comprehensive income, but eliminates certain options for presenting comprehensive income in the financial statements. In accordance with this updated guidance, we no longer present components of comprehensive income in our Consolidated Statements of Stockholders’ Equity. Instead, we are now required to present components of comprehensive income in either one continuous financial statement with two sections, net income and comprehensive income, or in two separate but consecutive statements. We elected the one continuous financial statement approach in the accompanying financial statements.

Noncontrolling Interests

The Consolidation topic of the Accounting Standards Codification (“ASC”) requires all entities to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements, but separate from the equity of the parent company. The Consolidation topic further requires that consolidated net income be reported at amounts attributable to the parent and the noncontrolling interest, rather than expensing the income attributable to the noncontrolling interest holder. Additionally, disclosures are required to clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners, including a disclosure on the face of the consolidated statements for income attributable to the noncontrolling interest holder.

Papa John’s had two joint venture arrangements as of June 24, 2012 and June 26, 2011, which were as follows:

	Restaurants as of June 24, 2012		Restaurants as of June 26, 2011		Restaurant Locations	Papa John's Ownership*			Noncontrolling Interest Ownership*

Star Papa, LP		76		75	Texas		51	%		49	%
Colonel's Limited, LLC		52		52	Maryland and Virginia		70	%		30	%

*The ownership percentages were the same for both the 2012 and 2011 periods presented in the accompanying consolidated financial statements.

The income before income taxes attributable to the joint ventures for the three and six months ended June 24, 2012 and June 26, 2011 was as follows (in thousands):

	Three Months				Six Months
	June 24,		June 26,		June 24,		June 26,
	2012		2011		2012		2011

Papa John's International, Inc.	$	1,854	$	1,518	$	3,897	$	3,316
Noncontrolling interests		1,172		929		2,498		2,051
Total income before income taxes	$	3,026	$	2,447	$	6,395	$	5,367

The Colonel’s Limited, LLC agreement contains a mandatory redemption clause and, accordingly, the Company has recorded this noncontrolling interest as a liability at its redemption value in other long-term liabilities.

The Star Papa, LP agreement contains a redemption feature that is not currently redeemable, but it is probable to become redeemable in the future. Due to specific valuation provisions contained in the agreement, this noncontrolling interest has been recorded at its carrying value in temporary equity.

The total of the mandatorily redeemable noncontrolling interest and the redeemable noncontrolling interest holders’ equity totaled $16.0 million as of June 24, 2012 and $15.0 million as of December 25, 2011.

As more fully described in Note 1, we have corrected errors in our accounting for noncontrolling interests related to our joint ventures.

Deferred Income Tax Accounts and Tax Reserves

We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining our 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 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 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 June 24, 2012, we had a net deferred tax liability of approximately $800,000.

Tax authorities periodically audit the Company. We record reserves for identified exposures and related interest and penalties. 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.

Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued and filed. There were no subsequent events that required recognition or disclosure.

Reclassifications

Certain prior year amounts in the Condensed Consolidated Balance Sheets and the Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation.

3.	Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss) is comprised of the following (in thousands):

	Foreign Currency			Interest Rate Swaps (a)			Defined Pension Plan			Accumulated Other Comprehensive Income (Loss)
Three Months Ended
Beginning balance - March 27, 2011	$	2,122		$	-		$	-		$	2,122
Current period other comprehensive income (loss)		(514	)		-			-			(514	)
Ending balance - June 26, 2011	$	1,608		$	-		$	-		$	1,608

Beginning balance - March 25, 2012	$	2,163		$	(74	)	$	(29	)	$	2,060
Current period other comprehensive income (loss)		(445	)		(6	)		-			(451	)
Ending balance - June 24, 2012	$	1,718		$	(80	)	$	(29	)	$	1,609

Six Months Ended
Beginning balance - December 26, 2010	$	1,008		$	(159	)	$	-		$	849
Current period other comprehensive income (loss)		600			159			-			759
Ending balance - June 26, 2011	$	1,608		$	-		$	-		$	1,608

Beginning balance - December 25, 2011	$	1,872		$	6		$	(29	)	$	1,849
Current period other comprehensive income (loss)		(154	)		(86	)		-			(240	)
Ending balance - June 24, 2012	$	1,718		$	(80	)	$	(29	)	$	1,609

(a)	Current period other comprehensive income (loss) is shown net of tax of $3 for the three months ended June 24, 2012 (none in the same period of 2011) and $89 and $51 for the six months ended June 26, 2011 and June 24, 2012, respectively.

4.	Fair Value Measurements and Disclosures

The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Assets and liabilities carried at fair value are required to be classified and disclosed in one of the following categories:

●	Level 1: Quoted market prices in active markets for identical assets or liabilities.

●	Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

●	Level 3: Unobservable inputs that are not corroborated by market data.

Our financial assets and liabilities that were measured at fair value on a recurring basis as of June 24, 2012 and December 25, 2011 are as follows (in thousands):

	Carrying		Fair Value Measurements
	Value		Level 1		Level 2		Level 3

June 24, 2012
Financial assets:
Cash surrender value of life insurance policies *	$	12,438	$	12,438	$	-	$	-

Financial liabilities:
Interest rate swap		127		-		127		-

December 25, 2011
Financial assets:
Cash surrender value of life insurance policies *	$	11,387	$	11,387	$	-	$	-
Interest rate swap		11		-		11		-

* Represents life insurance policies held in our non-qualified deferred compensation plan.

There were no transfers among levels within the fair value hierarchy during the six months ended June 24, 2012.

The fair value of our interest rate swap is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swap, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).

5. Debt

Our long-term debt is comprised of the outstanding balance under our revolving line of credit. The balance was $50.0 million as of June 24, 2012 and $51.5 million as of December 25, 2011.

In September 2010, we entered into a five-year, $175.0 million unsecured revolving credit facility (“Credit Facility”). The Credit Facility was amended in November 2011 (the “Amended Credit Facility”), which extended the maturity date of the Credit Facility to November 30, 2016. Under the Amended Credit Facility, outstanding balances accrue interest at 75 basis points to 150 basis points over LIBOR or other bank developed rates at our option (previously interest accrued at 100 basis points to 175 basis points above LIBOR). The remaining availability under the Amended Credit Facility, reduced for outstanding letters of credit, was approximately $111.5 million as of June 24, 2012. The fair value of the outstanding debt approximates the carrying value since the debt agreements are variable-rate instruments.

The Amended Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At June 24, 2012, we were in compliance with these covenants.

In August 2011, we entered into an interest rate swap agreement that provides for a fixed rate of 0.53%, as compared to LIBOR, with a notional amount of $50.0 million. The interest rate swap agreement expires in August 2013. We previously had two interest rate swap agreements that expired in January 2011. The previous swap agreements provided for fixed rates of 4.98% and 3.74%, as compared to LIBOR, with each having a notional amount of $50.0 million.

Our swaps are derivative instruments that are designated as cash flow hedges because the swaps provide a hedge against the effects of rising interest rates on borrowings. The effective portion of the gain or loss on the swap is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the swap affects earnings. Gains or losses on the swap representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Amounts payable or receivable under the swap are accounted for as adjustments to interest expense. As of June 24, 2012, the swap is a highly effective cash flow hedge.

The weighted average interest rates for our revolving credit facilities, including the impact of the swap agreements, were 1.3% and 1.2% for the three months ended June 24, 2012 and June 26, 2011, respectively, and 1.3% and 2.4% for the six months ended June 24, 2012 and June 26, 2011, respectively. Interest paid, including payments made or received under the swaps, was $232,000 and $248,000 for the three months ended June 24, 2012 and June 26, 2011, respectively, and $482,000 and $1.1 million for the six months ended June 24, 2012 and June 26, 2011, respectively. As of June 24, 2012, the portion of the $127,000 interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates $109,000.

6. Calculation of Earnings Per Share

The calculations of basic earnings per common share and earnings per common share – assuming dilution are as follows (in thousands, except per-share data):

	Three Months Ended				Six Months Ended
	June 24,		June 26,		June 24,		June 26,
	2012		2011		2012		2011
	(As Restated)		(As Restated)		(As Restated)		(As Restated)
Basic earnings per common share:
Net income, net of redeemable noncontrolling interests	$	14,289	$	12,068	$	31,270	$	28,044
Weighted average shares outstanding		23,733		25,464		23,893		25,474
Basic earnings per common share	$	0.60	$	0.47	$	1.31	$	1.10

Earnings per common share - assuming dilution:
Net income, net of redeemable noncontrolling interests	$	14,289	$	12,068	$	31,270	$	28,044

Weighted average shares outstanding		23,733		25,464		23,893		25,474
Dilutive effect of outstanding equity awards		379		221		377		239
Diluted weighted average shares outstanding		24,112		25,685		24,270		25,713
Earnings per common share - assuming dilution	$	0.59	$	0.47	$	1.29	$	1.09

Shares subject to options to purchase common stock with an exercise price greater than the average market price were not included in the computation of earnings per common share – assuming dilution because the effect would have been antidilutive. The weighted average number of shares subject to the antidilutive options was 269,000 for the three months ended June 26, 2011 and 355,000 for the six months ended June 26, 2011 (none for the three and six months ended June 24, 2012).

7.	Acquisition and Divestiture of Restaurants

On April 23, 2012, we completed the acquisition of 56 franchised Papa John’s restaurants located in the Denver and Minneapolis markets. The purchase price, which was paid in cash, was $5.2 million net of divestiture proceeds of $0.7 million from the sale of six restaurants located in the Denver market to an existing franchisee. This business combination was accounted for by the purchase method of accounting, whereby operating results subsequent to the acquisition date are included in our consolidated financial results.

The preliminary purchase price of the acquisition has been allocated based on initial fair value estimates as follows (in thousands):

Property and equipment	$	1,602
Reacquired franchise right		245
Goodwill		3,830
Other, including cash		239
Total purchase price	$	5,916

The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill, all of which is expected to be deductible for tax purposes.

8. Commitments and Contingencies

In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we remain contingently liable for payment of certain lease agreements, primarily associated with Perfect Pizza restaurant sites for which the Perfect Pizza franchisor was primarily liable. As the initial party to the lease agreements, we are liable to the extent the primary obligor does not satisfy its payment obligations.

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 had an option period up to nine months, which expired May 1, 2012, to determine which Perfect Pizza leases they would assume. We remain contingently liable for approximately 40 leases, which have varying terms with most expiring by the end of 2015. The estimated maximum amount of undiscounted rental payments we would be required to make in the event of non-payment under these leases is approximately $1.9 million, net of amounts reserved of approximately $800,000.

In addition, we are subject to claims and legal actions in the ordinary course of business. We believe that all such claims and actions currently pending against us are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.

9. Segment Information

We have defined six reportable segments: domestic Company-owned restaurants, domestic commissaries, North America franchising, international operations, variable interest entities (“VIEs”) and “all other” units.

The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, such as breadsticks, cheesesticks, chicken strips, chicken wings, dessert pizza, and soft drinks to the general public. The domestic commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The international operations segment principally consists of our Company-owned restaurants in China and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, Mexico and China and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. BIBP Commodities, Inc., a franchisee-owned corporation, which operated through February 2011, was a VIE in which we were deemed the primary beneficiary, and is the only activity reflected in the VIE segment. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as our “all other” segment, which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, risk management services, and information systems and related services used in restaurant operations, including our online and other technology-based ordering platforms.

Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes and eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the activity in consolidation.

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.

Our segment information is as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 24, 2012			June 26, 2011			June 24, 2012			June 26, 2011
	(As Restated)			(As Restated)			(As Restated)			(As Restated)
Revenues from external customers:
Domestic Company-owned restaurants	$	143,527		$	127,641		$	287,342		$	266,312
Domestic commissaries		126,593			121,027			264,203			248,699
North America franchising		19,307			18,227			40,047			38,143
International		17,381			14,269			34,234			27,030
All others		11,771			12,370			24,029			25,817
Total revenues from external customers	$	318,579		$	293,534		$	649,855		$	606,001

Intersegment revenues:
Domestic commissaries	$	39,953		$	35,872		$	81,490		$	73,972
North America franchising		561			535			1,110			1,083
International		56			58			110			105
Variable interest entities		-			-			-			25,117
All others		2,664			2,571			5,685			5,126
Total intersegment revenues	$	43,234		$	39,036		$	88,395		$	105,403

Income (loss) before income taxes:
Domestic Company-owned restaurants	$	9,358		$	7,421		$	21,679		$	18,304
Domestic commissaries		7,978			4,321			19,144			13,875
North America franchising		16,619			16,240			34,759			34,249
International		320			(250	)		592			(1,066	)
All others		471			(298	)		866			(676	)
Unallocated corporate expenses		(10,799	)		(8,607	)		(25,583	)		(19,103	)
Elimination of intersegment profits		(481	)		150			(471	)		(553	)
Total income before income taxes	$	23,466		$	18,977		$	50,986		$	45,030

Property and equipment:
Domestic Company-owned restaurants	$	179,140
Domestic commissaries		89,308
International		19,032
All others		42,668
Unallocated corporate assets		136,340
Accumulated depreciation and amortization		(279,921	)
Net property and equipment	$	186,567

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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. At June 24, 2012, there were 3,973 Papa John’s restaurants (676 Company-owned and 3,297 franchised) operating in all 50 states and 33 countries. 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.

The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results.

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 within this report. The correction of the error related to the mandatorily redeemable noncontrolling interest had an impact on our Condensed Consolidated Statements of Comprehensive Income, interest expense, income tax expense, and net income which is reflected herein for 2012 and 2011. The restatements resulted in decreases in diluted earnings per share of $0.02 and $0.01 for the three and six months ended June 24, 2012, respectively, and a decrease in diluted earnings per share of $0.02 for the six months ended June 26, 2011 (no impact for the three-month period ended June 26, 2011). 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 period presented. See “Note 1” and “Note 2” of “Notes to Condensed Consolidated Financial Statements” for additional information.

Non-GAAP Measures

In connection with a new multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in the first quarter of 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). The Company then contributed the supplier marketing payment to the Papa John’s Marketing Fund (“PJMF”), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The Company contribution to PJMF was fully expensed in the first quarter of 2012.

PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic Company-owned restaurants’ portion of the advertising credits resulted in an increase in income before income taxes of approximately $1.0 million for the six months ended June 24, 2012.

The overall impact of these transactions, defined as the “Incentive Contribution,” was a net increase to income before income taxes of approximately $250,000 for the three months ended June 24, 2012 and a reduction of $3.5 million for the six months ended June 24, 2012. The impact for full-year 2012 will be a reduction to income before income taxes of approximately $3.0 million (or a reduction to diluted earnings per share of approximately $0.08).

The following table reconciles our GAAP financial results to the adjusted financial results, excluding the impact of the Incentive Contribution, for the three and six months ended June 24, 2012:

Three Months Ended

Six Months Ended

June 24,

June 26,

Increase

June 24,

June 26,

Increase

(In thousands, except per share amounts)

2012

2011

(decrease)

2012

2011

(decrease)

(As Restated)