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 30, 2012, there were 4,163 Papa John's restaurants in operation, consisting of 696 Company-owned and 3,467 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 2012 were 368 as compared to 321 in 2011 and 325 in 2010 and unit closings in 2012 were 88 as compared to 84 in 2011 and 148 in 2010. We expect net unit growth of approximately 230 to 260 units during 2013. 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.

We continue to generate strong sales in our domestic Company-owned restaurants even in a very competitive market environment. Average annual Company-owned sales for our most recent comparable restaurant base were $953,000 for 2012 (53-week year), compared to $897,000 for 2011 and $863,000 for 2010 (2011 and 2010 are on a 52-week basis). 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 5.6% in 2012, increased 4.1% in 2011, and decreased 0.6% in 2010. The comparable sales for North America franchised units increased 2.9% in 2012, 3.1% in 2011 and 0.3% in 2010. "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 these factors improve our image and brand awareness. The average cash investment for the eight domestic Company-owned restaurants opened during 2012 was approximately $240,000, compared to the $260,000 investment for the eight units opened in 2011, exclusive of land and any tenant improvement allowances we received in both years.

Approximately 43% of our revenues for 2012, compared to 47% of our revenues for 2011 and 45% of our revenues for 2010, were derived from the sale to 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 profitability and growth, these activities contribute to product quality and consistency 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.

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. Our 2012 fiscal year consisted of 53 weeks, including a six-week period in the fourth quarter. The additional week resulted in additional revenues of approximately $21.5 million and additional income before income taxes of $4.1 million, or $0.11 per diluted share for both the fourth quarter and full year of 2012.

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

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.

Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2011-08, "Testing Goodwill for Impairment," 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. We applied the qualitative assessment to our domestic Company-owned restaurants and China reporting unit, 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 unit was greater than the carrying amounts.

ASU 2011-08 allows us to bypass the qualitative assessment and perform the two-step quantitative goodwill impairment test if indicators are present. We applied the quantitative test for our subsidiary located in the United Kingdom ("PJUK"), which represents $15.4 million of goodwill as of December 30, 2012. 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. 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 rates considered 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. Additionally, we made various estimates and assumptions in determining the fair value, including growth rates.

The fair value of PJUK exceeded the carrying value by 37%. 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. If adverse economic events occur in the United Kingdom, there is risk of future impairment charges.

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, property, 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 differ significantly 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.

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. 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 30, 2012, we had a net deferred income tax liability of approximately $400,000.

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. We recognized reductions of $738,000, $1.9 million and $550,000 in our income tax expense associated with the finalization of certain income tax issues in 2012, 2011 and 2010, respectively (see "Note 15" of "Notes to Consolidated Financial Statements").

Restatement of Previously Issued Financial Statements

In connection with the evaluation of the accounting for newly formed joint ventures in 2012, 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 which is reflected herein for 2011 and 2010. The corrections were recorded to our "Unallocated Corporate Expenses" segment. Additionally, 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 3" of "Notes to Consolidated Financial Statements" for additional information.

Items Impacting Comparability; Non-GAAP Measures

The following table reconciles our financial results as reported under
accounting principles generally accepted in the United States ("GAAP") to
certain non-GAAP measures. We present these non-GAAP measures to adjust for
certain items which we believe impact the comparability of our results of
operations.

                                                                     Year Ended
                                                  Dec. 30,          Dec. 25,            Dec. 26,
(In thousands, except per share amounts)            2012              2011                2010
                                                                  (As Restated)       (As Restated)

Total revenues, as reported                      $ 1,342,653     $     1,217,882     $     1,126,397
53rd week of operations (a)                          (21,500 )                 -                   -
Total revenues, as adjusted                      $ 1,321,153     $     1,217,882     $     1,126,397

Income before income taxes, as reported          $    98,395     $        84,791     $        83,310
53rd week of operations (a)                           (4,145 )                 -                   -
Incentive Contribution (b)                             2,971                   -                   -
Income from BIBP cheese purchasing entity (c)              -                   -              (6,804 )
Income before income taxes, as adjusted          $    97,221     $        84,791     $        76,506

Items Impacting Comparability; Non-GAAP Measures (continued)

                                                                     Year Ended
                                                  Dec. 30,          Dec. 25,            Dec. 26,
(In thousands, except per share amounts)            2012              2011                2010
                                                                  (As Restated)       (As Restated)

Net income, as reported                          $    61,660     $        54,735     $        52,578
53rd week of operations (a)                           (2,634 )                 -                   -
Incentive Contribution (b)                             1,955                   -                   -
Income from BIBP cheese purchasing entity (c)              -                   -              (4,339 )
Net income, as adjusted                          $    60,981     $        54,735     $        48,239

Earnings per diluted share, as reported          $      2.58     $          2.16     $          1.99
53rd week of operations (a)                            (0.11 )                 -                   -
Incentive Contribution (b)                              0.08                   -                   -
Income from BIBP cheese purchasing entity (c)              -                   -               (0.16 )
Earnings per diluted share, as adjusted          $      2.55     $          2.16     $          1.83

(a) 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. In 2012, the Company's fiscal year consisted of 53 weeks, with the additional week added to the fourth quarter (14 weeks) results.

(b) In connection with a new multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($1.0 million per year). 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's contribution to PJMF was fully expensed in 2012.

PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in 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 in 2012.

The overall impact of the two transactions described above, which are collectively defined as the "Incentive Contribution," was a reduction in income before income taxes of approximately $3.0 million in 2012 (or a reduction to diluted earnings per share of approximately $0.08).

(c) 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 of the variable interest entity, we consolidated the operating results of BIBP. BIBP operated at break-even for the first two months of 2011 and the 2010 consolidation impact of BIBP on income before income taxes was $6.8 million. The 2010 consolidation impact of BIBP on income before income taxes excluded 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.

The non-GAAP results shown above, which exclude the items impacting comparability, should not be construed as a substitute for or a better indicator of the Company's performance than the Company's GAAP results. Management believes presenting the financial information without these items is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude the Incentive Contribution. See "Discussion of Operating Results" for further analysis regarding the impact of these items.

In addition, we present free cash flow in this report, which is a non-GAAP measure. We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) 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. See "Liquidity and Capital Resources" for a reconciliation of free cash flow to the most directly comparable GAAP measure.

The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

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. 30,          Dec. 25,           Dec. 26,
                                                     2012              2011               2010
                                                                  (As Restated)      (As Restated)
Income Statement Data:                             53 weeks          52 weeks           52 weeks
North America revenues:
Domestic Company-owned restaurant sales                 44.1 %             43.2 %             44.7 %
Franchise royalties                                      5.9                6.1                6.2
Franchise and development fees                           0.1                0.1                0.0
Domestic commissary sales                               40.7               41.7               40.4
Other sales                                              3.8                4.2                4.6
International revenues:
Royalties and franchise and development fees             1.5                1.3                1.2
Restaurant and commissary sales                          3.9                3.4                2.9
Total revenues                                         100.0              100.0              100.0
Costs and expenses:
Domestic Company-owned restaurant cost of
sales (2)                                               23.2               24.1               22.1
Domestic Company-owned restaurant operating
expenses (2)                                            57.1               56.9               57.7
Domestic commissary and other expenses (3)              92.0               92.2               91.4
Income from the franchise cheese purchasing
  program, net of minority interest (4)                  0.0                0.0               (0.5 )
International operating expenses (5)                    84.6               84.5               88.7
General and administrative expenses                      9.8                9.2                9.8
Other general expenses                                   0.6                0.8                0.8
Depreciation and amortization                            2.4                2.7                2.9
Total costs and expenses                                92.6               92.9               92.3
Operating income                                         7.4                7.1                7.7
Net interest expense                                    (0.1 )             (0.1 )             (0.3 )
Income before income taxes                               7.3                7.0                7.4
Income tax expense                                       2.4                2.2                2.4
Net income, including redeemable
noncontrolling interests                                 4.9                4.8                5.0
Less: income attributable to redeemable
noncontrolling interests                                (0.3 )             (0.3 )             (0.3 )
Net income, net of redeemable noncontrolling
interests                                                4.6 %              4.5 %              4.7 %

                                                               Year Ended (1)
                                                   Dec. 30,       Dec. 25,       Dec. 26,
                                                     2012           2011           2010

Restaurant Data:                                   53 weeks       52 weeks       52 weeks
 Percentage increase (decrease) in comparable
domestic
  Company-owned restaurant sales (6)                    5.6 %          4.1 %         (0.6 %)
 Number of Company-owned restaurants included
in the
  most recent full year's comparable
restaurant base                                         615            581            577
 Average sales for Company-owned restaurants
included
  in the most recent comparable restaurant
base                                             $  953,000     $  897,000     $  863,000

Papa John's Restaurant Progression:
North America Company-owned:
Beginning of period                                     598            591            588
Opened                                                    8              8              5
Closed                                                   (3 )           (1 )           (2 )
Acquired from franchisees                                57              -              -
Sold to franchisees                                     (12 )            -              -
End of period                                           648            598            591
International Company-owned:
Beginning of period                                      30             21             26
Opened                                                   20              9              8
Closed                                                   (2 )            -             (2 )
Acquired from franchisees                                 -              -              1
Sold to franchisees                                       -              -            (12 )
End of period                                            48             30             21
North America franchised:
Beginning of period                                   2,463          2,346          2,246
Opened                                                  182            166            182
Closed                                                  (44 )          (49 )          (82 )
Acquired from Company                                    12              -              -
Sold to Company                                         (57 )            -              -
End of period                                         2,556          2,463          2,346
International franchised:
Beginning of period                                     792            688            609
Opened                                                  158            138            130
Closed                                                  (39 )          (34 )          (62 )
Acquired from Company                                     -              -             12
Sold to Company                                           -              -             (1 )
End of period                                           911            792            688
Total Papa John's restaurants - end of period         4,163          3,883          3,646

(1) We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. The 2010 and 2011 fiscal years consisted of 52 weeks and the 2012 fiscal year consisted of 53 weeks. The additional week in 2012 resulted in additional revenues of approximately $21.5 million and additional income before income taxes of approximately $4.1 million, or $0.11 per diluted share.

(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.

Results of Operations

2012 Compared to 2011

Discussion of Revenues

Consolidated revenues increased $124.8 million, or 10.2%, to $1.34 billion in 2012, compared to $1.22 billion in 2011. The 53rd week of operations in 2012 approximated $21.5 million, or 1.8%. The increase in revenues was primarily due to the following:

· Domestic Company-owned restaurant sales increased $66.4 million, or 12.6%, in 2012, primarily due to an increase in comparable sales of 5.6%, the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012, and $10.6 million, or 2.0%, benefit from the 53rd week of operations.

· North America franchise royalty revenues increased approximately $5.9 million, or 8.0%, in 2012, due to an increase in comparable sales of 2.9%, an increase in net franchise units over the prior year, and a $1.4 million, or 1.8%, . . .