Papa John’s International Annual Report 2013

Plain-text annual report

Papa John’s 37 International Markets Executive Leadership Team ANNUAL REPORT 2013 D D E E NG R R ING R E T T E B I E NTS.BE I E NTS. BE T T T T E E R P I Z Z A . John H. Schnatter Founder, Chairman and Chief Executive Ofﬁcer Steve M. Ritchie SVP, Global Operations and Global OST Timothy C. O’Hern SVP, Chief Development Ofﬁcer Sean A. Muldoon SVP, R&D, QA and Supply Chain Caroline Miller Oyler SVP, Legal Affairs Robert C. Kraut SVP, Chief Marketing Ofﬁcer Anthony N. Thompson President and Chief Operating Ofﬁcer Lance F. Tucker SVP, Chief Financial Ofﬁcer, Chief Administrative Ofﬁcer, and Treasurer Cynthia McClellan SVP, Information Systems and Project Management Ofﬁce R. Shane Hutchins SVP, PJ Food Service, Inc. Robert Smith VP, Global Human Resources Cayman Islands Dominican Republic United Kingdom Ireland Puerto Rico Cyprus Russia Turkey Jordan Lebanon Azerbaijan South Korea China Canada Mexico Trinidad Venezuela Egypt Saudi Arabia Guam Philippines Malaysia El Salvador Guatemala Nicaragua Costa Rica Chile Panama Colombia Ecuador Peru Note: 2013 Markets entered – Guatemala India Kuwait Bahrain Qatar Oman United Arab Emirates R ING R E T T E D E I E NTS. BE T T E R P I Z Z A B Note: International Locations as of December 30, 2012 . 2012 Markets entered – Azerbaijan, Guam, Lebanon Papa John’s 37 International Markets Executive Leadership Team Cayman Islands Dominican Republic United Kingdom Ireland Puerto Rico Cyprus Russia Turkey Jordan Lebanon Azerbaijan South Korea China Canada Mexico Trinidad Venezuela Egypt Saudi Arabia Guam Philippines Malaysia El Salvador Guatemala Nicaragua Costa Rica Chile Panama Colombia Ecuador Peru Note: 2013 Markets entered – Guatemala India Kuwait Bahrain Qatar Oman United Arab Emirates R ING R E T T E D E I E NTS. BE T T E R P I Z Z A B Note: International Locations as of December 30, 2012 . 2012 Markets entered – Azerbaijan, Guam, Lebanon ANNUAL REPORT 2013 R ING R E T T E B D E I E NTS. BE T T E R P I Z Z A . John H. Schnatter Founder, Chairman and Chief Executive Ofﬁcer Steve M. Ritchie SVP, Global Operations and Global OST Timothy C. O’Hern SVP, Chief Development Ofﬁcer Sean A. Muldoon SVP, R&D, QA and Supply Chain Caroline Miller Oyler SVP, Legal Affairs Robert C. Kraut SVP, Chief Marketing Ofﬁcer Anthony N. Thompson President and Chief Operating Ofﬁcer Lance F. Tucker SVP, Chief Financial Ofﬁcer, Chief Administrative Ofﬁcer, and Treasurer Cynthia McClellan SVP, Information Systems and Project Management Ofﬁce R. Shane Hutchins SVP, PJ Food Service, Inc. Robert Smith VP, Global Human Resources TO OUR SHAREHOLDERS, FRANCHISEES, SUPPLY PARTNERS AND TEAM MEMBERS: As Papa John’s celebrates its Thirtieth Anniversary, I’m proud to say we have never lost sight of our founding principle – the unrelenting focus on superior-quality products to drive a loyal customer base. In a very real way, we’ve always kept our “eye on the pie” for the past thirty years. At the end of the day, nothing sells like the truth; and, our customers take notice of our better ingredients, better pizza promise because they do taste the difference between mediocrity and superiority. To that end, I am both proud and pleased to report the results for 2013, another outstanding year for Papa John’s. History of Digital Leadership 2014 INDUSTRY FIRST 1st MOBILE- OPTIMIZED EGIFT CARD ORDERING 50%+ 1997 FIRST ONLINE ORDER (PILOT IN NORTH CAROLINA) Papa John’s achieved a 20.2% increase in EPS and an increase of $700 million in market capitalization in 2013. Over the past ﬁve years, EPS has grown an average of 20% per year and the market capitalization has gone from $500 million to more than $2 billion. We have also reinvested approximately $50 million per year for the last several years back into property, plant and equipment to ﬁrst and foremost protect and enhance the “Quality Moat” around the brand castle, further enhance productivity and innovations, and last but not least, drive future international success. With 28% combined ownership of the company’s stock, our Board and senior management team are highly vested in the continued long-term success of Papa John’s. $1.70 $1.50 $1.30 $1.10 $0.90 $0.70 $0.50 Earnings Per Share $1.55 $1.29 $1.08 $0.92 $0.69 2009 2010 2011 2012 2013 PJI Market Capitalization 1,908,930 1,221,700 905,040 704,660 629,080 Under the outstanding leadership of Papa John’s President and COO Tony Thompson, the company’s 2013 accomplishments are unparalleled – the result of exceptional execution of our strategy across all aspects of our growing business Quality and Service Leadership: There’s no better place to start than our system wide quality and service performance, driven by the exceptional execution of our world class operations team led by Steve Ritchie, Papa John’s Senior Vice President, Global Operations. We spend a great deal of time and money each year to ensure our restaurants are making and delivering the industry’s highest quality pizzas with world class customer service. We did not disappoint in 2013. Our quality and service scores were higher than any year in our history, which led to Papa John’s earning the highest rating in the prestigious American Customer Satisfaction Index for the 12th time in the last 14 years. Superior quality products and a focus on customer service were the primary drivers behind our 4% comparable North American sales increase in 2013, driving the ﬁfth straight year of pretax income growth in Papa John’s North American Franchise segment. Digital Leadership: In 2013, Papa John’s became the ﬁrst national pizza company to near 50% of domestic system sales through digital channels, building on its unmatched history of technology “ﬁrsts.” Papa John’s was the ﬁrst national pizza company to offer systemwide online ordering (2001); the ﬁrst to offer systemwide text ordering (2007); and the ﬁrst and only pizza company to offer a digital rewards program, Papa Rewards (2010). Our dedication to innovation through technology has been and remains a commitment of Papa John’s leadership. Online Sales Mix Domestic Restaurants 46% 40% 33% 28% 25% $5 BILLION IN U.S. DIGITAL SALES OVER 45% OF U.S. TOTAL SALES FROM DIGITAL SALES KINDLE FIRE ORDERING app* ANDROID ORDERING app* 2013 INDUSTRY FIRST 1st 2012 2011 $ $2 BILLION IN U.S. DIGITAL SALES* DIGITAL LOYALTY REWARDS PROGRAM iOS ORDERING app 2010 INDUSTRY FIRST 1st NATIONWIDE ONLINE ORDERING 2001 INDUSTRY FIRST 1st LOCAL SPECIAL ONLINE OFFERS* NATIONWIDE 24/7 “PLAN AHEAD” ONLINE ORDERING* 24/7 2006 INDUSTRY FIRST 1st NATIONWIDE MOBILE TEXT ORDERING* 2007 INDUSTRY FIRST 1st $ $1 BILLION IN U.S. DIGITAL SALES NATIONWIDE MOBILE WEB ORDERING INDUSTRY FIRST 1st 2008 *ALL U.S. DELIVERY RESTAURANTS. Kindle Fire and the Amazon “a” logo are registered trademarks of Amazon Technologies, Inc. Android is a registered trademark of Google, Inc. The Apple logo is a registered trademark of Apple, Inc. Leadership in Giving Back: Having been blessed in so many ways, we feel it is important to give back to the communities that we serve. The Salvation Army is our national charitable partner, and in 2013 we joined with them to support the victims and aid workers recovering from several disasters including the devastating tornados that hit Oklahoma City. Papa John’s work with the Salvation Army along with our local charitable efforts, and the numerous relief efforts, fundraisers, and humanitarian projects our franchisees participated in, totaled hundreds-of-thousands-of-dollars in monetary and product donations last year. We also positively impacted the lives of our friends and neighbors in communities throughout the country and world. Our system is grateful for and humbled by our success, and we will continue to support and positively impact the people in these communities that support us so strongly. International Growth: In 2013, Papa John’s continued to build international momentum with a 7.5% international comparable sales increase and 183 net unit openings around the world. We passed the one-thousandth international restaurant milestone in the third quarter, and ﬁnished the year with 1,142 restaurants open outside of North America. Strong sales momentum and market penetration continues in the UK, Russia, Latin America, China and the Middle East. 1,100 1,000 900 800 700 600 500 400 300 1,200 Ending Store Count International 1142 959 822 709 635 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Note: The results for 2009 and 2010 are presented on a non-GAAP basis for comparability purposes. See the Investor Relations section of our website which contains the GAAP to non-GAAP reconciliations. Directors John H. Schnatter Founder, Chairman and CEO Corporate Information Corporate Headquarters 2002 Papa John’s Boulevard Louisville, Kentucky 40299 502-261-7272 Mark S. Shapiro (1)(3*) Annual Meeting Executive Producer, Dick Clark Productions The annual meeting of stockholders will be held Tuesday, April 29, 2014, 11:00 A.M. (E.D.T) at: Stock Listing Papa John’s stock is listed on The NASDAQ Global Select Market under the ticker symbol PZZA Papa John’s International, Inc. 2002 Papa John’s Boulevard Louisville, Kentucky 40299 Independent Public Accountants Ernst & Young LLP Transfer Agent Computershare Shareholder Services 211 Quality Circle, Suite 210 College Station, TX 77845 www.computershare.com/investor 800-622-6757 (US, Canada, Puerto Rico) 781-575-4735 (non-US) SVP, Chief Financial Ofﬁcer, Chief Administrative Investor Relations Lance F. Tucker Ofﬁcer, and Treasurer 502-261-4218 Corporate Communications – Media Relations Robert C. Kraut SVP, Chief Marketing Ofﬁcer 502-261-4318 Forward-Looking Statements This report includes non-historical or “forward looking” statements concerning future events or conditions. Important risk factors, which could cause actual results to differ materially from these statements, are set forth in Item 1A. Risk Factors in the accompanying Form 10-K. For More Information To learn more about Papa John’s, or to order online, visit our website at www.papajohns.com W. Kent Taylor (2) Founder, Chairman and CEO of Texas Roadhouse, Inc. Christopher L. Coleman (1)(3) Managing Director, Rothschild – London Olivia F. Kirtley (1*)(2) Business Consultant Philip Guarascio (3) Chairman and CEO of PG Ventures LLC, a marketing consulting ﬁrm Norborne P. Cole, Jr. (2*)(4) Business Consultant NUMBERS INDICATE BOARD COMMITTEES: ( 1 ) Audit Committee ( 2 ) Compensation Committee ( 4 ) Lead Independent Director *Committee Chair ( 3 ) Corporate Governance and Nominating Committee TO OUR SHAREHOLDERS, FRANCHISEES, SUPPLY PARTNERS AND TEAM MEMBERS: As Papa John’s celebrates its Thirtieth Anniversary, I’m proud to say we have never lost sight of our founding principle – the unrelenting focus on superior-quality products to drive a loyal customer base. In a very real way, we’ve always kept our “eye on the pie” for the past thirty years. At the end of the day, nothing sells like the truth; and, our customers take notice of our better ingredients, better pizza promise because they do taste the difference between mediocrity and superiority. To that end, I am both proud and pleased to report the results for 2013, another outstanding year for Papa John’s. Papa John’s achieved a 20.2% increase in EPS and an increase Under the outstanding leadership of Papa John’s President and of $700 million in market capitalization in 2013. Over the past ﬁve COO Tony Thompson, the company’s 2013 accomplishments are years, EPS has grown an average of 20% per year and the market unparalleled – the result of exceptional execution of our strategy capitalization has gone from $500 million to more than $2 billion. across all aspects of our growing business We have also reinvested approximately $50 million per year for the last several years back into property, plant and equipment to ﬁrst and foremost protect and enhance the “Quality Moat” around the brand castle, further enhance productivity and innovations, and last but not least, drive future international success. With 28% combined ownership of the company’s stock, our Board and senior management team are highly vested in the continued long-term success of Papa John’s. $1.70 $1.50 $1.30 $1.10 $0.90 $0.70 $0.50 Earnings Per Share $1.55 $1.29 $1.08 $0.92 $0.69 2009 2010 2011 2012 2013 PJI Market Capitalization 1,908,930 1,221,700 905,040 704,660 629,080 Quality and Service Leadership: There’s no better place to start than our system wide quality and service performance, driven by the exceptional execution of our world class operations team led by Steve Ritchie, Papa John’s Senior Vice President, Global Operations. We spend a great deal of time and money each year to ensure our restaurants are making and delivering the industry’s highest quality pizzas with world class customer service. We did not disappoint in 2013. Our quality and service scores were higher than any year in our history, which led to Papa John’s earning the highest rating in the prestigious American Customer Satisfaction Index for the 12th time in the last 14 years. Superior quality products and a focus on customer service were the primary drivers behind our 4% comparable North American sales increase in 2013, driving the ﬁfth straight year of pretax income growth in Papa John’s North American Franchise segment. Digital Leadership: In 2013, Papa John’s became the ﬁrst national pizza company to near 50% of domestic system sales through digital channels, building on its unmatched history of technology “ﬁrsts.” Papa John’s was the ﬁrst national pizza company to offer systemwide online ordering (2001); the ﬁrst to offer systemwide text ordering (2007); and the ﬁrst and only pizza company to offer a digital rewards program, Papa Rewards (2010). Our dedication to innovation through technology has been and remains a commitment of Papa John’s leadership. Online Sales Mix Domestic Restaurants 46% 40% 33% 28% 25% History of Digital Leadership 2014 INDUSTRY FIRST 1st MOBILE- OPTIMIZED EGIFT CARD ORDERING 50%+ 1997 FIRST ONLINE ORDER (PILOT IN NORTH CAROLINA) $5 BILLION IN U.S. DIGITAL SALES OVER 45% OF U.S. TOTAL SALES FROM DIGITAL SALES KINDLE FIRE ORDERING app* ANDROID ORDERING app* 2013 INDUSTRY FIRST 1st 2012 2011 $ $2 BILLION IN U.S. DIGITAL SALES* DIGITAL LOYALTY REWARDS PROGRAM iOS ORDERING app 2010 INDUSTRY FIRST 1st NATIONWIDE ONLINE ORDERING 2001 INDUSTRY FIRST 1st LOCAL SPECIAL ONLINE OFFERS* NATIONWIDE 24/7 “PLAN AHEAD” ONLINE ORDERING* 24/7 2006 INDUSTRY FIRST 1st NATIONWIDE MOBILE TEXT ORDERING* $ $1 BILLION IN U.S. DIGITAL SALES NATIONWIDE MOBILE WEB ORDERING 2007 INDUSTRY FIRST 1st INDUSTRY FIRST 1st 2008 *ALL U.S. DELIVERY RESTAURANTS. Kindle Fire and the Amazon “a” logo are registered trademarks of Amazon Technologies, Inc. Android is a registered trademark of Google, Inc. The Apple logo is a registered trademark of Apple, Inc. Leadership in Giving Back: Having been blessed in so many ways, we feel it is important to give back to the communities that we serve. The Salvation Army is our national charitable partner, and in 2013 we joined with them to support the victims and aid workers recovering from several disasters including the devastating tornados that hit Oklahoma City. Papa John’s work with the Salvation Army along with our local charitable efforts, and the numerous relief efforts, fundraisers, and humanitarian projects our franchisees participated in, totaled hundreds-of-thousands-of-dollars in monetary and product donations last year. We also positively impacted the lives of our friends and neighbors in communities throughout the country and world. Our system is grateful for and humbled by our success, and we will continue to support and positively impact the people in these communities that support us so strongly. International Growth: In 2013, Papa John’s continued to build international momentum with a 7.5% international comparable sales increase and 183 net unit openings around the world. We passed the one-thousandth international restaurant milestone in the third quarter, and ﬁnished the year with 1,142 restaurants open outside of North America. Strong sales momentum and market penetration continues in the UK, Russia, Latin America, China and the Middle East. 1,200 Ending Store Count International 1,100 1142 959 822 709 635 1,000 900 800 700 600 500 400 300 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Note: The results for 2009 and 2010 are presented on a non-GAAP basis for comparability purposes. See the Investor Relations section of our website which contains the GAAP to non-GAAP reconciliations. Directors John H. Schnatter Founder, Chairman and CEO Corporate Information Corporate Headquarters 2002 Papa John’s Boulevard Louisville, Kentucky 40299 502-261-7272 Mark S. Shapiro (1)(3*) Annual Meeting Executive Producer, Dick Clark Productions The annual meeting of stockholders will be held Tuesday, April 29, 2014, 11:00 A.M. (E.D.T) at: Stock Listing Papa John’s stock is listed on The NASDAQ Global Select Market under the ticker symbol PZZA Papa John’s International, Inc. 2002 Papa John’s Boulevard Louisville, Kentucky 40299 Independent Public Accountants Ernst & Young LLP Transfer Agent Computershare Shareholder Services 211 Quality Circle, Suite 210 College Station, TX 77845 www.computershare.com/investor 800-622-6757 (US, Canada, Puerto Rico) 781-575-4735 (non-US) SVP, Chief Financial Ofﬁcer, Chief Administrative Investor Relations Lance F. Tucker Ofﬁcer, and Treasurer 502-261-4218 Corporate Communications – Media Relations Robert C. Kraut SVP, Chief Marketing Ofﬁcer 502-261-4318 Forward-Looking Statements This report includes non-historical or “forward looking” statements concerning future events or conditions. Important risk factors, which could cause actual results to differ materially from these statements, are set forth in Item 1A. Risk Factors in the accompanying Form 10-K. For More Information To learn more about Papa John’s, or to order online, visit our website at www.papajohns.com W. Kent Taylor (2) Founder, Chairman and CEO of Texas Roadhouse, Inc. Christopher L. Coleman (1)(3) Managing Director, Rothschild – London Olivia F. Kirtley (1*)(2) Business Consultant Philip Guarascio (3) Chairman and CEO of PG Ventures LLC, a marketing consulting ﬁrm Norborne P. Cole, Jr. (2*)(4) Business Consultant NUMBERS INDICATE BOARD COMMITTEES: ( 1 ) Audit Committee ( 2 ) Compensation Committee ( 4 ) Lead Independent Director *Committee Chair ( 3 ) Corporate Governance and Nominating Committee Corporate store sales in China were below expectations, though 2013 strategic infrastructure investments in technology and marketing should result in signiﬁcantly improved performance moving forward. Overall, new leadership in our operations and development, with consistent and disciplined execution, has positioned us for accelerated international growth and advanced levels of performance in 2014 and beyond. NFL Leadership: In 2013, Papa John’s was noted as the most recognized sponsor of the National Football League, surpassing signiﬁcant brands that have long been associated with the famous NFL moniker. As Papa John’s continued strategic activation around its NFL partnership as its Ofﬁcial Pizza, we continued to reap the rewards of this highly recognized afﬁliation. The Papa John’s/NFL partnership cultivated the sponsorship of nearly twenty individual NFL teams in 2013, and its continued relationship with and endorsement of Peyton Manning, the most recognized face of the NFL. With an overwhelming 62% of fans afﬁliating Manning as the face of the National Football League, this important Papa John’s relationship continued to be an impactful strategy for the company. Sponsors that do the best job activating around the NFL: 41% 36% 20% 23% 50% 40% 30% 20% 10% 5% 0% Visa Verizon Anheuser- Busch Papa John’s Source: Street & Smith’s Sports Business Journal, Nov. 25, 2013 issue Strong Business Model: Papa John’s success in 2013 continued to be supported by our winning and straightforward business model – investing in opportunities that pose minimal risk and present great potential for reward. When I look at investing, I prefer opportunities that have a relatively low down side with minimal risk and the potential of very high upside. At Papa John’s, our steady and consistent proﬁts provide a high level of stability, while the opportunities we have to grow our international business and domestic comparable sales provide the potential for very positive upside. While there were a multitude of positives last year at Papa John’s, there were several challenges as well. I’d like to further explain those challenges and summarize our ongoing efforts in dealing with them: Our ﬁrst challenge continues to be the difﬁcult market price inﬂation for several key ingredients. Input costs continue to rise, signiﬁcantly increasing the cost of our product. With that said, I am convinced that Papa John’s is in the best position in our industry to navigate high cost levels. Our Quality position, leadership in execution, proven business model, and solid ﬁnancial footing should enable us to navigate rising costs this year and forward. “In a very real way we’ve always kept our ‘eye on the pie’...” Our second challenge was the performance of our corporate markets in China as noted above. While we saw sales increases in Beijing and Tianjin, our average unit volumes need to improve. Tony, Steve and I are optimistic that the infrastructure and technology investments we made during 2013 will continue to move this important market forward in 2014. In closing, I give all the credit for our 2013 success and the success we’ve enjoyed over the past ﬁve years to our all-star operations and leadership team. Although we take our responsibilities as a publicly held company very seriously, we treat our people and product more like a family business. We are able to increase shareholder value because our franchisees and operators have an “ownership” mindset that is not “quarter to quarter” but truly long term. Just as important are the members of our outstanding corporate staff, who do a fantastic job dealing with the many obstacles and increasing government regulations that adversely affect all businesses. I am so proud of what the people at headquarters do day in and day out to support our ﬁeld operational team. We have had tremendous success over the past thirty years by keeping our “eye on the pie” and executing a very straightforward strategy, consisting of an unrelenting focus on quality and an unwavering commitment to earning our customers’ loyalty. We will continue to follow this winning strategy, and I’m conﬁdent that our history of success by operating in this manner will continue for years to come. John H. Schnatter Founder, Chairman and Chief Executive Ofﬁcer UNITED STATES SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December December 29, 2013 [ ] Transition report pursuant to Section Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________________ to _______________________ For the transition period from _____________________ to _______________________ For the transition period from _____________________ to _______________________ or Commission File Number: 0-21660 Commission File Number: 0 PAPA JOHN’S INTERNATIONAL, INC. PAPA JOHN’S INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware Delaware (State or other jurisdiction of (State or other jurisdiction of incorporation or organization) incorporation or organization) 61-1203323 (I.R.S. Employer Identification No.) 2002 Papa Johns Boulevard 2002 Papa Louisville, Kentucky Louisville, Kentucky (Address of principal executive offices) (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: Securities registered pursuant to Section (Title of Each Class) .01 par value Common Stock, $0.01 par value (Name of each exchange on which registered) The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: Securities registered pursuant to Section None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the known seasoned issuer, as defined in Rule 405 of the Indicate by check mark if the registrant is a well Securities Act. Yes [X] No [ ] 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 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or S Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or S the Act. Yes [ ] No [X] Yes [ ] No [X] egistrant (1) has filed all reports required to be filed by Section 13 or Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section Indicate by check mark whether the 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the 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. registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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] Non-accelerated filer [ ] 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 30, 2013, was $1,042,454,017. As of February 18, 2014, there were 41,888,411 shares of the Registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Part III of this annual report are incorporated by reference to the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 29, 2014. TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters Item 6. Item 7. and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Item 7A. Item 8. Item 9. Item 9A. Item 9B. Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Page 1 10 16 16 18 19 22 24 25 49 51 84 84 86 86 86 87 87 87 PART IV Item 15. Exhibits, Financial Statement Schedules 88 PART I Item 1. Business General Papa John’s International, Inc., a Delaware corporation (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark “Papa John’s”. Papa John’s began operations in 1984. At December 29, 2013, there were 4,428 Papa John’s restaurants in operation, consisting of 723 Company-owned and 3,705 franchised restaurants operating domestically in all 50 states and in 34 countries. Our Company-owned restaurants include 191 restaurants operated under four joint venture arrangements and 58 units in Beijing and North China. Papa John’s has defined five reportable segments: domestic Company-owned restaurants, domestic commissaries (Quality Control Centers), North America franchising, international operations, and “all other” business units. North America is defined as the United States and Canada. Domestic is defined as the contiguous United States. International franchisees are defined as all franchise operations outside of the United States and Canada. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 20” of “Notes to Consolidated Financial Statements” for financial information about our segments. All of our periodic and current reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, through our website located at www.papajohns.com, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. Those documents are available through our website as soon as reasonably practicable after we electronically file them with the SEC. We also make available free of charge on our website our Corporate Governance Guidelines, Board Committee Charters, and our Code of Ethics, which applies to Papa John's directors, officers and employees. Printed copies of such documents are also available free of charge upon written request to Investor Relations, Papa John’s International, Inc., P.O. Box 99900, Louisville, KY 40269-0900. You may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is also available at www.sec.gov. The references to these website addresses do not constitute incorporation by reference of the information contained on the websites, which should not be considered part of this document. Strategy Our goal is to build the strongest brand loyalty in the pizza industry. The key elements of our strategy include: High Quality Menu Offerings. Domestic Papa John’s restaurants offer a menu of high-quality pizza along with side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. Papa John’s traditional crust pizza is prepared using fresh dough (never frozen). Papa John’s pizzas are made from a proprietary blend of wheat flour, cheese made from 100% real mozzarella, fresh-packed pizza sauce made from vine-ripened tomatoes (not from concentrate) and a proprietary mix of savory spices, and a choice of high-quality meat (100% beef and pork with no fillers) and vegetable toppings. Domestically, all ingredients and toppings can be purchased from our Quality Control Center (“QC Center”) system, which delivers to individual restaurants twice weekly. To ensure consistent food quality, each domestic franchisee is required to purchase dough and tomato sauce from 1 our QC Centers and to purchase all other supplies from our QC Centers or other approved suppliers. Internationally, the menu may be more diverse than in our domestic operations to meet local tastes and customs. QC Centers outside the U.S. may be operated by franchisees pursuant to license agreements or by other third parties. International QC Centers are required to meet food safety and quality standards and to be in compliance with all applicable laws. We provide significant assistance to licensed international QC Centers in sourcing approved quality suppliers. In addition to our fresh dough traditional crust pizza, we offer a thin crust pizza, which is a par-baked product produced by a third-party vendor. Our traditional crust pizza offers a container of our special garlic sauce and a pepperoncini pepper. Each thin crust pizza is served with a packet of special seasonings and a pepperoncini pepper. We continue to test new product offerings both domestically and internationally. The new products can become a part of the permanent menu if they meet certain established guidelines. Efficient Operating System. We believe our operating and distribution systems, restaurant layout and designated delivery areas result in lower restaurant operating costs and improved food quality, and promote superior customer service. Our QC Center system takes advantage of volume purchasing of food and supplies, and provides consistency and efficiencies of scale in fresh dough production. This eliminates the need for each restaurant to order food from multiple vendors and commit substantial labor and other resources to dough preparation. Commitment to Team Member Training and Development. We are committed to the development and motivation of our team members through training programs, incentive and recognition programs and opportunities for advancement. Team member training programs are conducted for corporate restaurant team members, and offered to our franchisees electronically and at training locations across the United States and internationally. We offer performance-based financial incentives to corporate and restaurant team members at various levels. Marketing. Our domestic marketing strategy consists of both national and local components. Our national strategy includes national advertising via television, print, direct mail, digital, mobile marketing and social media channels. Our online and digital marketing activities have increased significantly over the past several years in response to increasing consumer use of online and mobile web technology. Local advertising programs include television, radio, and print materials. In international markets, we target customers who live or work within a small radius of a Papa John’s restaurant. Our international markets use a combination of advertising strategies, including television, radio, digital, and print depending on the size of the local market. Strong Franchise System. We are committed to developing and maintaining a strong franchise system by attracting experienced operators, supporting them to expand and grow their business and monitoring their compliance with our high standards. We seek to attract franchisees with experience in restaurant or retail operations and with the financial resources and management capability to open single or multiple locations. We devote significant resources to provide Papa John’s franchisees with assistance in restaurant operations, management training, team member training, marketing, site selection and restaurant design. Unit Sales and Investment Costs We are committed to maintaining strong unit economics. In 2013, the 633 domestic Company-owned restaurants included in the full year’s comparable restaurant base generated average unit sales of $988,000. North America franchise sales per unit on average are lower than Company-owned restaurants as a higher percentage of our Company-owned restaurants are located in more heavily penetrated markets. 2 The average cash investment for the 13 domestic traditional Company-owned restaurants opened during the 2013 fiscal year, exclusive of land, was approximately $280,000 per unit, excluding tenant allowances that we received. With few exceptions, domestic restaurants do not offer a dine-in area, which reduces our restaurant capital investment. We also opened 11 Company-owned restaurants in China, with an average investment cost of approximately $225,000. We define a “traditional” domestic Papa John’s restaurant as a delivery and carryout unit that services a defined trade area. We consider the location of a traditional restaurant to be important and therefore devote significant resources to the investigation and evaluation of potential sites. The site selection process includes a review of trade area demographics, target population density and competitive factors. A member of our development team inspects each potential domestic Company-owned restaurant location and substantially all franchised restaurant locations before a site is approved. Our restaurants are typically located in strip shopping centers or freestanding buildings that provide visibility, curb appeal and accessibility. Our restaurant design can be configured to fit a wide variety of building shapes and sizes, which increases the number of suitable locations for our restaurants. A typical domestic inline or end cap Papa John’s restaurant averages 1,100 to 1,500 square feet with visible exterior signage. “Non-traditional” Papa John’s restaurants generally do not provide delivery service but rather provide walk-up or carry-out service to a captive customer group within a designated facility, such as a food court at an airport, university or military base or an event-driven service at facilities such as sports stadiums or entertainment venues. Non-traditional units are designed to fit the unique requirements of the venue. Most of our international Papa John’s restaurants are slightly smaller and average between 900 and 1,400 square feet; however, in order to meet certain local customer preferences, some international restaurants have been opened in larger spaces to accommodate both dine-in and restaurant-based delivery service, typically with 35 to 100 seats. Development A total of 386 Papa John’s restaurants were opened during 2013, consisting of 30 Company-owned (19 in North America and 11 in Beijing and North China) and 356 franchised restaurants (152 in North America and 204 international), while 121 Papa John’s restaurants closed during 2013, consisting of three Company-owned (two in North America and one in Beijing) and 118 franchised restaurants (87 in North America and 31 international). During 2014, we expect net unit growth of approximately 220 to 250 units, approximately 70% of which will open in international markets. International franchised unit expansion includes an emphasis on markets in the Americas, the United Kingdom, the Middle East and Asia. Although most of our domestic Company-owned markets are well-penetrated, our Company-owned growth strategy is to continue to open domestic restaurants in existing markets as appropriate, thereby increasing consumer awareness and enabling us to take advantage of operational and marketing efficiencies. Our experience in developing markets indicates that market penetration through the opening of multiple restaurants in a particular market results in increased average restaurant sales in that market over time. We have co-developed domestic markets with some franchisees or divided markets among franchisees, and will continue to utilize market co-development in the future, where appropriate. 3 Of the total 3,286 North American restaurants open as of December 29, 2013, 665 or 20% were Company-owned (including 191 units owned in joint venture arrangements with franchisees in which the Company has a majority ownership position). The Company expects the percentage of domestic Company-owned units to decline over the next several years because future net openings will be more heavily weighted toward franchise units. From time to time, the Company evaluates the purchase or sale of significant markets, which could change the percentage of Company-owned units. Each is evaluated on its individual merits. Of the 1,142 international restaurants open as of December 29, 2013, 58 or 5% were Company-owned (located in Beijing and North China). We plan to continue to grow our international units during the next several years, substantially all of which will be franchised. QC Center System and Supply Chain Management Our domestic QC Centers, comprised of ten full-service regional production and distribution centers, supply pizza dough, food products, paper products, smallwares and cleaning supplies twice weekly to each restaurant throughout the contiguous United States. This system enables us to monitor and control product quality and consistency, while lowering food and other costs. We evaluate the QC Center system capacity in relation to planned restaurant growth, and facilities are developed or upgraded as operational or economic conditions warrant. We own full-service international QC Centers in the United Kingdom, Mexico City, Mexico and Beijing, China. Other international full-service QC Centers are licensed to franchisees or non-franchisee third parties and are generally located in the markets where our franchisees have restaurants. We set quality standards for all products used in our restaurants and designate approved outside suppliers of food and paper products that meet our quality standards. In order to ensure product quality and consistency, all Papa John’s restaurants are required to purchase tomato sauce and dough from QC Centers. Franchisees may purchase other goods directly from our QC Centers or other approved suppliers. National purchasing agreements with most of our suppliers generally result in volume discounts to us, allowing us to sell products to our restaurants at prices we believe are below those generally available in the marketplace. Within our domestic QC Center system, products are distributed to restaurants by refrigerated trucks leased and operated by us or transported by a dedicated logistics company. Marketing Programs Our local restaurant-level marketing programs target consumers within the delivery area of each restaurant through the use of local television, radio, print materials, targeted direct mail, store-to-door flyers, digital display advertising, email marketing, text messages and local social media. Local marketing efforts also include a variety of community-oriented activities within schools, sports venues and other organizations supported with some of the same advertising vehicles mentioned above. Domestic Company-owned and franchised Papa John’s restaurants within a defined market are required to join an area advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of sales to the Co-op for market-wide programs, such as television, radio, digital and print advertising, and sports sponsorships. The rate of contribution and uses of the monies collected are determined by a majority vote of the Co-op’s members. The contribution rate for Co-ops may generally not be below 2.0% of sales without approval from Papa John’s. The restaurant-level and Co-op marketing efforts are supported by media, print, digital and electronic advertising materials that are produced by Papa John’s Marketing Fund, Inc. (“PJMF”). PJMF is an unconsolidated nonstock corporation designed to operate at break-even for the purpose of designing and 4 administering advertising and promotional programs for all participating domestic restaurants. PJMF produces and buys air time for Papa John’s national television commercials, buys digital media such as banner advertising, paid search-engine advertising, mobile marketing, social media advertising and marketing, and SMS text and email, in addition to other brand-building activities, such as consumer research and public relations activities. Domestic Company-owned and franchised Papa John’s restaurants are required to contribute a certain minimum percentage of sales to PJMF. The contribution rate to PJMF can be increased above the required minimum contribution rate if approved by the governing board of PJMF up to 3% of sales, and beyond those levels if approved by a supermajority of domestic restaurants. The contribution rate has been 4.0% since 2011. We provide both Company-owned and franchised restaurants with pre-approved marketing materials and catalogs for the purchase of uniforms and promotional items. We also provide direct marketing services to Company-owned and franchised restaurants using customer information gathered by our proprietary point-of-sale technology (see “Company Operations – Domestic Point-of-Sale Technology”). In addition, we provide database tools, templates and training for operators to facilitate local email marketing and text messaging through our approved tools. Our proprietary digital ordering platform allows customers to order online. Our eCommerce platforms include “plan ahead ordering,” Spanish-language ordering capability, and enhanced mobile web ordering for our customers, including Papa John's iPhone® and Android® applications. We also have a Papa Rewards® program, which is an eCommerce customer loyalty program designed to increase loyalty and frequency of consumer use of our eCommerce ordering platform. We receive a percentage-based fee from U.S. franchisees for online sales, in addition to royalties, to defray development and operating costs associated with our eCommerce ordering platform. Our domestic restaurants offer customers the opportunity to purchase a reloadable gift card marketed as the “Papa Card.” The Papa Card is sold as either a plastic gift card purchased in our restaurants, or an online digital card purchased at our web site. We sell Papa Cards to consumers through third-party retailers and bulk orders of cards to business entities and organizations. We continue to explore other Papa Card distribution opportunities. The Papa Card may be redeemed for delivery, carryout, and eCommerce orders and is accepted at all Papa John’s traditional domestic restaurants. In international markets, we target customers who live or work within a small radius of a Papa John’s restaurant. Certain markets can effectively use television and radio as part of their marketing strategies. The majority of the marketing efforts include using print materials such as flyers, newspaper inserts, in- store marketing materials, and to a growing extent, digital marketing such as display, search engine marketing, social media, mobile marketing, email, and SMS text. Local marketing efforts, such as sponsoring or participating in community events, sporting events and school programs, are also used to build customer awareness. Company Operations Domestic Restaurant Personnel. A typical Papa John’s Company-owned domestic restaurant employs a restaurant manager and approximately 20 to 25 hourly team members, many of whom work part-time. The manager is responsible for the day-to-day operation of the restaurant and maintaining Company- established operating standards. We seek to hire experienced restaurant managers and staff and provide comprehensive training programs in areas such as operations and managerial skills. We also employ directors of operations who are responsible for overseeing an average of seven Company-owned restaurants. Additional levels of operations senior management and corporate staff also support the field teams in many areas, including, but not limited to, quality assurance, food safety, training, marketing and technology. We seek to motivate and retain personnel by providing opportunities for advancement and performance-based financial incentives. 5 Training and Education. The Global Operations Support and Training (“GOST”) department is responsible for creating tools and materials for the training and development of both corporate and franchise team members. We believe training is very important to delivering consistent operational execution. Operations personnel complete our management training program and ongoing development programs, including multi-unit training, in which instruction is given on all aspects of our systems and operations. Domestic Point-of-Sale Technology. Our proprietary PROFIT SystemTM, point-of-sale technology (“POS”), is in place in all North America traditional Papa John’s restaurants. We believe this technology facilitates fast and accurate order-taking and pricing, reduces paperwork and allows the restaurant manager to better monitor and control food and labor costs, including food inventory management and order placement from the domestic QC Centers. We believe the PROFIT System also enhances restaurant-level marketing capabilities. Polling capabilities allow us to obtain restaurant operating information, providing us with timely access to sales and customer information. The PROFIT System is also closely integrated with our digital ordering solutions in all domestic traditional Papa John’s restaurants, enabling Papa John’s to offer nationwide digital ordering to our customers. We plan to roll out our next generation POS system, which we refer to as FOCUS, to substantially all of our domestic restaurants beginning in 2014. We expect FOCUS will add efficiencies to our operations. The cost of the system will vary depending on the current equipment, including hardware and wiring, located at each restaurant. Our franchisees will have the option of obtaining financing for the new system from a designated lender. Domestic Hours of Operation. Our domestic restaurants are open seven days a week, typically from 11:00 a.m. to 12:30 a.m. Monday through Thursday, 11:00 a.m. to 1:30 a.m. on Friday and Saturday and 12:00 noon to 11:30 p.m. on Sunday. Carryout hours are generally more limited for late night, for security purposes. Franchise Program General. We continue to attract franchisees with significant restaurant and retail experience. We consider our franchisees to be a vital part of our system’s continued growth and believe our relationship with our franchisees is good. As of December 29, 2013, there were 3,705 franchised Papa John’s restaurants operating in all 50 states and 34 countries. During 2013, 356 (152 North America and 204 international) franchised Papa John’s restaurants were opened. As of December 29, 2013, we have development agreements with our franchisees for approximately 200 additional North America restaurants, the majority of which are committed to open over the next two to three years, and agreements for approximately 1,000 additional international franchised restaurants, the majority of which are scheduled to open over the next six years. There can be no assurance that all of these restaurants will be opened or that the development schedule set forth in the development agreements will be achieved. Approval. Franchisees are approved on the basis of the applicant’s business background, restaurant operating experience and financial resources. We seek franchisees to enter into development agreements for single or multiple restaurants. We require each franchisee to complete our training program or to hire a full-time operator who completes the training and has either an equity interest or the right to acquire an equity interest in the franchise operation. Outside the United States, we will allow an approved operator bonus plan to substitute for the equity interest. North America Development and Franchise Agreements. We enter into development agreements with our franchisees in North America for the opening of a specified number of restaurants within a defined period of time and specified geographic area. Substantially all existing franchise agreements have an initial 10- year term with a 10-year renewal option. We have the right to terminate a franchise agreement for a 6 variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our policies and standards. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. We provide assistance to Papa John’s franchisees in selecting sites, developing restaurants and evaluating the physical specifications for typical restaurants. We provide layout and design services and recommendations for subcontractors, signage installers and telephone systems to Papa John’s franchisees. Our franchisees can purchase complete new store equipment packages through an approved third-party supplier. In addition, we sell replacement smallwares and related items to our franchisees. Each franchisee is responsible for selecting the location for its restaurants but must obtain our approval of restaurant design and location based on accessibility and visibility of the site and targeted demographic factors, including population density, income, age and traffic. Under our standard domestic development agreement, the franchisee is required to pay, at the time of signing the agreement, a non-refundable fee of $25,000 for the first restaurant and $5,000 for any additional restaurants. The non-refundable fee is credited against the standard $25,000 franchise fee payable to us upon signing the franchise agreement for a specific location. Generally, a franchise agreement is executed when a franchisee secures a location. Our current standard development agreement requires the franchisee to pay a royalty fee of 5% of sales and the majority of our existing franchised restaurants also have a 5% royalty rate in effect. Domestic Franchise Development Incentives. Over the past few years, we have offered various development incentive programs for domestic franchisees to increase unit openings. Such incentives included the following for 2013 traditional openings: (1) no franchise fee if the unit opens on time in accordance with the agreed upon development schedule, $5,000 if the unit opens late (standard fee is $25,000); (2) the waiver of some or all of the 5% royalty fee for a period of time; (3) a credit for a portion of the purchase of certain equipment; and (4) a credit to be applied toward a future food purchase, under certain circumstances. We believe the development incentive programs have accelerated unit openings and expect they will continue to do so in 2014. Marketing Fund Incentives. In 2013, domestic franchisees could earn up to a 45 basis point royalty rebate (against our standard 5.0% royalty rate) by meeting certain sales growth targets. Domestic Franchise Support Initiatives. From time to time, we offer additional discretionary support initiatives to our domestic franchisees, including: • Food cost relief by lowering the commissary margin on certain commodities sold by PJ Food Service, Inc. (“PJFS”) to the franchise system and by providing incentive rebate opportunities; • Targeted royalty relief and local marketing support to assist certain identified franchisees or markets; • Restaurant opening incentives; and • Reduced cost direct mail campaigns from Preferred Marketing Solutions (“Preferred,” our wholly-owned print and promotions subsidiary). In 2014, we plan to continue domestic franchise support initiatives. We believe the support programs have mitigated potential unit closures and strengthened our brand. International Development and Franchise Agreements. We opened our first franchised restaurant outside the United States in 1998. We define “international” as all markets outside the United States and Canada. In international markets, we have either a development agreement or a master franchise agreement with a franchisee for the opening of a specified number of restaurants within a defined period of time and specified geographic area. Under a master franchise agreement, the franchisee has the right to 7 subfranchise a portion of the development to one or more subfranchisees approved by us. Under our current standard international development agreement, the franchisee is required to pay total fees of $25,000 per restaurant: $5,000 at the time of signing the agreement and $20,000 when the restaurant opens or on the agreed-upon development date, whichever comes first. Under our current standard master franchise agreement, the master franchisee is required to pay total fees of $25,000 per restaurant owned and operated by the master franchisee, under the same terms as the standard development agreement, and $15,000 for each subfranchised restaurant – $5,000 at the time of signing the agreement and $10,000 when the restaurant opens or on the agreed-upon development date, whichever comes first. Our current standard international master franchise and development agreements provide for payment to us of a royalty fee of 5% of sales. For international markets with subfranchise agreements, the effective subfranchise royalty received by the Company is generally 3%. The remaining terms applicable to the operation of individual restaurants are substantially equivalent to the terms of our domestic franchise agreement. From time to time, development agreements will be negotiated at other-than-standard terms for fees and royalties. We also offer various development incentives to help drive net unit growth. Non-traditional Restaurant Development. We had approximately 250 non-traditional restaurants at December 29, 2013. These agreements generally cover venues or areas not originally targeted for traditional unit development and have terms differing from the standard agreements. Franchisee Loans. Selected franchisees have borrowed funds from us, principally for the purchase of restaurants from us or other franchisees or for construction and development of new restaurants. Loans made to franchisees typically bear interest at fixed or floating rates and in most cases are secured by the fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise owners. At December 29, 2013, net loans outstanding totaled $16.8 million. See “Note 11” of “Notes to Consolidated Financial Statements” for additional information. Domestic Franchise Insurance Program. Our franchisees may elect to purchase various insurance policies, such as health insurance, non-owned automobile and workers’ compensation, through our wholly-owned insurance agency, Risk Services Corp. (“Risk Services”). Various third-party commercial insurance companies provide fully-insured coverage for these lines of business to franchisees participating in the franchise insurance program offered by Risk Services. Domestic Franchise Training and Support. Our domestic field support structure consists of franchise business directors, each of whom is responsible for serving an average of 130 franchised units. Our franchise business directors maintain open communication with the franchise community, relaying operating and marketing information and new initiatives between franchisees and us. Franchise business directors report to division vice presidents, who report to the Senior Vice President, Global Operations & Global Operations Support and Training. Every franchisee is required to have a principal operator approved by us who satisfactorily completes our required training program. Principal operators for traditional restaurants are required to devote their full business time and efforts to the operation of the franchisee’s traditional restaurants. Each franchised restaurant manager is also required to complete our Company-certified management training program. Ongoing supervision of training is monitored by the GOST team. Multi-unit franchisees are encouraged to appoint training store general managers or hire a full-time training coordinator certified to deliver Company-approved training programs. International Franchise Operations Support. We employ or contract with international business directors who are responsible for supporting one or more franchisees. The international business directors report to regional vice presidents. Additional levels of senior management and corporate staff also support the 8 international field teams in many areas, including but not limited to food safety, quality assurance, training, marketing and technology. Franchise Operations. All franchisees are required to operate their Papa John’s restaurants in compliance with our policies, standards and specifications, including matters such as menu items, ingredients, and restaurant design. Franchisees generally have full discretion to determine the prices to be charged to customers, but we have the authority to set maximum price points for nationally advertised promotions. Franchise Advisory Council. We have a Franchise Advisory Council (“FAC”) that consists of Company and franchisee representatives of domestic restaurants. We also have a franchise advisory council in the United Kingdom (“UK FAC”). The FAC and UK FAC and subcommittees hold regular meetings to discuss new product and marketing ideas, operations, growth and other business issues. Certain domestic franchisees have also formed a separate franchise association for the purpose of communicating and addressing issues, needs and opportunities among its members. We currently communicate with, and receive input from, our franchisees in several forms, including through the FAC, UK FAC, annual operations conferences, system communications, national conference calls, various regional meetings conducted with franchisees throughout the year and ongoing communications from franchise business directors and international business directors in the field. Monthly webcasts are also conducted by the Company to discuss current operational, marketing or other issues affecting the franchisees’ business. We are committed to communicating with our franchisees and receiving input from them. Industry and Competition The United States Quick Service Restaurant pizza industry (“QSR Pizza”) is mature and highly competitive with respect to price, service, location, food quality and variety. There are well-established competitors with substantially greater financial and other resources than Papa John’s. The category is largely fragmented and competitors include international, national and regional chains, as well as a large number of local independent pizza operators. Some of our competitors have been in existence for substantially longer periods than Papa John’s and can have higher levels of restaurant penetration and stronger, more developed brand awareness in markets where we compete. According to industry sources, domestic QSR Pizza category sales, which includes dine-in, carry-out and delivery, totaled approximately $32.5 billion in 2013, or a decrease of 0.2% from the prior year. With respect to the sale of franchises, we compete with many franchisors of restaurants and other business concepts. In general, there is also active competition for management personnel and attractive commercial real estate sites suitable for our restaurants. Government Regulation We, along with our franchisees, are subject to various federal, state and local laws affecting the operation of our respective businesses. Each Papa John’s restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area. Our QC Centers are licensed and subject to regulation by state and local health and fire codes, and the operation of our trucks is subject to Department of Transportation regulations. We are also subject to federal and state environmental regulations. In addition, our domestic system-wide restaurant operations are subject to various federal and state laws governing such matters as minimum wage requirements, benefits, working conditions, citizenship requirements, and overtime. 9 We are subject to Federal Trade Commission (“FTC”) regulation and various state laws regulating the offer and sale of franchises. The laws of several states also regulate substantive aspects of the franchisor- franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. State laws that regulate the franchisor-franchisee relationship presently exist in a significant number of states and bills have been introduced in Congress from time to time that would provide for federal regulation of the U.S. franchisor-franchisee relationship in certain respects if such bills were enacted. The state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship. Further, national, state and local government regulations or initiatives, including health care legislation, “living wage,” menu labeling, or other current or proposed regulations and increases in minimum wage rates affect Papa John’s as well as others within the restaurant industry. As we expand internationally, we are subject to applicable laws in each jurisdiction where franchised units are established. Trademarks, Copyrights and Domain Names Our rights in our principal trademarks and service marks are a significant part of our business. We own the federal registration of the trademark “Papa John’s.” We have also registered “Pizza Papa John’s and design” (our logo), “Better Ingredients. Better Pizza.”, “Pizza Papa John’s Better Ingredients. Better Pizza. and design” and “Papa Rewards” as trademarks and service marks. We also own federal registrations for several ancillary marks, principally advertising slogans. We have also applied to register our primary trademark, “Pizza Papa John’s and design,” in more than 100 foreign countries and the European Community. We are aware of the use by other persons in certain geographical areas of names and marks that are the same as or similar to our marks. It is our policy to pursue registration of our marks whenever possible and to vigorously oppose any infringement of our marks. We hold copyrights in certain packaging, training and promotional materials used in our business. In addition, we have registered and maintain Internet domain names, including “Papajohns.com.” Employees As of December 29, 2013, we employed approximately 20,700 persons, of whom approximately 18,000 were restaurant team members, approximately 900 were restaurant management personnel, approximately 700 were corporate personnel and approximately 1,100 were QC Center and Preferred personnel. Most restaurant team members work part-time and are paid on an hourly basis. None of our team members is covered by a collective bargaining agreement. We consider our team member relations to be good. Item 1A. Risk Factors We are subject to various risks that could have a negative effect on our business, financial condition and results of operations. These risks could cause actual operating results to differ from those expressed in certain “forward looking statements” contained in this Form 10-K as well as in other Company communications. Although we believe our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward-looking statements as a result of various factors: We face competition from other food industry competitors, and our results of operations can be negatively impacted by the actions of one or more of our competitors. The QSR Pizza category and the restaurant industry in general are intensely competitive, and there are many well-established competitors with substantially greater financial and other resources than the Papa John’s system. Some of these competitors have been in existence for a substantially longer period than 10 Papa John’s and may be better established in the markets where restaurants operated by us or our franchisees are, or may be, located. Demographic trends, traffic patterns, the type, number and location of competing restaurants, and changes in pricing or other marketing initiatives or promotional strategies, including new product and concept developments, by one or more of our major competitors can have a rapid and adverse impact on our sales and earnings and our system-wide restaurant operations. Such an adverse impact could also be caused or exacerbated if our marketing incentives or new product offerings are not effective in driving sales or if we have insufficient funds to support effective advertising programs for our system. Changes in consumer preferences or discretionary consumer spending could adversely impact our results. Changes in consumer preferences and trends (for example, changes in dietary preferences that could cause consumers to avoid pizza in favor of foods that are perceived as healthier, lower-calorie or otherwise based on their nutritional content) could adversely affect our restaurant business. Also, our success depends to a significant extent on numerous factors affecting consumer confidence and discretionary consumer income, including higher tax rates domestically or in international markets, and adverse economic conditions such as continued high levels of unemployment, high fuel and energy costs and reduced access to credit. Such factors could cause consumers to spend less on food or shift to lower- priced products. Further adverse changes in these factors could reduce sales or inhibit our ability to increase pricing, either of which could materially adversely affect our results of operations. Food safety and quality concerns may negatively impact our business and profitability. Incidents or reports of food- or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene and cleanliness failures or improper employee conduct at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation and a decrease in customer traffic resulting from these reports could negatively impact our revenues and profits. Similar incidents or reports occurring at quick service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us. In addition, we rely on our domestic and international suppliers, as do our franchisees, to provide quality ingredients and to comply with applicable laws and industry standards. A failure of one of our domestic or international suppliers to meet our quality standards, or meet domestic or international food industry standards, could result in a disruption in our supply chain and negatively impact our brand and our business and profitability. Our success depends on the differentiation of our brand and maintaining the value and quality reputation of our brand, and any damage to consumers’ perception of our brand may negatively impact our business and profitability. Our results depend upon our ability to differentiate our brand and our reputation for quality. Our brand has been highly rated in U.S. surveys and we strive to build the value of our brand as we develop international markets. The value of our brand and demand for our products could be damaged by incidents that harm consumer perceptions of the Company and our brand, such as product recalls, food safety issues, privacy breaches, and related negative publicity. Social media can be used to promote adverse consumer perceptions with significantly greater speed and scope than traditional media outlets. As a result, the value of our brand and the demand for our products could be damaged and have an adverse effect on our financial results. 11 We may not be able to execute our strategy or achieve our planned growth targets, which could negatively impact our business and our financial results. Our growth strategy depends on the Company’s and our franchisees’ ability to open new restaurants and to operate them on a profitable basis. We may fail to attract new qualified franchisees or existing franchisees may close underperforming locations. Planned growth targets and the ability to operate new and existing restaurants profitably are affected by economic, regulatory and competitive conditions and consumer buying habits. Increased commodity or operating costs, including, but not limited to, employee compensation and benefits or insurance costs, could slow the rate of new store openings or increase the number of store closings. Our business is susceptible to adverse changes in local, national and global economic conditions, which could make it difficult for us to meet our growth targets. Additionally, we or our franchisees may face challenges securing financing, finding suitable store locations at acceptable terms or securing required domestic or foreign government permits and approvals. Our franchisees remain dependent on the availability of financing to remodel or renovate existing locations or construct and open new restaurants. The reduced availability of credit has required, and may continue to require, the Company to provide financing to certain franchisees and prospective franchisees in order to mitigate store closings or allow new units to open. If we are unable or unwilling to provide such financing, we may experience slower than expected new restaurant openings and our results of operations may be adversely impacted. To the extent we provide financing to franchisees in domestic and international markets, our results could be negatively impacted by the credit performance of our franchisee loans, particularly if our franchisees encounter worsening economic or political conditions in their markets. If we do not meet our growth targets or the expectations of the market for net restaurant openings, our stock price could decline. Our results of operations and the operating results of our franchisees may be adversely impacted by increases in the cost of food ingredients and other commodities. We are exposed to ongoing commodity volatility, and an increase in the cost, or sustained high levels of the cost, of cheese or other commodities could adversely affect the profitability of our system-wide restaurant operations, particularly if we are unable to increase the selling price of our products to offset costs. Cheese, historically representing 35% to 40% of our food cost, and other commodities can be subject to significant cost fluctuations due to weather, availability, global demand and other factors that are beyond our control. Additionally, increases in fuel, utility, and insurance costs could adversely affect the profitability of our restaurant and QC Center businesses. Most of the factors affecting costs are beyond our control, and we may not be able to pass along these costs to our customers or franchisees Our domestic franchisees buy substantially all of their food products from our QC Center business. Our dependence on a sole supplier or a limited number of suppliers for some ingredients could result in disruptions to our business. Domestic restaurants purchase substantially all food and related products from our QC Centers. Domestically, we are dependent on sole suppliers for our cheese and flour products, and internationally we are dependent on a sole supplier for substantially all our cheese. Alternative sources may not be available on a timely basis to supply these key ingredients or be available on terms as favorable to us as under our current arrangements. Our corporate and franchised restaurants could also be harmed by a prolonged disruption in the supply of products from or to our QC Centers due to weather, crop disease, interruption of service by carriers and other events beyond our control. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business. 12 Changes in purchasing practices by our domestic franchisees could harm our commissary business. Although our domestic franchisees currently purchase substantially all food products from our QC Centers, they are only required to purchase tomato sauce, dough and other items we may designate as proprietary or integral to our system from our QC Centers. Any changes in purchasing practices by domestic franchisees, such as seeking alternative approved suppliers of ingredients or other food products, could adversely affect the financial results of our QC Centers and the Company. Our international operations are subject to increased risks and other factors that may make it more difficult to achieve or maintain profitability or meet planned growth rates. Our international operations could be negatively impacted by changes in international economic, political and health conditions in the countries in which the Company or our franchisees operate. In addition, there are risks associated with differing business and social cultures and consumer preferences, diverse and sometimes uncertain or unstable government regulations and structures, limited availability and high cost of suitable restaurant locations, and difficulties in sourcing and importing high-quality ingredients and other commodities in a cost-effective manner. In addition, our international operations are subject to additional factors, including compliance with anti-corruption and other foreign laws, and various currency regulations and fluctuations. Accordingly, there can be no assurance that our international operations will maintain profitability or meet planned growth rates. We are subject to numerous laws and regulations governing our workforce and our operations. Changes in these laws, including health care legislation and minimum wage increases or additional laws could increase costs for our system-wide operations. Domestic system-wide restaurant operations are subject to federal and state laws governing such matters as wages, benefits, working conditions, citizenship requirements and overtime. A significant number of hourly personnel are paid at rates closely related to the federal and state minimum wage requirements. Accordingly, further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases above federal wage rates would increase labor costs for our domestic system- wide operations. Additionally, current conditions may make it easier for workers to form unions, potentially resulting in higher costs. Local government agencies have also implemented ordinances that restrict the sale of certain food or drink products. Compliance with additional government mandates, including menu labeling requirements, could increase costs and be harmful to system-wide restaurant sales. The Affordable Care Act, enacted in 2010, requires employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. We are evaluating the impact the law will have on our domestic operations, and although we cannot predict with certainty the financial impact of the legislation, we, like other industry competitors, expect that the requirement that we provide more extensive health benefits to employees than we currently provide, and/or fund a larger portion than previously funded, could negatively impact our results of operations once the legislation is fully implemented. We operate in an increasingly complex regulatory environment, and the cost of regulatory compliance is increasing. Failure to comply with applicable U.S. and international labor, health care, food, anti-bribery and corruption, consumer and other laws, may result in civil and criminal liability, damages, fines and penalties. This could harm our reputation, limit our ability to grow and adversely affect our financial performance. 13 Our expansion into emerging or under-penetrated domestic and international markets may present increased risks. Any or all of the risks listed above could be even more harmful to the financial viability of our franchisees or could significantly impact the operating results of the Company in markets where we have a Company-owned presence, such as China. A decline in or failure to improve financial performance could lead to reduced new restaurant openings or unit closings at greater than anticipated levels and therefore adversely impact our ability to achieve our targets for growth and results of operations as well as have a negative impact on market share. Our business and brand may be harmed should the services of our Founder, John Schnatter, as Chief Executive Officer, Chairman or brand spokesman terminate for any reason. Failure to effectively execute succession planning could harm our Company and brand. John H. Schnatter, our Founder, Chairman and Chief Executive Officer, does not serve under an employment agreement and we do not maintain key man life insurance on Mr. Schnatter. We also depend on the continued availability of Mr. Schnatter’s image and his services as spokesman in our advertising and promotion materials. While we have entered into a license agreement with Mr. Schnatter related to the use of certain intellectual property related to his name, likeness and image, our business and brand may be harmed if Mr. Schnatter’s services were not available to the Company for any reason or the reputation of Mr. Schnatter were negatively impacted. In addition, failure to effectively execute succession planning could harm our Company and brand. We may be required to resort to litigation to protect our intellectual property rights, which could negatively affect our results of operations. We depend on our Papa John’s brand name and rely on a combination of trademarks, copyrights, service marks and similar intellectual property rights to protect and promote our brand. We believe the success of our business depends on our continued ability to use our existing trademarks and service marks to increase brand awareness and further develop our brand, both domestically and abroad. We may not be able to adequately protect our intellectual property rights and we may be required to resort to litigation to enforce such rights. Litigation could result in high costs and diversion of resources, which could negatively affect our results of operations, regardless of the outcome. Disruptions of our critical business or information technology systems could harm our ability to conduct normal business. We rely heavily on information systems, including digital ordering solutions, through which over 45% of our domestic sales originate. We also rely heavily on point-of-sale processing in our restaurants for data collection and payment systems for the collection of cash, credit and debit card transactions, and other processes and procedures. Our ability to efficiently and effectively manage our business depends on the reliability and capacity of these technology systems. In addition, we anticipate that consumers will continue to have more options to place orders digitally, both domestically and internationally. Our failure to adequately invest in new technology, particularly our digital ordering capabilities, could cause us to lose our competitive advantage and have an adverse effect on our results. Our systems could be damaged or interrupted by power loss through various technological failures or acts of God. In particular, we may experience occasional interruptions of our digital ordering solutions, which make online ordering unavailable or slow to respond, negatively impacting sales and the experience of our customers. If our digital ordering solutions do not perform with adequate speed, our customers may be less inclined to return to our digital ordering solutions, as frequently or at all. If our systems do not 14 operate properly, we may need to upgrade or replace these systems, which could require material capital investment from us and our franchisees. Part of our technology infrastructure is specifically designed for us and our operational systems, which could cause unexpected costs, delays or inefficiencies when infrastructure upgrades are needed. If we experience prolonged and widespread technological difficulties with the planned rollout of our upgraded POS system, “FOCUS,” our domestic corporate and franchise operations could be disrupted, adversely impacting sales. Significant portions of our technology infrastructure are provided by third parties, and the performance of these systems is largely beyond our control. Failure of our third party systems, and backup systems, to adequately perform, particularly as our online sales grow, could harm our business and the satisfaction of our customers. In addition, we may not have or be able to obtain adequate protection or insurance to mitigate the risks of these events or compensate for losses related to these events, which could damage our business and reputation and be expensive and difficult to remedy or repair. We may incur significant costs resulting from a security breach, including a breach of confidential customer information from our digital ordering business. We are subject to a number of privacy and data protection laws and regulations. Our business requires the collection and retention of large volumes of internal and customer data, including credit card data and other personally identifiable information of our employees and customers housed in the various information systems we use. The integrity and protection of that customer, employee and Company data is critical to us. Although we take significant steps to prevent security breaches such as theft of customer and Company information, failure to prevent fraud or security breaches could harm our business and revenues due to the reputational damage to our brand. Such a breach could also result in litigation, penalties, and other significant costs to us and have a material adverse effect on our financial results. We have been and will continue to be subject to various types of litigation, including collective and class action litigation, which could subject us to significant damages or other remedies. We and our restaurant industry competitors are subject to the risk of litigation from various parties, including vendors, customers, franchisees and employees. We are involved in a number of lawsuits, claims, investigations, and proceedings consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. We are currently a defendant in a case containing collective and class action allegations. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may not be accurately estimated. We evaluate all of the claims and proceedings involving us to assess the expected outcome and where possible we estimate the amount of potential losses to us. In many cases, particularly collective and class action cases, we may not be able to estimate the amount of potential losses and/or our estimates may prove to be insufficient. These assessments are made by management based on the information available at the time made and require the use of a significant amount of judgment, and actual outcomes or losses may materially differ. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert resources away from our operations and negatively impact earnings. Further, we may not be able to obtain adequate insurance to protect us from these types of litigation matters or extraordinary business losses. We may be subject to impairment charges. Impairment charges are possible if our subsidiaries located in the United Kingdom (“PJUK”) and China or previously acquired domestic restaurants perform below our expectations. This could result in a decrease in our reported asset value and reduction in our net income. 15 Our results of operations could be materially impacted as a result of the credit risk of operators of leases for which we remain contingently liable. We remain contingently liable for certain restaurant and commissary leases previously operated by us and subsequently sold or refranchised. We enter into these arrangements as part of the process of disposing of or refranchising our stores in the ordinary course of business. While the new operators are the primary obligors under such assigned leases, we could be liable in the event that one or more new operators are unwilling or unable to make any required lease payments. Continuing weakness in the economy and difficulty in credit markets could make it difficult for these operators to meet their contractual commitments. If these operators default on the leases and we are unable to sublease the properties for which we remain contingently liable, it could have a material impact on our results of operations. Item 1B. Unresolved Staff Comments None. Item 2. Properties As of December 29, 2013, there were 4,428 Papa John’s restaurants system-wide. The following tables provide the locations of our restaurants. We define “North America” as the United States and Canada and “domestic” as the contiguous United States. North America Restaurants: Alabama………………………………………………………… Alaska........................................................................................... Arizona …………………………………………………………. Arkansas………………………………………………………... California……………………………………………………….. Colorado………………………………………………………... Connecticut……………………………………………………... Delaware………………………………………………………... District of Columbia……………………………………………. Florida…………………………………………………………... Georgia …………………………………………………………. Hawaii........................................................................................... Idaho……………………………………………………………. Illinois........................................................................................... Indiana.......................................................................................... Iowa.............................................................................................. Kansas........................................................................................... Kentucky………………………………………………………... Louisiana……………………………………………………….. Maine…………………………………………………………… Maryland………………………………………………………... Massachusetts…………………………………………………... Michigan………………………………………………………... Minnesota..................................................................................... Mississippi.................................................................................... Missouri........................................................................................ Montana........................................................................................ Nebraska....................................................................................... Company - - 39 - - 25 - - - 47 89 - - 6 41 - 13 43 - - 60 - - 33 - 41 - - Franchised 79 6 36 24 210 24 16 15 11 227 62 14 11 116 84 25 21 70 61 7 40 19 45 17 32 32 10 17 Total 79 6 75 24 210 49 16 15 11 274 151 14 11 122 125 25 34 113 61 7 100 19 45 50 32 73 10 17 16 North America Restaurants (continued): Company - Nevada………………………………………………………….. - New Hampshire………………………………………………… - New Jersey……………………………………………………… - New Mexico……………………………………………………. - New York………………………………………………………. 85 North Carolina………………………………………………….. - North Dakota…………………………………………………… - Ohio…………………………………………………………….. Oklahoma……………………………………………………….. - Oregon………………………………………………………….. - - Pennsylvania……………………………………………………. - Rhode Island……………………………………………………. 6 South Carolina………………………………………………….. - South Dakota…………………………………………………… 30 Tennessee……………………………………………………….. 81 Texas……………………………………………………………. - Utah…………………………………………………………….. - Vermont………………………………………………………… 26 Virginia…………………………………………………………. - Washington…………………………………………………....... - West Virginia…………………………………………………… - Wisconsin………………………………………………………. Wyoming……………………………………………………….. - 665 Total U.S. Papa John’s Restaurants…………………………. Canada………………………………………………………….. - 665 Total North America Papa John’s Restaurants……………… Franchised 23 2 79 16 124 81 5 157 30 14 97 5 58 12 79 173 32 1 112 54 22 27 8 2,542 79 2,621 International Restaurants: Azerbaijan………………………………………………………. Bahrain…………………………………………………………. Cayman Islands…………………………………………............ Chile............................................................................................. China............................................................................................ Colombia...................................................................................... Costa Rica..................................................................................... Cyprus.......................................................................................... Dominican Republic..................................................................... Ecuador......................................................................................... Egypt............................................................................................ El Salvador................................................................................... Guam............................................................................................ Guatemala..................................................................................... India.............................................................................................. Ireland........................................................................................... Jordan........................................................................................... Kuwait.......................................................................................... Lebanon........................................................................................ Malaysia....................................................................................... - - - - 58 - - - - - - - - - - - - - - - 2 19 2 23 144 20 18 8 11 14 21 14 2 2 20 53 7 28 3 25 17 Total 23 2 79 16 124 166 5 157 30 14 97 5 64 12 109 254 32 1 138 54 22 27 8 3,207 79 3,286 2 19 2 23 202 20 18 8 11 14 21 14 2 2 20 53 7 28 3 25 International Restaurants (continued): Mexico.......................................................................................... Nicaragua...................................................................................... Oman............................................................................................ Panama......................................................................................... Peru............................................................................................... Philippines.................................................................................... Puerto Rico................................................................................... Qatar............................................................................................. Russia........................................................................................... Saudi Arabia................................................................................. South Korea................................................................................. Trinidad........................................................................................ Turkey.......................................................................................... United Arab Emirates................................................................... United Kingdom........................................................................... Venezuela..................................................................................... Total International Papa John’s Restaurants........................... Company - - - - - - - - - - - - - - - - 58 Franchised 67 2 7 6 25 15 16 14 65 14 81 6 16 33 246 35 1,084 Total 67 2 7 6 25 15 16 14 65 14 81 6 16 33 246 35 1,142 Note: Company-owned Papa John’s restaurants include restaurants owned by majority-owned subsidiaries. There were 191 such restaurants at December 29, 2013 (25 in Colorado, 26 in Maryland, 33 in Minnesota, 81 in Texas, and 26 in Virginia). Most Papa John’s Company-owned restaurants are located in leased space. The initial term of most domestic restaurant leases is generally five years with most leases providing for one or more options to renew for at least one additional term. Generally, the leases are triple net leases, which require us to pay all or a portion of the cost of insurance, taxes and utilities. Additionally, we lease our Company-owned restaurant sites in Beijing and North China. At December 29, 2013, we leased and subleased to franchisees in the United Kingdom 168 of the 246 franchised Papa John’s restaurant sites. The initial lease terms on the franchised sites are generally 10 to 15 years. The initial lease terms of the franchisee subleases are generally five to ten years. In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we remain contingently liable for payment under approximately 30 lease arrangements, primarily associated with Perfect Pizza restaurant sites. Seven of our ten domestic QC Centers are located in leased space, including the following locations: Raleigh, NC; Denver, CO; Phoenix, AZ; Des Moines, IA; Portland, OR; Pittsburgh, PA; and Cranbury, NJ. Our remaining three locations are in buildings we own, located in: Orlando, FL; Dallas, TX; and Louisville, KY. Additionally, our corporate headquarters and our printing operations are located in Louisville, KY in buildings owned by us. Internationally, we own a full-service QC Center in the United Kingdom and lease office space near London. We also lease our QC Centers and office space in Beijing, China and Mexico City, Mexico. Item 3. Legal Proceedings The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Accounting Standards Codification (“ASC”) 450, “Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, 18 settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Agne v. Papa John’s International, Inc. et al. is a class action filed on May 28, 2010 in the United States District Court for the Western District of Washington seeking damages for violations of the Telephone Consumer Protection Act and Washington State telemarketing laws alleging, among other things that several Papa John’s franchisees retained a vendor to send unsolicited commercial text message offers primarily in Washington and Oregon. The court granted plaintiff’s motion for class certification in November 2012; we filed a petition for permission to appeal the court’s ruling on class certification to the United States Court of Appeals for the Ninth Circuit. In February 2013, the parties tentatively agreed to the financial terms of a settlement of the litigation. The court preliminarily approved the terms in June 2013 and granted final approval of the settlement and fee award in October 2013, following the close of the claims period. The actual settlement cost was $2.9 million, and all settlement and fee payments were made in 2013. Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective action filed in August 2009 in the United States District Court, Eastern District of Missouri, alleging that delivery drivers were not reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act. Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the action. Additionally, in late December 2013, the District Court granted a motion for class certification in five additional states, which could add an additional 5,000 to 10,000 plaintiffs to the case. We intend to vigorously defend against all claims in this lawsuit. However, given the inherent uncertainties of litigation, the outcome of this case cannot be predicted and the amount of any potential loss cannot be reasonably estimated. A negative outcome in this case could have a material adverse effect on the Company. Item 4. Mine Safety Disclosures None. 19 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the current executive officers of Papa John’s: Name John H. Schnatter Age (a) 52 Founder, Chairman and Chief Executive Officer Position First Elected Executive Officer Anthony N. Thompson 47 President and Chief Operating Officer Robert C. Kraut Timothy C. O’Hern Steve M. Ritchie Lance F. Tucker 54 50 39 44 Senior Vice President and Chief Marketing Officer Senior Vice President and Chief Development Officer Senior Vice President, Global Operations & Global Operations Support and Training Senior Vice President, Chief Financial Officer, Chief Administrative Officer, and Treasurer (a) Ages are as of January 1, 2014. 1985 2009 2013 2005 2012 2011 John H. Schnatter created the Papa John’s concept and started operations in 1984. He currently serves as Founder, Chairman and Chief Executive Officer. He previously served as Interim Chief Executive Officer from December 2008 to April 2009, Executive Chairman of the Company from 2005 until May 2007, as Chairman of the Board and Chief Executive Officer from 1990 until 2005, and as President from 1985 to 1990 and from 2001 until 2005. Anthony N. Thompson was appointed President in August 2013 and Chief Operating Officer in July 2012, after previously serving as Executive Vice President, Global Operations since July 2011. Mr. Thompson has served as President, PJ Food Service since May 2010. Mr. Thompson joined Papa John's in 2006 and has held the positions of Executive Vice President, North American Operations from December 2010 to July 2011, Senior Vice President, PJ Food Service from 2009 to May 2010 and Vice President, QCC Operations from 2006 to 2009. Prior to joining Papa John's, Mr. Thompson worked for the Scotts Company for six years as Plant Manager, Director of Marysville Operations and Director of Lawn and Controls Operations. Before joining the Scotts Company, Mr. Thompson spent four years with Conagra Grocery Products Company and seven years in various roles with Gulf Coast Coca Cola. Robert C. Kraut was appointed Senior Vice President and Chief Marketing Officer in October 2013. From 2010 until June 2013, Mr. Kraut served as Senior Vice President of Brand Marketing and Advertising at Arby’s Restaurant Group. From 2006 until 2009, Mr. Kraut served as Vice President of Marketing Communications for Pizza Hut, Inc. Before joining Pizza Hut, Mr. Kraut held various marketing and advertising positions at General Motors. Timothy C. O'Hern was appointed Senior Vice President and Chief Development Officer in July 2012. He previously served as Senior Vice President, Development since June 2009, a position he previously held 20 from 2005 until 2007. From 2002 until 2005 and from 2007 until 2009, he managed the operations of a Papa John's franchisee in which he has an ownership interest. Prior to his departure from Papa John's in 2002, Mr. O'Hern held various positions, including Vice President of Global Development from February 2001 to 2002, Vice President of U.S. Development from March 1997 to February 2001, Director of Franchise Development from December 1996 to March 1997 and Construction Manager from November 1995 to December 1996. He has been a franchisee since 1993. Steve M. Ritchie was appointed Senior Vice President, Global Operations & Global Operations Support and Training in May 2013. Mr. Ritchie is responsible for all aspects of restaurant operations, support and training for both Company-owned and franchised restaurants throughout the world. Mr. Ritchie has served in various capacities of increasing responsibility since joining Papa John’s in 1996, including Senior Vice President, North and Latin American Operations & Global OST from July 2012 to May 2013, Senior Vice President, North American Operations & Global OST from August 2011 until July 2012, Senior Vice President, Operations and Global OST from December 2010 until August 2011 and Vice President, Operations & Global OST from July 2010 until December 2010. Since 2006, he also has served as a franchise owner and operator of multiple units in the Company’s Midwest Division. Lance F. Tucker was appointed Chief Administrative Officer in July 2012 and Chief Financial Officer and Treasurer in February 2011. Mr. Tucker previously held the positions of Chief of Staff and Senior Vice President, Strategic Planning from June 2010 to February 2011, after serving as Chief of Staff and Vice President, Strategic Planning since June 2009. Mr. Tucker was previously employed by the Company from 1994 to 1999 working in its finance department. From 2003 to 2009, Mr. Tucker served as Chief Financial Officer of Evergreen Real Estate, a company owned by John Schnatter. Mr. Tucker is a licensed Certified Public Accountant. There are no family relationships among our executive officers and other key personnel. 21 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock trades on The NASDAQ Global Select Market tier of The NASDAQ Stock Market under the symbol PZZA. As of February 18, 2014, there were 805 record holders of common stock. However, there are significantly more beneficial owners of our common stock than there are record holders. The following table sets forth, for the quarters indicated, the high and low sales prices of our common stock, as reported by The NASDAQ Stock Market, and dividends declared per common share. All sales prices have been adjusted to reflect a two-for-one split of the Company’s outstanding shares of stock. The stock split was effected in the form of a stock dividend and entitled each shareholder of record at the close of business on December 12, 2013 to receive one additional share for every outstanding share of stock held on the record date. The stock dividend of approximately 21.0 million shares of stock was distributed on December 27, 2013. 2013 First Quarter Second Quarter Third Quarter Fourth Quarter High $ 31.16 33.61 36.20 46.12 $ Low 24.94 29.50 32.78 33.88 2012 First Quarter Second Quarter Third Quarter Fourth Quarter High $ 20.41 25.23 28.21 27.34 $ Low 18.13 18.28 22.60 23.21 Dividends Declared per Share - $ - 0.125 0.125 Dividends Declared per Share $ - - - - Our Board of Directors declared a quarterly dividend of $0.125 per share on January 30, 2014 that was payable on February 21, 2014 to shareholders of record at the close of business on February 10, 2014. We anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends is subject to declaration by our Board of Directors and will depend upon future earnings, results of operations, capital requirements, our financial condition and other relevant factors. There can be no assurance that the Company will continue to pay quarterly cash dividends. Our Board of Directors has authorized the repurchase of up to $1.2 billion of common stock under a share repurchase program that began December 9, 1999, and expires December 31, 2014. Through December 29, 2013, a total of 103.0 million shares with an aggregate cost of $1.1 billion and an average price of $10.46 per share have been repurchased under this program. Subsequent to year-end, we acquired an additional 236,000 shares at an aggregate cost of $11.0 million. Approximately $110.9 million remained available under the Company’s share repurchase program as of February 18, 2014. 22 The following table summarizes our repurchase activity by fiscal period during the fourth quarter ended December 29, 2013, as adjusted for the two-for-one stock split, (in thousands, except per share amounts): Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Fiscal Period 09/30/2013 - 10/27/2013 10/28/2013 - 11/24/2013 11/25/2013 - 12/29/2013 146 1,034 101 $35.33 $38.59 $43.47 101,913 102,947 103,048 $166,143 $126,246 $121,875 The Company retired all common stock shares held in treasury as of October 29, 2013 in connection with the stock split. The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise. Stock Performance Graph The following performance graph compares the cumulative shareholder return of the Company's common stock for the five-year period between December 28, 2008 and December 29, 2013 to (i) the NASDAQ Stock Market (U.S.) Index and (ii) a group of the Company's peers consisting of U.S. companies listed on NASDAQ with standard industry classification (SIC) codes 5800-5899 (eating and drinking places). Management believes the companies included in this peer group appropriately reflect the scope of the Company’s operations and match the competitive market in which the Company operates. The graph assumes the value of the investments in the Company's common stock and in each index was $100 on December 28, 2008, and that all dividends were reinvested. Papa John's International, Inc. Papa John's International, Inc. Papa John's International, Inc. NASDAQ Stock Market (U.S. Companies) NASDAQ Stock Market (U.S. Companies) NASDAQ Stock Market (U.S. Companies) NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking Dec. 30, 2012 Dec. 30, 2012 300.23 Dec. 30, 2012 300.23 300.23 202.46 202.46 202.46 368.52 368.52 368.52 Dec. 29, 2013 Dec. 29, 2013 Dec. 29, 2013 514.23 514.23 514.23 286.22 286.22 286.22 565.22 565.22 565.22 Item 6. Selected Financial Data The selected financial data presented for each of the fiscal years in the five-year period ended December 29, 2013, were derived from our audited consolidated financial statements. The selected financial data below 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. (In thousands, except per share data) Year Ended (1) Income Statement Data North America revenues: Domestic Company-owned restaurant sales Franchise royalties (2) Franchise and development fees Domestic commissary sales Other sales International revenues: Royalties and franchise and development fees (3) Restaurant and commissary sales (4) Total revenues Operating income (5) Investment income Interest expense Income before income taxes Income tax expense Net income before attribution to noncontrolling interests Income attributable to noncontrolling interests (6) Net income attributable to the Company Dec. 29, 2013 Dec. 30, 2012 Dec. 25, 2011 Dec. 26, 2010 Dec. 27, 2009 52 weeks 53 weeks 52 weeks 52 weeks 52 weeks $ 635,317 81,692 1,181 578,870 53,322 21,979 66,661 1,439,022 106,503 589 (983) 106,109 33,130 72,979 (3,442) 69,537 $ $ 592,203 79,567 806 545,924 51,223 $ 525,841 73,694 722 508,155 50,912 $ 503,272 69,631 610 454,506 51,951 $ 503,818 62,083 912 417,689 54,045 19,881 53,049 1,342,653 99,807 750 (2,162) 98,395 32,393 66,002 (4,342) 61,660 $ 16,327 42,231 1,217,882 87,017 755 (2,981) 84,791 26,324 58,467 (3,732) 54,735 $ 13,265 33,162 1,126,397 86,744 875 (4,309) 83,310 27,247 56,063 (3,485) 52,578 $ 11,780 28,223 1,078,550 95,218 629 (11,660) 84,187 26,702 57,485 (3,756) 53,729 $ Net income attributable to common shareholders $ 68,497 $ 61,660 $ 54,735 $ 52,578 $ 53,729 Basic earnings per common share (7) $ 1.58 $ 1.31 $ 1.09 $ 1.00 $ 0.97 Earnings per common share - assuming dilution (7) $ 1.55 $ 1.29 $ 1.08 $ 0.99 $ 0.96 Basic weighted average common shares outstanding (7) Diluted weighted average common shares outstanding (7) 43,387 44,243 46,916 47,810 50,086 50,620 52,656 52,936 55,476 55,818 Dividends declared per common share $ 0.25 $ - $ - $ - $ - Balance Sheet Data Total assets Total debt Mandatorily redeemable noncontrolling interests (8) Redeemable noncontrolling interests Redeemable noncontrolling interests, including Total stockholders’ equity $ 464,291 157,900 10,786 7,024 138,184 $ 438,408 88,258 11,837 6,380 181,514 $ 390,382 51,489 11,065 3,965 205,647 $ 417,492 99,017 9,972 3,512 195,608 $ 396,009 99,050 10,960 3,215 173,145 (1) We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. The 2012 fiscal year consisted of 53 weeks and all other years above consisted of 52 weeks. The additional week resulted in additional revenues of approximately $21.5 million and additional income before income taxes of approximately $4.1 million, or $0.05 per diluted share for 2012. (2) North America franchise royalties were derived from franchised restaurant sales of $1.91 billion in 2013, $1.85 billion in 2012 ($1.82 billion on a 52 week basis), $1.71 billion in 2011, $1.62 billion in 2010, and $1.58 billion in 2009. (3) International royalties were derived from franchised restaurant sales of $460.0 million in 2013, $388.4 million in 2012 ($379.4 million on a 52 week basis), $320.0 million in 2011, $258.8 million in 2010, and $222.2 million in 2009. (4) Restaurant sales for international Company-owned restaurants were $22.7 million in 2013, $16.2 million in 2012, $12.4 million in 2011, $11.0 million in 2010, and $10.3 million in 2009. 24 (5) The operating results include the consolidation of BIBP Commodities, Inc. (“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 BIBP for past cheese purchases an amount equal to its accumulated deficit). BIBP increased operating income by $23.3 million in 2009 (break-even results in 2011 prior to dissolution). (6) Represents the noncontrolling interests’ allocation of income for our joint venture arrangements. (7) Adjusted to reflect a two-for-one stock split effected in the form of a stock dividend to stockholders of record on December 12, 2013. (8) Mandatorily 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 1984. At December 29, 2013, there were 4,428 Papa John’s restaurants in operation, consisting of 723 Company-owned and 3,705 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 2013 were 386 as compared to 368 in 2012 and 321 in 2011 and unit closings in 2013 were 121 as compared to 88 in 2012 and 84 in 2011. We expect net unit growth of approximately 220 to 250 units during 2014. 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 environment. Average annual Company-owned sales for our most recent comparable restaurant base were $988,000 for 2013 (52-week year), compared to $953,000 for 2012 (53-week year) and $897,000 for 2011 (52-week year). 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 6.6% in 2013, 5.6% in 2012, and 4.1% in 2011. We continue to be pleased with the ongoing growth in both our domestic and international franchise restaurant sales. The comparable sales for North America franchised units increased 3.1% in 2013, 2.9% in 2012 and 3.1% in 2011. The comparable sales for International franchised units increased 7.5% in 2013, 7.1% in 2012 and 5.1% in 2011. “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 13 domestic traditional Company-owned restaurants opened during 2013 was approximately $280,000, compared to the $260,000 investment for the eight units opened in 2012, exclusive of land and any tenant improvement allowances we received. We also opened 11 Company-owned restaurants in China, with an average investment cost of approximately $225,000 which compares to $240,000 for the 20 restaurants opened in 2012, on a constant dollar basis. 25 Approximately 43% to 47% of our domestic revenues for the last three years were derived from sales to franchisees of various items including food and paper products, printing and promotional items, risk management services and information systems equipment and software and related services. 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 (“GAAP”). 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: 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. Balances are charged off against the allowance after recovery efforts have ceased. Noncontrolling Interests The Company had the following four joint ventures in which there are noncontrolling interests as of December 29, 2013: Joint Venture Redemption Feature Location within the Consolidated Balance Sheet Recorded value Colonel’s Limited, LLC Mandatorily redeemable Other long-term liabilities Star Papa, LP PJ Denver, LLC PJ Minnesota, LLC Redeemable Redeemable No redemption feature Temporary equity Temporary equity Permanent equity Redemption value Carrying value Redemption value Carrying value Consolidated net income is required to be reported separately at amounts attributable to both to the parent and the noncontrolling interest. 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 of income attributable to the noncontrolling interest holder. See “Note 6” of “Notes to Consolidated Financial Statements” for additional information. Stock Based Compensation Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures and is recognized over the vesting period (generally in equal installments over three years). Restricted stock is valued based on the market price of the Company’s shares on the date of grant. Stock options are valued using a Black-Scholes option pricing model. 26 Our specific assumptions for estimating the fair value of options include the following: Assumptions (weighted average): Risk-free interest rate Expected dividend yield Expected volatility Expected term (in years) 2013 2012 2011 1.1% 0.1% 37.5% 6.0 1.1% 0.0% 37.8% 6.0 1.5% 0.0% 41.2% 3.7 The risk-free interest rate for the periods within the contractual life of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the annual dividend divided by the market price of the Company’s shares on the date of grant. Expected volatility was estimated by using the Company’s historical share price volatility for a period similar to the expected life of the option. See “Note 18” of “Notes to Consolidated Financial Statements” for additional information. 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. We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist. We applied the qualitative assessment for 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 were greater than their carrying amounts. With respect to the reporting unit for our subsidiary located in the United Kingdom (“PJUK”), which represents $15.7 million of goodwill as of December 29, 2013, we bypassed the qualitative assessment and performed the two-step quantitative goodwill impairment test, which indicated the fair value significantly exceeded the carrying amount. The fair value was calculated using an income approach that projected net cash flow, with various growth assumptions, 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. See “Note 8” of “Notes to Consolidated Financial Statements” for additional information. 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. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information. 27 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 29, 2013, we had a net deferred income tax liability of approximately $6.7 million. 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 a decrease of $909,000 and $711,000 in income tax expense associated with the finalization of certain income tax issues in 2013 and 2011, respectively. In 2012, we recognized additional income tax expense of approximately $305,000. See “Note 15” of “Notes to Consolidated Financial Statements” for additional information. 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 2013 and 2011 fiscal years consisted of 52 weeks while our 2012 fiscal year consisted of 53 weeks, including a six-week period in the fourth quarter. The additional week in 2012 resulted in additional revenues of approximately $21.5 million and additional income before income taxes of $4.1 million, or $0.05 per diluted common share. Two-for-One Stock Split The Company completed a two-for-one stock split of the Company’s outstanding shares of stock in December 2013 effected in the form of a stock dividend. Shareholders of record on December 12, 2013 received one additional share for each outstanding share of stock held on the record date. The stock dividend was distributed effective December 27, 2013. All share and per-share amounts have been adjusted to reflect the stock split. 28 Items Impacting Comparability; Non-GAAP Measures The following table reconciles our financial results as reported under 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. (In thousands, except per share amounts) Total revenues, as reported 53rd week of operations (a) Total revenues, as adjusted Income before income taxes, as reported 53rd week of operations (a) Incentive Contribution (b) Income before income taxes, as adjusted Net income, as reported 53rd week of operations (a) Incentive Contribution (b) Net income, as adjusted Earnings per diluted common share, as reported 53rd week of operations (a) Incentive Contribution (b) Earnings per diluted common share, as adjusted Dec. 29, 2013 $ 1,439,022 - $ 1,439,022 Year Ended Dec. 30, 2012 $ $ 1,342,653 (21,500) 1,321,153 Dec. 25, 2011 $ 1,217,882 - $ 1,217,882 $ $ $ 106,109 - (1,000) 105,109 69,537 - (660) 68,877 1.55 - (0.02) 1.53 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 98,395 (4,145) 2,971 97,221 61,660 (2,634) 1,955 60,981 1.29 (0.05) 0.04 1.28 84,791 - - 84,791 54,735 - - 54,735 1.08 - - 1.08 (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. The 2012 impact of the 53rd week on income before income taxes was an increase of $4.1 million, or $0.05 earnings per diluted common share. (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). In 2012, the Company contributed the supplier marketing payment to the Papa John’s Marketing Fund (“PJMF”), an unconsolidated nonstock corporation designed to operate at break even for the purpose of designing and administering advertising and promotional programs for all participating 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 these transactions described above, which are collectively defined as the “Incentive Contribution,” was an increase in income before income taxes of approximately $1.0 29 million in 2013 (or an increase in diluted earnings per common share of approximately $0.02) and a reduction in income before income taxes of approximately $3.0 million in 2012 (or a reduction to diluted earnings per share of approximately $0.04) 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 and analyzing each segment’s operating 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 “Results of Operations” 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. 30 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: Income Statement Data: North America revenues: Domestic Company-owned restaurant sales Franchise royalties Franchise and development fees Domestic commissary sales Other sales International revenues: Royalties and franchise and development fees Restaurant and commissary sales Total revenues Costs and expenses: Domestic Company-owned restaurant cost of sales (2) Domestic Company-owned restaurant operating expenses (2) Domestic commissary cost of sales (3) Domestic commissary operating expenses (3) Other operating expenses (4) International restaurant and commissary expenses (5) General and administrative expenses Other general expenses Depreciation and amortization Total costs and expenses Operating income Net interest expense Income before income taxes Income tax expense Net income before attribution to noncontrolling interests Income attributable to noncontrolling interests Net income attributable to the Company Dec. 29, 2013 Year Ended (1) Dec. 30, 2012 Dec. 25, 2011 52 weeks 53 weeks 52 weeks 44.2% 5.7 0.1 40.2 3.7 1.5 4.6 100.0 24.6 56.9 77.5 14.8 90.0 84.9 9.3 0.5 2.4 92.6 7.4 (0.1) 7.3 2.3 5.0 (0.2) 4.8% 44.1% 5.9 0.1 40.7 3.8 1.5 3.9 100.0 23.2 57.1 78.1 14.2 88.7 84.6 9.8 0.6 2.4 92.6 7.4 (0.1) 7.3 2.4 4.9 (0.3) 4.6% 43.2% 6.1 0.1 41.7 4.2 1.3 3.4 100.0 24.1 56.9 78.2 14.1 91.0 84.5 9.2 0.8 2.7 92.9 7.1 (0.1) 7.0 2.2 4.8 (0.3) 4.5% 31 Year Ended (1) Dec. 29, Dec. 30, Dec. 25, 2012 2013 2011 Restaurant Data: Percentage increase in comparable domestic Company-owned restaurant sales (6) Number of Company-owned restaurants included in the most recent full year's comparable restaurant base Average sales for Company-owned restaurants included 52 weeks 53 weeks 52 weeks 6.6% 5.6% 4.1% 633 615 581 in the most recent comparable restaurant base $988,000 $953,000 $897,000 Papa John's Restaurant Progression: North America Company-owned: Beginning of period Opened Closed Acquired from franchisees Sold to franchisees End of period International Company-owned: Beginning of period Opened Closed End of period North America franchised: Beginning of period Opened Closed Acquired from Company Sold to Company End of period International franchised: Beginning of period Opened Closed End of period Total Papa John's restaurants - end of period 648 19 (2) - - 665 48 11 (1) 58 2,556 152 (87) - - 2,621 911 204 (31) 1,084 4,428 598 8 (3) 57 (12) 648 30 20 (2) 48 2,463 182 (44) 12 (57) 2,556 792 158 (39) 911 4,163 591 8 (1) - - 598 21 9 - 30 2,346 166 (49) - - 2,463 688 138 (34) 792 3,883 (1) We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. The 2013 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 $0.05 per diluted common share. (2) As a percentage of domestic Company-owned restaurant sales. (3) As a percentage of domestic commissary sales. (4) As a percentage of other sales. (5) As a percentage of international restaurant and commissary sales. (6) Includes only Company-owned restaurants open throughout the periods being compared. 32 Results of Operations 2013 Compared to 2012 Discussion of Revenues. Consolidated revenues increased $96.4 million, or 7.2%, to $1.44 billion in 2013, compared to $1.34 billion in 2012. Revenues are summarized in the following table on a reporting segment basis. Alongside the GAAP financial statement data, we have included certain additional “non- GAAP” measures that the Company believes are important for purposes of comparing to prior year results and analyzing each segment’s revenue trends. Excluding the impact of the 53rd week of operations in 2012, which approximated $21.5 million, revenues increased 8.9%. (In thousands) North America Revenues: Domestic company-owned restaurant sales Franchise royalties Franchise and development fees Domestic commissary sales Other sales International Revenues: Royalties and franchise and development fees Restaurant and commissary sales Total Revenues Year Ended Dec. 29, 2013 52 weeks Dec. 30, 2012 53 weeks Increase 53rd Week Adjusted Increase- $ (*) Adjusted Increase- % (*) $ 635,317 81,692 1,181 578,870 53,322 $ 592,203 79,567 806 545,924 51,223 $ 43,114 2,125 375 32,946 2,099 $ 10,600 1,400 - 8,500 200 $ 53,714 3,525 375 41,446 2,299 21,979 66,661 1,439,022 $ 19,881 53,049 1,342,653 $ 2,098 13,612 96,369 $ 150 650 21,500 $ 2,248 14,262 117,869 $ 9.2% 4.5% 46.5% 7.7% 4.5% 11.4% 27.2% 8.9% The increase in revenues in 2013 compared to 2012 was primarily due to the following: • Domestic Company-owned restaurant sales increased $43.1 million, or 7.3%. Excluding the $10.6 million impact of the 53rd week in 2012, sales increased $53.7 million, or 9.2%, primarily due to an increase in comparable sales of 6.6% and the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012. • North America franchise royalty revenues increased $2.1 million, or 2.7%. Excluding the $1.4 million impact of the 53rd week in 2012, revenues increased approximately $3.5 million, or 4.5%, due to an increase in comparable sales of 3.1% and an increase in net franchise units over the prior year. This increase was slightly offset by reduced royalties attributable to the Company’s net acquisition of the 50 restaurants noted above. • • Domestic commissary sales increased $32.9 million, or 6.0%. Excluding the $8.5 million impact of the 53rd week in 2012, sales increased $41.4 million, or 7.7%, primarily due to higher commissary product volumes, primarily resulting from increases in the volume of restaurant sales, higher overall margins and increases in the prices of underlying commodities. International royalties and franchise and development fees increased $2.1 million or 10.6%. Excluding the $150,000 impact of the 53rd week in 2012, royalties and fees increased $2.2 million, or 11.4%. This was primarily due to an increase in units and comparable sales of 7.5%. International restaurant and commissary sales increased $13.6 million, or 25.7%. Excluding the $650,000 impact of the 53rd week in 2012, sales increased $14.3 million, or 27.2%. The increase was primarily due to an increase in China Company-owned restaurant sales due to an increase in units. In addition, we are no longer consolidating China one month in arrears, which puts China on the same reporting cycle as our Domestic operations. The inclusion of the additional month of operations in fiscal 2013 resulted in $2.1 million of incremental revenues and an incremental loss before income taxes of $215,000, which is not material to our consolidated financial statements. • 33 United Kingdom commissary revenues also increased due to both an increase in units and higher comparable sales. Discussion of Operating Results Our income before income taxes totaled $106.1 million in 2013, as compared to $98.4 million in 2012, an increase of approximately $7.7 million. Income before income taxes is summarized in the following table on a reporting segment basis. Alongside the GAAP financial statement data, we have included certain additional “non-GAAP’ measures that the Company believes are important for purposes of comparing to prior year results and analyzing each segment’s operating results. (In thousands) Domestic company-owned restaurants Domestic commissaries North America franchising International All others Unallocated corporate expenses Elimination of intersegment profits Total income before income taxes Year Ended Dec. 29, 2013 52 weeks Dec. 30, 2012 53 weeks Increase/ (Decrease) Week (a) 53rd Incentive Contribution (b) Adjusted Increase/ (Decrease) (c) $ $ $ $ $ 34,590 37,804 70,201 2,803 3,490 (41,025) (1,754) 106,109 38,114 34,317 69,332 3,063 2,889 (48,958) (362) 98,395 (3,524) 3,487 869 (260) 601 7,933 (1,392) 7,714 1,609 1,200 1,414 414 215 (707) - 4,145 $ 1,029 - - - (5,000) - (3,971) $ $ $ $ $ $ (886) 4,687 2,283 154 816 2,226 (1,392) 7,888 (a) The 53rd week of operations increased income before income taxes by approximately $4.1 million in 2012. The “Adjusted Increase/(Decrease)” column eliminates the impact of the 53rd week so that the 52 weeks of 2013 can be compared to an equivalent 52 weeks in 2012. (b) Includes the $5.0 million of expense related to the 2012 Incentive Contribution to PJMF and the related benefit of a $1.0 million advertising credit from PJMF that was received by the Domestic Company-owned restaurants. The annual amortization of the $5.0 million ($1.0 million per year) is the same in both years presented. The “Adjusted Increase/(Decrease)” column eliminates the impact of the Incentive Contribution for comparability. (c) See “Items Impacting Comparability; Non-GAAP Measures” previously discussed for further information. The impact of the 53rd week in 2012 substantially offset the impact of the Incentive Contribution. Changes in income before income taxes for 2013 in comparison to 2012 are summarized on a segment basis as follows: • Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes decreased $3.5 million. Excluding the 2012 impact of the 53rd week and the Incentive Contribution of approximately $2.6 million, income decreased $900,000 due to higher commodity costs of approximately $5.8 million, largely offset by incremental profits associated with higher comparable sales of 6.6%. Additionally, 2012 benefited from various supplier incentives of approximately $1.0 million. • Domestic Commissary Segment. Domestic commissaries’ income before income taxes increased $3.5 million. Excluding the impact of the 53rd week in 2012 of approximately $1.2 million, income increased $4.7 million. The increase was primarily due to higher commissary product volumes, resulting from increased restaurant sales volumes from the previously noted increase in net units and comparable sales, and higher margins. The incremental profits from higher sales were somewhat offset by higher costs of approximately $1.4 million related to 34 bringing distribution in house at certain of our commissaries from a third party provider. In addition, we had one-time dough production start up costs at our New Jersey commissary of approximately $700,000 in 2013. • • North America Franchising Segment. North America franchising income before income taxes increased approximately $900,000 in 2013. Excluding the impact of the 53rd week in 2012 of approximately $1.4 million, income increased approximately $2.3 million due to the previously mentioned royalty revenue increase, partially offset by both an increase in incentives and a reduction in royalties attributable to the Company’s net acquisition of the 50 Denver and Minneapolis restaurants. International Segment. The international segment reported income before income taxes of approximately $2.8 million in 2013 compared to $3.1 million in 2012, a decrease of approximately $300,000. Excluding the 2012 impact of the 53rd week of approximately $400,000, income increased approximately $150,000. This increase was primarily due to the increase in units and comparable sales of 7.5%, which provided higher royalties. Additionally, United Kingdom results improved by approximately $1.0 million due to increased units and higher comparable sales. These increases were substantially offset by higher operating losses in our Company-owned China market of approximately $2.1 million, including $215,000 of incremental losses associated with the additional month of operations in the fourth quarter of 2013, as previously discussed. The losses in the China market include a reduction in operating results at our Company-owned restaurants, primarily associated with new stores, as well as write off costs associated with closing one location and the disposition of certain other assets. Additionally, 2013 reflects higher infrastructure and support costs to expand in this underpenetrated market. Based on prior experience in underpenetrated markets, some operating losses can occur as the business is being established. • All Others Segment. The “All others” segment income increased approximately $600,000. Excluding the impact of the 53rd week in 2012 of approximately $200,000, income increased approximately $800,000. The increase was primarily due to an improvement in our online and mobile ordering (“eCommerce”) business due to higher online volumes. This increase was somewhat offset by reduced operating results at our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions (“Preferred”), due to reduced cost direct mail campaigns offered to our domestic franchised restaurants. • Unallocated Corporate Segment. Unallocated corporate expenses decreased $7.9 million. Excluding the impact of the 53rd week and the Incentive Contribution in 2012 of $5.7 million, expenses decreased $2.2 million. The components of unallocated corporate expenses excluding the 53rd week and the Incentive Contribution were as follows (in thousands): Year Ended December 29, 2013 Year Ended December 30, 2012 Increase (Decrease) General and administrative (a) Net interest expense (b) Depreciation expense Perfect Pizza lease obligation (c) Other (income) (d) Total unallocated corporate expenses $ $ $ 34,819 482 6,845 305 (426) 42,025 36,911 1,476 7,193 (135) (1,194) 44,251 (2,092) (994) (348) 440 768 (2,226) $ $ $ (a) The decrease in unallocated general and administrative costs was primarily due to 2012 including higher legal and professional fees of approximately $3.2 million, primarily associated with the Agne litigation reserves (see “Note 17” of “Notes to Consolidated Financial Statements” for additional information). In addition, management incentives, net of salary increases, were lower in 2013 by approximately $1.5 million. This was offset by 35 various other general and administrative cost increases including higher travel, operator’s conference and information technology costs. (b) The decrease in net interest was primarily due to a decrease in the change in redemption value of a mandatorily redeemable noncontrolling interest in a joint venture, partially offset by higher interest costs on our line of credit due to both a higher average debt balance and a higher effective interest rate. (c) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former Perfect Pizza operations in the United Kingdom. See “Note 17” of “Notes to Consolidated Financial Statements” for additional information. (d) Other income was lower primarily due to higher expenses associated with our online customer loyalty program. Diluted earnings per common share were $1.55 in 2013, compared to $1.29 in 2012, an increase of $0.26, or 20.2%. As previously discussed, the 2012 benefit of the 53rd week of operations was substantially offset by the impact of the Incentive Contribution. Diluted earnings per common share increased $0.12 due to the 7.5% reduction in weighted average shares outstanding. Review of Consolidated Operating Results Revenues. Domestic Company-owned restaurant sales were $635.3 million for 2013 compared to $592.2 million for 2012. As previously noted, the 7.2% increase was primarily due to a 6.6% increase in comparable sales and the net acquisition of 50 restaurants in Denver and Minneapolis from a franchisee in the second quarter of 2012. Excluding the impact of the 53rd week in 2012 of $10.6 million, revenues increased 9.2%. North America franchise sales increased 3.0% to $1.91 billion, from $1.85 billion in 2012, as domestic franchise comparable sales increased 3.1% and equivalent units increased 3.2%, somewhat offset by the impact of the 53rd week in 2012. “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 $81.7 million, representing an increase of 2.7% from the comparable period. As previously noted, this increase is due to the franchise comparable sales increase and an increase in units. Excluding the impact of the 53rd week in 2012 of $1.4 million, royalties increased 4.5%. 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. 36 The comparable sales base and average weekly sales for 2013 and 2012 for domestic Company-owned and North America franchised restaurants consisted of the following: Total domestic units (end of period) Equivalent units Comparable sales base units Comparable sales base percentage Average weekly sales - comparable units Average weekly sales - total non-comparable units* Average weekly sales - all units Year Ended December 29, 2013 Domestic Company- owned North America Franchised Year Ended December 30, 2012 North America Franchised Domestic Company- owned 665 649 633 97.5% 18,995 12,167 18,832 $ $ $ 2,621 2,492 2,263 90.8% 15,171 10,092 14,704 $ $ $ 648 624 615 98.6% 17,987 12,604 17,908 $ $ $ 2,556 2,415 2,190 90.7% 14,870 10,389 14,453 $ $ $ *Includes 185 traditional units in 2013 and 215 in 2012 and 184 non-traditional units in 2013 and 158 in 2012. North America franchise and development fees were approximately $1.2 million in 2013, or an increase of approximately $375,000 from 2012. Domestic commissary sales increased 6.0% to $578.9 million in 2013, from $545.9 million in the prior year. Excluding the impact of the 53rd week in 2012, the increase was 7.7%. As previously discussed, the increase was primarily due to an increase in sales volumes, higher overall margins and increases in the prices of commodities. 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 $1.76 per pound in 2013 from $1.69 per pound in 2012. Other sales increased $2.1 million to $53.3 million in 2013. Excluding the impact of the 53rd week in 2012, the increase was $2.3 million, or 4.5%. The increase primarily resulted from an increase in online fees due to higher online volumes. International franchise restaurant sales were $460.0 million in 2013, compared to $388.4 million in 2012. International franchise restaurant sales are not included in our consolidated statements of income; however, our international royalty revenue is derived from these sales. Total international revenues in our consolidated financial statements were $88.6 million for 2013 compared to $72.9 million in 2012, an increase of $15.7 million. This increase was primarily attributable to an increase in China Company- owned restaurant sales due to an increase in restaurants and an additional month of reported results, as previously discussed. Additionally, royalties and commissary sales increased due to an increase in franchised units and the 7.5% increase in comparable sales, calculated on a constant dollar basis. Our PJUK operations represented 48% of international revenues in 2013 and 51% in 2012 and our China Company-owned operations represented approximately 28% of international revenues in 2013 and 22% in 2012. 37 Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 18.5% in 2013 compared to 19.7% in 2012 (19.5% excluding the $1.0 million advertising credit from PJMF). The decrease of 1.2% consisted of the following differences: • Cost of sales was 1.4% higher as a percentage of sales in 2013 due to both higher commodity costs of approximately $5.8 million, including cheese, dough and meats, as well as lower national promotion pricing. 2012 also included various supplier incentives, as previously noted. • Salaries and benefits were 0.3% lower as a percentage of sales in 2013, primarily due to the benefit of higher sales volumes. • Advertising and related costs as a percentage of sales were relatively flat year-over-year; 2012 included a $1.0 million advertising credit received from PJMF. • Occupancy costs and other operating costs, on a combined basis as a percentage of sales, were relatively consistent (20.3% in 2013 and 20.4% in 2012). Domestic commissary operating margin was 7.7% in both 2013 and 2012, with the following differences by income statement line: • Cost of sales was 0.6% lower as a percentage of revenues in 2013 primarily due to pricing changes. • Salaries and benefits as a percentage of revenues were relatively consistent (4.3% in 2013 and 4.1% in 2012). • Other operating expenses were 0.4% higher as a percentage of revenues. This was primarily attributable to higher distribution and other operating costs related to bringing distribution in house for certain of our commissaries from a third party provider and the start up dough production costs at our New Jersey commissary, as previously discussed. Other operating expenses as a percentage of other sales were 90.0% in 2013, compared to 88.7% in 2012. The higher operating expenses were primarily due to the impact of the reduced cost direct mail campaigns offered to our domestic franchised restaurants by Preferred. International restaurant and commissary expenses were 84.9% in 2013 compared to 84.6% in 2012, as a percentage of total restaurant and commissary sales. The increase of 0.3% is primarily attributable to the higher operating expenses associated with our China Company-owned restaurant operations. As previously noted, our China Company-owned restaurant operations represented approximately 28% of international revenues in 2013 and 22% in 2012, an increase of 6%, and our PJUK operations represented 48% of international revenues in 2013, a decrease of 3%. General and administrative expenses were $134.2 million, or 9.3% of revenues for 2013, as compared to $131.6 million, or 9.8% of revenues for 2012. The decrease as a percentage of sales was primarily the result of leverage from higher sales. Additionally, 2012 included approximately $3.3 million related to the previously discussed Agne text messaging class action, which increased the 2012 general and administrative expenses percentage by approximately 0.2%. 38 Other general expenses reflected net expense of $6.7 million in 2013, as compared to $8.3 million in 2012 as detailed below (in thousands): 2013 2012 Increase (Decrease) Supplier marketing payment (a) Franchise and development incentives and initiatives (b) Disposition and impairment losses (c) Pre-opening restaurant costs Perfect Pizza lease obligation (d) Other expense (e) Total other general expenses $ $ $ (1,000) 4,645 804 458 305 1,461 6,673 4,000 3,194 362 321 (135) 571 8,313 (5,000) 1,451 442 137 440 890 (1,640) $ $ $ (a) See “Items Impacting Comparability; Non-GAAP Measures” above for further information about the Incentive Contribution. (b) Includes incentives provided to domestic franchisees for opening restaurants. (c) Disposition and impairment losses include costs associated with the disposition of certain systems and other equipment, which were higher in 2013. (d) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former Perfect Pizza operations in the United Kingdom. (e) The increase is primarily due to higher expenses associated with our online customer loyalty program. Depreciation and amortization was $35.1 million, or 2.4% of revenues for 2013, as compared to $32.8 million, or 2.4% of revenues, for 2012. The increase of $2.3 million is primarily due to higher deprecation for our domestic commissaries, primarily attributable to incremental depreciation related to the New Jersey dough production capital expenditures, and higher international depreciation costs primarily associated with the additional number of China Company-owned restaurants. Net interest. Net interest expense consisted of the following (in thousands): Interest expense - line of credit (a) Investment income Change in redemption value of mandatorily redeemable noncontrolling interest in a joint venture (b) Net interest (expense) income Dec. 29, 2013 Year Ended Dec. 30, 2012 (Increase) Decrease $ (2,131) 589 $ (1,114) 750 $ (1,017) (161) 1,148 (394) $ (1,048) (1,412) $ 2,196 1,018 $ (a) The increase in interest expense was due to a higher average outstanding debt balance and a higher effective interest rate. (b) See “Notes 2 and 6” of “Notes to Consolidated Financial Statements” for additional information. Income Tax Expense. Our effective income tax rate was 31.2% in 2013 compared to 32.9% in 2012. The lower tax rate in 2013 includes both higher levels of tax credits, including Work Opportunity Tax Credit and state and federal research and experimentation credits, as well as favorable nonrecurring settlements of specific state tax issues. We recognized a decrease of $909,000 in our 2013 income tax expense associated with the finalization of certain income tax issues while we recognized additional income tax 39 expense in 2012 of approximately $305,000. See “Note 15” of “Notes to Consolidated Financial Statements” for additional information. 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%, benefit from the 53rd week of operations. These increases were slightly offset by reduced royalties attributable to the Company’s net acquisition of the 50 restaurants noted above. • Domestic commissary sales increased $37.8 million, or 7.4%, in 2012, primarily due to higher commissary product volumes primarily resulting from increases in the volume of restaurant sales. The benefit from the 53rd week of operations was approximately $8.5 million, or an increase of 1.7%. International revenues increased $14.4 million, or 24.5%, in 2012, primarily due to an increase in the number of restaurants and an increase in comparable sales of 7.1%, calculated on a constant dollar basis, which excludes the impact of foreign currency translation. The benefit from the 53rd week of operations was approximately $800,000, or 1.4%. • Discussion of Operating Results Our income before income taxes totaled $98.4 million in 2012, as compared to $84.8 million in 2011, an increase of approximately $13.6 million. Income before income taxes is summarized in the following table on a reporting segment basis (in thousands): (a) 2012 53 weeks (a) 2011 52 weeks Increase (Decrease) $ $ $ 38,114 34,317 69,332 3,063 2,889 (48,958) (362) 98,395 28,980 30,532 66,222 (165) (441) (39,727) (610) 84,791 9,134 3,785 3,110 3,228 3,330 (9,231) 248 13,604 $ $ $ Domestic Company-owned restaurants (b) Domestic commissaries North America franchising International All others Unallocated corporate expenses (c) Elimination of intersegment profits Income before income taxes 40 (a) The 53rd week of operations increased income before income taxes by approximately $4.1 million in 2012 as follows: Increase (Decrease) Domestic company-owned restaurants Domestic commissaries North America franchising International All others Unallocated corporate expenses Income before income taxes $ $ 1,609 1,200 1,414 414 215 (707) 4,145 (b) Includes the benefit of a $1.0 million advertising credit from PJMF related to the Incentive Contribution in 2012. See “Items Impacting Comparability; Non-GAAP Measures” above for further information about the Incentive Contribution. (c) Includes the impact of the Incentive Contribution in 2012 ($4.0 million increase in expense). Changes in income before income taxes for 2012 are summarized on a segment basis as follows: • Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes increased $9.1 million from the prior comparable period, including approximately $1.6 million related to the 53rd week of operations. The remaining increase was due to the previously noted comparable sales increase, favorable commodity costs, and various supplier incentives. • Domestic Commissary Segment. Domestic commissaries’ income before income taxes increased $3.8 million in 2012 as compared to the comparable 2011 period. Approximately $1.2 million of the increase was due to the impact of the 53rd week of operations. The remaining increase was primarily due to higher commissary product volumes resulting from increased sales volumes from the previously noted increase in net units and comparable sales. • North America Franchising Segment. North America franchising income before income taxes increased approximately $3.1 million in 2012, including approximately $1.4 million related to the 53rd week of operations in 2012. The remaining increase was due to the previously mentioned royalty revenue increase, partially offset by both an increase in development incentive costs and a reduction in royalties attributable to the Company’s net acquisition of the 50 Denver and Minneapolis restaurants. International Segment. The international segment reported income before income taxes of approximately $3.1 million in 2012 compared to a loss of approximately $165,000 in 2011. The improvement in operating results of $3.2 million was primarily due to increased royalties due to growth in the number of units and a comparable sales increase of 7.1%, and improved operating results in our United Kingdom commissary. The 53rd week of operations increased operating results by approximately $400,000 in 2012. • • All Others Segment. The “All others” segment reported operating income of approximately $2.9 million in 2012, representing an increase of approximately $3.3 million, as compared to the corresponding 2011 period. The increase was primarily due to an improvement in our online and mobile ordering (“eCommerce”) business. This improvement was somewhat offset by reduced operating results at our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions (“Preferred”). 41 • Unallocated Corporate Segment. Unallocated corporate expenses increased $9.2 million in 2012, as compared to the prior year, including approximately $700,000 related to the 53rd week of operations. The components of unallocated corporate expenses were as follows (in thousands): Year Ended December 30, 2012 Year Ended December 25, 2011 Increase (Decrease) General and administrative (a) Supplier marketing payment (b) Net interest expense Depreciation expense Franchise incentives and initiatives (c) Perfect Pizza lease obligation (d) Other (income) expense (e) Total unallocated corporate expenses $ $ $ 37,618 4,000 1,476 7,193 - (135) (1,194) 48,958 24,807 - 2,300 8,021 3,234 832 533 39,727 12,811 4,000 (824) (828) (3,234) (967) (1,727) 9,231 $ $ $ (a) The increase in unallocated general and administrative costs was primarily due to increases in legal costs, including estimated costs associated with the tentative settlement of the Agne litigation (see “Note 17” of “Notes to Consolidated Financial Statements” for additional information), short-term management incentives, insurance costs, and higher costs related to our operators’ conference. (b) See “Items Impacting Comparability; Non-GAAP Measures” above for further information about the Incentive Contribution. (c) In 2011, we offered certain incentives to domestic franchisees for meeting certain sales targets, including driving comparable sales, transactions and online sales. Other incentives offered are included in the North America Franchising segment. (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) Other (income) expense improved primarily due to the prior year including both higher costs related to our online customer loyalty program and disposition and valuation costs associated with certain systems and other equipment. Diluted earnings per share were $1.29 in 2012, compared to $1.08 in 2011, an increase of $0.21, or 19.4%. The 2012 diluted earnings per share include the benefit of the 53rd week of operations ($0.05 per diluted share increase), which was substantially offset by the decrease of $0.04 per diluted share attributable to the Incentive Contribution. Diluted earnings per share increased $0.07 due to the reduction in weighted average shares outstanding (5.7% reduction). Review of Consolidated Operating Results Revenues. Domestic Company-owned restaurant sales were $592.2 million for 2012 compared to $525.8 million for 2011. The 12.6% increase was primarily due to a 5.6% increase in comparable sales and the net acquisition of 50 restaurants in Denver and Minneapolis 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 restaurant sales increased 7.9% to $1.85 billion, from $1.71 billion in 2011, as domestic franchise comparable sales increased 2.9% and equivalent units increased 3.6%. North America franchise restaurant 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 $79.6 million, representing an increase of 8.0% from the comparable period, including a $1.4 million, or 42 1.8% increase from the 53rd week of operations in 2012. The remaining increase in royalties was primarily due to the previously noted increase in franchise sales. The comparable sales base and average weekly sales for 2012 and 2011 for domestic Company-owned and North America franchised restaurants consisted of the following: Total domestic units (end of period) Equivalent units Comparable sales base units Comparable sales base percentage Average weekly sales - comparable units Average weekly sales - total non-comparable units* Average weekly sales - all units Year Ended December 30, 2012 Domestic Company- owned North America Franchised Year Ended December 25, 2011 North America Franchised Domestic Company- owned 648 624 615 98.6% 17,987 12,604 17,908 $ $ $ 2,556 2,415 2,190 90.7% 14,870 10,389 14,453 $ $ $ 598 589 581 98.6% 17,248 11,218 17,164 $ $ $ 2,463 2,332 2,135 91.6% 14,459 10,708 14,142 $ $ $ *Includes 215 traditional units in 2012 and 183 in 2011 and 158 non-traditional units in 2012 and 134 in 2011. North America franchise and development fees were approximately $800,000 in 2012, or an increase of approximately $100,000 from 2011. Domestic commissary sales increased 7.4% to $545.9 million in 2012, from $508.2 million in the prior comparable period. The increase was primarily due to higher commissary product volumes resulting from increases in the volume of restaurant sales. Our commissaries charge a fixed dollar mark-up on the cost of cheese. Cheese prices are based upon the block price, which decreased to an average price of $1.69 per pound in 2012 from the $1.80 per pound in 2011. Other sales increased $300,000 to $51.2 million in 2012. The increase primarily resulted from an increase in online sales, partially offset by a decline in sales at Preferred. International franchise restaurant sales were $388.4 million in 2012, compared to $320.0 million in 2011. International franchise restaurant sales are not included in our consolidated statements of income; however, our international royalty revenue is derived from these sales. Total international revenues were $72.9 million for 2012 compared to $58.6 million in 2011, reflecting an increase in the number of Company-owned and franchised restaurants in addition to the 7.1% increase in comparable sales, calculated on a constant dollar basis. Our PJUK operations represented 51% of international revenues in both 2012 and 2011. Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 19.7% in 2012 (19.5% excluding the $1.0 million advertising credit from PJMF) compared to 19.0% in 2011. The increase of 0.7% consisted of the following differences: • Cost of sales was 0.9% lower as a percentage of sales in 2012 due to lower commodity costs, primarily cheese; 2012 also included various supplier incentives. • Salaries and benefits were 0.5% higher as a percentage of sales in 2012, primarily due to higher bonuses paid to general managers. • Advertising and related costs as a percentage of sales were relatively flat year-over-year and included a $1.0 million advertising credit received from PJMF. The higher costs, excluding the 43 advertising credit, were due to increased local advertising, including additional costs for newly acquired markets. • Occupancy costs and other operating costs, on a combined basis, as a percentage of sales, were 0.2% lower in 2012 reflecting the benefit of increased sales. Domestic commissary operating margin was 7.7% in both 2012 and 2011, with the following differences by line item: • Cost of sales was 0.1% lower as a percentage of revenues in 2012, as compared to 2011 due to lower commodity costs, primarily cheese, which has a fixed-dollar markup. • Salaries and benefits as a percentage of revenues were flat year-over-year. • Other operating expenses were 0.1% higher as a percentage of revenues in 2012, as compared to 2011. Other operating expenses as a percentage of other sales were 88.7% in 2012, compared to 91.0% in 2011. The lower operating expenses were primarily due to an improvement in online results, due to both higher online fees and higher online sales volumes. International operating expenses were relatively consistent at 84.6% of international restaurant and commissary sales in 2012 as compared to 84.5% in 2011. The most significant change versus the prior year was an increase in operating expenses primarily associated with the new Company-owned restaurants in China (approximate 2.0% increase). This increase was substantially offset by lower operating expenses in the United Kingdom (approximate 1.5% decrease) as a result of improved operating results primarily attributable to higher sales. General and administrative expenses were $131.6 million, or 9.8% of revenues for 2012, as compared to $111.6 million, or 9.2% of revenues for 2011. The increase in general and administrative expenses of $20.0 million is primarily due to increases in legal costs of approximately $4.3 million, including estimated costs of $3.3 million associated with the tentative settlement of the Agne litigation, higher short-term management insurance costs of approximately $3.0 million, and higher costs related to our operators’ conference of $1.2 million. In addition, the 53rd week of operations in 2012 increased general and administrative expenses by approximately $700,000. incentives of approximately $7.5 million, higher Other general expenses reflected net expense of $8.3 million in 2012, as compared to $9.8 million in 2011 as detailed below (in thousands): 2012 2011 Increase (Decrease) Supplier marketing payment (a) Franchise and development incentives and initiatives (b) Provision for uncollectible accounts and notes receivable Disposition and impairment losses (c) Pre-opening restaurant costs Perfect Pizza lease obligation (d) Other (income) expense (e) Total other general expenses $ $ 4,000 3,194 826 362 321 (135) (255) 8,313 $ - 4,921 379 1,745 273 832 1,617 9,767 $ 4,000 (1,727) 447 (1,383) 48 (967) (1,872) (1,454) $ $ (a) See “Items Impacting Comparability; Non-GAAP Measures” above for further information about the Incentive Contribution. 44 (b) Includes incentives provided to domestic franchisees for opening restaurants. The 2011 amount includes approximately $3.2 million in incentives offered to domestic franchisees for meeting certain sales targets, including driving comparable sales, transactions and online sales, which were not offered in 2012. (c) Disposition and impairment losses include costs associated with the disposition of certain systems and other equipment, which were higher in 2011. (d) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former Perfect Pizza operations in the United Kingdom. (e) The decrease is primarily a result of 2011 including higher costs related to our online customer loyalty program. Depreciation and amortization was $32.8 million, or 2.4% of revenues for 2012, as compared to $32.7 million, or 2.7% of revenues, for 2011. Net interest. Net interest expense was approximately $1.4 million in 2012, compared to $2.2 million in 2011. The decrease in net interest costs reflects a lower effective interest rate and a reduction in interest expense associated with a change in redemption value of noncontrolling interest in a joint venture whose noncontrolling interest is deemed mandatorily redeemable. See “Notes 2 and 6” of “Notes to Consolidated Financial Statements” for additional information. Income Tax Expense. Our effective income tax rate was 32.9% in 2012 compared to 31.0% in 2011. Our effective income tax rate may fluctuate for various reasons, including the settlement or resolution of specific federal and state issues. We recognized additional income tax expense in 2012 of approximately $305,000, associated with the reserving of certain income tax issues while we recognized a decrease of $711,000 in our 2011 income tax expense. See “Note 15” of “Notes to Consolidated Financial Statements” for additional information. Liquidity and Capital Resources Our debt is comprised entirely of a revolving credit facility. The outstanding balance under this facility was $157.9 million as of December 29, 2013, $88.3 million as of December 30, 2012, and $51.5 million as of December 25, 2011. The increase in 2013 was primarily due to increased share repurchases. In September 2010, we entered into a five-year, $175 million unsecured revolving credit facility, which was amended in November 2011 to extend the maturity date to November 30, 2016. On April 30, 2013, we amended and restated our revolving credit facility to increase the amount available for borrowing thereunder to $300 million and extend the maturity date to April 30, 2018. The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points. The remaining availability under the revolving credit facility, reduced for outstanding letters of credit, was approximately $121.4 million as of December 29, 2013. In August 2011, we entered into an interest rate swap agreement that resulted in a fixed rate of 0.53%, instead of the variable rate of LIBOR, with a notional amount of $50.0 million and a maturity date of August 2013. On December 31, 2012, we amended our interest rate swap agreement to extend the maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56% from 0.53%) but did not impact the notional amount of the interest rate swap agreement. On July 30, 2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our revolving credit facility. The termination of the previous swap did not have a material impact on our 2013 results. See “Note 9” of “Notes to Consolidated Financial Statements” for additional information. 45 Our credit facility contains affirmative and negative covenants, including the following financial covenants, as defined by the credit facility: Permitted Ratio Actual Ratio for the Year Ended December 29, 2013 Leverage Ratio Not to exceed 3.0 to 1.0 Interest Coverage Ratio Not less than 3.5 to 1.0 1.2 to 1.0 4.9 to 1.0 Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“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 as of December 29, 2013. Cash flow provided by operating activities was $101.4 million for 2013 as compared to $104.4 million in 2012. The reduction in 2013, as compared to 2012, is primarily due to working capital needs offset somewhat by higher net income. Cash flow provided by operating activities increased to $104.4 million in 2012 from $101.0 million in 2011, primarily due to higher net income and favorable working capital changes, including deferred income taxes. The Company’s free cash flow for the last three years was as follows (in thousands): Dec. 29, 2013 Year Ended Dec. 30, 2012 Dec. 25, 2011 Net cash provided by operating activities Purchase of property and equipment (a) Free cash flow (b) $ 101,360 (50,750) 50,610 $ $ 104,379 (42,628) 61,751 $ $ 101,008 (29,319) 71,689 $ (a) The increased purchases of property and equipment in 2013 and 2012 primarily relate to expenditures on equipment for New Jersey dough production, technology investments, including our new domestic POS system, (“FOCUS”), and China new store builds. (b) 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. See “Items Impacting Comparability; Non-GAAP Measures” 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 facilities and equipment and the enhancement of corporate systems and facilities, including technological enhancements. Purchases of property and equipment amounted to $50.8 million, $42.6 million, and $29.3 million in 2013, 2012 and 2011, respectively, and are summarized by operating segment in “Note 20” of “Notes to Consolidated Financial Statements.” 46 We also require capital for share repurchases and the payment of cash dividends. The following is a summary of our common share repurchases, as adjusted for the stock split, for the last three years (in thousands, except average price per share): Fiscal Year 2011 2012 2013 Number of Shares Repurchased 4,168 4,552 3,538 Total Cash Paid $65,323 $106,095 $118,569 Average Price Per Share $15.67 $23.31 $33.51 Subsequent to December 29, 2013, we acquired an additional 236,000 shares at an aggregate cost of $11.0 million. Approximately $110.9 million remained available under the Company’s share repurchase program as of February 18, 2014. During the year ended December 29, 2013, we paid cash dividends of $10.8 million. Additionally, on January 30, 2014, our Board of Directors declared a first quarter 2014 cash dividend of $0.125 per share, or approximately $5.2 million. The dividend was paid on February 21, 2014 to shareholders of record as of the close of business on February 10, 2014. The declaration and payment of any future dividends will be at the discretion of the Board of Directors, subject to the Company’s financial results, cash requirements, and other factors deemed relevant by the Board of Directors. Contractual obligations and payments as of December 29, 2013 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) Interest payments (2) Total debt Operating leases Total contractual obligations $ - 2,389 2,389 38,304 40,693 $ $ - 4,778 4,778 63,867 68,645 $ $ $ 157,900 3,186 161,086 41,639 202,725 $ - - - 41,441 41,441 $ $ $ 157,900 10,353 168,253 185,251 353,504 (1) We utilize an interest rate swap to hedge against $75.0 million of our variable rate debt. The value of our interest rate swap was $76,000 at December 29, 2013 and was recorded in other long-term liabilities in the consolidated balance sheet. (2) Represents estimated interest payments on our revolving line of credit balance outstanding as of December 29, 2013. The interest payments assume the outstanding balance on our $300.0 million unsecured revolving line of credit will remain at $157.9 million until the maturity date of April 30, 2018. Interest payments are calculated based on LIBOR plus the applicable margin in effect at December 29, 2013, and considers the amended interest rate swap agreement in effect until April 30, 2018 (interest rate of 1.42%). The actual interest rates on our variable rate debt and the amount of our indebtedness could vary from those used to compute the above interest payments. See “Note 9” of “Notes to Consolidated Financial Statements” for additional information concerning our debt and credit arrangements. 47 The above table does not include the following: • Unrecognized tax benefits of $2.7 million since we are not able to make reasonable estimates of the period of cash settlement with respect to the taxing authority. • Redeemable and mandatorily redeemable noncontrolling interests of $17.8 million 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 operating leases of Company-owned restaurant sites, QC Centers, office space and transportation equipment. We guarantee leases for certain Papa John’s domestic franchisees, who purchased restaurants that were previously Company-owned, as well as approximately 30 leases in the United Kingdom in connection with the 2006 sale of our former Perfect Pizza operations. We are contingently liable on these leases. These leases have varying terms, the latest of which expires in 2018. As of December 29, 2013, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $2.7 million, net of amounts reserved of approximately $100,000 related to the Perfect Pizza operations. No liability has been recorded related to the other guarantees. 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 3-5 Years After 5 Years 1-3 Years Less than 1 Year Total Other Commercial Commitments: Standby letters of credit $ 20,710 $ - $ - $ - $ 20,710 We are party to standby letters of credit with off-balance sheet risk associated with our insurance programs. See “Notes 9, 12 and 17” 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 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 forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, capital expenditures, 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- 48 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; increases in or sustained high costs of food ingredients and other commodities; • • disruption of our supply chain or our commissary operations 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, including our expansion into emerging or underpenetrated markets, such as China, where we have a Company-owned presence. Based on prior experience in underpenetrated markets, operating losses are likely to occur as the market is being established; increased employee compensation, benefits, insurance, tax rates, 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; the impact of changes in currency exchange and interest rates; failure to effectively execute succession planning, and our reliance on the services of our Founder and Chief Executive Officer, who also serves as our brand spokesperson; • disruption of critical business or information technology systems, and risks associated with data privacy and security breaches, including theft of Company and customer information. This would include the increased risk associated with the planned rollout of our new domestic POS system. If prolonged and widespread technological problems are experienced during the rollout, our domestic corporate and franchise operations could be disrupted, which could adversely impact sales. These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” of this Annual Report on Form 10-K. 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 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our debt is comprised entirely of a revolving credit facility. On April 30, 2013, we amended and restated our revolving credit facility to increase the amount available for borrowing thereunder to $300 million, from $175 million, and extend the maturity date to April 30, 2018. The outstanding balance under this facility was $157.9 million as of December 29, 2013 and $88.3 million as of December 30, 2012. The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points. 49 We attempt to minimize interest risk exposure and to lower our overall borrowing costs for changes in interest rates through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions and have reset dates and critical terms that match those of the underlying debt. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis. In August 2011, we entered into an interest rate swap agreement that resulted in a fixed rate of 0.53%, instead of the variable rate of LIBOR, with a notional amount of $50.0 million and a maturity date of August 2013. On December 31, 2012, we amended our interest rate swap agreement to extend the maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56% from 0.53%) but did not impact the notional amount of the interest rate swap agreement. On July 30, 2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our revolving credit facility. The termination of the previous swap did not have a material impact on our 2013 results. The effective interest rate on the revolving line of credit, including the impact of the interest rate swap agreement, was 1.5% as of December 29, 2013. An increase in the present interest rate of 100 basis points on the line of credit balance outstanding as of December 29, 2013, including the impact of the interest rate swap, would increase interest expense by $829,000. Foreign Currency Exchange Rate Risk We do not enter into financial instruments to manage foreign currency exchange rates since only 6.2% of our total revenues are derived from sales to customers and royalties outside the United States. Commodity Price Risk In the ordinary course of business, the food and paper products we purchase, including cheese (historically representing 35% to 40% of our food cost), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our domestic Company-owned restaurants, which are accounted for as normal purchases; however, we still remain exposed to on-going commodity volatility. The following table presents the actual average block price for cheese by quarter in 2013, 2012 and 2011. Also presented is the projected full-year 2014 average block price (based on the February 18, 2014 Chicago Mercantile Exchange cheese futures prices for 2014): 2014 Projected Market 2013 Block Price 2012 Block Price 2011 Block Price $ $ $ $ Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year 2.135 1.911 1.851 1.789 1.922 1.662 1.784 1.740 1.849 1.759 $ $ $ $ 1.695 1.736 2.006 1.760 1.799 1.522 1.539 1.750 1.939 1.692 50 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 29, 2013 and December 30, 2012, 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 29, 2013. 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 29, 2013 and December 30, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 29, 2013, 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. 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 29, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 25, 2014, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Louisville, Kentucky February 25, 2014 51 Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts) North America revenues: Domestic Company-owned restaurant sales Franchise royalties Franchise and development fees Domestic commissary sales Other sales International revenues: Royalties and franchise and development fees Restaurant and commissary sales Total revenues Costs and expenses: Domestic Company-owned restaurant expenses: Cost of sales Salaries and benefits Advertising and related costs Occupancy costs Other restaurant operating expenses Total domestic Company-owned restaurant expenses Domestic commissary expenses: Cost of sales Salaries and benefits Other commissary operating expenses Total domestic commissary expenses Other operating expenses International restaurant and commissary expenses General and administrative expenses Other general expenses Depreciation and amortization Total costs and expenses Operating income Investment income Interest expense Income before income taxes Income tax expense Net income before attribution to noncontrolling interests Income attributable to noncontrolling interests Net income attributable to the Company Calculation of income for earnings per share: Net income attributable to the Company Increase in noncontrolling interest redemption value Net income attributable to participating securities Net income attributable to common shareholders Basic earnings per common share Earnings per common share - assuming dilution Basic weighted average common shares outstanding Diluted weighted average common shares outstanding December 29, 2013 Years Ended December 30, 2012 December 25, 2011 $ 635,317 81,692 1,181 578,870 53,322 $ 592,203 79,567 806 545,924 51,223 $ 525,841 73,694 722 508,155 50,912 21,979 66,661 1,439,022 19,881 53,049 1,342,653 16,327 42,231 1,217,882 156,237 173,316 59,172 36,546 92,280 517,551 137,378 163,260 54,583 34,734 85,847 475,802 126,887 142,093 49,035 32,278 75,558 425,851 448,693 25,123 60,526 534,342 48,011 56,609 134,228 6,673 35,105 1,332,519 106,503 589 (983) 106,109 33,130 72,979 (3,442) 69,537 $ 426,531 22,237 55,266 504,034 45,455 44,853 131,591 8,313 32,798 1,242,846 99,807 750 (2,162) 98,395 32,393 66,002 (4,342) 61,660 $ 397,323 20,713 50,932 468,968 46,316 35,674 111,608 9,767 32,681 1,130,865 87,017 755 (2,981) 84,791 26,324 58,467 (3,732) 54,735 $ $ 69,537 $ 61,660 $ 54,735 (510) - - (530) 68,497 $ - 61,660 $ - 54,735 $ $ $ 1.58 1.55 $ $ 1.31 1.29 $ $ 1.09 1.08 43,387 44,243 46,916 47,810 50,086 50,620 Dividends declared per common share $ 0.25 $ - $ - Supplemental data (see Note 16): Revenues - affiliates See accompanying notes. $ 3,259 $ 29,310 $ 28,078 52 Papa John's International, Inc. and S ubsidiaries Consolidated S tatements of Comprehensive Income (In thousands) Years Ended December 29, December 30, December 25, 2012 2011 2013 Net income before attribution to noncontrolling interests Other comprehensive income (loss), before tax: Foreign currency translation adjustments Interest rate swaps (1) Defined benefit pension plan Other comprehensive income (loss), before tax Income tax effect: Foreign currency translation adjustments Interest rate swaps (2) Defined benefit pension plan Income tax effect Other comprehensive income (loss), net of tax Comprehensive income before attribution to noncontrolling interests Comprehensive income, redeemable noncontrolling interests Comprehensive income, nonredeemable noncontrolling interests Comprehensive income attributable to the Company $ 72,979 $ 66,002 $ 58,467 1,065 (51) - 1,014 (394) 19 - (375) 639 73,618 (3,466) 24 70,176 $ 1,128 (114) 45 1,059 864 258 (45) 1,077 (1,110) 42 (16) (1,084) (25) 65,977 (4,342) - 61,635 $ - (93) 16 (77) 1,000 59,467 (3,732) - 55,735 $ (1) Amounts reclassified out of accumulated other comprehensive income (“AOCI”) into interest expense included $501, $150 and $341 for the years ended December 29, 2013, December 30, 2012 and December 25, 2011, respectively. (2) The income tax effects of amounts reclassified out of AOCI into interest expense were $185, $55 and $126 for the years ended December 29, 2013, December 30, 2012 and December 25, 2011, respectively. See accompanying notes. 53 Papa John’s International, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share amounts) Assets Current assets: Cash and cash equivalents Accounts receivable (less allowance for doubtful accounts of $4,318 in 2013 and $3,057 in 2012) Accounts receivable - affiliates (no allowance for doubtful accounts in 2013 and 2012) Notes receivable (no allowance for doubtful accounts in 2013 and 2012) Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Net property and equipment Notes receivable, less current portion (less allowance for doubtful accounts of $3,387 in 2013 and $5,028 in 2012) Goodwill Other assets Total assets Liabilities and stockholders’ equity Current liabilities: Accounts payable Income and other taxes payable Accrued expenses and other current liabilities Total current liabilities Deferred revenue Long-term debt Deferred income taxes Other long-term liabilities Total liabilities Redeemable noncontrolling interests Stockholders’ equity: Years Ended December 29, 2013 December 30, 2012 $ 13,670 $ 16,396 52,919 43,585 284 3,566 23,035 8,004 14,336 9,226 125,040 212,097 1,062 4,577 22,178 10,279 12,782 7,767 118,626 196,661 13,239 79,391 34,524 464,291 $ 12,536 78,958 31,627 438,408 $ $ 35,653 4,401 57,807 97,861 5,827 157,900 14,660 42,835 319,083 $ 32,624 10,429 60,528 103,581 7,329 88,258 10,672 40,674 250,514 7,024 6,380 Preferred stock ($0.01 par value per share; no shares issued) Common stock ($0.01 par value per share; issued 42,796 in 2013 and 74,176 in 2012) Additional paid-in capital Accumulated other comprehensive income Retained earnings Treasury stock (1,129 shares in 2013 and 29,694 shares in 2012, at cost) Total stockholders' equity, net of noncontrolling interests Noncontrolling interests in subsidiaries Total stockholders' equity Total liabilities, redeemable noncontrolling interests and stockholders' equity - 428 137,552 2,463 41,297 (44,066) 137,674 510 138,184 464,291 $ - 742 280,534 1,824 356,461 (458,047) 181,514 - 181,514 438,408 $ See accompanying notes. 54 Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (In thousands) Balance at December 26, 2010 Net income attributable to the Company (1) Other comprehensive income Exercise of stock options Tax effect of equity awards Acquisition of Company common stock Stock-based compensation expense Issuance of restricted stock Other Balance at December 25, 2011 Net income attributable to the Company (1) Other comprehensive income Exercise of stock options Tax effect of equity awards Acquisition of Company common stock Stock-based compensation expense Issuance of restricted stock Other Balance at December 30, 2012 Net income attributable to the Company (1) Other comprehensive income Cash dividends paid Exercise of stock options Tax effect of equity awards Acquisition of Company common stock Retirement of Company common stock Stock-based compensation expense Issuance of restricted stock Change in redemption value of noncontrolling interests Reclassification from temporary equity to permanent equity Contributions from noncontrolling interests Other Balance at December 29, 2013 Common Stock Shares Outstanding 50,878 - - 1,144 - (4,168) - 184 - 48,038 - - 864 - (4,552) - 132 - 44,482 - - - 570 - (3,536) - - 138 Papa John's International, Inc. Common Stock Additional Paid-In Capital $ 722 - - 12 - - - - - 734 - - 8 - - - - - 742 - - - 6 - - (320) - - $ 245,019 - - 14,030 (1,400) - 6,704 (2,253) (11) 262,089 - - 12,256 933 - 6,905 (1,582) (67) 280,534 - - 41 6,859 1,172 - (156,380) 7,409 (2,187) Accumulated Other Comprehensive Income (Loss) 849 $ - 1,000 - - - - - - 1,849 - (25) - - - - - - 1,824 - 639 - - - - - - - Retained Earnings 240,066 $ 54,735 - - - - - - - 294,801 61,660 - - - - - - - 356,461 69,537 - (10,751) - - - (373,440) - - $ Treasury Stock (291,048) - - - - (65,323) - 2,253 292 (353,826) - - - - (106,095) - 1,582 292 (458,047) - - - - - (118,569) 530,140 - 2,187 Noncontrolling Interests in Subsidiaries - $ - - - - - - - - - - - - - - - - - - (24) - - - - - - - - Total Stockholders’ Equity $ 195,608 54,735 1,000 14,042 (1,400) (65,323) 6,704 - 281 205,647 61,660 (25) 12,264 933 (106,095) 6,905 - 225 181,514 69,513 639 (10,710) 6,865 1,172 (118,569) - 7,409 - - - - - (510) - - (510) - - 13 41,667 - - - 428 $ - - 104 137,552 $ - - - 2,463 $ - - - 41,297 $ - - 223 (44,066) $ 434 100 - $ 510 434 100 327 138,184 $ (1) Net income to the Company at December 29, 2013, December 30, 2012 and December 25, 2011 excludes $3,442, $4,342 and $3,732, respectively, allocable to the noncontrolling interests for our joint venture arrangements. At December 25, 2011, the accumulated other comprehensive income of $1,849 was comprised of unrealized foreign currency translation gains of $1,872, a net unrealized gain on the interest rate swap agreement of $6, offset by a $29 pension plan liability. At December 30, 2012, the accumulated other comprehensive income of $1,824 was comprised of unrealized foreign currency translation gains of $1,889, offset by a net unrealized loss on the interest rate swap agreement of $65. At December 29, 2013, the accumulated other comprehensive income of $2,463 was comprised of unrealized foreign currency translation gains of $2,561, offset by a net unrealized loss on the interest rate swap agreement of $98. See accompanying notes. 55 Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Operating activities Net income before attribution to noncontrolling interests Adjustments to reconcile net income to net cash provided by operating activities: December 29, 2013 Years Ended December 30, 2012 December 25, 2011 $ 72,979 $ 66,002 $ 58,467 Disposition and impairment losses Provision for uncollectible accounts and notes receivable Depreciation and amortization Deferred income taxes Stock-based compensation expense Excess tax benefit on equity awards Other Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories Prepaid expenses Other current assets Other assets and liabilities Accounts payable Income and other taxes payable Accrued expenses and other current liabilities Deferred revenue Net cash provided by operating activities Investing activities Purchases of property and equipment Loans issued Repayments of loans issued Acquisitions, net of cash acquired Proceeds from divestitures of restaurants Other Net cash used in investing activities Financing activities Net proceeds (repayments) on line of credit facility Cash dividends paid Excess tax benefit on equity awards Tax payments for equity award issuances Proceeds from exercise of stock options Acquisition of Company common stock Contributions from noncontrolling interest holders Distributions to noncontrolling interest holders Other Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes. - 1,921 35,105 10,603 7,409 (4,755) 2,767 (11,058) (857) (1,553) (1,458) (3,728) 3,029 (6,027) (2,536) (481) 101,360 (50,750) (6,095) 7,068 - - 339 (49,438) 269 1,674 32,798 2,035 6,905 (1,967) 2,961 (18,048) (1,947) (2,572) (1,667) (3,952) (342) 6,460 12,209 3,561 104,379 (42,628) (4,903) 3,642 (6,175) 908 36 (49,120) 1,200 1,037 32,681 9,345 6,704 (741) 4,556 (4,298) (2,689) (2,514) 1,486 (877) 1,397 2,180 (5,685) (1,241) 101,008 (29,319) (3,492) 5,357 - - 68 (27,386) 69,642 (10,797) 4,755 (3,584) 6,865 (118,569) 950 (3,650) (327) (54,715) 67 (2,726) 16,396 13,670 $ 36,769 - 1,967 (855) 12,264 (106,095) 2,052 (4,256) 225 (57,929) 124 (2,546) 18,942 16,396 $ (47,511) - 741 (1,041) 14,042 (65,323) - (3,669) 160 (102,601) 92 (28,887) 47,829 18,942 $ 56 Papa John’s International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Description of Business Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) operates and franchises pizza delivery and carryout restaurants under the trademark “Papa John’s,” currently in all 50 states and 34 countries. Substantially all revenues are 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, and 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. 2. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Papa John’s and its subsidiaries. The results of our Company-owned operations in China were consolidated one month in arrears until fiscal 2013. The inclusion of the additional month of operations in fiscal 2013 resulted in $2.1 million of incremental international revenues and an incremental loss before income taxes of $215,000 reported in the international segment. This change in our consolidation policy did not have a material impact to our financial results for any of the years presented. All intercompany balances and transactions have been eliminated. Fiscal Year Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented consist of 52 weeks except for the 2012 fiscal year, which consists of 53 weeks. Variable Interest Entities Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF is a variable interest entity (“VIE”) as it does not have sufficient equity to fund its operations without ongoing financial support and contributions from its members. Based on the ownership and governance structure and operating procedures of PJMF, we have determined that we do not have the power to direct the most significant activities of PJMF and are therefore not the primary beneficiary. Accordingly, we determined that consolidation is not appropriate. 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 PJMF 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. 57 2. Significant Accounting Policies (continued) Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for doubtful accounts and notes receivable, intangible assets, online customer loyalty program obligation, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates. Reclassifications Certain prior year amounts in the consolidated statements of income have been reclassified to conform to the current year presentation, which had no effect on current or previously reported net income. Revenue Recognition Retail sales from Company-owned restaurants and franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as revenues when the products are delivered to or carried out by customers. Franchise fees are recognized when a franchised restaurant begins operations, at which time we have performed our obligations related to such fees. Fees received pursuant to development agreements which grant the right to develop franchised restaurants in future periods in specific geographic areas are deferred and recognized on a pro rata basis as franchised restaurants subject to the development agreements begin operations. Domestic production and distribution revenues are comprised of food, promotional items and supplies sold to franchised restaurants located in the United States and are recognized as revenue upon shipment of the related products to the franchisees. Information services, including software maintenance fees, help desk fees and online ordering fees are recognized as revenue as related services are provided and are included in other sales. Insurance commissions are recognized as revenue over the term of the policy period and are included in other sales. International revenues are comprised of restaurant sales, royalties and fees received from foreign franchisees and the sale and distribution of food to foreign franchisees, and are recognized consistently with the policies applied for revenues generated in the United States. Advertising and Related Costs Advertising and related costs include the costs of domestic Company-owned local restaurant activities such as mail coupons, door hangers and promotional items and contributions to PJMF and various local market cooperative advertising funds (“Co-op Funds”). Contributions by domestic Company-owned and franchised restaurants to PJMF and the Co-op Funds are based on an established percentage of monthly restaurant revenues. PJMF is responsible for developing and conducting marketing and advertising for the domestic Papa John’s system. The Co-op Funds are responsible for developing and conducting advertising activities in a specific market, including the placement of electronic and print materials developed by PJMF. We recognize domestic Company-owned restaurant contributions to PJMF and the Co-op Funds in which we do not have a controlling interest in the period in which the contribution accrues. The net assets of the Co-op Funds in which we possess majority voting rights, and thus control the cooperatives, are included in our consolidated balance sheets. 58 2. Significant Accounting Policies (continued) Leases Lease expense is recognized on a straight-line basis over the expected life of the lease term. A lease term often includes option periods, available at the inception of the lease, when failure to renew the lease would impose a penalty to us. Such penalty may include the recognition of impairment on our leasehold improvements should we choose not to continue the use of the leased property. Stock-Based Compensation Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures, and is recognized over the vesting period (generally in equal installments over three years). Restricted stock is valued based on the market price of the Company’s shares on the date of grant. Stock options are valued using a Black-Scholes option pricing model. Our specific assumptions for estimating the fair value of options are included in Note 18. Cash Equivalents Cash equivalents consist of highly liquid investments with maturity of three months or less at date of purchase. These investments are carried at cost, which approximates fair value. Accounts Receivable Substantially all accounts receivable are due from franchisees for purchases of food, paper products, restaurant equipment, printing and promotional items, risk management services, information systems and related services, and royalties. Credit is extended based on an evaluation of the franchisee’s financial condition and, generally, collateral is not required. A reserve for uncollectible accounts is established as deemed necessary based upon overall accounts receivable aging levels and a specific review of accounts for franchisees with known financial difficulties. Account balances are charged off against the allowance after recovery efforts have ceased. Notes Receivable The Company provides financing to select franchisees principally for use in the acquisition, construction and development of their restaurants and for the purchase of restaurants from the Company. Notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchise. We establish an allowance based on a review of each borrower’s economic performance and underlying collateral value. Note balances are charged off against the allowance after recovery efforts have ceased. Inventories Inventories, which consist of food products, paper goods and supplies, smallwares, and printing and promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method, or market. 59 2. Significant Accounting Policies (continued) Property and Equipment Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (generally five to ten years for restaurant, commissary and other equipment, and 20 to 40 years for buildings and improvements). Leasehold improvements are amortized over the terms of the respective leases, including the first renewal period (generally five to ten years). Depreciation expense was $34.5 million in 2013, $32.1 million in 2012 and $31.9 million in 2011. Deferred Costs We defer certain information systems development and related costs that meet established criteria. Amounts deferred, which are included in property and equipment, are amortized principally over periods not exceeding five years beginning in the month subsequent to completion of the related information systems project. Total costs deferred were approximately $3.3 million in 2013, $2.7 million in 2012 and $1.5 million in 2011. The unamortized information systems development costs approximated $7.5 million and $5.8 million as of December 29, 2013 and December 30, 2012, respectively. 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. We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist. We applied the qualitative assessment for 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 were greater than their carrying amounts. With respect to the reporting unit for our subsidiary located in the United Kingdom (“PJUK”), which represents $15.7 million of goodwill as of December 29, 2013, we bypassed the qualitative assessment and performed the two-step quantitative goodwill impairment test, which indicated the fair value significantly exceeded the carrying amount. The fair value was calculated using an income approach that projected net cash flow, with various growth assumptions, over a ten-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. Subsequent to completing our annual qualitative and quantitative goodwill impairment tests, no indications of impairment were identified. 60 2. Significant Accounting Policies (continued) 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. 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. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. 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. 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. Derivative Financial Instruments We recognize all derivatives on the balance sheet at fair value. At inception and on an ongoing basis, we assess whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flows of the hedged item. If the derivative meets the hedge criteria as defined by certain accounting standards, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value, if any, is immediately recognized in earnings. We recognized a loss of $51,000 ($32,000 after tax) in 2013, a loss of $114,000 ($72,000 after tax) in 2012 and income of $258,000 ($165,000 after tax) in 2011, in accumulated other comprehensive income for the net change in the fair value of our interest rate swap. See Note 9 for additional information on our debt and credit arrangements. 61 2. Significant Accounting Policies (continued) Noncontrolling Interests The Company has the following four joint ventures in which there are noncontrolling interests: Joint Venture Redemption Feature Location within the Consolidated Balance Sheet Colonel’s Limited, LLC Mandatorily redeemable Other long-term liabilities Star Papa, LP PJ Denver, LLC PJ Minnesota, LLC Redeemable Redeemable No redemption feature Temporary equity Temporary equity Permanent equity Recorded value Redemption value Carrying value Redemption value Carrying value Consolidated net income is required to be reported separately at amounts attributable to both the parent and the noncontrolling interest. 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 of income attributable to the noncontrolling interest holder. See Note 6 for additional information regarding noncontrolling interests. Foreign Currency Translation The local currency is the functional currency for our foreign subsidiaries located in the United Kingdom, Mexico and China. Earnings and losses are translated into U.S. dollars using monthly average exchange rates, while assets and liabilities are translated using year-end exchange rates. The resulting translation adjustments are included as a component of accumulated other comprehensive income (loss) net of income taxes. 3. Stockholders’ Equity Shares Authorized and Outstanding The Company has authorized 5.0 million preferred shares and 50.0 million common shares (such authorization was not impacted by the two-for-one stock split described below). The Company’s outstanding common shares, net of repurchased Company stock, were 41.7 million shares at December 29, 2013 and 44.5 million shares at December 30, 2012. There were no preferred shares issued or outstanding at December 29, 2013 and December 30, 2012. Two-for-one Stock Split and Treasury Retirement On October 29, 2013, our Board of Directors approved a two-for-one stock split of our outstanding shares. The stock split was effected in the form of a stock dividend and entitled each shareholder of record at the close of business on December 12, 2013 to receive one additional share for every outstanding share of stock held on the record date. The stock dividend was distributed on December 27, 2013 with approximately 21.0 million shares of stock distributed. All per share and share amounts in the accompanying consolidated financial statements and notes to the financial statements have been adjusted to reflect the stock split. In conjunction with the stock split, we retired shares held in treasury as of October 29, 2013, the date of approval by our Board of Directors. 62 3. Stockholders’ Equity (continued) Share Repurchase Program Our Board of Directors has authorized the repurchase of up to $1.2 billion of common stock under a share repurchase program that began on December 9, 1999 and expires on December 31, 2014. Funding for the share repurchase program has been provided through a credit facility, operating cash flow, stock option exercises and cash and cash equivalents. We repurchased 3.5 million and 4.6 million shares of our common stock for $118.6 million and $106.1 million in 2013 and 2012, respectively. Subsequent to year end through February 18, 2014, the Company acquired an additional 236,000 shares at an aggregate cost of $11.0 million. As of February 18, 2014, $110.9 million was available for repurchase of common stock under this authorization. Cash Dividend The Company initiated quarterly cash dividends to its shareholders during 2013. The Company paid a $0.125 per share dividend on September 20, 2013 (record date of September 6, 2013) and a second $0.125 dividend on November 22, 2013 (record date of November 11, 2013). The combined payment for both dividends was approximately $10.8 million. Subsequent to fiscal 2013, on January 30, 2014, our Board of Directors declared a first quarter 2014 cash dividend of $0.125 per share, or approximately $5.2 million. The dividend was paid on February 21, 2014 to shareholders of record as of the close of business on February 10, 2014. 4. Earnings per Share We compute earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. We consider time-based restricted stock awards to be participating securities because holders of such shares have non- forfeitable dividend rights. Under the two-class method, undistributed earnings allocated to participating securities are subtracted from net income attributable to the Company in determining net income attributable to common shareholders. Additionally, in accordance with ASC 480, Distinguishing Liabilities from Equity, the increase in the redemption value for the noncontrolling interest of PJ Denver, LLC reduces income attributable to common shareholders. Basic earnings per common share is computed by dividing net income attributable to common shareholders by the weighted-average common shares outstanding. Earnings per common share – assuming dilution is computed by dividing the net income attributable to common shareholders by the diluted weighted average common shares outstanding. Diluted weighted average common shares outstanding consists of basic weighted average common shares outstanding plus weighted average awards outstanding under our equity compensation plans, which are dilutive securities. 63 4. Earnings per Share (continued) The calculations of basic earnings per common share and earnings per common share – assuming dilution for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 are as follows (in thousands, except per share data): 2013 2012 2011 Basic earnings per common share: Net income attributable to the Company Increase in noncontrolling interest redemption value Net income attributable to participating securities Net income attributable to common shareholders $ $ $ 69,537 (510) (530) 68,497 61,660 - - 61,660 $ $ $ 54,735 - - 54,735 Weighted average common shares outstanding Basic earnings per common share 43,387 1.58 $ 46,916 1.31 $ 50,086 1.09 $ Earnings per common share - assuming dilution: Net income attributable to common shareholders $ 68,497 $ 61,660 $ 54,735 Weighted average common shares outstanding Dilutive effect of outstanding equity awards Diluted weighted average common shares outstanding Earnings per common share - assuming dilution 43,387 856 44,243 1.55 $ 46,916 894 47,810 1.29 $ 50,086 534 50,620 1.08 $ Shares subject to options to purchase common stock with an exercise price greater than the average market price for the year 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 antidilutive options was 129,000 in 2013 and 273,000 in 2011 (none in 2012). See Note 6 for additional information regarding our noncontrolling interests and Note 18 for equity awards, including restricted stock. 5. Fair Value Measurements and Disclosures We are 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. Fair value is a market- based measurement, not an entity specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash, accounts receivable and accounts payable. The fair value of our notes receivable net of allowances also approximates carrying value. The fair value of the amount outstanding under our revolving credit facility approximates its carrying value due to its variable market-based interest rate. These assets and liabilities are categorized as Level 1 as defined below. 64 5. Fair Value Measurements and Disclosures (continued) Certain assets and liabilities are measured at fair value on a recurring basis and 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 December 29, 2013 and December 30, 2012 are as follows (in thousands): Carrying Value Fair Value Measurements Level 2 Level 1 Level 3 December 29, 2013 Financial assets: Cash surrender value of life insurance policies (a) Financial liabilities: Interest rate swap (b) December 30, 2012 Financial assets: Cash surrender value of life insurance policies (a) Financial liabilities: Interest rate swap (b) $ 16,798 $ 16,798 $ - $ - 76 - 76 - $ 13,551 $ 13,551 $ - $ - 104 - 104 - (a) Represents life insurance policies held in our non-qualified deferred compensation plan. (b) 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”). There were no transfers among levels within the fair value hierarchy during fiscal 2013 or 2012. 65 6. Noncontrolling Interests Papa John’s has joint ventures in which there are noncontrolling interests, consisting of the following as of December 29, 2013, December 30, 2012 and December 25, 2011: Number of Restaurants Restaurant Locations Papa John's Ownership Noncontrolling Interest Ownership December 29, 2013 Star Papa, LP Colonel's Limited, LLC PJ Minnesota, LLC PJ Denver, LLC December 30, 2012 Star Papa, LP Colonel's Limited, LLC PJ Minnesota, LLC PJ Denver, LLC December 25, 2011 Star Papa, LP Colonel's Limited, LLC 81 52 33 25 78 52 30 22 76 52 Texas Maryland and Virginia Minnesota Colorado Texas Maryland and Virginia Minnesota Colorado Texas Maryland and Virginia 51% 70% 80% 60% 51% 70% 80% 60% 51% 70% 49% 30% 20% 40% 49% 30% 20% 40% 49% 30% The income before income taxes attributable to these joint ventures for the last three years was as follows (in thousands): 2013 2012 2011 Papa John's International, Inc. Noncontrolling interests Total income before income taxes $ $ 5,121 3,442 8,563 $ 6,823 4,342 11,165 $ $ $ 6,184 3,732 9,916 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 redemption value is adjusted at each reporting date and any change is recorded in interest expense. The adjustment to interest expense was income of $1.1 million in 2013, $1.0 million of expense in 2012 and $1.5 million of expense in 2011. The redemption value was $10.8 million as of December 29, 2013 and $11.8 million as of December 30, 2012. 66 6. Noncontrolling Interests (continued) The noncontrolling interest holders of two other joint ventures have the option to require the Company to purchase their interests. Since redemption of the noncontrolling interests is outside of the Company’s control, the noncontrolling interests are presented in the caption “Redeemable noncontrolling interests” in the consolidated balance sheets and include the following joint ventures: • 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. • The PJ Denver, LLC agreement contains a redemption feature that is currently redeemable and, therefore, this noncontrolling interest has been recorded at its current redemption value. The change in redemption value is recorded as an adjustment to “Redeemable noncontrolling interests” and “Retained earnings” in the consolidated balance sheets. We have a fourth joint venture, PJ Minnesota, LLC, that had a redemption feature until a contract amendment removed the redemption feature in the fourth quarter of 2013. The noncontrolling interest was reclassified from temporary equity to “Stockholders’ equity” in the consolidated balance sheet at December 29, 2013, at carrying value. The following summarizes changes in our redeemable noncontrolling interests (in thousands): $ $ 3,965 2,363 2,052 (2,000) 6,380 1,718 850 (2,000) 510 (434) 7,024 $ Balance at December 25, 2011 Net income Contributions from redeemable noncontrolling interest holders Distributions to redeemable noncontrolling interest holders Balance at December 30, 2012 Net income Contributions from redeemable noncontrolling interest holders Distributions to redeemable noncontrolling interest holders Change in redemption value Reclassification from temporary equity to permanent equity Balance at December 29, 2013 67 7. Acquisitions During 2012, we acquired 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 $700,000 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 purchase price of the acquisition has been allocated based on fair value estimates as follows (in thousands): Property and equipment Reacquired franchise right Goodwill Other, including cash Total purchase price $ 1,602 245 3,830 239 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 eligible for deduction over 15 years under the U.S. tax regulations. In July 2012, Papa John’s and a third party formed a limited liability company (PJ Minnesota, LLC) to operate the previously acquired Minneapolis restaurants. The Company’s equity (80% ownership) in the operations was funded by the contribution of the acquired restaurants, while the third party’s equity (20% ownership) was funded through a $275,000 loan issued by Papa John’s and a $25,000 cash contribution. There was no gain or loss on this transaction. We are required to fully consolidate the financial results of this limited liability company. See Note 6 for additional information. In September 2012, Papa John’s and a third party formed a limited liability company (PJ Denver, LLC) to operate the previously acquired Denver restaurants. The Company’s equity (60% ownership) in the operations was funded by the contribution of the acquired restaurants and cash (total value of $2.5 million), while the third party’s equity (40% ownership) was funded by a cash contribution of $1.7 million. There was no gain or loss on this transaction. We are required to fully consolidate the financial results of this limited liability company. See Note 6 for additional information. There were no significant acquisitions during 2013 or 2011. 68 8. Goodwill The following summarizes changes to the Company’s goodwill, by reporting segment (in thousands): Domestic Company- owned Restaurants International (a) $ $ All Others 436 $ - - - 436 - $ 436 Total $ 75,085 3,943 (636) 566 78,958 433 79,391 19,389 - - 566 19,955 433 20,388 $ $ $ Balance as of December 25, 2011 Acquisitions (b) Divestitures Foreign currency adjustments Balance as of December 30, 2012 Foreign currency adjustments Balance as of December 29, 2013 55,260 3,943 (636) - 58,567 - 58,567 (a) The international goodwill balances for all years presented are net of accumulated impairment of $2.3 million associated with our PJUK reporting unit, which was recorded in fiscal 2008. (b) Includes 56 restaurants located in the Denver and Minneapolis markets and one restaurant in another market. For fiscal years 2011-2013, we performed a qualitative analysis for our domestic Company-owned restaurants and our China reporting unit. For our PJUK reporting unit, which is included in the international reporting segment, we performed a quantitative analysis. Upon completion of our goodwill impairment tests in 2011-2013, no impairment charges were recorded. 9. Debt and Credit Arrangements Our debt is comprised entirely of a revolving credit facility. The outstanding balance under this facility was $157.9 million as of December 29, 2013 and $88.3 million as of December 30, 2012. In September 2010, we entered into a five-year, $175 million unsecured revolving credit facility, which was amended in November 2011 to extend the maturity date to November 30, 2016. On April 30, 2013, we amended and restated our revolving credit facility to increase the amount available for borrowing thereunder to $300 million and extend the maturity date to April 30, 2018. The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points. The remaining availability under the revolving credit facility, reduced for outstanding letters of credit, was approximately $121.4 million as of December 29, 2013. The credit facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At December 29, 2013, we were in compliance with these covenants. 69 9. Debt and Credit Arrangements (continued) In August 2011, we entered into an interest rate swap agreement that resulted in a fixed rate of 0.53%, instead of the variable rate of LIBOR, with a notional amount of $50.0 million and a maturity date of August 2013. On December 31, 2012, we amended our interest rate swap agreement to extend the maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56% from 0.53%) but did not impact the notional amount of the interest rate swap agreement. On July 30, 2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our revolving credit facility. The termination of the previous swap did not have a material impact on our 2013 results. Our swap is a derivative instrument that is designated as a cash flow hedge because the swap provides 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 December 29, 2013, the swap is a highly effective cash flow hedge with no ineffectiveness during the period ended December 29, 2013. The following table provides information on the location and amounts of our swaps in the accompanying consolidated financial statements (in thousands): Liability Derivatives Balance Sheet Location Fair Value Dec. 29, 2013 Fair Value Dec. 30, 2012 Interest rate swaps Other long-term liabilities $ 76 $ 104 There were no derivatives that were not designated as hedging instruments. 70 9. Debt and Credit Arrangements (continued) The effect of derivative instruments on the accompanying consolidated financial statements is as follows (in thousands): Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Derivatives - Cash Flow Hedging Relationships Interest rate swaps: Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) 2013 2012 2011 $ $ $ (32) (72) 165 Interest expense Interest expense Interest expense $ $ $ (501) (150) (341) Interest expense Interest expense Interest expense $ - $ - $ 65 The weighted average interest rates for the credit facilities, including the impact of the previously mentioned swap agreements, were 1.4%, 1.3% and 1.9% in fiscal 2013, 2012 and 2011, respectively. Interest paid, including payments made or received under the swaps, was $2.0 million in 2013, $967,000 in 2012 and $1.6 million in 2011. As of December 29, 2013, the portion of the $76,000 liability associated with the interest rate swap that would be reclassified into earnings during the next 12 months as interest expense approximates $17,000. 10. Net Property and Equipment Net property and equipment consists of the following (in thousands): 2013 2012 $ $ 33,000 86,763 106,487 280,381 20,155 526,786 (314,689) 212,097 32,776 86,219 96,652 249,055 23,262 487,964 (291,303) 196,661 $ $ Land Buildings and improvements Leasehold improvements Equipment and other Construction in progress Total property and equipment Accumulated depreciation and amortization Net property and equipment 71 11. Notes Receivable Selected franchisees have borrowed funds from the Company, principally for use in the acquisition, construction and development of their restaurants. We have also entered into loan agreements with certain franchisees that purchased restaurants from us or from other franchisees. Loans outstanding were approximately $16.8 million and $17.1 million on a consolidated basis as of December 29, 2013 and December 30, 2012, respectively, net of allowance for doubtful accounts. Notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchisee. The carrying amounts of the loans approximate fair value. Interest income recorded on franchisee loans was approximately $527,000 in 2013, $631,000 in 2012 and $665,000 in 2011 and is reported in investment income in the accompanying consolidated statements of income. Based on our review of certain borrowers’ economic performance and underlying collateral value, we established allowances of $3.4 million and $5.0 million as of December 29, 2013 and December 30, 2012, respectively, for potentially uncollectible notes receivable. The following summarizes changes in our notes receivable allowance for doubtful accounts (in thousands): Balance as of December 25, 2011 Charged to costs and expenses Deductions, including notes written off Balance as of December 30, 2012 Recovered from costs and expenses Deductions, including notes written off Balance as of December 29, 2013 12. Insurance Reserves $ 5,905 280 (1,157) 5,028 (495) (1,146) 3,387 $ The following table summarizes changes in our insurance program reserves (in thousands): Balance as of December 25, 2011 Expense Payments Balance as of December 30, 2012 Expense Payments Balance as of December 29, 2013 $ 19,278 27,728 (24,703) 22,303 23,187 (26,025) 19,465 $ We are a party to standby letters of credit with off-balance sheet risk associated with our insurance programs. The total amount committed under letters of credit for these programs was $20.6 million at December 29, 2013. 72 13. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in thousands): 2013 2012 Salaries, benefits and bonuses Purchases Insurance reserves, current Rent Customer loyalty program Consulting and professional fees Utilities Deposits Marketing Other Total $ $ 20,166 10,349 7,907 7,024 1,682 1,670 1,381 1,370 1,353 4,905 57,807 22,370 9,903 11,532 6,314 1,137 1,766 1,240 761 1,079 4,426 60,528 $ $ 14. Other Long-term Liabilities Other long-term liabilities consist of the following (in thousands): 2013 2012 Deferred compensation plan Insurance reserves Mandatorily redeemable noncontrolling interests Other Total $ $ 15,798 11,558 10,786 4,693 42,835 12,775 10,771 11,837 5,291 40,674 $ $ 15. Income Taxes A summary of the provision for income taxes follows (in thousands): 2013 2012 2011 Current: Federal Foreign State and local Deferred (federal and state) Total $ $ $ 19,731 1,974 822 10,603 33,130 26,065 1,669 2,624 2,035 32,393 $ $ $ 14,383 1,273 850 9,818 26,324 73 15. Income Taxes (continued) Significant deferred tax assets (liabilities) follow (in thousands): Accrued liabilities Accrued bonuses Other assets and liabilities Equity awards Other Foreign net operating losses Valuation allowance on foreign net operating losses and foreign deferred tax assets Total deferred tax assets Deferred expenses Accelerated depreciation Goodwill Other Total deferred tax liabilities Net deferred (liability) asset 2013 2012 $ 10,584 4,153 10,209 5,974 3,992 7,233 $ 10,412 5,365 11,492 5,377 4,643 7,896 (7,682) 34,463 (8,240) 36,945 (5,655) (16,838) (13,953) (4,673) (41,119) (6,656) $ (4,581) (15,966) (12,269) (4,522) (37,338) (393) $ The Company had approximately $34.0 million and $32.5 million of foreign tax net operating loss carryovers as of December 29, 2013 and December 30, 2012, respectively, for which a full valuation allowance has been provided. A substantial majority of our foreign tax net operating losses do not have an expiration date. The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 is as follows in both dollars and as a percentage of income before income taxes ($ in thousands): 2013 2012 2011 Income Tax Expense Income Tax Rate Income Tax Expense Income Tax Rate Income Tax Expense Income Tax Rate Tax at U.S. federal statutory rate State and local income taxes Foreign income taxes Settlement of certain tax issues Income of consolidated partnerships attributable to noncontrolling interests Non-qualified deferred compensation plan (income) loss Tax credits and other Total $ 37,138 1,820 1,974 (909) 35.0% 1.7% 1.9% (0.9%) $ 34,438 1,936 1,669 305 35.0% 2.0% 1.7% 0.3% $ 29,677 1,702 1,273 (711) 35.0% 2.0% 1.5% (0.9%) (1,263) (1.2%) (1,604) (1.6%) (1,379) (1.6%) (599) (5,031) 33,130 $ (0.6%) (4.7%) 31.2% (355) (3,996) 32,393 $ (0.4%) (4.1%) 32.9% 153 (4,391) 26,324 $ 0.2% (5.2%) 31.0% 74 15. Income Taxes (continued) Income taxes paid were $29.3 million in 2013, $25.3 million in 2012 and $15.6 million in 2011. The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company, with few exceptions, is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009. The Company is currently undergoing examinations by various tax authorities. The Company anticipates that the finalization of these current examinations and other issues could result in a decrease in the liability for unrecognized tax benefits (and a decrease of income tax expense) of approximately $287,000 during the next 12 months. The Company had $2.7 million of unrecognized tax benefits at December 29, 2013 of which, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for unrecognized tax benefits is as follows (in thousands): Balance at December 25, 2011 Additions for tax positions of prior years Reductions for lapse of statute of limitations Balance at December 30, 2012 Additions for tax positions of prior years Reductions for lapse of statute of limitations Settlements Balance at December 29, 2013 $ 2,988 664 (222) 3,430 170 (241) (698) 2,661 $ The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a part of income tax expense. The Company’s 2013 and 2012 income tax expense includes interest benefits of $140,000 and $137,000, respectively. The Company has accrued approximately $707,000 and $846,000 for the payment of interest and penalties as of December 29, 2013 and December 30, 2012, respectively. 16. Related Party Transactions Certain of our officers and directors own equity interests in entities that franchise restaurants. Following is a summary of full-year transactions and year-end balances with franchisees owned by related parties, PJMF and Papa Card, Inc. (in thousands): 2013 2012 2011 Revenues from affiliates: Commissary sales Other sales Franchise royalties Franchise and development fees Total $ $ $ 2,426 482 351 - 3,259 23,145 2,394 3,771 - 29,310 22,132 2,352 3,579 15 28,078 $ $ $ Accounts receivable - affiliates $ 284 $ 1,062 $ 682 The revenues from affiliates were at rates and terms available to independent franchisees. Additionally, the table excludes transactions and balances in 2013 for a former non-management director. 75 16. Related Party Transactions (continued) We paid $1.1 million in 2013, $1.1 million in 2012 and $1.0 million in 2011 for charter aircraft services provided by an entity owned by our Founder, Chairman and Chief Executive Officer. On November 12, 2013, we repurchased $38.6 million of our common stock (1.0 million shares at the closing price of $38.61 per share) from our Founder, Chairman and Chief Executive Officer. 17. Litigation, Commitments and Contingencies Litigation The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450 “Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Agne v. Papa John’s International, Inc. et al. is a class action filed on May 28, 2010 in the United States District Court for the Western District of Washington seeking damages for violations of the Telephone Consumer Protection Act and Washington State telemarketing laws alleging, among other things that several Papa John’s franchisees retained a vendor to send unsolicited commercial text message offers primarily in Washington and Oregon. The court granted plaintiff’s motion for class certification in November 2012; we filed a petition for permission to appeal the court’s ruling on class certification to the United States Court of Appeals for the Ninth Circuit. In February 2013, the parties tentatively agreed to the financial terms of a settlement of the litigation. The court preliminarily approved the terms in June 2013 and granted final approval of the settlement and fee award in October 2013, following the close of the claims period. The actual settlement cost was $2.9 million, and all settlement and fee payments were made in 2013. Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective action filed in August 2009 in the United States District Court, Eastern District of Missouri, alleging that delivery drivers were not reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act. Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the action. Additionally, in late December 2013, the District Court granted a motion for class certification in five additional states, which could add an additional 5,000 to 10,000 plaintiffs to the case. We intend to vigorously defend against all claims in this lawsuit. However, given the inherent uncertainties of litigation, the outcome of this case cannot be predicted and the amount of any potential loss cannot be reasonably estimated. A negative outcome in this case could have a material adverse effect on the Company. 76 17. Litigation, Commitments and Contingencies (continued) Leases We lease office, retail and commissary space under operating leases, which have an average term of five years and provide for at least one renewal. Certain leases further provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index. PJUK, our subsidiary located in the United Kingdom, leases certain retail space, which is primarily subleased to our franchisees. We also lease the tractors and trailers used by our distribution subsidiary, PJFS, for an average period of seven years. Total lease expense was $33.2 million in 2013, $28.7 million in 2012 and $25.7 million in 2011, net of sublease payments received. We subleased certain sites to our Papa John’s franchisees located in the United Kingdom in 2013, 2012 and 2011 and received payments of $4.9 million, $3.8 million and $3.7 million, respectively, which are netted with international operating expenses. Future gross lease costs, future expected sublease payments and net lease costs as of December 29, 2013, are as follows (in thousands): Gross Lease Costs Future Expected Sublease Payments Net Lease Costs $ $ $ 38,304 34,444 29,423 24,088 17,551 41,441 185,251 5,508 5,003 4,735 4,582 4,444 26,214 50,486 32,796 29,441 24,688 19,506 13,107 15,227 134,765 $ $ $ Year 2014 2015 2016 2017 2018 Thereafter Total As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 25 domestic leases. These leases have varying terms, the latest of which expires in 2018. As of December 29, 2013, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $1.6 million. As the fair value of the guarantees is not considered significant, no liability has been recorded. In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we remain contingently liable for payment of approximately 30 leases, which have varying terms with most expiring by the end of 2015. As the initial party to the lease agreements, we are liable to the extent the primary obligor does not satisfy its payment obligations. As of December 29, 2013, 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 $1.1 million, net of amounts reserved of approximately $100,000. The Company’s headquarters facility is leased under a capital lease arrangement with the City of Jeffersontown, Kentucky in connection with the issuance of $80.2 million in Industrial Revenue Bonds. The bonds are held 100% by the Company and, accordingly, the bond obligation and investment and related interest income and expense are eliminated in the consolidated financial statements resulting in the Company’s net investment cost being reported in net property and equipment. 77 18. Equity Compensation We award stock options and restricted stock (both time- and performance-based) from time to time under the Papa John’s International, Inc. 2011 Omnibus Incentive Plan and other such agreements as may arise. There are approximately 7.8 million shares of common stock authorized for issuance and remaining available under the 2011 Omnibus Incentive Plan as of December 29, 2013, which includes 4.0 million shares transferred from the Papa John’s International, Inc. 2008 Omnibus Incentive Plan. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Options outstanding as of December 29, 2013 generally expire five or ten years from the date of grant and vest over a three-year period. We recorded stock-based employee compensation expense of $7.4 million in 2013, $6.9 million in 2012 and $6.7 million in 2011. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $2.7 million in 2013, $2.4 million in 2012 and $2.2 million in 2011. At December 29, 2013, there was $5.9 million of unrecognized compensation cost related to nonvested option awards and restricted stock, of which the Company expects to recognize $4.4 million in 2014, $1.3 million in 2015 and $193,000 in 2016. Stock Options Options exercised included 697,000 shares in 2013, 864,000 shares in 2012 and 1.1 million shares in 2011. The total intrinsic value of the options exercised during 2013, 2012 and 2011 was $13.1 million, $7.5 million and $4.6 million, respectively. Cash received upon the exercise of stock options was $6.9 million, $12.3 million and $14.0 million during 2013, 2012 and 2011, respectively, and the related tax benefits realized were approximately $4.8 million, $2.6 million and $1.7 million during the corresponding periods. Information pertaining to option activity during 2013 is as follows (number of options and aggregate intrinsic value in thousands): Weighted Average Weighted Remaining Outstanding at December 30, 2012 Granted Exercised Cancelled Outstanding at December 29, 2013 Exercisable at December 29, 2013 Number Average Contractual Aggregate Intrinsic Value Term (In Years) Exercise Price $14.39 27.14 13.59 20.41 $17.39 $13.61 4.27 1.56 $58,030 $37,084 of Options 2,400 498 (697) (97) 2,104 1,182 78 18. Equity Compensation (continued) The following is a summary of the significant assumptions used in estimating the fair value of options granted in 2013, 2012 and 2011: Assumptions (weighted average): Risk-free interest rate Expected dividend yield Expected volatility Expected term (in years) 2013 2012 2011 1.1% 0.1% 37.5% 6.0 1.1% 0.0% 37.8% 6.0 1.5% 0.0% 41.2% 3.7 The risk-free interest rate for the periods within the contractual life of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the annual dividend divided by the market price of the Company’s shares on the date of grant. Expected volatility was estimated by using the Company’s historical share price volatility for a period similar to the expected life of the option. Options granted in 2013 and 2012 generally vest in equal installments over three years and expire ten years after grant. The expected term for these options represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method prescribed by Securities and Exchange Commission rules and regulations as there was insufficient historical detail to be used as an alternative basis to estimating the term. The expected term for options granted in 2011 that expire five years from the grant date was based on an analysis of actual historical exercises and forfeitures. The weighted average grant-date fair values of options granted during 2013, 2012 and 2011 was $9.87, $7.04 and $4.75, respectively. The Company granted 498,000, 508,000 and 806,000 options in 2013, 2012 and 2011, respectively. Restricted Stock In 2013, 2012 and 2011, we granted shares of restricted stock that were time-based and generally vest in equal installments over three years. These restricted shares are intended to focus participants on our long- range objectives, while at the same time serving as a retention mechanism. We consider time-based restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights. In 2013, we declared dividends totaling $86,000 ($0.25 per share) to holders of time- based restricted stock. Additionally, we granted approximately 111,000 shares of performance-based restricted stock units to executive management. These awards cliff-vest at the end of three years, in February 2015, based upon the Company’s achievement of a compounded annual growth rate of earnings per share and the achievement of certain sales and unit growth metrics. The fair value of both time- and performance-based restricted stock is based on the market price of the Company’s shares on the grant date. 79 18. Equity Compensation (continued) Information pertaining to restricted stock activity during 2013, 2012 and 2011 is as follows (shares in thousands): Weighted Average Grant-Date Fair Value $ 13.31 14.54 13.50 13.64 14.10 18.59 15.46 13.89 16.31 27.09 18.56 15.51 20.39 $ Shares 568 320 (156) (232) 500 266 (74) (156) 536 160 (70) (203) 423 Total as of December 26, 2010 Granted Forfeited Vested Total as of December 25, 2011 Granted Forfeited Vested Total as of December 30, 2012 Granted Forfeited Vested Total as of December 29, 2013 19. Employee Benefit Plans We have established the Papa John’s International, Inc. 401(k) Plan (the “401(k) Plan”), as a defined contribution benefit plan, in accordance with Section 401(k) of the Internal Revenue Code. The 401(k) Plan is open to employees who meet certain eligibility requirements and allows participating employees to defer receipt of a portion of their compensation and contribute such amount to one or more investment funds. At our discretion, we may make matching contribution payments, which are subject to vesting based on an employee’s length of service with us. In addition, we maintain a non-qualified deferred compensation plan available to certain employees and directors. Under this plan, the participants may defer a certain amount of their compensation, which is credited to the participants’ accounts. The participant-directed investments associated with this plan are included in other long-term assets ($16.8 million and $13.6 million at December 29, 2013 and December 30, 2012, respectively) and the associated liabilities ($15.8 million and $12.8 million at December 29, 2013 and December 30, 2012, respectively) are included in other long-term liabilities in the accompanying consolidated balance sheets. At our discretion, we contributed a matching payment of 1.5%, up to a maximum of 6% deferred, in 2013, 2012 and 2011 of a participating employee’s earnings deferred into both the 401(k) Plan and the non-qualified deferred compensation plan. Such costs were $691,000 in 2013, $630,000 in 2012 and $550,000 in 2011. PJUK, the Company’s United Kingdom subsidiary, provided a pension plan that was frozen in 1999. There are 11 participants in the PJUK pension plan. The Company recorded expense of $60,000, $154,000 and $268,000 associated with the pension plan for the fiscal years ended 2013, 2012 and 2011, respectively. The pension plan was fully funded at December 29, 2013. The Company is taking steps to transfer the remaining assets and liabilities of the pension plan to an outside insurance company. 80 20. Segment Information We have five reportable segments for all years presented: domestic Company-owned restaurants, domestic commissaries, North America franchising, international operations, and “all other” units. In 2011, we had a sixth segment, variable interest entities (“VIEs”). 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 poppers, 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 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. 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. In 2011, our VIE segment consisted of BIBP Commodities, Inc. (“BIBP”), a special-purpose entity formed at the direction of our Franchise Advisory Council, for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. BIBP operated through February 2011. 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. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). 81 20. Segment Information (continued) Our segment information is as follows: (In thousands) 2013 2012 2011 Revenues from external customers: Domestic Company-owned restaurants Domestic commissaries North America franchising International All others Total revenues from external customers Intersegment revenues: Domestic commissaries North America franchising International Variable interest entities (1) All others Total intersegment revenues Depreciation and amortization: Domestic Company-owned restaurants Domestic commissaries International All others Unallocated corporate expenses Total depreciation and amortization Income (loss) before income taxes: Domestic Company-owned restaurants Domestic commissaries North America franchising International All others Unallocated corporate expenses Elimination of intersegment profits Total income before income taxes $ $ $ 635,317 578,870 82,873 88,640 53,322 1,439,022 592,203 545,924 80,373 72,930 51,223 1,342,653 $ $ $ 525,841 508,155 74,416 58,558 50,912 1,217,882 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 171,212 2,267 229 - 11,606 185,314 13,242 4,738 2,824 4,801 7,193 32,798 38,114 34,317 69,332 3,063 2,889 (48,958) (362) 98,395 151,423 2,163 215 25,117 10,468 189,386 12,965 4,633 2,398 4,663 8,022 32,681 28,980 30,532 66,222 (165) (441) (39,727) (610) 84,791 191,756 2,222 280 - 14,197 208,455 13,284 5,690 3,966 5,320 6,845 35,105 34,590 37,804 70,201 2,803 3,490 (41,025) (1,754) 106,109 $ $ $ (1) The intersegment revenues for variable interest entities of $25.1 million in 2011 are attributable to BIBP, which operated as an independent, franchisee-owned corporation. BIBP purchased cheese at the market price and sold it to our distribution subsidiary, PJ Food Service, Inc. (“PJFS”), at a fixed price. PJFS in turn sold cheese to Papa John’s restaurants (both Company-owned and franchised) at a set price. PJFS purchased $25.1 million of cheese for the three months ended March 27, 2011. Prior to the termination of the purchasing agreement with BIBP in 2011, we recognized the operating losses generated by BIBP when BIBP’s shareholders’ equity was in a net deficit position. Further, we recognized the subsequent operating income generated by BIBP up to the amount of any losses previously recognized. Prior to ceasing operating activities, BIBP operated at break-even for the three months ended March 27, 2011. 82 20. Segment Information (continued) (In thousands) 2013 2012 2011 Property and equipment: Domestic Company-owned restaurants Domestic commissaries International All others Unallocated corporate assets Accumulated depreciation and amortization Net property and equipment Expenditures for property and equipment: Domestic Company-owned restaurants Domestic commissaries International All others Unallocated corporate Total expenditures for property and equipment $ $ $ 195,526 104,509 27,225 41,064 158,462 (314,689) 212,097 13,149 9,791 3,754 4,689 19,367 50,750 184,322 101,082 22,389 37,221 142,950 (291,303) 196,661 9,319 14,314 4,865 3,342 10,788 42,628 $ $ $ $ $ $ 176,506 85,714 17,413 33,984 132,098 (263,805) 181,910 14,094 5,612 1,733 1,792 6,088 29,319 $ $ $ 21. Quarterly Data - Unaudited, in Thousands, except Per Share Data Our quarterly select financial data is as follows: 2013 1st 2nd 3rd 4th Quarter Total revenues Operating income Net income attributable to the Company Basic earnings per common share Earnings per common share - assuming dilution Dividends declared per common share $ 355,604 29,625 19,306 0.43 $ $ 0.42 $ - $ 349,186 26,948 17,150 0.39 $ $ 0.39 $ - $ 346,342 21,448 14,276 0.33 0.32 0.125 $ $ $ $ 387,890 28,482 18,805 0.42 0.41 0.125 $ $ $ 2012 1st 2nd 3rd 4th Quarter Total revenues Operating income Net income attributable to the Company Basic earnings per common share Earnings per common share - assuming dilution $ 331,276 27,256 16,981 0.35 0.35 $ $ $ 318,579 24,327 14,289 0.30 0.30 $ $ $ 325,514 21,205 13,031 0.28 0.27 $ $ $ 367,284 27,019 17,359 0.38 0.37 $ $ 83 21. Quarterly Data - Unaudited, in Thousands, except Per Share Data (continued) All quarterly information above except for the fourth quarter of 2012 is presented in 13-week periods. The fourth quarter of 2012 includes a 14-week period, which increased revenues approximately $21.5 million and increased operating income approximately $4.1 million, or $0.05 per diluted share. The Incentive Contribution reduced first quarter 2012 operating income by approximately $3.7 million, or $0.05 per diluted share, and increased each of the second, third and fourth quarters of 2012 and each quarter of 2013 by approximately $250,000. The impact of the 53rd week of operations in 2012 was substantially offset by the Incentive Contribution on a full-year basis. See “Items Impacting Comparability; Non-GAAP Measures” of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information. Quarterly earnings per share on a full-year basis may not agree to the consolidated statements of income due to rounding. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective. (b) Management’s Report on our Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and the board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 1992 framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the 1992 framework established in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 29, 2013. Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting. 84 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 29, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (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 opinion, Papa John’s International, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 29, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 29, 2013 and December 30, 2012, 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 29, 2013 of Papa John’s International, Inc. and Subsidiaries and our report dated February 25, 2014 expressed an unqualified opinion thereon. Louisville, Kentucky February 25, 2014 /s/ Ernst & Young LLP 85 (c) Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 29, 2013 that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. Item 10. Directors, Executive Officers and Corporate Governance PART III Information regarding executive officers is included above under the caption “Executive Officers of the Registrant” at the end of Part I of this Report. Other information regarding directors, executive officers and corporate governance appearing under the captions “Corporate Governance,” “Item 1, Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Executive Compensation / Compensation Discussion and Analysis” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report. We have adopted a written code of ethics that applies to our directors, officers and employees. We intend to post all required disclosures concerning any amendments to, or waivers from, our code of ethics on our website to the extent permitted by NASDAQ. Our code of ethics can be found on our website, which is located at www.papajohns.com. Item 11. Executive Compensation Information regarding executive compensation appearing under the captions “Executive Compensation / Compensation Discussion and Analysis,” “Compensation Committee Report” and “Certain Relationships and Related Transactions – Compensation Committee Interlocks and Insider Participation” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report. 86 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table provides information as of December 29, 2013 regarding the number of shares of the Company’s common stock that may be issued under the Company’s equity compensation plans. (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans, excluding securities reflected in column (a) 2,103,932 164,486 2,268,418 $17.39 $17.39 7,848,244 7,848,244 Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders * Total * Represents shares of common stock issuable pursuant to the non-qualified deferred compensation plan. The weighted average exercise price (column b) does not include any assumed price for issuance of shares pursuant to the non-qualified deferred compensation plan. Information regarding security ownership of certain beneficial owners and management and related stockholder matters appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report. Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence appearing under the captions “Corporate Governance” and “Certain Relationships and Related Transactions” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report. Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services appearing under the caption “Ratification of the Selection of Independent Auditors” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report. 87 PART IV Item 15. Exhibits, Financial Statement Schedules (a)(1) Financial Statements: The following consolidated financial statements, notes related thereto and reports of independent auditors are included in Item 8 of this Report: • Reports of Independent Registered Public Accounting Firm • Consolidated Statements of Income for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 • Consolidated Statements of Comprehensive Income for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 • Consolidated Balance Sheets as of December 29, 2013 and December 30, 2012 • Consolidated Statements of Stockholders’ Equity for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 • Consolidated Statements of Cash Flows for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 • Notes to Consolidated Financial Statements 88 (a)(2) Financial Statement Schedules: Schedule II – Valuation and Qualifying Accounts (in thousands) Classification Fiscal year ended December 29, 2013: Deducted from asset accounts: Reserve for uncollectible accounts receivable Reserve for franchisee notes receivable Valuation allowance on foreign net operating losses Fiscal year ended December 30, 2012: Deducted from asset accounts: Reserve for uncollectible accounts receivable Reserve for franchisee notes receivable Valuation allowance on foreign net operating losses Fiscal year ended December 25, 2011: Deducted from asset accounts: Reserve for uncollectible accounts receivable Reserve for franchisee notes receivable Valuation allowance on foreign net operating losses Balance at Beginning of Year Charged to (recovered from) Costs and Expenses Additions / (Deductions) Balance at End of Year $ $ $ $ $ $ $ $ 3,057 5,028 8,240 16,325 3,034 5,905 7,474 16,413 2,795 9,951 8,123 20,869 $ $ $ $ 2,416 (495) (558) 1,363 1,394 280 766 2,440 1,072 (35) (649) 388 (1) (1) (1) (1) (1) (1) $ $ (1,155) (1,146) - (2,301) $ $ (1,371) (1,157) - (2,528) $ (833) (4,011) - (4,844) $ $ 4,318 3,387 7,682 15,387 $ $ 3,057 5,028 8,240 16,325 $ $ 3,034 5,905 7,474 16,413 $ (1) Uncollectible accounts written off, net of recoveries and reclassifications between accounts and notes receivable reserves. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a)(3) Exhibits: The exhibits listed in the accompanying index to Exhibits are filed as part of this Form 10-K. 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 25, 2014 PAPA JOHN’S INTERNATIONAL, INC. By: /s/ John H. Schnatter John H. Schnatter Founder, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ John H. Schnatter John H. Schnatter Founder, Chairman and Chief Executive Officer (Principal Executive Officer) February 25, 2014 /s/ Norborne P. Cole, Jr. Norborne P. Cole, Jr. Director February 25, 2014 /s/ Christopher L. Coleman Director Christopher L. Coleman /s/ Philip Guarascio Philip Guarascio /s/ Olivia F. Kirtley Olivia F. Kirtley Director Director /s/ Mark S. Shapiro Mark S. Shapiro Director February 25, 2014 February 25, 2014 February 25, 2014 February 25, 2014 /s/ W. Kent Taylor W. Kent Taylor /s/ Lance F. Tucker Lance F. Tucker Director February 25, 2014 Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) February 25, 2014 90 Exhibit Number 3.1 3.2 3.3 4.1 4.2 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* EXHIBIT INDEX Description of Exhibit Our Amended and Restated Certificate of Incorporation. Exhibit 3.1 to our Registration Statement on Form S-1 (Registration No. 33-61366) is incorporated herein by reference. Our Certificate of Amendment of Amended and Restated Certificate of Incorporation. Exhibit 3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1997, is incorporated herein by reference. Our Restated By-Laws. Exhibit 3.1 to our report on Form 8-K dated December 5, 2007 is incorporated herein by reference. Specimen Common Stock Certificate. Exhibit 4.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (Commission File No. 0-21660) is incorporated herein by reference. Amended and Restated Certificate of Incorporation and Restated By-Laws (see Exhibits 3.1, 3.2 and 3.3 above) are incorporated herein by reference. Employment Agreement between Papa John’s International, Inc. and Stephen M. Ritchie Effective March 5, 2012, as Amended December 21, 2012. Papa John’s International, Inc. Deferred Compensation Plan, as amended through December 5, 2012. Exhibit 10.1 to our report on Form 10-K as filed on February 28, 2013 is incorporated herein by reference. Employment Agreement between Papa John’s International, Inc. and Anthony N. Thompson Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.2 to our report on Form 10-K as filed on February 28, 2013 is incorporated herein by reference. Employment Agreement between Papa John’s International, Inc. and Lance F. Tucker Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.3 to our report on Form 10-K as filed on February 28, 2013 is incorporated herein by reference. Employment Agreement between Papa John’s International, Inc. and Timothy C. O’Hern Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.5 to our report on Form 10-K as filed on February 28, 2013 is incorporated herein by reference. Papa John’s International, Inc. 2008 Omnibus Incentive Plan. Exhibit 10.1 to our Registration Statement on Form S-8 (Registration No. 333-150762) dated May 5, 2008 is incorporated herein by reference. Papa John’s International, Inc. 2011 Omnibus Incentive Plan. Exhibit 4.1 to our report on Form 8-K as filed on May 3, 2011 is incorporated herein by reference. 91 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16 10.17 Agreement for Service as Chairman between John H. Schnatter and Papa John’s International, Inc. Exhibit 10.1 to our report on Form 8-K as filed on August 15, 2007 is incorporated herein by reference. Agreement for Service as Founder between John H. Schnatter and Papa John’s International, Inc. Exhibit 10.1 to our report on Form 8-K as filed on August 15, 2007 is incorporated herein by reference. Amendment and Restated Exclusive License Agreement between John H. Schnatter and Papa John’s International, Inc. Exhibit 10.1 to our report on Form 8-K as filed on May 19, 2008 is incorporated herein by reference. Papa John’s International, Inc. Severance Pay Plan. Exhibit 10.1 to our report on Form 10-Q filed on May 1, 2012, is incorporated herein by reference. Employment Agreement between Papa John’s International, Inc. and Andrew M. Varga Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.4 to our report on Form 10-K as filed on February 28, 2013 is incorporated herein by reference. Transition Agreement and Release between Papa John’s International, Inc. and Andrew M. Varga dated April 19, 2013. Exhibit 10.1 to our Report on Form 8-K/A as filed on April 23, 2013 is incorporated herein by reference. Employment Agreement between Papa John’s International, Inc. and Christopher J. Sternberg dated March 5, 2012. Exhibit 10.2 to our Report on Form 8-K as filed on March 7, 2012 is incorporated herein by reference. Separation and Consulting Agreement and Release between Christopher J. Sternberg and Papa John’s International, Inc. Exhibit 10.1 to our report on Form 10-Q as filed on July 31, 2012 is incorporated herein by reference. $300,000,000 Revolving Credit Facility / First Amended and Restated Credit Agreement dated April 30, 2013 by and among Papa John’s International, Inc., the Guarantors Party thereto, RSC Insurance Services, Ltd., a Bermuda company, the Banks party thereto, PNC Bank, National Association, as Administrative Agent, JPMorgan Chase Bank, N.A., as Co-Syndication Agent, U.S. Bank National Association, as Co-Syndication Agent, Bank of America, N.A., as Documentation Agent, PNC Capital Markets LLC, as Joint Lead Arranger and as Joint Bookrunner, and J.P. Morgan Securities LLC, as Joint Lead Arranger and as Joint Bookrunner. Exhibit 10.1 to our Report on Form 8-K as filed on May 6, 2013 is incorporated herein by reference. $175,000,000 Revolving Credit Facility by and among Papa John’s International, Inc., the Guarantors party thereto, RSC Insurance Services, Ltd., a Bermuda company, the Banks party thereto, PNC Bank, National Association, as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, U.S. Bank, National Association, as Co-Documentation Agent, Bank of America, N.A., as Co-Documentation Agent, Fifth Third Bank, as Co-Documentation Agent, PNC Capital Markets LLC, as Joint Lead Arranger and as Joint Bookrunner, and J.P. Morgan Securities LLC, as Joint Lead Arranger and as Joint Bookrunner dated September 2, 2010. Exhibit 10.1 to our report on Form 8-K as filed on September 9, 2010 is incorporated by reference. 92 10.18 21 23 31.1 31.2 32.1 32.2 101 First Amendment to Credit Agreement by and among Papa John’s International, Inc. the Guarantors party thereto, RSC Insurance Services, Ltd., a Bermuda company, PNC Bank, National Association, as a Bank and as Administrative Agent, JPMorgan Chase Bank, N.A., as a Bank and as Syndication Agent, Bank of America, N.A., as a Bank and as Co- Documentation Agent, Fifth Third Bank, as a Bank and as Co-Documentation Agent, U.S. Bank, National Association, as a Bank and as Co-Documentation Agent, and Branch Banking and Trust Company, as a Bank, dated November 30, 2011. Exhibit 10.1 to our report on Form 8-K filed December 1, 2011 is incorporated by reference. Subsidiaries of the Company. Consent of Ernst & Young LLP. Section 302 Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a- 15(e). Section 302 Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a- 15(e). Section 906 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Section 906 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Financial statements from the Annual Report on Form 10-K of Papa John’s International, Inc. for the year ended December 29, 2013, filed on February 25, 2014, formatted in XBRL: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements. __________________ *Compensatory plan required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. The Exhibits to this Annual Report on Form 10-K are not contained herein. The Company will furnish a copy of any of the Exhibits to a stockholder upon written request to Investor Relations, Papa John’s International, Inc., P.O. Box 99900, Louisville, KY 40269-0900. 93 TO OUR SHAREHOLDERS, FRANCHISEES, SUPPLY PARTNERS AND TEAM MEMBERS: As Papa John’s celebrates its Thirtieth Anniversary, I’m proud to say we have never lost sight of our founding principle – the unrelenting focus on superior-quality products to drive a loyal customer base. In a very real way, we’ve always kept our “eye on the pie” for the past thirty years. At the end of the day, nothing sells like the truth; and, our customers take notice of our better ingredients, better pizza promise because they do taste the difference between mediocrity and superiority. To that end, I am both proud and pleased to report the results for 2013, another outstanding year for Papa John’s. Papa John’s achieved a 20.2% increase in EPS and an increase Under the outstanding leadership of Papa John’s President and of $700 million in market capitalization in 2013. Over the past ﬁve COO Tony Thompson, the company’s 2013 accomplishments are years, EPS has grown an average of 20% per year and the market unparalleled – the result of exceptional execution of our strategy capitalization has gone from $500 million to more than $2 billion. across all aspects of our growing business We have also reinvested approximately $50 million per year for the last several years back into property, plant and equipment to ﬁrst and foremost protect and enhance the “Quality Moat” around the brand castle, further enhance productivity and innovations, and last but not least, drive future international success. With 28% combined ownership of the company’s stock, our Board and senior management team are highly vested in the continued long-term success of Papa John’s. $1.70 $1.50 $1.30 $1.10 $0.90 $0.70 $0.50 Earnings Per Share $1.55 $1.29 $1.08 $0.92 $0.69 2009 2010 2011 2012 2013 PJI Market Capitalization 1,908,930 1,221,700 905,040 704,660 629,080 Quality and Service Leadership: There’s no better place to start than our system wide quality and service performance, driven by the exceptional execution of our world class operations team led by Steve Ritchie, Papa John’s Senior Vice President, Global Operations. We spend a great deal of time and money each year to ensure our restaurants are making and delivering the industry’s highest quality pizzas with world class customer service. We did not disappoint in 2013. Our quality and service scores were higher than any year in our history, which led to Papa John’s earning the highest rating in the prestigious American Customer Satisfaction Index for the 12th time in the last 14 years. Superior quality products and a focus on customer service were the primary drivers behind our 4% comparable North American sales increase in 2013, driving the ﬁfth straight year of pretax income growth in Papa John’s North American Franchise segment. Digital Leadership: In 2013, Papa John’s became the ﬁrst national pizza company to near 50% of domestic system sales through digital channels, building on its unmatched history of technology “ﬁrsts.” Papa John’s was the ﬁrst national pizza company to offer systemwide online ordering (2001); the ﬁrst to offer systemwide text ordering (2007); and the ﬁrst and only pizza company to offer a digital rewards program, Papa Rewards (2010). Our dedication to innovation through technology has been and remains a commitment of Papa John’s leadership. Online Sales Mix Domestic Restaurants 46% 40% 33% 28% 25% History of Digital Leadership 2014 INDUSTRY FIRST 1st MOBILE- OPTIMIZED EGIFT CARD ORDERING 50%+ 1997 FIRST ONLINE ORDER (PILOT IN NORTH CAROLINA) $5 BILLION IN U.S. DIGITAL SALES OVER 45% OF U.S. TOTAL SALES FROM DIGITAL SALES KINDLE FIRE ORDERING app* ANDROID ORDERING app* 2013 INDUSTRY FIRST 1st 2012 2011 $ $2 BILLION IN U.S. DIGITAL SALES* DIGITAL LOYALTY REWARDS PROGRAM iOS ORDERING app 2010 INDUSTRY FIRST 1st NATIONWIDE ONLINE ORDERING 2001 INDUSTRY FIRST 1st LOCAL SPECIAL ONLINE OFFERS* NATIONWIDE 24/7 “PLAN AHEAD” ONLINE ORDERING* 24/7 2006 INDUSTRY FIRST 1st NATIONWIDE MOBILE TEXT ORDERING* 2007 INDUSTRY FIRST 1st $ $1 BILLION IN U.S. DIGITAL SALES NATIONWIDE MOBILE WEB ORDERING INDUSTRY FIRST 1st 2008 *ALL U.S. DELIVERY RESTAURANTS. Kindle Fire and the Amazon “a” logo are registered trademarks of Amazon Technologies, Inc. Android is a registered trademark of Google, Inc. The Apple logo is a registered trademark of Apple, Inc. Leadership in Giving Back: Having been blessed in so many ways, we feel it is important to give back to the communities that we serve. The Salvation Army is our national charitable partner, and in 2013 we joined with them to support the victims and aid workers recovering from several disasters including the devastating tornados that hit Oklahoma City. Papa John’s work with the Salvation Army along with our local charitable efforts, and the numerous relief efforts, fundraisers, and humanitarian projects our franchisees participated in, totaled hundreds-of-thousands-of-dollars in monetary and product donations last year. We also positively impacted the lives of our friends and neighbors in communities throughout the country and world. Our system is grateful for and humbled by our success, and we will continue to support and positively impact the people in these communities that support us so strongly. International Growth: In 2013, Papa John’s continued to build international momentum with a 7.5% international comparable sales increase and 183 net unit openings around the world. We passed the one-thousandth international restaurant milestone in the third quarter, and ﬁnished the year with 1,142 restaurants open outside of North America. Strong sales momentum and market penetration continues in the UK, Russia, Latin America, China and the Middle East. 1,100 1,000 900 800 700 600 500 400 300 1,200 Ending Store Count International 1142 959 822 709 635 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Note: The results for 2009 and 2010 are presented on a non-GAAP basis for comparability purposes. See the Investor Relations section of our website which contains the GAAP to non-GAAP reconciliations. Directors John H. Schnatter Founder, Chairman and CEO Corporate Information Corporate Headquarters 2002 Papa John’s Boulevard Louisville, Kentucky 40299 502-261-7272 Stock Listing Papa John’s stock is listed on The NASDAQ Global Select Market under the ticker symbol PZZA Annual Meeting The annual meeting of stockholders will be held Tuesday, April 29, 2014, 11:00 A.M. (E.D.T) at: Papa John’s International, Inc. 2002 Papa John’s Boulevard Louisville, Kentucky 40299 Independent Public Accountants Ernst & Young LLP Transfer Agent Computershare Shareholder Services 211 Quality Circle, Suite 210 College Station, TX 77845 www.computershare.com/investor 800-622-6757 (US, Canada, Puerto Rico) 781-575-4735 (non-US) Investor Relations Lance F. Tucker SVP, Chief Financial Ofﬁcer, Chief Administrative Ofﬁcer, and Treasurer 502-261-4218 Corporate Communications – Media Relations Robert C. Kraut SVP, Chief Marketing Ofﬁcer 502-261-4318 Forward-Looking Statements This report includes non-historical or “forward looking” statements concerning future events or conditions. Important risk factors, which could cause actual results to differ materially from these statements, are set forth in Item 1A. Risk Factors in the accompanying Form 10-K. For More Information To learn more about Papa John’s, or to order online, visit our website at www.papajohns.com Mark S. Shapiro (1)(3*) Executive Producer, Dick Clark Productions W. Kent Taylor (2) Founder, Chairman and CEO of Texas Roadhouse, Inc. Christopher L. Coleman (1)(3) Managing Director, Rothschild – London Olivia F. Kirtley (1*)(2) Business Consultant Philip Guarascio (3) Chairman and CEO of PG Ventures LLC, a marketing consulting ﬁrm Norborne P. Cole, Jr. (2*)(4) Business Consultant NUMBERS INDICATE BOARD COMMITTEES: ( 1 ) Audit Committee ( 2 ) Compensation Committee ( 3 ) Corporate Governance and Nominating Committee ( 4 ) Lead Independent Director *Committee Chair Papa John’s 37 International Markets Executive Leadership Team Cayman Islands Dominican Republic United Kingdom Ireland Puerto Rico Cyprus Russia Turkey Jordan Lebanon Azerbaijan South Korea China Canada Mexico Trinidad Venezuela El Salvador Guatemala Nicaragua Costa Rica Chile Panama Colombia Ecuador Peru Egypt Saudi Arabia Note: 2013 Markets entered – Guatemala Guam Philippines India Malaysia Kuwait Bahrain Qatar United Arab Emirates Oman ANNUAL REPORT 2013 R ING R E T T E B D E I E NTS. BE T T E R P I Z Z A . John H. Schnatter Founder, Chairman and Chief Executive Ofﬁcer Steve M. Ritchie SVP, Global Operations and Global OST Timothy C. O’Hern SVP, Chief Development Ofﬁcer Sean A. Muldoon SVP, R&D, QA and Supply Chain Caroline Miller Oyler SVP, Legal Affairs Robert C. Kraut SVP, Chief Marketing Ofﬁcer Anthony N. Thompson President and Chief Operating Ofﬁcer Lance F. Tucker SVP, Chief Financial Ofﬁcer, Chief Administrative Ofﬁcer, and Treasurer Cynthia McClellan SVP, Information Systems and Project Management Ofﬁce R. Shane Hutchins SVP, PJ Food Service, Inc. Robert Smith VP, Global Human Resources I E NTS.BE I E NTS. BE NG R R ING R D D E E E E R T T T T B P I E T T E Note: International Locations as of December 30, 2012 Note: International Locations as of December 30, 2012 2012 Markets entered – Azerbaijan, Guam, Lebanon 2012 Markets entered – Azerbaijan, Guam, Lebanon Z Z A .

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