Document and Entity Information(USD $)
12 Months Ended
Dec. 25, 2011
Jun. 26, 2011
Feb. 14, 2011
Document Information [Line Items]
Document Type
10-K
Amendment Flag
false
Document Period End Date
Dec. 25, 2011
Document Fiscal Year Focus
2011
Document Fiscal Period Focus
FY
Trading Symbol
PZZA
Entity Registrant Name
PAPA JOHNS INTERNATIONAL INC
Entity Central Index Key
0000901491
Current Fiscal Year End Date
--12-25
Entity Well-known Seasoned Issuer
Yes
Entity Current Reporting Status
Yes
Entity Voluntary Filers
No
Entity Filer Category
Large Accelerated Filer
Entity Common Stock, Shares Outstanding
24,242,254
Entity Public Float
$633,919,944
Consolidated Statements of Income(USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 25, 2011
Dec. 26, 2010
Dec. 27, 2009
Total revenues
$1,217,882,000
$1,126,397,000
$1,078,550,000
Income from the franchise cheese-purchasing program, net of noncontrolling interest
(5,634,000)
(18,079,000)
General and administrative expenses
111,608,000
109,954,000
111,361,000
Other general expenses
9,767,000
9,030,000
14,346,000
Depreciation and amortization
32,681,000
32,407,000
31,446,000
Total costs and expenses
1,130,865,000
1,039,653,000
983,332,000
Operating income
87,017,000
86,744,000
95,218,000
Investment income
755,000
875,000
629,000
Interest expense
(1,497,000)
(5,338,000)
(5,653,000)
Income before income taxes
86,275,000
82,281,000
90,194,000
Income tax expense
26,888,000
26,856,000
28,985,000
Net income, including noncontrolling interests
59,387,000
55,425,000
61,209,000
Less: income attributable to noncontrolling interests
(3,732,000)
(3,485,000)
(3,756,000)
Net income, net of noncontrolling interests
55,655,000
51,940,000
57,453,000
Basic earnings per common share
$2.22
$1.97
$2.07
Earnings per common share - assuming dilution
$2.20
$1.96
$2.06
Basic weighted average shares outstanding
25,043
26,328
27,738
Diluted weighted average shares outstanding
25,310
26,468
27,909
Supplemental data (see Note 14):
Revenues - affiliates
28,078,000
24,290,000
22,473,000
Other income - affiliates
57,000
Domestic Company-owned Restaurant [Member]
Revenue from external customers
525,841,000
503,272,000
503,818,000
Cost of sales
126,887,000
111,010,000
100,863,000
Salaries and benefits
142,093,000
137,840,000
146,116,000
Advertising and related costs
49,035,000
47,174,000
45,593,000
Occupancy costs
32,278,000
32,343,000
31,685,000
Other operating expenses
75,558,000
72,997,000
69,946,000
Total costs and expenses
425,851,000
401,364,000
394,203,000
North America [Member]
Franchise royalties
73,694,000
69,631,000
62,083,000
Franchise and development fees
722,000
610,000
912,000
Other sales
50,912,000
51,951,000
54,045,000
Domestic Commissaries [Member]
Revenue from external customers
508,155,000
454,506,000
417,689,000
International [Member]
Royalties and franchise and development fees
16,327,000
13,265,000
11,780,000
Operating expenses
35,674,000
29,429,000
24,356,000
International Restaurant and Commissaries [Member]
Revenue from external customers
42,231,000
33,162,000
28,223,000
Domestic Commissary and Other [Member]
Cost of sales
426,955,000
382,150,000
348,265,000
Salaries and benefits
35,141,000
34,063,000
33,839,000
Other operating expenses
53,188,000
46,890,000
43,595,000
Total costs and expenses
$515,284,000
$463,103,000
$425,699,000
Condensed Consolidated Balance Sheets(USD $)
In Thousands, unless otherwise specified
Dec. 25, 2011
Dec. 26, 2010
Current assets:
Cash and cash equivalents
$17,238
$46,225
Accounts receivable (less allowance for doubtful accounts of $3,034 in 2011 and $2,795 in 2010)
27,487
24,733
Accounts receivable - affiliates (no allowance for doubtful accounts in 2011 and 2010)
682
624
Notes receivable (no allowance for doubtful accounts in 2011 and 2010)
4,221
4,735
Inventories
20,091
17,402
Prepaid expenses
12,523
10,009
Other current assets
3,522
3,732
Deferred income taxes
7,636
9,647
Total current assets
93,400
117,107
Investments
1,704
1,604
Net property and equipment
185,132
186,594
Notes receivable, less current portion (less allowance for doubtful accounts of $5,905 in 2011 and $9,951 in 2010)
11,502
12,619
Goodwill
75,085
74,697
Other assets
23,559
23,320
Total assets
390,382
415,941
Current liabilities:
Accounts payable
32,966
31,569
Income and other taxes payable
3,969
1,789
Accrued expenses
42,808
42,825
Total current liabilities
79,743
76,183
Unearned franchise and development fees
6,170
6,596
Long-term debt
51,489
99,017
Other long-term liabilities
25,611
26,604
Deferred income taxes
9,147
341
Stockholders' equity:
Preferred stock ($.01 par value per share; authorized 5,000 shares, no shares issued)
  
  
Common stock ($.01 par value per share; authorized 50,000 shares, issued 36,656 in 2011 and 36,084 in 2010)
367
361
Additional paid-in capital
262,456
245,380
Accumulated other comprehensive income
1,849
849
Retained earnings
298,807
243,152
Treasury stock (12,637 shares in 2011 and 10,645 shares in 2010, at cost)
(353,826)
(291,048)
Total stockholders' equity, net of noncontrolling interests
209,653
198,694
Noncontrolling interests in subsidiaries
8,569
8,506
Total stockholders' equity
218,222
207,200
Total liabilities and stockholders' equity
$390,382
$415,941
Condensed Consolidated Balance Sheets (Parenthetical)(USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 25, 2011
Dec. 26, 2010
Accounts receivable, allowance for doubtful accounts
$3,034
$2,795
Accounts receivable-affiliates, allowance for doubtful accounts
0
0
Notes receivable, allowance for doubtful accounts
0
0
Notes receivable, less current portion, allowance for doubtful accounts
$5,905
$9,951
Preferred stock, par value
$0.01
$0.01
Preferred stock, shares authorized
5,000
5,000
Preferred stock, shares issued
0
0
Common stock, par value
$0.01
$0.01
Common stock, shares authorized
50,000
50,000
Common stock, shares issued
36,656
36,084
Treasury stock, shares
12,637
10,645
Consolidated Statements of Stockholders' Equity(USD $)
In Thousands, unless otherwise specified
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Noncontrolling Interests in Subsidiaries
Balance at Dec. 28, 2008
$138,238
$352
$216,553
$(3,818)
$133,759
$(216,860)
$8,252
Balance (in shares) at Dec. 28, 2008
27,637
Comprehensive income:
Net income
61,209
57,453
3,756
Change in valuation of interest rate swap agreements, net of tax
1,388
1,388
Foreign currency translation
1,310
1,310
Other
36
36
Comprehensive income
63,943
Exercise of stock options (in shares)
612
612
Exercise of stock options
9,830
6
9,824
Tax effect of equity awards
(342)
(342)
Acquisition of Company common stock
(28,477)
(28,477)
Acquisition of Company common stock, shares
(1,319)
Net contributions (distributions) - noncontrolling interests
(3,840)
(3,840)
Stock-based compensation expense
5,817
5,817
Other
(132)
(132)
Balance at Dec. 27, 2009
185,037
358
231,720
(1,084)
191,212
(245,337)
8,168
Balance (in shares) at Dec. 27, 2009
26,930
Comprehensive income:
Net income
55,425
51,940
3,485
Change in valuation of interest rate swap agreements, net of tax
2,404
2,404
Foreign currency translation
(523)
(523)
Other
52
52
Comprehensive income
57,358
Exercise of stock options (in shares)
356
356
Exercise of stock options
6,410
3
6,122
285
Tax effect of equity awards
62
62
Acquisition of Company common stock
(46,936)
(46,936)
Acquisition of Company common stock, shares
(1,881)
Net contributions (distributions) - noncontrolling interests
(3,147)
(3,147)
Stock-based compensation expense
6,066
6,066
Issuance of restricted stock (in shares)
34
Issuance of restricted stock
(881)
881
Other
2,350
2,291
59
Balance at Dec. 26, 2010
207,200
361
245,380
849
243,152
(291,048)
8,506
Balance (in shares) at Dec. 26, 2010
25,439
Comprehensive income:
Net income
59,387
55,655
3,732
Change in valuation of interest rate swap agreements, net of tax
165
165
Foreign currency translation
864
864
Other
(29)
(29)
Comprehensive income
60,387
Exercise of stock options (in shares)
572
572
Exercise of stock options
14,042
6
14,036
Tax effect of equity awards
(1,400)
(1,400)
Acquisition of Company common stock
(65,323)
(65,323)
Acquisition of Company common stock, shares
(2,084)
Net contributions (distributions) - noncontrolling interests
(3,669)
(3,669)
Stock-based compensation expense
6,704
6,704
Issuance of restricted stock (in shares)
92
Issuance of restricted stock
(2,253)
2,253
Other
281
(11)
292
Balance at Dec. 25, 2011
$218,222
$367
$262,456
$1,849
$298,807
$(353,826)
$8,569
Balance (in shares) at Dec. 25, 2011
24,019
Consolidated Statements of Stockholders' Equity (Parenthetical)(USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 25, 2011
Dec. 26, 2010
Dec. 27, 2009
Change in valuation of interest rate swap agreements, tax
$93
$1,352
$781
Accumulated other comprehensive income (loss)
1,849
849
(1,084)
Unrealized gain (loss) on the interest rate swap agreements
6
(159)
(2,563)
Pension plan liability
29
52
Unrealized foreign currency translation gains
$1,872
$1,008
$1,531
Consolidated Statements of Cash Flows(USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 25, 2011
Dec. 26, 2010
Dec. 27, 2009
Operating activities
Net income, including noncontrolling interests
$59,387
$55,425
$61,209
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable
1,037
917
2,242
Depreciation and amortization
32,681
32,407
31,446
Deferred income taxes
9,909
4,553
7,469
Stock-based compensation expense
6,704
6,066
5,817
Excess tax benefit on equity awards
(741)
(359)
(1,035)
Other
3,072
286
1,071
Disposition and impairment losses
1,200
479
1,258
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(4,298)
(5,022)
155
Inventories
(2,689)
(1,848)
1,096
Prepaid expenses
(2,514)
(1,303)
595
Other current assets
210
16
2,009
Other assets and liabilities
(1,600)
(416)
(4,197)
Accounts payable
1,397
4,579
(1,776)
Income and other taxes payable
2,180
480
(3,623)
Accrued expenses
(4,501)
(4,607)
338
Unearned franchise and development fees
(426)
928
(248)
Net cash provided by operating activities
101,008
92,581
103,826
Investing activities
Purchase of property and equipment
(29,319)
(31,125)
(33,538)
Purchase of investments
(229)
(549)
(1,187)
Proceeds from sale or maturity of investments
129
327
335
Loans issued
(3,492)
(2,637)
(11,635)
Repayments of loans issued
5,357
3,918
8,496
Acquisitions
(464)
Proceeds from divestitures of restaurants
1,397
830
Other
68
12
756
Net cash used in investing activities
(27,486)
(28,657)
(36,407)
Financing activities
Net repayments on line of credit facility
(47,511)
(24,500)
Net repayments from short-term debt - variable interest entities
(7,075)
Excess tax benefit on equity awards
741
359
1,035
Tax payments for restricted stock
(1,041)
Proceeds from exercise of stock options
14,042
6,410
9,830
Acquisition of Company common stock
(65,323)
(46,936)
(28,477)
Distributions to noncontrolling interests
(3,669)
(3,147)
(3,840)
Other
160
96
(27)
Net cash used in financing activities
(102,601)
(43,218)
(53,054)
Effect of exchange rate changes on cash and cash equivalents
92
62
176
Change in cash and cash equivalents
(28,987)
20,768
14,541
Cash and cash equivalents at beginning of year
46,225
25,457
10,916
Cash and cash equivalents at end of year
$17,238
$46,225
$25,457
Description of Business
Description of Business
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, the District of Columbia, Puerto Rico and 33 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.
Significant Accounting Policies
Significant Accounting Policies
2.  Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Papa John’s and its subsidiaries. Our financial results include BIBP Commodities, Inc. (“BIBP”), a variable interest entity (“VIE”) for which we are the primary beneficiary. The results of our Company-owned operations in Mexico and China are consolidated one month in arrears. The results of our inactive captive insurance subsidiary, RSC Insurance Services, Ltd. (“RSC”), are consolidated one quarter in arrears. 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.

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, insurance reserves and income 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.

Revenue Recognition

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. 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.
 
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.

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.

Investments

We determine the appropriate classification of investment securities at the time of purchase and reevaluate such designation as of each balance sheet date. Investments are comprised of cash equivalents. Such investments are designated for the purpose of funding insurance claim payments and are not available for general use.

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 for royalties from December sales. 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.

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.

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 $31.9 million in 2011, $31.4 million in 2010 and $30.6 million in 2009.
 
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.

Intangible Assets - Goodwill

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

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

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

As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment.  During 2011, in connection with a restructuring of our components in our domestic Company-owned restaurant segment, changes were made in the discrete financial information that was made available to the segment manager of our domestic Company-owned restaurant segment, which resulted in the identification of new components in 2011. Additionally, because components meet the aggregation provision of Accounting Standards Codification ("ASC") 280, “Segment Reporting,” we now aggregate the components of our domestic Company-owned restaurant segment into one reporting unit. Prior to 2011, the components were treated as individual reporting units.
 
Under ASU 2011-08, companies can bypass the qualitative assessment and move directly to the quantitative assessment for any reporting unit in any period if management believes that it is more efficient or there is a risk of impairment. All companies can elect to resume performing the qualitative assessment in any subsequent period. We applied the qualitative assessment for our domestic Company-owned restaurants and China reporting units, which is included in our international reporting segment.  As a result of our qualitative analysis, we determined that it was more-likely-than-not that the fair value of our domestic Company-owned restaurants and China reporting units were greater than the carrying amounts.

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

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

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 $1.5 million in 2011, $2.0 million in 2010 and $800,000 in 2009. The unamortized information systems development costs approximated $4.1 million and $3.6 million as of December 25, 2011 and December 26, 2010, respectively.

Deferred Income Tax Accounts and Tax Reserves

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

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.  As of December 25, 2011, we had a net deferred tax liability of $1.5 million.
 
Tax authorities periodically audit the Company. We record reserves for identified exposures. We evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements, which may impact our ultimate payment for such exposures.  We recognized reductions of $1.9 million, $550,000 and $1.2 million in our income tax expense associated with the finalization of certain income tax issues in 2011, 2010 and 2009, respectively. See Note 13 for additional information.

Advertising and Related Costs

Advertising and related costs include the costs of domestic Company-owned restaurant activities such as mail coupons, door hangers and promotional items and contributions to Papa John’s Marketing Fund, Inc., an unconsolidated non-profit corporation (the “Marketing Fund”) and various local market cooperative advertising funds (“Co-op Funds”). Contributions by domestic Company-owned and franchised restaurants to the Marketing Fund and the Co-op Funds are based on an established percentage of monthly restaurant revenues. The Marketing Fund is responsible for developing and conducting marketing and advertising for the 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 the Marketing Fund. We recognize domestic Company-owned restaurant contributions to the Marketing Fund and the Co-op Funds in which we do not have a controlling interest in the period in which the contribution accrues. The assets of the Co-op Funds in which we possess majority voting rights, and thus control the cooperatives, are consolidated in other current assets in our consolidated balance sheets. 

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 balance sheet accounts are translated using year-end exchange rates. The resulting translation adjustments are included as a component of accumulated other comprehensive income (loss).

Stock-Based Compensation

Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures. 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 17. Restricted stock is valued based on the market price of the Company’s shares on the date of grant.

Fair Value Measurements and Disclosures

The Fair Value Measurements and Disclosures topic of the ASC requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic emphasizes that fair value is a market-based measurement, not an entity-specific measurement.
 
The guidance requires that assets and liabilities carried at fair value 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 25, 2011 and December 26, 2010 are as follows:
 
   
Carrying
    
Fair Value Measurements
  
(In thousands)
  
Value
    
Level 1
    
Level 2
    
Level 3
  
                         
December 25, 2011
                        
Financial assets:
                        
   Investments
   $ 1,704     $ 1,704     $ -     $ -  
   Cash surrender value of life insurance policies *
     11,387       11,387       -       -  
   Interest rate swap
     11       -       11       -  
                                 
December 26, 2010
                                
Financial assets:
                                
   Investments
   $ 1,604     $ 1,604     $ -     $ -  
   Cash surrender value of life insurance policies *
     12,455       12,455       -       -  
                                 
Financial liabilities:
                                
   Interest rate swaps
     313       -       313       -  
                                 
* Represents life insurance held in our non-qualified deferred compensation plan.
                          
 
Derivative Financial Instruments

We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. 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 income of $258,000 ($165,000 after tax) in 2011, $3.8 million ($2.4 million after tax) in 2010 and $2.2 million ($1.4 million after tax) in 2009, in accumulated other comprehensive income for the net change in fair value of our derivatives associated with our debt agreements. The ineffective portion of our hedge was $25,000 in 2010 and $40,000 in 2009 (none in 2011). Fair value is based on quoted market prices. See Note 7 for additional information on our debt and credit arrangements.
 
Earnings per Share

The calculations of basic earnings per common share and earnings per common share – assuming dilution for the years ended December 25, 2011, December 26, 2010 and December 27, 2009 are as follows (in thousands, except per share data):
 
 
   
2011
    
2010
    
2009
  
Basic earnings per common share:
                  
Net income, net of noncontrolling interests
   $ 55,655     $ 51,940     $ 57,453  
Weighted average shares outstanding
     25,043       26,328       27,738  
Basic earnings per common share
   $ 2.22     $ 1.97     $ 2.07  
                         
Earnings per common share - assuming dilution:
                        
Net income, net of noncontrolling interests
   $ 55,655     $ 51,940     $ 57,453  
                         
Weighted average shares outstanding
     25,043       26,328       27,738  
Dilutive effect of outstanding equity awards
     267       140       171  
Diluted weighted average shares outstanding
     25,310       26,468       27,909  
Earnings per common share - assuming dilution
   $ 2.20     $ 1.96     $ 2.06  
                         
 
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 273,000 in 2011, 1.5 million in 2010 and 1.4 million in 2009.

Noncontrolling interests

We report noncontrolling interests in subsidiaries as equity in the consolidated financial statements, but separate from the equity of the parent company. Further, consolidated net income is required to be reported at amounts attributable to the parent and the noncontrolling interest, rather than expensing the income attributable to the noncontrolling interest holder. Additionally, disclosures are required to clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners, including a disclosure on the face of the consolidated statements of income attributable to the noncontrolling interest holder.
 
Papa John’s controlled two joint venture arrangements as of December 25, 2011, December 26, 2010 and December 27, 2009, which were as follows:

 
                 
Noncontrolling
  
   
Restaurants as of
  
Restaurant
  
Papa John's
    
Interest
  
   
December 25, 2011 *
  
Locations
  
Ownership *
    
Ownership *
  
                     
Star Papa, LP
     76  
Texas
     51 %     49 %
Colonel's Limited, LLC
     52  
Maryland and Virginia
     70 %     30 %
                           
 
*The ownership percentages for both joint ventures were the same for the years presented in the accompanying consolidated financial statements. There were 75 Star Papa, LP restaurants in 2010 and 2009 and 52 Colonel's Limited, LLC restaurants for all three years presented.
 
The income before income tax attributable to the joint ventures for the last three years is as follows:
 
   
Year Ended
  
(In thousands)
  
2011
    
2010
    
2009
  
                   
Papa John's International, Inc.
   $ 6,184     $ 5,658     $ 6,171  
Noncontrolling interests
     3,732       3,485       3,756  
Total income before income tax
   $ 9,916     $ 9,143     $ 9,927  
                         

The noncontrolling interest holders’ equity in the joint venture arrangements totaled $8.6 million as of December 25, 2011 and $8.5 million as of December 26, 2010.

Modification of our Non-qualified Deferred Compensation Plan

During 2010, we modified the provisions of our non-qualified deferred compensation plan. Previously, participants who elected an investment in phantom Papa John’s stock were paid in cash upon settlement of their investment balance. Effective the first quarter of 2010, we began settling future distributions of the deemed investment balances in Papa John’s stock through the issuance of treasury stock. Accordingly, during 2010, we reclassified $2.0 million from other long-term liabilities to paid-in capital in the accompanying consolidated financial statements.

New Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income.  In accordance with the new guidance, an entity will no longer be permitted to present comprehensive income in its consolidated statements of stockholders’ equity. Instead, entities will be required to present components of comprehensive income in either one continuous financial statement with two sections, net income and comprehensive income, or in two separate but consecutive statements. This guidance will be required beginning with our first quarter of fiscal 2012. We do not expect the adoption of this ASU to have any impact on our operating results.
 
Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation, including:

· The reclassification of certain assets and liabilities between current and long-term in our consolidated balance sheet and consolidated statements of cash flows.

· The reclassification of amounts related to our noncontrolling interests within our operating and financing activities in our consolidated statements of cash flows.

Segment Reporting Change


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

The Company evaluated subsequent events through the date the financial statements were issued and filed. There were no subsequent events that required recognition or disclosure.
Accounting for Variable Interest Entities
Accounting for Variable Interest Entities
3.  Accounting for Variable Interest Entities

The Consolidation topic of the ASC provides a framework for identifying variable interest entities ("VIEs") and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.

In general, a VIE is a corporation, partnership, limited liability company, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

Consolidation of a VIE is required if a party with an ownership, contractual or other financial interest in the VIE (“a variable interest holder”) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. The variable interest holder is also required to make disclosures about VIEs in which it has significant variable interest even when it is not required to consolidate.

Through February 2011, we had a purchasing agreement with 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 was 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 for the three months ended March 27, 2011 and $153.0 million and $142.4 million of cheese from BIBP during 2010 and 2009, respectively.
 
Prior to the termination of the purchasing agreement with BIBP, 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 breakeven for the three months ended March 27, 2011. We recognized pre-tax income of $21.0 million ($13.5 million net of tax, or $0.51 per diluted share) in 2010 and pre-tax income of $22.5 million ($14.6 million net of tax, or $0.52 per diluted share) in 2009, reflecting BIBP’s operating income (losses), net of BIBP’s shareholders’ equity.

BIBP had an accumulated deficit (representing prior purchases of cheese by PJFS from BIBP at below market prices) of $14.2 million at December 26, 2010. PJFS agreed to pay BIBP the amount equal to the accumulated deficit at December 26, 2010. Accordingly, BIBP recorded a decrease of $14.2 million in cost of sales and PJFS recorded a corresponding increase in cost of sales. This transaction did not have any impact on our 2010 consolidated income statement results since both PJFS and BIBP are fully consolidated.

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

The Company acquired 11 restaurants in Florida in 2009 at a purchase price of $2.8 million, which was comprised of a cash payment of approximately $460,000 and the cancellation of a $2.3 million note owed to us. We recorded goodwill of $1.5 million associated with this acquisition. The 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 statements. The goodwill associated with the above-mentioned acquisition was eligible for deduction over 15 years under U.S. tax regulations.

There were no significant acquisitions during 2011 and 2010.
Goodwill
Goodwill
5.  Goodwill

The following summarizes changes to the Company’s goodwill, by reporting segment (in thousands):
 
   
Domestic
Company-
owned
Restaurants
  
International *
    
All Others
    
Total
  
                         
Balance as of December 27, 2009
   $ 55,260     $ 19,370     $ 436     $ 75,066  
Foreign currency adjustments
     -       (369 )     -       (369 )
Balance as of December 26, 2010
     55,260       19,001       436       74,697  
Foreign currency adjustments
     -       388       -       388  
Balance as of December 25, 2011
   $ 55,260     $ 19,389     $ 436     $ 75,085  
 
*
 The international goodwill balances for all years presented are net of accumulated impairment of $2.3 million associated with our PJUK reporting unit.
 
Starting in 2011 the Company elected to early adopt the provisions of ASU 2011-08 with respect to our domestic Company-owned restaurants and China reporting unit, which is included in our international reporting segment, while we performed the quantitative goodwill impairment test for our PJUK reporting unit. For our 2010 and 2009 annual goodwill impairment assessments the Company performed the quantitative goodwill impairment test for all reporting units. Upon completion of our goodwill impairment tests in 2011, 2010 and 2009, no impairment charges were recorded. See Notes 4 and 6 for discussions of acquisitions and dispositions of Company-owned restaurants.
Restaurant Impairment and Dispositions
Restaurant Impairment and Dispositions
6.  Restaurant Impairment and Dispositions

The following table summarizes restaurant impairment and disposition losses (gains) included in other general expenses in the accompanying consolidated statements of income during 2011, 2010 and 2009 (in thousands):
 
   
2011
    
2010
    
2009
  
                   
Net book value of divested restaurants
   $ -     $ 2,828     $ 659  
                         
Cash proceeds received
     -       1,397       830  
Fair value of notes receivable (1)
     -       1,431       312  
Total consideration at fair value (1)
     -       2,828       1,142  
Gain on restaurants sold
     -       -       (483 )
                         
(Gain) loss on domestic restaurant closures
     (203 )     95       1,140  
Adjustment to long-lived asset impairment reserves
     117       158       -  
Total restaurant impairment and disposition (gains) losses
   $ (86 )   $ 253     $ 657  
                         
 
(1)
We sold 12 Company-owned restaurants to franchisees in 2010 and 2009. As a part of the agreements to sell the restaurants, we received notes receivable totaling $1.4 million in 2010 and $500,000 (fair value of $312,000) in 2009.
Debt and Credit Arrangements
Debt and Credit Arrangements
7. Debt and Credit Arrangements

Debt and credit arrangements consist of the following (in thousands):
 
   
2011
    
2010
  
             
Revolving line of credit
   $ 51,489     $ 99,000  
Other
     -       17  
Total long-term debt
   $ 51,489     $ 99,017  
                 
 
In September 2010, we entered into a five-year, $175.0 million unsecured Revolving Credit Facility (“New Credit Facility”) that replaced a $175.0 million unsecured Revolving Credit Facility (“Old Credit Facility”). The New Credit Facility was amended in November 2011 (the “Amended Credit Facility”), which extended the maturity date of the New Credit Facility to November 30, 2016. Under the Amended Credit Facility, outstanding balances are charged interest at 75 basis points to 150 basis points over LIBOR or other bank developed rates at our option (previously charged 100 basis points to 175 basis points above LIBOR). Outstanding balances under the Old Credit Facility were charged interest at 50 to 100 basis points over LIBOR or other bank developed rates, at our option. The remaining availability under the Amended Credit Facility, reduced for certain outstanding letters of credit, approximated $109.5 million as of December 25, 2011. The fair value of the outstanding debt approximates the carrying value since the debt agreements are variable-rate instruments.

The New Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At December 25, 2011 we were in compliance with these covenants.

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

Our swaps are derivative instruments that are designated as cash flow hedges because the swaps provide a hedge against the effects of rising interest rates on borrowings. The effective portion of the gain or loss on the swap is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the swap affects earnings. Gains or losses on the swap representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Amounts payable or receivable under the swap are accounted for as adjustments to interest expense.
 
The following tables provide information on the location and amounts of our swaps in the accompanying consolidated financial statements (in thousands):
 
Fair Values of Derivative Instruments
 
Derivatives designated as hedging instruments:
 
                 
 
Asset Derivatives
      
Liability Derivatives
      
 
Balance Sheet Location
  
Fair Value
Dec. 25, 2011
  
Balance Sheet Location
  
Fair Value
Dec. 26, 2010
  
                 
Interest rate swaps
 Other long-term assets
   $ 11  
 Other long-term liabilities
   $ 313  
                     

There were no derivatives that were not designated as hedging instruments under the provisions of the ASC topic, Derivatives and Hedging.
 
 
Effect of Derivative Instruments on the Consolidated Financial Statements
              
                       
Derivatives -
Cash Flow
Hedging
Relationships
  
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)
  
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)*
  
                       
Interest rate swaps:
                      
                       
   2011
   $ 165  
Interest expense
   $ (341 )
Interest expense
   $ 65  
   2010
   $ 2,404  
Interest expense
   $ (4,131 )
Interest expense
   $ (25 )
   2009
   $ 1,388  
Interest expense
   $ (4,037 )
Interest expense
   $ (40 )
                             
 
*
A portion of our second interest rate swap became over-hedged in 2009 since the outstanding debt balance associated with this swap was $49 million (floating rate debt of the swap was $50 million).

The weighted average interest rates for the credit facilities, including the impact of the previously mentioned swap agreements, were 1.9%, 5.2% and 4.8% in fiscal 2011, 2010 and 2009, respectively. Interest paid, including payments made or received under the swaps, was $1.6 million in 2011, $5.4 million in 2010 and $5.5 million in 2009.
Net Property and Equipment
Net Property and Equipment
8.  Net Property and Equipment

Net property and equipment consists of the following (in thousands):
 
   
2011
    
2010
  
Land
   $ 32,735     $ 32,701  
Buildings and improvements
     85,907       84,960  
Leasehold improvements
     90,855       85,230  
Equipment and other
     235,821       218,650  
Construction in progress
     5,159       4,599  
Total property and equipment
     450,477       426,140  
Less accumulated depreciation and amortization
     (265,345 )     (239,546 )
Net property and equipment
   $ 185,132     $ 186,594  
                 
Notes Receivable
Notes Receivable
9.  Notes Receivable

Selected franchisees have borrowed funds from our wholly-owned subsidiary, Capital Delivery, Ltd., 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 $15.7 million and $17.4 million on a consolidated basis as of December 25, 2011 and December 26, 2010, respectively, net of allowance for doubtful accounts.

Notes receivable bear interest at fixed or floating rates (with an average stated rate of 5.8% at December 25, 2011), 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 $665,000 in 2011, $794,000 in 2010 and $535,000 in 2009 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 $5.9 million and $10.0 million as of December 25, 2011 and December 26, 2010, respectively, for potentially uncollectible notes receivable. The following summarizes changes in our notes receivable allowance for doubtful accounts (in thousands):
 
Balance as of December 27, 2009
   $ 10,858  
Recovered from costs and expenses
     (433 )
Deductions, including notes written off
     (474 )
Balance as of December 26, 2010
     9,951  
Recovered from costs and expenses
     (35 )
Deductions, including notes written off
     (4,011 )
Balance as of December 25, 2011
   $ 5,905  
         
Insurance Reserves
Insurance Reserves
10. Insurance Reserves

Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles and health insurance coverage provided to our employees are self-insured up to certain individual and aggregate reinsurance levels. Losses are accrued based upon undiscounted estimates of the aggregate retained liability for claims incurred using certain third-party actuarial projections and our claims loss experience. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves recorded by the Company. Our estimated corporate insurance reserves totaled $19.3 million in 2011 and $19.0 million in 2010.

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 $14.4 million at December 25, 2011.
Accrued Expenses
Accrued Expenses
11.  Accrued Expenses

Accrued expenses consisted of the following (in thousands):

   
2011
    
2010
  
Salaries, benefits and bonuses
   $ 13,982     $ 13,337  
Self-insurance reserves, current
     9,215       8,834  
Rent
     6,242       6,083  
Purchases
     4,764       4,826  
Consulting and professional fees
     1,911       1,974  
Utilities
     1,420       1,557  
Customer loyalty program
     1,339       200  
Marketing
     635       1,192  
Other
     3,300       4,822  
Total
   $ 42,808     $ 42,825  
                 
Other Long-term Liabilities
Other Long-term Liabilities
12.  Other Long-term Liabilities

Other long-term liabilities consist of the following (in thousands):

 
   
2011
    
2010
  
Deferred compensation plan
   $ 10,793     $ 10,478  
Self-insurance reserves
     10,063       10,153  
Income tax reserves
     3,597       4,351  
Captive insurance claims loss reserves
     817       1,027  
Interest rate swaps
     -       313  
Other
     341       282  
Total
   $ 25,611     $ 26,604  
                 
Income Taxes
Income Taxes
13.  Income Taxes

A summary of the provision for income taxes follows (in thousands):
 
   
2011
    
2010
    
2009
  
Current:
                  
  Federal
   $ 14,383     $ 19,049     $ 18,551  
  Foreign
     1,273       1,171       904  
  State and local *
     850       2,083       2,061  
Deferred (federal and state)
     10,382       4,553       7,469  
Total
   $ 26,888     $ 26,856     $ 28,985  
                         
 
*
The decrease in state and local tax expense is due to the lapse of statute of limitations and a reduction in the state effective tax rate.

Significant deferred tax assets (liabilities) follow (in thousands):
 
 
   
2011
    
2010
  
Unearned development fees
   $ 2,249     $ 2,392  
Accrued liabilities
     14,897       14,647  
Other assets and liabilities
     7,294       10,920  
Stock options
     5,091       6,291  
Other
     -       144  
Foreign net operating losses
     7,474       8,123  
Valuation allowance on foreign net
                
   operating losses
     (7,474 )     (8,123 )
Total deferred tax assets
     29,531       34,394  
                 
Deferred expenses
     (3,497 )     (2,497 )
Accelerated depreciation
     (13,477 )     (10,192 )
Goodwill
     (10,426 )     (8,506 )
Other
     (3,642 )     (3,893 )
Total deferred tax liabilities
     (31,042 )     (25,088 )
Net deferred tax (liability) asset
   $ (1,511 )   $ 9,306  
                 


The Company had approximately $28.8 million and $27.8 million of foreign tax net operating loss carryovers as of December 25, 2011 and December 26, 2010, 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 25, 2011, December 26, 2010 and December 27, 2009 is as follows in both dollars and as a percentage of income before income taxes ($ in thousands):
 
   
2011
    
2010
    
2009
  
   
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
   $ 30,197       35.0 %   $ 28,798       35.0 %   $ 31,568       35.0 %
State and local income taxes
     1,702       2.0 %     1,896       2.3 %     2,037       2.2 %
Foreign income taxes
     1,273       1.5 %     1,171       1.4 %     904       1.0 %
Settlement of certain tax issues
     (1,912 )     (2.2 %)     (550 )     (0.7 %)     (1,238 )     (1.4 %)
Income of consolidated partnerships
                                                
   attributable to noncontrolling interests
     (1,379 )     (1.6 %)     (1,297 )     (1.6 %)     (1,397 )     (1.5 %)
Non-qualified deferred compensation
                                                
    plan loss (income)
     153       0.2 %     (434 )     (0.5 %)     (803 )     (0.9 %)
Tax credits and other
     (3,146 )     (3.7 %)     (2,728 )     (3.3 %)     (2,086 )     (2.3 %)
Total
   $ 26,888       31.2 %   $ 26,856       32.6 %   $ 28,985       32.1 %
                                                 
 
Income taxes paid were $15.6 million in 2011, $21.7 million in 2010 and $24.8 million in 2009.

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 2007. 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 $377,000 during the next 12 months.

A reconciliation of the beginning and ending liability for unrecognized state tax benefits is as follows (in thousands):
 
 
Balance at December 27, 2009
   $ 3,595  
Reductions for lapse of statute of limitations
     (264 )
Balance at December 26, 2010
     3,331  
Reductions for tax positions of prior years
     (95 )
Reductions for lapse of statute of limitations
     (248 )
Balance at December 25, 2011
   $ 2,988  
         
 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a part of income tax expense. The Company’s 2011 and 2010 income tax expense includes interest benefits of $368,000 and $145,000, respectively. The Company has accrued approximately $985,000 and $1.4 million for the payment of interest and penalties as of December 25, 2011 and December 26, 2010, respectively.
Related Party Transactions
Related Party Transactions
14.  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, the Marketing Fund and Papa Card, Inc. (in thousands):
 
   
2011
    
2010
    
2009
  
Revenues from affiliates:
                  
   Commissary sales
   $ 22,132     $ 19,137     $ 17,625  
   Other sales
     2,352       1,961       2,284  
   Franchise royalties
     3,579       3,192       2,514  
   Franchise and development fees
     15       -       50  
Total
   $ 28,078     $ 24,290     $ 22,473  
                         
Other income from affiliates
   $ -     $ -     $ 57  
Accounts receivable - affiliates
   $ 682     $ 624     $ 648  
                         
 
We paid $1.0 million in 2011, $443,000 in 2010 and $755,000 in 2009 for charter aircraft services provided by an entity owned by our Founder, Chairman and Chief Executive Officer.

We contributed $6.0 million in 2010 and $7.7 million in 2009 to the Marketing Fund as discretionary advertising contributions (none in 2011).

See Note 3 for information related to our purchasing agreement with BIBP.
Commitments and Contingencies
Commitments and Contingencies
15.  Commitments and Contingencies

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 eight years. Total lease expense was $25.7 million in 2011, $24.5 million in 2010 and $24.2 million in 2009, net of sublease payments received.

We subleased certain sites to our Papa John’s franchisees located in the United Kingdom in 2011, 2010 and 2009 and received payments of $3.7 million, $3.1 million and $2.9 million, respectively, which are netted with international operating expenses.
 
Future gross lease costs, future expected sublease payments and net lease costs as of December 25, 2011, are as follows (in thousands):
 
         
Future
        
         
Expected
        
   
Gross Lease
    
Sublease
    
Net Lease
  
Year
  
Costs
    
Payments
    
Costs
  
2012
   $ 29,760     $ 3,675     $ 26,085  
2013
     26,430       3,583       22,847  
2014
     22,394       3,330       19,064  
2015
     17,703       3,068       14,635  
2016
     12,853       2,777       10,076  
Thereafter
     29,703       15,653       14,050  
Total
   $ 138,843     $ 32,086     $ 106,757  
                         

In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we remain contingently liable for payment under approximately 40 lease arrangements, primarily associated with Perfect Pizza restaurant sites for which the Perfect Pizza franchisor is primarily liable. As the initial party to the lease agreements, we are liable to the extent the primary obligor does not satisfy its payment obligations. The leases have varying terms, the latest of which expires in 2017, with most expiring by the end of 2014. As of December 25, 2011, the estimated maximum amount of undiscounted rental payments we would be required to make in the event of non-payment under all such leases was approximately $2.5 million, excluding the $832,000 charge discussed below.

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

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

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.

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

The Company’s Board of Directors authorized the repurchase of up to $925.0 million of common stock through December 31, 2012, of which $71.5 million remained available for repurchase at December 25, 2011. Funding for the share repurchase program has been provided through a credit facility, operating cash flow, stock option exercises and cash and cash equivalents.

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

We award stock options and restricted stock 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 4.8 million shares of common stock authorized for issuance and remaining available under the 2011 Omnibus Incentive Plan as of December 25, 2011, which includes 2.0 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 25, 2011 generally expire five years from the date of grant and vest over a 24- or 36-month period.

We recorded stock-based employee compensation expense of $6.7 million in 2011, $6.1 million in 2010 and $5.8 million in 2009. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $2.2 million in 2011, $2.2 million in 2010 and $2.1 million in 2009. At December 25, 2011, there was $5.5 million of unrecognized compensation cost related to nonvested option awards and restricted stock, of which the Company expects to recognize $3.8 million in 2012, $1.5 million in 2013 and $200,000 in 2014.

Stock Options

Options exercised included 572,000 shares in 2011, 356,000 shares in 2010 and 612,000 shares in 2009. The total intrinsic value of the options exercised during 2011, 2010 and 2009 was $4.6 million, $2.6 million and $4.3 million, respectively. Cash received upon the exercise of stock options was $14.0 million, $6.4 million and $9.8 million during 2011, 2010 and 2009, respectively, and the related tax benefits realized were approximately $1.7 million, $943,000 and $1.5 million during the corresponding periods.
 
Information pertaining to option activity during 2011 is as follows (number of options and aggregate intrinsic value in thousands):
 
               
Weighted
        
         
Weighted
    
Average
        
   
Number
    
Average
    
Remaining
    
Aggregate
  
   
of
    
Exercise
    
Contractual
    
Intrinsic
  
   
Options
    
Price
    
Term
    
Value
  
Outstanding at December 26, 2010
     1,931     $ 26.80              
Granted
     403       29.09              
Exercised
     (572 )     24.56              
Cancelled
     (334 )     31.74              
Outstanding at December 25, 2011
     1,428     $ 27.19       2.63     $ 15,259  
Vested or expected to vest at December 25, 2011
     1,396     $ 27.04       2.69     $ 14,919  
Exercisable at December 25, 2011
     791     $ 26.40       1.77     $ 9,077  
                                 
 
 
The following is a summary of the significant assumptions used in estimating the fair value of options granted in 2011, 2010 and 2009:
 
 
   
2011
    
2010
    
2009
  
                   
Assumptions (weighted average):
                  
   Risk-free interest rate
     1.5 %     1.8 %     1.3 %
   Expected dividend yield
     0.0 %     0.0 %     0.0 %
   Expected volatility
     0.41       0.43       0.41  
   Expected term (in years)
     3.7       3.7       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 estimated volatility is based on the historical volatility of our stock and other factors. The expected term of options represents the period of time that options granted are expected to be outstanding.

The weighted average grant-date fair values of options granted during 2011, 2010 and 2009 was $9.50, $9.13 and $7.26, respectively. The Company granted 403,000, 445,000 and 997,000 options in 2011, 2010 and 2009, respectively.

Restricted Stock

In 2011, 2010 and 2009, we granted shares of restricted stock that were 100% time-based and have a three-year graded vesting schedule. These restricted shares are intended to focus participants on our long-range objectives, while at the same time serving as a retention mechanism. Prior to 2009, we granted performance-based restricted stock, which vested based on the achievement of compounded annual growth rate (CAGR) of consolidated income, as defined. The fair value of the restricted stock is based on the market price of the Company’s shares on the grant date.
 
Information pertaining to restricted stock activity during 2011, 2010 and 2009 is as follows (shares in thousands):
 
         
Weighted
  
         
Average
  
         
Grant-Date
  
   
Shares
    
Fair Value
  
Total as of December 28, 2008
     283     $ 29.84  
  Granted
     108       26.54  
  Forfeited
     (121 )     30.03  
Total as of December 27, 2009
     270       28.34  
  Granted
     171       27.13  
  Forfeited
     (123 )     30.77  
  Vested
     (34 )     26.40  
Total as of December 26, 2010
     284       26.62  
  Granted
     160       29.07  
  Forfeited
     (78 )     26.99  
  Vested
     (116 )     27.27  
Total as of December 25, 2011
     250     $ 28.19
Employee Benefit Plans
Employee Benefit Plans
18.  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 contributed a matching payment of 1.5% in 2011 and 2.1% in 2009 (no match in 2010) of a participating employee’s earnings, which is subject to vesting based on an employee’s length of service with us. Costs of the 401(k) Plan recognized in 2011 and 2009 were $550,000 and $800,000, respectively (none in 2010).

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 ($11.4 million and $12.5 million at December 25, 2011 and December 26, 2010, respectively) and the associated liabilities ($10.8 million and $10.5 million at December 25, 2011 and December 26, 2010, respectively) are included in other long-term liabilities in the accompanying consolidated balance sheets.

Most administrative costs of the 401(k) Plan and the non-qualified deferred compensation plan are paid by the Company and are not significant.

PJUK, the Company’s United Kingdom subsidiary, provided a pension plan that was frozen in 1999. There are approximately 20 participants in the PJUK pension plan. The Company recorded expense of $268,000, $258,000 and $260,000 associated with the pension plan for the fiscal years ended 2011, 2010 and 2009, respectively. The pension plan was fully funded at December 25, 2011.
Segment Information
Segment Information
19.  Segment Information

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

The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, such as breadsticks, cheesesticks, chicken strips, chicken wings, dessert pizza and soft drinks to the general public. The domestic commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The international operations segment principally consists of our Company-owned restaurants and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, Mexico and China and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. BIBP, which operated through February 2011, was a VIE in which we were deemed the primary beneficiary, as defined in Note 3, and is the only activity reflected in the VIE segment. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as our “all other” segment, which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, risk management services, and information systems and related services used in restaurant operations, including our online and other technology-based ordering platforms.

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

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2).

As previously noted, beginning in 2011, we realigned management responsibility for Hawaii, Alaska and Canada from the international segment to the domestic franchising segment in order to better leverage existing infrastructure and systems. As a result, we renamed the domestic franchising segment “North America franchising” in the first quarter of 2011. The prior year data has been reclassified from the international segment to the North America franchising segment to conform to the current year presentation.
 
Our segment information is as follows:
 
(in thousands)
  
2011
    
2010
    
2009
  
                   
Revenues from external customers:
                  
Domestic Company-owned restaurants
   $ 525,841     $ 503,272     $ 503,818  
Domestic commissaries
     508,155       454,506       417,689  
North America franchising
     74,416       70,241       62,995  
International
     58,558       46,427       40,003  
All others
     50,912       51,951       54,045  
Total revenues from external customers
   $ 1,217,882     $ 1,126,397     $ 1,078,550  
                         
Intersegment revenues:
                        
Domestic commissaries
   $ 151,423     $ 135,005     $ 133,999  
North America franchising
     2,163       2,045       2,019  
International
     215       909       1,093  
Variable interest entities (1)
     25,117       153,014       142,407  
All others
     10,468       12,061       11,751  
Total intersegment revenues
   $ 189,386     $ 303,034     $ 291,269  
                         
Depreciation and amortization:
                        
Domestic Company-owned restaurants
   $ 12,965     $ 13,155     $ 12,993  
Domestic commissaries
     4,633       4,522       4,819  
International
     2,398       2,368       2,207  
All others
     4,663       3,489       2,743  
Unallocated corporate expenses
     8,022       8,873       8,684  
Total depreciation and amortization
   $ 32,681     $ 32,407     $ 31,446  
                         
Income (loss) before income taxes:
                        
Domestic Company-owned restaurants
   $ 28,980     $ 31,619     $ 34,894