The following discussion of our financial condition and results of operations should be read in conjunction with the selected financial data and the audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements about our markets, the demand for our products and services and our future results and involves numerous risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement.
Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See "Risk factors" for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. Introduction and overview
We are one of the world's leading franchisors of quick service restaurants ("QSRs") serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin' Donuts and Baskin-Robbins brands. With over 17,400 points of distribution in 55 countries, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of December 29, 2012, Dunkin' Donuts had 10,479 global points of distribution with restaurants in 38 U.S. states and the District of Columbia and in 31 foreign countries. Baskin-Robbins had 6,980 global points of distribution as of the same date, with restaurants in 44 U.S. states and the District of Columbia and in 45 foreign countries.
We are organized into four reporting segments: Dunkin' Donuts U.S., Dunkin' Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We generate revenue from five primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream products to franchisees in certain international markets, (iv) retail store revenue at our company-owned restaurants, and (v) other income including fees for the licensing of our brands for products sold in non-franchised outlets, the licensing of the right to manufacture Baskin-Robbins ice cream sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, and online training fees.
Approximately 64% of our revenue for fiscal year 2012 was derived from royalty income and franchise fees. Rental income from franchisees that lease or sublease their properties from us accounted for 15% of our revenue for fiscal year 2012. An additional 14% of our revenue for fiscal year 2012 was generated from sales of ice cream products to Baskin-Robbins franchisees in certain international markets. The balance of our revenue for fiscal year 2012 consisted of revenue from our company-owned restaurants, license fees on products sold in non-franchised outlets, license fees on sales of ice cream products to Baskin-Robbins franchisees in the U.S., refranchising gains, transfer fees from franchisees, and online training fees.
Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With only 35 company-owned points of distribution as of December 29, 2012, we are less affected by store-level costs, profitability and fluctuations in commodity costs than other QSR operators.

Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing, research and development, and innovation personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For fiscal year 2012, franchisee contributions to the U.S. advertising funds were $332.3 million. We operate and report financial information on a 52- or 53-week year on a 13-week quarter (or 14-week fourth quarter, when applicable) basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday of the fourth quarter, when applicable). The data periods contained within fiscal years 2012, 2011, and 2010 reflect the results of operations for the 52-week, 53-week, and 52-week periods ending on December 29, 2012, December 31, 2011, and December 25, 2010, respectively. Certain financial measures and other metrics have been presented with the impact of the additional week on the results for fiscal year 2011. The impact of the additional week in fiscal year 2011 reflects our estimate of the 53rd week on systemwide sales growth, revenues, and expenses. Selected operating and financial highlights

                                            Fiscal year
                                   2012         2011         2010
Systemwide sales growth               5.2 %       9.1 %       6.7  %
Comparable store sales growth:
Dunkin' Donuts U.S.                   4.2 %       5.1 %       2.3  %
Dunkin' Donuts International(1)       2.0 %       n/a         n/a
Baskin-Robbins U.S.                   3.8 %       0.5 %      (5.2 )%
Baskin-Robbins International(1)       2.8 %       n/a         n/a
Total revenues                  $ 658,181     628,198     577,135
Operating income                  239,429     205,309     193,525
Adjusted operating income         307,157     270,740     233,067
Net income                        108,308      34,442      26,861
Adjusted net income               149,700     101,744      87,759

(1) Comparable store sales growth data was not available for our international segments until fiscal year 2012.

Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, impairment charges, and other non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies. See footnote 8 to "Selected Financial Data" for reconciliations of operating income and net income determined under GAAP to adjusted operating income and adjusted net income, respectively. Fiscal year 2012 compared to fiscal year 2011 Overall growth in systemwide sales of 5.2% for fiscal year 2012, or 7.0% on a 52-week basis, resulted from the following:
• Dunkin' Donuts U.S. systemwide sales growth of 5.6%, which was the result of comparable store sales growth of 4.2% driven by both increased average ticket and transaction counts, as well as net development of 291 restaurants in 2012, offset by approximately 190 basis points of a decline attributable to the extra week in fiscal year 2011. Increases in average ticket and transactions resulted from our continued focus on product and marketing innovation resulting in strong beverage sales growth, especially in cold beverages, strong breakfast sandwich sales across both core and limited-time offerings, continued growth in bakery sandwiches, and sales of Dunkin' Donuts K-Cup® portion packs including successful limited-time offerings.

• Dunkin' Donuts International systemwide sales growth of 4.2% as a result of sales increases in the Middle East and Southeast Asia driven by net new restaurant development and comparable store sales growth of 2.0%, offset by an unfavorable foreign currency impact.

• Baskin-Robbins U.S. systemwide sales growth of 1.5% resulting primarily from comparable store sales growth of 3.8%, offset by approximately 140 basis points of a decline attributable to the extra week in fiscal year 2011, as well as 30 net restaurant closures during 2012. Baskin-Robbins U.S. comparable store sales growth was driven by new product news and signature Flavors of the Month, custom cake sales, and new beverages.

• Baskin-Robbins International systemwide sales growth of 5.5% resulting from increased sales in South Korea and Japan, which resulted from both comparable store sales growth and net development. Offsetting this growth was approximately 170 basis points of a decline attributable to the extra week in fiscal year 2011, as well as an unfavorable foreign currency impact.

The increase in total revenues of $30.0 million, or 4.8%, for fiscal year 2012 primarily resulted from a $20.5 million increase in franchise fees and royalty income driven by the increase in Dunkin' Donuts U.S. systemwide sales, a $10.8 million increase in sales at company-owned restaurants due to additional locations acquired, and a $4.7 million increase in rental income. The overall $30.0 million growth in revenues reflects the unfavorable impact of the extra week in fiscal year 2011, which contributed approximately $8.0 million of incremental revenue in the prior year consisting primarily of additional royalty income and sales of ice cream products. Sales of ice cream products were also unfavorably impacted by approximately $5.8 million in the fourth quarter of 2012 from a one-time delay in revenue recognition as a result of a change in shipping terms related to the shift in ice cream manufacturing to Dean Foods. Operating income increased $34.1 million, or 16.6%, for fiscal year 2012 driven by the $20.5 million increase in franchise fees and royalty income, as well as a $25.8 million increase in income from equity method investments driven by an impairment of the investment in the Korea joint venture recorded in fiscal year 2011. The increase in operating income was also attributable to a $14.7 million expense incurred in the prior year related to the termination of the Sponsor management agreement in connection with the Company's initial public offering, as well as a $4.5 million increase in net rental income. Offsetting these increases in operating income was a $20.7 million increase in the Bertico litigation legal reserve recorded in the second quarter of 2012, and an approximately $14.0 million unfavorable impact associated with the closure of our ice cream manufacturing plant in Peterborough, Ontario, Canada. Adjusted operating income increased $36.4 million, or 13.5%, for fiscal year 2012 driven by the $20.5 million increase in franchise fees and royalty income, a $7.1 million increase in income from equity method investments driven by our Korea joint venture, and a $4.5 million increase in net rental income. Net income increased $73.9 million, or 214.5%, for fiscal year 2012 as a result of the $34.1 million increase in operating income, a $31.0 million decrease in net interest expense, and a $30.3 million decrease in loss on debt extinguishment and refinancing transactions, offset by a $22.0 million increase in income tax expense driven by increased profit before tax.
Adjusted net income increased $48.0 million, or 47.1%, for fiscal year 2012 resulting primarily from a $36.4 million increase in adjusted operating income and a $31.0 million decrease in net interest expense, offset by a $20.0 million increase in income tax expense.
Fiscal year 2011 compared to fiscal year 2010 Overall growth in systemwide sales of 9.1% for fiscal year 2011, or 7.4% on a 52-week basis, resulted from the following:
• Dunkin' Donuts U.S. systemwide sales growth of 9.4%, which was the result of comparable store sales growth of 5.1% driven by both increased average ticket and transaction counts, net restaurant development of 243 restaurants in 2011, and approximately 190 basis points of growth attributable to the extra week in fiscal year 2011.

• Dunkin' Donuts International systemwide sales growth of 9.1% as a result of sales increases in South Korea and Southeast Asia driven by net new restaurant development, comparable store sales growth, and favorable foreign exchange.

• Baskin-Robbins U.S. systemwide sales growth of 0.4% resulting primarily from comparable store sales growth of 0.5% and the extra week in fiscal year 2011, contributing approximately 140 basis points of growth, offset by a slightly reduced restaurant base.

• Baskin-Robbins International systemwide sales growth of 11.6% resulting from increased sales in South Korea and Japan, which resulted from both sales growth and favorable foreign exchange, as well as in the Middle East, and approximately 190 basis points of growth attributable to the extra week in fiscal year 2011.

The increase in total revenues of $51.1 million, or 8.8%, for fiscal year 2011 primarily resulted from increased franchise fees and royalty income of $38.5 million, driven by the increase in Dunkin' Donuts U.S. systemwide sales, as well as a $15.1

million increase in sales of ice cream products. Approximately $8.0 million of the increase in total revenues was attributable to the extra week in fiscal year 2011, consisting primarily of additional royalty income and sales of ice cream products.
Operating income increased $11.8 million, or 6.1%, for fiscal year 2011 driven by the increase in franchise fees and royalty income noted above, as well as a $10.3 million reduction in depreciation, amortization, and impairment charges. Offsetting these increases in operating income was an increase in general and administrative expenses of $17.0 million driven by a $14.7 million expense related to the termination of the Sponsor management agreement upon the Company's initial public offering in 2011, as well as a $21.3 million reduction in equity in net income of joint ventures driven by an impairment of the investment in the Korea joint venture.
Adjusted operating income increased $37.7 million, or 16.2%, for fiscal year 2011 driven by the increase in franchise fees and royalty income.
Net income increased $7.6 million, or 28.2%, for fiscal year 2011 as a result of the $11.8 million increase in operating income, a $27.7 million decrease in loss on debt extinguishment and refinancing transactions, and a $7.8 million decrease in interest expense, offset by a $39.8 million increase in income tax expense driven by increased profit before tax and benefits from state tax rate changes realized in the prior year.
Adjusted net income increased $14.0 million, or 15.9%, for fiscal year 2011 resulting primarily from a $37.7 million increase in adjusted operating income and a $7.8 million decrease in interest expense, offset by a $31.5 million increase in income tax expense.
Earnings per share
Earnings per common share and adjusted earnings per pro forma common share were as follows:

                                                             Fiscal year
                                                      2012       2011      2010
Earnings (loss) per share:
Class L - basic and diluted                             n/a    $ 6.14      4.87
Common - basic                                       $ 0.94     (1.41 )   (2.04 )
Common - diluted                                       0.93     (1.41 )   (2.04 )
Diluted adjusted earnings per pro forma common share   1.28      0.94      0.90

On August 1, 2011, the Company completed an initial public offering in which 22,250,000 shares of common stock were sold at an initial public offering price of $19.00 per share. Immediately prior to the offering, each share of the Company's Class L common stock converted into 2.4338 shares of common stock. The number of common shares used in the calculation of diluted adjusted earnings per pro forma common share for fiscal years 2011, 2010, and 2009 give effect to the conversion of all outstanding shares of Class L common stock at the conversion factor of 2.4338 common shares for each Class L share, as if the conversion was completed at the beginning of the respective fiscal year. The calculation of diluted adjusted earnings per pro forma common share also includes the dilutive effect of common restricted shares and stock options, using the treasury stock method. Shares sold in the offering are included in the diluted adjusted earnings per pro forma common share calculation beginning on the date that such shares were actually issued. Diluted adjusted earnings per pro forma common share is calculated using adjusted net income, as defined above.
Diluted adjusted earnings per pro forma common share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per pro forma common share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per pro forma common share should not be considered as an alternative to earnings (loss) per share derived in accordance with GAAP. Diluted adjusted earnings per pro forma common share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per pro forma common share is appropriate to provide additional information to investors to compare our performance prior to and after the completion of our initial public offering and related conversion of Class L shares into common stock as well as to provide investors with useful information regarding our historical operating results. The following table sets forth the computation of diluted adjusted earnings per pro forma common share:

                                                                 Fiscal year
                                                     2012             2011            2010
Adjusted net income available to common
shareholders (in thousands):
Adjusted net income                             $     149,700         101,744         87,759
Less: Adjusted net income allocated to
participating securities                                 (179 )          (494 )         (872 )
Adjusted net income available to common
shareholders                                    $     149,521         101,250         86,887
Pro forma weighted average number of common
shares - diluted:
Weighted average number of Class L shares over
period in which Class L shares were
outstanding(1)                                              -      22,845,378     22,806,796
Adjustment to weight Class L shares over
respective fiscal year(1)                                   -      (9,790,933 )            -
Weighted average number of Class L shares over
fiscal year                                                 -      13,054,445     22,806,796
Class L conversion factor                                   -          2.4338         2.4338
Weighted average number of converted Class L
shares                                                      -      31,772,244     55,507,768
Weighted average number of common shares          114,584,063      74,835,697     41,295,866
Pro forma weighted average number of common
shares - basic                                    114,584,063     106,607,941     96,803,634
Incremental dilutive common shares(2)               1,989,281       1,064,587        275,844
Pro forma weighted average number of common
shares - diluted                                  116,573,344     107,672,528     97,079,478
Diluted adjusted earnings per pro forma common
share                                           $        1.28            0.94           0.90

(1) The weighted average number of Class L shares in the actual Class L earnings per share calculation for fiscal year 2011 represents the weighted average from the beginning of the fiscal year up through the date of conversion of the Class L shares into common shares. As such, the pro forma weighted average number of common shares includes an adjustment to the weighted average number of Class L shares outstanding to reflect the length of time the Class L shares were outstanding prior to conversion relative to the fiscal year. The converted Class L shares are already included in the weighted average number of common shares outstanding for the period after their conversion.

(2) Represents the dilutive effect of restricted shares and stock options, using the treasury stock method.

Results of operations
Fiscal year 2012 compared to fiscal year 2011 Consolidated results of operations

                                       Fiscal  year          Increase (Decrease)
                                      2012        2011          $             %
                                         (In thousands, except percentages)
Franchise fees and royalty income  $ 418,940    398,474       20,466        5.1  %
Rental income                         96,816     92,145        4,671        5.1  %
Sales of ice cream products           94,659    100,068       (5,409 )     (5.4 )%
Sales at company-owned restaurants    22,922     12,154       10,768       88.6  %
Other revenues                        24,844     25,357         (513 )     (2.0 )%
Total revenues                     $ 658,181    628,198       29,983        4.8  %

Total revenues for the prior year benefited approximately $8.0 million from the impact of an extra week, consisting primarily of additional royalty income and sales of ice cream products. Additionally, total revenues for fiscal year 2012 were unfavorably impacted by approximately $5.8 million from a one-time delay in revenue recognition as a result of a change in shipping terms related to the shift in ice cream manufacturing to Dean Foods.
Without the effect of these two items, total revenues increased $43.8 million, or 7.1%, in fiscal year 2012 driven by an increase in royalty income, on a 52-week basis, of $28.4 million, or 7.9%, mainly as a result of Dunkin' Donuts U.S. systemwide sales growth. Sales at company-owned restaurants also increased $10.8 million, or 88.6%, as a result of company-owned stores acquired during 2012 and the full year impact of company-owned stores acquired at the end of 2011. Also contributing to the increase in total revenues was an increase in rental income of $4.7 million, or 5.1%, driven by incremental sales-based rental income resulting from growth in Dunkin' Donuts U.S. systemwide sales.

                                            Fiscal  year              Increase (Decrease)
                                         2012          2011            $              %
                                                (In thousands, except percentages)
Occupancy expenses - franchised
restaurants                          $   52,072        51,878           194            0.4  %
Cost of ice cream products               69,019        72,329        (3,310 )         (4.6 )%
Company-owned restaurant expenses        23,133        12,854        10,279           80.0  %
General and administrative expenses,
net                                     239,574       227,771        11,803            5.2  %
Depreciation and amortization            56,027        52,522         3,505            6.7  %
Impairment charges                        1,278         2,060          (782 )        (38.0 )%
Total operating costs and expenses   $  441,103       419,414        21,689            5.2  %
Net income (loss) of equity method
investments                              22,351        (3,475 )      25,826         (743.2 )%
Operating income                     $  239,429       205,309        34,120           16.6  %

Occupancy expenses for franchised restaurants for fiscal year 2012 remained flat with the prior year as an increase in sales-based rental expense was offset by a decline in the number of leased properties.
Cost of ice cream products declined $3.3 million, or 4.6% from the prior year, as a result of the 5.4% decline in sales of ice cream products driven by the one-time delay in revenue recognition as a result of the change in shipping terms.
General and administrative expenses for fiscal year 2012 were impacted by an incremental legal reserve of $20.7 million recorded upon the Canadian court's ruling in June 2012 in the Bertico litigation, as well as $5.0 million of costs associated with the announced closure of our ice cream manufacturing plant in Canada, consisting primarily of severance, payroll, and other transition-related costs. General and administrative expenses for fiscal year 2012 also include $4.8 million of transaction costs and incremental share-based compensation related to the secondary offerings and share repurchases that were completed in April and August 2012. For fiscal year 2011, general and administrative expenses include $14.7 million related to the termination of the Sponsor management agreement upon completion of the Company's initial public offering ("IPO"), $1.8 million of Sponsor management fees prior to the IPO, and $2.6 million of share-based compensation expense recognized for awards that became eligible to vest upon completion of the IPO. General and administrative expenses for fiscal year 2011 also include transaction costs of $1.0 million and share-based compensation expense of $0.9 million related to the secondary offering completed in November 2011.
Excluding the items noted above, general and administrative expenses increased $2.3 million, or 1.1%, in fiscal year 2012. This increase was driven by a $10.3 million increase in personnel costs related to continued investments in our Dunkin' Donuts U.S. contiguous growth strategy and our international brands, additional stock compensation expense, and higher incentive compensation payouts. Offsetting this increase was additional breakage income recorded in fiscal year 2012 of $5.4 million on unredeemed gift card and gift certificate balances. The remaining decrease in other general and administrative costs of $2.6 million resulted primarily from costs incurred in the prior year related to the roll-out of a new point-of-sale system for Baskin-Robbins franchisees and additional contributions made in 2011 to the advertising funds to support brand-building advertising.
Depreciation and amortization increased $3.5 million in fiscal year 2012 resulting primarily from accelerated depreciation recorded as a result of the announced closure of the ice cream manufacturing plant in Canada, offset by terminations of lease agreements in the normal course of business resulting in . . .