AFC ENTERPRISES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our Selected Financial Data, our Consolidated Financial Statements and our Risk Factors that are included elsewhere in this filing.

Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements, as a result of a number of factors including those factors set forth in Item 1A. of this Annual Report and other factors presented throughout this filing.

Nature of Business AFC develops, operates, and franchises quick-service restaurants under the trade names Popeyes® Chicken & Biscuits and Popeyes® Louisiana Kitchen (collectively "Popeyes") in 47 states, the District of Columbia, Puerto Rico, Guam, the Cayman Islands, and 26 foreign countries. Popeyes has two reportable business segments: franchise operations and company-operated restaurants. Financial information concerning these business segments can be found at Note 20 to our Consolidated Financial Statements.

Management Overview of 2012 Results Our fiscal year 2012 results and highlights include the following.

• Reported net income was $30.4 million, or $1.24 per diluted share, compared to $24.2 million, or $0.97 per diluted share, in 2011. Adjusted earnings per diluted share, which included approximately $0.01 for the 53rd week of operations, were $1.24 compared to $0.99 in 2011, a 25% increase. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures".

• Global same-store sales increased 6.9%, compared to a 3.1% increase last year.

• System-wide sales increased 13.5%, compared to a 6.6% increase in 2011.

• The Popeyes system opened 141 restaurants, compared to 140 last year, and permanently closed 75 restaurants, resulting in 66 net openings, compared to 65 in 2011.

• General and administrative expenses were $67.6 million, at 3.0% of system-wide sales compared to $61.3 million at 3.1% of system-wide sales in 2011.

• Operating EBITDA of $55.9 million was 31.3% of total revenues, compared to $45.4 million, at 29.5% of total revenues last year. Operating EBITDA is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures." • Free cash flow was $36.7 million, compared to $28.5 million in 2011. As a percentage of total revenue, free cash flow increased to 20.5%, compared to 18.5% last year. Free cash flow is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures".

2012 Same-Store Sales Global same-store sales increased 6.9%, compared to a 3.1% increase in 2011.

Total domestic same-store sales increased 7.5%, compared to a 3.0% increase last year. This positive sales growth reflects Popeyes continued introduction of highly innovative new products, supported by expanded relevant advertising and strengthened restaurant execution.

22-------------------------------------------------------------------------------- Table of Contents International same-store sales increased 2.6%, compared to a 3.3% increase last year, the sixth consecutive year of positive same-store sales.

For additional information on our business strategies, see the discussion under the heading "Our Business Strategy" in Item 1 to this Annual Report on Form 10-K.

As it concerns our expected same-store sales results for 2013, see the discussion under the heading "Operating and Financial Outlook for 2013" later in this Item 7.

2012 Unit Growth The Popeyes system opened 141 restaurants in 2012, which included 84 domestic and 57 international restaurants, compared to 140 openings in 2011. The Popeyes system permanently closed 75 restaurants in fiscal 2012, resulting in 66 net restaurant openings, compared to 65 net openings last year. These closures included 29 domestic and 46 international restaurants.

Factors Affecting Comparability of Consolidated Results of Operations: 2012, 2011 and 2010 For 2012, 2011, and 2010, the following items and events affect comparability of reported operating results: • The Company's fiscal year ends on the last Sunday in December. The 2012 fiscal year consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks each. The 53rd week in 2012 increased sales by company-operated restaurants by approximately $1.2 million and increased franchise revenues by approximately $1.7 million. The net impact of the 53rd week earnings per share was approximately $0.01 per diluted share.

• During 2012, 2011 and 2010, the company built five, two new restaurants and one new restaurant, respectively.

• During 2011, the Company recognized $0.8 million of work opportunity tax credits related to prior years.

• The Company recognized $0.8 million in expense for the corporate support center relocation in 2011.

• During 2010 we expensed $0.6 million as a component of Interest expense, net in connection with our new credit facility.

• During 2010, we recorded a tax benefit of $1.4 million, related to the completion of a federal income tax audit for years 2004 and 2005.

Comparisons of Fiscal Years 2012 and 2011 Sales by Company-Operated Restaurants Sales by company-operated restaurants were $64.0 million in 2012, a $9.4 million increase from 2011. The increase was primarily due to new restaurants opened and a 5.3% increase in same-store sales.

Franchise Revenues Franchise revenues have three basic components: (1) ongoing royalty payments that are determined based on a percentage of franchisee sales; (2) franchise fees associated with new restaurant openings; and (3) development fees associated with the opening of new franchised restaurants in a given market.

Royalty revenues are the largest component of franchise revenues, constituting more than 90%.

Franchise revenues were $110.5 million in 2012, a $15.5 million increase from 2011. The increase was primarily due to an increase in royalties, resulting primarily from an increase in franchise same-store sales of 7.5% during 2012 and new franchised restaurants.

23 -------------------------------------------------------------------------------- Table of Contents Company Operated Restaurant Profit Company-operated restaurant operating profit of $11.1 million was 17.3% of sales, compared to $10.2 million and 18.7% of sales last year. The $0.9 million increase in Company-operated restaurant operating profit was primarily due to same-store sales of 5.3% and two new restaurant openings in 2011. The 2012 operating profit includes approximately $0.3 million in pre-opening costs associated with opening 5 new restaurants. The 2011 restaurant operating profit includes a $0.5 million favorable adjustment to insurance reserves. Excluding the effects of pre-opening costs in 2012 and the change in estimated insurance reserves in 2011, Company-operated restaurant operating profit margin would have been 17.8% in both 2012 and 2011. Company-operated restaurant operating profit margin is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures." General and Administrative Expenses General and administrative expenses were $67.6 million at 3.0% of system-wide sales in 2012, a $6.3 million increase from 2011. This increase was primarily attributable to: • $3.1 million increase in short-term and long-term employee incentive costs, • $1.0 million increase in restaurant support and pre-opening costs in new company-operated markets, • $0.9 million increase in domestic new restaurant development and reimage expenses, • $0.5 million in legal fees related to licensing arrangements, • $0.6 million increase in franchisee restaurant support services and new restaurant opening support costs, and • $0.2 million increase in global support center and other general administrative expenses, net.

General and administrative expenses remain among the most efficient in the industry at approximately 3.0% and 3.1% of system wide sales during 2012 and 2011, respectively.

Other Expenses (Income), Net Other income was $0.5 million in income in 2012 compared to other expenses of $0.5 million last year. Fiscal 2012 results include $0.9 million in gains on sale of real estate assets to franchisees, partially offset by $0.4 million loss on disposal of property and equipment and other expenses, net. In 2011, the Company recognized $0.8 million in expenses for the global support center relocation, offset by a $0.8 net gain on the sale of assets and $0.5 million in disposals of property and equipment and other expenses, net.

See Note 16 to our Consolidated Financial Statements for a description of Other expenses (income), net for 2012 and 2011.

24-------------------------------------------------------------------------------- Table of Contents Operating Profit Operating profit in 2012 was $51.3 million, a $10.6 million increase compared to 2011. Operating EBITDA was $55.9 million compared to $45.4 million in 2011.

Fluctuations in the components of revenue and expense giving rise to these changes are discussed above. The following is an analysis of the fluctuations in operating profit by business segment. Operating profit for each reportable segment includes operating results directly attributable to each segment plus a 5% inter-company royalty charge from franchise operations to company-operated restaurants.

As a (Dollars in millions) 2012 2011 Fluctuation Percent Franchise operations $ 51.0 $ 40.2 $ 10.8 26.9% Company-operated restaurants 4.4 5.2 (0.8 ) (15.3%) Operating profit before unallocated expenses 55.4 45.4 10.0 22.0% Less unallocated expenses: Depreciation and amortization 4.6 4.2 0.4 10.0% Other expenses (income), net (0.5 ) 0.5 1.0 200.0% Total $ 51.3 $ 40.7 $ 10.6 26.0% The $10.8 million growth in franchise operations was primarily due to the $15.5 million increase in franchise revenue partially offset by increases in general and administrative expenses related to short-term and long-term employee incentive costs, domestic new restaurant development and reimage expenses, legal fees and franchise restaurant support services and new restaurant opening support costs.

Company-operated restaurants segment operating profit was $4.4 million, a $0.8 million or 15.3%, decrease from 2011. For 2012, company-operated restaurant operating profit was $11.1 million, a $0.9 million increase compared to 2011.

Company-operated restaurant operating profit was offset by a $0.9 million planned increase in restaurant support and pre-opening costs in new company-operated markets Indianapolis and Charlotte, a $0.4 million increase in training, assessments and support costs in the New Orleans and Memphis company-operated restaurants and a $0.4 million increase in the intercompany royalty charge due to growth in revenues.

Income Tax Expense Income tax expense was $17.3 million, yielding an effective tax rate of 36.3%, compared to an effective tax rate of 34.6% in 2011. The prior year income tax expense included a tax benefit of $0.8 million, or 2.2%, for work opportunity tax credits related to prior years. Excluding the impact of these tax credits, the 2012 effective rate was lower than 2011 due to minor favorable adjustments to income tax reserves, partially offset by higher state income taxes. The effective rates differ from statutory rates due to adjustments in estimated tax reserves, tax credits and permanent differences between reported income and taxable income for tax purposes.

Comparisons of Fiscal Years 2011 and 2010 Sales by Company-Operated Restaurants Sales by company-operated restaurants were $54.6 million in 2011, a $1.9 million increase from 2010. The increase was primarily due to new restaurants opened and the 1.1% increase in same-store sales.

Franchise Revenues Franchise revenues were $95.0 million in 2011, a $5.6 million increase from 2010. The increase was primarily due to an increase in royalties, resulting primarily from an increase in franchise same-store sales during 2011 and new franchised restaurants.

25 -------------------------------------------------------------------------------- Table of Contents Rent and Other Revenues Rent and other revenues are primarily composed of rental income associated with properties leased or subleased to franchisees and is recognized on the straight-line basis over the lease term. Rent and other revenues were $4.2 million in 2011, a $0.1 million decrease from 2010.

Company Operated Restaurant Profit Company-operated restaurant operating profit of $10.2 million was 18.7% of sales, compared to $10.1 million and 19.2% of sales last year. The 50 basis point decrease in Company-operated restaurant operating profit margin for fiscal year 2011 was due to inflation in commodity costs of approximately 8% which were partially offset by nominal menu price increases, supply chain savings and efficiencies in labor and other non-food related costs. Company-operated restaurant operating profit margin is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures" in this Item 7.

Rent and Other Occupancy Expenses Rent and other occupancy expenses were $2.7 million in 2011, a $0.6 million increase from 2010 primarily due to deferred rent credits recognized related to an assignment of a lease to a franchisee during 2010.

General and Administrative Expenses General and administrative expenses were $61.3 million at 3.1% of system-wide sales in 2011, a $4.9 million increase from 2010.

This increase was primarily attributable to: • $1.7 million increase in international expenses including salary and personnel related costs, travel and other general and administrative costs, • $1.2 million increase in domestic new restaurant development expenses, • $0.9 million increase in franchisee restaurant support services and new restaurant opening support costs, • $0.7 million increase in information technology expenses, and • $0.4 million increase in incentive and stock-based compensation expense and other general administrative expenses, net.

General and administrative expenses were approximately 3.1% and 3.0% of system wide sales during 2011 and 2010, respectively.

Other Expenses (Income), Net Other expenses were $0.5 million, compared to other expenses of $0.2 million in the previous year. In 2011, the Company recognized $0.8 million in expenses for the corporate support center relocation, offset by a $0.8 net gain on the sale of assets and $0.5 million in impairments and disposal of fixed assets and other expenses.

See Note 16 to our Consolidated Financial Statements for a description of Other expenses (income), net for 2011 and 2010.

Operating Profit Operating profit of $40.7 million was $0.5 million less than in 2010 and Operating EBITDA was $45.4 million compared to $45.3 million. Higher revenues were offset by strategic investments to accelerate global sales and new restaurant development and by higher commodity costs in company-operated restaurants. Fluctuations in the various components of revenue and expense giving rise to this change are discussed above.

26-------------------------------------------------------------------------------- Table of Contents The following is an analysis of the fluctuations in operating profit by business segment.

Operating profit for each reportable segment includes operating results directly allocable to each segment plus a 5% inter-company royalty charge from franchise operations to company-operated restaurants.

As a (Dollars in millions) 2011 2010 Fluctuation Percent Franchise operations $ 40.2 $ 39.7 $ 0.5 1.3% Company-operated restaurants 5.2 5.6 (0.4 ) (7.1%) Operating profit before unallocated expenses 45.4 45.3 0.1 0.2% Less unallocated expenses: Depreciation and amortization 4.2 3.9 0.3 0.7% Other expenses (income), net 0.5 0.2 0.3 150.0% Total $ 40.7 $ 41.2 $ (0.5 ) (1.2%) The $0.5 million growth in franchise operations was primarily due to the $5.6 million increase in franchise revenue partially offset by increases in general and administrative expenses related to international franchise operations, domestic new restaurant development expenses, franchise restaurant support services and new restaurant opening support costs, information technology expenses and incentive and stock-based compensation expenses.

Company-operated restaurants segment operating profit was $5.2 million, a $0.4 million or 7.1%, decrease from 2010. For 2011, company-operated restaurant operating profit was $10.2 million, a $0.1 million increase compared to 2010.

Company-operated restaurant operating profit was offset by a $0.1 million planned increase in restaurant support and pre-opening costs in our Indianapolis company-operated market, a $0.1 million increase in the intercompany royalty charge due to growth in revenues and a $0.3 million increase in information technology support and other general and administrative expenses, net.

Interest Expense, Net Interest expense, net was $3.7 million, a $4.3 million decrease from 2010. This decrease was primarily due to lower average interest rates under the Company's new 2010 credit facility and lower average debt balances outstanding.

Income Tax Expense Income tax expense was $12.8 million, yielding an effective tax rate of 34.6%, compared to an effective tax rate of 31.0% in the prior year. In 2010, the Company recorded a tax benefit of $1.4 million, or $0.05 per diluted share, related to the completion of a federal income tax audit for years 2004 and 2005.

Excluding the tax benefit of $1.4 million during 2010, the 2010 effective tax rate would have been 35.2%. The Company's effective tax rate differs from statutory rates due primarily to adjustments in estimated tax reserves and other permanent differences.

Liquidity and Capital Resources We finance our business activities primarily with: • Cash flows generated from our operating activities, and • Borrowings under our 2010 Credit Facility.

27 -------------------------------------------------------------------------------- Table of Contents Based primarily upon our generation of cash flows from operations, coupled with our existing cash reserves (approximately $17.0 million available as of December 30, 2012), and available borrowings under our 2010 Credit Facility (approximately $22.6 million available as of December 30, 2012), we believe that we will have adequate cash flow (primarily from operating cash flows) to meet our anticipated future requirements for working capital, various contractual obligations and expected capital expenditures for 2013.

Under the 2010 Credit Facility, we have the negotiated the right to increase our Revolving Loan Commitment by up to an additional $20 million, which would give the Company a total of $42.6 million available under the 2010 Credit Facility.

On December 23, 2010, the Company entered into the 2010 Credit Facility and refinanced the 2005 Credit Facility with proceeds drawn at closing.

Key terms in the 2010 Credit Facility are discussed in the Long Term Debt section in this Item 7.

See Note 9 for a discussion of the 2010 Credit Facility.

Our franchise model provides strong, diverse and reliable cash flows. Net cash provided by operating activities of the Company was $40.2 million and $32.1 million for 2012 and 2011, respectively. The increase in cash provided by operating activities was primarily attributable to: (1) higher revenues and (2) operating profit. See our Company's Consolidated Statements of Cash Flows in our Consolidated Financial Statements.

Our cash flows and available borrowings allow us to pursue our growth strategies. Our priorities in the use of available cash are: • reinvestment in core business activities that promote the Company's strategic initiatives, • repurchase of shares of our common stock (subject to the restrictions under our 2010 Credit Facility) and • reduction of long-term debt.

Our investment in core business activities includes our obligation to maintain and reimage our company-operated restaurants, construct company-operated restaurants and provide operations support to our franchise system.

Information regarding increased capital spending planned during 2013 is discussed under the heading entitled Operational and Financial Outlook for 2013 within this Item 7.

Under the terms of the Company's 2010 Credit Facility, quarterly principal payments of $1.5 million will be due during 2013 and 2014, and $4.5 million during 2015.

Total Leverage Ratio is defined as the ratio of the Company's Consolidated Total Indebtedness to Consolidated EBITDA for the four immediately preceding fiscal quarters. Consolidated Total Indebtedness means, as at any date of determination, the aggregate principal amount of Indebtedness of the Company and its Subsidiaries.

Minimum Fixed Charge Coverage Ratio is defined as the ratio of the company's Consolidated EBITDA plus Consolidated Rental Expense less provisions for current taxes less Consolidated Capital Expenditures to Consolidated Fixed Charges.

Consolidated Fixed Charges is defined as the sum of aggregate amounts of scheduled principal payments made during such period on Indebtedness, including Capital Lease Obligations, Consolidated Cash Interest, and Consolidated Rental Expense.

28 -------------------------------------------------------------------------------- Table of Contents At December 30, 2012 the Company was compliant with all debt covenant requirements. The Company's Total Leverage Ratio was 1.20 to 1.0 compared to a covenant requirement of less than 2.75 to 1.0 and the Minimum Fixed Charge Coverage Ratio was 2.75 to 1.0 compared to a covenant requirement of greater than 1.25 to 1.0.

During 2012, we amended the 2010 Credit Facility definition of Consolidated Capital Expenditures to exclude the purchase price paid for Permitted Acquisitions. Also, the definition of Consolidated Capital Expenditures was amended to exclude up to $15.0 million of expenditures for capital or other pre-opening expenses specifically related to the conversion and reimaging of restaurants in California and Minnesota through the end of fiscal 2013.

On November 13, 2012 the Company completed a $13.8 million acquisition of 27 restaurants in California and Minnesota. The restaurants were previously in the trade image of another quick service restaurant concept. Twenty-six (26) of the acquired restaurants are being converted into the Popeyes Louisiana Kitchen image at a cost of approximately $11.0 million. Following the conversion, the restaurants will be leased to Popeyes franchisees to operate under a standard franchise agreement. The remaining restaurant property will be sold. As of December 30, 2012, two of the California restaurants had been converted and leased to a franchisee.

On November 7, 2012, the Company entered into a new agreement with the King Features Syndicate Division of Hearst Holdings, Inc., licensor of the Popeye® the Sailorman and associated cartoon characters. As part of the new agreement, the parties agreed to dismiss the pending declaratory judgment action related to their previous license agreement. The new agreement confirms the expiration of the previous license agreement and the parties agree to cooperate with each other to protect their respective intellectual property rights on a world-wide basis. A one-time $7.0 million payment made to King Features, as well as the associated legal fees of $1.0 million, were recorded as an indefinite-lived intangible asset.

The Company's Board of Directors has approved a share repurchase program. On February 13, 2013 the Board of Directors approved an additional $50.0 million for the share repurchase program. As of February 27, 2013, the remaining dollar amount of shares that may be repurchased under the program was approximately $51.4 million. See Note 12 to our Consolidated Financial Statements.

During 2012 and 2011, we repurchased and retired 741,228 and 1,465,436 shares of common stock for approximately $15.2 million and $22.3 million, respectively.

During fiscal 2010, no shares of common stock were repurchased or retired.

Pursuant to the terms of the Company's 2010 Credit Facility, the Company may repurchase its common shares when the Total Leverage ratio is less than 2.00 to 1.0 Operating and Financial Outlook for 2013 The Company is providing certain targets regarding its expectations for fiscal 2013.

• Same-store sales growth in the range of 3 to 4%.

• New restaurant openings in the range of 175 to 195, and net restaurant openings in the range of 85 to 115, for a net unit growth rate of 4 to 5.5%.

¡ During 2013, the Company expects to open and operate 6-10 new restaurants.

¡ Also included in 2013 openings are 24 of the restaurants acquired in Minnesota and California which will be converted to Popeyes primarily in the second and third quarters. Following the conversion, the restaurants will be leased to Popeyes franchisees to operate under a standard franchise agreements. One remaining acquired restaurant property will be sold.

29 -------------------------------------------------------------------------------- Table of Contents • General and administrative expenses are expected to increase to $72 to $74 million as we continue our investment in strategic initiatives and human capital. General and administrative expenses are expected to remain at approximately 3.0% of system-wide sales.

• Capital expenditures for the year are expected to be $24 to $28 million, including the conversion of acquired restaurants in California and Minnesota and the development of Company-operated restaurants.

• Adjusted earnings per diluted share in the range of $1.37 to $1.42, a 10 to 14% increase over 2012, after including the effect of the following two items: ¡ In 2013, the Company plans to repurchase $15 to $20 million in outstanding shares, compared to $15.2 million in 2012.

¡ The Company's effective income tax rate in 2013 is expected to be approximately 37%, compared to 36.3% in 2012 Long-Term Guidance Consistent with previous guidance, over the course of the upcoming five years, the Company believes the execution of its Strategic Plan will deliver on an average annualized basis the following results: same-store sales growth of 1 to 3%; net unit growth of 4 to 6%; and earnings per diluted share growth of 13 to 15%.

Contractual Obligations The following table summarizes our contractual obligations, due over the next five years and thereafter, as of December 30, 2012: There- (In millions) 2013 2014 2015 2016 2017 after Total Long-term debt, excluding capital leases(1) $ 6.0 $ 6.3 $ 56.8 $ 0.3 $ 0.3 $ 0.8 $ 70.5 Interest on long-term debt, excluding capital leases(1) 2.3 2.1 2.1 0.1 0.1 0.1 6.8 Leases(2) 6.4 6.9 6.6 6.2 5.9 75.6 107.6 Copeland formula agreement(3) 3.1 3.1 3.1 3.1 3.1 33.9 49.4 Information technology outsourcing(3) 1.4 - - - - - 1.4 Business process services(3) 1.5 1.5 0.5 - - - 3.5 Total(4) $ 20.7 $ 19.9 $ 69.1 $ 9.7 $ 9.4 $ 110.4 $ 239.2 (1) For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 30, 2012. See Note 9 to our Consolidated Financial Statements for information concerning the terms of our 2010 Credit Facility, as amended and restated, and the 2011 interest rate swap agreements.

(2) Of the $107.6 million of minimum lease payments, $101.1 million of those payments relate to operating leases and the remaining $6.5 million of payments relate to capital leases. See Note 10 to our Consolidated Financial Statements.

(3) See Note 15 to our Consolidated Financial Statements.

(4) We have not included in the contractual obligations table approximately $1.3 million for uncertain tax positions we have taken on a tax return. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the amount or period of cash settlement, if any, with the respective taxing authorities. These liabilities also include amounts that are temporary in nature and for which we anticipate that over time there will be no net cash outflow.

30 -------------------------------------------------------------------------------- Table of Contents Share Repurchase Program During 2012 and 2011, we repurchased and retired 741,228 and 1,465,436 shares of common stock for approximately $15.2 and $22.3 million, respectively. During fiscal 2010 no shares of common stock were repurchased or retired.

On February 13, 2013 the Board of Directors approved an additional $50.0 million for the share repurchase program. As of February 27, 2013, the remaining shares that may be repurchased under the program was approximately $51.4 million.

Pursuant to the terms of the Company's 2010 Credit Facility, the Company may repurchase its common stock when the Total Leverage Ratio is less than 2.00 to 1.0 The Total Leverage Ratio at December 30, 2012 is 1.20 to 1.0.

Capital Expenditures Our capital expenditures consist primarily of re-imaging activities associated with company-operated restaurants, new restaurant construction and development, equipment replacements, investments in information technology, intangible assets and other property and equipment. Capital expenditures related to re-imaging activities consist of significant renovations, upgrades and improvements, which on a per restaurant basis typically cost between $70,000 and $130,000. Capital expenditures associated with new freestanding restaurant construction typically cost, on a per restaurant basis, between $0.7 million and $1.1 million.

During 2012, we invested approximately $27.3 million in various capital projects, comprised of $16.9 for the acquisition and conversion of restaurants in California and Minnesota, $7.2 million for the construction of five new restaurants located in Indianapolis and Charlotte, $1.1 million for information technology hardware and software, $0.6 million for reimaging activities at company restaurants, and $1.5 million in other capital assets to repair and rebuild damaged restaurants, and to maintain, replace and extend the lives of Company-operated QSR equipment and facilities.

During 2011, we invested approximately $10.4 million in various capital projects, comprised of $1.5 million for the construction of two new restaurants located in Indianapolis and New Orleans, $0.2 million for information technology hardware and software, $1.5 million for reimaging activities at company restaurants, $6.1 million for the construction of the new corporate office, $0.6 million for new point of sale equipment at company-operated restaurants, and $0.5 million in other capital assets to repair and rebuild damaged restaurants, and to maintain, replace and extend the lives of company-operated QSR equipment and facilities. Approximately $2.8 million was received in tenant improvement allowances for the construction of the new corporate office reducing the total cash outlay for capital projects from $10.4 million to $7.6 million.

During 2010, we invested approximately $3.2 million in various capital projects, comprised of $1.4 million for information technology hardware and software at Company-operated restaurants and the corporate office, $1.2 million for restaurant reimaging and corporate office construction and $0.6 million in other capital assets to maintain, replace and extend the lives of company-operated QSR equipment and facilities.

Substantially all of our capital expenditures have been financed using cash provided from operating activities and borrowings under our bank credit facilities.

See Operating and Financial Outlook for 2012 for a discussion of expected capital expenditures during 2012.

Off-Balance Sheet Arrangements The Company has no significant Off-Balance Sheet Arrangements.

31-------------------------------------------------------------------------------- Table of Contents Long Term Debt 2010 Credit Facility. On December 23, 2010, the Company entered into a bank credit facility with a group of lenders consisting of a five year $60.0 million dollar revolving credit facility and a five year $40.0 million dollar term loan.

The 2005 Credit Facility was retired with proceeds from the 2010 Credit Facility.

Key terms in the 2010 Credit Facility include the following: • The term loan and revolving credit facility maturity date is December 23, 2015.

• The Company must maintain a Total Leverage Ratio of < 2.75 to 1.0.

• The interest rate is LIBOR plus 250 basis points.

• The Company must maintain a Minimum Fixed Charge Coverage Ratio of > 1.25 to 1.0.

• The Company may repurchase and retire its common shares at any time the Total Leverage Ratio is less than 2.00 to 1.0.

• The Company may make Permitted Acquisitions at any time the Total Leverage Ratio is less than 2.50 to 1.0.

In connection with the refinancing during 2010, the Company expensed $0.6 million associated with the extinguishment of the Term B Loan, which is reported as a component of "Interest expense, net." Additionally, the Company capitalized approximately $1.2 million of fees related to the new facility as debt issuance costs which will be amortized over the remaining life of the facility utilizing the effective interest method for the term loan and the straight-line method for the revolving credit facility.

The revolving credit facility and term loan bear interest based upon alternative indices (LIBOR, Federal Funds Effective Rate, Prime Rate and a Base CD rate) plus an applicable margin as specified in the facility. The margins on the term and revolving credit facility may fluctuate because of changes in certain financial leverage ratios and the Company's compliance with applicable covenants of the 2010 Credit Facility. The Company also pays a quarterly commitment fee of 0.5% on the unused portions of the revolving credit facility. As of December 30, 2012, the Company had $37.0 million of loans outstanding under its revolving credit facility. Under the terms of the revolving credit facility, the Company may obtain other short-term borrowings of up to $10.0 million and letters of credit up to $25.0 million. Collectively, these other borrowings and letters of credit may not exceed the amount of unused borrowings under the 2010 Credit Facility. As of December 30, 2012, the Company had $0.4 million of outstanding letters of credit. Availability for short-term borrowings and letters of credit under the revolving credit facility was $22.6 million.

The 2010 Credit Facility is secured by a first priority security interest in substantially all of the Company's assets. The 2010 Credit Facility contains financial and other covenants, including covenants requiring the Company to maintain various financial ratios, limiting its ability to incur additional indebtedness, restricting the amount of capital expenditures that may be incurred, restricting the payment of cash dividends, and limiting the amount of debt which can be loaned to the Company's franchisees or guaranteed on their behalf. This facility also limits the Company's ability to engage in mergers or acquisitions, sell certain assets, repurchase its common stock and enter into certain lease transactions. The 2010 Credit Facility includes customary events of default, including, but not limited to, the failure to pay any interest, principal or fees when due, the failure to perform certain covenant agreements, inaccurate or false representations or warranties, insolvency or bankruptcy, change of control, the occurrence of certain ERISA events and judgment defaults.

Under the terms of the Company's 2010 Credit Facility, quarterly principal payments of $1.5 million will be due during 2013 and 2014, and $4.5 million during 2015.

32 -------------------------------------------------------------------------------- Table of Contents As of December 30, 2012, the Company was in compliance with the financial and other covenants of the 2010 Credit Facility. As of December 30, 2012 and December 25, 2011, the Company's weighted average interest rate for all outstanding indebtedness under the 2010 Credit Facility were 3.7% and 3.8% respectively.

Fair Value of Debt The fair values of each of our long-term debt instruments are based on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our term loan and capital lease obligations approximated their carrying values as of December 30, 2012.

Impact of Inflation The impact of inflation on the cost of food, labor, fuel and energy costs, and other commodities has impacted our operating expenses. To the extent permitted by the competitive environment in which we operate, increased costs are partially recovered through menu price increases coupled with purchasing prices and productivity improvements.

Tax Matters We are involved in U.S., state and local tax audits for income, franchise, property and sales and use taxes. In general, the statute of limitations remains open with respect to tax returns that were filed for each tax year after 2008.

However, upon notice of a pending tax audit, we often agree to extend the statute of limitations to allow for complete and accurate tax audits to be performed. The U.S. federal tax years 2010 through 2011 are open to audit. In general, the state tax years open to audit range from 2008 through 2011.

Market Risk We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates and interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. The following analysis provides quantitative information regarding these risks.

Commodity Market Risk. We are exposed to market risk from changes in poultry and other commodity prices. Fresh chicken is the principal raw material for our Popeyes operations, constituting more than 40% of our combined "Restaurant food, beverages and packaging" costs. These costs are significantly affected by fluctuations in the cost of chicken, which can result from a number of factors, including increases in the cost of grain, disease, declining market supply of fast-food sized chickens and other factors that affect availability, and greater international demand for domestic chicken products. We are affected by fluctuations in the cost of other commodities including shortening, wheat, gas and utility price fluctuations. Our ability to recover increased costs through higher pricing is limited by the competitive environment in which we operate.

In order to ensure favorable pricing for fresh chicken purchases and to maintain an adequate supply of fresh chicken for the Popeyes system, Supply Management Services, Inc. (a not-for-profit purchasing cooperative of which we are a member) has entered into chicken purchasing contracts with chicken suppliers.

The contracts, which pertain to the vast majority of our system-wide purchases for Popeyes are "cost-plus" contracts that utilize prices based upon the cost of feed grains plus certain agreed upon non-feed and processing costs. In order to stabilize pricing for the Popeyes system, Supply Management Services, Inc. has entered into commodity pricing agreements for certain commodities including corn, soy, and wheat which impact the price of poultry and other food costs.

Current commodity coverage is 100% of Q1 needs and approximately 25% of Q2 needs at levels equal to or slightly lower than in Q4 2012.

Foreign Currency Exchange Rate Risk. We are exposed to foreign currency exchange risk from the potential changes in foreign currency rates that directly impact our royalty revenues and cash flows from our international franchise operations.

In 2012, franchise revenues from these foreign currency based operations represented 33 -------------------------------------------------------------------------------- Table of Contents approximately 7.8% of our total franchise revenues. For each of 2012, 2011, and 2010, foreign-sourced revenues represented approximately 6.9%, 7.5%, and 7.2%, of our total revenues, respectively. All other things being equal, for the fiscal year ended December 30, 2012, operating profit would have decreased by approximately $0.7 million if all foreign currencies had uniformly weakened 10% relative to the U.S. Dollar.

As of December 30, 2012, approximately $1.1 million of our accounts receivable were denominated in foreign currencies. During 2012 the net loss from the exchange rate was insignificant. Our international franchised operations are in 26 foreign countries with approximately 50% or our revenues from international royalties originating from restaurants in Korea, Canada and Turkey.

Interest Rate Risk. Our net exposure to interest rate risk consists of our borrowings under our 2010 Credit Facility, as amended and restated. Borrowings made pursuant to that facility include interest rates that are benchmarked to U.S. and European short-term floating interest rates. As of December 30, 2012, the balances outstanding under our 2010 Credit Facility, totaled $68.3 million.

The impact on our annual results of operations of a hypothetical one-point interest rate change on the outstanding balances under our 2010 Credit Facility would be approximately $0.4 million.

Critical Accounting Policies and Estimates Our significant accounting policies are presented in Note 2 to our Consolidated Financial Statements. Of our significant accounting policies, we believe the following involve a higher degree of risk, judgment and/or complexity. These policies involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could significantly affect our results of operations, financial condition and cash flows in future years.

Impairment of Long-Lived Assets. We evaluate property and equipment for impairment during the fourth quarter of each year or when circumstances arise indicating that a particular asset may be impaired. For property and equipment at company-operated restaurants, we perform our annual impairment evaluation on an individual restaurant basis. We evaluate restaurants using a "two-year history of operating losses" as our primary indicator of potential impairment.

We evaluate recoverability based on the restaurant's forecasted undiscounted cash flows for the expected remaining useful life of the unit, which incorporate our best estimate of sales growth and margin improvement based upon our plans for the restaurant and actual results at comparable restaurants. The carrying values of restaurant assets that are not considered recoverable are written down to their estimated fair market value, which we generally measure by discounting estimated future cash flows. We performed our annual evaluation of property and equivalent during the fourth quarter 2012 and determined that no impairment was indicated.

Estimates of future cash flows are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions. The discount rate used in the fair value calculations is our estimate of the required rate of return that a third party would expect to receive when purchasing a similar restaurant and the related long-lived assets. We believe the discount is commensurate with the risks and uncertainty inherent in the forecasted cash flows.

Impairment of Goodwill and Trademarks. We evaluate goodwill and trademarks for impairment on an annual basis (during the fourth quarter of each year) or more frequently when circumstances arise indicating that a particular asset may be impaired. Our goodwill impairment evaluation includes a comparison of the fair value of our reporting units with their carrying value. Our reporting units are our business segments. Intangible assets, including goodwill, are allocated to each reporting unit. The estimated fair value of each reporting unit is the amount for which the reporting unit could be sold in a current transaction between willing parties. We estimate the fair value of our reporting units using a discounted cash flow model or market price, if available. The operating assumptions used in the discounted cash flow model are generally consistent with the reporting unit's past performance and with the projections and assumptions that are used in our current operating plans. Such 34-------------------------------------------------------------------------------- Table of Contents assumptions are subject to change as a result of changing economic and competitive conditions. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows. If a reporting unit's carrying value exceeds its fair value, goodwill is written down to its implied fair value. The Company follows a similar analysis for the evaluation of trademarks, but that analysis is performed on a company-wide basis.

During the fourth quarter of fiscal year 2012, we performed our annual assessment of recoverability of goodwill and trademarks and determined that no impairment was indicated. Our Company-operated restaurants segment has goodwill of $2.2 million as of the end of 2012. The assumptions used in determining fair value for this reporting unit are generally consistent with the reporting unit's past performance and with the projections and assumptions that are used in the Company's current operating plans. While our operating assumptions reflect what we believe are reasonable and achievable growth rates, failure to realize these growth rates could result in future impairment of the recorded goodwill. If we believe the risks inherent in the business increase, the resulting change in the discount rate could also result in future impairment of the recorded goodwill.

Fair Value Measurements. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For those assets and liabilities recorded or disclosed at fair value, we determine fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets, we determine fair value based upon the quoted market price of similar assets or the present value of expected future cash flows considering the risks involved, including counterparty performance risk if appropriate, and using discount rates appropriate for the duration. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation.

Level 1 Inputs based upon quoted prices in active markets for identical assets.

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly.Level 3 Inputs that are unobservable for the asset.

Allowances for Accounts and Notes Receivable and Contingent Liabilities. We reserve a franchisee's receivable balance based upon pre-defined aging criteria and upon the occurrence of other events that indicate that we may or may not collect the balance due. In the case of notes receivable, we perform this evaluation on a note-by-note basis, whereas this analysis is performed in the aggregate for accounts receivable. We provide for an allowance for uncollectibility based on such reviews. See Note 2 to the Consolidated Financial Statements for information concerning our allowance account for both accounts receivable and notes receivable.

With respect to contingent liabilities, we similarly reserve for such contingencies when we are able to assess that an expected loss is both probable and reasonably estimable.

Leases. When determining the lease term, we often include option periods for which failure to renew the lease imposes a penalty in such an amount that a renewal appears, at the inception of the lease, to be reasonably assured. We record rent expense for leases that contain scheduled rent increases on a straight-line basis over the lease term, including any option periods considered in the determination of that lease term. Contingent rentals are generally based on sales levels in excess of stipulated amounts, and thus are not considered minimum lease payments and are included in rent expense as they accrue.

Deferred Tax Assets and Tax Reserves. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

35-------------------------------------------------------------------------------- Table of Contents We assess the likelihood that we will be able to recover our deferred tax assets. We consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, we increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We carried a valuation allowance on our deferred tax assets of $5.9 million at December 30, 2012 and $5.5 million at December 25, 2011, based on our view that it is more likely than not that we will not be able to take a tax benefit for certain state operating loss carryforwards which continue to expire.

The Company recognizes the benefit of positions taken or expected to be taken in a tax return in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. Changes in judgment that result in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the interim period in which the change occurs.

At December 30, 2012, we had approximately $1.3 million of unrecognized tax benefits, $0.2 million of which, if recognized, would affect the effective tax rate. At December 30, 2012, the Company had approximately $0.1 million of accrued interest and penalties related to uncertain tax positions.

See Note 18 to the Consolidated Financial Statements for a further discussion of our income taxes.

Stock-Based Compensation Expense The Company measures and recognizes stock-based compensation expense at fair value for all share-based payments, including stock options, restricted stock awards and restricted share units. The fair value of stock options with only service conditions are estimated using a Black-Scholes option-pricing model. The fair value of stock options with service and market conditions are valued utilizing a Monte Carlo simulation embedded in a lattice model. The fair value of stock-based compensation is amortized on the graded vesting attribution method. Our option pricing models require various highly subjective and judgmental assumptions including risk-free interest rates, expected volatility of our stock price, expected forfeiture rates, expected dividend yield and expected term. If any of the assumptions used in the models change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. Our specific weighted average assumptions used to estimate the fair value of stock-based employee compensation are set forth in Note 13 to the Consolidated Financial Statements.

Derivative Financial Instruments We use interest rate swap agreements to reduce our interest rate risk on our floating rate debt under the terms of the 2010 Credit Facility. We recognize all derivatives on the balance sheet at fair value. At inception and on an on-going 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, changes in the fair value of the derivative are recognized in "Accumulated other comprehensive loss" 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.

As a result of the use of derivative instruments, we are exposed to risk that the counterparties will fail to meet their contractual obligations. Recent adverse developments in the global financial and credit markets could negatively impact the creditworthiness of our counterparties and cause one or more of our counterparties to fail to perform as expected. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. To date, all counterparties have performed in accordance with their contractual obligations.

36 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Standards In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets for impairment. The guidance allows an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this guidance to have a material impact on our operating results.

Management's Use of Non-GAAP Financial Measures Adjusted earnings per diluted share, Operating EBITDA, Company-operated restaurant operating profit margins and Free cash flow are supplemental non-GAAP financial measures. The Company uses adjusted earnings per diluted share, Operating EBITDA, Company-operated restaurant operating profit margins and Free cash flow in addition to net income, operating profit and cash flows from operating activities, to assess its performance and believes it is important for investors to be able to evaluate the Company using the same measures used by management. The Company believes these measures are important indicators of its operational strength and performance of its business because they provide a link between profitability and operating cash flow. Adjusted earnings per diluted share, Operating EBITDA, Company-operated restaurant operating profit margins and Free cash flow as calculated by the Company are not necessarily comparable to similarly titled measures reported by other companies. In addition, adjusted earnings per diluted share, Operating EBITDA, Company-operated restaurant operating profit margins and Free cash flow: (a) do not represent net income, cash flows from operations or earnings per share as defined by GAAP; (b) are not necessarily indicative of cash available to fund cash flow needs; and (c) should not be considered as an alternative to net income, earnings per share, operating profit, cash flows from operating activities or other financial information determined under GAAP.

Adjusted Earnings Per Diluted Share: Calculation and Definition The Company defines adjusted earnings for the periods presented as the Company's reported net income after adjusting for certain non-operating items consisting of the following: (i) other expense (income), net, as follows: • Fiscal 2012 includes $0.9 million in gains on sale of real estate assets to franchisees partially offset by $0.3 million loss on disposals of property and equipment and $0.1 of million hurricane-related expenses, net.

• Fiscal 2011 includes $0.8 million in expenses for the global service center relocation, and $0.5 million in disposals of fixed assets offset by a $0.8 million net gain on the sale of assets; (ii) for fiscal 2011, $0.5 million in accelerated depreciation related to the Company's relocation to a new global corporate service center; (iii) for fiscal 2012, $0.5 million in legal fees related to licensing arrangements and (iv) the tax effect of these adjustments.

Adjusted earnings per diluted share provides the per share effect of adjusted net income on a diluted basis. The following table reconciles on a historical basis fiscal 2012 and fiscal 2011, the Company's adjusted 37-------------------------------------------------------------------------------- Table of Contents earnings per diluted share on a consolidated basis to the line on its consolidated statement of operations entitled net income, which the Company believes is the most directly comparable GAAP measure on its consolidated statement of operations to adjusted earnings per diluted share: (in millions, except per share data) Fiscal 2012 Fiscal 2011 Net income $ 30.4 $ 24.2 Other expense (income), net (0.5 ) 0.5 Accelerated depreciation related to the Company's relocation to a new Global Service Center - 0.5 Fees related to licensing arrangements 0.5 - Tax effect - (0.5 ) Adjusted net income $ 30.4 $ 24.7 Adjusted earnings per diluted share $ 1.24 $0.9 9 Weighted average diluted shares outstanding 24.5 25.0 Operating EBITDA: Calculation and Definition The Company defines Operating EBITDA as "earnings before interest expense, taxes, depreciation and amortization, other expenses (income), net and legal fees related to licensing arrangements." The following table reconciles on a historical basis for 2012 and 2011, the Company's earnings before interest expense, taxes, depreciation and amortization, other expenses (income), net and legal fees related to licensing arrangements ("Operating EBITDA") on a consolidated basis to the line on its consolidated statement of operations entitled net income, which the Company believes is the most directly comparable GAAP measure on its consolidated statement of operations to Operating EBITDA.

"Operating EBITDA" as a percentage of "Total Revenues" is defined as "Operating EBITDA" divided by "Total Revenues".

(dollars in millions) Fiscal 2012 Fiscal 2011 Net income $ 30.4 $ 24.2 Interest expense, net 3.6 3.7 Income tax expense 17.3 12.8 Depreciation and amortization 4.6 4.2 Other expenses (income), net (0.5 ) 0.5 Legal fees related to licensing arrangements 0.5 - Operating EBITDA $ 55.9 $ 45.4 Total Revenues $ 178.8 $ 153.8 Operating EBITDA as a percentage of Total Revenues 31.3 % 29.5 % 38 -------------------------------------------------------------------------------- Table of Contents Company-Operated Restaurant Operating Profit Margin: Calculation and Definition The Company defines adjusted company-operated restaurant operating profit as "sales by company-operated restaurants" minus "restaurant employee, occupancy and other expenses" minus "restaurant food, beverages and packaging". The following table reconciles on a historical basis for 2012 and 2011, the Company's company-operated restaurant operating profit to the line item on its consolidated statement of operations entitled "sales by company-operated restaurants," which the Company believes is the most directly comparable GAAP measure on its consolidated statement of operations to "Company-operated restaurant operating profit". Company-operated restaurant operating profit margin is defined as Company-operated restaurant operating profit divided by "sales by company-operated restaurants".

(dollars in millions) Fiscal 2012 Fiscal 2011 Sales by company-operated restaurants $ 64.0 $ 54.6 Restaurant employee, occupancy and other expenses (31.2 ) (26.1 ) Restaurant food, beverages and packaging (21.7 ) (18.3 ) Company-operated restaurant operating profit $ 11.1 $ 10.2 Company-operated restaurant operating profit margin 17.3 % 18.7 % Free Cash Flow: Calculation and Definition The Company defines Free Cash Flow as "net income" plus "depreciation and amortization," plus "stock-based compensation expense," minus "maintenance capital expenditures" (which includes: for fiscal 2012 $0.6 million in Company-operated restaurant reimages, $1.1 million of information technology hardware and software and $1.5 million in other capital assets to maintain, replace and extend the lives of Company-operated restaurant facilities, and for fiscal 2011 $1.5 million in Company-operated restaurant reimages, $0.8 million of information technology hardware and software and $0.5 million in other capital assets to maintain, replace and extend the lives of Company-operated restaurant facilities). In 2012, maintenance capital expenditures exclude $16.9 million related to the acquired restaurants in Minnesota and California and $7.2 million for the construction of new company-operated restaurants. In 2011, maintenance capital expenditures exclude $3.3 million related to the construction of the new corporate office, and $1.5 million for the construction of new Company-operated restaurants.

The following table reconciles on a historical basis for fiscal 2012 and fiscal 2011, the Company's free cash flow on a consolidated basis to the line on its consolidated statement of operations entitled net income, which the Company believes is the most directly comparable GAAP measure on its consolidated statement of operations to free cash flow. "Free Cash Flow as a percentage of total revenue (Free Cash Flow Margin)" is defined as "Free Cash Flow" divided by "Total revenue." (dollars in millions) Fiscal 2012 Fiscal 2011 Net income $ 30.4 $ 24.2 Depreciation and amortization 4.6 4.2 Stock-based compensation expense 4.9 2.9 Maintenance capital expenditures (3.2 ) (2.8 ) Free cash flow $ 36.7 $ 28.5 Total Revenue $ 178.8 $ 153.8 Free cash flow as a percentage of total revenue (Free cash flow margin) 20.5 % 18.5 % 39 -------------------------------------------------------------------------------- Table of Contents Forward-Looking Statements Forward-Looking Statement: Certain statements in this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management's current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties. Examples of such statements in this Annual Report on Form 10-K include discussions regarding the Company's planned implementation of its strategic plan, expectations regarding future growth, planned share repurchases, projections and expectations regarding same-store sales for fiscal 2013 and beyond, the Company's ability to improve restaurant level margins, guidance for new restaurant openings and closures, effective income tax rate, and the Company's anticipated 2013 and long-term performance, including projections regarding general and administrative expenses, net earnings per diluted share, operating profit, operating EBITDA and similar statements of belief or expectation regarding future events. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: competition from other restaurant concepts and food retailers, continued disruptions in the financial markets, the loss of franchisees and other business partners, labor shortages or increased labor costs, increased costs of our principal food products, changes in consumer preferences and demographic trends, as well as concerns about health or food quality, instances of avian flu or other food-borne illnesses, general economic conditions, the loss of senior management and the inability to attract and retain additional qualified management personnel, limitations on our business under our credit facility, our ability to comply with the repayment requirements, covenants, tests and restrictions contained in our credit facility, failure of our franchisees, a decline in the number of franchised units, a decline in our ability to franchise new units, slowed expansion into new markets, unexpected and adverse fluctuations in quarterly results, increased government regulation, effects of volatile gasoline prices, supply and delivery shortages or interruptions, currency, economic and political factors that affect our international operations, inadequate protection of our intellectual property and liabilities for environmental contamination and the other risk factors detailed in this Annual Report on Form 10-K and other documents we file with the Securities and Exchange Commission. Therefore, you should not place undue reliance on any forward-looking statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risk can be found in Item 7 of this report under the heading "Market Risk" and is hereby incorporated by reference into this Item 7A.

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