S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on May 4, 2011

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

DUNKIN’ BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   5810   20-4145825

(State or other jurisdiction of

incorporation or organization)

 

(Primary standard industrial

classification code number)

 

(I.R.S. employer

identification number)

130 Royall Street

Canton, Massachusetts 02021

(781) 737-3000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Nigel Travis

Chief Executive Officer

Dunkin’ Brands Group, Inc.

130 Royall Street

Canton, Massachusetts 02021

(781) 737-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Craig E. Marcus    Richard Emmett   D. Rhett Brandon
Ropes & Gray LLP    Senior Vice President and General Counsel   Simpson Thacher & Bartlett LLP
Prudential Tower    Dunkin’ Brands Group, Inc.   425 Lexington Avenue
800 Boylston Street    130 Royall Street   New York, New York 10017
Boston, Massachusetts 02199-3600    Canton, Massachusetts 02021   Telephone: (212) 455-2000
Telephone: (617) 951-7000    Telephone: (781) 737-3360   Facsimile: (212) 455-2502
Facsimile: (617) 951-7050    Facsimile: (781) 737-4360  

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

 

Large accelerated Filer   ¨    Accelerated filer   ¨   Non-accelerated filer   x     Smaller reporting company   ¨
         (Do not check if a smaller reporting company)      

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum Aggregate
Offering Price(1)

  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  $400,000,000   $46,440
 
 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated May 4, 2011

Prospectus

            Shares

LOGO

Dunkin’ Brands Group, Inc.

Common stock

This is an initial public offering of common stock of Dunkin’ Brands Group, Inc. Dunkin’ Brands Group, Inc. is selling             shares of common stock.

Prior to this offering, there has been no public market for our common stock. The estimated initial public offering price is between $             and $             per share. We intend to apply to have our shares of common stock listed on the The NASDAQ Global Select Market, subject to notice of issuance, under the symbol “DNKN.”

 

      Per share        Total  

Initial public offering price

   $                                    $                              

Underwriting discounts and commissions

   $           $     

Proceeds to us before expenses

   $           $     

Delivery of the shares of common stock is expected to be made on or about                     , 2011. We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions as set forth above, up to an additional             shares of our common stock to cover over-allotments.

Investing in our common stock involves substantial risk. Please read “Risk factors” beginning on page 11.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

J.P. Morgan   Barclays Capital   Morgan Stanley
BofA Merrill Lynch     Goldman, Sachs & Co.

 

                    , 2011


Table of Contents

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Table of Contents

Table of contents

 

Prospectus summary

     1   

Risk factors

     11   

Cautionary note regarding forward-looking statements

     30   

The reclassification

     32   

Use of proceeds

     33   

Dividend policy

     34   

Capitalization

     35   

Dilution

     37   

Selected historical consolidated financial and other data

     39   

Management’s discussion and analysis of financial condition and results of operations

     43   

Business

     68   

Management

     89   

Related party transactions

     123   

Description of indebtedness

     125   

Principal stockholders

     129   

Description of capital stock

     132   

Shares eligible for future sale

     136   

Material U.S. federal tax considerations for Non-U.S. Holders of common stock

     138   

Underwriting

     142   

Legal matters

     150   

Experts

     150   

Where you can find more information

     151   

Index to consolidated financial statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize be distributed to you. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. This document may only be used where it is legal to sell these securities. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus.

 

 

 

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Market and other industry data

In this prospectus, we rely on and refer to information regarding the restaurant industry, the quick service restaurant (“QSR”) segment of the restaurant industry and the QSR segment categories and subcategories that include coffee, donuts, muffins, bagels, breakfast sandwiches, hard serve ice cream, soft serve ice cream, frozen yogurt, shakes, malts and floats, all of which has been sourced from the industry research firms The NPD Group, Inc. (which prepares and disseminates Consumer Reported Eating Share Trends (“CREST® data”)), Nielsen, Euromonitor International, or Technomic Information Services or compiled from market research reports, analyst reports and other publicly available information. Unless otherwise indicated in this prospectus, market data relating to the United States QSR segment and QSR segment categories and subcategories listed above, including Dunkin’ Donuts’ and Baskin-Robbins’ market positions in the QSR segment or such categories and subcategories, was prepared by, or was derived by us from, CREST® data. CREST® data with respect to each of Dunkin’ Donuts and Baskin-Robbins and the QSR segment and the categories and subcategories in which each of them competes, unless otherwise indicated, is for the 12 months ended February 28, 2011. In addition, we refer to customer loyalty rankings prepared by Brand Keys, Inc. (“Brand Keys”), a customer loyalty research and strategic planning consultancy. Other industry and market data included in this prospectus are from internal analyses based upon data available from known sources or other proprietary research and analysis. We believe these data to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because this information cannot always be verified with complete certainty due to the limitations on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market and other similar industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable. We cannot guarantee the accuracy or completeness of any such information contained in this prospectus.

Trademarks, service marks and copyrights

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Some of the trademarks we own include Dunkin’ Donuts® and Baskin-Robbins®. We also sell products under several licensed brands, including, but not limited to, Oreo® and Reese’s®. In addition, we own or have the rights to copyrights, patents, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, service marks, trade names and copyrights referred to in this prospectus are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks, service marks and trade names.

 

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Prospectus summary

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the financial data and related notes and the section entitled “Risk factors” before deciding whether to invest in our common stock. Unless otherwise indicated or the context otherwise requires, references in this prospectus to the “Company,” “Dunkin’ Brands,” “we,” “us” and “our” refer to Dunkin’ Brands Group, Inc. and its consolidated subsidiaries. References in this prospectus to our franchisees include our international licensees. References in this prospectus to years are to our fiscal years, which end on the last Saturday in December. Data regarding number of restaurants or points of distribution are calculated as of March 26, 2011, unless otherwise indicated. All share data assume a per share Class L preference amount of $             , which is the per share Class L preference amount that we used to estimate the number of shares of common stock issuable upon the conversion of our Class L common stock into our common stock as described under “The reclassification.” All information in this prospectus assumes no exercise of the underwriters’ over-allotment option, unless otherwise noted.

Our company

We are the world’s leading franchisor 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 16,000 points of distribution in 57 countries, our portfolio has strong brand awareness in our key markets around the globe and has industry-leading market share in a number of growing categories of the QSR segment. Dunkin’ Donuts operates primarily in the breakfast daypart within the QSR segment of the restaurant industry which has experienced significantly better guest traffic trends than the overall QSR segment in recent years. Dunkin’ Donuts holds the #1 position in the U.S. by servings in each of the QSR subcategories of “Hot regular coffee,” “Iced coffee,” “Donuts,” “Bagels” and “Muffins” and holds the #2 position in the U.S. by servings in each of the QSR subcategories of “Total coffee” and “Breakfast sandwiches.” Baskin-Robbins is the #1 QSR chain in the U.S. for servings of hard serve ice cream and has established leading market positions in Japan as well as in the growing ice cream QSR markets in South Korea and the Middle East.

We believe that our nearly 100% franchised business model offers strategic and financial benefits. For example, because we do not own or operate a significant number of stores, our company is able to focus on menu innovation, marketing, franchisee coaching and support, and other initiatives to drive the overall success of our brand. Financially, our franchised model allows us to grow our points of distribution and brand recognition with limited capital investment by us and to maintain one of the leading cash flow margins in the QSR industry.

We operate our business in four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International and Baskin-Robbins U.S. In 2010, our Dunkin’ Donuts segments generated revenues of $416.5 million, or 76% of our total segment revenues, of which $402.4 million was in the U.S. segment, and $14.1 million was in the international segment. In 2010, our Baskin-Robbins segments generated revenues of $134.2 million, of which $91.3 million was in the international segment and $42.9 million was in the U.S. segment. As of March 26, 2011, there were 9,805 Dunkin’ Donuts points of distribution, of which 6,799 were in the U.S. and 3,006 were international, and 6,482 Baskin-Robbins points of distribution, of which 3,959 were international and 2,523 were in the U.S. Our points of distribution consist of traditional end-cap, in-line and stand-alone restaurants, many with drive thrus, and gas and convenience locations, as well as alternative points of distribution (“APODs”), such as full- or self-service kiosks in grocery stores, hospitals, airports, offices, colleges and other smaller-footprint properties.

For fiscal year 2010, we generated total revenues and operating income of $577.1 million and $193.5 million, respectively.

 

 

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Our history and recent accomplishments

Both of our brands have a rich heritage dating back to the 1940s, when Bill Rosenberg founded his first restaurant, subsequently renamed Dunkin’ Donuts, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. For many years, we operated as a subsidiary of Allied Domecq PLC, which was acquired in July 2005 by Pernod Ricard S.A. Pernod Ricard made the decision to divest Dunkin’ Brands in order to remain a focused global spirits company. As a result, in March of 2006, we were acquired by investment funds affiliated with Bain Capital Partners, LLC, The Carlyle Group and Thomas H. Lee Partners, L.P. (collectively, the “Sponsors”).

Since 2001, we have grown our global Dunkin’ Donuts points of distribution and systemwide sales by compound annual growth rates of 6.9% and 8.7%, respectively. During the same period, we have also grown our global Baskin-Robbins total points of distribution and systemwide sales by compound annual growth rates of 4.0% and 6.8%, respectively. Until the first quarter of fiscal 2008, Dunkin’ Donuts U.S. had experienced 45 consecutive quarters of positive comparable store sales growth. During fiscal 2008 and 2009, we believe we demonstrated strong comparable store sales resilience during the recession, and we increased our overall profitability while investing for future growth. During fiscal 2010, Dunkin’ Donuts U.S. experienced sequential improvement in comparable store sales growth with comparable store sales growth of (0.6)%, 1.9%, 2.7% and 4.7% in the first through the fourth quarters, respectively. Positive comparable store sales growth has continued in the first quarter of fiscal 2011 despite adverse weather conditions in the Northeast region during the quarter.

Dunkin’ Donuts U.S. comparable store sales growth(1)

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(1)   Data for fiscal year 2001 through fiscal year 2005 represent results for the fiscal years ended August. All other fiscal years represent results for the fiscal years ended the last Saturday in December.

Our competitive business strengths

We attribute our success in the QSR segment to the following strengths:

Strong and established brands with leading market positions

Our Dunkin’ Donuts and Baskin-Robbins brands have histories dating back more than 60 years, and have well-established reputations for delivering high-quality beverage and food products at a good value through convenient locations with fast and friendly service. Today both brands are leaders in their respective QSR categories, with aided brand awareness in excess of 95% in the U.S., and a strong, growing presence overseas.

In addition to our leading U.S. market positions, for the fifth consecutive year, Dunkin’ Donuts was recognized in 2010 by Brand Keys, a customer satisfaction research company, as #1 in customer loyalty in the coffee category. Our customer loyalty is particularly evident in New England, where we have our highest penetration per capita in the U.S. and where, according to CREST® data, we hold a 52% market share of breakfast daypart visits and our market share of 57% of total QSR coffee based on servings is nearly six times greater than that of our nearest competitor. Further demonstrating the strength of our brand, in 2010, the Dunkin’ Donuts 12 oz. original blend bagged coffee was the #1 grocery stock-keeping unit nationally in the premium coffee category, with double the sales of our closest competitor, according to Nielsen.

 

 

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Similarly, Baskin-Robbins is the #1 QSR chain in the U.S. for servings of hard serve ice cream and has established leading market positions in Japan, South Korea and the Middle East.

Franchised business model provides an attractive platform for growth

Nearly 100% of our locations are franchised, allowing us to focus on our brand differentiation and menu innovation, while our franchisees expand our points of distribution. This expansion requires limited financial investment by us, given that new store development and substantially all of our store advertising costs are funded by franchisees. Consequently, we achieved a strong operating income margin of approximately 34% in fiscal 2010. With strong operating income margins and low capital requirements, we generate strong and consistent cash flow. For our domestic businesses, because our revenues are largely derived from royalties based on a percentage of franchisee revenues, as well as contractual lease payments and other franchise fees, we are not directly impacted by changes in restaurant-level profitability, including the impact of increases in commodity costs. We offer our franchisees significant operational support aiming to continuously improve restaurant profitability. One example is supporting their supply chain, where we believe we have facilitated approximately $220 million in cost reductions since 2008 through strategic sourcing and other initiatives.

Attractive store-level economics generate franchisee demand for new restaurants

We believe that our restaurants offer a compelling investment opportunity to our franchisees, which in turn generates franchisee demand for additional restaurants. In the U.S., new traditional format Dunkin’ Donuts stores opened during fiscal 2010, excluding gas and convenience locations, generated average weekly sales of approximately $16,400, or annualized unit volumes of approximately $855,000, while the average capital expenditure required to open a new traditional restaurant site in the U.S., excluding gas and convenience locations, was approximately $474,000 in 2010. Of our fiscal 2010 openings and existing commitments, approximately 90% have been made by existing franchisees that are able, in many cases, to use cash flow generated from their existing restaurants to fund a portion of their expansion costs.

As a result of Dunkin’ Donuts’ attractive franchisee store-level economics and strong brand appeal, we have a robust and growing new restaurant pipeline. During 2010, our franchisees opened 206 net new Dunkin’ Donuts points of distribution in the U.S. Based on the commitments we have secured or expect to secure, we anticipate the opening of approximately 200 to 250 net new points of distribution in the U.S. in 2011.

Experienced management team with proven track record in the industry

Our senior management team has significant QSR, foodservice and franchise company experience. Prior to joining Dunkin’ Donuts, our CEO Nigel Travis served as the CEO of Papa John’s International Inc. and previously held numerous senior positions at Blockbuster Inc. and Burger King Corporation. John Costello, our Chief Global Marketing & Innovation Officer, joined Dunkin’ Brands in 2009 having previously held leadership roles at The Home Depot, Sears, Yahoo!, Nielsen Marketing Research and Procter & Gamble. Paul Twohig, our Chief Operating Officer, joined Dunkin’ Donuts U.S. in October 2009 having previously held senior positions at Starbucks Corporation and Panera Bread Company. Neal Yanofsky, our new President of International, joined us in May 2011 after holding senior positions at Generation Mobile, Panera Bread Company, Fidelity Ventures and Au Bon Pain. Our CFO Neil Moses joined in November 2010, having previously held numerous senior positions with public companies, including, most recently, CFO of Parametric Technology Corporation.

 

 

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Our growth strategy

We believe there are significant opportunities to grow our brands globally, further support the profitability of our franchisees, expand our leadership in the coffee, baked goods and ice cream categories of the QSR segment of the restaurant industry and deliver shareholder value by executing on the following strategies:

Increase comparable store sales and profitability in Dunkin’ Donuts U.S.

We intend to continue building on our comparable store sales growth momentum and improve profitability through the following initiatives:

Further increase coffee and beverage sales. Since the late 1980s, we have transformed Dunkin’ Donuts into a coffee-focused brand and have developed a significantly enhanced menu of beverage products, including Coolattas®, espressos, iced lattes and flavored coffees. Approximately 60% of U.S. systemwide sales for fiscal 2010 were generated from coffee and other beverages, which have attractive profit margins and, we believe, generate increased guest visits to our stores and higher unit volumes. We plan to increase our high-margin coffee and beverage revenue through continued new product innovations and related marketing, including highly recognizable advertising campaigns such as “America Runs on Dunkin’” and “What are you Drinkin’?” Beginning in the summer of 2011, Dunkin’ Donuts will offer Dunkin’ Donuts coffee in Keurig® K-Cups, the leading single-serve brewing system in the U.S., exclusively at participating Dunkin’ Donuts restaurants across the U.S.

Extend leadership in breakfast daypart while growing afternoon daypart. As we maintain and expand our current leading market position in the breakfast daypart through innovative bakery and breakfast sandwich products like the Big ‘N Toasty and the Wake-Up Wrap®, we plan to expand Dunkin’ Donuts’ position in the afternoon daypart (between 2:00 p.m. and 5:00 p.m.), which currently represents only approximately 12% of our franchisee-reported sales. We believe that our extensive coffee- and beverage-based menu, coupled with new “hearty snack” introductions, such as Bagel Twists, position us to grow share in this daypart. We believe this will require minimal additional capital investment by our franchisees.

Drive continued enhancements in restaurant operations. We will continue to maintain a highly operations-focused culture to help our franchisees maximize the quality and consistency of their guests’ in-store experience, as well as to drive franchisee profitability. To accomplish this, we have enhanced initial and ongoing restaurant manager and crew training programs and developed new in-store planning and tracking technology tools to assist our franchisees. As evidence of our recent success in these areas, the number of respondents to our Guest Satisfaction Survey program in March 2011 rating their overall experience as “Highly Satisfied” represented an all-time high and reflects a significant improvement over prior results.

Continue Dunkin’ Donuts U.S. contiguous store expansion

We believe there is a significant opportunity to grow our points of distribution for Dunkin’ Donuts in the U.S. given the strong potential outside of the Northeast region to increase our per-capita penetration to levels closer to those in our core markets. Our development strategy resulted in more than 200 net new U.S. openings in fiscal 2010, which was among the largest store count increases in the QSR industry that year. During fiscal 2011 and fiscal 2012, we expect our franchisees to open approximately 200 to 250 net new points of distribution per year in the U.S., principally in existing developed markets. Our long-term goal is to more than double our U.S. footprint and reach a total of 15,000 points of distribution in the U.S. for Dunkin’ Donuts. The following table details our per-capita penetration levels in our U.S. regions.

 

 

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Region      Population
(in millions)
       Stores1        Penetration  
   

New England and New York

       36.0           3,720           1:9,700   

Other Eastern U.S.

       142.5           2,943           1:48,400   

Western U.S.

       130.0           109           1:1,193,000   
   

 

1   As of December 25, 2010

The key elements of our future domestic development strategy are:

Increase penetration in existing markets. In our traditional core markets of New England and New York, we now have one Dunkin’ Donuts store for every 9,700 people. In the near term, we intend to focus our development on other existing markets east of the Mississippi River, where we currently, have only approximately one Dunkin’ Donuts store for every 48,400 people. In certain Eastern U.S. markets outside of our core markets, such as Philadelphia, Chicago and South Florida, we have already achieved per-capita penetration of greater than one Dunkin’ Donuts store for every 25,000 people.

Expand into new markets using a disciplined approach. We believe that the Western part of the U.S. represents a significant growth opportunity for Dunkin’ Donuts. However, we believe that a disciplined approach to development is the best one for our brand and franchisees. Specifically, in the near-term, we will focus on development in contiguous markets that are adjacent to our existing base, and generally move outward to less penetrated markets in progression, providing for marketing and supply chain efficiencies within each new market.

Focus on store-level economics. We believe our strong store-level economics have driven unit growth throughout our history. In recent years, we have undertaken significant initiatives to further enhance store-level economics for our franchisees, including reducing the cash investment for new stores, increasing beverage sales, lowering supply chain costs and implementing more efficient store management systems. We believe these initiatives have further increased franchisee profitability. For example, to open an end-cap restaurant with a drive-thru, we have reduced the upfront capital expenditure costs by approximately 23% between fiscal 2008 and fiscal 2010 and during that same period, we believe we have facilitated approximately $220 million in cost reductions through strategic sourcing and other initiatives. We will continue to focus on these initiatives to further enhance operating efficiencies.

Drive accelerated international growth of both brands

We believe there is a significant opportunity to grow our points of distribution for both brands in international markets. Our international expansion strategy has resulted in more than 3,100 net new openings in the last 10 years. During fiscal 2011 and fiscal 2012, we expect our franchisees to open approximately 450 to 500 net new points of distribution per year internationally, principally in our existing markets.

The key elements of our future international development strategy are:

Grow in our existing core markets. Our international development strategy for both brands includes growth in our existing core markets. For the Dunkin’ Donuts brand, we intend to focus on growth in South Korea and the Middle East, where we currently have 875 and 204 points of distribution, respectively. For Baskin-Robbins, we intend to focus on Japan, South Korea, and the Middle East where, in 2010, we had the #1 market share positions in the Fast Food Ice Cream category in those markets. We intend to leverage our operational infrastructure to grow our existing store base of 2,499 Baskin-Robbins points of distribution in these markets.

 

 

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Capitalize on other markets with significant growth potential. We intend to expand in certain international focus markets where our brands do not have a significant store presence, but where we believe there is consumer demand for our products as well as strong franchisee partners. We plan to pursue opportunities for Dunkin’ Donuts to expand its presence primarily in China, Germany, Spain and Russia, and for Baskin-Robbins primarily in China, Russia, Mexico, Australia and Indonesia, which we believe are currently underserved markets. Through our disciplined process of identifying attractive new markets to enter each year, we recently announced an agreement with an experienced QSR franchisee to enter the Indian market with our Dunkin’ Donuts brand. The agreement calls for the development of at least 500 Dunkin’ Donuts restaurants throughout India, the first of which are expected to open by early 2012. By teaming with local operators, we believe we are better able to adapt our brands to local business practices and consumer preferences.

Further develop our franchisee support infrastructure. We plan to increase our focus on providing our international franchisees with operational tools and services that can help them to efficiently operate in their markets and become more profitable. For each of our brands, we plan to focus on improving our native-language restaurant training programs and updating existing restaurants for our new international retail restaurant designs. To accomplish this, we are dedicating additional resources to our restaurant operations support teams in key geographies in order to assist international franchisees in improving their store-level operations.

Increase comparable store sales growth of Baskin-Robbins U.S.

In the U.S., Baskin-Robbins’ core strengths are its national brand recognition, 65 years of heritage, a well-established reputation for high quality ice cream and attractive margins. To capitalize on these strengths, we are focused on generating renewed excitement for the brand, which includes our recently introduced “More Flavors, More FunTM” marketing campaign. At the restaurant level, we seek to improve sales by focusing on operational and service improvements as well as by increasing cake and beverage sales through product innovation, marketing and technology.

In August 2010, we hired Bill Mitchell to lead our Baskin-Robbins U.S. operations. Mr. Mitchell currently serves as our Senior Vice President and Brand Officer of Baskin-Robbins U.S., and prior to joining us he served in a variety of management roles over a 10-year period at Papa John’s International, and before that at Popeyes, a division of AFC Enterprises. Since joining Dunkin’ Brands, Mr. Mitchell has led the introduction of technology improvements across the Baskin-Robbins system, which we believe will aid our franchisees in operating their restaurants more efficiently and profitably. Under Mr. Mitchell’s leadership, early Baskin-Robbins U.S. results include comparable store sales growth in the first quarter of fiscal 2011 of 0.5%. Further, the majority of respondents to our Guest Satisfaction Survey program in March 2011 rated their overall experience as “Extremely Satisfied,” representing an all-time high and a significant improvement from early 2010.

Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk factors” in deciding whether to invest in our common stock.

Company information

Our principal executive offices are located at 130 Royall Street, Canton, Massachusetts 02021, our telephone number at that address is (781) 737-3000 and our internet address is www.dunkinbrands.com. Our website, and the information contained on our website, is not part of this prospectus.

 

 

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The offering

 

Common stock offered by us

        shares (or          shares if the underwriters exercise their option to purchase additional shares in full)

 

Common stock to be outstanding immediately after completion of this offering

        shares (or          shares if the underwriters exercise their option to purchase additional shares in full)

 

Over-allotment option

We have granted the underwriters a 30-day option to purchase up to an additional          shares to cover over-allotments.

 

Use of proceeds

We expect to receive net proceeds, after deducting estimated offering expenses and underwriting discounts and commissions, of approximately $         million (or $         million if the underwriters exercise their option to purchase additional shares in full), based on an assumed offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus). We intend to use the net proceeds from this offering, together with the net proceeds from our anticipated additional $100 million of term loan borrowings, as described under “Description of indebtedness—Senior credit facility,” to repay all amounts outstanding under the Dunkin’ Brands, Inc. 9 5/8% senior notes due 2018, and to use any remaining net proceeds for working capital and for general corporate purposes. As of April 30, 2011, there was approximately $475.0 million in aggregate principal amount of the Dunkin’ Brands, Inc. 9 5/8% senior notes outstanding. See “Use of proceeds.”

 

Principal stockholders

Upon completion of this offering, investment funds affiliated with the Sponsors will indirectly beneficially own a controlling interest in us. As a result, we currently intend to avail ourselves of the controlled company exemption under the NASDAQ Marketplace Rules. For more information, see “Management—Board structure and committee composition.”

 

Risk factors

You should read carefully the “Risk factors” section of this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Select Market symbol

“DNKN”

The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding after giving effect to the reclassification (assuming an offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus)) and excludes         shares of our common stock issuable upon the exercise of outstanding options at a weighted average exercise price equal to $         per share, of which options to purchase         shares were exercisable as of                     , 2011, and an additional                     shares of our common stock issuable under our 2011 Omnibus Incentive Plan.

 

 

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Summary historical consolidated financial and other data

The following table sets forth our summary historical consolidated financial and other data as of the dates and for the periods indicated. The summary historical financial data as of December 26, 2009 and December 25, 2010 and for each of the three years in the period ended December 25, 2010 presented in this table have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The summary historical financial data as of March 26, 2011 and for the three-month periods ended March 27, 2010 and March 26, 2011 have been derived from the unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 27, 2008 have been derived from our historical audited financial statements for such year, which are not included in this prospectus. The summary consolidated balance sheet data as of March 27, 2010 has been derived from our unaudited consolidated financial statements for such period, which are not included in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the three-month period ended March 26, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. The data in the following table related to points of distribution, comparable store sales growth, franchisee-reported sales and systemwide sales growth are unaudited for all periods presented.

This summary historical consolidated financial and other data should be read in conjunction with the disclosures set forth under “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and the related notes therto appearing elsewhere in this prospectus.

 

 

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     Fiscal year ended     Three months ended  
    December 27,
2008
    December 26,
2009
    December 25,
2010
    March 27,
2010
    March 26,
2011
 
   
    ($ in thousands, except per share data or as otherwise indicated)  

Consolidated Statements of Operations Data:

         

Franchise fees and royalty income

  $ 349,047      $ 344,020      $ 359,927      $ 80,165      $ 85,959   

Rental income

    97,886        93,651        91,102        22,116        22,131   

Sales of ice cream products

    71,445        75,256        84,989        17,793        22,716   

Other revenues

    26,551        25,146        41,117        7,338        8,407   
       

Total revenues

    544,929        538,073        577,135        127,412        139,213   

Amortization of intangible assets

    37,848        35,994        32,467        8,823        7,082   

Impairment charges(1)

    331,862        8,517        7,075        1,414        653   

Other operating costs and expenses(2)(3)

    330,281        323,318        361,893        84,132        87,424   
       

Total operating costs and expenses

    699,991        367,829        401,435        94,369        95,159   

Equity in net income of joint ventures(4)

    14,169        14,301        17,825        3,642        782   
       

Operating income (loss)

    (140,893     184,545        193,525        36,685        44,836   

Interest expense, net(5)

    (115,944     (115,019     (112,532     (27,520     (33,767

Gain (loss) on debt extinguishment and refinancing transactions

           3,684        (61,955            (11,007

Other gains (losses), net

    (3,929     1,066        408        245        476   
       

Income (loss) before income taxes

    (260,766     74,276        19,446        9,410        538   

Net income (loss)

  $ (269,898   $ 35,008      $ 26,861      $ 5,938      $ (1,723

Earnings (loss) per share:

         

Class L—basic and diluted

  $ 4.17      $ 4.57      $ 4.87      $ 1.21      $ 0.85   

Class A—basic and diluted

  $ (1.96   $ (0.37   $ (0.45   $ (0.12   $ (0.11

Pro Forma Consolidated Statements of Operations Data(6):

         

Pro forma net income

      $          $     

Pro forma earnings per share:

         

Basic

      $          $     

Diluted

      $          $     

Pro forma weighted average shares outstanding:

         

Basic

         

Diluted

         

Consolidated Balance Sheet Data:

         

Total cash, cash equivalents, and restricted cash(7)

  $ 251,368      $ 171,403      $ 134,504      $ 201,452      $ 120,850   

Total assets

    3,341,649        3,224,717        3,147,288        3,216,352        3,115,177   

Total debt(8)

    1,668,410        1,451,757        1,864,881        1,486,267        1,867,534   

Total liabilities

    2,614,327        2,454,109        2,841,047        2,439,924        2,802,360   

Common stock, Class L

    1,127,863        1,232,001        840,582        1,257,068        862,184   

Total stockholders’ equity (deficit)

    (400,541     (461,393     (534,341     (480,640     (549,367

Other Financial Data:

         

Capital expenditures

    27,518        18,012        15,358        3,465        3,734   

Points of Distribution(9):

         

Dunkin’ Donuts U.S.

    6,395        6,566        6,772        6,599        6,799   

Dunkin’ Donuts International

    2,440        2,620        2,988        2,685        3,006   

Baskin-Robbins U.S.

    2,692        2,597        2,547        2,572        2,523   

Baskin-Robbins International

    3,321        3,610        3,886        3,650        3,959   
       

Total distribution points

    14,848        15,393        16,193        15,506        16,287   

Comparable Store Sales Growth (U.S. Only)(10):

         

Dunkin’ Donuts

    (0.8)%        (1.3)%        2.3%         (0.6)%        2.8%   

Baskin-Robbins

    (2.2)%        (6.0)%        (5.2)%        (7.9)%        0.5%   

Franchisee-Reported Sales ($ in millions)(11):

         

Dunkin’ Donuts U.S.

  $ 5,004      $ 5,174      $ 5,403      $ 1,233      $ 1,299   

Dunkin’ Donuts International

    529        508        584        139        153   

Baskin-Robbins U.S.

    560        524        494        102        102   

Baskin-Robbins International

    800        970        1,158        225        237   
       

Total Franchisee-Reported Sales

  $ 6,893      $ 7,176      $ 7,639      $ 1,699      $ 1,791   

Company-Owned Store Sales ($ in millions)(12):

         

Dunkin’ Donuts U.S.

  $      $ 2      $ 17      $ 2      $ 2   

Systemwide Sales Growth(13):

         

Dunkin’ Donuts U.S.

    4.4%         3.4%         4.7%         2.0%         5.3%   

Dunkin’ Donuts International

    11.1%         (4.0)%        15.0%         19.0%         10.0%   

Baskin-Robbins U.S.

    (2.1)%        (6.4)%        (5.5)%        (8.8)%        0.2%   

Baskin-Robbins International

    10.7%         21.3%         19.4%         28.3%         5.2%   
       

Total Systemwide Sales Growth

    5.0%         4.1%         6.7%         5.4%         5.4%   
   

 

 

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(1)   

Fiscal year 2008 includes $294.5 million of goodwill impairment charges related to Dunkin’ Donuts U.S. and Baskin-Robbins International, as well as a $34.0 million trade name impairment related to Baskin-Robbins U.S.

 

(2)   

Includes fees paid to the Sponsors of $3.0 million for each of the fiscal years 2008, 2009 and 2010 and $750,000 for each of the three months ended March 27, 2010 and March 26, 2011 under a management agreement, which will be terminated upon the consummation of this offering. See “Related party transactions—Arrangements with our investors.”

 

(3)  

Includes the following amounts:

 

     Fiscal year ended      Three months ended  
     December 27,      December 26,     December 25,      March 27,      March 26,  
     2008      2009     2010      2010      2011  
     (Unaudited, $ in thousands)                

Stock compensation expense

   $ 1,749       $ 1,745      $ 1,461       $ 612       $ 241   

Transaction costs (a)

     —           —          1,083         —           37   

Senior executive transition and severance (b)

     1,340         3,889        4,306         323         273   

Franchisee-related restructuring (c)

     —           12,180        2,748         474         —     

Legal reserves and related costs

     —           —          4,813         —           475   

Breakage income on historical gift certificates

     —           (3,166     —           —           —     

New market entry (d)

     7,239         1,735        —           —           275   

Technology and market related initiatives (e)

     —           134        2,066         430         1,509   

 

  (a)   Represents costs and expenses related to our 2010 refinancing and dividend transactions.
  (b)   Represents severance and related benefit costs associated with non-recurring reorganizations (fiscal 2010 includes the accrual of costs associated with our executive Chairman transition).
  (c)   Represents one-time costs of franchisee-related restructuring programs.
  (d)   Represents one-time costs and fees associated with entry into new markets.
  (e)   Represents costs associated with various franchisee information technology and one-time market research programs.

 

(4)   

Includes amortization expense, net of tax, related to intangible franchise rights established in purchase accounting of $907,000, $899,000, and $897,000 for fiscal years 2008, 2009 and 2010, respectively, and $219,000 for each of the three months ended March 27, 2010 and March 26, 2011, respectively.

 

(5)   

Interest expense, net, for fiscal 2010 and the three months ended March 26, 2011 on a pro forma basis would have been approximately $71.7 million and $17.9 million, respectively, after giving effect to the November 2010 refinancing, the February 2011 re-pricing transaction, a $100.0 million increase in term loans outstanding under the senior credit facility and the repayment of the senior notes in their entirety, as if these transactions had occurred on the first day of the respective periods.

 

(6)  

The pro forma consolidated statements of operations data for fiscal 2010 and the three months ended March 26, 2011 give effect to (a) the reclassification of our Class A common stock and the conversion of our Class L common stock, both into our common stock, as described in “The reclassification,” (b) the issuance of common stock in this offering and the application of the net proceeds therefrom as described in “Use of proceeds,” (c) our anticipated additional $100.0 million in term loan borrowings and corresponding repayment of senior notes and (d) the termination of our management agreement with the Sponsors in connection with this offering, as if each had occurred on the first day of the period presented. See “Description of indebtedness–Senior credit facility” and “Related party transactions.”

 

(7)   

Amounts as of December 27, 2008 and December 26, 2009 include cash held in restricted accounts pursuant to the terms of the securitization indebtedness. Following the redemption and discharge of the securitization indebtedness in fiscal year 2010, such amounts are no longer restricted. The amounts also include cash held as advertising funds or reserved for gift card/certificate programs. Our cash, cash equivalents and restricted cash balance at December 27, 2008 increased primarily as a result of short-term borrowings.

 

(8)   

Includes capital lease obligations of $4.2 million, $5.4 million, $5.4 million, $5.4 million and $5.3 million as of December 27, 2008, December 26, 2009, December 25, 2010, March 27, 2010 and March 26, 2011, respectively.

 

(9)   

Represents period end points of distribution.

 

(10)   

Represents the growth in average weekly sales for franchisee- and company-owned restaurants that have been open at least 54 weeks that have reported sales in the current and comparable prior year week.

 

(11)   

Franchisee-reported sales include sales at franchisee restaurants, including joint ventures.

 

(12)   

Company-owned store sales include sales at restaurants owned and operated by Dunkin’ Brands. During all periods presented, Baskin-Robbins U.S. company-owned store sales were less than $500,000.

 

(13)  

Systemwide sales growth represents the percentage change in sales at both franchisee- and company-owned restaurants from the comparable period of the prior year. Changes in systemwide sales are driven by changes in average comparable store sales and changes in the number of restaurants.

 

 

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Risk factors

An investment in our common stock involves various risks. You should carefully consider the following risks and all of the other information contained in this prospectus before investing in our common stock. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our company. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment in our common stock.

Risks related to our business and industry

Our financial results are affected by the operating results of our franchisees.

We receive a substantial majority of our revenues in the form of royalties, which are generally based on a percentage of gross sales at franchised restaurants, rent and other fees from franchisees. Accordingly, our financial results are to a large extent dependent upon the operational and financial success of our franchisees. If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate and our royalty, rent and other revenues may decline and our accounts receivable and related allowance for doubtful accounts may increase. In addition, if our franchisees fail to renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our business and operating results.

Our franchisees could take actions that could harm our business.

Our franchisees are contractually obligated to operate their restaurants in accordance with the operations, safety and health standards set forth in our agreements with them. However, franchisees are independent third parties whom we do not control. The franchisees own, operate and oversee the daily operations of their restaurants. As a result, the ultimate success and quality of any franchised restaurant rests with the franchisee. If franchisees do not successfully operate restaurants in a manner consistent with required standards, franchise fees paid to us and royalty income will be adversely affected and brand image and reputation could be harmed, which in turn could materially and adversely affect our business and operating results.

Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, active and/or potential disputes with franchisees could damage our brand reputation and/or our relationships with the broader franchisee group.

Our success depends substantially on the value of our brands.

Our success is dependent in large part upon our ability to maintain and enhance the value of our brands, our customers’ connection to our brands and a positive relationship with our franchisees. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to the way we manage our relationship with our franchisees, our growth strategies, our development efforts in domestic and foreign markets, or the ordinary course of our, or our franchisees’, business. Other incidents may arise from events that are or may be beyond our ability to control and may damage our brands, such as actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare or otherwise; litigation and claims; security breaches or other fraudulent activities associated with our electronic payment systems; and illegal activity

 

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targeted at us or others. Consumer demand for our products and our brands’ value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our products, which would likely result in lower sales and, ultimately, lower royalty income, which in turn could materially and adversely affect our business and operating results.

The quick service restaurant segment is highly competitive, and competition could lower our revenues.

The QSR segment of the restaurant industry is intensely competitive. The beverage and food products sold by our franchisees compete directly against products sold at other QSRs, local and regional beverage and food operations, specialty beverage and food retailers, supermarkets and wholesale suppliers, many bearing recognized brand names and having significant customer loyalty. In addition to the prevailing baseline level of competition, major market players in noncompeting industries may choose to enter the restaurant industry. Key competitive factors include the number and location of restaurants, quality and speed of service, attractiveness of facilities, effectiveness of advertising, marketing and operational programs, price, demographic patterns and trends, consumer preferences and spending patterns, menu diversification, health or dietary preferences and perceptions and new product development. Some of our competitors have substantially greater financial and other resources than us, which may provide them with a competitive advantage. In addition, we compete within the restaurant industry and the QSR segment not only for customers but also for qualified franchisees. We cannot guarantee the retention of any, including the top-performing, franchisees in the future, or that we will maintain the ability to attract, retain, and motivate sufficient numbers of franchisees of the same caliber, which could materially and adversely affect our business and operating results. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, the loss of market share and the inability to attract, or loss of, qualified franchisees, which could result in lower franchise fees and royalty income, and materially and adversely affect our business and operating results.

We cannot predict the impact that the following may have on our business: (i) new or improved technologies, (ii) alternative methods of delivery or (iii) changes in consumer behavior facilitated by these technologies and alternative methods of delivery.

Advances in technologies or alternative methods of delivery, including advances in vending machine technology and home coffee makers, or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on our business. Moreover, technology and consumer offerings continue to develop, and we expect that new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable customer proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business. In addition, our competitors, some of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of alternative methods of delivery, which could harm our competitive position. There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery, or to effectively adjust our product mix, service offerings and marketing and merchandising initiatives for products and services that address, and anticipate advances in, technology and market trends. If we are not able to successfully respond to these challenges, our business, financial condition and operating results could be harmed.

Economic conditions adversely affecting consumer discretionary spending may negatively impact our business and operating results.

We believe that our franchisees’ sales, customer traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels and the

 

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availability of discretionary income. Recent economic developments have weakened consumer confidence and impacted spending of discretionary income. Our franchisees’ sales are dependent upon discretionary spending by consumers; any reduction in sales at franchised restaurants will result in lower royalty payments from franchisees to us and adversely impact our profitability. If the economic downturn continues for a prolonged period of time or becomes more pervasive, our business and results of operations could be materially and adversely affected. In addition, the pace of new restaurant openings may be slowed and restaurants may be forced to close, reducing the restaurant base from which we derive royalty income. As long as the weak economic environment continues, our franchisees’ sales and profitability and our overall business and operating results could be adversely affected.

Our substantial indebtedness could adversely affect our financial condition.

We have, and after this offering and the application of the net proceeds therefrom, will continue to have, a significant amount of indebtedness. As of March 26, 2011, on an as adjusted basis after giving effect to this offering and the upsize to our term loan, we would have had total indebtedness of approximately $1.5 billion, excluding $11.2 million of undrawn letters of credit and $88.8 million of unused commitments under our senior credit facility.

Subject to the limits contained in the credit agreement governing our senior credit facility and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:

 

 

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

 

requiring a substantial portion of our cash flow to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

 

increasing our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

 

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the senior credit facility, are at variable rates of interest;

 

 

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

 

placing us at a disadvantage compared to other, less leveraged competitors or competitors with comparable debt at more favorable interest rates; and

 

 

increasing our cost of borrowing.

Our variable rate debt exposes us to interest rate risk which could adversely affect our cash flow.

The borrowings under our senior credit facility bear interest at variable rates. Other debt we incur also could be variable rate debt. If market interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flow. While we may in the future enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.

 

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The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The credit agreement governing our senior credit facility contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:

 

 

incur certain liens;

 

 

incur additional indebtedness and guarantee indebtedness;

 

 

pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;

 

 

prepay, redeem or repurchase certain debt;

 

 

make investments, loans, advances and acquisitions;

 

 

sell or otherwise dispose of assets, including capital stock of our subsidiaries;

 

 

enter into transactions with affiliates;

 

 

alter the businesses we conduct;

 

 

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

 

consolidate, merge or sell all or substantially all of our assets.

In addition, the restrictive covenants in the credit agreement governing our senior credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control.

A breach of the covenants under the credit agreement governing our senior credit facility could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our senior credit facility would permit the lenders under our senior credit facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our senior credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness, which could force us into bankruptcy or liquidation. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.

If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior credit facility to avoid being in default. If we breach our covenants under our senior credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs we would be in default under our senior credit facility, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

Infringement, misappropriation or dilution of our intellectual property could harm our business.

We regard our Dunkin’ Donuts® and Baskin-Robbins® trademarks as having significant value and as being important factors in the marketing of our brands. We have also obtained trademark protection for several of

 

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our product offerings and advertising slogans, including “America Runs on Dunkin’®” and “What are you Drinkin’?®”. We believe that these and other intellectual property are valuable assets that are critical to our success. We rely on a combination of protections provided by contracts, as well as copyright, patent, trademark, and other laws, such as trade secret and unfair competition laws, to protect our intellectual property from infringement, misappropriation or dilution. We have registered certain trademarks and service marks and have other trademark and service mark registration applications pending in the U.S. and foreign jurisdictions. However, not all of the trademarks or service marks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of those countries. Although we monitor trademark portfolios both internally and through external search agents and impose an obligation on franchisees to notify us upon learning of potential infringement, there can be no assurance that we will be able to adequately maintain, enforce and protect our trademarks or other intellectual property rights. We are aware of names and marks similar to our service marks being used by other persons in certain geographic areas in which we have restaurants. Although we believe such uses will not adversely affect us, further or currently unknown unauthorized uses or other infringement of our trademarks or service marks could diminish the value of our brands and may adversely affect our business. Effective intellectual property protection may not be available in every country in which we have or intend to open or franchise a restaurant. Failure to adequately protect our intellectual property rights could damage our brands and impair our ability to compete effectively. Even where we have effectively secured statutory protection for our trade secrets and other intellectual property, our competitors may misappropriate our intellectual property and our employees, consultants and suppliers may breach their contractual obligations not to reveal our confidential information including trade secrets. Although we have taken measures to protect our intellectual property, there can be no assurance that these protections will be adequate or that third parties will not independently develop products or concepts that are substantially similar to ours. Despite our efforts, it may be possible for third-parties to reverse-engineer, otherwise obtain, copy, and use information that we regard as proprietary. Furthermore, defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking an injunction and/or compensation for misappropriation of confidential information, could result in the expenditure of significant resources and divert the attention of management, which in turn may materially and adversely affect our business and operating results.

Although we monitor and restrict franchisee activities through our franchise and license agreements, franchisees may refer to our brands improperly in writings or conversation, resulting in the dilution of our intellectual property. Franchisee noncompliance with the terms and conditions of our franchise or license agreements may reduce the overall goodwill of our brands, whether through the failure to meet health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of our brands, resulting in consumer confusion or dilution. Any reduction of our brands’ goodwill, consumer confusion, or dilution is likely to impact sales, and could materially and adversely impact our business and operating results.

Under certain license agreements, our subsidiaries have licensed to Dunkin’ Brands the right to use certain trademarks, and in connection with those licenses, Dunkin’ Brands monitors the use of trademarks and the quality of the licensed products. While courts have generally approved the delegation of quality-control obligations by a trademark licensor to a licensee under appropriate circumstances, there can be no guarantee that these arrangements will not be deemed invalid on the ground that the trademark owner is not controlling the nature and quality of goods and services sold under the licensed trademarks.

 

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The restaurant industry is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessen the demand for our products, which could reduce sales by our franchisees and reduce our royalty revenues.

The restaurant industry is affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid donuts and other products we offer in favor of foods that are perceived as more healthy, our franchisees’ sales would suffer, resulting in lower royalty payments to us, and our business and operating results would be harmed.

If we fail to successfully implement our growth strategy, which includes opening new domestic and international restaurants, our ability to increase our revenues and operating profits could be adversely affected.

Our growth strategy relies in part upon new restaurant development by existing and new franchisees. We and our franchisees face many challenges in opening new restaurants, including:

 

 

availability of financing;

 

 

selection and availability of suitable restaurant locations;

 

 

competition for restaurant sites;

 

 

negotiation of acceptable lease and financing terms;

 

 

securing required domestic or foreign governmental permits and approvals;

 

 

consumer tastes in new geographic regions and acceptance of our products;

 

 

employment and training of qualified personnel;

 

 

impact of inclement weather, natural disasters and other acts of nature; and

 

 

general economic and business conditions.

In particular, because the majority of our new restaurant development is funded by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. We do not provide our franchisees with direct financing and therefore their ability to access borrowed funds generally depends on their independent relationships with various financial institutions. If our franchisees (or prospective franchisees) are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of new restaurants, and our future growth could be adversely affected. Our failure to add a significant number of new restaurants would adversely affect our ability to increase our revenues and operating income.

To the extent our franchisees are unable to open new stores as we anticipate, our revenue growth would come primarily from growth in comparable store sales. Our failure to add a significant number of new restaurants or grow comparable store sales would adversely affect our ability to increase our revenues and operating income and could materially and adversely harm our business and operating results.

Increases in commodity prices may negatively affect payments from our franchisees and licensees.

Coffee and other commodity prices are subject to substantial price fluctuations, stemming from variations in weather patterns, shifting political or economic conditions in coffee-producing countries and delays in the

 

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supply chain. If commodity prices rise, franchisees may experience reduced sales, due to decreased consumer demand at retail prices that have been raised to offset increased commodity prices, which may reduce franchisee profitability. Any such decline in franchisee sales will reduce our royalty income, which in turn may materially and adversely affect our business and operating results.

Through our wholly-owned subsidiary Dunkin’ Brands Canada Ltd. (“DBCL”), we manufacture ice cream at a facility located in Peterborough, Ontario, Canada (the “Peterborough Facility”). We sell such ice cream to certain international franchisees for their resale. As a result, we are subject to risks associated with dairy products and sugar, the primary ingredients used in the production of ice cream at the Peterborough Facility, including price fluctuations and interruptions in the supply chain of these commodities. If the prices of these commodities rise, we may increase the cost of ice cream sold to such international franchisees, but only after a thirty day notice period, during which our margin on such sales would decline.

Our joint ventures in Japan and South Korea (the “International JVs”), as well as our licensees in Russia and India, do not rely on the Peterborough Facility and instead manufacture ice cream products independently. Each of the International JVs owns a manufacturing facility in its country of operation. The revenues derived from the International JVs differ fundamentally from those of other types of franchise arrangements in the system because the income that we receive from the International JVs are based in part on the profitability, rather than the gross sales, of the restaurants operated by the International JVs. Accordingly, in the event that the International JVs experience staple ingredient price increases that adversely affect the profitability of the restaurants operated by the International JVs, that decrease in profitability would reduce distributions by the International JVs to us, which in turn could materially and adversely impact our business and operating results.

Shortages of coffee could adversely affect our revenues.

If coffee consumption continues to increase worldwide or there is a disruption in the supply of coffee due to natural disasters, political unrest or other calamities, the global coffee supply may fail to meet demand. If coffee demand is not met, franchisees may experience reduced sales which, in turn, would reduce our royalty income. Such a reduction in our royalty income may materially and adversely affect our business and operating results.

We and our franchisees rely on computer systems to process transactions and manage our business, and a disruption or a failure of such systems or technology could harm our ability to effectively manage our business.

Network and information technology systems are integral to our business. We utilize various computer systems, including our FAST System and our EFTPay System, which are customized, web-based systems. The FAST System is the system by which our U.S. and Canadian franchisees report their weekly sales and pay their corresponding royalty fees and required advertising fund contributions. When sales are reported by a U.S. or Canadian franchisee, a withdrawal for the authorized amount is initiated from the franchisee’s bank after 12 days (from the week ending or month ending date). The FAST System is critical to our ability to accurately track sales and compute royalties due from our U.S. and Canadian franchisees. The EFTPay System is used by our U.S. and Canadian franchisees to make payments against open, non-fee invoices (i.e., all invoices except royalty and advertising funds). When a franchisee selects an invoice and submits the payment, on the following day a withdrawal for the selected amount is initiated from the franchisee’s bank. Our systems, including the FAST System and the EFTPay System, are subject to damage and/or interruption as a result of power outages, computer and network failures, computer viruses and other disruptive software, security breaches, catastrophic events and improper usage by employees. Such events could have an adverse impact on us, including a disruption in operations, a need for a costly repair, upgrade or replacement of systems, or a decrease in, or in the collection of, royalties paid to us by our franchisees.

 

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Interruptions in the supply of product to franchisees and licensees could adversely affect our revenues.

In order to maintain quality-control standards and consistency among restaurants, we require through our franchise agreements that our franchisees obtain food and other supplies from preferred suppliers approved in advance. In this regard, we and our franchisees depend on an integral group of suppliers for ingredients, foodstuffs, beverages and disposable serving instruments including, but not limited to, Rich Products Corp., Dean Foods Co., Sara Lee Corporation and Silver Pail Dairy, Ltd. as well as four coffee roasters and two donut mix suppliers. To facilitate the efficiency of our franchisees’ supply chain, we have historically entered into several preferred-supplier arrangements for particular food or beverage items.

The Dunkin’ Donuts system is supported domestically by the franchisee-owned purchasing and distribution cooperative known as the National Distributor Commitment Program (the “NDCP”). We have a long-term agreement with the NDCP for the NDCP to provide substantially all of the goods needed to operate a Dunkin’ Donuts restaurant in the U.S. The NDCP also supplies some international markets. The NDCP aggregates the franchisee demand, sends requests for proposals to approved suppliers and negotiates contracts for approved items. The NDCP also inventories the items in its four regional distribution centers and ships products to franchisees at least one time per week. Other than through certain contractual rights, we have limited ability to control the NDCP. While the NDCP maintains contingency plans with its top tier suppliers and has a contingency plan for its own distribution function to restaurants, our franchisees bear risks associated with the timeliness, solvency, reputation, labor relations, freight costs, price of raw materials and compliance with health and safety standards of each supplier (including DBCL and those of the International JVs) including, but not limited to, risks associated with contamination to food and beverage products. We have little control over such suppliers other than DBCL, which produces ice cream for resale by us. Disruptions in these relationships may reduce franchisee sales and, in turn, our royalty income.

Overall difficulty of suppliers (including DBCL and those of the International JVs) meeting franchisee product demand, interruptions in the supply chain, obstacles or delays in the process of renegotiating or renewing agreements with preferred suppliers, financial difficulties experienced by suppliers, or the deficiency, lack, or poor quality of alternative suppliers could adversely impact franchisee sales which, in turn, would reduce our royalty income and could materially and adversely affect our business and operating results.

We may not be able to recoup our expenditures on properties we sublease to franchisees.

Pursuant to the terms of certain prime leases we have entered into with third-party landlords, we may be required to construct or improve a property, pay taxes, maintain insurance and comply with building codes and other applicable laws. The subleases we enter into with franchisees related to such properties typically pass through such obligations, but if a franchisee fails to perform the obligations passed through to them, we will be required to perform those obligations, resulting in an increase in our leasing and operational costs and expenses. Additionally, in some locations, we may pay more rent and other amounts to third-party landlords under a prime lease than we receive from the franchisee who subleases such property. Typically, our franchisees’ rent is based in part on a percentage of gross sales at the restaurant, so a downturn in gross sales would negatively affect the level of the payments we receive.

If the international markets in which we compete are affected by changes in political, social, legal, economic or other factors, our business and operating results may be materially and adversely affected.

As of March 26, 2011, we had 6,965 restaurants located in 56 foreign countries. The international operations of our franchisees may subject us to additional risks, which differ in each country in which our franchisees operate, and such risks may negatively affect our result in a delay in or loss of royalty income to us.

 

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The factors impacting the international markets in which restaurants are located may include:

 

 

recessionary or expansive trends in international markets;

 

 

changes in foreign currency exchange rates and hyperinflation or deflation in the foreign countries in which we or the International JVs operate;

 

 

the imposition of restrictions on currency conversion or the transfer of funds;

 

 

increases in the taxes paid and other changes in applicable tax laws;

 

 

legal and regulatory changes and the burdens and costs of local operators’ compliance with a variety of laws, including trade restrictions and tariffs;

 

 

interruptions in the supply of product;

 

 

increases in anti-American sentiment and the identification of the Dunkin’ Donuts brand and Baskin-Robbins brand as American brands;

 

 

political and economic instability; and

 

 

natural disasters and other calamities.

Any or all of these factors may reduce distributions from our International JVs or other international partners and/or royalty income, which in turn may materially and adversely impact our business and operating results.

Termination of an arrangement with a master franchisee could adversely impact our revenues.

Internationally, and in limited cases domestically, we enter into relationships with “master franchisees” to develop and operate restaurants in defined geographic areas. Master franchisees are granted exclusivity rights with respect to larger territories than the typical franchisee, and in particular cases, expansion after minimum requirements are met is subject to the discretion of the master franchisee. The termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay of the development of franchised restaurants, or an interruption in the operation of one of our brands in a particular market or markets. Any such delay or interruption would result in a delay in, or loss of, royalty income to us whether by way of delayed royalty income or delayed revenues from the sale of ice cream products by us to franchisees internationally, or reduced sales. Any interruption in operations due to the termination of an arrangement with a master franchisee similarly could result in lower revenues for us, particularly if we were to determine to close restaurants following the termination of an arrangement with a master franchisee.

Our contracts with the U.S. military are non-exclusive and may be terminated with little notice.

We have contracts with the U.S. military, including with the Army & Air Force Exchange Service and the Navy Exchange Service Command. These military contracts are predominantly between the U.S. military and Baskin-Robbins. We derive revenue from the arrangements provided for under these contracts mainly through the sale of ice cream to the U.S. military (rather than through royalties) for resale on base locations and in field operations. While revenues derived from arrangements with the U.S. military represented less than 2% of our total revenues and less than 6% of our international revenues for 2010, because these contracts are non-exclusive and cancellable with minimal notice and have no minimum purchase requirements, revenues attributable to these contracts may vary significantly year to year. Any changes in the U.S. military’s domestic or international needs, or a decision by the U.S. military to use a different supplier, could result in lower revenues for us.

 

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Fluctuations in exchange rates affect our revenues.

We are subject to inherent risks attributed to operating in a global economy. Most of our revenues, costs and debts are denominated in U.S. dollars. However, sales made by franchisees outside of the U.S. are denominated in the currency of the country in which the point of distribution is located, and this currency could become less valuable prior to calculation of our royalty payments in U.S. dollars as a result of exchange rate fluctuations. As a result, currency fluctuations could reduce our royalty income. Unfavorable currency fluctuations could result in a reduction in our revenues. Cost of ice cream produced in the Peterborough Facility in Canada as well as income we earn from our joint ventures are also subject to currency fluctuations. These currency fluctuations affecting our revenues and costs could adversely affect our business and operating results.

Adverse public or medical opinions about the health effects of consuming our products, as well as reports of incidents involving food-borne illnesses or food tampering, whether or not accurate, could harm our brands and our business.

Some of our products contain caffeine, dairy products, sugar and other active compounds, the health effects of which are the subject of increasing public scrutiny, including the suggestion that excessive consumption of caffeine, dairy products, sugar and other active compounds can lead to a variety of adverse health effects. There has also been greater public awareness that sedentary lifestyles, combined with excessive consumption of high-calorie foods, have led to a rapidly rising rate of obesity. In the U.S. and certain other countries, there is increasing consumer awareness of health risks, including obesity, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products. While we offer some healthier beverage and food items, including reduced fat items, an unfavorable report on the health effects of caffeine or other compounds present in our products, or negative publicity or litigation arising from other health risks such as obesity, could significantly reduce the demand for our beverages and food products.

Similarly, instances or reports, whether true or not, of unclean water supply, food-borne illnesses and food tampering have in the past severely injured the reputations of companies in the food processing, grocery and QSR segments and could in the future affect us as well. Any report linking us or our franchisees to the use of unclean water, food-borne illnesses or food tampering could damage our brands’ value, immediately and severely hurt sales of beverages and food products and possibly lead to product liability claims. In addition, instances of food-borne illnesses or food tampering, even those occurring solely at the restaurants of competitors, could, by resulting in negative publicity about the foodservice or restaurant industry, adversely affect our sales on a regional or global basis. A decrease in customer traffic as a result of these health concerns or negative publicity could materially and adversely affect our brands and our business.

We may not be able to enforce payment of fees under certain of our franchise arrangements.

In certain limited instances, a franchisee may be operating a restaurant in the U.S. pursuant to an unwritten franchise arrangement. Such circumstances may arise where a franchisee arrangement has expired and new or renewal agreements have yet to be executed or where the franchisee has developed and opened a restaurant but has failed to memorialize the franchisor-franchisee relationship in an executed agreement as of the opening date of such restaurant. In certain other limited instances, we may allow a franchisee in good standing to operate domestically pursuant to franchise arrangements which have expired in their normal course and have not yet been renewed. There is a risk that either category of these franchise arrangements may not be enforceable under federal, state and local laws and regulations prior to correction or if left uncorrected. In these instances, the franchise arrangements may be enforceable on the basis of custom and assent of performance. If the franchisee, however, were to neglect to remit royalty payments in a timely fashion, we may

 

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be unable to enforce the payment of such fees which, in turn, may materially and adversely affect our business and operating results. While we generally require franchise arrangements in foreign jurisdictions to be entered into pursuant to written franchise arrangements, subject to certain exceptions, some expired contracts, letters of intent or oral agreements in existence may not be enforceable under local laws, which could impair our ability to collect royalty income, which in turn may materially and adversely impact our business and operating results.

Our business activities subject us to litigation risk that could affect us adversely by subjecting us to significant money damages and other remedies or by increasing our litigation expense.

In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. In addition, we are, from time to time, the subject of complaints or litigation from customers alleging illness, injury or other food-quality, health or operational concerns and from suppliers alleging breach of contract. We may also be subject to employee claims based on, among other things, discrimination, harassment or wrongful termination. Finally, litigation against a franchisee or its affiliates by third parties, whether in the ordinary course of business or otherwise, may include claims against us by virtue of our relationship with the defendant-franchisee. In addition to decreasing the ability of a defendant-franchisee to make royalty payments and diverting our management resources, adverse publicity resulting from such allegations may materially and adversely affect us and our brands, regardless of whether such allegations are valid or whether we are liable. A substantial unsatisfied judgment against us or one of our subsidiaries could result in bankruptcy, which would materially and adversely affect our business and operating results.

Our business is subject to various laws and regulations and changes in such laws and regulations, and/or failure to comply with existing or future laws and regulations, could adversely affect us.

We are subject to state franchise registration requirements, the rules and regulations of the Federal Trade Commission (the “FTC”), various state laws regulating the offer and sale of franchises in the U.S. through the provision of franchise disclosure documents containing certain mandatory disclosures and certain rules and requirements regulating franchising arrangements in foreign countries. Although we believe that the Franchisors’ Franchise Disclosure Documents, together with any applicable state-specific versions or supplements, and franchising procedures that we use comply in all material respects with both the FTC guidelines and all applicable state laws regulating franchising in those states in which we offer new franchise arrangements, noncompliance could reduce anticipated royalty income, which in turn may materially and adversely affect our business and operating results.

Our franchisees are subject to various existing U.S. federal, state, local and foreign laws affecting the operation of the restaurants including various health, sanitation, fire and safety standards. Franchisees may in the future become subject to regulation (or further regulation) seeking to tax or regulate high-fat foods or requiring the display of detailed nutrition information, which would be costly to comply with and could result in reduced demand for our products. In connection with the continued operation or remodeling of certain restaurants, the franchisees may be required to expend funds to meet U.S. federal, state and local and foreign regulations. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area or cause an existing restaurant to cease operations. All of these situations would decrease sales of an affected restaurant and reduce royalty payments to us with respect to such restaurant.

The franchisees are also subject to the Fair Labor Standards Act of 1938, as amended, and various other laws in the U.S. and in foreign countries governing such matters as minimum-wage requirements, overtime and other

 

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working conditions and citizenship requirements. A significant number of our franchisees’ food-service employees are paid at rates related to the U.S. federal minimum wage, and past increases in the U.S. federal minimum wage have increased labor costs, as would future increases. Any increases in labor costs might result in franchisees inadequately staffing restaurants. Understaffed restaurants could reduce sales at such restaurants, decrease royalty payments and adversely affect our brands.

Our and our franchisees’ operations and properties are subject to extensive U.S. federal, state and local laws and regulations, including those relating to environmental, building and zoning requirements. Our development of properties for leasing or subleasing to franchisees depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. Failure to comply with legal requirements could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. We may incur investigation, remediation or other costs related to releases of hazardous materials or other environmental conditions at our properties, regardless of whether such environmental conditions were created by us or a third party, such as a prior owner or tenant. We have incurred costs to address soil and groundwater contamination at some sites, and continue to incur nominal remediation costs at some of our other locations. If such issues become more expensive to address, or if new issues arise, they could increase our expenses, generate negative publicity, or otherwise adversely affect us.

Our tax returns and positions are subject to review and audit by federal, state and local taxing authorities and adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

The federal income tax returns of the Company for fiscal years 2006, 2007 and 2008 are currently under audit by the Internal Revenue Service (“IRS”), and the IRS has proposed adjustments for fiscal years 2006 and 2007 to increase our taxable income as it relates to our gift card program, specifically to record taxable income upon the activation of gift cards. We have filed a protest to the IRS’ proposed adjustments, and we believe we have alternative grounds to appeal on should this position be denied (see Note 14 of the notes to our audited consolidated financial statements included elsewhere in this prospectus). While we believe that the Company has properly reported taxable income and paid taxes in accordance with applicable laws and that the proposed adjustments are inconsistent with our franchisor model and the structure of our gift card program, no assurance can be made that we will prevail in the final resolution of this matter. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interest, thereby negatively and adversely impacting our financial condition, results of operations or cash flows.

We are subject to a variety of additional risks associated with our franchisees.

Our franchise system subjects us to a number of risks, any one of which may impact our ability to collect royalty payments from our franchisees, may harm the goodwill associated with our brands, and/or may materially and adversely impact our business and results of operations.

Bankruptcy of U.S. Franchisees. A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise arrangements and, to the extent such franchisee is a lessee pursuant to a franchisee lease/sublease with us, payments due under such franchisee lease/sublease. In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise arrangements and/or franchisee lease/sublease pursuant to Section 365 under the United States bankruptcy code, in which case there would be no further royalty payments and/or franchisee lease/sublease payments from such franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.

 

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Franchisee Changes in Control. The franchise arrangements prohibit “changes in control” of a franchisee without our consent as the franchisor, except in the event of the death or disability of a franchisee (if a natural person) or a principal of a franchisee entity. In such event, the executors and representatives of the franchisee are required by to transfer the relevant franchise arrangements to a successor franchisee approved by the franchisor. There is, however, no assurance that any such successor would be found or, if found, would be able to perform the former franchisee’s obligations under such franchise arrangements or successfully operate the restaurant. If a successor franchisee is not found, or if the successor franchisee that is found is not as successful in operating the restaurant as the then-deceased franchisee or franchisee principal, the sales of the restaurant could be adversely affected.

Franchisee Insurance. The franchise arrangements require each franchisee to maintain certain insurance types and levels. Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material and adverse effect on a franchisee’s ability to satisfy its obligations under its franchise arrangement, including its ability to make royalty payments.

Some of our Franchisees are Operating Entities. Franchisees may be natural persons or legal entities. Our franchisees that are operating companies (as opposed to limited purpose entities) are subject to business, credit, financial and other risks, which may be unrelated to the operations of the restaurants. These unrelated risks could materially and adversely affect a franchisee that is an operating company and its ability to make its royalty payments in full or on a timely basis, which in turn may materially and adversely affect our business and operating results.

Franchise Arrangement Termination; Nonrenewal. Each franchise arrangement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although under certain circumstances a franchise arrangement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise arrangements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten the licensed intellectual property.

In addition, each franchise agreement has an expiration date. Upon the expiration of the franchise arrangement, we or the franchisee may, or may not, elect to renew the franchise arrangements. If the franchisee arrangement is renewed, the franchisee will receive a “successor” franchise arrangement for an additional term. Such option, however, is contingent on the franchisee’s execution of the then-current form of franchise arrangements (which may include increased royalty payments, advertising fees and other costs), the satisfaction of certain conditions (including modernization of the restaurant and related operations) and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, the expiring franchise arrangements will terminate upon expiration of the term of the franchise arrangements.

Product Liability Exposure. We require franchisees to maintain insurance coverage to protect against the risk of product liability and demand strict franchisee compliance with health and safety regulations. However, franchisees may receive through the supply chain (from central manufacturing locations (CMLs), NDCP or otherwise), or produce defective food or beverage products, which may adversely impact our brands’ goodwill.

Americans with Disabilities Act. Restaurants located in the U.S. must comply with Title III of the Americans with Disabilities Act of 1990, as amended (the “ADA”). Although we believe newer restaurants meet the ADA construction standards and, further, that franchisees have historically been diligent in the remodeling of older restaurants, a finding of noncompliance with the ADA could result in the imposition of injunctive relief, fines, an award of damages to private litigants or additional capital expenditures to remedy such noncompliance. Any

 

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imposition of injunctive relief, fines, damage awards or capital expenditures could adversely affect the ability of a franchisee to make royalty payments, or could generate negative publicity, or otherwise adversely affect us.

Franchisee Litigation. Franchisees are subject to a variety of litigation risks, including, but not limited to, customer claims, personal-injury claims, environmental claims, employee allegations of improper termination and discrimination, claims related to violations of the ADA, religious freedom, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and intellectual-property claims. Each of these claims may increase costs and limit the funds available to make royalty payments and reduce the execution of new franchise arrangements.

Potential conflicts with franchisee organizations. Although we believe our relationship with our franchisees is open and strong, the nature of the franchisor-franchisee relationship can give rise to conflict. In the U.S., our approach is collaborative in that we have established district advisory councils, regional advisory councils and a national brand advisory council for each of the Dunkin’ Donuts brand and the Baskin-Robbins brand. The councils are comprised of franchisees and brand employees and executives, and they meet to discuss the strengths, weaknesses, challenges and opportunities facing the brands as well as the rollout of new products and projects. Internationally, our operations are primarily conducted through joint ventures with local licensees, so our relationships are conducted directly with our licensees rather than separate advisory committees. No material disputes exist in the U.S. or internationally at this time.

Failure to retain our existing senior management team or the inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

Our success will continue to depend to a significant extent on our executive management team and the ability of other key management personnel to replace executives who retire or resign. We may not be able to retain our executive officers and key personnel or attract additional qualified management personnel to replace executives who retire or resign. Failure to retain our leadership team and attract and retain other important personnel could lead to ineffective management and operations, which could materially and adversely affect our business and operating results.

If we or our franchisees or licensees are unable to protect our customers’ credit card data, we or our franchisees could be exposed to data loss, litigation, and liability, and our reputation could be significantly harmed.

Privacy protection is increasingly demanding and the introduction of electronic payment methods exposes us and our franchisees to increased risk of privacy and/or security breaches as well as other risks. In connection with credit card sales, our franchisees (and we from our company-operated restaurants) transmit confidential credit card information by way of secure private retail networks. Although we use private networks, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit card sales, and our franchisees’ and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation, and liability, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation and could materially and adversely affect our business and operating results.

Catastrophic events may disrupt our business.

Unforeseen events, including war, terrorism and other international, regional or local instability or conflicts (including labor issues), embargos, public health issues (including tainted food, food-borne illnesses, food

 

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tampering, or water supply or widespread/pandemic illness such as the avian or H1N1 flu), and natural disasters such as earthquakes, tsunamis, hurricanes, or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, could disrupt our operations or that of our franchisees, or suppliers; or result in political or economic instability. For example, the recent earthquake and tsunami in Japan resulted in the temporary closing of a number of Baskin-Robbins restaurants, seven of which remain closed. These events could reduce traffic in our restaurants and demand for our products; make it difficult or impossible for our franchisees to receive products from their suppliers; disrupt or prevent our ability to perform functions at the corporate level; and/or otherwise impede our or our franchisees’ ability to continue business operations in a continuous manner consistent with the level and extent of business activities prior to the occurrence of the unexpected event or events, which in turn may materially and adversely impact our business and operating results.

Risks related to this offering and our common stock

We are a “controlled company” within the meaning of the NASDAQ Marketplace Rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, the Sponsors will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the corporate governance standards of The NASDAQ Global Select Market. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

 

the requirement that a majority of the board of directors consist of independent directors;

 

 

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, or otherwise have director nominees selected by vote of a majority of the independent directors;

 

 

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

 

the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors, our nominating and corporate governance committee and compensation committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The NASDAQ Global Select Market.

The Sponsors, however, are not subject to any contractual obligation to retain their controlling interest, except that they have agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of our common stock or other capital stock or other securities exercisable or convertible therefor for a period of at least 180 days after the date of this prospectus without the prior written consent of J.P. Morgan Securities LLC, Barclays Capital Inc. and Morgan Stanley & Co. Incorporated. Except for this brief period, there can be no assurance as to the period of time during which any of the Sponsors will maintain their ownership of our common stock following the offering.

 

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Our stock price could be extremely volatile and, as a result, you may not be able to resell your shares at or above the price you paid for them.

Since the time that we were acquired by Allied Domecq PLC in 1989, there has not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained after this offering. In addition, the stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this prospectus and others such as:

 

 

variations in our operating performance and the performance of our competitors;

 

 

actual or anticipated fluctuations in our quarterly or annual operating results;

 

 

publication of research reports by securities analysts about us or our competitors or our industry;

 

 

our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

 

additions and departures of key personnel;

 

 

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

 

the passage of legislation or other regulatory developments affecting us or our industry;

 

 

speculation in the press or investment community;

 

 

changes in accounting principles;

 

 

terrorist acts, acts of war or periods of widespread civil unrest;

 

 

natural disasters and other calamities; and

 

 

changes in general market and economic conditions.

As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Following the closing of this offering, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote, and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

 

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There may be sales of a substantial amount of our common stock after this offering by our current stockholders, and these sales could cause the price of our common stock to fall.

After this offering, there will be         shares of common stock outstanding. There will be         shares issued and outstanding if the underwriters exercise in full their option to purchase additional shares. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Following completion of this offering, approximately     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares from us) will be held by investment funds affiliated with the Sponsors and members of our management and employees.

Each of our directors, executive officers and significant equity holders (including affiliates of the Sponsors) have entered into a lock-up agreement with J.P. Morgan Securities LLC, Barclays Capital Inc. and Morgan Stanley & Co. Incorporated on behalf of the underwriters which regulates their sales of our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions and automatic extensions in certain circumstances. See “Shares eligible for future sale– Lock-up agreements.”

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future. Of the shares to be outstanding after the offering, the shares offered by this prospectus will be eligible for immediate sale in the public market without restriction by persons other than our affiliates. Our remaining outstanding shares will become available for resale in the public market as shown in the chart below.

 

Number of Shares   Date Available for Resale
                                                               180 days after this offering (             ,             ), subject to certain exceptions and                                                                automatic extensions in certain circumstances.

Beginning 180 days after this offering, subject to certain exceptions and automatic extensions in certain circumstances, holders of shares of our common stock may require us to register their shares for resale under the federal securities laws, and holders of additional shares of our common stock would be entitled to have their shares included in any such registration statement, all subject to reduction upon the request of the underwriter of the offering, if any. See “Related party transactions—Arrangements with our investors.” Registration of those shares would allow the holders to immediately resell their shares in the public market. Any such sales or anticipation thereof could cause the market price of our common stock to decline.

In addition, after this offering, we intend to register shares of common stock that are reserved for issuance under our 2011 Omnibus Incentive Plan. For more information, see “Shares eligible for future sale—Registration statements on form S-8.”

Provisions in our charter documents and Delaware law may deter takeover efforts that you feel would be beneficial to stockholder value.

In addition to the Sponsors’ beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and Delaware law contain provisions which could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential

 

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hostile acquiror. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures and efforts by stockholders to change the direction or management of the company may be unsuccessful. See “Description of capital stock.”

If you purchase shares in this offering, you will suffer immediate and substantial dilution.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the pro forma book value of your stock, which would have been $         per share as of March 26, 2011 based on an assumed initial public offering price of $         per share (the mid-point of the offering range shown on the cover of this prospectus), because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. You will experience additional dilution upon the exercise of options and warrants to purchase our common stock, including those options currently outstanding and those granted in the future, and the issuance of restricted stock or other equity awards under our stock incentive plans. To the extent we raise additional capital by issuing equity securities, our stockholders will experience substantial additional dilution. See “Dilution.”

Requirements associated with being a public company will require significant company resources and management attention.

Prior to this offering, we were not subject to the reporting requirements of the Securities Exchange Act of 1934, or the other rules and regulations of the SEC or any securities exchange relating to public companies. We are working with independent legal, accounting, financial and other advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal controls over financial reporting. However, we cannot assure you that these and other measures we may take will be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

In addition, compliance with reporting and other requirements applicable to public companies will create additional costs for us, will require the time and attention of management and will require the hiring of additional personnel and outside consultants. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree to which our management’s attention will be consumed by these matters. In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as executive officers.

The Sponsors will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control.

We are currently controlled, and after this offering is completed will continue to be controlled, by the Sponsors. Upon completion of this offering, investment funds affiliated with the Sponsors will beneficially own     % of our outstanding common stock (    % if the underwriters exercise in full the option to purchase additional shares

 

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from us). For as long as the Sponsors continue to beneficially own shares of common stock representing more than 50% of the voting power of our common stock, they will be able to direct the election of all of the members of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, these entities will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in our control and could take other actions that might be favorable to them. Even if their ownership falls below 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions. In addition, each of the Sponsors will have a contractual right to nominate two directors to our board for as long as such Sponsor owns at least 10% of our outstanding common stock (and one director for so long as such Sponsor owns at least 3% of our outstanding common stock) and the Sponsors will have certain contractual rights to have their nominees serve on our compensation committee and our nominating and governance committee. See “Related party transactions–Arrangements with our investors.”

Additionally, the Sponsors are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our senior credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

 

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Cautionary note regarding forward-looking statements

This prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk factors” section of this prospectus, which include, but are not limited to, the following:

 

 

the ongoing level of profitability of our franchisees and licensees;

 

 

changes in working relationships with our franchisees and licensees and the actions of our franchisees and licensees;

 

 

the strength of our brand in the markets in which we compete;

 

 

changes in competition within the quick service restaurant segment of the food service industry;

 

 

changes in consumer behavior resulting from changes in technologies or alternative methods of delivery;

 

 

economic and political conditions in the countries where we operate;

 

 

our substantial indebtedness;

 

 

our ability to protect our intellectual property rights;

 

 

consumer preferences, spending patterns and demographic trends;

 

 

the success of our growth strategy and international development;

 

 

changes in commodity and food prices, particularly coffee, dairy products and sugar, and other operating costs;

 

 

shortages of coffee;

 

 

failure of our network and information technology systems;

 

 

interruptions or shortages in the supply of products to our franchisees and licensees;

 

 

inability to recover our capital costs;

 

 

changes in political, legal, economic or other factors in international markets;

 

 

termination of master franchisee agreement or contracts with the U.S. military;

 

 

currency exchange rates;

 

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the impact of food borne-illness or food safety issues or adverse public or medical opinions regarding the health effects of consuming our products;

 

 

our ability to collect royalty payments from our franchisees and licensees;

 

 

uncertainties relating to litigation;

 

 

changes in regulatory requirements or our and our franchisees and licensees ability to comply with current or future regulatory requirements;

 

 

review and audit of certain of our tax returns;

 

 

the ability of our franchisees and licensees to open new restaurants and keep existing restaurants in operation;

 

 

our ability to retain key personnel;

 

 

our inability to protect customer credit card data; and

 

 

catastrophic events.

Those factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.

Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

 

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The reclassification

In connection with this offering, on                     , 2011, we reclassified our Class A common stock into common stock and effected a     -for-     reverse split of each class of our common stock. Immediately prior to this offering, we had two classes of common stock outstanding, common stock and Class L common stock. The Class L common stock was identical to the common stock, except that the Class L common stock was convertible into shares of our common stock as described below, and each share of Class L common stock was entitled to a preferential payment upon any distribution by us to holders of our capital stock, whether by dividend, liquidating distribution or otherwise, equal to the base amount for such share ($        ) plus an amount that accrued from March 1, 2006, the date that we were acquired by investment funds affiliated with the Sponsors, on the outstanding preference amount at a rate of 9% per annum, compounded quarterly. After payment of this preference amount, each share of common stock and Class L common stock shared equally in all distributions by us to holders of our common stock.

Immediately prior to this offering, we will convert each outstanding share of Class L common stock into one share of common stock plus an additional number of shares of common stock determined by dividing the Class L preference amount, currently estimated to be $         , by the initial public offering price of a share of our common stock in this offering net of the estimated underwriting discount and a pro rata portion, based upon the number of shares being sold in this offering, of the estimated offering-related expenses incurred by us.

References to the “reclassification” throughout this prospectus refer to the reclassification of our Class A common stock into our common stock, the     -for-     reverse stock split and the conversion of our Class L common stock into our common stock.

Assuming an initial public offering price of $         per share, which is the midpoint of the range set forth on the front cover of this prospectus,         shares of common stock will be outstanding immediately after the reclassification but before this offering. The actual number of shares of common stock that will be issued as a result of the reclassification is subject to change based on the actual initial public offering price and the closing date of this offering. See “Description of capital stock.”

 

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Use of proceeds

We estimate that the net proceeds we will receive from the sale of         shares of our common stock in this offering, after deducting underwriter discounts and commissions and estimated expenses payable by us, will be approximately $         million (or $         million, if the underwriters exercise their option to purchase additional shares in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

We intend to use the net proceeds from this offering, together with the net proceeds from our additional $100 million of term loan borrowings, as described under “Description of indebtedness—Senior credit facility,” to repay all amounts outstanding under the Dunkin’ Brands, Inc. 9 5/8% senior notes due December 1, 2018, and to use any remaining net proceeds for working capital and for general corporate purposes. As of April 30, 2011, there was approximately $475.0 million in aggregate principal amount of the Dunkin’ Brands, Inc. 9 5/8% senior notes outstanding. The senior notes were issued on November 23, 2010, and the proceeds of the senior notes (together with borrowings under Dunkin’ Brands, Inc.’s senior credit facility and cash on hand) were used to repay indebtedness of certain of our indirect subsidiaries, to pay a cash dividend of $500.0 million on the outstanding shares of our Class L common stock and to pay related fees and expenses.

 

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Dividend policy

On December 3, 2010, we paid a cash dividend of $500.0 million on the outstanding shares of our Class L common stock. Our board of directors does not currently intend to pay regular dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following this offering and may, subject to compliance with the covenants contained in our senior credit facility and other considerations, determine to pay dividends in the future.

 

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Capitalization

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of March 26, 2011 on (1) an actual basis and (2) an as adjusted basis to give effect to (w) the reclassification that will be effectuated prior to the closing of this offering as if it had occurred on March 26, 2011, (x) the issuance of common stock in this offering and the application of the net proceeds there from as described in “Use of proceeds” (y) our anticipated additional $100 million in term loan borrowings, and (z) the payment of approximately $14 million out of general funds in fees under our management agreement with the Sponsors in connection with this offering and the termination of the management agreement. See “Description of indebtedness—Senior credit facility” and “Related party transactions.”

This table should be read in conjunction with “Use of Proceeds,” “Selected historical consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

        As of
March 26, 2011
 
       Actual        As
adjusted
 
   
       (Dollars in thousands)  

Cash and cash equivalents(1)(2)

     $ 120,508         $     
          

Long-term debt, including current portion;

         

Revolving credit facility(3)

     $         $     

Term loan facility

       1,394,146        

Capital leases

       5,316        
          

Total secured debt

       1,399,462        

9 5/8% senior notes

       468,072        
          

Total long-term debt

       1,867,534        
          

Class L common stock $0.001 par value; 100,000,000 shares authorized and 23,060,006 shares issued and outstanding on an actual basis; no shares authorized, issued and outstanding on an as adjusted basis

       862,184        

Stockholders’ equity (deficit) :

         

Preferred stock, $0.001 par value; no shares authorized, issued and outstanding on an actual basis;          shares authorized and no shares issued and outstanding on an as adjusted basis

         

Common stock, $0.001 par value; 400,000,000 shares authorized and 192,219,311 shares issued and outstanding on an actual basis;                  shares authorized and                  shares issued and outstanding on an as adjusted basis

       192        

Additional paid-in capital

       196,245        

Treasury stock, at cost

       (1,919     

Accumulated deficit(4)

       (762,469     

Accumulated other comprehensive income

       18,584        
          

Total stockholders’ equity (deficit)

       (549,367     
          

Total capitalization

     $ 2,180,351         $                
   

 

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(1)   Amount includes an aggregate of $69.3 million of cash held for advertising funds or reserved for gift card/certificate programs.

 

(2)   A $1.00 increase (decrease) in the assumed initial public offering price of $         per share of our common stock would increase (decrease) our as adjusted cash and cash equivalents by $         million, after deducting the estimated underwriters’ discounts and commissions and estimated expenses payable by us.

 

(3)   Excludes $11.2 million of undrawn letters of credit.

 

(4)  

In connection with the redemption of the Dunkin’ Brands, Inc. 9 5/8% senior notes with the net proceeds from this offering, accumulated deficit will be increased to reflect a non-recurring charge of approximately $         million relating to the redemption at a premium to their principal amount of approximately $         million principal amount of the senior notes, a non-recurring charge of approximately $         million relating to the elimination of discount on the notes redeemed and the elimination of approximately $         million of related deferred financing costs.

 

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Dilution

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact the initial public offering price per share of the common stock is substantially in excess of the book value per share of common stock attributable to the existing stockholders for the presently outstanding shares of common stock. We calculate net tangible book value per share of our common stock by dividing the net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of outstanding shares of our common stock.

Our net tangible book value at March 26, 2011 was approximately $        million, or $        per share of our common stock pro forma for the reclassification but before giving effect to this offering. Pro forma net tangible book value per share before the offering has been determined by dividing net tangible book value (total book value of tangible assets less total liabilities) by the number of shares of common stock outstanding at March 26, 2011, assuming that the reclassification had taken place on March 26, 2011. Dilution in net tangible book value per share represents the difference between the amount per share that you pay in this offering and the net tangible book value per share immediately after this offering.

After giving effect to the receipt of the estimated net proceeds from our sale of shares in this offering, assuming an initial public offering price of $        per share (the mid-point of the offering range shown on the cover of this prospectus), and the application of the estimated net proceeds therefrom as described under “Use of proceeds,” our pro forma as adjusted net tangible book value at March 26, 2011 would have been approximately $        , or $         per share of common stock. This represents an immediate increase in net tangible book value per share of $         to existing stockholders and an immediate decrease in net tangible book value per share of $         to you. The following table illustrates this dilution per share.

 

                  

Assumed initial public offering price per share of common stock

      $                

Pro forma net tangible book value per share at March 26, 2011

   $                   

Increase per share attributable to new investors in this offering

     
           

Pro forma net tangible book value per share of common stock after this offering

      $     
           

Dilution per share to new investors

      $     
   

If the underwriters exercise their over-allotment option in full to purchase additional shares, the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering would be $         per share of our common stock. This represents an increase in pro forma as adjusted net tangible book value of $         per share of our common stock to existing stockholders and dilution in pro forma as adjusted net tangible book value of $         per share of our common stock to you.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share of our common stock would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $         million, or by $         per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated expenses payable by us.

 

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The following table sets forth, as of March 26, 2011, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

      Shares purchased      Total consideration     

Average

price Per
share

 
     Number      Percent      Amount      Percent     
   

Existing stockholders

                    %       $                                  %       $                

New investors

              
        

Total

        100%       $                      100%      
   

If the underwriters were to fully exercise their over-allotment option to purchase additional shares of our common stock from us, the percentage of shares of our common stock held by existing stockholders would be     %, and the percentage of shares of our common stock held by new investors would be     %.

To the extent any outstanding options or other equity awards are exercised or become vested or any additional options or other equity awards are granted and exercised or become vested or other issuances of shares of our common stock are made, there may be further economic dilution to new investors.

 

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Selected historical consolidated financial and other data

The following table sets forth our selected historical consolidated financial and other data as of the dates and for the periods indicated. The selected historical financial data as of December 26, 2009 and December 25, 2010 and for each of the three years in the period ended December 25, 2010 presented in this table have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical financial data as of March 26, 2011 and for the three-month periods ended March 27, 2010 and March 26, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of March 27, 2010 has been derived from our unaudited consolidated financial statements as of such date, which are not included in this prospectus. The selected historical financial data as of December 30, 2006, December 29, 2007 and December 27, 2008 and for the ten month period ended December 30, 2006 and the year ended December 29, 2007 have been derived from our audited consolidated financial statements for such years and periods, which are not included in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods and operating results for the three-month period ended March 26, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. The data in the following table related to points of distribution, comparable store sales growth, franchisee-reported sales, and systemwide sales growth are unaudited for all periods presented.

This selected historical consolidated financial and other data should be read in conjunction with the disclosure set forth under “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

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     Ten months
ended
December 30,
2006(1)
    Fiscal year ended     Three months ended  
      December 29,
2007
    December 27,
2008
    December 26,
2009
    December 25,
2010
    March 27,
2010
    March 26,
2011
 
   
    ($ in thousands, except per share data or as otherwise noted)  

Consolidated Statements of Operations Data:

             

Franchise fees and royalty income

  $ 255,654      $ 325,441      $ 349,047      $ 344,020      $ 359,927      $ 80,165      $ 85,959   

Rental income

    80,016        98,860        97,886        93,651        91,102        22,116        22,131   

Sales of ice cream products

    49,064        63,777        71,445        75,256        84,989        17,793        22,716   

Other revenues

    26,612        28,857        26,551        25,146        41,117        7,338        8,407   
       

Total revenues

    411,346        516,935        544,929        538,073        577,135        127,412        139,213   

Amortization of intangible assets

    33,050        39,387        37,848        35,994        32,467        8,823        7,082   

Impairment charges(2)

    1,525        4,483        331,862        8,517        7,075        1,414        653   

Other operating costs and expenses(3)(4)

    281,428        311,005        330,281        323,318        361,893        84,132        87,424   
       

Total operating costs and expenses

    316,003        354,875        699,991        367,829        401,435        94,369        95,159   

Equity in net income of joint ventures(5)

    11,219        12,439        14,169        14,301        17,825        3,642        782   
       

Operating income (loss)

    106,562        174,499        (140,893     184,545        193,525        36,685        44,836   

Interest expense, net(6)

    (131,827     (111,677     (115,944     (115,019     (112,532     (27,520     (33,767

Gain (loss) on debt extinguishment and refinancing transactions

                         3,684        (61,955            (11,007

Other gains (losses), net

    162        3,462        (3,929     1,066        408        245        476   
       

Income (loss) from continuing operations before income taxes

    (25,103     66,284        (260,766     74,276        19,446        9,410        538   

Income (loss) from continuing operations

    (14,354     39,331        (269,898     35,008        26,861        5,938        (1,723

Net income (loss)(7)

  $ (13,400   $ 34,699      $ (269,898   $ 35,008      $ 26,861      $ 5,938      $ (1,723

Earnings (loss) per share:

           

Class L—basic and diluted

  $ 6.50      $ 4.12      $ 4.17      $ 4.57      $ 4.87      $ 1.21      $ 0.85   

Class A—basic and diluted

  $ (0.89   $ (0.32   $ (1.96   $ (0.37   $ (0.45   $ (0.12   $ (0.11

Pro Forma Consolidated Statements of Operations Data(8):

             

Pro forma net income

          $          $     

Pro forma earnings per share:

             

Basic

          $          $     

Diluted

          $          $     

Pro forma weighted average shares outstanding:

             

Basic

             

Diluted

             

Consolidated Balance Sheet Data:

             

Total cash, cash equivalents, and restricted cash(9)

  $ 127,558      $ 147,968      $ 251,368      $ 171,403      $ 134,504      $ 201,452      $ 120,850   

Total assets

    3,622,084        3,608,753        3,341,649        3,224,717        3,147,288        3,216,352        3,115,177   

Total debt(10)

    1,603,636        1,603,561        1,668,410        1,451,757        1,864,881        1,486,267        1,867,534   

Total liabilities

    2,569,294        2,606,011        2,614,327        2,454,109        2,841,047        2,439,924        2,802,360   

Common stock, Class L

    1,029,488        1,033,450        1,127,863        1,232,001        840,582        1,257,068        862,184   

Total stockholders’ equity (deficit)

    23,302        (30,708     (400,541     (461,393     (534,341     (480,640     (549,367

Other Financial Data:

             

Capital expenditures

    29,706        37,542        27,518        18,012        15,358        3,465        3,734   

Points of Distribution(11):

             

Dunkin’ Donuts U.S.

    5,368        5,769        6,395        6,566        6,772        6,599        6,799   

Dunkin’ Donuts International

    1,925        2,219        2,440        2,620        2,988        2,685        3,006   

Baskin-Robbins U.S.

    2,872        2,763        2,692        2,597        2,547        2,572        2,523   

Baskin-Robbins International

    3,021        3,111        3,321        3,610        3,886        3,650        3,959   
       

Total distribution points

    13,186        13,862        14,848        15,393        16,193        15,506        16,287   
   

 

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Ten months
ended
December 30,
2006(1)

    Fiscal year ended     Three months ended  
      December 29,
2007
    December 27,
2008
    December 26,
2009
    December 25,
2010
    March 27,
2010
    March 26,
2011
 
   
    ($ in thousands, except as otherwise noted)  

Comparable Store Sales Growth (U.S. Only)(12):

             

Dunkin’ Donuts

    4.1%        1.3%         (0.8)%        (1.3)%        2.3%         (0.6)%        2.8%   

Baskin-Robbins

    (2.2)%        0.3%         (2.2)%        (6.0)%        (5.2)%        (7.9)%        0.5%   

Franchisee-Reported Sales ($ in millions)(13):

             

Dunkin’ Donuts U.S.

  $ 3,842      $ 4,792      $ 5,004      $ 5,174      $ 5,403      $ 1,233      $ 1,299   

Dunkin’ Donuts International

    364        476        529        508        584        139        153   

Baskin-Robbins U.S.

    503        572        560        524        494        102        102   

Baskin-Robbins International

    575        723        800        970        1,158        225        237   
       

Total Franchisee-Reported Sales

  $ 5,284      $ 6,563      $ 6,893      $ 7,176      $ 7,639      $ 1,699      $ 1,791   

Company-Owned Store Sales ($ in millions)(14):

             

Dunkin’ Donuts U.S.

  $      $      $      $ 2      $ 17      $ 2      $ 2   

Systemwide Sales Growth(15):

             

Dunkin’ Donuts U.S.

      5.7%         4.4%         3.4%         4.7%         2.0%         5.3%   

Dunkin’ Donuts International

      8.5%         11.1%         (4.0)%        15.0%         19.0%         10.0%   

Baskin-Robbins U.S.

      (1.3)%        (2.1)%        (6.4)%        (5.5)%        (8.8)%        0.2%   

Baskin-Robbins International

      9.7%         10.7%         21.3%         19.4%         28.3%         5.2%   
       

Total Systemwide Sales Growth

      5.6%         5.0%         4.1%         6.7%         5.4%         5.4%   
   

 

(1)   Results relate to the ten months ended December 30, 2006 and do not represent a full fiscal year. We were acquired on March 1, 2006. The results reflect the period from March 1, 2006 through December 30, 2006.

 

(2)   Fiscal year 2008 includes $294.5 million of goodwill impairment charges related to Dunkin’ Donuts U.S. and Baskin-Robbins International, as well as a $34.0 million trade name impairment charge related to Baskin-Robbins U.S.

 

(3)   Includes fees paid to the Sponsors of $2.5 million for the ten months ended December 30, 2006, $3.0 million for each of fiscal 2007, 2008, 2009 and 2010 and $750,000 for each of the three months ended March 27, 2010 and March 26, 2011, under a management agreement, which will be terminated upon the consummation of this offering. See “Related party transactions—Arrangements with our investors.”

 

(4)   Includes the following amounts:

 

   

Ten months

ended

December 30,

2006

    Fiscal year ended     Three months ended  
      December 29,     December 27,     December 26,     December 25,     March 27,      March 26,  
      2007     2008     2009     2010     2010      2011  
                                                        
    (Unaudited, $ in thousands)   

Stock compensation expense

  $ 3,086      $ 2,782      $ 1,749      $ 1,745      $ 1,461      $ 612       $ 241   

Transaction costs (a)

    18,466        1,323        —          —          1,083        —           37   

Senior executive transition and severance (b)

    740        —          1,340        3,889        4,306        323         273   

Franchisee-related restructuring (c)

    —          —          —          12,180        2,748        474         —     

Legal reserves and related costs

    —          —          —          —          4,813        —           475   

Breakage income on historical gift certificates

    —          —          —          (3,166     —          —           —     

New market entry (d)

    —          —          7,239        1,735        —          —           275   

Technology and market related initiatives (e)

    —          —          —          134        2,066        430         1,509   

 

  (a)   Represents costs and expenses related to our fiscal year end change, the securitization and other debt transactions, and our 2010 refinancing and dividend transactions.
  (b)   Represents severance and related benefit costs associated with non-recurring reorganizations (fiscal 2010 includes the accrual of costs associated with our executive Chairman transition).
  (c)   Represents one-time costs of franchisee-related restructuring programs.
  (d)   Represents one-time costs and fees associated with entry into new markets.
  (e)   Represents costs associated with various franchisee information technology and one-time market research programs.

 

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(5)   Includes amortization expense, net of tax, related to intangible franchise rights established in purchase accounting of $1.8 million, $907 thousand, $899,000, and $897,000 for fiscal years 2007, 2008, 2009, and 2010, respectively, and $219,000 for each of the three months ended March 27, 2010 and March 26, 2011, respectively.

 

(6)   Interest expense, net, for fiscal 2010 and the three months ended March 26, 2011 on a pro forma basis would have been approximately $71.7 million and $17.9 million, respectively, after giving effect to the November 2010 refinancing, the February 2011 re-pricing transaction, a $100.0 million increase in term loans outstanding under the senior credit facility, and the repayment of the senior notes in their entirety, as if these transactions had occurred on the first day of the respective periods.

 

(7)   We completed the sale of our Togo’s brand on November 30, 2007. Net income for the ten months ended December 30, 2006 and the fiscal year ended December 29, 2007 includes income from discontinued operations of $1.0 million and a loss from discontinued operations of $4.6 million, respectively, related to the Togo’s operations and sale.

 

(8)   The pro forma consolidated statements of operations data for fiscal 2010 and the three months ended March 26, 2011 give effect to (a) the reclassification of our Class A common stock and the conversion of our Class L common stock, both into our common stock, as described in “The reclassification,” (b) the issuance of common stock in this offering and the application of the net proceeds therefrom as described in “Use of proceeds,” (c) our anticipated additional $100.0 million in term loan borrowings and corresponding repayment of senior notes, and (d) the termination of our management agreement with the Sponsors in connection with this offering, as if each had occurred on the first day of the period presented. See “Description of indebtedness-Senior credit facility” and “Related party transactions.”

 

(9)   Amounts as of December 30, 2006, December 29, 2007, December 27, 2008, and December 26, 2009 include cash held in restricted accounts pursuant to the terms of the securitization indebtedness. Following the redemption and discharge of the securitization indebtedness in fiscal year 2010, such amounts are no longer restricted. The amounts also include cash held for advertising funds or reserved for gift card/certificate programs. Our cash and cash equivalents and restricted cash balances at December 27, 2008 increased primarily as a result of short-term borrowings.

 

(10)   Includes capital lease obligations of $3.7 million, $3.6 million, $4.2 million, $5.4 million, $5.4 million, $5.4 million and $5.3 million as of December 30, 2006, December 29, 2007, December 27, 2008, December 26, 2009, December 25, 2010, March 27, 2010 and March 26, 2011, respectively.

 

(11)   Represents period end distribution points.

 

(12)   Represents the growth in average weekly sales for franchisee- and company-owned restaurants that have been open at least 54 weeks that have reported sales in the current and comparable prior year week.

 

(13)   Franchisee-reported sales include sales at franchisee restaurants, including joint ventures.

 

(14)   Company-owned store sales include sales at restaurants owned and operated by Dunkin’ Brands. During all periods presented, Baskin-Robbins U.S. company-owned store sales were less than $500,000.

 

(15)   Systemwide sales growth represents the percentage change in sales at both franchisee- and company-owned restaurants from the comparable period of the prior year. Changes in systemwide sales are driven by changes in average comparable store sales and changes in the number of restaurants.

 

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Management’s discussion and analysis of

financial condition and results of operations

The following discussion of our financial condition and results of operations should be read in conjunction with the “Selected historical consolidated financial data” and the audited and unaudited historical consolidated financial statements and related notes. 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” and “Cautionary note regarding forward-looking statements” 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 the world’s leading franchisor 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 16,000 points of distribution in 57 countries, our portfolio has strong brand awareness in our key markets around the globe and has industry-leading market share in a number of growing categories of the QSR segment. Dunkin’ Donuts has 9,805 global points of distribution with restaurants in 36 U.S. states and the District of Columbia and in 31 foreign countries worldwide. Baskin-Robbins has 6,482 global points of distribution with restaurants in 45 U.S. states and the District of Columbia and in 46 foreign countries worldwide.

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 four 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, and (iv) 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, revenue from our company-owned restaurants, and online training fees.

Approximately 62% of our revenue for fiscal year 2010 was derived from royalty income and franchise fees. An additional 16% of our revenue for fiscal year 2010 was generated from rental income from franchisees that lease or sublease their properties from us. The balance of our revenue for fiscal year 2010 consisted of sales of ice cream products to Baskin-Robbins franchisees in certain international markets, license fees on sales of ice cream products to Baskin-Robbins franchisees in the U.S., refranchising gains, transfer fees from franchisees, revenue from our company-owned restaurants, 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 17 company-owned restaurants as of March 26, 2011, we are less affected by store-level costs and profitability and fluctuations in commodity costs than other QSR operators.

 

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Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing 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 2010, franchisee contributions to the U.S. advertising funds were $289.5 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 2010, 2009, and 2008 reflect the results of operations for the 52-week periods ending on December 25, 2010, December 26, 2009, and December 27, 2008, respectively. The data periods contained within the three months ended March 26, 2011 and March 27, 2010 reflect the results of operations for the 13-week periods ending on those dates. Operating results for the three months ended March 26, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

Critical accounting policies

Our significant accounting policies are more fully described under the heading “Summary of significant accounting policies” in Note 2 of the notes to the consolidated financial statements. However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations and require application of significant judgment by our management. In applying these policies, management uses its judgment in making certain assumptions and estimates. These judgments involve estimations of the effect of matters that are inherently uncertain and may have a significant impact on our quarterly and annual results of operations or financial condition. Changes in estimates and judgments could significantly affect our result of operations, financial condition, and cash flow in future years. The following is a description of what we consider to be our most significant critical accounting policies.

Revenue recognition

Initial franchise fee revenue is recognized upon substantial completion of the services required of us as stated in the franchise agreement, which is generally upon opening of the respective restaurant. Fees collected in advance are deferred until earned. Royalty income is based on a percentage of franchisee gross sales and is recognized when earned, which occurs at the franchisees’ point of sale. Renewal fees are recognized when a renewal agreement with a franchisee becomes effective. Rental income for base rentals is recorded on a straight-line basis over the lease term. Contingent rent is recognized as earned, and any amounts received from lessees in advance of achieving stipulated thresholds are deferred until such threshold is actually achieved. Revenue from the sale of ice cream is recognized when title and risk of loss transfers to the buyer, which is generally upon shipment. Licensing fees are recognized when earned, which is generally upon sale of the underlying products by the licensees. Retail store revenues at company-owned restaurants are recognized when payment is tendered at the point of sale, net of sales tax and other sales-related taxes. Gains on the refranchise or sale of a restaurant are recognized when the sale transaction closes, the franchisee has a minimum amount of the purchase price in at risk equity, and we are satisfied that the buyer can meet its financial obligations to us.

Allowances for franchise, license and lease receivables / guaranteed financing

We reserve all or a portion of a franchisee’s receivable balance when deemed necessary based upon detailed review of such balances, and apply a pre-defined reserve percentage based on an aging criteria to other

 

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balances. We perform our reserve analysis during each fiscal quarter or when events or circumstances indicate that we may not collect the balance due. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control.

In limited instances, we issue guarantees to financial institutions so that our franchisees can obtain financing with terms of approximately five to ten years for various business purposes. We recognize a liability and offsetting asset for the fair value of such guarantees. The fair value of a guarantee is based on historical default rates of our total guaranteed loan pool. We monitor the financial condition of our franchisees and record provisions for estimated losses on guaranteed liabilities of our franchisees if we believe that our franchisees are unable to make their required payments. As of March 26, 2011, if all of our outstanding guarantees of franchisee financing obligations came due simultaneously, we would be liable for approximately $7.7 million. As of March 26, 2011, there were no amounts under such guarantees that were contingently due. We generally have cross-default provisions with these franchisees that would put the franchisee in default of its franchise agreement in the event of non-payment under such loans. We believe these cross-default provisions significantly reduce the risk that we would not be able to recover the amount of required payments under these guarantees and, historically, we have not incurred significant losses under these guarantees due to defaults by our franchisees.

Impairment of goodwill and other intangible assets

Goodwill and trade names (indefinite lived intangibles) have been assigned to our reporting units, which are also our operating segments, for purposes of impairment testing. Our reporting units, which have indefinite lived intangible assets associated with them, are Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International.

We evaluate the remaining useful life of our trade names to determine whether current events and circumstances continue to support an indefinite useful life. In addition, all of our indefinite lived intangible assets are tested for impairment annually. The trade name intangible asset impairment test consists of a comparison of the fair value of each trade name with its carrying value, with any excess of carrying value over fair value being recognized as an impairment loss. The fair value of trade names is estimated using the relief from royalty method, an income approach to valuation, which includes projecting future systemwide sales and other estimates. The goodwill impairment test consists of a comparison of each reporting unit’s fair value to its carrying value. The fair value of a reporting unit is an estimate of the amount for which the unit as a whole could be sold in a current transaction between willing parties. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value. Fair value of a reporting unit is estimated based on a combination of comparative market multiples and discounted cash flow valuation approaches. Currently, we have selected the first day of our fiscal third quarter as the date on which to perform our annual impairment tests for all indefinite lived intangible assets. We also test for impairment whenever events or circumstances indicate that the fair value of such indefinite lived intangibles has been impaired. We recorded a $294.5 million goodwill impairment charge related to Dunkin’ Donuts U.S. and Baskin-Robbins International, as well as a $34.0 million trade name impairment related to Baskin-Robbins U.S., during fiscal 2008. No impairment of indefinite lived intangible assets was recorded during fiscal 2009, fiscal 2010, or the three months ended March 26, 2011.

We have intangible assets other than goodwill and trade names that are amortized on a straight-line basis over their estimated useful lives or terms of their related agreements. Other intangible assets consist primarily of franchise and international license rights (franchise rights), ice cream manufacturing and territorial franchise agreement license rights (license rights) and operating lease interests acquired related to our prime leases and

 

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subleases (operating leases acquired). Franchise rights recorded in the consolidated balance sheets were valued using an excess earnings approach. The valuation of franchise rights was calculated using an estimation of future royalty income and related expenses associated with existing franchise contracts at the acquisition date. Our valuation included assumptions related to the projected attrition and renewal rates on those existing franchise arrangements being valued. License rights recorded in the consolidated balance sheets were valued based on an estimate of future revenues and costs related to the ongoing management of the contracts over the remaining useful lives. Favorable and unfavorable operating leases acquired were recorded on purchased leases based on differences between contractual rents under the respective lease agreements and prevailing market rents at the lease acquisition date. Favorable operating leases acquired are included as a component of other intangible assets in the consolidated balance sheets. Due to the high level of lease renewals made by our Dunkin’ Donuts franchisees, all lease renewal options for the Dunkin’ Donuts leases were included in the valuation of the favorable operating leases acquired. Amortization of franchise rights, license rights, and favorable operating leases acquired is recorded as amortization expense in the consolidated statements of operations and amortized over the respective franchise, license, and lease terms using the straight-line method. Unfavorable operating leases acquired related to our prime leases and subleases are recorded in the liability section of the consolidated balance sheets and are amortized into rental expense and rental income, respectively, over the base lease term of the respective leases using the straight-line method. Our amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. An intangible asset that is deemed impaired is written down to its estimated fair value, which is based on discounted cash flow.

Income tax valuation and tax reserves

Our major tax jurisdictions are the U.S. and Canada. The majority of our legal entities were converted to limited liability companies (“LLCs”) on March 1, 2006 and a number of new LLCs were created on or about March 15, 2006. All of these LLCs are single member entities which are treated as disregarded entities and included as part of us in the consolidated federal income tax return. Dunkin’ Brands Canada Ltd. (DBCL) files separate Canadian and provincial tax returns and Dunkin Brands (UK) Limited files separate tax returns in the United Kingdom. The current income tax liability for DBCL and Dunkin Brands (UK) Limited is calculated on a stand-alone basis. The current federal tax liability for each entity included in our consolidated federal income tax return is calculated on a stand-alone basis, including foreign taxes, for which a separate company foreign tax credit is calculated in lieu of a deduction for foreign withholding taxes paid. As a matter of course, we are regularly audited by federal, state, and foreign tax authorities.

Deferred tax assets and liabilities are recorded for the expected future tax consequences of items that have been included in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of assets and liabilities and the respective tax bases of assets and liabilities using enacted tax rates that are expected to apply in years in which the temporary differences are expected to reverse. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in the consolidated statements of operations in the year in which the law is enacted. Valuation allowances are provided when we do not believe it is more likely than not that we will realize the benefit of identified tax assets.

A tax position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not 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 50% likely of being realized upon ultimate settlement. Estimates of interest and penalties on unrecognized tax benefits are recorded in the provision for income taxes.

 

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In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Selected operating and financial highlights

 

      Three months ended     Fiscal year  
    

March 27,

2010

    

March 26,

2011

   
          2008     2009      2010  
   
     (In thousands, except percentages)  

Systemwide sales growth:

     5.4%         5.4%        5.0%        4.1%         6.7%    

Comparable store sales growth (U.S. only):

            

Dunkin’ Donuts U.S.

     (0.6)%         2.8%        (0.8)%        (1.3)%         2.3%    

Baskin-Robbins U.S.

     (7.9)%         0.5%        (2.2)%        (6.0)%         (5.2)%   

Total revenues

   $ 127,412       $ 139,213      $ 544,929      $ 538,073       $ 577,135   

Operating income (loss)

     36,685         44,836        (140,893     184,545         193,525   

Net income (loss)

     5,938         (1,723     (269,898     35,008         26,861   
   

Three months ended March 26, 2011 compared to the three months ended March 27, 2010

Our financial results are largely driven by changes in systemwide sales, which include sales by all points of distribution, whether owned by Dunkin’ Brands or by its franchisees and licensees. While we do not record sales by franchisees or licensees as revenue, we believe that this information is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue, assists readers in evaluating our performance relative to competitors, and indicates the strength of our franchised brands. Comparable store sales growth represents the growth in average weekly sales for restaurants that have been open at least 54 weeks that have reported sales in the current and comparable prior year week.

Overall growth in systemwide sales of 5.4% for the three months ended March 26, 2011 resulted from the following:

 

 

Dunkin’ Donuts U.S. systemwide sales growth of 5.3%, as the result of 200 net new restaurants opened since March 27, 2010 and comparable store sales growth of 2.8% driven by increased average ticket;

 

 

Baskin-Robbins International systemwide sales growth of 5.2% as a result of increased sales in South Korea and Japan, which resulted primarily from favorable foreign exchange, as well as Australia;

 

 

Dunkin’ Donuts International systemwide sales growth of 10.0%, which was driven by results in South Korea and Southeast Asia, as well as Russia and the Middle East; and

 

 

Baskin-Robbins U.S. systemwide sales growth of 0.2% resulting from comparable store sales growth of 0.5%, offset by a slightly reduced restaurant base.

The increase in total revenues of $11.8 million, or 9.3%, for the three months ended March 26, 2011 primarily resulted from increased franchise fees and royalty income of $5.8 million and sales of ice cream products of $4.9 million, both of which were driven by the overall increase in systemwide sales.

 

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Operating income increased $8.2 million, or 22.2%, for the three months ended March 26, 2011, driven by the revenue increases noted above, offset by a $2.9 million decline in equity in net income of joint ventures. Increases in costs of ice cream and general and administrative expenses were offset by reduced occupancy expenses for franchised restaurants and depreciation and amortization, resulting in relatively flat total operating costs and expenses as compared to the prior year comparable period.

The net loss for the three months ended March 26, 2011 was driven by an $11.0 million pre-tax loss related to the debt re-pricing transaction completed in the first quarter of 2011, as well as $6.2 million of additional net interest expense resulting from additional long-term debt obtained since the prior year. Offsetting these additional costs was an increase in operating income of $8.2 million.

Fiscal year 2010 compared to fiscal year 2009

Overall growth in systemwide sales of 6.7% for fiscal 2010 resulted from the following:

 

 

Dunkin’ Donuts U.S. systemwide sales growth of 4.7%, which was the result of net restaurant development of 206 restaurants in 2010 and comparable store sales growth of 2.3% driven by both increased transaction counts and average ticket;

 

 

Baskin-Robbins International systemwide sales growth of 19.4% as a result of increased sales in South Korea and Japan, which resulted from both strong sales growth and favorable foreign exchange, as well as the Middle East;

 

 

Dunkin’ Donuts International systemwide sales growth of 15.0%, which resulted from results in South Korea and Southeast Asia driven by a combination of new restaurant development and comparable store sales growth; and

 

 

Baskin-Robbins U.S. systemwide sales decline of 5.5% resulting from a comparable store sales decline of 5.2% in addition to a slightly reduced restaurant base.

The increase in total revenues of $39.1 million, or 7.3%, for fiscal 2010 primarily resulted from increased franchise fees and royalty income of $15.9 million, driven primarily by the increase in Dunkin’ Donuts U.S. systemwide sales, as well as a $16.0 million increase in other revenues resulting from additional company-owned restaurants held during the year.

Operating income increased $9.0 million, or 4.9%, for fiscal 2010 driven by the increase in franchise fees and royalty income noted above, as well as a $3.5 million increase in equity in net income of joint ventures. Increases in general and administrative expenses, excluding cost of sales for company-owned restaurants, offset the additional revenues and joint venture income.

Net income decreased $8.1 million for fiscal 2010 driven by a $62.0 million pre-tax loss on debt extinguishment, offset by a $46.7 million decrease in tax expense due to reduced profit before tax, as well as a $9.0 million increase in operating income.

Fiscal year 2009 compared to fiscal year 2008

Overall growth in systemwide sales of 4.1% for fiscal year 2009 resulted from the following:

 

 

Dunkin’ Donuts U.S. systemwide sales growth of 3.4%, which was the result of net restaurant development of 171 restaurants in 2009, offset by a decrease in comparable store sales of 1.3% driven by increased discounting, which we believe was successful in driving traffic to our restaurants during the difficult economic climate;

 

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Baskin-Robbins International systemwide sales growth of 21.3% as a result of a combination of strong sales in South Korea, Japan, and the Middle East, partially offset by negative foreign exchange impact;

 

 

Dunkin’ Donuts International systemwide sales decline of 4.0% driven by negative foreign exchange related to the Korean won and lower sales in Colombia and the Philippines, partially offset by higher sales in the Middle East; and

 

 

Baskin-Robbins U.S. systemwide sales decline of 6.4% resulting from a comparable store sales decline of 6.0% in addition to a slightly reduced restaurant base.

The decline in total revenues of $6.9 million, or 1.3%, for fiscal 2009 primarily resulted from reduced franchise fees of $14.0 million due to fewer restaurant openings domestically as compared to the prior year. The decline in franchise fees was offset by an increase in royalty income of $9.0 million driven by the increase in Dunkin’ Donuts U.S. systemwide sales.

Operating income increased $325.4 million for fiscal 2009 primarily as a result of fiscal 2008 including $328.5 million of impairment charges related to goodwill and trade name intangible asset. The $6.9 million reduction in revenues was offset by a $3.6 million reduction in occupancy expenses for franchised restaurants and a $3.4 million reduction in depreciation and amortization.

Net income increased $304.9 million for fiscal 2009 driven by the $325.4 million increase in operating income resulting from the goodwill and trade name impairment charges recorded in fiscal 2008. Offsetting the operating income decline was a $30.0 million increase in tax expense primarily resulting from 2008 including tax benefits related to the trade name impairment charge and changes in future state tax rates.

Results of operations

Three months ended March 26, 2011 compared to the three months ended March 27, 2010

Consolidated results of operations

 

      Three months ended                  
     March 27,
2010
     March 26,
2011
    

Increase (Decrease)

 
         $      %  
   
     (In thousands, except percentages)  

Franchise fees and royalty income

   $ 80,165         85,959           5,794         7.2%   

Rental income

     22,116         22,131         15         0.1%   

Sales of ice cream products

     17,793         22,716         4,923           27.7%   

Other revenues

     7,338         8,407         1,069         14.6%   
        

Total revenues

   $ 127,412         139,213         11,801         9.3%   
   

Total revenues for the three months ended March 26, 2011 as compared to the corresponding period in the prior year increased by $11.8 million, or 9.3%. Royalty income increased $4.2 million, or 5.6%, mainly as the result of Dunkin’ Donuts U.S. systemwide sales growth. Sales of ice cream products also contributed to the increase in total revenues, which were primarily driven by strong sales in the Middle East and Australia, as well as a December 2010 price increase that was implemented to offset higher commodity costs. Other revenues

 

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also increased $1.1 million primarily as a result of increases in licensing income and refranchising gains, as well as a decline in subsidies paid to franchisees that are recorded as reductions in revenue.

 

      Three months ended                 
    

March 27,

2010

    

March 26,

2011

    

Increase (Decrease)

 
         $     %  
   
     (In thousands, except percentages)  

Occupancy expenses—franchised restaurants

   $ 14,156         12,288         (1,868     (13.2)%   

Cost of ice cream products

     12,222         15,124         2,902        23.7%    

General and administrative expenses, net

     51,245         53,886         2,641        5.2%    

Depreciation and amortization

     15,332         13,208         (2,124     (13.9)%   

Impairment charges

     1,414         653         (761     (53.8)%   
        

Total operating costs and expenses

   $ 94,369         95,159         790        0.8%    
        

Equity in net income of joint ventures

   $ 3,642         782         (2,860     (78.5)%   

Operating income

     36,685         44,836         8,151        22.2%    
   

Occupancy expenses for franchised restaurants for the three months ended March 26, 2011 decreased $1.9 million from the prior year comparable period primarily as a result of lease reserves recorded in the prior year, as well as a decline in the number of leased properties.

Cost of ice cream products increased 23.7% from the corresponding period in the prior year, as compared to a 27.7% increase in sales of ice cream products. The higher percentage increase in sales of ice cream products was primarily the result of increases in selling prices.

The increase in general and administrative expenses of $2.6 million from the corresponding period in the prior year was driven by an increase in payroll and related benefit costs of $2.3 million, or 7.9%, as a result of merit increases, increased headcount, and higher projected incentive compensation payouts. General and administrative expenses for the three months ended March 26, 2011 also included $1.0 million related to the roll-out of a new point-of-sale system for Baskin-Robbins franchisees. Offsetting these increases was a $0.9 million decline in bad debt and other reserves. Upon completion of this offering, we expect to incur an expense of approximately $14 million within general and administrative expenses related to the termination of the Sponsor management agreement.

Depreciation and amortization declined a total of $2.1 million from the corresponding period in the prior year, primarily as a result of a license right intangible asset becoming fully amortized, as well as terminations of lease agreements in the normal course of business resulting in the write-off of favorable lease intangible assets, which thereby reduced future amortization. Additionally, depreciation declined from the prior year due to assets becoming fully depreciated and the write-off of leasehold improvements upon terminations of lease agreements.

The decrease in impairment charges resulted primarily from a $0.7 million impairment charge recorded in the corresponding period in the prior year related to corporate assets.

 

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Equity in net income of joint ventures decreased as a result of decreases in income from both our Japan and South Korea joint ventures. Joint venture income from Japan was negatively impacted by the March 2011 earthquake and tsunami. Additionally, South Korea joint venture income declined as a result of increased operating expenses.

 

      Three months ended                
    

March 27,

2010

   

March 26,

2011

   

Increase (Decrease)

 
       $     %  
   
     (In thousands, except percentages)  

Interest expense, net

   $ (27,520     (33,767     (6,247     22.7%   

Loss on debt extinguishment and refinancing transaction

            (11,007     (11,007     n/m   

Other gains, net

     245        476        231        94.3%   
        

Total other expense

   $ (27,275     (44,298     (17,023     62.4%   
   

Net interest expense increased from the corresponding period in the prior year due to incremental interest expense related to net additional long-term debt of $429 million obtained since the corresponding period in the prior year, offset by a reduction in the average cost of borrowing.

The loss on debt extinguishment and refinancing for the three months ended March 26, 2011 resulted from the term loan re-pricing transaction completed in the first quarter of 2011. As the re-pricing transaction included the repayment of $150.0 million of senior notes utilizing the proceeds from the corresponding increase in the term loan, a $6.6 million loss on debt extinguishment was recorded related to the senior notes, which included the write-off of unamortized debt issuance costs and original issue discount of $5.8 million and transaction related fees of $0.8 million. Additionally, a $4.4 million loss was recorded related to the re-pricing of the term loan, which consisted of $3.7 million of third-party fees incurred, the write-off of $0.5 million of unamortized debt issuance costs and original issue discount, and $0.2 million of call premiums paid to lenders that exited the term loan syndicate.

The increase in other gains resulted from $0.1 million of additional gains on investments sold, as well as $0.1 million of additional foreign exchange gains primarily as a result of additional weakening of the U.S. dollar against the Canadian dollar as compared to the corresponding period in the prior year.

 

      Three months ended  
     March 27, 2010      March 26, 2011  
   
     (In thousands, except percentages)  

Income before income taxes

   $ 9,410         538   

Provision for income taxes

     3,472         2,261   

Effective tax rate

     36.9%         420.3%   
   

The increased effective tax rate of 420.3% for the three months ended March 26, 2011 was primarily attributable to enacted increases in state tax rates, which resulted in additional deferred tax expense of approximately $1.9 million in the three months ended March 26, 2011. The effective tax rate for the three months ended March 26, 2011 was also impacted by a reduced income before income taxes, driven by the loss on debt extinguishment and refinancing transaction, which magnified the impact of permanent and other tax differences.

 

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Operating segments

We operate four reportable operating segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We evaluate the performance of our segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization, impairment charges, foreign currency gains and losses, other gains and losses, and unallocated corporate charges, referred to as segment profit. Segment profit for the Dunkin’ Donuts International and Baskin-Robbins International segments include equity in net income from joint ventures. For a reconciliation to total revenues and net income, see the notes to our consolidated financial statements. Revenues for Dunkin’ Donuts U.S. include royalties and rental income earned from company-owned restaurants. For purposes of evaluating segment profit, Dunkin’ Donuts U.S. includes the net operating income earned from company-owned restaurants. Revenues for all other segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues not included in segment revenues include retail sales from company-owned restaurants, as well as revenue earned through arrangements with third parties in which our brand names are used and revenue generated from online training programs for franchisees that are not allocated to a specific segment.

Dunkin’ Donuts U.S.

 

      Three Months Ended      Increase (Decrease)  
    

March 27,

2010

    

March 26,

2011

    
         $      %  
   
     (In thousands, except percentages)  

Revenues

   $ 91,403         96,512         5,109         5.6%   

Segment profit

     63,563         70,707         7,144         11.2%   
   

The increase in Dunkin’ Donuts U.S. revenue for the three months ended March 26, 2011 was primarily driven by an increase in royalty income of $3.3 million as a result of an increase in systemwide sales, as well as an increase in franchise fees of $1.1 million. Other revenues also increased $0.6 million due to an increase in refranchising gains and a decline in subsidies paid to franchisees that are recorded as reductions in revenue.

The increase in Dunkin’ Donuts U.S. segment profit for the three months ended March 26, 2011 was primarily driven by the $5.1 million increase in total revenues. The increase in segment profit also resulted from a decline in total occupancy expenses of $1.8 million driven by additional lease reserves recorded in the prior year and a decline in the number of leased locations. The remaining increase in segment profit resulted from a $0.4 million decline in general and administrative expenses due to declines in bad debt provisions and legal settlements, offset by an increase in payroll-related costs due to merit increases, increased headcount, and higher projected incentive compensation.

Dunkin’ Donuts International

 

      Three months ended          
    

March 27,

2010

    

March 26,

2011

     Increase (Decrease)  
         $     %  
   
     (In thousands, except percentages)  

Revenues

   $ 3,321         3,869         548        16.5%    

Segment profit

     3,712         3,181         (531     (14.3)%   
   

 

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The increase in Dunkin’ Donuts International revenue for the three months ended March 26, 2011 resulted primarily from an increase in royalty income of $0.3 million driven by the increase in systemwide sales. Also contributing to the increased revenue from the prior year was an increase of $0.3 million in franchise fees driven by a deposit retained from a former licensee in Mexico.

The decrease in Dunkin’ Donuts International segment profit for the three months ended March 26, 2011 was primarily driven by a decline in income from the South Korea joint venture of $0.7 million. The decrease in segment profit also resulted from a $0.3 million increase in general and administrative expenses primarily as a result of an increase in payroll-related costs due to increased headcount and merit increases. These declines in segment profit were offset by the $0.5 million increase in revenues.

Baskin-Robbins U.S.

 

      Three months ended          
    

March 27,

2010

    

March 26,

2011

     Increase (Decrease)  
         $     %  
   
     (In thousands, except percentages)  

Revenues

   $ 9,032         9,045         13        0.1%    

Segment profit

     5,224         4,300         (924     (17.7)%   
   

Baskin-Robbins U.S. revenue for the three months ended March 26, 2011 remained flat to the prior year comparable period, which is consistent with the change in systemwide sales.

Baskin-Robbins U.S. segment profit declined as a result of increased general and administrative expenses for the three months ended March 26, 2011 including $1.0 million related to the roll-out of a new point-of-sale system for Baskin-Robbins franchisees.

Baskin-Robbins International

 

      Three months ended          
    

March 27,

2010

    

March 26,

2011

     Increase (Decrease)  
           $     %  
   
     (In thousands, except percentages)  

Revenues

   $ 19,043         24,662         5,619        29.5%    

Segment profit

     8,527         8,164         (363     (4.3)%   
   

The growth in Baskin-Robbins International revenue for the three months ended March 26, 2011 resulted from an increase in sales of ice cream products of $5.0 million, which was primarily driven by strong sales in the Middle East and Australia. Royalty income also increased $0.6 million mainly as a result of higher sales and additional royalties earned in Australia due to the termination of a master license agreement.

The decline in Baskin-Robbins International segment profit resulted primarily from a decrease in joint venture income of $2.1 million for the Baskin-Robbins businesses in South Korea and Japan. The decline in joint venture income for Japan primarily resulted from the March 2011 earthquake and tsunami, while South Korea joint venture income declined as a result of increased operating expenses. Additionally, general and administrative expenses increased $0.9 million as a result of an increase in payroll-related costs due to additional headcount and merit increases, additional travel costs, and increased professional fees. Offsetting these declines in segment profit was a $2.1 million increase in net margin on ice cream sales driven by strong sales and price increases, as well as the increase in royalty income of $0.6 million.

 

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Fiscal year 2010 compared to fiscal year 2009

Consolidated results of operations

 

     

Fiscal year

2009

    

Fiscal year

2010

     Increase (Decrease)  
         $     %  
   
     (In thousands, except percentages)  

Franchise fees and royalty income

   $ 344,020         359,927         15,907        4.6%    

Rental income

     93,651         91,102         (2,549     (2.7)%   

Sales of ice cream products

     75,256         84,989         9,733        12.9%    

Other revenues

     25,146         41,117         15,971        63.5%    
        

Total revenues

   $ 538,073         577,135         39,062        7.3%    
   

The increase in total revenues from fiscal 2009 to fiscal 2010 was primarily driven by an increase in royalty income of $15.1 million, or 4.7%, from the prior year as the result of Dunkin’ Donuts U.S. systemwide sales growth. Other revenues also increased $16.0 million primarily as a result of the acquisition of company-owned restaurants, which contributed an additional $15.2 million of revenue in fiscal 2010. Sales of ice cream products also contributed to the increase in total revenues from fiscal 2009 to fiscal 2010, which were primarily driven by strong sales to the Middle East. These increases in revenue were offset by a decline in rental income of $2.5 million primarily as a result of a decline in the number of leased properties.

 

     

Fiscal year

2009

    

Fiscal year

2010

     Increase (Decrease)  
         $     %  
   
     (In thousands, except percentages)  

Occupancy expenses—franchised restaurants

   $ 51,964         53,739         1,775        3.4%    

Cots of ice cream products

     47,432         59,175         11,743        24.8%    

General and administrative expenses, net

     197,005         223,620         26,615        13.5%    

Depreciation and amortization

     62,911         57,826         (5,085     (8.1)%   

Impairment charges

     8,517         7,075         (1,442     (16.9)%   
        

Total operating costs and expenses

   $ 367,829         401,435         33,606        9.1%    
        

Equity in net income of joint ventures

     14,301         17,825         3,524        24.6%    

Operating income

   $ 184,545         193,525         8,980        4.9%    
   

Occupancy expenses for franchised restaurants increased $1.8 million from fiscal 2009 to fiscal 2010 resulting primarily from the impact of lease reserves, offset by a decline in the number of leased properties. Cost of ice cream products increased 24.8% from the prior year, as compared to a 12.9% increase in sales of ice cream products, primarily as the result of unfavorable commodity prices and foreign exchange.

The increase in other general and administrative expenses from fiscal 2009 to fiscal 2010 was driven by increased cost of sales for company-owned restaurants acquired during 2010 of $15.0 million. Also contributing to the increase in general and administrative expenses was an increase in payroll and related benefit costs of $6.8 million, or 6.0%, as a result of higher incentive compensation payouts and 401(k) matching contributions. Increased professional fees and legal costs driven by information technology enhancements and legal settlement reserves also contributed approximately $10.6 million to the increase in general administrative expenses. These increased expenses were offset by a decrease in bad debt and other reserves of $6.7 million.

Depreciation and amortization declined a total of $5.1 million from fiscal 2009 to fiscal 2010. The decrease is due primarily to a license right intangible asset becoming fully amortized, as well as terminations of lease

 

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agreements in the normal course of business resulting in the write-off of favorable lease intangible assets, which thereby reduced future amortization. Additionally, depreciation declined from the prior year due to assets becoming fully depreciated, sales of corporate assets, and the write-off of leasehold improvements upon terminations of lease agreements.

The decrease in impairment charges from fiscal 2009 to fiscal 2010 resulted from an impairment charge recorded in 2009 related to corporate assets, offset by additional impairment charges recorded in 2010 on favorable operating leases due to terminations of lease agreements.

Equity in net income of joint ventures increased from fiscal 2009 to fiscal 2010 as a result of increases in income from both our Japan and South Korea joint ventures. The increases in Japan and South Korea joint venture income from 2009 were primarily driven by sales growth, as well as favorable impact of foreign exchange.

 

     

Fiscal year

2009

   

Fiscal year

2010

    Increase (Decrease)  
       $     %  
   
     (In thousands, except percentages)  

Interest expense, net

   $ (115,019     (112,532     2,487        (2.2)%   

Gain (loss) on debt extinguishment

     3,684        (61,955     (65,639     (1,781.7)%   

Other gains, net

     1,066        408        (658     (61.7)%   
        

Total other expense (loss)

   $ (110,269     (174,079     (63,810     57.9%    
   

Net interest expense declined from fiscal 2009 to fiscal 2010 due to the voluntary retirement of long-term debt with a face value of $99.8 million in the second quarter of 2010, reducing interest paid, insurer premiums, and the amortization of deferred financing costs. These decreases were slightly offset by incremental interest expense on approximately $528 million of additional long-term debt obtained in the fourth quarter of 2010.

The fluctuation in gains and losses on debt extinguishment resulted from the refinancing of existing long-term debt in the fourth quarter of 2010, which yielded a $58.3 million loss, as well as the voluntary retirement of long-term debt in the second quarter of 2010, which resulted in a $3.7 million loss. The gain on debt extinguishment of $3.7 million recorded in 2009 resulted from the voluntary retirement of long-term debt in the third quarter of 2009.

The decline in other gains from fiscal 2009 to fiscal 2010 resulted from reduced net foreign exchange gains, primarily as a result of significant weakening of the U.S. dollar against the Canadian dollar in 2009.

 

     

Fiscal year

2009

    

Fiscal year

2010

 
     
   
     (In thousands, except percentages)  

Income before income taxes

   $ 74,276         19,446   

Provision for income taxes

     39,268         (7,415

Effective tax rate

     52.9%         (38.1)%   
   

The negative effective tax rate of 38.1% in fiscal 2010 was primarily attributable to changes in state tax rates, which resulted in a deferred tax benefit of approximately $5.7 million in fiscal 2010. The effective tax rate for both years was also impacted by changes in reserves for uncertain tax positions, which are not driven by changes in income before income taxes. Reserves for uncertain tax positions were $9.1 million in fiscal 2009, as compared to a benefit of $3.1 million in fiscal 2010. The effective tax rate for fiscal 2010 was also impacted by a reduced income before income taxes, driven by the loss on debt extinguishment, which magnified the impact of permanent and other tax differences. Additionally, the higher effective tax rate in fiscal 2009 resulted from a $5.8 million additional valuation allowance recorded on capital loss carryforwards.

 

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Operating segments

Dunkin’ Donuts U.S.

 

     

Fiscal year

2009

    

Fiscal year

2010

     Increase (Decrease)  
         $      %  
   
     (In thousands, except percentages)  

Revenues

   $ 387,595         402,394         14,799         3.8%   

Segment profit

     275,961         293,132         17,171         6.2%   
   

The increase in Dunkin’ Donuts U.S. revenue from fiscal 2009 to fiscal 2010 was driven by an increase in royalty income of $14.9 million as a result of an increase in systemwide sales.

The increase in Dunkin’ Donuts U.S. segment profit from fiscal 2009 to fiscal 2010 was primarily driven by the $14.9 million increase in royalty income. The increase in segment profit from fiscal 2009 to fiscal 2010 also resulted from a decline in general and administrative expenses of $5.1 million primarily attributable to decreases in both bad debt provisions and franchisee-related restructuring activities, offset by an increase in legal settlements and payroll-related costs due primarily to increased incentive compensation. Additionally, higher total occupancy expenses of $2.9 million from fiscal 2009 to fiscal 2010 resulted primarily from lease reserves recorded.

Dunkin’ Donuts International

 

     

Fiscal year

2009

    

Fiscal year

2010

     Increase (Decrease)  
         $      %  
   
     (In thousands, except percentages)  

Revenues

   $ 12,326         14,128         1,802         14.6%   

Segment profit

     12,628         14,573         1,945         15.4%   
   

The increase in Dunkin’ Donuts International revenue from fiscal 2009 to fiscal 2010 resulted primarily from an increase in royalty income of $1.2 million driven by the increase in systemwide sales. Also contributing to the increased revenue from the prior year was an increase of $0.9 million in franchise fees driven by development in China and Russia.

The increase in Dunkin’ Donuts International segment profit from fiscal 2009 to fiscal 2010 was primarily driven by the increases in revenues of $1.8 million, as noted above.

Baskin-Robbins U.S.

 

     

Fiscal year

2009

    

Fiscal year

2010

     Increase (Decrease)  
         $      %  
   
     (In thousands, except percentages)  

Revenues

   $ 46,293         42,920         (3,373)         (7.3)%   

Segment profit

     33,459         27,607         (5,852)         (17.5)%   
   

The decline in Baskin-Robbins U.S. revenue from fiscal 2009 to fiscal 2010 was driven by the decline in systemwide sales, which impacted both royalty income, which declined $1.7 million, and licensing income earned through the sale of ice cream to franchisees by a third-party, which declined $0.6 million. Rental income also decreased $0.6 million in fiscal 2010 driven by a decline in the number of subleases, as well as revised sublease terms which resulted in adjustments of straight-line rental income.

 

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Baskin-Robbins U.S. segment profit declined from fiscal 2009 to fiscal 2010 primarily as a result of the declines in royalty, licensing, and rental income. Also contributing to the decline in segment profit from 2009 was additional gift certificate breakage income recorded in 2009 of $2.6 million, as the Company determined during fiscal year 2009 that sufficient historical patterns existed to estimate breakage and therefore recognized a cumulative adjustment for all gift certificates outstanding.

Baskin-Robbins International

 

     

Fiscal year

2009

    

Fiscal year

2010

     Increase (Decrease)  
         $      %  
   
     (In thousands, except percentages)  

Revenues

   $ 80,764         91,285         10,521         13.0%   

Segment profit

     41,212         41,596         384         0.9%   
   

The growth in Baskin-Robbins International revenue from fiscal 2009 to fiscal 2010 resulted primarily from an increase in ice cream sales of $9.8 million, which was driven by higher sales in the Middle East. Royalty income also increased $1.2 million in fiscal 2010 due to growth in systemwide sales, specifically in Japan, South Korea, and Russia.

Baskin-Robbins International segment profit remained relatively flat from fiscal 2009 to fiscal 2010. Joint venture income from the Baskin-Robbins businesses in South Korea and Japan increased $3.3 million from 2009, driven by systemwide sales growth in both countries. Royalty income also increased $1.2 million, as noted above. Offsetting these increases in segment profit was a decline in net margin on ice cream sales of $1.9 million, primarily as the result of unfavorable commodity prices and foreign exchange. Also offsetting the increases in segment profit were increases in travel, professional fees, and other general and administrative costs totaling $1.8 million.

Fiscal year 2009 compared to fiscal year 2008

Consolidated results of operations

 

     

Fiscal year

2008

    

Fiscal year

2009

     Increase (Decrease)  
         $      %  
   
     (In thousands, except percentages)  

Franchise fees and royalty income

   $ 349,047         344,020         (5,027)         (1.4)%   

Rental income

     97,886         93,651         (4,235)         (4.3)%   

Sales of ice cream products

     71,445         75,256         3,811          5.3%    

Other revenues

     26,551         25,146         (1,405)         (5.3)%   
        

Total revenues

   $ 544,929         538,073         (6,856)         (1.3)%   
   

The decline in total revenues from fiscal 2008 to fiscal 2009 was primarily driven by reduced franchise fees of $14.0 million, resulting from the opening of 431 fewer restaurants domestically. Rental and sublease income decreased $4.2 million, or 4.3%, from the prior year, driven by declines in comparable store sales in locations where rent is earned based on a percentage of sales, as well as a reduction in the amortization of unfavorable operating leases acquired due to lease terminations in the prior year. Other revenues declined $1.4 million from fiscal 2008 primarily as a result of fewer refranchising transactions in fiscal 2009, offset by increased licensing fees. Offsetting these decreases was an increase in royalty income of $9.0 million, or 2.9%, from the prior year

 

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driven by Dunkin’ Donuts U.S. systemwide sales growth. Sales of ice cream products also increased $3.8 million, or 5.3%, from the prior year driven primarily by Baskin-Robbins store development internationally.

 

     

Fiscal year

2008

   

Fiscal year

2009

     Increase (Decrease)  
        $      %  
   
     (In thousands, except percentages)  

Occupancy expenses—franchised restaurants

   $ 55,581        51,964         (3,617)         (6.5)%   

Cots of ice cream products

     49,407        47,432         (1,975)         (4.0)%   

General and administrative expenses, net

     196,841        197,005         164          0.1%    

Depreciation and amortization

     66,300        62,911         (3,389)         (5.1)%   

Impairment charges

     331,862        8,517         (323,345)         (97.4)%   
        

Total operating costs and expenses

   $ 699,991        367,829         (332,162)         (47.5)%   
        

Equity in net income of joint ventures

     14,169        14,301         132          0.9%    

Operating income

   $ (140,893     184,545         325,438          n/m    
   

Occupancy expenses for franchised restaurants declined $3.6 million from fiscal 2008 to fiscal 2009 resulting primarily from the reversal of a lease reserve in 2009. Cost of ice cream and ice cream products decreased in fiscal 2009 despite higher sales volume primarily as the result of favorable commodity prices and foreign exchange.

General and administrative expenses, net, were flat from 2008 to 2009. Professional and legal costs declined primarily as a result of consulting fees incurred in 2008 related to entry into new markets that did not recur in 2009. Payroll and related benefit costs also declined from fiscal 2008 to fiscal 2009 due primarily to the temporary suspension of 401(k) matching contributions in fiscal 2009. Additionally, income of $3.2 million related to cumulative breakage of historical gift certificate balances was recorded in 2009. A focus on cost reductions during fiscal 2009 resulted in lower travel, meeting, and other controllable expenses. Partially offsetting these decreases in expenses in fiscal 2009 were increases in franchisee-related restructuring activities and a decline in legal settlement income.

Depreciation and amortization declined a total of $3.4 million from fiscal 2008 to fiscal 2009 due to terminations of lease agreements in the normal course of business, resulting in the write-off of favorable lease intangible assets which thereby reduced future amortization. Additionally, corporate assets were held for sale beginning in the third quarter of 2009, for which no depreciation was subsequently recorded.

The decrease in impairment charges from fiscal 2008 to fiscal 2009 was driven by a goodwill impairment charge recorded in 2008 of $294.5 million related to the Dunkin’ Donuts U.S. and Baskin-Robbins International businesses, as well as a 2008 charge of $34.0 million related to the Baskin-Robbins trade name. These impairment charges were triggered by declines in fair value of the intangible assets due to the overall economic environment and declines in peer company market values. Partially offsetting these declines in impairment charges from fiscal 2008 to fiscal 2009 was an impairment charge recorded in 2009 related to corporate assets.

Equity in net income of joint ventures increased slightly from fiscal 2008 to fiscal 2009 as a result of an increase in income from our Japan joint venture, offset by a decrease in income from our South Korea joint venture. The increase in Japan joint venture income in fiscal 2009 resulted from an increase in the joint venture’s net income driven by sales growth, as well as a favorable impact of foreign exchange. The decrease in South Korea joint venture income in fiscal 2009 resulted from an unfavorable impact of foreign exchange, partially offset by an increase in the joint venture’s net income due to growth in sales.

 

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Fiscal year

2008

    

Fiscal year

2009

    Increase (Decrease)  
        $      %  
   
     (In thousands, except percentages)  

Interest expense, net

   $ (115,944)         (115,019     925         (0.8)%   

Gain (loss) on debt extinguishment

     —          3,684        3,684         n/a   

Other gains, net

     (3,929)         1,066        4,995         (127.1)%   
        

Total other expense (loss)

   $ (119,873)         (110,269     9,604         (8.0)%   
   

Net interest expense declined from fiscal 2008 to fiscal 2009 due to the voluntary retirement of long-term debt with a face value of $153.7 million in the third quarter of 2009, reducing interest paid, insurer premiums, and the amortization of deferred financing costs, partially offset by a decrease in interest income due to declining interest rates.

During fiscal 2009, gains on debt extinguishment of $3.7 million were recorded as a result of the voluntary retirement of long-term debt in the third quarter of 2009. No such gains or losses were recorded in fiscal 2008.

The fluctuation in other gains and losses resulted from additional net foreign exchange gains of $4.6 million recorded in 2009 as compared to 2008 as a result of the strengthening of the U.S. dollar against the Canadian dollar in 2008, whereas the U.S. dollar weakened against the Canadian dollar in 2009. The remaining fluctuation resulted from gains and losses recorded on sales of available-for-sale securities.

 

     

Fiscal year

2008

   

Fiscal year

2009

 
    
   
     (In thousands, except percentages)  

Income (loss) before income taxes

   $ (260,766     74,276   

Provision for income taxes

     9,132        39,268   

Effective tax rate

     (3.5 )%      52.9%   
   

The negative effective tax rate of 3.5% in fiscal 2008 resulted from the goodwill impairment charge of $294.5 million, which was not deductible for tax purposes and therefore no tax benefit was recorded. Excluding the goodwill impairment charge, the effective tax rate for fiscal 2008 would have been 27.1%. Contributing to the reduced effective tax rate in fiscal 2008 was a $4.4 million tax benefit related to changes in future tax rates in Massachusetts that were enacted in 2008. The effective tax rate for both years was also impacted by reserves recorded for uncertain tax positions, which were not driven by changes in income before income taxes. These reserves for uncertain tax positions were $3.5 million and $9.1 million in fiscal 2008 and fiscal 2009, respectively. Additionally, the higher effective tax rate in fiscal 2009 resulted from an additional valuation allowance of approximately $5.8 million recorded on capital loss carryforwards.

Operating segments

Dunkin’ Donuts U.S.

 

     

Fiscal year

2008

    

Fiscal year

2009

    Increase (Decrease)  
            $          %  
   
     (In thousands, except percentages)  

Revenues

   $ 397,176         387,595        (9,581)         (2.4)%   

Segment profit

     288,009         275,961        (12,048)         (4.2)%   
   

The decline in Dunkin’ Donuts U.S. revenue from fiscal 2008 to fiscal 2009 was driven by a $12.4 million decline in franchise fees, resulting from the opening of 370 fewer restaurants compared to the prior year. Additionally,

 

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rental income decreased $3.4 million primarily as a result of the impact of negative comparable store sales on rent that is earned based on a percentage of sales. Also negatively impacting rental income were write-offs of unfavorable operating leases in fiscal 2008, which result in additional rental income at the time of write-off and reduce amortization to rental income in future periods. Other revenues declined $3.7 million from fiscal 2008 due to fewer refranchising transactions, as well as increased franchisee-related restructuring activities, which were recorded as reductions of revenue. Offsetting these declines in fiscal 2009 was an increase in royalty income of $9.9 million, or 3.7%, consistent with the increase in systemwide sales.

The decline in Dunkin’ Donuts U.S. segment profit from fiscal 2008 to fiscal 2009 was primarily driven by the declines in franchise fees and refranchising gains. Additionally, net rent margin declined $1.9 million from fiscal 2008 to fiscal 2009 driven by a decline in net rental income that is earned based on a percentage of sales due to negative comparable store sales and prior year write-offs of unfavorable operating leases acquired, partially offset by the reversal of a lease reserve. The decrease in segment profit from fiscal 2008 to fiscal 2009 also resulted from increases in both bad debt provisions and franchisee-related restructuring activities. Partially offsetting these declines in segment profit was an increase in royalty income of $9.9 million as noted above, as well as a decline in payroll-related costs of $4.5 million due to lower headcount and lower incentive compensation. Travel expenses and professional fees also declined $1.9 million in fiscal 2009 resulting from increased focus on cost management.

Dunkin’ Donuts International

 

     

Fiscal year

2008

    

Fiscal year

2009

    Increase (Decrease)  
              $          %  
   
     (In thousands, except percentages)  

Revenues

   $ 13,241         12,326        (915)         (6.9)%   

Segment profit

     14,534         12,628        (1,906)         (13.1)%   
   

The decrease in Dunkin’ Donuts International revenue from fiscal 2008 to fiscal 2009 resulted primarily from a $0.7 million decline in franchise fees due to fewer restaurant openings in fiscal 2009 as compared to the prior year. Additionally, other revenues declined $0.5 million in fiscal 2009 due to income generated in the prior year from company-owned operations in Spain, which were sold in fiscal 2009.

The decrease in Dunkin’ Donuts International segment profit from fiscal 2008 to fiscal 2009 was driven by the declines in franchise fees and other revenues, as discussed above. In addition, income from the South Korea joint venture declined $0.7 million from fiscal 2008 to fiscal 2009, which was driven primarily by an unfavorable impact of foreign exchange.

Baskin-Robbins U.S.

 

     

Fiscal year

2008

    

Fiscal year

2009

    Increase (Decrease)  
              $          %  
   
     (In thousands, except percentages)  

Revenues

   $ 50,499         46,293        (4,206)         (8.3)%   

Segment profit

     33,925         33,459        (466)         (1.4)%   
   

The decline in Baskin-Robbins U.S. revenue from fiscal 2008 to fiscal 2009 was driven by the decline in systemwide sales due to negative comparable store sales in addition to a slightly smaller restaurant base, which impacted both royalty income and licensing income earned through the sale of ice cream to franchisees

 

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by a third-party. Franchise fees declined $1.6 million in fiscal 2009 due to 61 fewer restaurant openings. Rental income also declined $0.4 million in fiscal 2009 as the number of subleases declined.

Baskin-Robbins U.S. segment profit declined from fiscal 2008 to fiscal 2009 primarily as a result of the declines in royalty income, franchise fees, and licensing income. Partially offsetting these declines was gift certificate breakage income recorded in 2009 of $3.2 million. All other general and administrative expenses included in segment profit for Baskin-Robbins U.S. declined in fiscal 2009 by approximately $0.6 million.

Baskin-Robbins International

 

     

Fiscal year

2008

    

Fiscal year

2009

    Increase (Decrease)  
              $          %  
   
     (In thousands, except percentages)  

Revenues

   $ 76,066         80,764        4,698         6.2%   

Segment profit

     33,257         41,212        7,955         23.9%   
   

The growth in Baskin-Robbins International revenue from fiscal 2008 to fiscal 2009 resulted primarily from an increase of ice cream sales of $3.9 million, which was driven by higher sales in the Middle East, partially offset by unfavorable impacts of foreign exchange. Additionally, increased restaurant openings in China and Indonesia in fiscal 2009 resulted in higher franchise fees. Royalty income also increased $0.5 million in fiscal 2009 due to the growth in systemwide sales.

Baskin-Robbins International segment profit growth from fiscal 2008 to fiscal 2009 was primarily driven by an increase in net margin on sales of ice cream and ice cream related products of $5.9 million. This increase was driven by higher sales volumes in the Middle East, as well as significant commodity price declines during 2009. Also contributing to the increase in segment profit was an increase in franchise fees and royalty income of approximately $1.1 million. Additionally, joint venture income in Japan in fiscal 2009 increased $1.7 million driven by an increase in the joint venture’s net income driven by sales growth, and a favorable impact of foreign exchange. Partially offsetting these increases in segment profit in fiscal 2009 was a decrease in joint venture income in South Korea of $0.9 million as a result of unfavorable impact of foreign exchange, partially offset by an increase in the joint venture’s net income due to growth in sales.

Liquidity and capital resources

As of March 26, 2011, we held $120.5 million of cash and cash equivalents, which included $69.3 million of cash held for advertising funds and reserved for gift card/certificate programs. In addition, as of March 26, 2011, we had a borrowing capacity of $88.8 million under our $100.0 million revolving credit facility. During the three months ended March 26, 2011, net cash provided by operating activities was $3.6 million, as compared to $24.6 million for the three months ended March 27, 2010. During fiscal years 2010, 2009, and 2008, net cash provided by operating activities was $229.0 million, $116.1 million, and $74.7 million, respectively.

Net cash provided by operating activities of $3.6 million during the three months ended March 26, 2011 was primarily driven by a net loss of $1.7 million (increased by depreciation and amortization of $13.2 million and $13.1 million of other net non-cash reconciling adjustments), offset by $21.0 million of changes in operating assets and liabilities. During the three months ended March 26, 2011, we invested $3.7 million in capital additions to property and equipment. Net cash used in financing activities was $13.8 million during the three months ended March 26, 2011, driven primarily by costs associated with the February 2011 re-pricing transaction of $17.0 million, offset by proceeds from the issuance of common stock of $3.2 million.

Net cash provided by operating activities of $229.0 million during fiscal 2010 was primarily driven by net income of $26.9 million (increased by depreciation and amortization of $57.8 million and $26.7 million of other

 

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net non-cash reconciling adjustments), $6.6 million of dividends received from international joint ventures, and $111.0 million of changes in operating assets and liabilities, including the release of approximately $101.7 million of restricted cash as a result of the November 2010 debt refinancing. During fiscal 2010, we invested $15.4 million in capital additions to property and equipment. Net cash used in financing activities was $132.6 million during fiscal 2010, which includes proceeds from the issuance of long-term debt, net of repayment and voluntary retirement of debt and debt issuance costs, of $353.4 million and a $16.1 million decrease in debt-related restricted cash balances, offset by dividends paid on common stock of approximately $500.0 million.

On November 23, 2010, we consummated a refinancing transaction whereby Dunkin’ Brands, Inc. (i) issued and sold $625.0 million aggregate principal amount of 9 5/8% senior notes due 2018 and (ii) borrowed $1.25 billion in term loans and secured a $100.0 million revolving credit facility from a consortium of banks. The senior secured credit facility was amended on February 18, 2011, primarily to obtain more favorable interest rate margins and to increase the term loan borrowings under the senior secured credit facility to $1.40 billion. The full $150.0 million increase in term loan borrowings under the senior secured credit facility was used to redeem an equal principal amount of the senior notes at a price of 100.5% of par on March 21, 2011. We expect to further increase the size of the term loan facility by an additional $100.0 million to approximately $1.50 billion prior to the consummation of this offering. Interest expense, net, for fiscal 2010 and the three months ended March 26, 2011 on a pro forma basis would have been approximately $71.7 million and $17.9 million, respectively, after giving effect to the November 2010 refinancing, the February 2011 re-pricing transaction, a $100.0 million increase in term loans outstanding under the senior credit facility, and the repayment of the senior notes, as if these transactions had occurred on the first day of the respective periods.

The senior notes require semi-annual interest payments, beginning June 1, 2011. We may redeem some or all of the senior notes at fixed redemption prices of 100.5% of par through November 30, 2011, 102.5% of par from December 1, 2011 through November 30, 2012, 102.0% of par from December 1, 2012 through November 30, 2013, and 100% of par commencing December 1, 2013 through maturity. In the event of a change in control, as defined in the indenture governing the senior notes, or certain asset sales we will be obligated to repurchase the senior notes tendered at the option of the holders at a fixed price. We expect to use the net proceeds from this offering, together with the net proceeds from our anticipated $100.0 million of additional term loan borrowings, to redeem approximately $475.0 million in principal amount of the senior notes. The senior notes are guaranteed by certain of Dunkin’ Brands, Inc.’s wholly-owned domestic subsidiaries. The senior notes are unsecured and are effectively subordinated to the senior secured credit facility to the extent of the value of the assets securing such debt.

The senior credit facility is guaranteed by certain of Dunkin’ Brands, Inc.’s wholly-owned domestic subsidiaries and includes a term loan facility and a revolving credit facility. Following the February 2011 amendment, the aggregate borrowings available under the senior secured credit facility are $1.50 billion, consisting of a full-drawn $1.40 billion term loan facility and a $100.0 million revolving credit facility under which $11.2 million of letters of credit were outstanding as of March 26, 2011. Borrowings under the term loan bear interest, payable at least quarterly. The senior secured credit facility requires principal amortization repayments to be made on term loan borrowings equal to $14.0 million per calendar year, payable in quarterly installments through September 2017. The final scheduled principal payment on the outstanding borrowings under the term loan is due in November 2017.

The senior credit facility also provides for borrowings of up to $100.0 million under the revolving credit facility, of which up to $50.0 million is available for letter of credit advances. Borrowings under the revolving credit facility (excluding letters of credit) bear interest, payable at least quarterly. We also pay a 0.50% commitment fee per annum on the unused portion of the revolver. The fee for letter of credit amounts outstanding ranges from 3.75% to 4.25%. At March 26, 2011, the fee for letter of credit amounts outstanding was 4.25%. At

 

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March 26, 2011, there was $88.8 million in available borrowings under the revolving credit facility, with $11.2 million of letters of credit outstanding. The revolving credit facility expires in November 2015.

The senior credit facility includes covenants that require us to maintain a ratio of debt to adjusted EBITDA (the “leverage ratio”) and a ratio of adjusted EBITDA to interest expense (the “coverage ratio”), within a certain range that will adjust over time. Failure to comply with either of these covenants would result in an event of default under our senior credit facility unless waived by our senior credit lenders. An event of default under our senior credit facility can result in the acceleration of our indebtedness under the facility, which in turn can result in an event of default and possible acceleration of our other indebtedness. For fiscal 2011, our leverage ratio must be below 8.6 and our interest coverage ratio must be above 1.45. Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants contained in our senior credit facility. Adjusted EBITDA is defined in our senior credit facility as net income/(loss) before interest, taxes, depreciation and amortization and impairment of long-lived assets, as adjusted for the items summarized in the table below. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term adjusted EBITDA varies from others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income/(loss), operating income or any other performance measures derived in accordance with GAAP, as a measure of operating performance or as an alternative to cash flows as a measure of liquidity. Adjusted EBITDA 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 adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financing covenants. As of March 26, 2011, we were in compliance with our debt covenants with a leverage ratio of 6.3 and an interest coverage ratio of 2.2, which were calculated for the twelve months ended March 26, 2011 based upon the adjustments to EBITDA, as provided for under the terms of our senior credit facility. The following is a reconciliation of net income to adjusted EBITDA for the twelve months ended March 26, 2011 (in thousands):

 

      Twelve months ended
March 26, 2011
 
   

Net income

   $ 19,200   

Interest expense

     119,128   

Income tax expense (benefit)

     (8,626

Depreciation and amortization

     55,702   

Impairment of long-lived assets

     6,314   
        

EBITDA

   $ 191,718   

Adjustments:

  

Non-cash adjustments(a)

   $ 6,636   

Transaction costs(b)

     1,120   

Sponsor management fees(c)

     3,000   

Loss on debt extinguishment and refinancing transaction(d)

     72,962   

Senior executive transition and severance(e)

     4,256   

New market entry(f)

     275   

Franchisee-related restructuring(g)

     2,274   

Technology and market related initiatives(h)

     3,145   

Other(i)

     1,888   
        

Total adjustments

   $ 95,556   
        

Adjusted EBITDA

   $ 287,274   
   

 

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(a)   Represents non-cash adjustments, including stock compensation expense, legal reserves, and other non-cash gains and losses.

 

(b)   Represents cost and expenses related to the Company’s refinancing and dividend transactions.

 

(c)   Represents annual fees paid to the Sponsors under a management agreement, which will be terminated upon the consummation of this offering. See “Related party transactions – Arrangements with our investors.”

 

(d)   Represents gains/losses recorded and related transaction costs associated with the refinancing of long-term debt, including the write-off of deferred financing costs and original issue discount, as well as pre-payment premiums.

 

(e)   Represents severance and related benefits costs associated with non-recurring reorganizations (includes the accrual of costs associated with Executive Chairman transition).

 

(f)   Represents one-time costs and fees associated with entry into new markets.

 

(g)   Represents one-time costs of franchisee-related restructuring programs.

 

(h)   Represents costs associated with various franchisee information technology and one-time market research programs.

 

(i)   Represents the net impact of other non-recurring and individually insignificant adjustments.

Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and amounts available under our revolving credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. We believe that we will be able to meet these obligations even if we experience no growth in sales or profits. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk factors.” There can be no assurances, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our revolving credit facility or otherwise to enable us to service our indebtedness, including our senior secured credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the senior secured credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Off balance sheet obligations

We have entered into a third-party guarantee with a distribution facility of franchisee products that ensures franchisees will purchase a certain volume of product. As product is purchased by our franchisees over the term of the agreement, the amount of the guarantee is reduced. As of March 26, 2011, we were contingently liable for $8.4 million, under this guarantee. Based on current internal forecasts, we believe the franchisees will achieve the required volume of purchases, and therefore, we would not be required to make payments under this agreement. Additionally, the Company has various supply chain contracts that provide for purchase commitments or exclusivity, the majority of which result in the Company being contingently liable upon early termination of the agreement or engaging with another supplier. Based on prior history and the Company’s ability to extend contract terms, we have not recorded any liabilities related to these commitments. As of March 26, 2011, we were contingently liable under such supply chain agreements for approximately $20.3 million.

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants and the guarantee of certain other leases, we are contingently liable on certain lease agreements. These leases have varying terms, the latest of which expires in 2024. As of March 26, 2011, the potential amount of undiscounted payments we could be required to make in the event of nonpayment by the primary lessee was $7.8 million. Our franchisees are the primary lessees under the majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of nonpayment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases, and we have not recorded a liability for such contingent liabilities.

We do not have any other material off balance sheet obligations other than the guaranteed financing arrangements discussed above in “Critical accounting policies.”

 

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Inflation

Historically, inflation has not had a material effect on our results of operations. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations.

Seasonality

Our revenues are subject to fluctuations based on seasonality, primarily with respect to Baskin-Robbins. The ice cream industry generally experiences an increase during the spring and summer months, whereas Dunkin’ Donuts hot beverage sales generally increase during the fall and winter months and iced beverage sales generally increase during the spring and summer months.

Quantitative and qualitative disclosures about market risk

Foreign exchange risk

We are subject to inherent risks attributed to operating in a global economy. Most of our revenues, costs and debts are denominated in U.S. dollars. Our investments in, and equity income from, joint ventures are denominated in foreign currencies, and are therefore subject to foreign currency fluctuations. For fiscal year 2010, a 5% change in foreign currencies relative to the U.S. dollar would have had a $0.9 million impact on equity in net income of joint ventures. Additionally, a 5% change in foreign currencies as of March 26, 2011 would have had an $8.8 million impact on the carrying value of our investments in joint ventures. In the future, we may consider the use of derivative financial instruments, such as forward contracts, to manage foreign currency exchange rate risks.

Interest rate risk

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate exposure mainly relates to the term loan outstanding under our new senior credit facility. We have a $1.40 billion term loan facility bearing interest at variable rates. Each eighth of a percentage point change in interest rates would result in a $1.8 million change in annual interest expense on our new term loan facility. We also have a revolving credit facility, which provides for borrowings of up to $100.0 million and bears interest at variable rates. Assuming the revolver is fully drawn, each eighth of a percentage point change in interest rates would result in a $0.1 million change in annual interest expense on our revolving loan facility.

In the future, we may enter into hedging instruments, involving the exchange of floating for fixed rate interest payments, to reduce interest rate volatility.

 

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Contractual obligations

The following table sets forth our contractual obligations as of December 25, 2010. There have been no significant changes to our contractual obligations since December 25, 2010, with the exception of the February 2011 re-pricing transaction, which is reflected in the long-term debt obligations below.

 

(In millions)   

Total

    

Less than

1 year

    

1-3

years

    

3-5

years

    

More than

5 years

 
              
   

Long-term debt(1)(2)

   $ 2,835.7         129.3         254.9         304.4         2,147.1   

Capital lease obligations

     9.7         0.7         1.4         1.5         6.1   

Operating lease obligations

     652.6         51.4         100.6         94.1         406.5   

Purchase obligations(3)(4)

                                       

Short and long-term obligations(5)

     19.5         3.9         6.6         6.0         3.0   
        

Total(6)

   $ 3,517.5         185.3         363.5         406.0         2,562.7   
   

 

(1)   Amounts include mandatory principal payments on long-term debt, as well as estimated interest of $115.3 million, $226.9 million, $276.4 million, and $342.1 million for less than 1 year, 1-3 years, 3-5 years, and more than 5 years, respectively. Amounts reflect the impact of the repricing and increase of our term loans completed in February 2011, and the corresponding redemption of senior notes. Interest on the $1.4 billion of term loans under our senior credit facility is variable, subject to an interest rate floor, and have been estimated based on a LIBOR yield curve. Our term loans also require us to prepay an amount equal to 50% of excess cash flow (as defined in the senior credit facility) for the preceding fiscal year beginning in the first quarter of fiscal 2012, if our leverage ratio exceeds 5.25x at the end of such fiscal year. If the leverage ratio is less than 5.25x, then 25% of excess cash flow is required to be prepaid, and if the leverage ratio is less than 4.00x, then no excess cash flow prepayment is required. Excess cash flow prepayments have not been reflected in the contractual obligation amounts above.

 

(2)   We intend to use the net proceeds from this offering, together with the net proceeds from our anticipated additional $100.0 million of term loan borrowings, to repay all amounts outstanding under the senior notes. See “Use of proceeds.”

 

(3)   We entered into a third-party guarantee with a distribution facility of franchisee products that ensures franchisees will purchase a certain volume of product. As of December 25, 2010, we were contingently liable for $8.6 million under this guarantee. We have various supply chain contracts that provide for purchase commitments or exclusivity, the majority of which result in our being contingently liable upon early termination of the agreement or engaging with another supplier. Based on prior history and our ability to extend contract terms, we have not recorded any liabilities related to these commitments. As of December 25, 2010, we were contingently liable under such supply chain agreements for approximately $16 million.

 

(4)   We are guarantors of and are contingently liable for certain lease arrangements primarily as the result of our assigning our interest. As of December 25, 2010, we were contingently liable for $7.2 million under these guarantees, which are discussed further above in “Off Balance Sheet Obligations.” Additionally, in certain cases, we issue guarantees to financial institutions so that franchisees can obtain financing. If all outstanding guarantees, which are discussed further above in “Critical accounting policies,” came due as of December 25, 2010, we would be liable for approximately $7.7 million.

 

(5)   Amounts include obligations to former employees, as well as Sponsor management fees, which are currently payable at $3.0 million per year. In connection with this offering and the termination of our agreement with the Sponsors, the contractual payments will be accelerated and we will be required to pay approximately $14 million to the Sponsors upon the consummation of this offering in lieu of future payments. See “Related party transactions – Arrangements with our investors.”

 

(6)   As of December 25, 2010, the Company has a liability for uncertain tax positions of $29.6 million for which the timing of payment, if any, for $28.5 million is unknown at this time. The Company expects to pay approximately $1.1 million related to these uncertain tax positions during fiscal 2011.

 

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Recently issued accounting standards

In December 2010, the Financial Accounting Standards Board (FASB) issued new guidance to amend the criteria for performing the second step of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing the second step if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This new guidance is effective for the Company beginning in fiscal year 2011. We do not expect the adoption of this guidance to have a material impact on our goodwill assessment or our consolidated financial statements.

In January 2010, the FASB issued new guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Levels 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and clarifications of existing disclosures were effective for the Company in fiscal year 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which were effective for the Company in fiscal year 2011. The adoption of this guidance did not have any impact on our financial position or results of operations, as it only relates to disclosures.

 

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Business

Our company

We are the world’s leading franchisor 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 16,000 points of distribution in 57 countries, our portfolio has strong brand awareness in our key markets around the globe and has industry-leading market share in a number of growing categories of the QSR segment. Dunkin’ Donuts operates primarily in the breakfast daypart within the QSR segment of the restaurant industry which has experienced significantly better guest traffic trends than the overall QSR segment in recent years. Dunkin’ Donuts holds the #1 position in the U.S. by servings in each of the QSR subcategories of “Hot regular coffee,” “Iced coffee,” “Donuts,” “Bagels,” and “Muffins,” and holds the #2 position in the U.S. by servings in each of the QSR subcategories of “Total coffee” and “Breakfast sandwiches.” Baskin-Robbins is the #1 QSR chain in the U.S. for servings of hard serve ice cream and has established leading market positions in Japan as well as in the growing ice cream QSR markets in South Korea and the Middle East.

We believe that our nearly 100% franchised business model offers strategic and financial benefits. For example, because we do not own or operate a significant number of stores, our company is able to focus on menu innovation, marketing, franchisee coaching and support, and other initiatives to drive the overall success of our brand. Financially, our franchised model allows us to grow our points of distribution and brand recognition with limited capital investment by us and to maintain one of the leading cash flow margins in the QSR industry.

We operate our business in four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International and Baskin-Robbins U.S. In 2010, our Dunkin’ Donuts segments generated revenues of $416.5 million, or 76% of our total segment revenues, of which $402.4 million was in the U.S. segment and $14.1 million was in the international segment. In 2010, our Baskin-Robbins segments generated revenues of $134.2 million, of which $91.3 million was in the international segment and $42.9 million was in the U.S. segment. As of March 26, 2011, there were 9,805 Dunkin’ Donuts points of distribution, of which 6,799 were in the U.S. and 3,006 were international, and 6,482 Baskin-Robbins points of distribution, of which 3,959 were international and 2,523 were in the U.S. Our points of distribution consist of traditional end-cap, in-line and stand-alone restaurants, many with drive thrus, and gas and convenience locations, as well as alternative points of distribution (“APODs”), such as full- or self-service kiosks in grocery stores, hospitals, airports, offices, colleges and other smaller-footprint properties.

We generate revenue from four primary sources: (i) royalties and fees associated with franchised restaurants; (ii) rental income from restaurant properties that we lease or sublease to franchisees; (iii) sales of ice cream and ice cream products to franchisees in certain international markets; and (iv) other income including fees for the licensing of the Dunkin’ Donuts brand for products sold in on-franchised outlets (such as retail packaged coffee) and the licensing of the rights to manufacture Baskin-Robbins ice cream to a third party for ice cream and related products sold to U.S. franchisees; as well as refranchising gains, transfer fees from franchisees, revenue from our company-owned restaurants and online training fees.

For fiscal year 2010, we generated total revenues and operating income of $577.1 million and $193.5 million, respectively.

Our history and recent accomplishments

Both of our brands have a rich heritage dating back to the 1940s, when Bill Rosenberg founded his first restaurant, subsequently renamed Dunkin’ Donuts, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. Baskin-Robbins and Dunkin’ Donuts were

 

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individually acquired by Allied Domecq PLC in 1973 and 1989, respectively. The brands were organized under the Allied Domecq Quick Service Restaurants subsidiary, which was renamed Dunkin’ Brands, Inc. in 2004. Allied Domecq was acquired in July 2005 by Pernod Ricard S.A. Pernod Ricard made the decision to divest Dunkin’ Brands in order to remain a focused global spirits company. As a result, in March of 2006, we were acquired by investment funds affiliated with Bain Capital Partners, LLC, The Carlyle Group and Thomas H. Lee Partners, L.P. (collectively, the “Sponsors”).

Since 2001, we have grown our global Dunkin’ Donuts points of distribution and systemwide sales by compound annual growth rates of 6.9% and 8.7%, respectively. During the same period, we have also grown our global Baskin-Robbins total points of distribution and systemwide sales by compound annual growth rates of 4.0% and 6.8%, respectively. Until the first quarter of fiscal 2008, Dunkin’ Donuts U.S. had experienced 45 consecutive quarters of positive comparable store sales growth. During fiscal 2008 and 2009, we believe we demonstrated strong comparable store sales resilience during the recession, and we increased our overall profitability while investing for future growth. During fiscal 2010, Dunkin’ Donuts U.S. experienced sequential improvement in comparable store sales growth with comparable store sales growth of (0.6)%, 1.9%, 2.7% and 4.7% in the first through fourth quarters, respectively. Positive comparable store sales growth has continued in the first quarter of fiscal 2011 despite adverse weather conditions in the Northeast region during the quarter.

Dunkin’ Donuts U.S. comparable store sales growth(1)

LOGO

 

  (1)   Data for fiscal year 2001 through fiscal year 2005 represent results for the fiscal years ended August. All other fiscal years represent results for the fiscal years ended the last Saturday in December.  

Our competitive business strengths

We attribute our success in the QSR segment to the following strengths:

Strong and established brands with leading market positions

Our Dunkin’ Donuts and Baskin-Robbins brands have histories dating back more than 60 years, and have well-established reputations for delivering high-quality beverage and food products at a good value through convenient locations with fast and friendly service. Today both brands are leaders in their respective QSR categories, with aided brand awareness in excess of 95% in the U.S., and a strong, growing presence overseas.

In addition to our leading U.S. market positions, for the fifth consecutive year, Dunkin’ Donuts was recognized in 2010 by Brand Keys, a customer satisfaction research company, as #1 in customer loyalty in the coffee category. Our customer loyalty is particularly evident in New England, where we have our highest penetration per capita in the U.S. and where, according to CREST® data, we hold a 52% market share of breakfast daypart visits and our market share of 57% of total QSR coffee based on servings is nearly six times greater than that of our nearest competitor. Further demonstrating the strength of our brand, in 2010 the Dunkin’ Donuts 12 oz. original blend bagged coffee was the #1 grocery stock-keeping unit nationally in the premium coffee category, with double the sales of our closest competitor, according to Nielsen.

Similarly, Baskin-Robbins is the #1 QSR chain in the U.S. for servings of hard serve ice cream and has established leading market positions in Japan, South Korea and the Middle East.

 

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Franchised business model provides an attractive platform for growth

Nearly 100% of our locations are franchised, allowing us to focus on our brand differentiation and menu innovation, while our franchisees expand our points of distribution. This expansion requires limited financial investment by us, given that new store development and substantially all of our store advertising costs are funded by franchisees. Consequently, we achieved a strong operating income margin of approximately 34% in fiscal 2010. With strong operating income margins and low capital requirements, we generate strong and consistent cash flow. For our domestic businesses, because our revenues are largely derived from royalties based on a percentage of franchisee revenues as well as contractual lease payments and other franchise fees, we are not directly impacted by changes in restaurant-level profitability, including the impact of increases in commodity costs. We offer our franchisees significant operational support by aiming to continuously improve restaurant profitability. One example is supporting their supply chain, where we believe we have facilitated approximately $220 million in cost reductions since 2008 through strategic sourcing and other initiatives.

Attractive store level economics generate franchisee demand for new restaurants

We believe that our restaurants offer a compelling investment opportunity to our franchisees, which in turn generates franchisee demand for additional restaurants. In the U.S., new traditional format Dunkin’ Donuts stores opened during fiscal 2010, excluding gas and convenience locations, generated average weekly sales of approximately $16,400, or annualized unit volumes of approximately $855,000, while the average capital expenditure required to open a new traditional restaurant site in the U.S., excluding gas and convenience locations, was approximately $474,000 in 2010. Of our fiscal 2010 openings and existing commitments, approximately 90% have been made by existing franchisees that are able, in many cases, to use cash flow generated from their existing restaurants to fund a portion of their expansion costs.

As a result of Dunkin’ Donuts’ attractive franchisee store-level economics and strong brand appeal, we have a robust and growing new restaurant pipeline. During 2010, our franchisees opened 206 net new Dunkin’ Donuts points of distribution in the U.S. Based on the commitments we have secured or expect to secure, we anticipate the opening of approximately 200 to 250 net new points of distribution in the U.S. in 2011. Consistent with our overall points of distribution mix, we expect that approximately 80% of our Dunkin’ Donuts openings in the U.S. will be traditional format restaurants; however, this percentage may be higher or lower in any given year as a result of specific development initiatives or other factors.

We believe our strong store-level economics and our track record of performance through economic cycles has resulted in a diverse and stable franchisee base, with the largest franchisee in the U.S. owning less than 3.5% of the U.S. Dunkin’ Donuts points of distribution and domestic franchisees operating, on average, 5.9 points of distribution in the U.S. Similarly, no Baskin-Robbins franchisee in the U.S. owns more than 1% of the U.S. Baskin-Robbins points of distribution, and domestic franchisees operate, on average, 1.85 points of distribution in the U.S. In addition, we believe the transfer rate of less than 4% per year in each of 2008, 2009 and 2010 for both our Dunkin’ Donuts franchisees and our Baskin-Robbins franchisees reflects the stability of our U.S. franchisee base.

Experienced management team with proven track record in the industry

Our senior management team has significant QSR, foodservice and franchise company experience. Prior to joining Dunkin’ Donuts, our CEO Nigel Travis served as the CEO of Papa John’s International Inc. and previously held numerous senior positions at Blockbuster Inc. and Burger King Corporation. John Costello, our Chief Global Marketing & Innovation Officer, joined Dunkin’ Brands in 2009 having previously held leadership roles at The

 

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Home Depot, Sears, Yahoo!, Nielsen Marketing Research and Procter & Gamble. Paul Twohig, our Chief Operating Officer, joined Dunkin’ Donuts U.S. in October 2009 having previously held senior positions at Starbucks Corporation and Panera Bread Company. Neal Yanofsky, our new President of International, joined us in May 2011 after holding senior positions at Generation Mobile, Panera Bread Company, Fidelity Ventures and Au Bon Pain. Our CFO Neil Moses joined in November 2010, having previously held numerous senior positions with public companies, including, most recently, CFO of Parametric Technology Corporation.

Our growth strategy

We believe there are significant opportunities to grow our brands globally, further support the profitability of our franchisees, expand our leadership in the coffee, baked goods and ice cream categories of the QSR segment of the restaurant industry and deliver shareholder value by executing on the following strategies:

Increase comparable store sales and profitability in Dunkin’ Donuts U.S.

We intend to continue building on our comparable store sales growth momentum and improve profitability through the following initiatives:

Further increase coffee and beverage sales. Since the late 1980s, we have transformed Dunkin’ Donuts into a coffee-focused brand and have developed a significantly enhanced menu of beverage products, including Coolattas®, espressos, iced lattes and flavored coffees. Approximately 60% of U.S. systemwide sales for fiscal 2010 were generated from coffee and other beverages, which have attractive profit margins and, we believe, generate increased guest visits to our stores and higher unit volumes. We plan to increase our high-margin coffee and beverage revenue through continued new product innovations and related marketing, including highly recognizable advertising campaigns such as “America Runs on Dunkin’” and “What are you Drinkin’?”

Beginning in the summer of 2011, Dunkin’ Donuts will offer 14-count boxes of authentic Dunkin’ Donuts coffee in Keurig® K-Cups, the leading single-serve brewing system in the U.S., exclusively at participating Dunkin’ Donuts restaurants across the U.S. Using coffee sourced and roasted to Dunkin’ Donuts’ exacting specifications, Dunkin’ K-Cup portion packs will be available in five popular Dunkin’ Donuts flavors, including Original Blend, Dunkin’ Decaf, French Vanilla, Hazelnut and Dunkin’ Dark®. In addition, participating Dunkin’ Donuts restaurants will, on occasion, offer Keurig Single-Cup Brewers for sale. Brewers with Keurig Brewed® technology were the top five selling coffee makers in the U.S. on a dollar basis for the period of October through December 2010 and represented an estimated 49% of total coffee maker dollar sales for that period according to CREST® data. We believe this alliance is a significant long-term growth opportunity that will generate incremental sales and profits for our Dunkin’ Donuts franchisees.

Extend leadership in breakfast daypart while growing afternoon daypart. As we maintain and expand our current leading market position in the breakfast daypart through innovative bakery and breakfast sandwich products like the Big ‘N Toasty and the Wake-Up Wrap®, we plan to expand Dunkin’ Donuts’ position in the afternoon daypart (between 2:00 p.m. and 5:00 p.m.), which currently represents only approximately 12% of our franchisee-reported sales. We believe that our extensive coffee- and beverage-based menu coupled with new “hearty snack” introductions, such as Bagel Twists, position us to grow share in this daypart. We believe this will require minimal additional capital investment by our franchisees.

Drive continued enhancements in restaurant operations. We will continue to maintain a highly operations-focused culture to help our franchisees maximize the quality and consistency of their guests’ in-store experience, as well as to drive franchisee profitability. To accomplish this, we have enhanced initial and ongoing restaurant manager and crew training programs and developed new in-store planning and tracking technology

 

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tools to assist our franchisees. As evidence of our recent success in these areas, the number of respondents to our Guest Satisfaction Survey program in March 2011 rating their overall experience as “Highly Satisfied” represented an all-time high and reflects a significant improvement over prior results.

Continue Dunkin’ Donuts U.S. contiguous store expansion

We believe there is a significant opportunity to grow our points of distribution for Dunkin’ Donuts in the U.S. given the strong potential outside of the Northeast region to increase our per-capita penetration to levels closer to those in our core markets. Our development strategy resulted in more than 200 net new U.S. openings in fiscal 2010, which was among the largest store count increases in the QSR industry that year. During fiscal 2011 and fiscal 2012, we expect our franchisees to open approximately 200 to 250 net new points of distribution per year in the U.S., principally in existing developed markets. Our long-term goal is to more than double our U.S. footprint and reach a total of 15,000 points of distribution in the U.S. for Dunkin’ Donuts. The following table details our per-capita penetration levels in our U.S. regions.

 

Region    Population (in millions)      Stores1      Penetration  
   

New England and New York

     36.0         3,720         1:9,700   

Other Eastern U.S.

     142.5         2,943         1:48,400   

Western U.S.

     130.0         109         1:1,193,000   
   

 

1   As of December 25, 2010

The key elements of our future domestic development strategy are:

Increase penetration in existing markets. In our traditional core markets of New England and New York, we now have one Dunkin’ Donuts store for every 9,700 people. In the near term, we intend to focus our development on other existing markets east of the Mississippi River, where we currently have only approximately one Dunkin’ Donuts store for every 48,400 people. In certain Eastern U.S. markets outside of our core markets, such as Philadelphia, Chicago and South Florida we have already achieved per-capita penetration of greater than one Dunkin’ Donuts store for every 25,000 people.

Expand into new markets using a disciplined approach. We believe that the Western part of the U.S. represents a significant growth opportunity for Dunkin’ Donuts. However, we believe that a disciplined approach to development is the best one for our brand and franchisees. Specifically, in the near term, we will focus on development in contiguous markets that are adjacent to our existing base, and generally move outward to less penetrated markets in progression, providing for marketing and supply chain efficiencies within each new market.

Focus on store-level economics. We believe our strong store-level economics have driven unit growth throughout our history. In recent years, we have undertaken significant initiatives to further enhance store-level economics for our franchisees, including reducing the cash investment for new stores, increasing beverage sales, lowering supply chain costs and implementing more efficient store management systems. We believe these initiatives have further increased franchisee profitability. For example, to open an end-cap restaurant with a drive-thru, we have reduced the upfront capital expenditure costs by approximately 23% between fiscal 2008 and fiscal 2010 and during that same period, we believe we have facilitated approximately $220 million in cost reductions through strategic sourcing and other initiatives. We will continue to focus on these initiatives to further enhance operating efficiencies.

 

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Drive accelerated international growth of both brands

We believe there is a significant opportunity to grow our points of distribution for both brands in international markets. Our international expansion strategy has resulted in more than 3,100 net new openings in the last 10 years. During fiscal 2011 and fiscal 2012, we expect our franchisees to open approximately 450 to 500 net new points of distribution per year internationally, principally in our existing markets.

The key elements of our future international development strategy are:

Grow in our existing core markets. Our international development strategy for both brands includes growth in our existing core markets. For the Dunkin’ Donuts brand, we intend to focus on growth in South Korea and the Middle East, where we currently have 875 and 204 points of distribution, respectively. For Baskin-Robbins, we intend to focus on Japan, South Korea, and the Middle East where, in 2010, we had the #1 market share positions in the Fast Food Ice Cream category in those markets. We intend to leverage our operational infrastructure to grow our existing store base of 2,499 Baskin-Robbins points of distribution in these markets.

Capitalize on other markets with significant growth potential. We intend to expand in certain international focus markets where our brands do not have a significant store presence, but where we believe there is consumer demand for our products as well as strong franchisee partners. We plan to pursue opportunities for Dunkin’ Donuts to expand its presence primarily in China, Germany, Spain and Russia, and for Baskin-Robbins primarily in China, Russia, Mexico, Australia and Indonesia, which we believe are currently underserved markets. Through our disciplined process of identifying attractive new markets to enter each year, we recently announced an agreement with an experienced QSR franchisee to enter the Indian market with our Dunkin’ Donuts brand. The agreement calls for the development of at least 500 Dunkin’ Donuts restaurants throughout India, the first of which are expected to open by early 2012. By teaming with local operators, we believe we are better able to adapt our brands to local business practices and consumer preferences.

Further develop our franchisee support infrastructure. We plan to increase our focus on providing our international franchisees with operational tools and services that can help them to efficiently operate in their markets and become more profitable. For each of our brands, we plan to focus on improving our native-language restaurant training programs and updating existing restaurants for our new international retail restaurant designs. To accomplish this, we are dedicating additional resources to our restaurant operations support teams in key geographies in order to assist international franchisees in improving their store-level operations.

Increase comparable store sales growth of Baskin-Robbins U.S.

In the U.S., Baskin-Robbins’ core strengths are its national brand recognition, 65 years of heritage, a well-established reputation for high quality ice cream and attractive margins. To capitalize on these strengths, we are focused on generating renewed excitement for the brand, which includes our recently introduced “More Flavors, More FunTM” marketing campaign. At the restaurant level, we seek to improve sales by focusing on operational and service improvements as well as by increasing cake and beverage sales through product innovation, marketing and technology.

In August 2010 we hired Bill Mitchell to lead our Baskin-Robbins U.S. operations. Mr. Mitchell currently serves as our Senior Vice President and Brand Officer of Baskin-Robbins U.S., and prior to joining us he served in a variety of management roles over a 10-year period at Papa John’s International, and before that at Popeyes, a division of AFC Enterprises. Since joining Dunkin’ Brands, Mr. Mitchell has led the introduction of technology improvements across the Baskin-Robbins system, which we believe will aid our franchisees in operating their

 

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restaurants more efficiently and profitably. Under Mr. Mitchell’s leadership, early Baskin-Robbins U.S. results include comparable store sales growth in the first quarter of fiscal 2011 of 0.5%. Further, the majority of respondents to our Guest Satisfaction Survey program in March 2011 rated their overall experience as “Extremely Satisfied,” representing an all-time high and a significant point improvement from early 2010.

Industry overview

According to Technomic, the QSR segment of the U.S. restaurant industry accounted for approximately $174 billion of the total $361 billion restaurant industry sales in the U.S. in 2010. The U.S. restaurant industry is generally categorized into segments by price point ranges, the types of food and beverages offered and service available to consumers. QSRs consist of establishments where customers generally order at a cash register or select items from a food bar and pay before the meal is eaten. QSRs generally seek to capitalize on consumer desires for quality and convenient food at economical prices. Technomic reports that, in 2010, QSRs comprised nine of the top ten chain restaurants by U.S. systemwide sales and ten of the top ten chain restaurants by number of units.

Our Dunkin’ Donuts brand competes in the QSR segment categories and subcategories that include coffee, donuts, muffins, bagels and breakfast sandwiches. In addition, in the U.S., our Dunkin’ Donuts brand has historically focused on the breakfast daypart, which we define to include the portion of each day from 5:00 a.m. until 11:00 a.m. While, according to CREST® data, the compound annual growth rate for total QSR daypart visits in the U.S. have been flat or negative over the five-year period ended February 28, 2011, the compound annual growth rate for QSR visits in the U.S. during the breakfast daypart averaged 2.0% over the same five-year period.

In 2010, there were sales of more than 7.0 billion restaurant servings of coffee in the U.S., 80% of which were attributable to the QSR segment according to CREST® data. Over the years, our Dunkin’ Donuts brand has evolved into a predominantly coffee-based concept, with approximately 60% of Dunkin’ Donuts’ U.S. systemwide sales for the fiscal year ended December 25, 2010 generated from coffee and other beverages. We believe QSRs, including Dunkin’ Donuts, are attractively positioned to capture additional coffee market share through an increased focus on coffee offerings.

Our Baskin-Robbins brand competes primarily in QSR segment categories and subcategories that include hard serve ice cream as well as those that include soft serve ice cream, frozen yogurt, shakes, malts and floats. While both of our brands compete internationally, over 60% of Baskin-Robbins restaurants are located outside of the U.S. and represent the majority of our total international sales and points of distribution.

Our brands

Our brands date back to the 1940s when Bill Rosenberg founded his first restaurant, subsequently renamed Dunkin’ Donuts, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. Dunkin’ Donuts and Baskin-Robbins share the same vision of delivering high-quality beverage and food products at a good value through convenient locations.

Dunkin’ Donuts—U.S.

Dunkin’ Donuts is a leading U.S. QSR concept, with leading market positions in each of the coffee, donut, bagel, muffin and breakfast sandwich categories. Since the late 1980s, Dunkin’ Donuts has transformed itself into a coffee and beverage-based concept and is the national leader in hot regular coffee, with sales of over 1 billion

 

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servings of coffee. From the fiscal year ended August 31, 2001 to the twelve months ended March 26, 2011 Dunkin’ Donuts U.S. systemwide sales have grown at an 8.6% compound annual growth rate. Total U.S. Dunkin’ Donuts points of distribution grew from the beginning of that period from 3,583 to 6,799 as of March 26, 2011. Approximately 86% of these points of distribution are traditional restaurants consisting of end-cap, in-line and stand-alone restaurants, many with drive-thrus, and gas and convenience locations. In addition, we have alternative points of distribution (“APODs”), such as full- or self-service kiosks in grocery stores, hospitals, airports, offices and other smaller-footprint properties. We believe that Dunkin’ Donuts continues to have significant growth potential in the U.S. given its strong brand awareness and variety of restaurant formats. For the fiscal year ended December 25, 2010, the Dunkin’ Donuts franchise system generated U.S. franchisee-reported sales of $5.4 billion, which accounted for approximately 70.7% of our global franchisee-reported sales, and had 6,772 U.S. points of distribution (including more than 2,900 restaurants with drive-thrus) at period end.

Baskin-Robbins—U.S.

Baskin-Robbins is the #1 QSR chain in the U.S. for servings of hard serve ice cream and develops and sells a full range of frozen ice cream treats such as cones, cakes, sundaes and frozen beverages. Baskin-Robbins enjoys 95% aided brand awareness in the U.S. and is known for its innovative flavors, popular “Birthday Club” program and ice cream flavor library of over 1,000 different offerings. Baskin-Robbins’ “31 flavors”, offering consumers a different flavor for each day of the month, is recognized by ice cream consumers nationwide. For the fiscal year ended December 25, 2010, the Baskin-Robbins franchise system generated U.S. franchisee-reported sales of $494 million, which accounted for approximately 6.5% of our global franchisee-reported sales, and had 2,547 U.S. points of distribution at period end.

International operations

Our international business is primarily conducted via joint ventures and country or territorial license arrangements with “master franchisees”, who both operate and sub-franchise the brand within their licensed area. Our international franchise system of 6,874 restaurants, predominantly located across Asia and the Middle East, generated systemwide sales of $1.7 billion for the fiscal year ended December 25, 2010, which represented 23% of Dunkin’ Brands’ global systemwide sales. Dunkin’ Donuts had 2,988 restaurants in 30 countries (excluding the U.S.), accounting for $584 million of international systemwide sales for the fiscal year ended December 25, 2010, and Baskin-Robbins had 3,866 restaurants in 46 countries (excluding the U.S.), accounting for approximately $1.2 billion of international systemwide sales for the same period. From August 31, 2000 to March 26, 2011, total international Dunkin’ Donuts points of distribution grew from 1,517 to 3,006 and total international Baskin-Robbins points of distribution grew from 2,109 to 3,959. We believe that we have opportunities to continue to grow our Dunkin’ Donuts and Baskin-Robbins concepts internationally in new and existing markets through brand and menu differentiation.

Overview of franchising

Franchising is a business arrangement whereby a service organization, the franchisor, grants an operator, the franchisee, a license to sell the franchisor’s products and services and use its system and trademarks in a given area, with or without exclusivity. In the context of the restaurant industry, a franchisee pays the franchisor for its concept, strategy, marketing, operating system, training, purchasing power and brand recognition.

 

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Franchisee relationships

One of the ways by which we seek to maximize the alignment of our interests with those of our franchisees is by not deriving additional income through serving as the supplier to our domestic franchisees. In addition because the ability to execute our strategy is dependent upon the strength of our relationships with our franchisees, we maintain a multi-tiered advisory council system to foster an active dialogue with franchisees. The advisory council system provides feedback and input on all major brand initiatives and is a source of timely information on evolving consumer preferences, which assists new product introductions and advertising campaigns.

Unlike certain other QSR franchise systems, we generally do not guarantee our franchisees’ financing obligations. As of March 26, 2011, if all of our outstanding guarantees of franchisee financing obligations came due, we would be liable for $7.7 million. We intend to continue our past practice of limiting our guarantee of financing for franchisees.

Franchise agreement terms

For each franchised restaurant, we enter into a franchise agreement covering a standard set of terms and conditions. A prospective franchisee may elect to open either a single-branded distribution point or a multi-branded distribution point. In addition, and depending upon the market, a franchisee may purchase the right to open a franchised restaurant at one or multiple locations (via a store development agreement, or “SDA”). When granting the right to operate a restaurant to a potential franchisee, we will generally evaluate the potential franchisee’s prior food-service experience, history in managing profit and loss operations, financial history and available capital and financing. We also evaluate potential new franchisees based on financial measures, including (for the smallest restaurant development commitment) a liquid asset minimum of $125,000 for the Baskin-Robbins brand, a liquid asset minimum of $250,000 for the Dunkin’ Donuts brand, a net worth minimum of $250,000 for the Baskin-Robbins brand and a net worth minimum of $500,000 for the Dunkin’ Donuts brand.

The typical franchise agreement in the U.S. has a 20-year term. The majority of our franchisees have entered into a prime lease with a third-party landlord. When we sublease properties to franchisees, the sublease generally follows the prime lease term structure. Our leases to franchisees are typically structured to provide a ten-year term and two five-year options to renew.

We help domestic franchisees select sites and develop restaurants that conform to the physical specifications of a typical restaurant. Each domestic franchisee is responsible for selecting a site, but must obtain site approval from us based on accessibility, visibility, proximity to other restaurants and targeted demographic factors including population density and traffic patterns. Additionally, the franchisee must also refurbish and remodel each restaurant periodically (typically every five and ten years, respectively).

We currently require each domestic franchisee’s managing owner and designated manager to complete initial and ongoing training programs provided by us, including minimum periods of classroom and on-the-job training. We monitor quality and endeavor to ensure compliance with our standards for restaurant operations through restaurant visits in the U.S. In addition, a formal restaurant review is conducted throughout our domestic operations at least once per year and comprises two separate restaurant visits. To complement these procedures, we use “Guest Satisfaction Surveys” in the U.S. to assess customer satisfaction with restaurant operations, such as product quality, restaurant cleanliness and customer service. Within each of our master franchisee and joint venture organizations, training facilities have been established by the master franchisee or joint venture based on our specifications. From those training facilities, the master franchisee or joint venture trains future staff members of the international restaurants. Our master franchisees and joint venture entities also periodically send their primary training managers to the U.S. for re-certification.

 

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Store development agreements

We grant domestic franchisees the right to open one or more restaurants within a specified geographic area pursuant to the terms of SDAs. An SDA specifies the number of restaurants and the mix of the brands represented by such restaurants that a franchisee is obligated to open. Each SDA also requires the franchisee to meet certain milestones in the development and opening of the restaurant and, if the franchisee meets those obligations, we agree, during the term of such SDA, not to operate or franchise new restaurants in the designated geographic area covered by such SDA. In addition to an SDA, a franchisee signs a separate franchise agreement for each restaurant developed under such SDA.

Master franchise model and international arrangements

Master franchise arrangements are used on a limited basis domestically (the Baskin-Robbins brand has five “territory” franchise agreements for certain Midwestern and Northwestern markets) but more widely internationally for both the Baskin-Robbins brand and the Dunkin’ Donuts brand. In addition, international arrangements include single unit franchises in Canada (both brands), the United Kingdom and Australia (Baskin-Robbins brand) as well as joint venture agreements in Korea (both brands) and Japan (Baskin-Robbins).

Master franchise agreements are the most prevalent international relationships for both brands. Under these agreements, the applicable brand grants the master franchisee the exclusive right to develop and operate a certain number of restaurants within a particular geographic area, such as selected cities, one or more provinces or an entire country, pursuant to a development schedule that defines the number of restaurants that the master franchisee must open annually. Those development schedules customarily extend for five to ten years. If the master franchisee fails to perform its obligations, the exclusivity provision of the agreement terminates and additional franchisee agreements may be put in place to develop restaurants.

The master franchisee is required to pay an upfront initial franchise fee for each developed restaurant and, for the Dunkin’ Donuts brand, royalties. For the Baskin-Robbins brand, the master franchisee is typically required to purchase ice cream from Baskin-Robbins or an approved supplier. In most countries, the master franchisee is also required to spend a certain percentage of gross sales on advertising in such foreign country in order to promote the brand. Generally, the master franchise agreement serves as the franchise agreement for the underlying restaurants operating pursuant to such model. Depending on the individual agreement, we may permit the master franchisee to subfranchise with its territory.

 

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Our brands have presence in the following countries:

 

Country    Dunkin’ Donuts    Baskin-Robbins
 

Aruba

   ü    ü

Australia

      ü

Azerbaijan

      ü

Bahamas

   ü   

Bahrain

      ü

Bangladesh

      ü

Bulgaria

   ü   

Canada

   ü    ü

Cayman Islands

   ü   

Chile

   ü   

China

   ü    ü

Colombia

   ü    ü

Curacao

      ü

Denmark

      ü

Dominican Republic

      ü

Ecuador

   ü    ü

Egypt

      ü

England

      ü

Georgia

      ü

Germany

   ü   

Honduras

   ü    ü

India

   ü    ü

Indonesia

   ü    ü

Jamaica

      ü

Japan

      ü

Kazakhstan

      ü

Korea

   ü    ü

Kuwait

   ü    ü

Latvia

      ü

Lebanon

   ü    ü

Malaysia

   ü    ü

Maldives

      ü

Mauritius

      ü

Mexico

      ü

Nepal

      ü

New Zealand

   ü   

Oman

   ü    ü

Pakistan

   ü   

Panama

   ü    ü

Peru

   ü   

Philippines

   ü   

Portugal

      ü

Qatar

   ü    ü

Russia

   ü    ü

Saudi Arabia

   ü    ü

Scotland

      ü

Singapore

   ü   

Sri Lanka

      ü

St. Maarten

      ü