S-1/A 1 ds1a.htm AMENDMENT NO.3 TO FORM S-1 Amendment No.3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 11, 2011

Registration No. 333-173898

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

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

 

Amount to be
Registered(1)

  Proposed Maximum
Offering Price
Per Share
 

Proposed

Maximum Aggregate
Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, $0.001 par value per share

  25,587,500   $18.00  

$460,575,000

 

$53,473

 
 

(1) Includes 3,337,500 shares of common stock issuable upon exercise of an option to purchase additional shares granted to the underwriters.

(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended, based upon an estimate of the maximum aggregate offering price.

(3) $46,440 was previously paid on May 4, 2011.

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 July 11, 2011

Prospectus

22,250,000 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 22,250,000 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 $16.00 and $18.00 per share. We have applied 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 3,337,500 shares of our common stock.

Investing in our common stock involves substantial risk. Please read “Risk factors” beginning on page 13.

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.

 

Baird   William Blair & Company   Raymond James
Stifel Nicolaus Weisel   Wells Fargo Securities   Moelis & Company
SMBC Nikko   Ramirez & Co., Inc.   The Williams Capital Group, L.P.

                    , 2011


Table of Contents

LOGO


Table of Contents

Table of contents

 

Prospectus summary

     1   

Risk factors

     13   

Cautionary note regarding forward-looking statements

     33   

The reclassification

     35   

Use of proceeds

     37   

Dividend policy

     38   

Capitalization

     39   

Dilution

     41   

Selected consolidated financial and other data

     43   

Unaudited pro forma condensed consolidated financial statements

     47   

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

     58   

Business

     83   

Management

     105   

Related party transactions

     142   

Description of indebtedness

     144   

Principal stockholders

     148   

Description of capital stock

     151   

Shares eligible for future sale

     155   

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

     157   

Underwriting

     161   

Legal matters

     169   

Experts

     169   

Where you can find more information

     170   

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.

 

 

 

i


Table of Contents

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, as reported by The NPD Group, Inc. as of such date. In addition, we refer to the Customer Loyalty Engagement IndexSM prepared by Brand Keys, Inc. (“Brand Keys”), a customer loyalty research and strategic planning consultancy. Brand Keys’ Customer Loyalty Engagement IndexSM is an annual syndicated study that currently examines customers’ relationships with 528 brands in 79 categories. 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.

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.

The reclassification

In connection with this offering, on July 8, 2011, we effected a 1-for-4.568 reverse split of our Class A common stock and then reclassified our Class A common stock into common stock. Immediately prior to this offering, we will convert each outstanding share of Class L common stock into approximately 0.2189 of a share of common stock plus an additional number of shares determined by dividing the per share Class L preference amount, currently estimated to be $38.77, 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. Unless otherwise indicated, all share data gives effect to the reclassification, including a conversion of all shares of our Class L common stock into shares of our common stock based upon such estimated Class L preference amount and the estimated offering-related expenses disclosed in this prospectus. See “The reclassification.”

 

ii


Table of Contents

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 information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares, unless otherwise noted.

Our company

We are one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin’ Donuts and Baskin-Robbins brands. With over 16,000 points of distribution in 57 countries, we believe that our portfolio has strong brand awareness in our key markets. 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 and South Korea. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service.

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.

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 years 2008, 2009 and 2010, we generated total revenues of $544.9 million, $538.1 million and $577.1 million, respectively, operating income (loss) of $(140.9) million, $184.5 million and $193.5 million, respectively and net income (loss) of $(269.9) million, $35.0 million and $26.9 million, respectively. Our net loss in 2008 included a pre-tax impairment charge of $328.5 million related to goodwill and trade name intangible assets, and our net income for fiscal year 2010 included a $62.0 million pre-tax loss on debt extinguishment primarily associated with our November 2010 refinancing transaction.

 

 

- 1 -


Table of Contents

Our history and recent accomplishments

Both of our brands have a rich heritage dating back to the 1940s. 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”).

We have experienced positive growth globally for both our Dunkin’ Donuts and Baskin-Robbins brands in systemwide sales in each of the last ten years. In addition, other than in 2007 with respect to Baskin-Robbins, we have experienced positive year over year growth globally for both of our Dunkin’ Donuts and Baskin-Robbins brands in points of distribution in each of the last 10 years. During this ten-year period 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. In 2008, 2009 and 2010, our Dunkin’ Donuts global points of distribution at year end totaled 8,835, 9,186 and 9,760, respectively. Dunkin’ Donuts systemwide sales for the same three years grew 5.0%, 2.7%, and 5.6%, respectively. In 2008, 2009, 2010, our Baskin-Robbins global points of distribution at year end totaled 6,013, 6,207 and 6,433, respectively. Baskin-Robbins systemwide sales for the same three years grew 5.1%, 9.8%, and 10.6%, respectively.

Our largest operating segment, Dunkin’ Donuts U.S. had experienced 45 consecutive quarters of positive comparable store sales growth until the first quarter of 2008. During fiscal 2008, 2009 and 2010, we believe we demonstrated comparable store sales resilience during the recession, and invested for future growth. These investments were in three key areas—expanding menu and marketing initiatives to drive comparable store sales growth, expanding our store development team and investing in proprietary tools to assess new store opportunities and increasing management resources for our international business. 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)

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 Baskin-Robbins U.S. operating segment, which represented approximately 7.4% of our total revenues in 2010, experienced decreased comparable stores sales in 2008, 2009 and 2010 of (2.2)%, (6.0)% and (5.2)%, respectively.

 

 

- 2 -


Table of Contents

Our competitive business strengths

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

Strong and established brands with leading market positions

We believe our Dunkin’ Donuts and Baskin-Robbins brands 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 (where respondents are provided with brand names and asked if they have heard of them) of approximately 95% in the U.S., and a growing presence overseas. For the fifth consecutive year, Dunkin’ Donuts was recognized in 2011 by Brand Keys, a customer satisfaction research company, as #1 in the U.S. on its Customer Loyalty Engagement IndexSM 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 a market share of 57% of total QSR coffee based on servings. 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 and South Korea.

Franchised business model provides a 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 with operational guidance from us. 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 an operating income margin of approximately 34% in fiscal 2010. For our domestic businesses, our revenues are largely derived from royalties based on a percentage of franchisee revenues rather than their net income, as well as contractual lease payments and other franchise fees.

Store-level economics generate franchisee demand for new Dunkin’ Donuts restaurants in the U.S.

In the U.S., new traditional format Dunkin’ Donuts stores opened during fiscal 2010, excluding gas and convenience locations, generated 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. While we do not directly benefit from improvements in store-level profitability, we believe that strong store level economics is important to our ability to attract and retain successful franchisees and grow our business. Of our fiscal 2010 openings and existing commitments, approximately 90% have been made by existing franchisees.

Highly experienced management team

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. Other key members of the

 

 

- 3 -


Table of Contents

management team have previously held senior positions at various leading QSR and public consumer and retail companies, including Starbucks Corporation, The Home Depot, McDonald’s, Procter & Gamble, Panera Bread Company and Au Bon Pain.

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 brand focused on coffee and other beverages, which products now represent approximately 60% of U.S. systemwide sales for fiscal 2010, and, we believe generate increased customer visits to our stores and higher unit volumes. We plan to increase our coffee and beverage revenue through continued new product innovations and related marketing, including 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 products like the Big ‘N Toasty and the Wake-Up Wrap®, 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 the afternoon daypart (between 2:00 p.m. and 5:00 p.m.).

Continue to develop 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 customers’ in-store experience, as well as to increase franchisee profitability, particularly through training programs and new technology. As evidence of our recent success in these areas, over 162,000 respondents, representing approximately 93% of all respondents, to our Guest Satisfaction Survey program in March 2011 rated their overall experience as “Satisfied” or “Highly Satisfied,” representing an all-time high.

 

 

- 4 -


Table of Contents

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. In fiscal 2010, we had 206 net new U.S. store openings. 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. We believe that our strategy of focusing on contiguous growth has the potential, over approximately the next 20 years, to more than double our current U.S. footprint and reach a total of 15,000 points of distribution in the U.S. 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 the near term, we intend to focus our development on other existing markets east of the Mississippi River. 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. Specifically, in the near-term, we intend to maintain a 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. In recent years, we have undertaken significant initiatives to further enhance store-level economics for our franchisees that we believe have further increased franchisee profitability. For example, we reduced the upfront capital expenditure costs to open an end-cap restaurant with a drive-thru by approximately 23% between fiscal 2008 and fiscal 2010. Additionally, between fiscal 2008 and the first quarter of fiscal 2011, we believe we have facilitated approximately $220 million in franchisee cost reductions primarily through strategic sourcing, as well as through other initiatives, such as rationalizing the number of product offerings to reduce waste and reducing costs on branded packaging by reducing the color mix in graphics. We believe that the majority of these cost savings represent sustainable improvements to our franchisees’ supply costs, with the remainder dependent upon the outcome of future supply contract re-negotiations, which typically occur every two to four years. However, there can be no assurance that these cost reductions will be sustainable in the future.

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.

 

 

- 5 -


Table of Contents

The key elements of our future international development strategy are:

Grow in our existing core markets. For the Dunkin’ Donuts brand, we intend to focus on growth in South Korea and the Middle East. For Baskin-Robbins, we intend to focus on Japan, South Korea, and key markets in the Middle East. In 2010, we had the #1 market share positions in the Fast Food Ice Cream category in Japan and South Korea.

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 with knowledge of local business practices and consumer preferences. We recently announced an agreement with an experienced QSR franchisee to enter the Indian market with our Dunkin’ Donuts brand with the development of at least 500 Dunkin’ Donuts restaurants throughout India, the first of which are expected to open by early 2012.

Further develop our franchisee support infrastructure. We plan to increase our focus on providing our international franchisees with operational tools and services such as native-language restaurant training programs and new international retail restaurant designs that can help them to efficiently operate in their markets and become more profitable.

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 and #1 position in the QSR industry for servings of hard serve ice cream. While the Baskin-Robbins U.S. segment has experienced decreasing comparable store sales in each of the last three years due primarily to increased competition and decreased consumer spending, and the number of Baskin-Robbins U.S. stores has decreased in each year since 2008, we believe that we can capitalize on the brand’s strengths and generate renewed excitement for the brand, including through our recently introduced “More Flavors, More FunTM” marketing campaign. In addition, at the restaurant level, we seek to improve sales by focusing on operational and service improvements as well as 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 senior industry roles. 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, over 6,700 respondents, representing approximately 87% of all respondents, to our Guest Satisfaction Survey program in March 2011 rated their overall experience as “Satisfied” or “Extremely Satisfied,” representing an all-time high.

Recent developments

Fiscal quarter ended June 25, 2011

We are in the process of finalizing our financial results for the fiscal quarter ended June 25, 2011. Based on available information to date, we expect to report total revenues for the fiscal quarter ended June 25, 2011 of between $155 million and $158 million, compared to $150.4 million for the fiscal quarter ended June 26, 2010; net income for the fiscal quarter ended June 25, 2011 of between $16.4 million and $17.4 million, compared to $17.3 million for the fiscal quarter ended June 26, 2010; Dunkin’ Donuts U.S. comparable store sales growth of between 3.5% and 4.0%, compared to 1.9% for the fiscal quarter ended June 26, 2010; Baskin-Robbins U.S. comparable store sales decrease of between (2.5)% and (3.2)%, compared to (5.1)% for the fiscal quarter ended June 26, 2010; total franchisee-reported sales of $2,128 million, compared to $1,988 million for the fiscal quarter ended June 26, 2010; and total systemwide sales growth of 6.9%, as compared to 6.4% for the fiscal quarter ended June 26, 2010.

 

 

- 6 -


Table of Contents

Dunkin’ Donuts U.S. net new store openings were 39 during the fiscal quarter ended June 25, 2011, compared to 42 Dunkin’ Donuts U.S. net new store openings during the fiscal quarter ended June 26, 2010. Internationally, our net new store openings during the fiscal quarter ended June 25, 2011 were 114, as compared to 285 net new store openings in the fiscal quarter ended June 26, 2010.

Our unaudited consolidated financial data for the fiscal quarter ended June 25, 2011 presented above within a range are preliminary, based upon our estimates and preliminary information provided to us by our franchisees and subject to completion of our financial closing procedures. All of the data presented above have been prepared by and are the responsibility of management or have been reported to us by our franchisees. Our independent registered public accounting firm, KPMG LLP, has not audited, reviewed, compiled or performed any procedures, and does not express an opinion or any other form of assurance with respect to any of such data. This summary is not a comprehensive statement of our financial results for the period and our actual results may differ materially from these estimates as a result of the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for this period are finalized, including receipt of additional information reported to us by our franchisees.

We have provided a range for the preliminary results described above primarily because our financial closing procedures for the fiscal quarter ended June 25, 2011 are not yet complete and we may receive further updated information reported to us by our franchisees and, as a result, we expect that our final results upon completion of our closing procedures and receipt of any additional information reported to us by our franchisees will be within the ranges described above. Data regarding comparable store sales growth or decrease, franchisee-reported sales and systemwide sales growth are not audited or reviewed by our independent registered public accounting firm.

Risk factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. 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. Among these important risks are the following:

 

 

As of March 26, 2011, on an as-adjusted basis after giving effect to this offering and the application of the net proceeds therefrom, we would have had total indebtedness of approximately $1.5 billion and our substantial debt could limit our ability to pursue our growth strategy;

 

 

our plans depend on initiatives designed to increase sales and improve the efficiencies, costs and effectiveness of our operations, and failure to achieve or sustain these plans could affect our performance adversely;

 

 

general economic factors and changes in consumer preference may adversely affect our performance;

 

 

we face competition that could limit our growth opportunities; and

 

 

our planned future growth will be impeded, which would adversely affect revenues, if our franchisees cannot open new domestic and international restaurants as anticipated.

 

 

- 7 -


Table of Contents

The Sponsors

Bain Capital Partners, LLC

Bain Capital, LLC is a global private investment firm headquartered in Boston whose affiliates, including Bain Capital Partners, manage several pools of capital including private equity, venture capital, public equity, high-yield assets and mezzanine capital with approximately $67 billion in assets under management. Since its inception in 1984, funds sponsored by Bain Capital have made private equity investments and add-on acquisitions in over 300 companies in a variety of industries around the world.

The Carlyle Group

Established in 1987, The Carlyle Group is a global alternative asset manager with $106.7 billion of assets under management committed to 84 funds as of December 31, 2010. Carlyle invests across three asset classes — corporate private equity, real assets and global market strategies — in Africa, Asia, Australia, Europe, North America and South America. Since its inception through December 31, 2010, Carlyle has invested $68.7 billion of equity in 1,035 transactions.

Thomas H. Lee Partners

Thomas H. Lee Partners is one of the world’s oldest and most experienced private equity firms. THL invests in growth-oriented companies, and focuses on global businesses headquartered primarily in North America. Since the firm’s founding in 1974, Thomas H. Lee Partners has acquired more than 100 portfolio companies and have completed over 200 add-on acquisitions, representing a combined value of more than $150 billion. The firm’s two most recent private equity funds comprise more than $14 billion of aggregate committed capital.

Upon completion of this offering, the Sponsors will continue to hold a controlling interest in us and will continue to have significant influence over us and decisions made by stockholders and may have interests that differ from yours. See “Risk factors—Risks related to this offering and 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.

 

 

- 8 -


Table of Contents

The offering

 

Common stock offered by us

22,250,000 shares (or 25,587,500 shares if the underwriters exercise their option to purchase additional shares in full)

 

Common stock to be outstanding immediately after completion of this offering

126,355,687 shares (or 129,693,187 shares if the underwriters exercise their option to purchase additional shares in full). For additional information regarding the impact of a change in the assumed initial public offering price on the number of shares outstanding after completion of this offering related to the conversion of our Class L common stock, see “The reclassification.”

 

Underwriters’ option to purchase additional shares

We have granted the underwriters a 30-day option to purchase up to an additional 3,337,500 shares.

 

Use of proceeds

We expect to receive net proceeds, after deducting estimated offering expenses and underwriting discounts and commissions, of approximately $348.4 million (or $401.4 million if the underwriters exercise their option to purchase additional shares in full), based on an assumed offering price of $17.00 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 additional $100 million of term loan borrowings, as described under “Description of indebtedness—Senior credit facility,” and available cash 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 $17.00 per share (the mid-point of the price range set forth on the cover of this prospectus)) and excludes 5,454,048 shares of our common stock issuable upon the exercise of outstanding options at a weighted average exercise price equal to $3.72 per share, of which options to purchase 530,171 shares were exercisable as of June 25, 2011, and an additional 7,000,000 shares of our common stock issuable under our 2011 Omnibus Long-Term Incentive Plan.

 

 

- 9 -


Table of Contents

Summary consolidated financial and other data

The following table sets forth our summary historical and unaudited pro forma 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 unaudited pro forma consolidated financial data for the year ended December 25, 2010 and for the three-month period ended March 26, 2011 have been derived from our historical financial statements for such year and period, which are included elsewhere in this prospectus, after giving effect to the transactions specified under “Unaudited pro forma condensed consolidated financial statements.” 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 and unaudited pro forma consolidated financial and other data should be read in conjunction with the disclosures set forth under “Capitalization,” “Unaudited pro forma condensed consolidated financial statements,” “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.

 

 

- 10 -


Table of Contents
     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   

Common—basic and diluted

  $ (8.95   $ (1.69   $ (2.04   $ (0.53   $ (0.51

Pro Forma Consolidated Statements of Operations Data(6):

         

Pro forma net income

      $ 90,427        $ 14,856   

Pro forma earnings per share:

         

Basic and diluted

      $ 0.72        $ 0.12   

Pro forma weighted average shares outstanding:

         

Basic

        125,002,165          125,104,446   

Diluted

        125,278,009          125,567,898   

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%   
   

 

 

- 11 -


Table of Contents
(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 year 2010 and the three months ended March 26, 2011 on a pro forma basis would have been approximately $71.5 million and $17.9 million, respectively. See “Unaudited pro forma condensed consolidated financial statements.”

 

(6)  

See “Unaudited pro forma condensed consolidated financial statements.”

 

(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.

 

 

- 12 -


Table of Contents

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. 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.

Sub-franchisees could take actions that could harm our business and that of our master franchisees.

In certain of our international markets, we enter into agreements with master franchisees that permit the master franchisee to develop and operate restaurants in defined geographic areas. As permitted by our master franchisee agreements, certain master franchisees elect to sub-franchise rights to develop and operate restaurants in the geographic area covered by the master franchisee agreement. Our master franchisee agreements contractually obligate our master franchisees to operate their restaurants in accordance with specified operations, safety and health standards and also require that any sub-franchise agreement contain similar requirements. However, we are not party to the agreements with the sub-franchisees and, as a result, are dependent upon our master franchisees to enforce these standards with respect to sub-franchised restaurants. As a result, the ultimate success and quality of any sub-franchised restaurant rests with the master franchisee. If sub-franchisees do not successfully operate their restaurants in a manner consistent with required standards, franchise fees and royalty income paid to the applicable master franchisee and, ultimately, to us could be adversely affected and our brand image and reputation may be harmed, which could materially and adversely affect our business and operating results.

 

- 13 -


Table of Contents

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 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

 

- 14 -


Table of Contents

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 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 the May 2011 $100 million increase in our term loan and the corresponding repayment of senior notes, this offering and the application of the net proceeds therefrom, 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;

 

- 15 -


Table of Contents
 

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.

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.

 

- 16 -


Table of Contents

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. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources,” and “Description of indebtedness.”

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 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.

 

- 17 -


Table of Contents

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.

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.

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.

 

- 18 -


Table of Contents

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 supply chain. In particular, the cost of commodity inputs for a number of goods, including ice cream and coffee, rose in fiscal 2010. 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,

 

- 19 -


Table of Contents

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.

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 a group of suppliers for ingredients, foodstuffs, beverages and disposable serving instruments including, but not limited to, Rich Products Corp., Dean Foods Co., PepsiCo, Inc. and Silver Pail Dairy, Ltd. as well as four primary coffee roasters and two primary donut mix suppliers. In 2010, we and our franchisees purchased products from over 450 approved domestic suppliers, with approximately 15 of such suppliers providing half, based on dollar volume, of all products purchased domestically. We look to approve multiple suppliers for most products, and require any single sourced supplier, such as PepsiCo, Inc., to have audited contingency plans in place to ensure continuity of supply. In addition we believe that, if necessary, we could obtain readily available alternative sources of supply for each product that we currently source through a single supplier. 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. We have a long-term agreement with the National DCP, LLC (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. We do not control the NDCP and have only limited contractual rights under our agreement with the NDCP associated with supplier certification and quality assurance and protection of our intellectual property. While the NDCP maintains contingency plans with its approved 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

 

- 20 -


Table of Contents

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.

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. In fiscal 2008, 2009 and 2010, we derived approximately 12.9%, 14. 1% and 14.6%, respectively, of our total revenues from master franchisee arrangements. 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.

 

- 21 -


Table of Contents

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.

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.

 

- 22 -


Table of Contents

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 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. As of March 26, 2011, less than 2% of our stores were operating without a written agreement. 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 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. Our international operations may be subject to additional risks related to litigation, including difficulties in enforcement of contractual obligations governed by foreign law due to differing interpretations of rights and obligations, compliance with multiple and potentially conflicting laws, new and potentially untested laws and judicial systems and reduced or diminished protection of intellectual property. 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

 

- 23 -


Table of Contents

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 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 or settle on should this position be denied (see Note 14 of the notes to our audited consolidated financial statements included elsewhere in this prospectus). As described in Note 14 of the notes to our audited consolidated financial statements included in this prospectus, if the IRS were to prevail in this matter the proposed adjustments would result in additional taxable income of approximately $58.9 million for fiscal years 2006 and 2007 and approximately $26.0 million of additional federal and state taxes and interest owed, net of federal and state benefits. If the IRS prevails, a cash payment would be required and the additional taxable income would represent temporary differences that will be deductible in future years.

 

- 24 -


Table of Contents

Therefore, the potential tax expense attributable to the IRS adjustments for 2006 and 2007 would be limited to $2.1 million, consisting of federal and state interest, net of federal and state benefits. In addition, if the IRS were to prevail in respect of fiscal years 2006 and 2007 it is likely to make similar claims for years subsequent to fiscal 2007 and the potential additional federal and state taxes and interest owed, net of federal and state benefits, for fiscal years 2008, 2009 and 2010, computed on a similar basis to the IRS method used for fiscal years 2006 and 2007, and factoring in for the timing of our gift card uses and activations, would be approximately $19.2 million. The corresponding potential tax expense impact attributable to these later fiscal years, 2008 through 2010, would be approximately $0.3 million. 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.

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

 

- 25 -


Table of Contents

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 general liability insurance coverage to protect against the risk of product liability and other risks 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 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.

 

- 26 -


Table of Contents

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 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.

 

- 27 -


Table of Contents

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 compensation committee will not consist entirely of independent directors and the board committees will not be subject to annual performance evaluations. In addition, we will not have a nominating and corporate governance committee. 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. LLC. 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.

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;

 

- 28 -


Table of Contents
 

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.

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 126,355,687 shares of common stock outstanding. There will be 129,693,187 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 78.2% of our outstanding common stock (or approximately 76.2% 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. LLC on behalf of the underwriters which regulates their sales of our common stock for a period of

 

- 29 -


Table of Contents

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, subject to the provisions of Rule 144 and Rule 701.

 

Number of Shares   Date Available for Resale
1,178,890   On the date of this offering (            , 2011)

102,926,797

  180 days after this offering (             , 2012), 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 Long-Term Incentive Plan. For more information, see “Shares eligible for future sale—Registration statements on form S-8.”

Certain participants in our directed share program must hold their shares for a minimum of 180 days following the date of the final prospectus related to this offering and accordingly will be subject to market risks not imposed on other investors in the offering.

At our request, the underwriters have reserved up to 1,335,000 shares of the common stock offered hereby for sale to our employees and franchisees. Purchasers of these shares who have entered into a lockup agreement with the underwriters in connection with this offering, which generally includes our officers, directors and significant stockholders, will be required to agree that they will not, subject to exceptions, offer, sell, contract to sell or otherwise dispose of or hedge any such shares for a period of 180 days after the date of the final prospectus relating to this offering, subject to certain specified extensions. As a result of such restriction, such purchasers may face risks not faced by other investors who have the right to sell their shares at any time following the offering. These risks include the market risk of holding our shares during the period that such restrictions are in effect. In addition, the price of our common stock may be adversely affected following expiration of the lockup period if there is an increase in the number of shares for sale in the market.

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

 

- 30 -


Table of Contents

has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquiror. Our certificate of incorporation also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock other than the Sponsors. 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 of $(31.15) per share as of March 26, 2011 based on an assumed initial public offering price of $17.00 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.”

Because certain of our officers hold restricted stock or option awards that will vest upon a change of control if the Sponsors achieve certain minimum rates of return on their initial investment in us, these officers may have interests in us that conflict with yours.

Certain of our officers hold, in the aggregate, 541,310 shares of restricted stock and options to purchase 2,671,728 shares that are subject to vesting upon a change of control if the Sponsors achieve certain minimum rates of return on their initial investment in us. See “Management—Potential payments upon termination or change in control—Change in control” for additional information regarding the required minimum rate of return. As a result, these officers may view certain change of control transactions more favorably than an investor in this offering due to the vesting opportunities available to them and, as a result, may have an economic incentive to support a transaction that you may not believe to be favorable to stockholders who purchased shares in this offering.

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 approximately 78.2% of our outstanding common stock (approximately 76.2% if the underwriters exercise in full the option to purchase additional shares 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

 

- 31 -


Table of Contents

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. 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.

 

- 32 -


Table of Contents

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;

 

 

our master franchisees’ relationships with sub-franchisees;

 

 

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;

 

- 33 -


Table of Contents
 

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.

 

- 34 -


Table of Contents

The reclassification

In connection with this offering, on July 8, 2011, we effected a 1-for-4.568 reverse split of our Class A common stock and then reclassified our Class A common stock into 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 ($41.7516) 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 approximately 0.2189 of a 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 $38.77, 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. The estimated Class L preference amount is based upon an assumed pricing date for this offering of July 20, 2011. To the extent that the pricing date for this offering occurs before or after such date, the Class L preference amount per share will be less or more, as applicable, than such estimated amount by approximately $0.01 per day. The estimated Class L preference amount of $38.77 based on the assumed initial public offering date of July 20, 2011 is calculated as follows:

 

Class L base amount as of March 1, 2006 (1)

  $ 41.7516   

Accumulated dividends at 9% per annum, compounded quarterly, as of July 20, 2011

    22.8742   

Less: Dividends paid on Class L shares (2)

    (25.8558
       

Class L preference amount as of July 20, 2011

  $ 38.7700   

 

(1)   Represents the initial Class L base amount specified in our certificate of incorporation at the time of the initial issuance of the shares of Class L common stock.

 

(2)   Represents cumulative dividends paid per Class L share, consisting of a $90.0 million dividend paid on November 1, 2007 and a $500.0 million dividend paid on December 3, 2010.

References to the “reclassification” throughout this prospectus refer to the 1-for-4.568 reverse stock split of our Class A common stock, the reclassification of our Class A common stock into our common stock and the conversion of our Class L common stock into our common stock.

Assuming an initial public offering price of $17.00 per share, which is the midpoint of the range set forth on the front cover of this prospectus, offering-related expenses incurred by us as specified under “Underwriting” of $5,268,500, and the Class L preference amount specified above, 104,105,687 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, the offering-related expenses incurred by us and the closing date of this offering. See “Description of capital stock.”

 

- 35 -


Table of Contents

Because the number of shares of common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would have a corresponding impact on the number of outstanding shares of common stock presented in this prospectus after giving effect to this offering. The following number of shares of our common stock would be outstanding immediately after the reclassification but before this offering, assuming the initial public offering prices for our common stock shown below and assuming the offering related-expenses and the Class L preference amount specified above:

 

      $15.00      $16.00      $17.00      $18.00      $19.00  

Class L conversion factor (1)

     3.0304         2.8527         2.6946         2.5559         2.4306   

Shares outstanding (2)

     111,782,460         107,720,796         104,105,687         100,932,192         98,066,740   

 

(1)   The Class L conversion factor is affected by changes in offering expenses at each offering price, specifically the estimated underwriting discount, which is based on a percentage of the total offering proceeds. No other offering expenses are affected by changes in the offering price.

 

(2)   For additional information regarding the impact of a change in the assumed initial public offering price on the number of shares outstanding, see Note 6 to our unaudited pro forma condensed consolidated financial statements included below under “Unaudited pro forma condensed consolidated financial statements.”

 

- 36 -


Table of Contents

Use of proceeds

We estimate that the net proceeds we will receive from the sale of the shares of our common stock in this offering, after deducting underwriter discounts and commissions and estimated expenses payable by us, will be approximately $348.4 million (or $401.4 million, if the underwriters exercise their option to purchase additional shares in full). This estimate assumes an initial public offering price of $17.00 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 $17.00 per share would increase (decrease) the net proceeds to us from this offering by $20.8 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,” and available cash 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.

 

- 37 -


Table of Contents

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.

 

- 38 -


Table of Contents

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 additional $100 million in term loan borrowings and corresponding repayment of senior notes, 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 consolidated financial and other data,” “Unaudited pro forma condensed consolidated financial statements,” “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         $ 56,646   
          

Long-term debt, including current portion;

         

Revolving credit facility(3)

     $         $   

Term loan facility

       1,394,146           1,494,146   

Capital leases

       5,316           5,316   
          

Total secured debt

       1,399,462           1,499,462   

9 5/8% senior notes

       468,072             
          

Total long-term debt

       1,867,534           1,499,462   
          

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; 25,000,000 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 43,044,440 shares issued and outstanding on an actual basis; 475,000,000 shares authorized and 126,468,145 shares issued and outstanding on an as adjusted basis(4)

       192           126   

Additional paid-in capital

       196,245           1,419,355   

Treasury stock, at cost

       (1,919        (10,384

Accumulated deficit(5)

       (762,469        (788,362

Accumulated other comprehensive income

       18,584           18,584   
          

Total stockholders’ equity (deficit)

       (549,367        639,319   
          

Total capitalization

     $ 2,180,351         $ 2,138,781   
   

 

- 39 -


Table of Contents
(1)   Actual amount includes an aggregate of $69.3 million of cash held for advertising funds or reserved for gift card/certificate programs. As of June 25, 2011 and at the time of the initial public offering, we expect to have as adjusted cash and cash equivalents that exceed the amount held for advertising funds and reserved for gift card/certificate programs.

 

(2)   A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share of our common stock would increase (decrease) our as adjusted cash and cash equivalents by $20.8 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)   The number of shares issued and outstanding on an as adjusted basis includes a net of 112,458 shares (on an as adjusted basis) that have ceased to be outstanding after March 26, 2011.

 

(5)  

The as adjusted amount reflects the loss on debt extinguishment to be recorded in connection with the repayment of the senior notes, fees expensed in connection with the additional $100.0 million term loan borrowings, and the termination fee related to the management agreement with the Sponsors, all of which are net of tax benefits. See “Unaudited pro forma condensed consolidated financial statements.”

 

- 40 -


Table of Contents

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 by the number of outstanding shares of our common stock.

Our net tangible book value deficiency at March 26, 2011 was approximately $(2.1) billion, or $(20.58) per share of our common stock pro forma for the reclassification but before giving effect to this offering. Pro forma net tangible book value deficiency per share before the offering has been determined by dividing net tangible book value (total book value of tangible assets, which excludes goodwill, net intangible assets and deferred financing costs, less total liabilities, which excludes unfavorable operating leases acquired) 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 deficiency per share represents the difference between the amount per share that you pay in this offering and the net tangible book value deficiency 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 $17.00 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 deficiency at March 26, 2011 would have been approximately $(1.8) billion, or $(14.15) per share of common stock. This represents an immediate decrease in net tangible book value deficiency per share of $6.43 to existing stockholders and an immediate increase in net tangible book value deficiency per share of $(31.15) to you. The following table illustrates this dilution per share.

 

                 

Assumed initial public offering price per share of common stock

     $ 17.00   

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

   $ (20.58  

Increase per share attributable to new investors in this offering

     6.43     
          

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

     $ (14.15
          

Dilution per share to new investors

     $ (31.15
   

If the underwriters exercise their option to purchase additional shares in full to purchase additional shares, the pro forma as adjusted net tangible book value deficiency per share of our common stock after giving effect to this offering would be $(13.37) per share of our common stock. This represents a decrease in pro forma as adjusted net tangible book value deficiency of $7.21 per share of our common stock to existing stockholders and dilution in pro forma as adjusted net tangible book value deficiency of $(30.37) per share of our common stock to you.

A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share of our common stock would decrease (increase) our pro forma net tangible book value deficiency after giving effect to the offering by $20.8 million, 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. Because the number of shares of common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would also have a corresponding impact on our pro forma net

 

- 41 -


Table of Contents

tangible book value deficiency per share of common stock. Our pro forma net tangible book value deficiency per share of common stock would have been the following at March 26, 2011 assuming the initial public offering prices for our common stock shown below:

 

$15.00   $16.00   $17.00   $18.00   $19.00
                 

$(13.64)

  $(13.91)   $(14.15)   $(14.34)   $(14.52)
                 

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 (1)(2)

     104,120,255         82%       $ 1,061,234,709         74%       $ 10.19   

New investors

     22,250,000         18         378,250,000         26         17.00   
        

Total

     126,370,255         100%       $ 1,439,484,709         100%      
   

 

(1)   Shares purchased by existing stockholders is determined as follows:

 

Class L shares issued and outstanding as of March 26, 2011

     23,060,006   

Less: Class L treasury shares as of March 26, 2011

     (190,362
        

Net Class L shares outstanding as of March 26, 2011

     22,869,644   

Class L conversion factor (a)

     2.6946   
        

Converted net Class L shares as of March 26, 2011

     61,625,654   

Common shares issued and outstanding as of March 26, 2011

     43,044,440   

Less: Common treasury shares as of March 26, 2011

     (549,839
        

Total common shares purchased by existing stockholders

     104,120,255   

 

  (a)   See note 6 to the unaudited pro forma consolidated statement of operations for the fiscal year ended December 25, 2010 for computation of the Class L conversion factor and related assumptions.

Because the number of shares of common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would have a corresponding impact on the number of shares purchased by existing stockholders. The number of shares purchased by existing stockholders would have been the following as of March 26, 2011 assuming the initial public offering prices for our common stock shown below:

 

      $15.00      $16.00      $17.00      $18.00      $19.00  

Class L conversion factor (a)

     3.0304         2.8527         2.6946         2.5559         2.4306   

Shares purchased by existing stockholders

     111,798,126         107,735,881         104,120,255         100,946,305         98,080,447   

Percent of total shares purchased by existing stockholders

     83%         83%         82%         82%         82%   
   

 

  (a)   The Class L conversion factor is affected by changes in offering expenses at each offering price, specifically the estimated underwriting discount, which is based on a percentage of the total offering proceeds. No other offering expenses are affected by changes in the offering price.

 

(2)   Total consideration excludes the return of cumulative dividends paid to existing stockholders of $590.0 million.

If the underwriters were to fully exercise their 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 80%, and the percentage of shares of our common stock held by new investors would be 20%.

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.

 

- 42 -


Table of Contents

Selected consolidated financial and other data

The following table sets forth our selected historical and unaudited pro forma 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 unaudited pro forma consolidated financial data for the year ended December 25, 2010 and for the three-month period ended March 26, 2011 have been derived from our historical financial statements for such year and period, which are included elsewhere in this prospectus, after giving effect to the transactions specified under “Unaudited pro forma condensed consolidated financial statements.” 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 and unaudited pro forma consolidated financial and other data should be read in conjunction with the disclosure set forth under “Capitalization,” “Unaudited pro forma condensed consolidated financial statements,” “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.

 

- 43 -


Table of Contents
     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   

Common—basic and diluted

  $ (4.09   $ (1.48   $ (8.95   $ (1.69   $ (2.04   $ (0.53   $ (0.51

Pro Forma Consolidated Statements of Operations Data(8):

             

Pro forma net income

          $ 90,427        $ 14,856   

Pro forma earnings per share:

             

Basic and diluted

          $ 0.72        $ 0.12   

Pro forma weighted average shares outstanding:

             

Basic

            125,002,165          125,104,446   

Diluted

            125,278,009          125,567,898   

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   
   

 

- 44 -


Table of Contents
    

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.

 

(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.

 

- 45 -


Table of Contents
(6)   Interest expense, net, for fiscal year 2010 and the three months ended March 26, 2011 on a pro forma basis would have been approximately $71.5 million and $17.9 million, respectively. See “Unaudited pro forma condensed consolidated financial statements.”

 

(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)   See “Unaudited pro forma condensed consolidated financial statements.”

 

(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.

 

- 46 -


Table of Contents

Unaudited pro forma condensed consolidated financial statements

The following unaudited pro forma condensed consolidated financial statements of Dunkin’ Brands Group, Inc. at March 26, 2011, for the fiscal year ended December 25, 2010, and for the three months ended March 26, 2011, are based on historical consolidated financial statements of Dunkin’ Brands Group, Inc., which are included elsewhere in this prospectus.

The unaudited pro forma condensed consolidated balance sheet at March 26, 2011 gives effect to (a) the issuance of common stock in this offering and the application of the net proceeds therefrom as described in “Use of proceeds,” (b) the conversion of our Class L common stock into our common stock, as described in “The reclassification,” (c) the termination of our management agreement with the Sponsors in connection with this offering, and (d) the additional $100.0 million in term loan borrowings received by us in May 2011 and the corresponding repayment of an equal amount of senior notes, as if each had occurred on March 26, 2011.

The unaudited pro forma consolidated statement of operations for the fiscal year ended December 25, 2010 gives effect to (a) adjustments to interest expense as a result of the November 2010 refinancing, the February 2011 re-pricing transaction, a $100.0 million increase in term loans outstanding and the corresponding repayment of an equal amount of senior notes, and the repayment of the remaining outstanding amount of senior notes from the proceeds of this offering and (b) the termination of our management agreement with the Sponsors in connection with this offering, as if each had occurred on the first day of fiscal year 2010.

The unaudited pro forma consolidated statement of operations for the three months ended March 26, 2011 gives effect to (a) adjustments to interest expense as a result of the February 2011 re-pricing transaction, a $100.0 million increase in term loans outstanding and the corresponding repayment of an equal amount of senior notes, and the repayment of the remaining outstanding amount of senior notes from the proceeds of this offering and (b) 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 first fiscal quarter of 2011.

The unaudited pro forma condensed consolidated financial statements are presented for informational purposes only and do not purport to represent what the actual financial condition or results of operations of Dunkin’ Brands Group, Inc. would have been if such transactions had been completed as of the dates or for the periods indicated above or that may be achieved as of any future date or for any future period. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the accompanying notes, “Management’s discussion and analysis of financial condition and results of operations,” and the historical consolidated financial statements and accompanying notes of Dunkin’ Brands Group, Inc., included elsewhere in this prospectus.

 

- 47 -


Table of Contents

Unaudited Pro Forma Condensed Consolidated Balance Sheet

March 26, 2011

(In thousands)

 

                          Adjustments for Other Transactions         
               
    Historical
As Reported
March 26, 2011
    Adjustments
Related to
the Offering
   

Pro Forma for
the Offering

March 26, 2011

    Reclassification
of Common
Stock
    Termination
of Sponsor
Management
Agreement
    $100M
Term Loan
Borrowing
   

Pro Forma for

the Offering and

Other Transactions

March 26, 2011

 
   

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 120,508        (40,781 )(1)      79,727               (14,000 )(10)      (9,081 )(14)      56,646   

Prepaid income taxes

    11,767        6,582 (2)      18,349               5,800 (11)      3,281 (15)      27,430   

Other current assets

    115,905               115,905               (500 )(12)             115,405   
       

Total current assets

    248,180        (34,199     213,981               (8,700     (5,800     199,481   

Goodwill

    888,675               888,675                             888,675   

Other intangible assets, net

    1,528,752               1,528,752                             1,528,752   

Other assets

    449,570        (9,110 )(3)      440,460                      (2,430 )(16)      438,030   
       

Total assets

  $ 3,115,177        (43,309     3,071,868               (8,700     (8,230     3,054,938   
       

Liabilities, Common Stock, and Stockholders’ Equity (Deficit)

             

Current liabilities:

             

Current portion of long-term debt

  $ 14,000               14,000                      1,000 (17)      15,000   

Other current liabilities

    225,394        (12,301 )(4)      213,093                      (4,768 )(18)      208,325   
       

Total current liabilities

    239,394        (12,301     227,093                      (3,768     223,325   
       

Long-term debt, net

    1,848,218        (369,531 )(5)      1,478,687                      459 (19)      1,479,146   

Deferred income taxes, net

    587,124        (1,600 )(6)      585,524                             585,524   

Other long-term liabilities

    127,624               127,624                             127,624   
       

Total long-term liabilities

    2,562,966        (371,131     2,191,835                      459        2,192,294   
       

Common stock, Class L

    862,184               862,184        (862,184 )(9)                      

Stockholders’ equity (deficit):

             

Common stock

    42        22 (7)      64        62 (9)                    126   

Additional paid-in capital

    196,395        352,373 (7)      548,768        870,587 (9)                    1,419,355   

Treasury stock, at cost

    (1,919            (1,919     (8,465 )(9)                    (10,384

Accumulated deficit

    (762,469     (12,272 )(8)      (774,741            (8,700 )(13)      (4,921 )(20)      (788,362

Accumulated other comprehensive income

    18,584               18,584                             18,584   
       

Total stockholders’ equity (deficit)

    (549,367     340,123        (209,244     862,184        (8,700     (4,921     639,319   
       

Total liabilities, common stock, and stockholders’ equity (deficit)

  $ 3,115,177        (43,309     3,071,868               (8,700     (8,230     3,054,938   
       

 

- 48 -


Table of Contents

Adjustments Related to the Offering

 

(1)   To reflect adjustments made to cash for the following:

 

Proceeds from this offering

   $ 378,250   

Less: estimated fees and expenses related to this offering

     (29,855

Less: repayment of Senior Notes

     (375,000

Less: payment of accrued interest on $375.0 million of Senior Notes as of March 26, 2011

     (12,301

Less: prepayment premium due upon repayment of $375.0 million of Senior Notes

     (1,875
        
   $ (40,781
        

 

(2)   To adjust prepaid income taxes to reflect the recording of a tax benefit related to the loss on debt extinguishment, as calculated in note 8 below, calculated at an estimated statutory tax rate of 40.0%.

 

(3)   To reflect the write-off of deferred financing costs in connection with the repayment of the Senior Notes.

 

(4)   To reflect the payment of accrued interest of $12.3 million related to $375.0 million of Senior Notes as of March 26, 2011.

 

(5)   To reflect the repayment of Senior Notes with a face amount of $375.0 million, net of unamortized original issue discount of $5.5 million.

 

(6)   To reflect the reduction of deferred tax liability, net, at an estimated statutory tax rate of 40.0% related to share-based compensation expense calculated in note 7(c) below.

 

(7)   The adjustments to additional paid-in capital are summarized as follows:

 

Proceeds from this offering (a)

   $ 378,250   

Less: estimated fees and expenses related to this offering

     (29,855
        

Net proceeds from this offering

     348,395   

Less: Par value of common stock issued in this offering (b)

     (22
        

Additional paid-in capital on shares issued in this offering

     348,373   

Incremental share-based compensation expense (c)

     4,000   
        

Total adjustment to additional paid-in capital

   $ 352,373   
        

 

  (a)   To reflect the issuance of 22,250,000 shares of the Company’s common stock offered hereby at an assumed initial public offering price of $17.00 per share (the midpoint of the range set forth on the cover of this prospectus).

 

  (b)   To reflect the reclassification to common stock of the par value of $0.001 per share for the 22,250,000 shares issued in this offering.

 

  (c)   To reflect approximately $4 million of additional share-based compensation expense expected to be recorded upon completion of this offering related to approximately 0.9 million restricted shares granted to employees that were not eligible to vest until completion of an initial public offering or change of control. See “Management-Compensation discussion and analysis-Change in control.” The weighted average grant date fair value of these restricted shares is approximately $4.36 per share, which was determined utilizing Monte Carlo simulations and the value of the underlying common stock on the dates of grant.

 

(8)   To reflect a $9.9 million after-tax loss on debt extinguishment and $2.4 million after-tax share-based compensation expense, as shown below:

 

  (a)   The $9.9 million after-tax loss on debt extinguishment to be recorded in connection with the repayment of $375.0 million of Senior Notes consists of the following:

 

Write-off of deferred financing costs related to the Senior Notes

   $ (9,110

Write-off of original issue discount related to the Senior Notes

     (5,469

Prepayment premium due upon repayment of the Senior Notes

     (1,875
        

Loss on debt extinguishment before income taxes

     (16,454

Tax benefit at an estimated statutory tax rate of 40.0%

     6,582   
        

Loss on debt extinguishment after income taxes

   $ (9,872
        

 

  (b)   The $2.4 million after-tax share-based compensation expense consists of $4.0 million pre-tax share-based compensation expense as discussed in note 7(c), net of a deferred tax benefit of $1.6 million calculated at an estimated statutory tax rate of 40.0%.

Reclassification of Common Stock

 

(9)   To reflect the conversion of Class L common stock to common stock based on its preferential distribution amount. See “The reclassification.” The conversion of Class L common stock to common stock includes the conversion of Class L common treasury stock into common treasury stock of $8.5 million representing historical Class L common stock held in treasury at the shares’ reacquisition cost. The adjustment to common stock is calculated as follows:

 

Class L shares outstanding as of March 26, 2011

     23,060,006   

Class L conversion factor(a)

     2.6946   
        

Converted Class L shares as of March 26, 2011

     62,138,611   

Par value per share

   $ 0.001   
        

Converted Class L shares, par value (in thousands)

   $ 62   
        

 

  (a)   See note 6 to the unaudited pro forma consolidated statement of operations for the fiscal year ended December 25, 2010 for computation of the Class L conversion factor and related assumptions.

 

- 49 -


Table of Contents
       The adjustment to additional paid-in capital is calculated as follows (in thousands):

 

Conversion of Class L common stock at redemption value as of March 26, 2011

   $ 862,184   

Plus: Class L treasury stock (190,362 shares) at reacquisition cost, reclassified to common treasury stock

     8,465   
        

Value of converted Class L common stock

     870,649   

Less: Par value of converted Class L common stock (62,138,611 shares at $0.001 par value per share)

     (62
        

Adjustment to additional paid-in capital

   $ 870,587   
        

Termination of Sponsor Management Agreement

 

(10)   To reflect cash that will be paid to terminate the management agreement with the Sponsors in connection with this offering of approximately $14.0 million, which is equal to the net present value of the aggregate amount of the $3.0 million annual management fee that would have been payable in each of the five years following such termination less amounts prepaid at March 26, 2011.

 

(11)   To adjust prepaid income taxes to reflect a tax benefit of $5.8 million related to the recognition of the termination fee for the management agreement with the Sponsors, calculated at an estimated statutory tax rate of 40.0%. See note 13.

 

(12)   To reflect a reduction in prepaid expenses of $500,000 for prepaid Sponsor management fees as of March 26, 2011.

 

(13)   To reflect the expense for the $14.5 million termination fee related to the management agreement with the Sponsors, net of a tax benefit of $5.8 million calculated using an estimated statutory tax rate of 40.0%.

$100 Million Term Loan Borrowing

 

(14)   To reflect the net decrease in cash as a result of the repayment of $100.0 million of Senior Notes, offset by an increase in cash as a result of the additional term loan borrowing. The adjustments made to cash are as follows:

 

Proceeds from the additional term loan borrowing

   $ 100,000   

Less: payment of accrued interest on the term loan as of March 26, 2011

     (1,488

Less: estimated fees associated with the additional term loan borrowing

     (3,813

Less: repayment of Senior Notes

     (100,000

Less: payment of accrued interest on $100.0 million of Senior Notes as of March 26, 2011

     (3,280

Less: prepayment premium due upon repayment of $100.0 million of Senior Notes

     (500
        
   $ (9,081
        

 

(15)   To adjust prepaid income taxes to reflect the recording of a tax benefit related to the loss on debt extinguishment, as calculated in note 20 below, calculated at an estimated statutory tax rate of 40.0%.

 

(16)   To reflect the write-off of deferred financing costs in connection with the repayment of the Senior Notes.

 

(17)   To reflect the current portion of long-term debt related to the additional term loan borrowing as the term loan requires the Company to make annual principal payments of 1% of the original principal amount.

 

(18)   To reflect the payment of accrued interest related to the term loan and accrued interest related to $100.0 million of the Senior Notes as of March 26, 2011.

 

(19)   To reflect the $100.0 million of additional term loan borrowings, net of $1.0 million classified within the current portion of long-term debt, offset by the repayment of Senior Notes with a face amount of $100.0 million, net of original issue discount of $1.5 million.

 

(20)   To reflect the loss on debt extinguishment to be recorded in connection with the repayment of the Senior Notes and the fees expensed in connection with the additional term loan borrowings. The adjustments consist of the following:

 

Write-off of deferred financing costs related to the Senior Notes

   $ (2,430

Write-off of original issue discount related to $100.0 million of Senior Notes

     (1,459

Prepayment premium due upon repayment of $100.0 million of Senior Notes

     (500

Estimated fees associated with the additional term loan borrowings

     (3,813
        

Loss on debt extinguishment and refinancing transaction before income taxes

     (8,202

Tax benefit at an estimated statutory tax rate of 40.0%

     3,281   
        

Loss on debt extinguishment and refinancing transaction after income taxes

   $ (4,921
        

 

- 50 -


Table of Contents

Unaudited Pro Forma Consolidated Statement of Operations

Fiscal Year Ended December 25, 2010

(In thousands, except share and per share amounts)

 

                          Adjustments for Other
Transactions
        
    Historical
As Reported
Fiscal Year
Ended
December 25,
2010
    Adjustments
Related to
the Offering
    Pro Forma
for the
Offering
December 25,
2010
    Termination
of Sponsor
Management
Agreement
    Refinancing
and Debt-
Related
Transactions
    Pro Forma
Fiscal Year
Ended
December 25,
2010
 
   

Revenues:

           

Franchise fees and royalty income

  $ 359,927               359,927                      359,927   

Rental income

    91,102               91,102                      91,102   

Sales of ice cream products

    84,989               84,989                      84,989   

Other revenues

    41,117               41,117                      41,117   
       

Total revenues

    577,135               577,135                      577,135   
       

Operating costs and expenses:

           

Occupancy expenses – franchised restaurants

    53,739               53,739                      53,739   

Cost of ice cream products

    59,175               59,175                      59,175   

General and administrative expenses, net

    223,620               223,620        (3,000 )(3)             220,620   

Depreciation and amortization

    57,826               57,826                      57,826   

Other impairment charges

    7,075               7,075                      7,075   
       

Total operating costs and expenses

    401,435               401,435        (3,000            398,435   

Equity in net income of joint ventures

    17,825               17,825                      17,825   
       

Operating income

    193,525               193,525        3,000               196,525   
       

Other income (expense):

           

Interest income

    305               305                      305   

Interest expense

    (112,837     29,783 (1)      (83,054            11,206 (4)      (71,848

Loss on debt extinguishment

    (61,955            (61,955            61,955 (5)        

Other income, net

    408               408                      408   
       

Total other expense

    (174,079     29,783        (144,296            73,161        (71,135
       

Income before income taxes

    19,446        29,783        49,229        3,000        73,161        125,390   

Provision (benefit) for income taxes

    (7,415     11,913 (2)      4,498        1,200 (2)      29,265 (2)      34,963   
       

Net income

  $ 26,861        17,870        44,731        1,800        43,896        90,427   
       

Pro forma earnings per share:

           

Basic and diluted

            $ 0.72 (6) 

Pro forma weighted average common shares outstanding:

           

Basic

              125,002,165 (6) 

Diluted

              125,278,009 (6) 
       

 

(1)  

As of the beginning of fiscal year 2010, the Company’s outstanding debt consisted of $1.35 billion of A-2 Notes at a fixed rate of 5.779% and $100.0 million of M-1 Notes at a fixed rate of 8.285%, all of which related to a securitized borrowing consummated in 2006. Had the offering occurred on the first day of fiscal year 2010, the Company would have used the proceeds to repay $375.0 million of A-2 Notes. Subsequently, when the Company refinanced the securitization debt in November 2010, the outstanding securitization debt balance would have been $375.0 million lower. As the securitization debt would have been $375.0 million lower at the time of the refinancing, the pro forma adjustments assume

 

- 51 -


Table of Contents
 

that the Company would have issued $375.0 million less in Senior Notes, resulting in the issuance of $250.0 million of Senior Notes rather than the $625.0 million that was actually issued in November 2010. The adjustments related to the offering reflect the reduction of interest expense resulting from the pro forma repayment of $375.0 million of A-2 Notes, as well as the reduction in interest expense due to the issuance of $250.0 million of Senior Notes rather than $625.0 million. The pro forma adjustments to historical interest expense related to the offering are as follows:

 

Interest Expense:    Historical As
Reported
Fiscal Year
Ended
December 25,
2010
     Adjustments
Related to
the Offering
    Pro Forma
for the
Offering
December 25,
2010
 
   

Securitization indebtedness

   $ 92,988         (24,755 )(a)      68,233   

Senior Notes

     5,456         (3,309 )(b)      2,147   

Term loan borrowings

     6,589                6,589   

Revolving credit facility

     74                74   

Deferred financing fees and original issue discount

     6,523         (1,719 )(c)      4,804   

Capital leases

     505                505   

Other

     702                702   
        
   $ 112,837         (29,783     83,054   
        

 

  (a)   Reduction of historical interest expense related to $375.0 million of securitization debt that was incurred from the beginning of fiscal year 2010 through the date of repayment of the securitization debt as part of the debt refinancing in November 2010. The pro forma adjustment reflects the use of proceeds of the offering to repay $375.0 million of A-2 Notes as if the offering occurred on the first day of fiscal year 2010. The adjustment to interest expense is calculated at an annual rate of 5.779% plus premium payments to Ambac, who unconditionally and irrevocably guaranteed the A-2 Notes, at an annual rate of 1.0% through April 15, 2010 and an annual rate of 1.25% thereafter.

 

  (b)   Elimination of historical interest expense related to $375.0 million of Senior Notes that was incurred from the date of issuance in November 2010 through the end of fiscal year 2010. The adjustment assumes the elimination of $375.0 million of Senior Notes outstanding for approximately 33 days during fiscal year 2010 at an annual rate of 9.625%.

 

  (c)   Reduce amortization of deferred financing costs and original issue discount in connection with the transactions discussed in (a) and (b) above, which resulted in the elimination of $1.6 million of amortization related to the securitization debt, and the elimination of $0.1 million of amortization related to the Senior Notes.

 

(2)   To reflect the tax effect of the pro forma adjustments at an estimated statutory tax rate of 40.0%.

 

(3)   To reflect a reduction of $3.0 million annually as a result of the termination of the management agreement with the Sponsors. Upon completion of this offering, we expect to incur an expense of approximately $14.5 million within general and administrative expenses and a corresponding tax benefit of $5.8 million related to the termination of the Sponsor management agreement, which have been excluded from the pro forma statement of operations. Additionally, the Company expects to record additional share-based compensation expense of approximately $4.0 million and a corresponding tax benefit of $1.6 million upon completion of this offering, related to restricted shares granted to employees that were not eligible to vest until completion of an initial public offering or change of control, which were excluded from the pro forma statement of operations. See “Management-Compensation discussion and analysis-Change in control.”

 

(4)   The adjustments related to the refinancing and debt-related transactions reflect the impact on interest expense as if the November 2010 refinancing and additional term loan borrowings in February 2011 and May 2011 were used to fully repay the securitization indebtedness of $971.3 million and outstanding $250.0 million of Senior Notes, after giving effect to the offering, on the first day of fiscal year 2010, which would have resulted in $1.5 billion of term loan borrowings outstanding during all of fiscal year 2010. Pro forma adjustments were as follows:

 

Interest Expense:    Pro Forma
for the
Offering
December 25,
2010
     Refinancing
and Debt-
Related
Transactions
    Pro Forma
Fiscal Year
Ended
December 25,
2010
 
   

Securitization indebtedness

   $ 68,233         (68,233 )(a)        

Senior Notes

     2,147         (2,147 )(b)        

Term loan borrowings

     6,589         57,628 (c)      64,217   

Revolving credit facility

     74         720 (d)      794   

Deferred financing fees and original issue discount

     4,804         826 (e)      5,630   

Capital leases

     505                505   

Other

     702                702   
        
   $ 83,054         (11,206     71,848   
        

 

  (a)   Elimination of historical interest expense on the securitization debt that was incurred from the beginning of fiscal year 2010 through the date of repayment of the securitization debt as part of the debt refinancing in November 2010, after reflecting the pro forma repayment of $375.0 million of A-2 Notes discussed in note 1 above. The pro forma adjustment is based on (i) weighted average A-2 Notes outstanding of $916.8 million at an annual rate of 5.779%, (ii) Ambac premiums at annual rate of 1.0% through April 15, 2010 and an annual rate of 1.25% thereafter, and (iii) M-1 Notes outstanding of $100.0 million at an annual rate of 8.285%.

 

  (b)   Elimination of historical interest expense on $250.0 million of Senior Notes that was incurred from the date of issuance in November 2010 through the end of fiscal year 2010 after reflecting the pro forma reduction in the issuance of Senior Notes by $375.0 million discussed in note 1. The remaining $250.0 million Senior Notes balance would be repaid as part of the additional term loan borrowings in February and May 2011, if those transactions had occurred at the beginning of fiscal year 2010. The Senior Notes accrue interest at an annual rate of 9.625% and were outstanding for 33 days during fiscal year 2010.

 

- 52 -


Table of Contents
  (c)   Increase in interest expense on the term loan borrowings to reflect the term loans outstanding for the entire year. Interest expense on the term loan is calculated based on an initial term loan outstanding of $1.5 billion at an annual rate of 4.25%, reduced by principal payments of $3.75 million paid at the end of each calendar quarter. The annual rate of 4.25% is based on a 360-day year, resulting in a daily rate of 0.012%. Interest expense is calculated as follows:

 

Period    Principal
Outstanding
During
Quarter
     Daily
Rate
     Days in
Fiscal
Quarter
     Pro
Forma
Interest
Expense
 
   

Q1 2010

     1,500,000         0.012%         91         16,115   

Q2 2010

     1,496,250         0.012%         91         16,074   

Q3 2010

     1,492,500         0.012%         91         16,034   

Q4 2010

     1,488,750         0.012%         91         15,994   
                 
              64,217   
                 

 

  (d)   Increase in interest expense on the revolving credit facility to reflect the revolving credit facility being outstanding for the entire year. Interest expense on the revolving credit facility is calculated based on $11.2 million utilized under the revolving credit facility for letters of credit at an annual rate of 3.125%, and a rate of 0.5% on the $88.8 million unused portion of the revolving credit facility.

 

  (e)   Increase amortization of deferred financing costs and original issue discount due to additional amortization related to the term loan borrowings and revolving credit facility of $5.3 million, offset by the elimination of $4.4 million of amortization related to the securitization debt and the elimination of $0.1 million of amortization related to the Senior Notes.

 

(5)   To eliminate the loss on debt extinguishment as the refinancing transaction that occurred during the year ended December 25, 2010 would not have occurred if this offering and related transactions had been consummated at the beginning of fiscal year 2010. We expect to incur losses on debt extinguishment related to the repayment of the Senior Notes and fees related to the additional term loan borrowings in the periods in which these events occur, which have been excluded from the pro forma statement of operations.

 

(6)   Gives effect to the assumed conversion of all outstanding shares of Class L common stock as if the initial public offering was completed at the beginning of fiscal year 2010. Class L common stock converts into one share of common stock, adjusted for any stock splits. Additionally, Class L common stockholders receive an additional number of shares of common stock determined by dividing the Class L preference amount 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 of the estimated offering-related expenses incurred by us. The Class L preference amount is calculated based on the base amount ($41.7516) plus 9% accretion per annum, compounded quarterly, less dividends paid since March 1, 2006. See “The reclassification.” The following table sets forth the computation of the conversion factor for the Class L common stock, based on an offering price of $17.00 per share, the midpoint of the preliminary offering range of $16.00 to $18.00 per share, and the Class L preference amount as of an estimated initial public offering date of July 20, 2011:

 

Class L preference amount per share (a)

   $ 38.7700   

Initial public offering price per share

     17.00   

Offering expenses per share (b)

     (1.34
        

Initial public offering price per share, net of expenses

     15.66   
        

Conversion factor for Class L preference amount

     2.4757   

Class L base share (c)

     0.2189   
        

Class L conversion factor

     2.6946   
        

 

  (a)   See “The reclassification” for additional information regarding the calculation of the Class L preference amount per share.

 

  (b)   Calculated based on total estimated offering expenses, including underwriting discounts and other offering-related expenses incurred by us, of $29.9 million and shares issued in the offering of 22,250,000.

 

  (c)   Conversion of Class L common stock into one share of common stock, adjusted for the 1-for-4.568 reverse stock split attributable to the common stock.

 

       Basic earnings per share is computed on the basis of the weighted average number of Class L and common shares that were outstanding during the period. Diluted earnings per share includes the dilutive effect of 275,844 common restricted shares and stock options, using the treasury stock method. There were no Class L common stock equivalents outstanding during fiscal year 2010. Shares to be sold in the offering are included in the pro forma basic and diluted earnings per share calculations. The following table sets forth the computation of pro forma basic and diluted earnings per share:

 

      Basic      Diluted  
   

Pro forma net income (in thousands)

   $ 90,427       $ 90,427   

Pro forma weighted average number of common shares:

     

Weighted average number of Class L shares

     22,806,796         22,806,796   

Class L conversion factor

     2.6946         2.6946   
        

Weighted average number of converted Class L shares

     61,456,299         61,456,299   

Weighted average number of common shares

     41,295,866         41,571,710   

Shares issued in this offering

     22,250,000         22,250,000   
        

Pro forma weighted average number of common shares

     125,002,165         125,278,009   
        

Pro forma earnings per common share

   $ 0.72       $ 0.72   

 

- 53 -


Table of Contents
       As the Class L conversion factor is determined based on the initial public offering price, the pro forma weighted average number of common shares, and therefore pro forma basic and diluted earnings per common share, would change if the offering price is not $17.00 per share. The following table sets forth the impact of a change in the offering price on the Class L conversion factor, pro forma weighted average number of common shares, and pro forma earnings per common share:

 

      Offering price per share  
   
   $ 15.00       $ 16.00       $ 17.00       $ 18.00       $ 19.00   
        

Class L conversion factor (a)

     3.0304         2.8527         2.6946         2.5559         2.4306   

Pro forma weighted average number of common shares – basic

     132,658,937         128,607,855         125,002,165         121,836,938         118,978,955   

Pro forma weighted average number of common shares – diluted

     132,934,780         128,883,699         125,278,009         122,112,782         119,254,799   

Pro forma earnings per common share – basic and diluted

   $ 0.68       $ 0.70       $ 0.72       $ 0.74       $ 0.76   

 

  (a)   The Class L conversion factor is affected by changes in offering expenses at each offering price, specifically the estimated underwriting discount, which is based on a percentage of the total offering proceeds. No other offering expenses are affected by changes in the offering price.

 

- 54 -


Table of Contents

Unaudited Pro Forma Consolidated Statement of Operations

Three Months Ended March 26, 2011

(In thousands, except share and per share amounts)

 

     Historical
As Reported
Three Months
Ended
March 26,
2011
    Adjustments
Related to
the Offering
    Pro Forma for
the Offering
March 26,
2011
    Adjustments for Other Transactions     Pro Forma
Three Months
Ended
March 26,
2011
 
          Termination of
Sponsor
Management
Agreement
    Refinancing and
Debt-Related
Transactions
   
   

Revenues:

           

Franchise fees and royalty income

  $ 85,959          85,959                      85,959   

Rental income

    22,131          22,131                      22,131   

Sales of ice cream products

    22,716          22,716                      22,716   

Other revenues

    8,407          8,407                      8,407   
       

Total revenues

    139,213               139,213                      139,213   
       

Operating costs and expenses:

           

Occupancy expenses—franchised restaurants

    12,288          12,288                      12,288   

Cost of ice cream products

    15,124          15,124                      15,124   

General and administrative expenses, net

    53,886          53,886        (750 )(3)             53,136   

Depreciation and amortization

    13,208          13,208                      13,208   

Impairment charges

    653          653                      653   
       

Total operating costs and expenses

    95,159               95,159        (750            94,409   

Equity in net income of joint ventures

    782          782                      782   
       

Operating income

    44,836               44,836        750               45,586   
       

Other income (expense):

           

Interest income

    115          115                      115   

Interest expense

    (33,882     9,426 (1)      (24,456            6,448 (4)      (18,008

Loss on debt extinguishment and refinancing transaction

    (11,007       (11,007            11,007 (5)        

Other income, net

    476          476                      476   
       

Total other expense

    (44,298     9,426        (34,872            17,455        (17,417
       

Income before income taxes

    538        9,426        9,964        750        17,455        28,169   

Provision for income taxes

    2,261        3,770 (2)      6,031        300 (2)      6,982 (2)      13,313   
       

Net income (loss)

  $ (1,723     5,656        3,933        450        10,473        14,856   
       

Pro forma earnings per share:

           

Basic and diluted

            $ 0.12 (6) 

Pro forma weighted average common shares outstanding:

           

Basic

              125,104,446 (6) 

Diluted

              125,567,898 (6) 

 

- 55 -


Table of Contents
(1)   To adjust interest expense to reflect the use of proceeds from the offering to repay $375.0 million of Senior Notes as of the first day of the first quarter of fiscal year 2011. The pro forma adjustments to historical interest expense are as follows:

 

Interest Expense:    Historical
As Reported
Three Months
Ended
March 26,
2011
     Adjustments
Related to
the Offering
    Pro Forma for
the Offering
March 26,
2011
 
   

Senior Notes

   $ 14,858         (9,124 )(a)      5,734   

Term loan borrowings

     16,897                16,897   

Revolving credit facility

     236                236   

Deferred financing fees and original issue discount

     1,582         (302 )(b)      1,280   

Capital leases

     122                122   

Other

     187                187   
        
   $ 33,882         (9,426     24,456   
        

 

  (a)   Elimination of historical interest expense related to $375.0 million of Senior Notes that was incurred during the three months ended March 26, 2011, as the proceeds from the offering would be used to repay $375.0 million of Senior Notes which accrued interest at an annual rate of 9.625%.
  (b)   Reduce amortization of deferred financing costs and original issue discount to reflect the repayment of $375.0 million of Senior Notes.

 

(2)   To reflect the tax effect of the pro forma adjustments at an estimated statutory tax rate of 40.0%.

 

(3)   To reflect a reduction of $750,000 quarterly as a result of the termination of the management agreement with the Sponsors. Upon completion of this offering, we expect to incur an expense of approximately $14.5 million within general and administrative expenses and a corresponding tax benefit of $5.8 million related to the termination of the Sponsor management agreement, which have been excluded from the pro forma statement of operations. Additionally, the Company expects to record additional share-based compensation expense of approximately $4.0 million and a corresponding tax benefit of $1.6 million upon completion of this offering, related to restricted shares granted to employees that were not eligible to vest until completion of an initial public offering or change of control, which have been excluded from the pro forma statement of operations. See “Management-Compensation discussion and analysis-Change in control.”

 

(4)   The adjustments related to the refinancing and debt-related transactions reflect the impact on interest expense as if the additional term loan borrowings in February 2011 and May 2011 were used to fully repay the outstanding $250.0 million of Senior Notes, after giving effect to the offering, on the first day of the first quarter of fiscal year 2011, which would have resulted in $1.5 billion of term loan borrowings outstanding during all of the first quarter of fiscal year 2011. Pro forma adjustments were as follows:

 

Interest Expense:    Pro Forma for
the Offering
March 26,
2011
     Refinancing and
Debt-Related
Transactions
    Pro Forma
Three Months
Ended
March 26,
2011
 
   

Senior Notes

   $ 5,734         (5,734 )(a)        

Term loan borrowings

     16,897         (782 )(b)      16,115   

Revolving credit facility

     236         (37 )(c)      199   

Deferred financing fees and original issue discount

     1,280         105 (d)      1,385   

Capital leases

     122                122   

Other

     187                187   
        
   $ 24,456         (6,448     18,008   
        

 

  (a)   Elimination of historical interest expense on $250.0 million of Senior Notes that was incurred during the three months ended March 26, 2011 after reflecting the pro forma reduction in the Senior Notes of $375.0 million discussed in note 1. The remaining $250.0 million Senior Notes balance would be repaid as part of the additional term loan borrowings in February and May 2011, if those transactions had occurred at the beginning of fiscal year 2011. The Senior Notes accrue interest at an annual rate of 9.625% and were outstanding for the entire first quarter of fiscal year 2011.

 

  (b)   Decrease in interest expense on the term loan borrowings which was driven by the February 2011 repricing of the term loan, resulting in a decrease in the annual interest rate from 5.75% to 4.25%. Interest expense on the term loan is calculated based on an initial term loan outstanding of $1.5 billion at an annual rate of 4.25%, which based on a 360-day year, results in a daily rate of 0.012%. With 91 days in the fiscal quarter, applying the daily rate to the principal balance of $1.5 billion results in pro forma interest expense of $16.1 million.

 

  (c)   Decrease in interest expense on the revolving credit facility which was driven by a decrease in the annual interest rate in May 2011 from 4.375% to 3.125%. Interest expense on the revolving credit facility is calculated based on $11.2 million utilized under the revolving credit facility for letters of credit at an annual rate of 3.125%, and a rate of 0.5% on the $88.8 million unused portion of the revolving credit facility.

 

  (d)   Increase amortization of deferred financing costs and original issue discount due to additional amortization related to the term loan borrowings and revolving credit facility of $0.3 million, offset by the elimination of $0.2 million of amortization related to the Senior Notes.

 

(5)   To eliminate the loss on debt extinguishment as the February 2011 repricing transaction that occurred during the quarter ended March 26, 2011 would not have occurred if this offering and related transactions had been consummated at the beginning of the first fiscal quarter of 2011. We expect to incur losses on debt extinguishment related to the repayment of the Senior Notes and fees related to the additional term loan borrowings in the periods in which these events occur, which have been excluded from the pro forma statement of operations.

 

- 56 -


Table of Contents
(6)   Gives effect to the assumed conversion of all outstanding shares of Class L common stock as if the initial public offering was completed at the beginning of the fiscal quarter. Class L common stock converts into one share of common stock, adjusted for any stock splits. Additionally, Class L common stockholders receive an additional number of shares of common stock determined by dividing the Class L preference amount 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 of the estimated offering-related expenses incurred by us. The Class L preference amount is calculated based on the base amount ($41.7516) plus 9% accretion per annum, compounded quarterly, less dividends paid since March 1, 2006. See “The reclassification.” The following table sets forth the computation of the conversion factor for the Class L common stock, based on an offering price of $17.00 per share, the midpoint of the preliminary offering range of $16.00 to $18.00 per share, and the Class L preference amount as of an estimated initial public offering date of July 20, 2011:

 

Class L preference amount per share (a)

   $ 38.7700   

Initial public offering price per share

     17.00   

Offering expenses per share (b)

     (1.34
        

Initial public offering price per share, net of expenses

     15.66   
        

Conversion factor for Class L preference amount

     2.4757   

Class L base share (c)

     0.2189   
        

Class L conversion factor

     2.6946   
        

 

  (a)   See “The reclassification” for additional information regarding the calculation of the Class L preference amount per share.

 

  (b)   Calculated based on total estimated offering expenses, including underwriting discounts and other offering-related expenses incurred by us, of $29.9 million and shares issued in the offering of 22,250,000.

 

  (c)   Conversion of Class L common stock into one share of common stock, adjusted for the 1-for-4.568 reverse stock split attributable to the common stock.

 

       Basic earnings per share is computed on the basis of the weighted average number of Class L and common shares that were outstanding during the period. Diluted earnings per share includes the dilutive effect of 463,452 common restricted shares and stock options, using the treasury stock method. There were no Class L common stock equivalents outstanding during the three months ended March 26, 2011. Shares to be sold in the offering are included in the pro forma basic and diluted earnings per share calculations. The following table sets forth the computation of pro forma basic and diluted earnings per share:

 

      Basic      Diluted  
   

Pro forma net income (in thousands)

   $ 14,856       $ 14,856   

Pro forma weighted average number of common shares:

     

Weighted average number of Class L shares

     22,817,115         22,817,115   

Class L conversion factor

     2.6946         2.6946   
        

Weighted average number of converted Class L shares

     61,484,105         61,484,105   

Weighted average number of common shares

     41,370,341         41,833,793   

Shares issued in this offering

     22,250,000         22,250,000   
        

Pro forma weighted average number of common shares

     125,104,446         125,567,898   
        

Pro forma earnings per common share

   $ 0.12       $ 0.12   

 

       As the Class L conversion factor is determined based on the initial public offering price, the pro forma weighted average number of common shares, and therefore pro forma basic and diluted earnings per common share, would change if the offering price is not $17.00 per share. The following table sets forth the impact of a change in the offering price on the Class L conversion factor, pro forma weighted average number of common shares, and pro forma earnings per common share:

 

      Offering price per share  
     $15.00      $16.00      $17.00      $18.00      $19.00  
   

Class L conversion factor (a)

     3.0304         2.8527         2.6946         2.5559         2.4306   

Pro forma weighted average number of common
shares –basic

     132,764,681         128,711,767         125,104,446         121,937,787         119,078,511   

Pro forma weighted average number of common
shares – diluted

     133,228,133         129,175,219         125,567,898         122,401,239         119,541,963   

Pro forma earnings per common share – basic and diluted

   $ 0.11       $ 0.12       $ 0.12       $ 0.12       $ 0.12   

 

  (a)   The Class L conversion factor is affected by changes in offering expenses at each offering price, specifically the estimated underwriting discount, which is based on a percentage of the total offering proceeds. No other offering expenses are affected by changes in the offering price.

 

- 57 -


Table of Contents

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 one of the world’s leading franchisors of quick service restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin’ Donuts and Baskin-Robbins brands. With over 16,000 points of distribution in 57 countries, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of March 26, 2011, Dunkin’ Donuts had 9,805 global points of distribution with restaurants in 36 U.S. states and the District of Columbia and in 31 foreign countries. Baskin-Robbins had 6,482 global points of distribution as of the same date, with restaurants in 45 U.S. states and the District of Columbia and in 46 foreign countries.

We are organized into four reporting segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We generate revenue from 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.

 

- 58 -


Table of Contents

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 $290.0 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