S-1 1 d242648ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on November 1, 2011

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

DUNKIN’ BRANDS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   5810   20-4145825

(State or other jurisdiction of

incorporation or organization)

 

(Primary standard industrial

classification code number)

 

(I.R.S. employer

identification number)

130 Royall Street

Canton, Massachusetts 02021

(781) 737-3000

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

 

 

Nigel Travis

Chief Executive Officer

Dunkin’ Brands Group, Inc.

130 Royall Street

Canton, Massachusetts 02021

(781) 737-3000

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

 

 

Copies to:

 

Craig E. Marcus

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, Massachusetts 02199-3600

Telephone: (617) 951-7000

Facsimile: (617) 951-7050

 

Richard Emmett

Senior Vice President and General Counsel

Dunkin’ Brands Group, Inc.

130 Royall Street

Canton, Massachusetts 02021

Telephone: (781) 737-3360

Facsimile: (781) 737-4360

 

D. Rhett Brandon

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Telephone: (212) 455-2000

Facsimile: (212) 455-2502

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
  Proposed Maximum
Offering Price Per
Share (2)
  Proposed Maximum
Aggregate Offering
Price (2)
  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  25,300,000(1)   $28.23375   $714,313,875   $81,861
                 
(1)   Includes shares issuable upon exercise of the underwriters’ option to purchase additional shares of common stock.

 

(2)   Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended. In accordance with Rule 457(c) of the Securities Act of 1933, as amended, the price shown is the average of the high and low selling prices of the Common Stock on October 26, 2011, as reported on the NASDAQ Global Select Market.

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.

 

 

 


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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 November 1, 2011

Prospectus

22,000,000 Shares

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Dunkin’ Brands Group, Inc.

Common stock

The selling stockholders named in this prospectus are offering 22,000,000 shares of our common stock. We will not receive any proceeds from the sale of our common stock by the selling stockholders.

Our common stock is listed on The NASDAQ Global Select Market under the symbol “DNKN.” On October 28, 2011, the last sale price of our common stock as reported on the NASDAQ Global Select Market was $27.89 per share.

 

      Per share        Total  

Public offering price

   $                      $                

Underwriting discounts and commissions

   $                      $                

Proceeds to selling stockholders, before expenses

   $                      $                

Delivery of the shares of common stock is expected to be made on or about                     , 2011. Certain of the selling stockholders identified in this prospectus 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 3,300,000 shares of our common stock. We will not receive any of the proceeds from the sale of shares by these selling stockholders if the underwriters exercise their option to purchase additional shares of 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  
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


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Table of Contents

Table of contents

 

Prospectus summary

     1   

Risk factors

     13   

Cautionary note regarding forward-looking statements

     32   

Use of proceeds

     34   

Market price of our common stock

     35   

Dividend policy

     36   

Capitalization

     37   

Selected consolidated financial and other data

     38   

Unaudited pro forma consolidated statements of operations

     42   

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

     49   

Business

     82   

Management

     104   

Related party transactions

     141   

Description of indebtedness

     143   

Principal and selling stockholders

     146   

Description of capital stock

     150   

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

     153   

Underwriting

     157   

Legal matters

     165   

Experts

     165   

Where you can find more information

     165   

Index to consolidated financial statements

     F-1   

 

 

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

 

 

 

 

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Market and other industry data

In this prospectus, we rely on and refer to information regarding the restaurant industry, the quick service restaurant (“QSR”) segment of the restaurant industry and the QSR segment categories and subcategories that include coffee, donuts, muffins, bagels, breakfast sandwiches, hard serve ice cream, soft serve ice cream, frozen yogurt, shakes, malts and floats, all of which has been sourced from the industry research firms The NPD Group, Inc. (which prepares and disseminates Consumer Reported Eating Share Trends (“CREST® data”)), Nielsen, Euromonitor International, or Technomic Information Services or compiled from market research reports, analyst reports and other publicly available information. Unless otherwise indicated in this prospectus, market data relating to the United States QSR segment and QSR segment categories and subcategories listed above, including Dunkin’ Donuts’ and Baskin-Robbins’ market positions in the QSR segment or such categories and subcategories, was prepared by, or was derived by us from, CREST® data. CREST® data with respect to each of Dunkin’ Donuts and Baskin-Robbins and the QSR segment and the categories and subcategories in which each of them competes, unless otherwise indicated, is for the 12 months ended August 31, 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.

Our initial public offering

In July 2011, we issued and sold 22,250,000 shares of common stock and certain of our stockholders sold 3,337,500 shares of common stock at a price of $19.00 per share in our initial public offering (the “IPO”). Upon the completion of the offering, our common stock was listed on the NASDAQ Global Select Market under the symbol “DNKN.” Immediately prior to the IPO, we effected a 1-for-4.568 reverse split of our Class A common stock, reclassified our Class A common stock into common stock and converted each outstanding share of Class L common stock into approximately 2.43 shares of common stock. Unless otherwise indicated, all share data gives effect to the reclassification.

 

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Prospectus summary

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the financial data and related notes and the section entitled “Risk factors” before deciding whether to invest in our common stock. Unless otherwise indicated or the context otherwise requires, references in this prospectus to the “Company,” “Dunkin’ Brands,” “we,” “us” and “our” refer to Dunkin’ Brands Group, Inc. and its consolidated subsidiaries. References in this prospectus to our franchisees include our international licensees. References in this prospectus to years are to our fiscal years, which end on the last Saturday in December. Data regarding number of restaurants or points of distribution are calculated as of September 24, 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 16,500 points of distribution in 56 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/decaf/flavored coffee,” “Iced coffee,” “Donuts” and “Bagels,” is tied for the #1 position in the U.S. by servings in the subcategory of “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 $414.5 million, or 76% of our total segment revenues, of which $400.3 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 September 24, 2011, there were 9,900 Dunkin’ Donuts points of distribution, of which 6,895 were in the U.S. and 3,005 were international, and 6,625 Baskin-Robbins points of distribution, of which 4,133 were international and 2,492 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

 

 

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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.

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”). In July 2011, we issued and sold 22,250,000 shares of common stock and certain of our stockholders sold 3,337,500 shares of common stock at a price of $19.00 per share in our initial public offering (the “IPO”). Upon the completion of the IPO, our common stock was listed on the NASDAQ Global Select Market under the symbol “DNKN.”

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 ten 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 and 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 accelerated from the first through the third quarter of fiscal 2011.

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

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

 

 

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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, 2010 and the nine months ended September 24, 2011 of (2.2)%, (6.0)%, (5.2)% and (0.7)%, respectively.

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 55% market share of breakfast daypart visits and a 60% market share 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.

 

 

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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 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 and Panera Bread Company.

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’?” In the summer of 2011, Dunkin’ Donuts began offering 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 176,000 respondents, representing approximately 92% of all respondents, to our Guest Satisfaction Survey program in September 2011 rated their overall experience as “Satisfied” or “Highly Satisfied”.

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, we expect our franchisees to open approximately 220 to 240 net new points of distribution in the U.S. Additionally, in 2012 we expect our franchisees to open an additional 200 to 250 net new points of distribution in the U.S.,

 

 

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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 third quarter of fiscal 2011, we believe we have facilitated approximately $243 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 ten years. During fiscal 2011 and fiscal 2012, we expect our franchisees to open approximately 450 to 500 net new points of distribution per year internationally, principally in our existing markets.

The key elements of our future international development strategy are:

Grow in our existing core markets. 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.

 

 

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Capitalize on other markets with significant growth potential. We intend to expand in certain international focus markets where our brands do not have a significant store presence, but where we believe there is consumer demand for our products as well as strong franchisee partners 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, fiscal 2011 Baskin-Robbins U.S. results include a comparable store sales decrease of (0.7)% for the nine months ended September 24, 2011 and comparable store sales growth of 1.7% for the third quarter of fiscal 2011. Further, over 8,500 respondents, representing approximately 90% of all respondents, to our Guest Satisfaction Survey program in September 2011 rated their overall experience as “Satisfied” or “Extremely Satisfied,” representing an all-time high.

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 September 24, 2011, we 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.

 

 

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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 management firm with $153 billion in assets under management across 86 funds and 49 fund of funds vehicles.* Carlyle operates its business across four segments: corporate private equity, real assets, global market strategies and fund of funds solutions. Carlyle has more than 1,100 employees, including more than 500 investment professionals in 34 offices across six continents, and serves over 1,400 carry fund investors from 73 countries. Across its corporate private equity and real assets segments, Carlyle has investments in over 200 portfolio companies that employ more than 600,000 people.

 

*   As of June 30, 2011, after giving effect to acquisitions of AlpInvest Partners B.V. and Emerging Sovereign Group LLC on July 1, 2011.

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.

 

 

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Table of Contents

The offering

 

Common stock offered by the selling stockholders

22,000,000 shares

 

Underwriters’ option to purchase additional shares

Certain of the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 3,300,000 shares.

 

Use of proceeds

We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

 

Principal stockholders

Upon completion of this offering, investment funds affiliated with the Sponsors will continue to indirectly beneficially own a controlling interest in us. As a result, we will continue 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.

 

NASDAQ Global Select Market symbol

“DNKN”

 

 

 

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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 September 24, 2011 and for the nine-month periods ended September 25, 2010 and September 24, 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 September 25, 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 nine-month period ended September 24, 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 nine-month period ended September 24, 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 consolidated statements of operations.” 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 consolidated statements of operations,” “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

 

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Table of Contents
     Fiscal year ended     Nine months ended  
    December 27,
2008
    December 26,
2009
    December 25,
2010
    September 25,
2010
    September 24,
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      $ 263,020      $ 288,660   

Rental income

    97,886        93,651        91,102        69,807        69,950   

Sales of ice cream products

    71,445        75,256        84,989        65,116        73,532   

Other revenues

    26,551        25,146        41,117        29,416        27,551   
 

 

 

 

Total revenues

    544,929        538,073        577,135        427,359        459,693   

Amortization of intangible assets

    37,848        35,994        32,467        25,315        21,106   

Impairment charges(1)

    331,862        8,517        7,075        2,955        1,220   

Other operating costs and expenses(2)(3)

    330,281        323,318        361,893        265,957        288,831   
 

 

 

 

Total operating costs and expenses

    699,991        367,829        401,435        294,227        311,157   

Equity in net income of joint ventures(4)

    14,169        14,301        17,825        16,013        12,206   
 

 

 

 

Operating income (loss)

    (140,893     184,545        193,525        149,145        160,742   

Interest expense, net(5)

    (115,944     (115,019     (112,532     (80,598     (86,502

Gain (loss) on debt extinguishment and refinancing transactions

           3,684        (61,955     (3,693     (34,222

Other gains (losses), net

    (3,929     1,066        408        (33     (11
 

 

 

 

Income (loss) before income taxes

    (260,766     74,276        19,446        64,821        40,007   

Net income (loss)

  $ (269,898   $ 35,008      $ 26,861        42,117        22,851   

Earnings (loss) per share:

         

Class L—basic and diluted

  $ 4.17      $ 4.57      $ 4.87      $ 3.69      $ 6.14   

Common—basic and diluted

  $ (8.95   $ (1.69   $ (2.04   $ (1.02   $ (2.00

Pro Forma Consolidated Statements of Operations Data(6):

         

Pro forma net income

      $ 92,674        $ 76,321   

Pro forma earnings per share:

         

Basic and diluted

      $ 0.78        $ 0.64   

Pro forma weighted average shares outstanding:

         

Basic

        119,053,634          119,344,826   

Diluted

        119,329,478          120,080,068   

Consolidated Balance Sheet Data:

         

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

  $ 251,368      $ 171,403      $ 134,504      $ 130,441      $ 182,073   

Total assets

    3,341,649        3,224,717        3,147,288        3,107,631        3,129,445   

Total debt(8)

    1,668,410        1,451,757        1,864,881        1,351,957        1,492,538   

Total liabilities

    2,614,327        2,454,109        2,841,047        2,287,666        2,396,208   

Common stock, Class L

    1,127,863        1,232,001        840,582        1,313,768          

Total stockholders’ equity (deficit)

    (400,541     (461,393     (534,341     (493,803     733,237   

Other Financial Data:

         

Capital expenditures

    27,518        18,012        15,358        11,109        12,800   

Adjusted operating income(9)

    228,817        229,056        233,067        177,415        197,739   

Adjusted net income(9)

    69,719        59,504        87,759        61,295        65,582   

Points of Distribution(10):

         

Dunkin’ Donuts U.S.

    6,395        6,566        6,772        6,698        6,895   

Dunkin’ Donuts International

    2,440        2,620        2,988        2,975        3,005   

Baskin-Robbins U.S.

    2,692        2,597        2,547        2,558        2,492   

Baskin-Robbins International

    3,321        3,610        3,886        3,816        4,133   
 

 

 

 

Total distribution points

    14,848        15,393        16,193        16,047        16,525   

Comparable Store Sales Growth (U.S. Only)(11):

         

Dunkin’ Donuts

    (0.8)%        (1.3)%        2.3%        1.4     4.3%    

Baskin-Robbins

    (2.2)%        (6.0)%        (5.2)%        (6.1)     (0.7)%   

Franchisee-Reported Sales ($ in millions)(12):

         

Dunkin’ Donuts U.S.

  $ 5,004      $ 5,174      $ 5,403      $ 3,994      $ 4,263   

Dunkin’ Donuts International

    529        508        584        429        477   

Baskin-Robbins U.S.

    560        524        494        407        399   

Baskin-Robbins International

    800        970        1,158        878        982   
 

 

 

 

Total Franchisee-Reported Sales

  $ 6,893      $ 7,176      $ 7,639      $ 5,708      $ 6,121   

Company-Owned Store Sales ($ in millions)(13):

         

Dunkin’ Donuts U.S.

  $      $ 2      $ 17      $ 13      $ 8   

Systemwide Sales Growth(14):

         

Dunkin’ Donuts U.S.

    4.4%         3.4%        4.7%        3.7%        6.6%   

Dunkin’ Donuts International

    11.1%         (4.0)%        15.0%        15.9%        11.4%   

Baskin-Robbins U.S.

    (2.1)%        (6.4)%        (5.5)%        (6.5)%        (1.9)%   

Baskin-Robbins International

    10.7%         21.3%        19.4%        21.6%        11.8%   
 

 

 

 

Total Systemwide Sales Growth

    5.0%         4.1%        6.7%        6.1%        7.1%   

 

 

 

 

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(1)   

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

 

(2)   

Includes fees paid to the Sponsors of $3.0 million for each of the fiscal years 2008, 2009 and 2010, $2.3 million for the nine months ended September 25, 2010 and $16.4 million for the nine months ended September 24, 2011 under a management agreement, which was terminated in connection with our IPO. See “Related party transactions—Arrangements with our investors.”

 

(3)   

Includes the following amounts:

 

     Fiscal year ended      Nine months ended  
     December 27,
2008
     December 26,
2009
    December 25,
2010
     September 25,
2010
     September 24,
2011
 
     (Unaudited, $ in thousands)  

Stock compensation expense

   $ 1,749       $ 1,745      $ 1,461       $ 1,175       $ 3,414   

Transaction costs(a)

                    1,083                 762   

Senior executive transition and severance(b)

     1,340         3,889        4,306         4,293         870   

Franchisee-related restructuring(c)

             12,180        2,748         1,888           

Legal reserves and related costs

                    4,813         2,404         354   

Breakage income on historical gift certificates

             (3,166                       

New market entry(d)

     7,239         1,735                        1,218   

Technology and market related initiatives(e)

             134        2,066         1,460         4,006   

 

  (a)   Represents direct and indirect costs and expenses related to our refinancing, dividend, and initial public offering transactions.

 

  (b)   Represents severance and related benefit costs associated with non-recurring reorganizations (fiscal 2010 and the nine months ended September 25, 2010 include 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, $897,000 for fiscal years 2008, 2009 and 2010, respectively, and $661,000 and $672,000 for the nine months ended September 25, 2010 and September 24, 2011, respectively.

 

(5)   

Interest expense, net, for fiscal year 2010 and the nine months ended September 24, 2011 on a pro forma basis would have been approximately $67.8 million and $50.6 million, respectively. See “Unaudited pro forma consolidated statements of operations.”

 

(6)   

See “Unaudited pro forma consolidated statements of operations.”

 

(7)   

Amounts as of December 27, 2008, December 26, 2009, and September 25, 2010 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 $5.2 million as of December 27, 2008, December 26, 2009, December 25, 2010, September 25, 2010 and September 24, 2011, respectively.

 

(9)   

Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, impairment charges, and Sponsor management agreement termination fee, and, in the case of adjusted net income, loss on debt extinguishment and refinancing transactions, net of the tax impact of such adjustments. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies. Adjusted operating income and adjusted net income are reconciled from operating income (loss) and net income (loss), respectively, determined under GAAP as follows:

 

     Fiscal year ended     Nine months ended  
     December 27,
2008
    December 26,
2009
    December 25,
2010
    September 25,
2010
    September 24,
2011
 
     (Unaudited, $ in thousands)  

Operating income (loss)

   $ (140,893   $ 184,545      $ 193,525      $ 149,145      $ 160,742   

Adjustments:

          

Sponsor termination fee

                                 14,671   

Amortization of other intangible assets

     37,848        35,994        32,467        25,315        21,106   

Impairment charges

     331,862        8,517        7,075        2,955        1,220   
  

 

 

 

Adjusted operating income

   $ 228,817      $ 229,056      $ 233,067      $ 177,415      $ 197,739   

Net income (loss)

   $ (269,898   $ 35,008      $ 26,861      $ 42,117      $ 22,851   

Adjustments:

          

Sponsor termination fee

                                 14,671   

Amortization of other intangible assets

     37,848        35,994        32,467        25,315        21,106   

Impairment charges

     331,862        8,517        7,075        2,955        1,220   

Loss (gain) on debt extinguishment and refinancing transactions

            (3,684     61,955        3,693        34,222   

Tax impact of adjustments(i)

     (30,093     (16,331     (40,599     (12,785     (28,488
  

 

 

 

Adjusted net income

   $ 69,719      $ 59,504      $ 87,759      $ 61,295      $ 65,582   

 

 

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  (i)   

Tax impact of adjustments calculated at a 40% effective tax rate for each period presented, excluding the goodwill impairment charge in fiscal year 2008, as the goodwill is not deductible for tax purposes

 

(10)   

Represents period end points of distribution.

 

(11)   

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.

 

(12)   

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

 

(13)   

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.

 

(14)   

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

 

 

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Risk factors

An investment in our common stock involves various risks. You should carefully consider the following risks and all of the other information contained in this prospectus before investing in our common stock. The risks described below are those which we believe are the material risks that we face. 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.

 

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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

 

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competitors, some of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of alternative methods of delivery, which could harm our competitive position. There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery, or to effectively adjust our product mix, service offerings and marketing and merchandising initiatives for products and services that address, and anticipate advances in, technology and market trends. If we are not able to successfully respond to these challenges, our business, financial condition and operating results could be harmed.

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

We believe that our franchisees’ sales, customer traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels and the 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 a significant amount of indebtedness. As of September 24, 2011, we had total indebtedness of approximately $1.5 billion, excluding $11.1 million of undrawn letters of credit and $88.9 million of unused commitments under our senior credit facility.

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

increasing our cost of borrowing.

 

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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.

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.”

 

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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.

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

 

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

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

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

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

 

 

availability of financing;

 

 

selection and availability of suitable restaurant locations;

 

 

competition for restaurant sites;

 

 

negotiation of acceptable lease and financing terms;

 

 

securing required domestic or foreign governmental permits and approvals;

 

 

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

 

 

employment and training of qualified personnel;

 

 

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

 

 

general economic and business conditions.

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

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

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

Coffee and other commodity prices are subject to substantial price fluctuations, stemming from variations in weather patterns, shifting political or economic conditions in coffee-producing countries and delays in the supply chain. In particular, the cost of commodity inputs for a number of goods, including ice cream and coffee,

 

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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 required under our franchise agreements, during which our margin on such sales would decline.

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

Shortages of coffee could adversely affect our revenues.

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

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

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

 

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

In order to maintain quality-control standards and consistency among restaurants, we require through our franchise agreements that our franchisees obtain food and other supplies from preferred suppliers approved in advance. In this regard, we and our franchisees depend on 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 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.

 

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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 September 24, 2011, we had 7,138 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, and for the nine months ended September 24, 2011, we derived approximately 15.0% of our total revenues from master franchisee agreements. The termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay of the development of franchised restaurants, or an interruption in the operation of one of our brands in a particular market or markets. Any such delay or interruption would result in a delay in, or loss of, royalty income to us whether by way of delayed royalty income or delayed revenues from the sale of ice cream products by us to franchisees internationally, or reduced sales. Any interruption in operations due to the termination of an arrangement with a master franchisee similarly could result in lower revenues for us, particularly if we were to determine to close restaurants following the termination of an arrangement with a master franchisee.

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

We have contracts with the U.S. military, including with the Army & Air Force Exchange Service and the Navy Exchange Service Command. These military contracts are predominantly between the U.S. military and Baskin-Robbins. We derive revenue from the arrangements provided for under these contracts mainly through the sale

 

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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.

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

 

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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 September 24, 2011, approximately 1% 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 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

 

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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, 2008 and 2009 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’s proposed adjustments. (See Note 12 of the notes to our unaudited consolidated financial statements included elsewhere in this prospectus). As described in Note 12 of the notes to our unaudited 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 $26.5 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. Therefore, the potential tax expense attributable to the IRS adjustments for fiscal years 2006 and 2007 would be limited to $2.9 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

 

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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 $19.6 million. The corresponding potential tax expense impact attributable to these later fiscal years, 2008 through 2010, would be approximately $0.7 million. In October 2011, representatives of the Company met with the IRS appeals officer. Based on that meeting, the Company proposed a settlement related to this issue and is awaiting a response from the IRS. If our settlement proposal is accepted as presented, we expect to make a cash tax payment in an amount that is less than the amounts proposed by the IRS to cumulatively adjust our tax method of accounting for our gift card program through the tax year ended December 25, 2010. No assurance can be made that a settlement can be reached, or that we will otherwise prevail in the final resolution of this matter. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interests, 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 to transfer the relevant franchise arrangements to a successor franchisee approved by the franchisor. There can be, 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 or disabled franchisee or franchisee principal, the sales of the restaurant could be adversely affected.

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

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

Franchise Arrangement Termination; Nonrenewal. Each franchise arrangement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although under

 

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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 our 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.

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

 

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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 March 2011 earthquake and tsunami in Japan resulted in the temporary closing of a number of Baskin-Robbins restaurants, less than five of which remain closed. These events could reduce traffic in our restaurants and demand for our products; make it difficult or impossible for our franchisees to receive products from their suppliers; disrupt or prevent our ability to perform functions at the corporate level; and/or otherwise impede our or our franchisees’ ability to continue business operations in a continuous manner consistent with the level and extent of business activities prior to the occurrence of the unexpected event or events, which in turn may materially and adversely impact our business and operating results.

Risks related to this offering and our common stock

We are a “controlled company” within the meaning of the NASDAQ Marketplace Rules and, as a result, we 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 the completion of this offering, the Sponsors are expected to continue to control a majority of the voting power of our outstanding common stock. As a result, we expect we will continue to be 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;

 

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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 continue to utilize these exemptions. As a result, we do not have a majority of independent directors, our compensation committee does not consist entirely of independent directors and the board committees are not 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 90 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.

We completed our IPO in July 2011. An active public market for our common stock may not develop or be sustained after this offering. Since the IPO, the price of our common stock, as reported by NASDAQ, has ranged from a low of $25.00 on September 12, 2011 to a high of $31.94 on August 1, 2011. In addition, the stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this prospectus and others such as:

 

 

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

 

 

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

 

 

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

 

 

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

 

 

additions and departures of key personnel;

 

 

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

 

 

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

 

 

speculation in the press or investment community;

 

 

changes in accounting principles;

 

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

Pursuant to the terms of our amended and restated charter and bylaws, 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.

As of September 24, 2011, there were 120,157,900 shares of common stock outstanding. Of our issued and outstanding shares, all the common stock sold in our IPO or 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 56.9% of our outstanding common stock (or approximately 54.2% if the underwriters exercise in full their option to purchase additional shares from certain of the selling stockholders) will be held by investment funds affiliated with the Sponsors.

Each of our directors, executive officers, significant equity holders (including affiliates of the Sponsors) and each selling stockholder has 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 90 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 sold in the IPO and 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.

 

Number of Shares    Date Available for Resale

1,465,093

   On the date of this offering (November     , 2011)

71,105,307

   90 days after this offering (                     , 2012), subject to certain exceptions and automatic extensions in certain circumstances.

 

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Beginning 90 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, we have registered shares of common stock that are reserved for issuance under our 2011 Omnibus Long-Term Incentive Plan.

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

In addition to the Sponsors’ beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and Delaware law contain provisions which could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential 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 $(41.84) per share as of September 24, 2011 based on an assumed offering price of $27.89 (the closing price of our common stock on October 28, 2011), 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.

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, 580,214 shares of restricted stock and options to purchase 2,922,294 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.

 

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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 56.9% of our outstanding common stock (approximately 54.2% if the underwriters exercise in full the option to purchase additional shares from certain of the selling stockholders). For as long as the Sponsors continue to beneficially own shares of common stock representing more than 50% of the voting power of our common stock, they will be able to direct the election of all of the members of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, these entities will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in our control and could take other actions that might be favorable to them. Even if their ownership falls below 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions. In addition, each of the Sponsors will have a contractual right to nominate two directors to our board for as long as such Sponsor owns at least 10% of our outstanding common stock (and one director for so long as such Sponsor owns at least 3% of our outstanding common stock) and the Sponsors will have certain contractual rights to have their nominees serve on our compensation committee. See “Related party transactions—Arrangements with our investors.”

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

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

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

 

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Cautionary note regarding forward-looking statements

This prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act, as amended. 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 agreements or contracts with the U.S. military;

 

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currency exchange rates;

 

 

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

 

 

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

 

 

uncertainties relating to litigation;

 

 

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

 

 

review and audit of certain of our tax returns;

 

 

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

 

 

our ability to retain key personnel;

 

 

our inability to protect customer credit card data; and

 

 

catastrophic events.

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

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

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

 

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Use of proceeds

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

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Market price of our common stock

Our common stock has been listed on the NASDAQ Global Select Market under the symbol “DNKN” since July 27, 2011. Prior to that time, there was no public market for our common stock. The following table sets forth for the periods indicated the high and low sale prices of our common stock on the NASDAQ Global Select Market.

 

      High      Low  

 

 

2011

     

Third Quarter (beginning July 27, 2011)

   $ 31.94       $ 25.00   

Fourth Quarter (through October 28, 2011)

   $ 29.85       $ 25.80   

 

 

A recent reported closing price for our common stock is set forth on the cover page of this prospectus. American Stock Transfer & Trust Company, LLC is the transfer agent and registrar for our common stock. On September 24, 2011, we had 203 holders of record of our common stock.

 

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Dividend policy

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

 

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Capitalization

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of September 24, 2011. This table should be read in conjunction with “Use of proceeds,” “Selected consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

      As of
September 24, 2011
 

 

 
     (Dollars in thousands)  

Cash and cash equivalents(1)

   $ 181,849   
  

 

 

 

Long-term debt, including current portion;

  

Revolving credit facility(2)

   $   

Term loan facility

     1,487,324   

Capital leases

     5,214   
  

 

 

 

Total secured debt

     1,492,538   
  

 

 

 

Total long-term debt

     1,492,538   
  

 

 

 

Stockholders’ equity (deficit) :

  

Preferred stock, $0.001 par value; 25,000,000 shares authorized and no shares issued and outstanding

       

Common stock, $0.001 par value; 475,000,000 shares authorized and 120,157,900 shares issued and outstanding

     119   

Additional paid-in capital

     1,475,495   

Accumulated deficit

     (763,666

Accumulated other comprehensive income

     21,289   
  

 

 

 

Total stockholders’ equity

     733,237   
  

 

 

 

Total capitalization

   $ 2,225,775   

 

 

 

(1)   Includes an aggregate of $69.7 million of cash held for advertising funds or reserved for gift card/certificate programs.

 

(2)   Excludes $11.1 million of undrawn letters of credit.

 

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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 September 24, 2011 and for the nine-month periods ended September 25, 2010 and September 24, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of September 25, 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 nine-month period ended September 24, 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 nine-month period ended September 24, 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 consolidated statements of operations.” 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 consolidated statements of operations,” “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

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     Ten months
ended
December 30,
2006(1)
    Fiscal year ended     Nine months ended  
      December 29,
2007
    December 27,
2008
    December 26,
2009
    December 25,
2010
    September 25,
2010
    September 24,
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      $ 263,020      $ 288,660   

Rental income

    80,016        98,860        97,886        93,651        91,102        69,807        69,950   

Sales of ice cream products

    49,064        63,777        71,445        75,256        84,989        65,116        73,532   

Other revenues

    26,612        28,857        26,551        25,146        41,117        29,416        27,551   
 

 

 

 

Total revenues

    411,346        516,935        544,929        538,073        577,135        427,359        459,693   

Amortization of intangible assets

    33,050        39,387        37,848        35,994        32,467        25,315        21,106   

Impairment charges(2)

    1,525        4,483        331,862        8,517        7,075        2,955        1,220   

Other operating costs and expenses(3)(4)

    281,428        311,005        330,281        323,318        361,893        265,957        288,831   
 

 

 

 

Total operating costs and expenses

    316,003        354,875        699,991        367,829        401,435        294,227        311,157   

Equity in net income of joint ventures(5)

    11,219        12,439        14,169        14,301        17,825        16,013        12,206   
 

 

 

 

Operating income (loss)

    106,562        174,499        (140,893     184,545        193,525        149,145        160,742   

Interest expense, net(6)

    (131,827     (111,677     (115,944     (115,019     (112,532     (80,598     (86,502

Gain (loss) on debt extinguishment and refinancing transactions

                         3,684        (61,955     (3,693     (34,222

Other gains (losses), net

    162        3,462        (3,929     1,066        408        (33     (11
 

 

 

 

Income (loss) from continuing operations before income taxes

    (25,103     66,284        (260,766     74,276        19,446        64,821        40,007   

Income (loss) from continuing operations

    (14,354     39,331        (269,898     35,008        26,861        42,117        22,851   

Net income (loss)(7)

  $ (13,400   $ 34,699      $ (269,898   $ 35,008      $ 26,861      $ 42,117      $ 22,851   

Earnings (loss) per share:

           

Class L—basic and diluted

  $ 6.50      $ 4.12      $ 4.17      $ 4.57      $ 4.87      $ 3.69      $ 6.14   

Common—basic and diluted

  $ (4.09   $ (1.48   $ (8.95   $ (1.69   $ (2.04   $ (1.02   $ (2.00

Pro Forma Consolidated Statements of Operations Data(8):

             

Pro forma net income

          $ 92,674        $ 76,321   

Pro forma earnings per share:

             

Basic and diluted

          $ 0.78        $ 0.64   

Pro forma weighted average shares outstanding:

             

Basic

            119,053,634          119,344,826   

Diluted

            119,329,478          120,080,068   

Consolidated Balance Sheet Data:

             

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

  $ 127,558      $ 147,968      $ 251,368      $ 171,403      $ 134,504      $ 130,441      $ 182,073   

Total assets

    3,622,084        3,608,753        3,341,649        3,224,717        3,147,288        3,107,631        3,129,445   

Total debt(10)

    1,603,636        1,603,561        1,668,410        1,451,757        1,864,881        1,351,957        1,492,538   

Total liabilities

    2,569,294        2,606,011        2,614,327        2,454,109        2,841,047        2,287,666        2,396,208   

Common stock, Class L

    1,029,488        1,033,450        1,127,863        1,232,001        840,582        1,313,768          

Total stockholders’ equity (deficit)

    23,302        (30,708     (400,541     (461,393     (534,341     (493,803     733,237   

Other Financial Data:

             

Capital expenditures

    29,706        37,542        27,518        18,012        15,358        11,109        12,800   

Adjusted operating income(11)

    141,137        218,369        228,817        229,056        233,067        177,415        197,739   

Adjusted net income(11)

    7,345        61,021        69,719        59,504        87,759        61,295        65,582   

Points of Distribution(12):

             

Dunkin’ Donuts U.S.

    5,368        5,769        6,395        6,566        6,772        6,698        6,895   

Dunkin’ Donuts International

    1,925        2,219        2,440        2,620        2,988        2,975        3,005   

Baskin-Robbins U.S.

    2,872        2,763        2,692        2,597        2,547        2,558        2,492   

Baskin-Robbins International

    3,021        3,111        3,321        3,610        3,886        3,816        4,133   
 

 

 

 

Total distribution points

    13,186        13,862        14,848        15,393        16,193        16,047        16,525   

 

 

 

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Table of Contents
     Ten months
ended
December 30,
2006(1)
    Fiscal year ended     Nine months ended  
      December 29,
2007
    December 27,
2008
    December 26,
2009
    December 25,
2010
    September 25,
2010
    September 24,
2011
 

 

 
    ($ in thousands, except as otherwise noted)  

Comparable Store Sales Growth (U.S. Only)(13):

             

Dunkin’ Donuts

    4.1%        1.3%       (0.8)%        (1.3)%        2.3%       1.4%        4.3%   

Baskin-Robbins

    (2.2)%        0.3%       (2.2)%        (6.0)%        (5.2)%        (6.1)%        (0.7)%   

Franchisee-Reported Sales ($ in millions)(14):

             

Dunkin’ Donuts U.S.

  $ 3,842      $ 4,792      $ 5,004      $ 5,174      $ 5,403      $ 3,994      $ 4,263   

Dunkin’ Donuts International

    364        476        529        508        584        429        477   

Baskin-Robbins U.S.

    503        572        560        524        494        407        399   

Baskin-Robbins International

    575        723        800        970        1,158        878        982   
 

 

 

 

Total Franchisee-Reported Sales

  $ 5,284      $ 6,563      $ 6,893      $ 7,176      $ 7,639      $ 5,708      $ 6,121   

Company-Owned Store Sales ($ in millions)(15):

             

Dunkin’ Donuts U.S.

  $      $      $      $ 2      $ 17      $ 13      $ 8   

Systemwide Sales Growth(16):

             

Dunkin’ Donuts U.S.

      5.7%       4.4%       3.4%       4.7%       3.7%       6.6%   

Dunkin’ Donuts International

      8.5%       11.1%       (4.0)%        15.0%       15.9%       11.4%   

Baskin-Robbins U.S.

      (1.3)%        (2.1)%        (6.4)%        (5.5)%        (6.5)%        (1.9)%   

Baskin-Robbins International

      9.7%       10.7%       21.3%       19.4%       21.6%       11.8%   
 

 

 

 

Total Systemwide Sales Growth

      5.6%       5.0%       4.1%       6.7%       6.1%       7.1%   

 

 
(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, $2.3 million for the nine months ended September 25, 2010 and $16.4 million for the nine months ended September 24, 2011 under a management agreement, which was terminated in connection with our IPO. See “Related party transactions—Arrangements with our investors.”

 

(4)   Includes the following amounts:

 

   

Ten months

ended

December 30,

2006

    Fiscal year ended     Nine months ended  
    December 29,
2007
    December 27,
2008
    December 26,
2009
    December 25,
2010
    September 25,
2010
    September 24,
2011
 
 

 

 

 
    (Unaudited, $ in thousands)  

Stock compensation expense

  $ 3,086      $ 2,782      $ 1,749      $ 1,745      $ 1,461      $ 1,175      $ 3,414   

Transaction costs (a)

    18,466        1,323                      1,083               762   

Senior executive transition and severance (b)

    740               1,340        3,889        4,306        4,293        870   

Franchisee-related restructuring (c)

                         12,180        2,748        1,888          

Legal reserves and related costs

                                4,813        2,404        354   

Breakage income on historical gift certificates

                         (3,166                     

New market entry (d)

                  7,239        1,735                      1,218   

Technology and market related initiatives (e)

                         134        2,066        1,460        4,006   

 

  (a)   Represents direct and indirect costs and expenses related to our fiscal year end change, the securitization and other debt transactions, our 2010 refinancing and dividend transactions, and our initial public offering.
  (b)   Represents severance and related benefit costs associated with non-recurring reorganizations (fiscal 2010 and the nine months ended September 25, 2010 include 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, $907,000, $899,000, and $897,000 for fiscal years 2007, 2008, 2009, and 2010, respectively, and $661,000 and $672,000 for the nine months ended September 25, 2010 and September 24, 2011, respectively.

 

(6)   Interest expense, net, for fiscal year 2010 and the nine months ended September 24, 2011 on a pro forma basis would have been approximately $67.8 million and $50.6 million, respectively. See “Unaudited pro forma consolidated statements of operations.”

 

(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.

 

 

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Table of Contents
(8)   See “Unaudited pro forma consolidated statements of operations.”

 

(9)   Amounts as of December 30, 2006, December 29, 2007, December 27, 2008, December 26, 2009, and September 25, 2010 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 $5.2 million as of December 30, 2006, December 29, 2007, December 27, 2008, December 26, 2009, December 25, 2010, September 25, 2010 and September 24, 2011, respectively.

 

(11)   Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, impairment charges, and Sponsor management agreement termination fee, and, in the case of adjusted net income, loss on debt extinguishment and refinancing transactions, net of the tax impact of such adjustments. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies. Adjusted operating income and adjusted net income are reconciled from operating income (loss) and net income (loss), respectively, determined under GAAP as follows:

 

   

Ten months

ended

December 30,

2006

    Fiscal year ended     Nine months ended  
    December 29,
2007
    December 27,
2008
    December 26,
2009
    December 25,
2010
    September 25,
2010
    September 24,
2011
 
 

 

 

 
    (Unaudited, $ in thousands)  

Operating income (loss)

  $ 106,562      $ 174,499      $ (140,893)      $ 184,545      $ 193,525      $ 149,145      $ 160,742   

Adjustments:

             

Sponsor termination fee

                                              14,671   

Amortization of other intangible assets

    33,050        39,387        37,848        35,994        32,467        25,315        21,106   

Impairment charges

    1,525        4,483        331,862        8,517        7,075        2,955        1,220   
 

 

 

 

Adjusted operating income

  $ 141,137      $ 218,369      $ 228,817      $ 229,056      $ 233,067      $ 177,415      $ 197,739   

Net income (loss)

  $ (13,400)      $ 34,699      $ (269,898)      $ 35,008      $ 26,861      $ 42,117      $ 22,851   

Adjustments:

             

Sponsor termination fee

                                              14,671   

Amortization of other intangible assets

    33,050        39,387        37,848        35,994        32,467        25,315        21,106   

Impairment charges

    1,525        4,483        331,862        8,517        7,075        2,955        1,220   

Loss (gain) on debt extinguishment and refinancing transactions

                         (3,684)        61,955        3,693        34,222   

Tax impact of adjustments(i)

    (13,830)        (17,548)        (30,093)        (16,331)        (40,599)        (12,785)        (28,488)   
 

 

 

 

Adjusted net income

  $ 7,345      $ 61,021      $ 69,719      $ 59,504      $ 87,759      $ 61,295      $ 65,582   

 

  (i)   Tax impact of adjustments calculated at a 40% effective tax rate for each period presented, excluding the goodwill impairment charge in fiscal year 2008, as the goodwill is not deductible for tax purposes

 

(12)   Represents period end distribution points.

 

(13)   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.

 

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

 

(15)   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.

 

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

 

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Table of Contents

Unaudited pro forma consolidated statements of operations

The following unaudited pro forma consolidated statements of operations of Dunkin’ Brands Group, Inc. for the fiscal year ended December 25, 2010, and for the nine months ended September 24, 2011, are based on historical consolidated statements of operations of Dunkin’ Brands Group, Inc., which are included elsewhere in this prospectus. An unaudited pro forma consolidated balance sheet is not presented herein as all of the transactions noted below occurred prior to and are reflected in the unaudited consolidated balance sheet as of September 24, 2011 included elsewhere in this prospectus.

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 and May 2011 re-pricing transactions, and the repayment of the remaining outstanding amount of senior notes from the proceeds of our IPO and (b) the termination of our management agreement with the Sponsors in connection with our IPO, as if each had occurred on the first day of fiscal year 2010.

The unaudited pro forma consolidated statement of operations for the nine months ended September 24, 2011 gives effect to (a) adjustments to interest expense as a result of the February 2011 and May 2011 re-pricing transactions, and the repayment of the remaining outstanding amount of senior notes from the proceeds of our IPO and (b) the termination of our management agreement with the Sponsors in connection with our IPO, as if each had occurred on the first day of the first fiscal quarter of 2011.

The unaudited pro forma consolidated statements of operations are presented for informational purposes only and do not purport to represent what the actual 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 consolidated statements of operations 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.

 

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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 IPO
    Pro Forma
for the IPO
Fiscal Year
Ended
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

    25,359               25,359                      25,359   

Amortization of other intangible assets

    32,467               32,467                      32,467   

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            14,950 (4)      (68,104

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            76,905        (67,391
 

 

 

 

Income before income taxes

    19,446        29,783        49,229        3,000        76,905        129,134   

Provision (benefit) for income taxes

    (7,415     11,913 (2)      4,498        1,200 (2)      30,762 (2)      36,460   
 

 

 

 

Net income

  $ 26,861        17,870        44,731        1,800        46,143        92,674   
 

 

 

 

Pro forma earnings per share:

           

Basic and diluted

            $ 0.78 (6) 

Pro forma weighted average common shares outstanding:

           

Basic

              119,053,634 (6) 

Diluted

              119,329,478 (6) 

 

 

 

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Table of Contents
(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 IPO 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 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 IPO 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 IPO are as follows:

 

Interest Expense:    Historical As
Reported
Fiscal Year
Ended
December 25,
2010
     Adjustments
Related to
the IPO
    Pro Forma
for the IPO
Fiscal Year
Ended
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 IPO to repay $375.0 million of A-2 Notes as if the IPO 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 the IPO, we incurred an expense of approximately $14.7 million and a corresponding tax benefit of $5.9 million related to the termination of the Sponsor management agreement, which have been excluded from the pro forma statement of operations. Additionally, the Company recorded additional share-based compensation expense of approximately $2.6 million and a corresponding tax benefit of $1.0 million upon completion of the IPO, 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.

 

(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 IPO, 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 IPO
Fiscal Year
Ended
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         53,851 (c)      60,440   

Revolving credit facility

     74         720 (d)      794   

Deferred financing fees and original issue discount

     4,804         859 (e)      5,663   

Capital leases

     505                505   

Other

     702                702   
  

 

 

 
   $ 83,054         (14,950     68,104   
  

 

 

 

 

  (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

 

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$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.

 

  (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 4.00%, reduced by principal payments of $3.75 million paid at the end of each calendar quarter. The annual rate of 4.00%, which is the rate in effect as of September 24, 2011, is based on a 360-day year, resulting in a daily rate of 0.011%. 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         0.011%         91         15,167   

Q2 2010

     1,496,250         0.011%         91         15,129   

Q3 2010

     1,492,500         0.011%         91         15,091   

Q4 2010

     1,488,750         0.011%         91         15,053   
           

 

 

 
              60,440   
           

 

 

 

 

  (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 $5.4 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 the IPO and related transactions had been consummated at the beginning of fiscal year 2010. Upon completion of the IPO, we incurred losses on debt extinguishment and refinancing transactions totaling approximately $18.1 million and a related tax benefit of $7.2 million related to the repayment of the Senior Notes and fees related to the additional term loan borrowings, 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 converted into approximately 2.4338 shares of common stock immediately prior to the IPO. 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 sold in the IPO 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)

   $ 92,674       $ 92,674   

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

     2.4338         2.4338   
  

 

 

 

Weighted average number of converted Class L shares

     55,507,768         55,507,768   

Weighted average number of common shares

     41,295,866         41,571,710   

Shares issued in the IPO

     22,250,000         22,250,000   
  

 

 

 

Pro forma weighted average number of common shares

     119,053,634         119,329,478   
  

 

 

 

Pro forma earnings per common share

   $ 0.78       $ 0.78   

 

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Unaudited Pro Forma Consolidated Statement of Operations

Nine Months Ended September 24, 2011

(In thousands, except share and per share amounts)

 

     Historical
As Reported
Nine Months
Ended
September 24,
2011
    Adjustments
Related to
the IPO
   

Pro Forma for
the IPO

Nine Months
Ended
September 24,
2011

    Adjustments for Other Transactions     Pro Forma
Nine Months
Ended
September 24,
2011
 
          Termination of
Sponsor
Management
Agreement
    Refinancing and
Debt-Related
Transactions
   

 

 

Revenues:

           

Franchise fees and royalty income

  $ 288,660               288,660                      288,660   

Rental income

    69,950               69,950                      69,950   

Sales of ice cream products

    73,532               73,532                      73,532   

Other revenues

    27,551               27,551                      27,551   
 

 

 

 

Total revenues

    459,693               459,693                      459,693   
 

 

 

 

Operating costs and expenses:

           

Occupancy expenses—franchised restaurants

    38,278               38,278                      38,278   

Cost of ice cream products

    52,795               52,795                      52,795   

General and administrative expenses, net

    179,408               179,408        (19,035 )(3)             160,373   

Depreciation

    18,350               18,350                      18,350   

Amortization of other intangible assets

    21,106               21,106                      21,106   

Impairment charges

    1,220               1,220                      1,220   
 

 

 

 

Total operating costs and expenses

    311,157               311,157        (19,035            292,122   

Equity in net income of joint ventures

    12,206               12,206                      12,206   
 

 

 

 

Operating income

    160,742               160,742        19,035               179,777   
 

 

 

 

Other income (expense):

           

Interest income

    403               403                      403   

Interest expense

    (86,905     25,372 (1)      (61,533            10,488 (4)      (51,045

Loss on debt extinguishment and refinancing transaction

    (34,222            (34,222            34,222 (5)        

Other income, net

    (11            (11                   (11
 

 

 

 

Total other expense

    (120,735     25,372        (95,363            44,710        (50,653
 

 

 

 

Income before income taxes

    40,007        25,372        65,379        19,035        44,710        129,124   

Provision for income taxes

    17,156        10,149 (2)      27,305        7,614 (2)      17,884 (2)      52,803   
 

 

 

 

Net income

  $ 22,851        15,223        38,074        11,421        26,826        76,321   
 

 

 

 

Pro forma earnings per share:

           

Basic and diluted

            $ 0.64 (6) 

Pro forma weighted average common shares outstanding:

           

Basic

              119,344,826 (6) 

Diluted

              120,080,068 (6) 

 

 

 

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

 

Interest Expense:    Historical
As Reported
Nine Months
Ended
September 24,
2011
     Adjustments
Related to
the IPO
   

Pro Forma for
the IPO

Nine Months
Ended
September 24,
2011

 

 

 

Senior Notes

   $ 32,763         (24,623 )(a)      8,140   

Term loan borrowings

     47,802                47,802   

Revolving credit facility

     685                685   

Deferred financing fees and original issue discount

     4,814         (749 )(b)      4,065   

Capital leases

     364                364   

Other

     477                477   
  

 

 

 
   $ 86,905         (25,372     61,533   
  

 

 

 

 

  (a)   Elimination of historical interest expense related to $375.0 million of Senior Notes that was incurred during the nine months ended September 24, 2011, as the proceeds from the IPO would be used to repay $375.0 million of Senior Notes which accrued interest at an annual rate of 9.625% for approximately eight months during the fiscal period.

 

  (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 expenses as a result of the termination of the management agreement with the Sponsors. During the nine months ended September 24, 2011, we incurred expenses of approximately $1.7 million for management services through the date of the IPO. Upon completion of the IPO, we incurred an expense of approximately $14.7 million related to the termination of the Sponsor management agreement. Additionally, the Company recorded additional share-based compensation expense of approximately $2.6 million upon completion of the IPO 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.

 

(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 IPO, on the first day of fiscal year 2011, which would have resulted in $1.5 billion of term loan borrowings outstanding during all of the nine months ended September 24, 2011. Pro forma adjustments were as follows:

 

Interest Expense:   

Pro Forma for
the IPO

Nine Months
Ended
September 24,
2011

     Refinancing and
Debt-Related
Transactions
    Pro Forma
Nine Months
Ended
September 24,
2011
 

 

 

Senior Notes

   $ 8,140         (8,140 )(a)        

Term loan borrowings

     47,802         (2,415 )(b)      45,387   

Revolving credit facility

     685         (92 )(c)      593   

Deferred financing fees and original issue discount

     4,065         159 (d)      4,224   

Capital leases

     364                364   

Other

     477                477   
  

 

 

 
   $ 61,533         (10,488     51,045   
  

 

 

 

 

  (a)   Elimination of historical interest expense on $250.0 million of Senior Notes that was incurred during the nine months ended September 24, 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%.

 

  (b)   Decrease in interest expense on the term loan borrowings to reflect an initial term loan outstanding of $1.5 billion at an annual rate of 4.00%, reduced by principal payments of $3.75 million paid at the end of each calendar quarter. The annual rate of 4.00%, which is the rate in effect as of September 24, 2011, is based on a 360-day year, resulting in a daily rate of 0.011%. Interest expense is calculated as follows:

 

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

 

 

Q1 2011

     1,500,000         0.011%         91         15,167   

Q2 2011

     1,496,250         0.011%         91         15,129   

Q3 2011

     1,492,500         0.011%         91         15,091   
           

 

 

 
              45,387   
           

 

 

 

 

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  (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 $11.1 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 $88.9 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 $0.4 million, offset by the elimination of $0.2 million of amortization related to the Senior Notes.

 

(5)   To eliminate the loss on debt extinguishment and refinancing transactions as the repricing of the term loans and repayments of the Senior Notes that occurred during the nine months ended September 24, 2011 would not have occurred if the IPO and related transactions had been consummated at the beginning of fiscal year 2011.

 

(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 2011. Class L common stock converted into approximately 2.4338 shares of common stock immediately prior to the IPO. 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 735,242 common restricted shares and stock options, using the treasury stock method. There were no Class L common stock equivalents outstanding during the nine months ended September 24, 2011. Shares to be sold in the IPO 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)

   $ 76,321      $ 76,321   

Pro forma weighted average number of common shares:

    

Weighted average number of Class L shares over period in which Class L shares were outstanding(a)

     22,845,378        22,845,378   

Adjustment to weight Class L shares over respective fiscal period(a)

     (5,104,722     (5,104,722
  

 

 

 

Weighted average number of Class L shares over respective fiscal period

     17,740,656        17,740,656   

Class L conversion factor

     2.4338        2.4338   
  

 

 

 

Weighted average number of converted Class L shares

     43,177,665        43,177,665   

Weighted average number of common shares

     58,807,271        59,542,513   

Adjustment to reflect shares issued in IPO as outstanding for entire fiscal period

     17,359,890        17,359,890   
  

 

 

 

Pro forma weighted average number of common shares

     119,344,826        120,080,068   
  

 

 

 

Pro forma earnings per common share

   $ 0.64      $ 0.64   

 

  (a)   The weighted average number of Class L shares in the actual Class L earnings per share calculation for the nine months ended September 24, 2011 represents the weighted average from the beginning of the period up through the date of conversion of the Class L shares into common shares. As such, the pro forma weighted average number of common shares includes an adjustment to the weighted average number of Class L shares outstanding to reflect the length of time the Class L shares were outstanding prior to conversion relative to the nine month period. The converted Class L shares are already included in the weighted average number of common shares outstanding for the period after their conversion.

 

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Management’s discussion and analysis of

financial condition and results of operations

The following discussion of our financial condition and results of operations should be read in conjunction with the “Selected historical consolidated financial data” and the audited and unaudited historical consolidated financial statements and related notes. This discussion contains forward-looking statements about our markets, the demand for our products and services and our future results and involves numerous risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk factors” and “Cautionary note regarding forward-looking statements” for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.

Introduction and overview

We are 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 16,500 points of distribution in 56 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 September 24, 2011, Dunkin’ Donuts had 9,900 global points of distribution with restaurants in 36 U.S. states and the District of Columbia and in 31 foreign countries. Baskin-Robbins had 6,625 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 22 company-owned points of distribution as of September 24, 2011, we are less affected by store-level costs and profitability and fluctuations in commodity costs than other QSR operators.

 

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Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For fiscal year 2010, franchisee contributions to the U.S. advertising funds were $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 and nine months ended September 24, 2011 and September 25, 2010 reflect the results of operations for the 13- and 39-week periods ending on those dates. Operating results for the three- and nine-month periods ended September 24, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

Critical accounting policies

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

Revenue recognition

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

Allowances for franchise, license and lease receivables / guaranteed financing

We reserve all or a portion of a franchisee’s receivable balance when deemed necessary based upon detailed review of such balances, and apply a pre-defined reserve percentage based on an aging criteria to other balances. We perform our reserve analysis during each fiscal quarter or when events or circumstances indicate

 

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that we may not collect the balance due. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control.

In limited instances, we issue guarantees to financial institutions so that our franchisees can obtain financing with terms of approximately five to ten years for various business purposes. We recognize a liability and offsetting asset for the fair value of such guarantees. The fair value of a guarantee is based on historical default rates of our total guaranteed loan pool. We monitor the financial condition of our franchisees and record provisions for estimated losses on guaranteed liabilities of our franchisees if we believe that our franchisees are unable to make their required payments. As of September 24, 2011, if all of our outstanding guarantees of franchisee financing obligations came due simultaneously, we would be liable for approximately $7.1 million. As of September 24, 2011, there were no amounts under such guarantees that were contingently due. We generally have cross-default provisions with these franchisees that would put the franchisee in default of its franchise agreement in the event of non-payment under such loans. We believe these cross-default provisions significantly reduce the risk that we would not be able to recover the amount of required payments under these guarantees and, historically, we have not incurred significant losses under these guarantees due to defaults by our franchisees.

Impairment of goodwill and other intangible assets

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

We evaluate the remaining useful life of our trade names to determine whether current events and circumstances continue to support an indefinite useful life. In addition, all of our indefinite lived intangible assets are tested for impairment annually. The trade name intangible asset impairment test consists of a comparison of the fair value of each trade name with its carrying value, with any excess of carrying value over fair value being recognized as an impairment loss. The fair value of trade names is estimated using the relief from royalty method, an income approach to valuation, which includes projecting future systemwide sales and other estimates. The goodwill impairment test consists of a comparison of each reporting unit’s fair value to its carrying value. The fair value of a reporting unit is an estimate of the amount for which the unit as a whole could be sold in a current transaction between willing parties. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value. Fair value of a reporting unit is estimated based on a combination of comparative market multiples and discounted cash flow valuation approaches. Currently, we have selected the first day of our fiscal third quarter as the date on which to perform our annual impairment tests for all indefinite lived intangible assets. We also test for impairment whenever events or circumstances indicate that the fair value of such indefinite lived intangibles has been impaired. We recorded a $294.5 million goodwill impairment charge related to Dunkin’ Donuts U.S. and Baskin-Robbins International, as well as a $34.0 million trade name impairment related to Baskin-Robbins U.S., during fiscal 2008. No impairment of indefinite lived intangible assets was recorded during fiscal 2009, fiscal 2010, or the nine months ended September 24, 2011.

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

 

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

Common stock valuation

For all stock-based awards, we measure compensation cost at fair value on the date of grant and recognize compensation expense over the service period that the awards are expected to vest. The key assumption in determining the fair value of stock-based awards on the date of grant is the fair value of the underlying common stock. From fiscal year 2008 through the nine-month period ended September 24, 2011, we granted restricted shares and stock options to employees with a fair value of the underlying common stock as follows:

 

Grant date    Number of
restricted
shares
     Number of
executive
options
    

Number of

nonexecutive
options

     Fair value per
common share
 

 

 

6/24/2008

                     69,615         5.44   

7/1/2008

     160,902                         5.44   

5/15/2009

                     14,908         1.92   

2/23/2010

             4,575,306                 3.01   

7/26/2010

             169,658         19,702         5.02   

8/6/2010

             5,473         202,496         5.02   

3/9/2011

             637,040         21,891         7.31   

7/26/2011

     65,000         191,000         28,600         19.00   

 

 

For the awards granted on July 26, 2011, the fair value per common share was determined based on the initial public offering price of the Company’s common stock. For awards granted prior to July 26, 2011, the fair value of common stock underlying the Company’s restricted shares and options was determined based on contemporaneous valuations performed by an independent third-party valuation specialist in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The valuation methodology utilized by the independent third-party valuation specialist was consistent for all valuations completed from 2006 through the first quarter of fiscal year 2011. Financial projections underlying the valuation were determined by management based on long-range projections that were prepared on at least an annual basis and reviewed with the board of

 

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directors. Due to the Company’s two classes of common stock, Class L and common, the valuation approach was a two-step process in which the overall equity value of the Company was determined, and then allocated between the two classes of stock.

Overall enterprise and equity values were estimated using a combination of both market and income approaches in order to corroborate the values derived under the different methods. The market-based approach was based on multiples of historical and projected earnings before interest, taxes, depreciation, and amortization (“EBITDA”) utilizing trading multiples of a selected peer group of quick service restaurant companies. The selected peer group was generally consistent in each valuation and included a consistent focus on three core peer comparables. The selected multiples from the peer group were then applied to the Company’s historical and projected EBITDA to derive indicated values of the total enterprise. The income approach utilized the discounted cash flow method, which determined enterprise value based on the present value of estimated future net cash flows the business is expected to generate over a forecasted five-year period plus the present value of estimated cash flows beyond that period based on a level of growth in perpetuity. These cash flows were discounted to present value using a weighted average cost of capital (“WACC”), which reflects the time value of money and the appropriate degree of risks inherent in the business. Net debt as of the valuation date was then deducted from the total enterprise values determined under both the market and income approaches to determine the equity values. Once calculated, the market and income valuation approaches were then weighted to determine a single total equity value, with 60% of the weighting allocated to the market approach and 40% of the weighting allocated to the income approach. The weighting was consistent for all periods.

The total equity value at each valuation date was then allocated to common stock and Class L based on the probability weighted expected return method (the “PWERM methodology”), which involved a forward-looking analysis of possible future exit valuations based on a range of EBITDA multiples at various future exit dates, the estimation of future and present value under each outcome, and the application of a probability factor to each outcome. Returns to each class of stock as of each possible future exit date and under each EBITDA multiple scenario were calculated by (i) first allocating equity value to the Class L shares up to the amount of its preferential distribution amount at the assumed exit date and (ii) allocating any residual equity value to the common stock and Class L on a participating basis. The position of the common stock as the lowest security in the capital structure and only participating in returns after the Class L preferential distribution amount is satisfied results in greater volatility in the common stock fair value.

The significant assumptions underlying the common stock valuations at each grant date were as follows:

 

                   Discounted cash flow     PWERM  
Grant Date(s)   Fair value
per common
share
    Market
approach
EBITDA
multiples
    Perpetuity
growth rate
    Discount
rate
(WACC)
    Core
EBITDA
multiple
    Weighted
average
years to exit
    Common
stock
discount
rate
    Class L
discount
rate
 

 

 

6/24/2008, 7/1/2008

  $ 5.44        10.0x-11.0x        3.5%        9.5%        10.5x        2.0        40.0%        12.0%   

5/15/2009

  $ 1.92        10.0x        3.5%        10.4%        10.0x        2.5        45.0%        13.0%   

2/23/2010

  $ 3.01        10.0x-10.5x        3.5%        9.8%        10.5x        2.3        42.5%        12.5%   

7/26/2010, 8/6/2010

  $ 5.02        10.5x-11.0x        3.0%        10.2%        10.5x        2.0        42.5%        12.5%   

3/9/2011

  $ 7.31        10.0x-11.0x        3.0%        10.6%        10.5x        1.6        32.5%        11.5%   

 

 

A 0.5x change in the EBITDA multiples used under the market approach for the three most recent valuation dates listed in the table above would have resulted in a 5% to 9% change in the common stock value per share, while a 1.0x change in the EBITDA multiples would have resulted in a 10% to 16% change in the common stock

 

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value per share. A 50 basis point change in the perpetuity growth rate used in the discounted cash flow calculation under the income approach for the three most recent valuation dates listed in the table above would have resulted in a 3% to 7% change in the common stock value per share. A 100 basis point change in the discount rate used in the discounted cash flow calculation under the income approach for the three most recent valuation dates listed in the table above would have resulted in a 9% to 16% change in the common stock value per share.

From 2008 through the first fiscal quarter of 2011, the overall equity value of the Company has trended consistent with overall stock market indices and companies within the restaurant industry. The Company’s equity value declined towards the end of 2008 and into early 2009 driven by broad economic trends that impacted both internal financial results and projections, as well as overall market multiples and values. Since that time period, the overall equity markets have partially recovered, and the Company’s total equity value has tracked along with that recovery. The Company’s common stock has realized greater volatility over this period than the Company’s overall equity value due to its placement within the capital structure, where the Class L shares are entitled to receive a 9% preferred return.

Income tax valuation and tax reserves

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

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

A tax position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Estimates of interest and penalties on unrecognized tax benefits are recorded in the provision for income taxes.

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

 

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Selected operating and financial highlights

 

     Three months ended     Nine months ended     Fiscal year  
    September 25,     September 24,     September 25,     September 24,    
    2010     2011     2010     2011     2008     2009      2010  

 

 
    (In thousands, except percentages)  

Systemwide sales growth:

    6.6%        8.9%        6.1%        7.1%        5.0%        4.1%         6.7%   

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

              

Dunkin’ Donuts U.S.

    2.7%        6.0%        1.4%        4.3%        (0.8)%        (1.3)%         2.3%   

Baskin-Robbins U.S.

    (5.8)%        1.7%        (6.1)%        (0.7)%        (2.2)%        (6.0)%         (5.2)%   

Total revenues

  $ 149,531      $ 163,508      $ 427,359      $ 459,693      $ 544,929      $ 538,073       $ 577,135   

Operating income (loss)

    54,574        54,112        149,145        160,742        (140,893     184,545         193,525   

Adjusted operating income

    62,601        75,947        177,415        197,739          

Net income (loss)

    18,842        7,412        42,117        22,851        (269,898     35,008         26,861   

Adjusted net income (loss)

    23,658        31,343        61,295        65,582          

 

 

Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, impairment charges, and Sponsor management agreement termination fee, and, in the case of adjusted net income, loss on debt extinguishment and refinancing transactions, net of the tax impact of such adjustments. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies. Adjusted operating income and adjusted net income are reconciled from operating income (loss) and net income (loss), respectively, determined under GAAP as follows:

 

     Three months ended     Nine months ended     Fiscal year  
   

September 25,

2010

   

September 24,

2011

    September 25,
2010
    September 24,
2011
   
            2008     2009     2010  

 

 
    (In thousands)  

Operating income (loss)

  $ 54,574        54,112        149,145        160,742        (140,893     184,545        193,525   

Adjustments:

             

Sponsor termination fee

           14,671               14,671                        

Amortization of other intangible assets

    7,762        7,001        25,315        21,106        37,848        35,994        32,467   

Impairment charges

    265        163        2,955        1,220        331,862        8,517        7,075   
 

 

 

 

Adjusted operating income

  $ 62,601        75,947        177,415        197,739        228,817        229,056        233,067   

Net income (loss)

  $ 18,842        7,412        42,117        22,851        (269,898     35,008        26,861   

Adjustments:

             

Sponsor termination fee

           14,671               14,671                        

Amortization of other intangible assets

    7,762        7,001        25,315        21,106        37,848        35,994        32,467   

Impairment charges

    265        163        2,955        1,220        331,862        8,517        7,075   

Loss (gain) on debt extinguishment and refinancing transactions

           18,050        3,693        34,222               (3,684     61,955   

Tax impact of adjustments(1)

    (3,211     (15,954     (12,785     (28,488     (30,093     (16,331     (40,599
 

 

 

 

Adjusted net income

  $ 23,658        31,343        61,295        65,582        69,719        59,504        87,759   

 

 

 

(1)   Tax impact of adjustments calculated at a 40% effective tax rate for each period presented, excluding the goodwill impairment charge in fiscal year 2008, as the goodwill is not deductible for tax purposes.

 

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Three and nine months ended September 24, 2011 compared to the three and nine months ended September 25, 2010

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

Overall growth in systemwide sales of 8.9% and 7.1% for the three and nine months ended September 24, 2011, respectively, resulted from the following:

 

 

Dunkin’ Donuts U.S. systemwide sales growth of 8.3% and 6.6% for the three and nine months ended September 24, 2011, respectively, as a result of 197 net new restaurants opened since September 25, 2010 and comparable store sales growth of 6.0% and 4.3%, respectively, driven by a combination of an increase in both transactions and average ticket. The increase in average ticket was driven primarily by three factors: shift in product mix towards iced beverages and premium breakfast sandwiches, increase in units per transaction, and an increase in pricing.

 

 

Baskin-Robbins International systemwide sales growth of 13.0% and 11.8% for the three and nine months ended September 24, 2011, respectively, as a result of increased sales in South Korea and Japan, which resulted from favorable foreign exchange and strong sales, as well as increased sales in the Middle East.

 

 

Dunkin’ Donuts International systemwide sales growth of 13.7% and 11.4% for the three and nine months ended September 24, 2011, respectively, which was driven by favorable foreign exchange and strong sales in South Korea, as well as increased sales in Southeast Asia and the Middle East.

 

 

Baskin-Robbins U.S. systemwide sales declines of 0.1% and 1.9% for the three and nine months ended September 24, 2011, respectively. The systemwide sales decline for the three months ended September 24, 2011 resulted from reduced points of distribution, offset by comparable store sales growth of 1.7%. The systemwide sales decline for the nine months ended September 24, 2011 resulted from a comparable store sales decline of 0.7%, as well as a reduced restaurant base.

The increase in total revenues of approximately $14.0 million, or 9.3%, for the three months ended September 24, 2011 as compared to the comparable period of 2010 primarily resulted from increased franchise fees and royalty income of $12.4 million and sales of ice cream products of $2.2 million, which were primarily driven by the overall increase in systemwide sales. The increase in total revenues of approximately $32.3 million, or 7.6%, for the nine months ended September 24, 2011 as compared to the comparable period of 2010 primarily resulted from increased franchise fees and royalty income of $25.6 million and sales of ice cream products of $8.4 million, both of which were also driven by the overall increase in systemwide sales, offset by a $1.9 million decline in other revenues resulting from fewer company-owned stores.

Operating income for the three months ended September 24, 2011 remained relatively flat with the prior year, decreasing $0.5 million, or 0.8%. This slight decline resulted primarily from a $12.2 million increase in general and administrative expenses driven by a $14.7 million expense related to the termination of the Sponsor management agreement upon the Company’s initial public offering, as well as a $2.6 million increase in the cost of ice cream products due to higher sales volumes and unfavorable commodity costs, offset by the $14.0 million increase in total revenues. Operating income increased $11.6 million, or 7.8%, for the nine months ended

 

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September 24, 2011, driven by the $25.6 million increase in franchise fees and royalty income and a $5.0 million decline in depreciation and amortization, offset by a $16.3 million increase in general and administrative expenses driven by the expense related to the termination of the Sponsor management agreement, as well as a $3.8 million decline in equity in net income of joint ventures.

Adjusted operating income increased $13.3 million, or 21.3%, for the three months ended September 24, 2011 primarily as a result of a $12.4 million increase in franchise fees and royalty income and a $2.4 million decrease in general and administrative expenses. Adjusted operating income increased $20.3 million, or 11.5%, for the nine months ended September 24, 2011 driven by a $25.6 million increase in franchise fees and royalty income and a $0.9 million decrease in occupancy expenses for franchised restaurants, offset by a $3.8 million decrease in joint venture income and a $1.9 million decrease in other revenues.

Net income declined $11.4 million, or 60.7%, for the three months ended September 24, 2011 resulting from an $18.1 million loss on debt extinguishment and refinancing transactions recorded in the current quarter resulting from the completion of the initial public offering and related repayment of senior notes, offset by a $5.8 million decline in the provision for income taxes. Net income declined $19.3 million, or 45.7%, for the nine months ended September 24, 2011, primarily driven by increased losses on debt extinguishment and refinancing transactions of $30.5 million resulting from repayments of senior notes and amendments to the senior credit facility, as well as a $6.2 million increase in interest expense resulting from additional long-term debt obtained since the prior year. These declines in net income were offset by an increase in operating income of $11.6 million and a decrease in the provision for income taxes of $5.5 million.

Adjusted net income increased $7.7 million, or 32.5%, for the three months ended September 24, 2011 primarily as a result of a $13.3 million increase in adjusted operating income and a $1.6 million decrease in interest expense, offset by a $6.9 million increase in the provision for income taxes. Adjusted net income increased $4.3 million, or 7.0%, for the nine months ended September 24, 2011 driven by a $20.3 million increase in adjusted operating income, offset by a $10.2 million increase in the provision for income taxes and a $6.2 million increase in interest expense.

Fiscal year 2010 compared to fiscal year 2009

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

 

 

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

 

 

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

 

 

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

 

 

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

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

 

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Operating income increased $9.0 million, or 4.9%, for fiscal 2010 driven by the increase in franchise fees and royalty income noted above, as well as a $3.5 million increase in equity in net income of joint ventures and a $6.5 million reduction in depreciation, amortization and impairment charges. Increases in general and administrative expenses, excluding cost of sales for company-owned restaurants, offset the additional revenues and joint venture income.

Adjusted operating income increased $4.0 million, or 1.8%, for fiscal 2010 driven by the increases in franchise fees and royalty income and equity in net income of joint ventures, offset by increased general and administrative expenses, excluding cost of sales for company-owned restaurants.

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

Adjusted net income increased $28.3 million, or 47.5%, for fiscal 2010 resulting primarily from a $22.4 million decrease in the provision for income taxes, a $4.0 million increase in adjusted operating income, and a $2.6 million decrease in interest expense.

Fiscal year 2009 compared to fiscal year 2008

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

 

 

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

 

 

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

 

 

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

 

 

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

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

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

Adjusted operating income for fiscal 2009 remained flat with the prior year, increasing $0.2 million, or 0.1%. The slight increase resulted primarily from a $3.6 million reduction in occupancy expenses for franchised restaurants, a $2.0 million reduction in cost of ice cream products, and a $1.5 million decrease in depreciation, which were offset by a $6.9 million reduction in revenues.

 

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Net income increased $304.9 million for fiscal 2009 driven by the $325.4 million increase in operating income resulting from the goodwill and trade name impairment charges recorded in fiscal 2008. Offsetting the operating income decline was a $30.1 million increase in tax expense primarily resulting from 2008 including tax benefits related to the trade name impairment charge and changes in future state tax rates.

Adjusted net income declined $10.2 million, or 14.7%, for fiscal 2009 resulting primarily from a $16.4 million increase in the provision for income taxes, offset by more favorable other gains/losses of $5.0 million and a $1.0 million decrease in net interest expense.

Earnings per share

Earnings and adjusted earnings per common share and pro forma common share for the three and nine months ended September 24, 2011 and September 25, 2010 were as follows:

 

     Three months ended     Nine months ended  
    September 25,
2010
    September 24,
2011
   

September 25,
2010

   

September 24,
2011

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share—basic and diluted:

       

Class L

  $ 1.25      $ 4.46      $ 3.69      $ 6.14   

Common

    (0.24     (1.01     (1.02     (2.00