Dunkin' Donuts 2012 Annual Report Download - page 96

-86-
2012 and December 31, 2011, the Company had recorded reserves for such guarantees of $389 thousand and $390 thousand,
respectively.
The Company has entered into a third-party guarantee with a distribution facility of franchisee products that ensures franchisees
will purchase a certain volume of product over a 10-year period. As product is purchased by the Company’s franchisees over
the term of the agreement, the amount of the guarantee is reduced. As of December 29, 2012 and December 31, 2011, the
Company was contingently liable for $6.8 million and $7.8 million, respectively, under this guarantee. The Company has also
entered into a third-party guarantee with this distribution facility that ensures franchisees will sell a certain volume of product
each year over a 5-year period. As of December 29, 2012, the Company was contingently liable for $7.5 million under this
guarantee. Additionally, the Company has various supply chain contracts that provide for purchase commitments or exclusivity,
the majority of which result in the Company being contingently liable upon early termination of the agreement or engaging
with another supplier. As of December 29, 2012 and December 31, 2011, we were contingently liable under such supply chain
agreements for approximately $57.5 million and $23.9 million, respectively. The Company assesses the risk of performing
under each of these guarantees on a quarterly basis, and, based on various factors including internal forecasts, prior history, and
ability to extend contract terms, we have not recorded any liabilities related to these commitments.
As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain
restaurants and the guarantee of certain other leases, we are contingently liable on certain lease agreements. These leases have
varying terms, the latest of which expires in 2026. As of December 29, 2012 and December 31, 2011, the potential amount of
undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $5.6
million and $10.5 million, respectively. Our franchisees are the primary lessees under the majority of these leases. The
Company generally has cross-default provisions with these franchisees that would put them in default of their franchise
agreement in the event of nonpayment under the lease. We believe these cross-default provisions significantly reduce the risk
that we will be required to make payments under these leases. Accordingly, we do not believe it is probable that the Company
will be required to make payments under such leases, and we have not recorded a liability for such contingent liabilities.
(c) Letters of credit
At December 29, 2012 and December 31, 2011, the Company had standby letters of credit outstanding for a total of $11.5
million and $11.2 million, respectively. There were no amounts drawn down on these letters of credit.
(d) Legal matters
In May 2003, a group of Dunkin’ Donuts franchisees from Quebec, Canada filed a lawsuit against the Company on a variety of
claims, based on events which primarily occurred 10 to 15 years ago, including but not limited to, alleging that the Company
breached its franchise agreements and provided inadequate management and support to Dunkin’ Donuts franchisees in Quebec
(“Bertico litigation”). On June 22, 2012, the Quebec Superior Court found for the plaintiffs and issued a judgment against the
Company in the amount of approximately C$16.4 million (approximately $15.9 million), plus costs and interest, representing
loss in value of the franchises and lost profits. During the second quarter of 2012, the Company increased its estimated liability
related to the Bertico litigation by $20.7 million to reflect the judgment amount and estimated plaintiff legal costs and interest.
During the third and fourth quarters of 2012, the Company accrued an additional $493 thousand for interest that continues to
accrue on the judgment amount, resulting in an estimated liability of $25.8 million, including the impact of foreign exchange,
as of December 29, 2012. The Company had recorded an estimated liability of approximately $3.9 million as of December 31,
2011, representing the Company’s best estimate within the range of losses which could be incurred in connection with this
matter. The Company strongly disagrees with the decision reached by the Court and believes the damages awarded were
unwarranted. As such, the Company is vigorously appealing the decision.
The Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such
matters include disputes related to compliance with the terms of franchise and development agreements, including claims or
threats of claims of breach of contract, negligence, and other alleged violations by the Company. At December 29, 2012 and
December 31, 2011, contingent liabilities, excluding the Bertico litigation, totaling $1.5 million and $736 thousand,
respectively, were included in other current liabilities in the consolidated balance sheets to reflect the Company’s estimate of
the potential loss which may be incurred in connection with these matters. While the Company intends to vigorously defend its
positions against all claims in these lawsuits and disputes, it is reasonably possible that the losses in connection with all matters
could increase by up to an additional $12.0 million based on the outcome of ongoing litigation or negotiations.
(18) Retirement plans
401(k) Plan
Employees of the Company, excluding employees of certain international subsidiaries, participate in a defined contribution
retirement plan, the Dunkin’ Brands, Inc. 401(k) Retirement Plan (“401(k) Plan”), under Section 401(k) of the Internal Revenue