Baskin Robbins 2011 Annual Report Download - page 38

Our franchisees are subject to various existing U.S. federal, state, local and foreign laws affecting the operation
of the restaurants including various health, sanitation, fire and safety standards. Franchisees may in the future
become subject to regulation (or further regulation) seeking to tax or regulate high-fat foods or requiring the
display of detailed nutrition information, which would be costly to comply with and could result in reduced
demand for our products. In connection with the continued operation or remodeling of certain restaurants, the
franchisees may be required to expend funds to meet U.S. federal, state and local and foreign regulations.
Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the
opening of a new restaurant in a particular area or cause an existing restaurant to cease operations. All of these
situations would decrease sales of an affected restaurant and reduce royalty payments to us with respect to such
restaurant.
The franchisees are also subject to the Fair Labor Standards Act of 1938, as amended, and various other laws in
the U.S. and in foreign countries governing such matters as minimum-wage requirements, overtime and other
working conditions and citizenship requirements. A significant number of our franchisees’ food-service
employees are paid at rates related to the U.S. federal minimum wage, and past increases in the U.S. federal
minimum wage have increased labor costs, as would future increases. Any increases in labor costs might result in
franchisees inadequately staffing restaurants. Understaffed restaurants could reduce sales at such restaurants,
decrease royalty payments and adversely affect our brands.
Our and our franchisees’ operations and properties are subject to extensive U.S. federal, state and local laws and
regulations, including those relating to environmental, building and zoning requirements. Our development of
properties for leasing or subleasing to franchisees depends to a significant extent on the selection and acquisition
of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and
requirements. Failure to comply with legal requirements could result in, among other things, revocation of
required licenses, administrative enforcement actions, fines and civil and criminal liability. We may incur
investigation, remediation or other costs related to releases of hazardous materials or other environmental
conditions at our properties, regardless of whether such environmental conditions were created by us or a third
party, such as a prior owner or tenant. We have incurred costs to address soil and groundwater contamination at
some sites and continue to incur nominal remediation costs at some of our other locations. If such issues become
more expensive to address, or if new issues arise, they could increase our expenses, generate negative publicity,
or otherwise adversely affect us.
Our tax returns and positions are subject to review and audit by foreign, 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.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. The federal income
tax returns of the Company for fiscal years 2006 through 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 15 of the notes to our audited
consolidated financial statements included herein). As described in Note 15 of the notes to our audited
consolidated financial statements included herein, 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 $26.8 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 $3.1 million, consisting of
federal and state interest, net of federal and state benefits. In addition, if the IRS were to prevail in respect of
fiscal years 2006 and 2007 it is likely to make similar claims for years subsequent to fiscal 2007 and the potential
additional federal and state taxes and interest owed, net of federal and state benefits, for fiscal years 2008 through
2010, computed on a similar basis to the IRS method used for fiscal years 2006 and 2007, and factoring in the
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