Baskin Robbins 2011 Annual Report Download - page 39

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timing of our gift card uses and activations, would be approximately $19.7 million. The corresponding potential
tax expense impact attributable to these later fiscal years, 2008 through 2010, would be approximately $0.8
million. During the fourth quarter of 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.
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