Baskin Robbins 2013 Annual Report Download - page 100

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Supply Chain Guarantees
In 2012, the Company entered into a third-party guarantee with a distribution facility of franchisee products that guarantees
franchisees would sell a certain volume of cooler beverages each year over a 4-year period. During the second quarter of fiscal
year 2013, the Company determined that the franchisees will not achieve the required sales volume, and therefore, the
Company accrued the maximum guarantee under the agreement of $7.5 million, which is included in other current liabilities in
the consolidated balance sheets and general and administrative expenses, net in the consolidated statements of operations. The
Company expects to make the required guarantee payment during the first quarter of 2014. No additional guarantee payments
will be required under the agreement.
The Company has also entered into a third-party guarantee with this 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 28, 2013 and
December 29, 2012, the Company was contingently liable for $5.7 million and $6.8 million, respectively, 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 28, 2013 and December 29, 2012, we were contingently liable under such supply chain
agreements for approximately $52.6 million and $57.5 million, respectively. The Company assesses the risk of performing
under each of these guarantees on a quarterly basis, and, considering various factors including internal forecasts, prior history,
and ability to extend contract terms, we have accrued $906 thousand related to these commitments as of December 28, 2013,
which is included in other current liabilities in the consolidated balance sheets. There were no amounts accrued as of
December 29, 2012.
Lease Guarantees
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 2024. As of December 28, 2013 and December 29, 2012, the potential amount of
undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $6.4
million and $5.6 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 28, 2013 and December 29, 2012, the Company had standby letters of credit outstanding for a total of $3.0
million and $11.5 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 fiscal years 2013 and 2012, the Company accrued additional interest on the judgment amount of $952 thousand and
$493 thousand, respectively, resulting in an estimated liability of $25.1 million, including the impact of foreign exchange, as of
December 28, 2013. 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 28, 2013 and
December 29, 2012, contingent liabilities, excluding the Bertico litigation, totaling $1.5 million 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