Baskin Robbins 2013 Annual Report Download - page 28

-18-
the display of detailed nutrition information. Each of these regulations would be costly to comply with and/or could result in
reduced demand for our products.
In connection with the continued operation or remodeling of certain restaurants, 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 Internal Revenue Service
(“IRS”) concluded its examination of the federal income tax returns for the fiscal year 2010 during fiscal year 2013 and agreed
to a settlement regarding the recognition of revenue for gift cards and other matters. The Company made a cash payment for the
additional federal tax due totaling $3.0 million. Based on this and previous settlements, additional state taxes and federal and
state interest owed, net of federal and state benefits, are approximately $1.5 million, of which approximately $0.8 million was
paid during fiscal year 2013. As the additional federal and state taxes owed for all periods represent temporary differences that
will be deductible in future years, the potential tax expense is limited to federal and state interest, net of federal and state
benefits, which we do not expect to be material. See Note 16 of the notes to our audited consolidated financial statements
included herein.
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