Dunkin' Donuts 2015 Annual Report Download - page 98

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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 fiscal year 2013, the
Company determined that the franchisees would 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 general and administrative expenses, net in the
consolidated statements of operations. The Company made the full required guarantee payment during fiscal year 2014. No
additional guarantee payments will be required under the agreement.
The Company has various supply chain agreements that provide for purchase commitments, the majority of which result in the
Company being contingently liable upon early termination of the agreement. As of December 26, 2015 and December 27,
2014, the Company was contingently liable under such supply chain agreements for approximately $157.8 million and $55.8
million, respectively. The increase in contingent liabilities from the prior year is primarily due to the Company entering into an
amended and restated agreement with a supplier during the third quarter of fiscal year 2015 upon expiration of the original
agreement, under which the Company guarantees franchisees will purchase a certain volume of product each year over the term
of the agreement. Similar to certain other supply chain commitments, as product is purchased by the Company’s franchisees
over the term of the agreement, the amount of the guarantee is reduced. 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 accrued $507 thousand related to supply chain commitments as of December 27, 2014,
which is included in other current liabilities in the consolidated balance sheets. There was no accrual required as of
December 26, 2015 related to these commitments.
Lease Guarantees
The Company is contingently liable on certain lease agreements typically resulting from assigning our interest in obligations
under property leases as a condition of refranchising certain restaurants and the guarantee of certain other leases. These leases
have varying terms, the latest of which expires in 2024. As of December 26, 2015 and December 27, 2014, the potential
amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee
was $3.7 million and $6.3 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 26, 2015 and December 27, 2014, the Company had standby letters of credit outstanding for a total of $26.3
million and $2.9 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, 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 (the “Bertico litigation”). In June 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, plus costs and interest, representing loss in value of the franchises and lost profits. The Company appealed the
decision, and in April 2015, the Quebec Court of Appeals (Montreal) ruled to reduce the damages to approximately C$10.9
million, plus costs and interest. Similar claims have also been made against the Company by other former Dunkin’ Donuts
franchisees in Canada. As a result of the Bertico litigation appellate ruling and assessment of similar claims, the Company
reduced its aggregate legal reserves for the Bertico litigation and similar claims by approximately $2.8 million during the first
quarter of fiscal year 2015, which is recorded within general and administrative expenses, net in the consolidated statements of
operations, resulting in an estimated liability of $18.1 million as of December 26, 2015. The Company has sought leave to
appeal with the Supreme Court of Canada in the Bertico litigation.
Additionally, 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 26, 2015 and December 27, 2014, contingent liabilities, excluding the Bertico litigation, totaling $215 thousand and
$765 thousand, respectively, were included in other current liabilities in the consolidated balance sheets to reflect the
Company’s estimate of the probable losses which may be incurred in connection with these matters.