DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Financial Report March 26, 2011 and March 27, 2010 (Unaudited) DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Table of Contents Page Consolidated Financial Statements: Consolidated Balance Sheets (unaudited) 2 Consolidated Statements of Operations (unaudited) 3 Consolidated Statement of Stockholder’s Equity and Comprehensive Income (unaudited) 4 Consolidated Statements of Cash Flows (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) (Unaudited) Assets Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $5,170 and $5,518 as of March 26, 2011 and December 25, 2010, respectively Notes and other receivables, net of allowance for doubtful accounts of $3,237 and $2,443 as of March 26, 2011 and December 25, 2010, respectively Assets held for sale Deferred income taxes, net Restricted assets of advertising funds Prepaid income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net of accumulated depreciation of $95,024 and $90,663 as of March 26, 2011 and December 25, 2010, respectively Investments in joint ventures Goodwill Other intangible assets, net Restricted cash Other assets Total assets Liabilities and Stockholder’s Equity Current liabilities: Current portion of long-term debt Capital lease obligations Accounts payable Liabilities of advertising funds Deferred income Other current liabilities Total current liabilities Long-term debt, net Capital lease obligations Unfavorable operating leases acquired Deferred income Deferred income taxes, net Other long-term liabilities Total long-term liabilities Commitments and contingencies (note 10) Stockholder’s equity: Common stock, $0.01 par value; 1,000 shares authorized; 100 shares issued and outstanding Additional paid-in capital Accumulated deficit Accumulated other comprehensive income Total stockholder’s equity Total liabilities and stockholder’s equity See accompanying notes to unaudited consolidated financial statements. March 26, December 25, 2011 2010 $ 120,508 134,100 38,141 35,239 9,780 44,704 1,473 4,328 12,613 12,570 32,787 25,113 11,767 7,641 21,111 20,682 248,180 284,377 189,693 193,273 175,107 169,276 888,675 888,655 1,528,752 1,535,657 342 404 84,428 75,646 $ 3,115,177 3,147,288 $ 14,000 12,500 212 205 9,478 9,822 48,965 48,213 24,492 26,221 142,247 183,594 239,394 280,555 1,848,218 1,847,016 5,104 5,160 23,866 24,744 21,543 21,326 587,124 586,337 77,111 75,909 2,562,966 2,560,492 —— 488,755 485,413 (194,522) (192,799) 18,584 13,627 312,817 306,241 $ 3,115,177 3,147,288 2 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands) (Unaudited) Three months ended March 26, March 27, 2011 2010 Revenues: Franchise fees and royalty income $ 85,959 80,165 Rental income 22,131 22,116 Sales of ice cream products 22,716 17,793 Other revenues 8,407 7,338 Total revenues 139,213 127,412 Operating costs and expenses: Occupancy expenses – franchised restaurants 12,288 14,156 Cost of ice cream products 15,124 12,222 General and administrative expenses, net 53,886 51,245 Depreciation and amortization 13,208 15,332 Impairment charges 653 1,414 Total operating costs and expenses 95,159 94,369 Operating income 44,054 33,043 Other income (expense): Interest income 115 71 Interest expense (33,882) (27,591) Equity in net income of joint ventures 782 3,642 Loss on debt extinguishment and refinancing transaction (11,007) — Other gains, net 476 245 Total other expense (43,516) (23,633) Income before income taxes 538 9,410 Provision for income taxes 2,261 3,472 Net income (loss) $ (1,723) 5,938 See accompanying notes to unaudited consolidated financial statements. 3 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholder’s Equity and Comprehensive Income (In thousands) (Unaudited) Accumulated Additional other Common stock paid-in Accumulated comprehensive Shares Amount capital deficit income Total Balance at December 25, 2010 100 $ — 485,413 (192,799) 13,627 306,241 Net loss — — — (1,723) — (1,723) Effect of foreign currency translation — — — — 5,033 5,033 Other — — — — (76) (76) Comprehensive income 3,234 Contributions from parent, net — — 3,342 — — 3,342 Balance at March 26, 2011 100 $ — 488,755 (194,522) 18,584 312,817 See accompanying notes to unaudited consolidated financial statements. 4 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Amortization of deferred financing costs and original issue discount Loss on debt extinguishment and refinancing transaction Impact of unfavorable operating leases acquired Deferred income taxes Impairment charges Provision for bad debt Share-based compensation expense Equity in net income of joint ventures Other, net Change in operating assets and liabilities: Restricted cash Accounts, notes, and other receivables, net Other current assets Accounts payable Other current liabilities Restricted liabilities of advertising funds, net Income taxes payable, net Deferred income Other, net Net cash provided by operating activities Cash flows from investing activities: Additions to property and equipment Other, net Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Repayment of long-term debt Proceeds from short-term debt Payments on capital lease obligations Deferred financing and other debt-related costs Change in restricted cash Contributions from (dividends to) parent, net Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental cash flow information: Cash paid for: Income taxes Interest Noncash investing activity: Property and equipment included in accounts payable and accrued expenses See accompanying notes to unaudited consolidated financial statements. Three months ended March 26, March 27, 2011 2010 $ (1,723) 5,938 13,208 15,332 1,582 1,797 11,007 — (852) (972) 726 (1,887) 653 1,414 602 1,183 241 612 (782) (3,642) (118) 5 — 22,661 31,480 25,594 2,679 1,430 381 (3,169) (41,696) (41,117) (6,926) (3,783) (3,819) 4,447 (1,520) (1,737) (1,529) 487 3,594 24,593 (3,734) (3,465) 301 — (3,433) (3,465) 150,000 — (150,750) — — 34,564 (49) (54) (16,209) — 73 420 3,101 (2,959) (13,834) 31,971 81 9 (13,592) 53,108 134,100 53,210 $ 120,508 106,318 $ 5,303 899 20,827 25,467 $ 1,130 842 5 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (1) Description of Business and Organization Dunkin’ Brands, Inc. (DBI) and subsidiaries (collectively, the Company), through its brand companies, is one of the world’s largest franchisors of restaurants serving coffee and baked goods as well as ice cream within the quick service restaurant segment of the restaurant industry. We develop, franchise, and license a system of both traditional and nontraditional quick service restaurants and, in limited circumstances, own and operate individual locations. Through our Dunkin’ Donuts brand, we develop and franchise restaurants featuring coffee, donuts, bagels, and related products. Through our Baskin-Robbins brand, we develop and franchise restaurants featuring ice cream, frozen beverages, and related products. Additionally, our subsidiaries located in Canada and the United Kingdom manufacture and/or distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in various international markets. DBI is a wholly owned subsidiary of Dunkin’ Brands Holdings, Inc. (Holdco), which is a wholly owned subsidiary of Dunkin’ Brands Group Holdings, Inc. (DBGHI). DBGHI is owned by funds controlled by Bain Capital Partners, LLC, The Carlyle Group, and Thomas H. Lee Partners, L.P. (collectively, the Sponsors or BCT). Throughout these financial statements, “the Company,” “we,” “us,” “our,” and “management” refer to DBI and subsidiaries taken as a whole. (2) Summary of Significant Accounting Policies (a) Unaudited Financial Statements The consolidated balance sheet as of March 26, 2011 and the consolidated statements of operations and cash flows for the three months ended March 26, 2011 and March 27, 2010 are unaudited. The accompanying consolidated financial statements include the accounts of DBI and subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant transactions and balances between subsidiaries and affiliates have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with U.S. GAAP have been recorded. Such adjustments consisted only of normal recurring items. The accompanying consolidated financial statements should be read in conjunction with the Company’s most recently issued consolidated financial statements as of and for the fiscal year ended December 25, 2010. 6 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (b) Fiscal Year The Company operates and reports financial information on a 52 or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter. The data periods contained within our three months ended March 26, 2011 and March 27, 2010 reflect the results of operations for the 13-week periods ending on those dates. Operating results for the three months ended March 26, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. (c) Accounting Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. (d) Fair Value of Financial Instruments The carrying amounts of accounts receivable, notes and other receivables, assets and liabilities related to the advertising funds, accounts payable, other payables, and accrued expenses approximate fair value because of their short-term nature. For long-term receivables, we review the creditworthiness of the counterparty on a quarterly basis, and adjust the carrying value as necessary. We believe the carrying value of long-term receivables of $5.6 million and $4.8 million as of March 26, 2011 and December 25, 2010, respectively, approximates fair value. Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. 7 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) Financial assets and liabilities measured at fair value on a recurring basis as of March 26, 2011 are summarized as follows (in thousands): Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Assets: Mutual funds $ 3,030 Total assets $ 3,030 — Liabilities: Deferred compensation liabilities $ 7,764 Total liabilities $ — 7,764 The mutual funds and deferred compensation liabilities primarily relate to the Dunkin’ Brands, Inc. Non-Qualified Deferred Compensation Plan (DCP Plan), which allows for pre-tax salary deferrals for certain qualifying employees. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, as defined under U.S. GAAP, because their inputs are derived principally from observable market data by correlation to the hypothetical investments. The Company holds mutual funds, as well as money market funds, to partially offset the Company’s liabilities under the DCP Plan as well as other benefit plans. The changes in the fair value of the mutual funds are derived using quoted prices in active markets for the specific funds. As such, the mutual funds are classified within Level 1, as defined under U.S. GAAP. The carrying value and fair value of long-term debt were as follows (in thousands): March 26, 2011 Carrying Fair Financial liabilities value value Term B-1 Loans $ 1,394,146 1,403,500 Senior Notes 468,072 484,500 $ 1,862,218 1,888,000 The fair values of our Term B-1 Loans and Senior Notes are estimated based on bid and offer prices for the same or similar instruments. Considerable judgment is required to develop these estimates. 8 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (e) Concentration of Credit Risk The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees and licensees for franchise fees and royalty income. In addition, we have note and lease receivables from certain of our franchisees and licensees. The financial condition of these franchisees and licensees is largely dependent upon the underlying business trends of our brands and market conditions within the quick service restaurant industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each brand and the short-term nature of the franchise and license fee and lease receivables. No individual franchisee or master licensee accounts for more than 10% of total revenues or accounts and notes receivable. (f) Recent Accounting Pronouncements In December 2010, the Financial Accounting Standards Board (FASB) issued new guidance to amend the criteria for performing the second step of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing the second step if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This new guidance is effective for the Company beginning in fiscal year 2011. We do not expect the adoption of this guidance to have a material impact on our goodwill assessment or our consolidated financial statements. In July 2010, the FASB issued new guidance for improving disclosures about the credit quality of financing receivables and the allowance for credit losses. This guidance requires an entity to provide enhanced disclosures of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The Company adopted this guidance during the first quarter of fiscal year 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements, and the relevant disclosures are included herein. In January 2010, the FASB issued new guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Levels 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and clarifications of existing disclosures were effective for the Company in fiscal year 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which were effective for the Company in fiscal year 2011. The adoption of this guidance did not have any impact on our financial position or results of operations, as it only relates to disclosures. (g) Subsequent Events Subsequent events have been evaluated up through April 27, 2011, the date these consolidated financial statements were available to be issued. 9 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (3) Goodwill and Other Intangible Assets The changes in the gross carrying amount of goodwill from December 25, 2010 to March 26, 2011 are due to the impact of foreign currency fluctuations. Other intangible assets at March 26, 2011 consisted of the following (in thousands): Weighted average amortization Gross period carrying Accumulated Net carrying (years) amount amortization amount Definite-lived intangibles: Franchise rights 20 $ 383,942 (103,946) 279,996 Favorable operating leases acquired 13 90,101 (35,391) 54,710 License rights 6 6,230 (3,154) 3,076 Indefinite-lived intangible: Trade names N/A 1,190,970 — 1,190,970 $ 1,671,243 (142,491) 1,528,752 Other intangible assets at December 25, 2010 consisted of the following (in thousands): Weighted average amortization Gross Net period carrying Accumulated carrying (years) amount amortization amount Definite lived intangibles: Franchise rights 20 $ 385,309 (100,296) 285,013 Favorable operating leases acquired 13 90,406 (33,965) 56,441 License rights 10 6,230 (2,997) 3,233 Indefinite lived intangible: Trade names N/A 1,190,970 — 1,190,970 $ 1,672,915 (137,258) 1,535,657 The changes in the gross carrying amount of other intangible assets from December 25, 2010 to March 26, 2011 are due to the impact of foreign currency fluctuations and the impairment of favorable operating leases acquired resulting from lease terminations. Impairment of favorable operating leases acquired totaled $12 thousand and $700 thousand for the three months ended March 26, 2011 and March 27, 2010, respectively, and is included within impairment charges in the consolidated statements of operations. 10 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) Total estimated amortization expense for fiscal years ending December 2011 through 2015 is presented below (in thousands). The amount reflected below for the fiscal year ending December 2011 includes year-to-date amortization. Fiscal year: 2011 $ 28,012 2012 26,943 2013 26,350 2014 25,806 2015 25,450 The impact of our unfavorable leases acquired resulted in an increase in rental income and a decrease in rental expense as follows (in thousands): Three months ended March 26, March 27, 2011 2010 Increase in rental income $ 374 461 Decrease in rental expense 478 511 Total increase in operating income $ 852 972 (4) Debt On February 18, 2011, the Company completed a re-pricing of its term loans under the senior credit facility, as well as increased the size of the term loans from $1.25 billion to $1.40 billion. The incremental proceeds of the term loans were used to repay $150.0 million of the Company’s Senior Notes. As a result of the re-pricing of the term loans, the Company recorded a loss on debt extinguishment and refinancing transaction of $4.4 million, which includes a debt extinguishment of $465 thousand related to the write-off of original issuance discount and deferred financing costs, and $3.9 million of costs related to the refinancing, including a prepayment premium and fees paid to third-party creditors. In conjunction with the repurchase of Senior Notes, the Company recorded a loss on debt extinguishment of $6.6 million, which includes the write-off of original issuance discount and deferred financing costs totaling $5.8 million, as well as a prepayment premium and third-party costs of $758 thousand. Term loan borrowings under the amended senior credit facility bear interest at a rate per annum equal to, at our option, either a base rate or a Eurodollar rate. The base rate is equal to an applicable rate of 2.00% plus the highest of (a) the Federal Funds rate plus 0.50%, (b) a prime rate, (c) one-month LIBOR rate plus 1.00%, and (d) 2.25%. The Eurodollar rate is equal to an applicable rate of 3.00% plus the higher of (a) a LIBOR rate and (b) 1.25%. The interest rate on the revolving credit facility remained unchanged. Repayments are required to be made on term loan borrowings equal to $14.0 million per calendar year, payable in quarterly installments through September 2017. 11 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (5) Other Current Liabilities Other current liabilities consisted of the following (in thousands): March 26, December 25, 2011 2010 Gift card/certificate liability $ 80,898 123,078 Accrued salary and benefits 16,173 21,307 Accrued professional and legal costs 9,257 9,839 Accrued interest 17,292 6,129 Other 18,627 23,241 Total other current liabilities $ 142,247 183,594 (6) Comprehensive Income Comprehensive income for the three months ended March 26, 2011 and March 27, 2010 consisted of the following (in thousands): Three months ended March 26, March 27, 2011 2010 Net income (loss) $ (1,723) 5,938 Effect of foreign currency translation 5,033 2,148 Other (76) 81 Total comprehensive income $ 3,234 8,167 The components of accumulated other comprehensive income were as follows (in thousands): March 26, December 25, 2011 2010 Effect of foreign currency translation $ 19,383 14,350 Other (799) (723) Total accumulated other comprehensive income $ 18,584 13,627 12 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (7) Segment Information The Company is strategically aligned into two global brands, Dunkin’ Donuts and Baskin-Robbins, which are further segregated between U.S. operations and international operations. As such, the Company has determined that it has four operating segments, which are its reportable segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. Dunkin’ Donuts U.S., Baskin-Robbins U.S., and Dunkin’ Donuts International primarily derive their revenues through royalty income, franchise fees, and rental income. Baskin-Robbins U.S. also derives revenue through license fees from a third-party license agreement. Baskin-Robbins International primarily derives its revenues from the manufacturing and sales of ice cream products, as well as royalty income, franchise fees, and license fees. The operating results of each segment are regularly reviewed and evaluated separately by the Company’s senior management, which includes, but is not limited to, the chief executive officer, the chief financial officer, and worldwide brand officers. Senior management primarily evaluates the performance of its segments and allocates resources to them based on earnings before interest, taxes, depreciation, amortization, impairment charges, foreign currency gains and losses, other gains, and unallocated corporate charges referred to as segment profit. When senior management reviews a balance sheet, it is at a consolidated level. The accounting policies applicable to each segment are consistent with those used in the consolidated financial statements. Revenues for Dunkin’ Donuts U.S. include royalties and rental income earned from company-owned restaurants. Revenues for all other segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues reported as “Other” include retail sales for company-owned restaurants, as well as revenue earned through arrangements with third parties in which our brand names are used and revenue generated from online training programs for franchisees that are not allocated to a specific segment. Revenues by segment were as follows (in thousands): Revenues Three months ended March 26, March 27, 2011 2010 (As adjusted) Dunkin’ Donuts U.S. $ 96,512 91,403 Dunkin’ Donuts International 3,869 3,321 Baskin-Robbins U.S. 9,045 9,032 Baskin-Robbins International 24,662 19,043 Total reportable segment revenues 134,088 122,799 Other 5,412 4,837 Elimination of company-owned restaurants' royalties and rental income (287) (224) Total revenues $ 139,213 127,412 13 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) For purposes of evaluating segment profit, Dunkin’ Donuts U.S. includes the net operating income earned from company-owned restaurants. Expenses included in “Corporate and other” in the segment profit table below include corporate overhead costs, such as payroll and related benefit costs and professional services. Segment profit by segment was as follows (in thousands): Segment profit Three months ended March 26, March 27, 2011 2010 (As adjusted) Dunkin’ Donuts U.S. $ 70,707 63,563 Dunkin’ Donuts International 3,181 3,712 Baskin-Robbins U.S. 4,300 5,224 Baskin-Robbins International 8,164 8,527 Total reportable segment profit 86,352 81,026 Corporate and other (27,655) (27,595) Interest expense, net (33,767) (27,520) Depreciation and amortization (13,208) (15,332) Impairment charges (653) (1,414) Loss on debt extinguishment and refinancing transaction (11,007) — Other gains, net 476 245 Income before income taxes $ 538 9,410 Equity in net income of joint ventures is included in segment profit for the Dunkin’ Donuts International and Baskin-Robbins International reportable segments. Equity in net income of joint ventures by reportable segment was as follows (in thousands): Three months ended March 26, March 27, 2011 2010 Dunkin’ Donuts International $ 388 1,136 Baskin-Robbins International 394 2,506 Total equity in net income of joint ventures $ 782 3,642 14 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (8) Stockholders’ Equity (a) Dividends and Capital Contributions All of the issued and outstanding shares of the Company are owned by Holdco, which is a wholly owned subsidiary of DBGHI. Distributions to and contributions from Holdco and DBGHI are reflected as contributions from parent, net in the Company’s consolidated statements of stockholder’s equity and comprehensive income, which consist primarily of proceeds from the sale of DBGHI common stock that are collected by DBI, offset by the repurchase of DBGHI common stock that is made with DBI funds. The Company recognizes share-based compensation in conjunction with share-based compensation issued by DBGHI. Share-based awards in DBGHI common stock are granted to employees of DBI, and as such, the related compensation expense is recorded in the accompanying consolidated statements of operations. Share-based compensation expense associated with these grants is recorded as a non-cash capital contribution from parent. Contributions from parent, net in the consolidated statements of stockholder’s equity and comprehensive income consisted of the following for the three months ended (in thousands): March 26, 2011 Cash contributions from parent, net $ 3,101 Non-cash contributions from parent 241 Total contributions from parent, net $ 3,342 (b) Equity Incentive Plans DBGHI’s 2006 Executive Incentive Plan, as amended, (the 2006 Plan) provides for the grant of stock-based and other incentive awards. A maximum of 55,689,151 shares of DBGHI Class A common stock may be delivered in satisfaction of awards under the 2006 Plan, of which a maximum of 22,899,228 shares may be awarded as nonvested (restricted) shares and a maximum of 32,789,923 may be delivered in satisfaction of stock options. In March 2011, DBGHI granted options to purchase a total of 2,910,000 shares of DBGHI Class A common stock to certain executives under the 2006 Plan. The stock options vest in two separate tranches, which have been designated as Tranche 4 and Tranche 5. Tranche 4 options vest in equal annual amounts over a five-year period subsequent to the grant date. Tranche 5 options vest based on continued service over a five-year period and achievement of specified investor returns upon a sale, distribution, or dividend. Both Tranche 4 and Tranche 5 options provide for partial accelerated vesting upon change in control. The maximum contractual term of the options is ten years. 15 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) DBGHI estimated the fair value of the Tranche 4 options on the date of grant using the Black-Scholes option pricing model. The fair value of the Tranche 5 options was estimated on the date of grant using a combination of lattice models and Monte Carlo simulations. The estimated fair value of awards granted is based upon certain assumptions, including probability of achievement of performance and market conditions for certain awards, stock price, expected term, expected volatility, dividend yield, and a risk-free interest rate. Total compensation expense related to all share-based awards was $241 thousand and $612 thousand for the three months ended March 26, 2011 and March 27, 2010, respectively, and is included in general and administrative expenses, net in the consolidated statements of operations. (9) Income Taxes During the three months ended March 26, 2011, the Company recognized deferred tax expense of $1.9 million, due to enacted changes in future state income tax rates. This change in enacted tax rates affects the tax rate expected to be in effect in future periods when the deferred tax assets and liabilities reverse. (10) Commitments and Contingencies (a) Lease Commitments The Company is party to various leases for property, including land and buildings, leased automobiles, and office equipment under noncancelable operating and capital lease arrangements. (b) Guarantees The Company has established agreements with certain financial institutions whereby the Company’s franchisees can obtain financing with terms of approximately five to ten years for various business purposes. Substantially all loan proceeds are used by the franchisees to finance store improvements, new store development, new central production locations, equipment purchases, related business acquisition costs, working capital, and other costs. In limited instances, the Company guarantees a portion of the payments and commitments of the franchisees, which is collateralized by the store equipment owned by the franchisee. Under the terms of the agreements, in the event that all outstanding borrowings come due simultaneously, the Company would be contingently liable for $7.7 million at March 26, 2011 and December 25, 2010. At March 26, 2011 and December 25, 2010, there were no amounts under such guarantees that were due. The fair value of the guarantee liability and corresponding asset recorded on the consolidated balance sheets was $966 thousand and $1.4 million, respectively, at March 26, 2011 and $1.0 million and $1.5 million, respectively, at December 25, 2010. The Company assesses the risk of performing under these guarantees for each franchisee relationship on a quarterly basis. As of March 26, 2011 and December 25, 2010, the Company had recorded reserves for such guarantees of $837 thousand and $1.2 million, respectively. The Company has entered into a third-party guarantee with a distribution facility of franchisee products that ensures franchisees will purchase a certain volume of product over a ten-year period. As product is purchased by the Company’s franchisees over the term of the agreement, the amount of 16 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) the guarantee is reduced. As of March 26, 2011 and December 25, 2010, the Company was contingently liable for $8.4 million and $8.6 million, respectively, under this guarantee. Based on current internal forecasts, the Company believes the franchisees will achieve the required volume of purchases, and therefore, the Company would not be required to make payments under this agreement. 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. Based on prior history and the Company’s ability to extend contract terms, we have not recorded any liabilities related to these commitments. As of March 26, 2011, we were contingently liable under such supply chain agreements for approximately $19.2 million. 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 March 26, 2011 and December 25, 2010, the potential amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessee was $7.8 million and $7.2 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 March 26, 2011 and December 25, 2010, the Company had standby letters of credit outstanding for a total of $11.2 million. There were no amounts drawn down on these letters of credit. (d) Legal Matters The Company is engaged in several matters of litigation arising in the ordinary course of its business as a franchisor. Such matters include disputes of complying 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 March 26, 2011 and December 25, 2010, contingent liabilities totaling $4.3 million and $4.2 million, respectively, 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 the matters noted above. While the Company intends to vigorously defend its positions against all claims in these lawsuits and disputes, it is reasonably possible that the losses in connection with these matters could increase by up to an additional $8.0 million based on the outcome of ongoing litigation or negotiations. 17 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) (11) Related-Party Transactions (a) Advertising Funds At March 26, 2011 and December 25, 2010, the Company had a net payable of $16.2 million and $23.1 million, respectively, to the various advertising funds. To cover administrative expenses of the advertising funds, the Company charges each advertising fund a management fee for items such as facilities, accounting services, information technology, data processing, product development, legal, administrative support services, and other operating expenses, which amounted to $1.5 million and $1.4 million for the three months ended March 26, 2011 and March 27, 2010, respectively. Such management fees are reflected in the consolidated statements of operations as a reduction in general and administrative expenses, net. (b) Sponsors The Company is charged an annual management fee by the Sponsors of $1.0 million per Sponsor, payable in quarterly installments. The Company recognized $750 thousand of expense related to Sponsor management fees during the three months ended March 26, 2011 and March 27, 2010, which is included in general and administrative expenses, net in the consolidated statements of operations. At March 26, 2011 and December 25, 2010, the Company had $500 thousand of prepaid management fees to the Sponsors, which were recorded in prepaid expenses and other current assets in the consolidated balance sheets. At March 26, 2011 and December 25, 2010, certain affiliates of the Sponsors held $65.7 million and $70.6 million, respectively, of term loans, net of original issue discount, issued under the Company’s senior credit facility. The terms of these loans are identical to all other term loans issued to investors in the senior credit facility. (c) Joint Ventures The Company received royalties from its joint ventures as follows (in thousands): Three months ended March 26, March 27, 2011 2010 B-R 31 Ice Cream Co., Ltd (BR Japan) $ 348 305 Baskin-Robbins Co., Ltd Korea (BR Korea) 869 $ 1,217 1,145 At March 26, 2011 and December 25, 2010, the Company had $1.2 million and $962 thousand, respectively, of royalties receivable from its joint ventures which were recorded in accounts receivable, net of allowance for doubtful accounts, in the consolidated balance sheets. 18 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 26, 2011 and March 27, 2010 (Unaudited) The Company made payments to its joint ventures totaling approximately $109 thousand and $455 thousand during the three months ended March 26, 2011 and March 27, 2010, respectively, primarily for the purchase of ice cream products and incentive payments. (12) Supplemental Guarantor Consolidating Financial Statements The majority of the Company’s 100% owned domestic subsidiaries (the Subsidiary Guarantors) have guaranteed on a joint and several, full and unconditional basis, the repayment of the Senior Notes. Certain foreign and other subsidiaries (the Subsidiary Non-Guarantors) have not guaranteed such debt. The following tables present the consolidating balance sheets of the Company (Issuer), the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of March 26, 2011 and December 25, 2010, and the related consolidating statements of operations and condensed consolidating statements of cash flows for the three months ended March 26, 2011 and March 27, 2010. 19 Assets Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts $ Notes and other receivables, net of allowance for doubtful accounts Intercompany receivables, net Assets held for sale Deferred income taxes, net Restricted assets of advertising funds Prepaid income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net Investments in joint ventures Goodwill Other intangible assets, net Investments in subsidiaries Restricted cash Deferred income taxes, net Other assets Total assets $ Liabilities and Stockholder’s Equity Current liabilities: Current portion of long-term debt Capital lease obligations Accounts payable Liabilities of advertising funds Deferred income $ Intercompany payables, net Other current liabilities Total current liabilities Long-term debt, net Capital lease obligations Unfavorable operating leases acquired Deferred income Deferred income taxes, net Other long-term liabilities Total long-term liabilities Stockholder’s equity: Common stock Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total stockholder’s equity Total liabilities and stockholder’s equity $ DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidating Balance Sheets March 26, 2011 (In thousands) (Unaudited) Subsidiary Issuer Guarantors 31,181 17,278 — 36,787 36 7,609 — 202,370 — 1,285 947 10,291 —— 10,759 — 3,514 7,494 Subsidiary Non-Guarantors 72,049 1,354 2,135 14,842 188 1,375 32,787 1,032 10,423 136,185 5,735 — 1,972 1,798 — 342 2,023 72 148,127 — — 1,401 48,965 292 — 76,332 126,990 — — 319 49 — 8,651 9,019 — 12,601 532 (1,015) 12,118 148,127 Eliminations Consolidated — 120,508 — 38,141 — 9,780 (217,212) — — 1,473 — 12,613 — 32,787 (24) 11,767 (320) 21,111 (217,556) 248,180 — 189,693 — 175,107 — 888,675 — 1,528,752 (2,347,749) — — 342 (2,023) — — 84,428 (2,567,328) 3,115,177 — 14,000 — 212 — 9,478 — 48,965 — 24,492 (217,212) — (130) 142,247 (217,342) 239,394 — 1,848,218 — 5,104 — 23,866 — 21,543 (2,023) 587,124 — 77,111 (2,023) 2,562,966 —— (2,317,082) 488,755 (14,252) (194,522) (16,629) 18,584 (2,347,963) 312,817 (2,567,328) 3,115,177 46,437 25,115 — — — 2,343,916 — — 47,053 283,114 158,843 175,107 886,703 1,526,954 3,833 — — 37,303 2,462,521 3,071,857 14,000 — 1,736 — — 217,212 36,772 — 212 6,341 — 24,200 — 29,273 269,720 60,026 1,848,218 — — 5,104 — 23,547 — 21,494 1,337 587,810 30,215 38,245 1,879,770 676,200 —— 488,756 2,304,480 (194,270) 13,468 18,545 17,683 313,031 2,335,631 2,462,521 3,071,857 20 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidating Balance Sheets December 25, 2010 (In thousands) (Unaudited) Assets Issuer Subsidiary Guarantors Subsidiary Non-Guarantors Eliminations Consolidated Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts Notes and other receivables, net of allowance for doubtful accounts Intercompany receivables, net Assets held for sale Deferred income taxes, net Restricted assets of advertising funds Prepaid income taxes Prepaid expenses and other current assets $ 31,482 — 306 — — 947 — 6,554 4,102 21,298 33,784 9,017 166,368 4,328 10,289 — — 7,706 81,320 1,455 35,713 21,827 — 1,334 25,113 1,110 8,874 — — (332) (188,195) — — — (23) — 134,100 35,239 44,704 — 4,328 12,570 25,113 7,641 20,682 Total current assets 43,391 252,790 176,746 (188,550) 284,377 Property and equipment, net Investments in joint ventures Goodwill Other intangible assets, net Investments in subsidiaries Restricted cash 26,617 — — — 2,308,052 — 161,231 169,276 886,703 1,533,837 3,497 — 5,425 — 1,952 1,820 — 404 — — — — (2,311,549) — 193,273 169,276 888,655 1,535,657 — 404 Deferred income taxes, net Other assets — 40,182 — 35,376 2,006 88 (2,006) — — 75,646 Total assets $ 2,418,242 3,042,710 188,441 (2,502,105) 3,147,288 Liabilities and Stockholder’s Equity Current liabilities: Current portion of long-term debt Capital lease obligations Accounts payable Liabilities of advertising funds Deferred income Intercompany payables, net Other current liabilities $ 12,500 — 2,860 — — 188,195 30,261 — 205 5,808 — 26,102 — 34,298 — — 1,154 48,213 119 — 119,164 — — — — — (188,195) (129) 12,500 205 9,822 48,213 26,221 — 183,594 Total current liabilities 233,816 66,413 168,650 (188,324) 280,555 Long-term debt, net Capital lease obligations Unfavorable operating leases acquired Deferred income Deferred income taxes, net Other long-term liabilities 1,847,016 — — — 1,335 29,608 — 5,160 24,389 21,238 587,008 37,857 — — 355 88 — 8,444 — — — — (2,006) — 1,847,016 5,160 24,744 21,326 586,337 75,909 Total long-term liabilities 1,877,959 675,652 8,887 (2,006) 2,560,492 Stockholder’s equity: Common stock — — — — — Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) 485,413 (192,534) 13,588 2,304,480 (16,784) 12,949 12,601 (421) (1,276) (2,317,081) 16,940 (11,634) 485,413 (192,799) 13,627 Total stockholder’s equity 306,467 2,300,645 10,904 (2,311,775) 306,241 Total liabilities and stockholder’s equity $ 2,418,242 3,042,710 188,441 (2,502,105) 3,147,288 21 Revenues: Franchise fees and royalty income Rental income Sales of ice cream products Other revenues Franchise fees and royalty income Rental income Sales of ice cream products Other revenues Total revenues Operating costs and expenses: Occupancy expenses -franchised restaurants Cost of ice cream products General and administrative expenses, net Depreciation and amortization Other impairment charges Total operating costs and expenses Operating income (loss) Other income (expense): Interest income Interest expense Equity in net income of joint ventures Equity in net income of subsidiaries Loss on debt extinguishment Other gains, net Total other income (expense) Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidating Statements of Operations Three Months Ended March 26, 2011 (In thousands) (Unaudited) Subsidiary Subsidiary Issuer Guarantors Non-Guarantors $ — 85,696 263 — 21,895 236 — 21,214 15,912 — 8,358 794 — 137,163 17,205 — 12,161 127 — 15,217 14,344 7,270 45,659 1,704 2,348 10,619 241 — 653 — 9,618 84,309 16,416 (9,618) 52,854 789 8 104 19 (33,589) (300) (9) — 782 — 30,847 358 — (11,007) — — 129 11 352 (13,612) 955 362 (23,230) 53,809 1,151 (21,494) 23,557 198 $ (1,736) 30,252 953 Eliminations Consolidated — 85,959 — 22,131 (14,410) 22,716 (745) 8,407 (15,155) 139,213 — 12,288 (14,437) 15,124 (747) 53,886 — 13,208 — 653 (15,184) 95,159 29 44,054 (16) 115 16 (33,882) — 782 (31,205) — — (11,007) (16) 476 (31,221) (43,516) (31,192) 538 — 2,261 (31,192) (1,723) 22 Revenues: Franchise fees and royalty income Rental income Sales of ice cream products Other revenues Franchise fees and royalty income Rental income Sales of ice cream products Other revenues Total revenues Operating costs and expenses: Occupancy expenses -franchised restaurants Cost of ice cream products General and administrative expenses, net Depreciation and amortization Other impairment charges Total operating costs and expenses Operating income (loss) Other income (expense): Interest income Interest expense Equity in net income of joint ventures Equity in net income of subsidiaries Gain on debt extinguishment Other gains (losses), net Total other income (expense) Income before income taxes Provision (benefit) for income taxes Net income DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Consolidating Statements of Operations Three Months Ended March 27, 2010 (In thousands) (Unaudited) Subsidiary Subsidiary Issuer Guarantors Non-Guarantors $ — 79,833 332 — 21,904 212 — 17,396 12,460 — 7,285 299 — 126,418 13,303 — 14,118 38 — 12,728 11,567 6,727 43,601 1,163 2,329 12,723 280 700 713 1 9,756 83,883 13,049 (9,756) 42,535 254 5 31 35 (35) (27,530) (26) — 3,642 — 11,617 274 — — —— 3 (8) 269 11,590 (23,591) 278 1,834 18,944 532 (4,113) 7,333 252 $ 5,947 11,611 280 Eliminations Consolidated — 80,165 — 22,116 (12,063) 17,793 (246) 7,338 (12,309) 127,412 — 14,156 (12,073) 12,222 (246) 51,245 — 15,332 — 1,414 (12,319) 94,369 10 33,043 — 71 — (27,591) — 3,642 (11,891) — —— (19) 245 (11,910) (23,633) (11,900) 9,410 — 3,472 (11,900) 5,938 23 Net cash provided by (used in) operating activities Cash flows from investing activities: Additions to property and equipment Other, net Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Repaymentof long-term debt Payments on capital lease obligations Deferred financing and other debt-related costs Change in restricted cash Excess tax benefits from share-based compensation Contributions from parent, net Intercompany financing, net Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Condensed Consolidating Statements of Cash Flows Three Months Ended March 26, 2011 (In thousands) (Unaudited) Subsidiary Subsidiary Issuer Guarantors Non-Guarantors $ 16,809 (3,971) (9,244) (796) (2,757) (181) 301 — — (495) (2,757) (181) 150,000 — — (150,750) — — — (49) — (16,209) — — —— 73 ——— 3,101 — — (2,757) 2,757 — (16,615) 2,708 73 —— 81 (301) (4,020) (9,271) 31,482 21,298 81,320 $ 31,181 17,278 72,049 Eliminations Consolidated — 3,594 — (3,734) — 301 — (3,433) — 150,000 — (150,750) — (49) — (16,209) — 73 —— — 3,101 —— — (13,834) — 81 — (13,592) — 134,100 — 120,508 24 DUNKIN’ BRANDS, INC. AND SUBSIDIARIES Condensed Consolidating Statements of Cash Flows Three Months Ended March 27, 2010 (In thousands) (Unaudited) Subsidiary Subsidiary Issuer Guarantors Non-Guarantors Eliminations Consolidated Net cash provided by (used in) operating activities $ 23,452 (19) 1,160 — 24,593 Cash flows from investing activities: Additions to property and equipment (1,156) (1,707) (602) — (3,465) Net cash used in investing activities (1,156) (1,707) (602) — (3,465) Cash flows from financing activities: Proceeds from short-term debt — 34,564 — — 34,564 Payments on capital lease obligations — (54) — — (54) Change in restricted cash — 262 158 — 420 Dividends to parent, net (2,959) — — — (2,959) Intercompany financing, net 32,857 (32,857) — — — Net cash provided by financing activities 29,898 1,915 158 — 31,971 Effect of exchange rate changes on cash — — 9 — 9 Increase in cash and cash equivalents 52,194 189 725 — 53,108 Cash and cash equivalents, beginning of year 36,295 15,441 1,474 — 53,210 Cash and cash equivalents, end of year $ 88,489 15,630 2,199 — 106,318 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited historical consolidated financial statements and related notes. In this section, the terms “we,” “our,” “ours,” “us” and “Dunkin’ Brands” refer collectively to DBI and its consolidated subsidiaries. This discussion contains forward- looking statements about our markets, the demand for our products and services and our future results and involves numerous risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We do not undertake to publicly update or revise any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law. Introduction and Overview Under our Dunkin’ Donuts and Baskin-Robbins brands, we are one of the world’s largest franchisors of restaurants serving coffee and baked goods as well as ice cream within the quick-service restaurant (“QSR”) segment of the restaurant industry. With over 16,000 points of distribution in 57 countries, our portfolio has developed strong brand awareness in our key markets. Dunkin’ Donuts has 9,805 global points of distribution with restaurants in 36 U.S. states and the District of Columbia and in 30 foreign countries worldwide. Baskin-Robbins has 6,482 global points of distribution with restaurants in 45 U.S. states and the District of Columbia and in 46 foreign countries worldwide. We are organized into four reporting segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We generate revenue from four primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream products to franchisees in certain international markets, and (iv) other income including fees for the licensing of our brands for products sold in non-franchised outlets, the licensing of the right to manufacture Baskin-Robbins ice cream sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, revenue from our company-owned restaurants, and online training fees. Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. During the three months ended March 26, 2011, we opened 136 Dunkin’ Donuts brand restaurants and 145 Baskin-Robbins brand restaurants worldwide. With only 17 company-owned restaurants as of March 26, 2011, we are less affected directly by store-level costs and profitability and fluctuations in commodity costs than other QSR operators. Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limits our working capital needs. For the three months ended March 26, 2011, franchisee contributions to the U.S. advertising funds were $68 million. 26 DBI operates and reports financial information on a 52 or 53-week year on a 13-week quarter (or 14-week fourth quarter, when applicable) basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday of the fourth quarter, when applicable). The data periods contained within the three months ended March 26, 2011 and March 27, 2010 reflect the results of operations for the 13-week periods ending on those dates. Operating results for the three months ended March 26, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. The fiscal year ending December 31, 2011 will consist of operating results for the 53-week period ending on that date. Systemwide Sales by Segment Systemwide sales include sales by all points of distribution for the relevant operating segment, whether owned by Dunkin’ Brands or by its franchisees and licensees. While we do not record sales by franchisees or licensees as revenue, we believe that this information is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue, assists readers in evaluating our performance relative to competitors, and indicates the strength of our franchised brands. Comparable store sales growth represents the growth in average weekly sales for stores that have been open at least 54 weeks that have reported sales in the current and comparable prior year week. Systemwide sales for the three months ended March 26, 2011 and March 27, 2010 were as follows: March 26, March 27, 2011 2010 $ % Increase (Decrease) Three months ended Dunkin' Donuts U.S. Dunkin' Donuts International Baskin-Robbins U.S. Baskin-Robbins International $ (In millions, except percentages) 1,301.2 1,235.6 65.6 153.1 139.2 13.9 101.9 101.7 0.2 236.9 225.2 11.7 5.3% 10.0% 0.2% 5.2% Total $ 1,793.1 1,701.7 91.4 5.4% Growth in systemwide sales for Dunkin’ Donuts U.S. of 5.3% for the three months ended March 26, 2011 as compared to the corresponding period in the prior year was the result of net development of 200 restaurants since the prior year comparable period and comparable store sales growth of 2.8%. Comparable store sales growth was primarily driven by increased average ticket. Dunkin’ Donuts International systemwide sales for the three months ended March 26, 2011 increased 10.0% from the prior year comparable period. This increase was driven primarily by results in South Korea and Southeast Asia, as well as Russia and the Middle East. In South Korea and Russia, increased sales were driven mainly by new restaurant development. Southeast Asia and Middle East results were driven by a combination of new restaurant development and comparable store sales growth. Baskin-Robbins U.S. systemwide sales for the three months ended March 26, 2011 were flat compared with the prior year comparable quarter, resulting from comparable store sales growth of 0.5% being offset by a slightly reduced restaurant base. Baskin-Robbins International systemwide sales for the three months ended March 26, 2011 increased 5.2% from the corresponding period in the prior year, driven primarily by increased sales in South Korea and Japan, which resulted primarily from favorable foreign exchange. Australia was also a significant contributor to the overall systemwide sales growth for Baskin-Robbins International. 27 Results of Operations for the Three Months Ended March 26, 2011 and March 27, 2010 Consolidated results of operations Three months ended March 26, March 27, Increase (Decrease) 2011 2010 $ % (In thousands, except percentages) Franchise fees and royalty income 85,959 $ 80,165 5,794 7.2% Rental income 22,131 22,116 15 0.1% Sales of ice cream products 22,716 17,793 4,923 27.7% Other revenues 8,407 7,338 1,069 14.6% Total revenues 139,213 $ 127,412 11,801 9.3% Total revenues for the three months ended March 26, 2011 as compared to the corresponding period in the prior year increased by $11.8 million, or 9.3%. Royalty income increased $4.2 million, or 5.6%, mainly as the result of Dunkin’ Donuts U.S. systemwide sales growth. Sales of ice cream products also contributed to the increase in total revenues, which were primarily driven by strong sales in the Middle East and Australia, as well as a December 2010 price increase that was implemented to offset higher commodity costs. Other revenues also increased $1.1 million primarily as a result of increases in licensing income and refranchising gains, as well as a decline in subsidies paid to franchisees that are recorded as reductions in revenue. Three months ended March 26, March 27, Increase (Decrease) 2011 2010 $ % (In thousands, except percentages) Occupancy expenses -franchised restaurants 12,288 $ 14,156 (1,868) (13.2)% Cost of ice cream products 15,124 12,222 2,902 23.7% General and administrative expenses, net 53,886 51,245 2,641 5.2% Depreciation and amortization 13,208 15,332 (2,124) (13.9)% Impairment charges 653 1,414 (761) (53.8)% Total operating costs and expenses 95,159 $ 94,369 790 0.8% Operating income 44,054 $ 33,043 11,011 33.3% Occupancy expenses for franchised restaurants for the three months ended March 26, 2011 decreased $1.9 million from the prior year comparable period primarily as a result of lease reserves recorded in the prior year, as well as a decline in the number of leased properties. Cost of ice cream products increased 23.7% from the prior year, as compared to a 27.7% increase in sales of ice cream products. The higher percentage increase in sales of ice cream products was primarily the result of increases in selling prices. The increase in general and administrative expenses of $2.6 million from the prior year was driven by an increase in payroll and related benefit costs of $2.3 million, or 7.9%, as a result of merit increases, increased headcount, and higher projected incentive compensation payouts. General and administrative expenses for the three months ended March 26, 2011 also included $1.0 million related to the roll-out of a new point-of-sale system for Baskin-Robbins franchisees. Offsetting these increases was a $0.9 million decline in bad debt and other reserves. Depreciation and amortization declined a total of $2.1 million from the prior year, primarily as a result of a license right intangible asset becoming fully amortized, as well as terminations of lease agreements in the normal course of business resulting in the write-off of favorable lease intangible assets, which thereby reduced future amortization. Additionally, depreciation declined from the prior year due to assets becoming fully depreciated and the write-off of leasehold improvements upon terminations of lease agreements. The decrease in impairment charges resulted primarily from a $0.7 million impairment charge recorded in the prior year related to corporate assets. 28 Three months ended March 26, March 27, Increase (Decrease) 2011 2010 $ % (In thousands, except percentages) Interest expense, net $ (33,767) (27,520) (6,247) 22.7% Equity in net income of joint ventures 782 3,642 (2,860) (78.5)% Loss on debt extinguishment and refinancing transaction (11,007) -(11,007) nm Other gains, net 476 245 231 94.3% Total other expense $ (43,516) (23,633) (19,883) 84.1% Net interest expense increased from the prior year due to incremental interest expense related to net additional long-term debt of $429 million obtained since the prior year, offset by a reduction in the average cost of borrowing. Equity in net income of joint ventures decreased as a result of decreases in income from both our Japan and South Korea joint ventures. Joint venture income from Japan was negatively impacted by the March 2011 earthquake and tsunami. Additionally, South Korea joint venture income declined as a result of increased operating expenses. The loss on debt extinguishment and refinancing for the three months ended March 26, 2011 resulted from the debt repricing transaction completed in the first quarter of 2011. As the re-pricing transaction included the repayment of $150.0 million of senior notes utilizing the proceeds from the corresponding increase in the term loan, a $6.6 million loss on debt extinguishment was recorded related to the senior notes, which included the write-off of unamortized debt issuance costs and original issue discount of $5.8 million and transaction related fees of $0.8 million. Additionally, a $4.4 million loss was recorded related to the re-pricing of the term loan, which consisted of $3.7 million of third-party fees incurred, the write-off of $0.5 million of unamortized debt issuance costs and original issue discount, and $0.2 million of call premiums paid to lenders that exited the term loan syndicate. The increase in other gains resulted from $0.1 million of additional gains on investments sold, as well as $0.1 million of additional foreign exchange gains primarily as a result of additional weakening of the U.S. dollar against the Canadian dollar as compared to the prior year. Three months ended March 26, 2011 March 27, 2010 Income before income taxes Provision for income taxes Effective tax rate 538 $ 9,410 2,261 3,472 420.3% 36.9% ($ in thousands, except percentages) The increased effective tax rate of 420.3% for the three months ended March 26, 2011 was primarily attributable to enacted increases in state tax rates, which resulted in additional deferred tax expense of approximately $1.9 million in the three months ended March 26, 2011. The effective tax rate for the three months ended March 26, 2011 was also impacted by a reduced income before income taxes, driven by the loss on debt extinguishment and refinancing transaction, which magnified the impact of permanent and other tax differences. Operating segments We operate four reportable operating segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We evaluate the performance of our segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization, impairment charges, foreign currency gains and losses, other gains and losses, and unallocated corporate charges, referred to as segment profit. Segment profit for the Dunkin’ Donuts International and Baskin-Robbins International segments include equity in net income from joint ventures. For a reconciliation to total revenues and net income, see Note 7 of the notes to our unaudited consolidated financial statements. Revenues for Dunkin’ Donuts U.S. include royalties and rental income earned from company-owned restaurants. For purposes of evaluating segment profit, Dunkin’ Donuts U.S. includes the net operating income earned from company-owned 29 restaurants. Revenues for all other segments include only transactions with unaffiliated customers and include no intersegment revenues. Revenues not included in segment revenues include retail sales from company-owned restaurants, as well as revenue earned through arrangements with third parties in which our brand names are used and revenue generated from online training programs for franchisees that are not allocated to a specific segment. Dunkin’ Donuts U.S. Three months ended March 26, March 27, Increase (Decrease) 2011 2010 $ % (In thousands, except percentages) Revenues $ 96,512 91,403 5,109 5.6% Segment profit 70,707 63,563 7,144 11.2% The increase in Dunkin’ Donuts U.S. revenue for the three months ended March 26, 2011 was primarily driven by an increase in royalty income of $3.3 million as a result of an increase in systemwide sales, as well as an increase in franchise fees of $1.1 million. Other revenues also increased $0.6 million due to an increase in refranchising gains and a decline in subsidies paid to franchisees that are recorded as reductions in revenue. The increase in Dunkin’ Donuts U.S. segment profit for the three months ended March 26, 2011 was primarily driven by the $5.1 million increase in total revenues. The increase in segment profit also resulted from a decline in total occupancy expenses of $1.8 million driven by additional lease reserves recorded in the prior year and a decline in the number of leased locations. The remaining increase in segment profit resulted from a $0.4 million decline in general and administrative expenses due to declines in bad debt provisions and legal settlements, offset by an increase in payroll-related costs due to merit increases, increased headcount, and higher projected incentive compensation. Dunkin’ Donuts International Three months ended March 26, 2011 March 27, 2010 $ % Increase (Decrease) Revenues Segment profit (In thousands, except percentages) 3,869 $ 3,321 548 3,181 3,712 (531) 16.5% (14.3)% The increase in Dunkin’ Donuts International revenue for the three months ended March 26, 2011 resulted primarily from an increase in royalty income of $0.3 million driven by the increase in systemwide sales. Also contributing to the increased revenue from the prior year was an increase of $0.3 million in franchise fees driven by a deposit retained from a former licensee in Mexico. The decrease in Dunkin’ Donuts International segment profit for the three months ended March 26, 2011 was primarily driven by a decline in income from the South Korea joint venture of $0.7 million. The decrease in segment profit also resulted from a $0.3 million increase in general and administrative expenses primarily as a result of an increase in payroll- related costs due to increased headcount and merit increases. These declines in segment profit were offset by the $0.5 million increase in revenues. 30 Baskin-Robbins U.S. Three months ended March 26, 2011 March 27, 2010 $ % Increase (Decrease) Revenues Segment profit (In thousands, except percentages) 9,045 $ 9,032 13 4,300 5,224 (924) 0.1% (17.7)% Baskin-Robbins U.S. revenue for the three months ended March 26, 2011 remained flat to the prior year comparable period, which is consistent with the change in systemwide sales. Baskin-Robbins U.S. segment profit declined as a result of increased general and administrative expenses for the three months ended March 26, 2011 including $1.0 million related to the roll-out of a new point-of-sale system for Baskin- Robbins franchisees. Baskin-Robbins International Three months ended March 26, 2011 March 27, 2010 $ % Increase (Decrease) Revenues Segment profit (In thousands, except percentages) 24,662 $ 19,043 5,619 8,164 8,527 (363) 29.5% (4.3)% The growth in Baskin-Robbins International revenue for the three months ended March 26, 2011 resulted from an increase in sales of ice cream products of $5.0 million, which was primarily driven by strong sales in the Middle East and Australia. Royalty income also increased $0.6 million mainly as a result of higher sales and additional royalties earned in Australia due to the termination of a master license agreement. The decline in Baskin-Robbins International segment profit resulted primarily from a decrease in joint venture income of $2.1 million for the Baskin-Robbins businesses in South Korea and Japan. Additionally, general and administrative expenses increased $0.9 million as a result of an increase in payroll-related costs due to additional headcount and merit increases, additional travel costs, and increased professional fees. Offsetting these declines in segment profit was a $2.1 million increase in net margin on ice cream sales driven by strong sales and price increases, as well as the increase in royalty income of $0.6 million. Liquidity and Capital Resources As of March 26, 2011, we held $120.5 million of unrestricted cash and cash equivalents, which included $69.3 million of cash intended to be used for advertising funds and gift card/certificate programs. In addition, as of March 26, 2011, we had a borrowing capacity of $88.8 million under our $100.0 million revolving credit facility. During the three months ended March 26, 2011, net cash provided by operating activities was $3.6 million, as compared to $24.6 million for the three months ended March 27, 2010. Net cash provided by operating activities of $3.6 million during the three months ended March 26, 2011 was primarily driven by a net loss of $1.7 million (increased by depreciation and amortization of $13.2 million and $13.1 million of other net non-cash reconciling adjustments), offset by $21.0 million of changes in operating assets and liabilities. During the three months ended March 26, 2011, we invested $3.7 million in capital additions to property and equipment. Net cash used in financing activities was $13.8 million during the three months ended March 26, 2011, driven primarily by costs associated with the February 2011 re-pricing transaction of $17.0 million, offset by proceeds from the issuance of our parent company’s common stock of $3.2 million. 31 In February 2011, the Company completed a re-pricing of its term loans under the senior credit facility, as well as increased the size of the term loans from $1.25 billion to $1.40 billion. The incremental proceeds of the term loans were used to repay $150.0 million of the Company’s senior notes. Term loan borrowings under the amended senior credit facility bear interest at a rate per annum equal to, at our option, either a base rate or a Eurodollar rate. The base rate is equal to an applicable rate of 2.00% plus the highest of (a) the Federal Funds rate plus 0.50%, (b) a prime rate, (c) one month LIBOR rate plus 1.00%, and (d) 2.25%. The Eurodollar rate is equal to an applicable rate of 3.00% plus the higher of (a) a LIBOR rate and (b) 1.25%. The interest rate on the revolving credit facility remained unchanged. Repayments are required to be made on term loan borrowings equal to $14.0 million per calendar year, payable in quarterly installments through September 2017. Covenants under the senior credit facility remained unchanged, with the exception of broader restrictions on the use of funds to repay subordinated debt. At March 26, 2011, the Company was in compliance with all of covenants under its debt agreements. We expect that cash on hand, cash flow from operations, and our borrowing capacity under our revolving credit facility will allow us to meet cash requirements, including capital expenditures, tax payments, and debt service payments, over the next twelve months and for the foreseeable future. Recently Issued Accounting Standards In December 2010, the Financial Accounting Standards Board (FASB) issued new guidance to amend the criteria for performing the second step of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing the second step if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This new guidance is effective for the Company beginning in fiscal year 2012. The Company is currently assessing the impact of this guidance on its consolidated financial statements. In July 2010, the FASB issued new guidance for improving disclosures about the credit quality of financing receivables and the allowance for credit losses. This guidance requires an entity to provide enhanced disclosures of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The Company adopted this guidance during the first quarter of fiscal year 2011, and the relevant disclosures are included the notes to the unaudited consolidated financial statements included herein. In January 2010, the FASB issued new guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Levels 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and clarifications of existing disclosures were effective for the Company in fiscal year 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which were effective for the Company in fiscal year 2011. The adoption of this guidance did not have any impact on our financial position or results of operations, as it only relates to disclosures. 32