Attached files
file | filename |
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EX-31.2 - EX-31.2 - Burger King Holdings Inc | g27162exv31w2.htm |
EX-31.1 - EX-31.1 - Burger King Holdings Inc | g27162exv31w1.htm |
EX-10.76 - EX-10.76 - Burger King Holdings Inc | g27162exv10w76.htm |
EX-10.77 - EX-10.77 - Burger King Holdings Inc | g27162exv10w77.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2011 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from to |
Commission file number: 001-32875
BURGER KING HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 75-3095469 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
5505 Blue Lagoon Drive, Miami, Florida | 33126 | |
(Address of Principal Executive Offices) | (Zip Code) |
(305) 378-3000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ*
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (check one);
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As
of May 13, 2011, there were 100,000 shares of the Registrants Common Stock outstanding, all of
which were owned by Burger King Capital Holdings, LLC, the Registrants parent holding company. The
registrants Common Stock is not publicly traded.
*The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, but is not subject to such filing
requirements.
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page | ||||||||
PART I Financial Information |
||||||||
Item 1. | 3 | |||||||
Item 2. | 32 | |||||||
Item 3. | 48 | |||||||
Item 4. | 48 | |||||||
PART II Other Information |
||||||||
Item 1. | 50 | |||||||
Item 1A. | 51 | |||||||
Item 5. | 52 | |||||||
Item 6. | 56 | |||||||
57 | ||||||||
58 | ||||||||
EX-10.76 | ||||||||
EX-10.77 | ||||||||
EX-31.1 | ||||||||
EX-31.2 |
2
Table of Contents
PART I Financial Information
Item 1. Financial Statements
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
As of | As of | |||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(In millions, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 267.1 | $ | 207.0 | ||||
Trade and notes receivable, net |
139.1 | 148.0 | ||||||
Prepaids and other current assets, net |
173.6 | 159.2 | ||||||
Deferred income taxes, net |
26.4 | 23.2 | ||||||
Total current assets |
606.2 | 537.4 | ||||||
Property and
equipment, net of accumulated depreciation of $57.9 million and
$26.1 million,
respectively |
1,171.7 | 1,193.6 | ||||||
Intangible assets, net |
2,976.8 | 2,931.9 | ||||||
Goodwill |
529.0 | 529.9 | ||||||
Net investment in property leased to franchisees |
138.2 | 140.0 | ||||||
Other assets, net |
231.1 | 226.6 | ||||||
Total assets |
$ | 5,653.0 | $ | 5,559.4 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts and drafts payable |
$ | 75.2 | $ | 90.2 | ||||
Accrued advertising |
90.5 | 82.5 | ||||||
Other accrued liabilities |
263.6 | 249.4 | ||||||
Current portion of long-term debt and capital leases |
30.4 | 32.9 | ||||||
Total current liabilities |
459.7 | 455.0 | ||||||
Long-term debt, net of current portion |
2,689.4 | 2,652.0 | ||||||
Capital leases, net of current portion |
62.7 | 63.7 | ||||||
Other liabilities, net |
201.2 | 208.2 | ||||||
Deferred income taxes, net |
744.5 | 725.5 | ||||||
Total liabilities |
4,157.5 | 4,104.4 | ||||||
Commitments and Contingencies (Note 15) |
||||||||
Subsequent event (Note 18) |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value; 200,000 shares authorized at March 31, 2011
and December 31, 2011;
100,000 shares issued and outstanding at March 31, 2011 and December 31, 2010 |
| | ||||||
Additional paid-in capital |
1,563.5 | 1,563.5 | ||||||
(Accumulated deficit)/retained earnings |
(112.4 | ) | (105.6 | ) | ||||
Accumulated other comprehensive income (loss) |
44.4 | (2.9 | ) | |||||
Total stockholders equity |
1,495.5 | 1,455.0 | ||||||
Total liabilities and stockholders equity |
$ | 5,653.0 | $ | 5,559.4 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Condensed Consolidated Statements of Operations
(Unaudited)
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Revenues: |
||||||||
Company restaurant revenues |
$ | 392.5 | $ | 439.2 | ||||
Franchise revenues |
132.2 | 129.9 | ||||||
Property revenues |
27.3 | 27.8 | ||||||
Total revenues |
552.0 | 596.9 | ||||||
Company restaurant expenses: |
||||||||
Food, paper and product costs |
126.7 | 138.0 | ||||||
Payroll and employee benefits |
120.0 | 138.2 | ||||||
Occupancy and other operating costs |
110.8 | 113.3 | ||||||
Total company restaurant expenses |
357.5 | 389.5 | ||||||
Selling, general and administrative expenses |
109.2 | 117.8 | ||||||
Property expenses |
17.9 | 15.2 | ||||||
Other operating (income) expense, net |
5.0 | (4.5 | ) | |||||
Total operating costs and expenses |
489.6 | 518.0 | ||||||
Income from operations |
62.4 | 78.9 | ||||||
Interest expense |
51.7 | 12.2 | ||||||
Interest income |
(1.3 | ) | (0.3 | ) | ||||
Total interest expense, net |
50.4 | 11.9 | ||||||
Loss on early extinguishment of debt |
19.6 | | ||||||
Income (loss) before income taxes |
(7.6 | ) | 67.0 | |||||
Income tax expense (benefit) |
(0.8 | ) | 26.0 | |||||
Net income (loss) |
$ | (6.8 | ) | $ | 41.0 | |||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (6.8 | ) | $ | 41.0 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
40.5 | 27.5 | ||||||
Loss on early extinguishment of debt |
19.6 | | ||||||
Gain on hedging activities |
| (0.4 | ) | |||||
Amortization of deferred financing cost and debt issuance discount |
3.3 | 0.5 | ||||||
Loss on remeasurement of foreign denominated transactions |
2.4 | 20.3 | ||||||
Gain on refranchisings, dispositions of assets and release of unfavorable lease obligation |
| (2.8 | ) | |||||
Impairment of non-restaurant properties |
| 0.2 | ||||||
Bad debt expense, net of recoveries |
| 0.1 | ||||||
Share-based compensation |
0.2 | 4.3 | ||||||
Deferred income taxes |
13.1 | (1.7 | ) | |||||
Changes in current assets and liabilities, excluding acquisitions and dispositions: |
||||||||
Trade and notes receivables |
11.6 | (7.8 | ) | |||||
Prepaids and other current assets |
(10.3 | ) | (3.7 | ) | ||||
Accounts and drafts payable |
(16.2 | ) | (32.8 | ) | ||||
Accrued advertising |
6.6 | 12.3 | ||||||
Other accrued liabilities |
8.2 | 25.0 | ||||||
Other long-term assets and liabilities |
(6.2 | ) | (4.8 | ) | ||||
Net cash provided by operating activities |
66.0 | 77.2 | ||||||
Cash flows from investing activities: |
||||||||
Payments for property and equipment |
(9.7 | ) | (26.3 | ) | ||||
Proceeds from refranchisings, disposition of assets and restaurant closures |
7.9 | 4.7 | ||||||
Payments for acquired franchisee operations, net of cash acquired |
| (12.8 | ) | |||||
Return of investment on direct financing leases |
2.0 | 2.2 | ||||||
Other investing activities |
(0.1 | ) | 0.9 | |||||
Net cash
provided by (used for) investing activities |
0.1 | (31.3 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from term debt |
1,857.6 | | ||||||
Repayments of term debt and capital leases |
(1,844.0 | ) | (17.0 | ) | ||||
Borrowings under revolving credit facility |
| 9.0 | ||||||
Repayments of revolving credit facility |
| (9.0 | ) | |||||
Payment of financing costs |
(23.1 | ) | | |||||
Dividends paid on common stock |
| (8.5 | ) | |||||
Proceeds from stock option exercises |
| 2.4 | ||||||
Excess tax benefits from share-based compensation |
| 1.1 | ||||||
Net cash used for financing activities |
(9.5 | ) | (22.0 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
3.5 | (5.7 | ) | |||||
Increase in cash and cash equivalents |
60.1 | 18.2 | ||||||
Cash and cash equivalents at beginning of period |
207.0 | 139.9 | ||||||
Cash and cash equivalents at end of period |
$ | 267.1 | $ | 158.1 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Supplemental cash flow disclosures: |
||||||||
Interest paid |
$ | 29.5 | $ | 11.9 | ||||
Income taxes paid |
$ | 6.6 | $ | 9.2 | ||||
Non-cash investing and financing activities: |
||||||||
Acquisition of property with capital lease obligations |
$ | | $ | 0.2 | ||||
Net investment in direct financing leases |
$ | | $ | 4.3 |
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization
Burger King Holdings, Inc. (BKH or the Company) is a Delaware corporation formed on July
23, 2002. The Company is the parent of Burger King Corporation (BKC), a Florida corporation that
franchises and operates fast food hamburger restaurants, principally under the Burger King® brand
(the Brand).
The Company generates revenues from three sources: (i) retail sales at Company restaurants;
(ii) franchise revenues, consisting of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees; and (iii) property income from
restaurants that the Company leases or subleases to franchisees.
On September 2, 2010, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Burger King Worldwide Holdings, Inc., formerly known as Blue Acquisition Holding
Corporation, a Delaware corporation (Parent) and Blue Acquisition Sub, Inc., a Delaware
corporation (Merger Sub), a wholly owned subsidiary of Parent established as an acquisition
vehicle for the purpose of acquiring the Company. In accordance with the terms of the Merger
Agreement, on October 19, 2010 (the Merger Date), Merger Sub completed its acquisition of 100% of
the Companys equity (the Acquisition) and merged with and into the Company, with the Company
continuing as the surviving corporation (the Merger). Parent is wholly-owned by 3G Special
Situations Fund II, L.P. (3G), which is an affiliate of 3G Capital Partners, Ltd., a private
equity investment firm based in New York (3G Capital or the Sponsor). The common stock of BKH
ceased to be traded on the New York Stock Exchange after close of market on October 19, 2010 and
BKH continues operations as a privately-held company. The Acquisition, Merger and related
financing transactions are collectively referred to as the Transactions.
On April 8, 2011, Parent transferred 100% of the stock of the Company to Burger King Capital
Holdings, LLC, a Delaware limited liability company (BKCH), in exchange for membership interests
in BKCH. As a result, BKCH became a wholly-owned subsidiary of Parent and the Company became a
wholly-owned subsidiary of BKCH. See Note 18.
Note 2. Basis of Presentation and Consolidation
The Company has prepared the accompanying unaudited Condensed Consolidated Financial
Statements (Financial Statements) in accordance with the rules and regulations of the Securities
and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include
all of the information and footnotes required by United States generally accepted accounting
principles (GAAP) for complete financial statements. Therefore, the Financial Statements should
be read in conjunction with the audited Consolidated Financial
Statements contained in Part II, Item 8 of the
Companys Transition Report on Form 10-K for the six-month period ended December 31,
2010 filed with the SEC on March 23, 2011. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation have been included
in the Financial Statements. The results for interim periods do not necessarily indicate the
results that may be expected for any other interim period or for the full year.
The Financial Statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany balances and transactions have been eliminated in
consolidation.
As discussed in Note 1, the Company was acquired by an affiliate of 3G Capital in a
transaction accounted for as a business combination using the acquisition method of accounting. In
addition, Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC)
805-50-S99-1 Business Combinations Related Issues requires the application of push down
accounting in situations where the ownership of an entity has changed. As a result, the post-merger
financial statements of the Company reflect the new basis of accounting.
The preliminary
allocation of consideration to the net tangible and intangible assets acquired
and liabilities assumed as of March 31, 2011 and
December 31, 2010 reflects various preliminary
fair value estimates and
analyses, including preliminary work performed by third-party valuation specialists, which are
subject to change within the measurement period as valuations are finalized. The primary areas of
the preliminary purchase price allocations that are not yet finalized relate to the fair values of
certain tangible assets acquired and
liabilities assumed, the valuation of intangible assets acquired, income and non-income based
taxes and goodwill. The Company expects to continue to obtain information to assist in determining
the fair value of the net assets acquired at the Merger Date during the measurement period.
Measurement period adjustments that the Company determines to be material will be applied
retrospectively to the Merger Date.
7
Table of Contents
Unless the context otherwise requires, all references to the Successor refer to Burger King
Holdings, Inc. and all its subsidiaries, including BKC, for the period subsequent to the
Acquisition. All references to Predecessor refer to Burger King Holdings, Inc. and all its
subsidiaries, including BKC, for all periods prior to the Acquisition, which operated under a
different ownership and capital structure. In addition, the Acquisition was accounted for under the
acquisition method of accounting, which resulted in purchase price allocations that affect the
comparability of results of operations for periods before and after the Acquisition.
Certain prior year amounts in the accompanying Financial Statements and Notes to the Financial
Statements have been reclassified in order to be comparable with the current year classifications.
These reclassifications had no effect on previously reported net income.
Change in Fiscal Year End
On November 5, 2010, the BKH Board of Directors approved a change in fiscal year-end from June
30 to December 31. The change became effective at the end of the quarter ended December 31, 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the Companys Financial Statements
and Notes to the Financial Statements. Management adjusts such estimates and assumptions when facts
and circumstances dictate. Such estimates and assumptions may be affected by volatile credit,
equity, foreign currency and energy markets, and declines in consumer spending. As future events
and their effects cannot be determined with precision, actual results could differ significantly
from these estimates.
New Financial Accounting Standards Board (FASB) Updates Issued But Not Yet Adopted
In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses. This ASU amends ASC Topic 310 by requiring additional disclosures about the credit
quality of financing receivables and the related allowance for credit losses. The disclosures
required by this ASU are effective for non-public entities for annual reporting periods ending on
or after December 15, 2011, which for the Company will be December 31, 2011. The amendments in this ASU will
affect only disclosures and are not expected to have a significant impact on the Company.
On December 20, 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts. This ASU is a consensus of the FASB Emerging Issues Task Force (EITF)
and requires an entity to perform Step 2 of the goodwill impairment test if it is more likely than
not that a goodwill impairment exists for reporting units with zero or negative carrying amounts.
An entity should consider whether there are any adverse qualitative factors indicating that
impairment may exist. If the entity determines that it is more likely than not that the goodwill is
impaired, Step 2 should be performed. Any resulting goodwill impairment should be recorded as a
cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any
impairments occurring after initial adoptions should be included in earnings. The amendments in
this ASU are effective for non-public entities for fiscal years, and interim periods, beginning
after December 15, 2011, which for the Company will be
January 1, 2012. Early adoption is not permitted. The Company has not yet determined the impact, if any, that the adoption of this ASU will have on the Company.
8
Table of Contents
Note 3. Share-based Compensation
Successor
On February 2, 2011, the Board of Directors of Parent approved and adopted the Burger King
Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan (the Omnibus Plan). The Omnibus Plan
generally provides for the grant of awards to employees, directors, consultants and other persons
who provide services to Parent and its subsidiaries, with respect to an aggregate of 5,000
shares (5 million millishares or .001 of one full share) of common stock. The Omnibus Plan permits
the grant of several types of awards with respect to the common stock, including stock options,
restricted stock units, restricted stock and performance shares.
On February 3, 2011, Parent granted options to purchase up to 3,634 shares (3,634,616
millishares) to key employees of BKC and its subsidiaries and members of the Board of Directors of Parent. The exercise
price per millishare is $15.82, and the options vest 100% on October 19, 2015, provided the
employee is continuously employed by BKC or one of its subsidiaries and the director remains on the
board of Parent. The grant date fair value of the options granted was
$1.96 per millishare and
was estimated using the Black-Scholes option pricing model based on the following weighted-average
input assumptions: exercise price of $15.82 per share; risk-free interest rate of 1.93%; expected
term of 5.0 years; expected volatility of 35.0%; and expected dividend yield of zero. The
compensation cost related to these granted options will be recognized ratably over the requisite
service period.
The Company recorded $0.2 million of share-based compensation expense in selling, general and
administrative expenses for the three months ended March 31, 2011 as a result of the option grants
described above. No stock options were exercised during the three months ended March 31, 2011.
As a result of the Acquisition, the Predecessors unvested share-based compensation awards
were accelerated to vest and, together with previously vested awards, were cancelled and settled in
cash using the $24.00 purchase price per share of common stock paid by 3G in the Acquisition. Cash
payments totaling $10.1 million related to certain equity grants
made in August 2010 (the August 2010
Equity Grants) were put in trust for each employee, the proceeds of which are payable over a
two-year period, subject to his or her continued employment on the applicable payment date. These
amounts were recorded as deferred compensation cost and are classified as an asset (current and
long term) at the Merger Date. As of March 31, 2011, $1.1 million of deferred compensation cost
remains as an asset in the consolidated balance sheets as the Companys recent restructuring plan
resulted in the reduction of employees whose funds were held in trust. This amount will be
amortized as compensation expense on a straight-line basis over the requisite service period of two
years.
In addition to the options granted, as described above, on March 1, 2011, Parent offered
officers of the Company who had proceeds from the August 2010 Equity Grants deposited into trust a
one-time opportunity, until April 19, 2011, to purchase millishares of common stock of Parent
under the Omnibus Plan (Investment Shares) at a purchase price of $15.82 per millishare. Any
officer who elects to purchase Investment Shares will also receive an option to purchase two
millishares for each Investment Share purchased, at an exercise price of $15.82 per millishare. The
options cliff vest on October 19, 2015. The grant date fair value of the options granted was the
same as the option grants noted above and the valuation was also based on the Black-Scholes option
pricing model using the same weighted-average input assumptions.
Predecessor
The Predecessor recorded $4.3 million of share-based compensation expense for the three months
ended March 31, 2010 in selling, general and administrative expenses. Excess tax benefits from
stock options exercised of $1.1 million in the three months ended March 31, 2010 were reported as
financing cash flows in the accompanying condensed consolidated statements of cash flows.
9
Table of Contents
Note 4. Restaurant Acquisitions, Closures and Dispositions
Acquisitions
Restaurant acquisitions are summarized as follows:
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions, except restaurant count) | ||||||||
Number of restaurants acquired |
| 35 | ||||||
Prepaids and other current assets |
$ | | $ | 4.0 | ||||
Property and equipment, net |
| 4.9 | ||||||
Goodwill and other intangible assets |
| 6.4 | ||||||
Assumed liabilities |
| (2.5 | ) | |||||
Total purchase price |
$ | | $ | 12.8 | ||||
Closures and Dispositions
Gains and losses on closures and dispositions represent sales of Company properties and other
costs related to restaurant closures and sales of Company restaurants to franchisees, referred to
as refranchisings, and are recorded in other operating (income) expenses, net in the accompanying
condensed consolidated statements of operations (See Note 14). Gains and losses recognized in the
current period may reflect closures and refranchisings that occurred in previous periods.
Closures and dispositions are summarized as follows:
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions, except restaurant count) | ||||||||
Number of restaurant closures |
7 | 5 | ||||||
Number of refranchisings |
3 | | ||||||
Net (gains) losses on
disposal of assets,
restaurant
closures and refranchisings |
$ | 0.4 | $ | (3.2 | ) |
Note 5. Prepaids and Other Current Assets, net
Included
in prepaids and other current assets, net, were prepaid expenses of
$50.3 million and
$38.7 million, inventories totaling $13.9 million and $15.6 million, foreign currency forward
contracts of $6.9 million and $7.9 million, and refundable income taxes of $101.5 million and $85.9
million as of March 31, 2011 and December 31, 2010, respectively.
10
Table of Contents
Note 6. Intangible Assets, net and Goodwill
As a result of the Merger on the Merger Date, and the related application of acquisition
accounting, the Company completed a preliminary valuation of the Brand and other identifiable
intangible assets as of that date. As of March 31, 2011 and December 31, 2010, the Brand, the
Companys only intangible asset with an indefinite life, had a carrying value of $2.1 billion. As
of March 31, 2011 and December 31, 2010, goodwill had a carrying value of $529.0 million and $529.9
million, respectively. The goodwill is attributable to preliminary acquisition accounting and will
be allocated to reporting units upon completion of the fair value studies in 2011.
The tables below present intangible assets subject to amortization:
As of | As of | |||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Franchise agreements |
$ | 880.5 | $ | 859.4 | ||||
Accumulated amortization |
(16.8 | ) | (7.2 | ) | ||||
Total, Net |
$ | 863.7 | $ | 852.2 | ||||
As of | As of | |||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Favorable leases |
$ | 26.8 | $ | 26.8 | ||||
Accumulated amortization |
(1.2 | ) | (0.7 | ) | ||||
Total, Net |
$ | 25.6 | $ | 26.1 | ||||
The
Company recorded amortization expense on intangible assets of $10.1 million during the
three months ended March 31, 2011. The Predecessor recorded amortization expense on intangible
assets of $1.9 million during the three months ended March 31, 2010.
Franchise agreements and favorable leases have weighted average amortization periods of
approximately 23 years and 12 years, respectively. The total intangible asset weighted average
amortization period is approximately 23 years.
11
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Note 7. Comprehensive Income
The components of total comprehensive income are as follows:
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net income (loss) |
$ | (6.8 | ) | $ | 41.0 | |||
Translation adjustment |
45.6 | 1.9 | ||||||
Net change in fair value of derivatives (1) |
2.3 | 1.1 | ||||||
Amounts reclassified to earnings during the period
from terminated caps/swaps (2) |
(0.6 | ) | (0.2 | ) | ||||
Pension and post-retirement benefit plans (3) |
| 0.5 | ||||||
Total other comprehensive income (loss) |
47.3 | 3.3 | ||||||
Total
comprehensive income (loss) |
$ | 40.5 | $ | 44.3 | ||||
(1) | Amounts are presented net of tax of $1.6 million and $0.6 million for the three months ended March 31, 2011 and 2010, respectively. | |
(2) | Amounts are presented net of tax of $0.4 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively. | |
(3) | The tax effect for the three-month period ended March 31, 2010 was not significant. |
Note 8. Other Accrued Liabilities and Other Liabilities
Included in other accrued liabilities (current), as of March 31, 2011 and December 31, 2010,
were accrued payroll and employee-related benefits costs totaling $43.6 million and $34.4 million,
respectively; accrued severance of $38.4 million and $46.8 million, respectively; interest payable
of $36.1 million and $16.2 million, respectively; foreign currency forward contracts of $6.4
million and $7.6 million, respectively; gift card liabilities of $13.7 million and $17.4 million, respectively; and sales tax payable of $15.3 million and $12.6 million, respectively.
Included in other liabilities (non-current), as of March 31, 2011 and December 31, 2010, were
accrued pension liabilities of $58.8 million and $60.1 million, respectively; liabilities for
unfavorable leases of $35.9 million and $38.6 million, respectively; casualty insurance reserves of
$21.8 million and $22.3 million, respectively; retiree health benefits of $25.6 million and
$25.1 million, respectively; deferred income of $13.1 million and $13.3 million, respectively; liability under the Executive Retirement Plan (the ERP liability) of $22.0 million and $25.6 million,
respectively; and income tax payable of $13.3 million and $15.4 million, respectively.
12
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Note 9. Long-Term Debt
Long-term debt is comprised of the following:
Principal | Interst rates (a) | |||||||||||
As of | As of | |||||||||||
March 31, | December 31, | |||||||||||
Three Months Ended | ||||||||||||
Maturity dates | 2011 | 2010 | March 31, 2011 | |||||||||
(In millions) | ||||||||||||
Secured Term Loan USD
tranche (b) |
2016 | $ | 1,596.0 | $ | 1,510.0 | 6.2% | ||||||
Secured Term Loan Euro
tranche (b) |
2016 | 282.7 | 334.2 | 6.4% | ||||||||
9 7/8 % Senior Notes |
2018 | 800.0 | 800.0 | 10.3% | ||||||||
Deferred Premiums on
interest rate caps USD
(See Note 11) |
2016 | 40.8 | 42.4 | 2.5% | ||||||||
Deferred Premiums on
interest rate caps EUR
(See Note 11) |
2016 | 9.1 | 11.1 | 2.9% | ||||||||
Revolving Credit Facility |
2015 | | | N/A | ||||||||
Other |
N/A | 1.3 | 1.4 | |||||||||
Total debt |
2,729.9 | 2,699.1 | ||||||||||
Less: current
maturities of debt |
(24.4 | ) | (27.0 | ) | ||||||||
Total long-term debt |
$ | 2,705.5 | $ | 2,672.1 | ||||||||
(a) | Represents the effective interest rate for the instrument computed on a quarterly basis, including the amortization of deferred debt issuance costs and discount, as applicable, and in the case of the Companys Secured Term Loans, the effect of interest rate caps. | |
(b) | Principal face amount herein is presented gross of a 1% discount of $14.8 million on the USD tranche and $1.3 million on the Euro tranche at March 31, 2011 and $16.8 million on the USD tranche and $3.3 million on the Euro tranche at December 31, 2010. |
Amended Credit Agreement
On February 15, 2011, BKC entered into a credit agreement dated as of October 19, 2010, as
amended and restated as of February 15, 2011 (the Amended Credit Agreement), with JPMorgan Chase
Bank, N.A., as administrative agent, Barclays Capital, as syndication agent, and the lenders party
thereto from time to time. Under the Amended Credit Agreement, the aggregate principal amount of
secured term loans denominated in U.S. dollars was increased to $1,600.0 million and the amount of
secured term loans denominated in Euros was reduced to 200.0 million (the Term Loan Facility).
The Amended Credit Agreement also provides for a senior secured revolving credit facility for up to
$150.0 million of revolving extensions of credit outstanding at any time (including revolving
loans, swingline loans and letters of credit), the amount of which was unchanged by the February
15, 2011 amendment (the Revolving Credit Facility, together with the Term Loan Facility, the
Credit Facilities).
Under the Amended Credit Agreement, at BKCs election, the interest rate per annum applicable
to the loans is based on a fluctuating rate of interest determined by reference to either (i) a
base rate determined by reference to the higher of (a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) the federal funds effective rate plus 0.50% and (c) the Eurocurrency rate applicable for an
interest period of one month plus 1.00%, plus an applicable margin equal to 2.00% for loans under
the U.S. dollar denominated tranche of the Term Loan Facility and 2.25% for loans under the
Revolving Credit Facility, or (ii) a Eurocurrency rate determined by reference to EURIBOR for the
Euro denominated tranche and LIBOR for the U.S. dollar denominated tranche and Revolving Credit
Facility, adjusted for statutory reserve requirements, plus an applicable margin equal to 3.25% for
loans under the Euro denominated tranche of the Term Loan Facility, 3.00% for loans under the U.S.
dollar denominated tranche of the Term Loan Facility and 3.25% for loans under the Revolving Credit
Facility. Term Loan borrowings under the Amended Credit Agreement are subject to a LIBOR floor of
1.50%.
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In connection with the Amended Credit Agreement, the Company recorded a $19.6 million loss on
early extinguishment of debt during the three months ended March 31, 2011.
As of March 31, 2011, the Company had $26.0 million in irrevocable standby letters of credit
outstanding, which were issued primarily to certain insurance carriers to guarantee payments of
deductibles for various insurance programs, such as health and commercial liability insurance. Such
letters of credit are secured by the collateral under the Companys Revolving Credit Facility. As
of March 31, 2011, no amounts had been drawn on any of these irrevocable standby letters of credit.
The financial covenants, negative covenants, affirmative covenants, maturity dates, prepayment
events and events of default, as described in the Companys Transition Report on Form 10-K for the
six-month period ended December 31, 2010, were unchanged by the February 15, 2011 amendment. As of
March 31, 2011, the Company was in compliance with all covenants of the Amended Credit Agreement.
9 7/8% Senior Notes
On October 19, 2010, Merger Sub, as the initial issuer, and Wilmington Trust FSB, as trustee,
executed an indenture pursuant to which the senior notes (the Senior Notes) were issued (the
Senior Notes Indenture). Upon the consummation of the Merger, Merger Sub, BKC, the Company, as a
guarantor, and the other guarantors entered into a supplemental indenture (the Supplemental
Indenture) pursuant to which BKC assumed the obligations of Merger Sub under the Senior Notes
Indenture and the Senior Notes and the Company and the other guarantors guaranteed the Senior Notes
on a senior basis. The Senior Notes bear interest at a rate of 9.875% per annum, which is payable
semi-annually on October 15 and April 15 of each year, commencing on April 15, 2011. The Senior
Notes mature on October 15, 2018.
The Senior Notes are general unsecured senior obligations of BKC that rank pari passu in right
of payment with all existing and future senior indebtedness of BKC. The Senior Notes are
effectively subordinated to all secured indebtedness of BKC (including the Credit Facilities) to
the extent of the value of the assets securing such indebtedness and are structurally subordinated
to all indebtedness and other liabilities, including preferred stock, of non-guarantor
subsidiaries.
The Senior Notes are guaranteed by BKH and all existing direct and indirect subsidiaries that
borrow under or guarantee any indebtedness or indebtedness of another guarantor. Under certain
circumstances, subsidiary guarantors may be released from their guarantees without the consent of
the holders of the Senior Notes.
The Senior Notes Indenture contains certain covenants that the Company must meet during the
term of the Senior Notes, including, but not limited to, limitations on restricted payments (as
defined in the Senior Notes Indenture), incurrence of indebtedness, issuance of disqualified stock
and preferred stock, asset sales, mergers and consolidations, transactions with affiliates,
guarantees of indebtedness by subsidiaries and activities of BKH. As of March 31, 2011, the Company
was in compliance with all covenants of the Senior Notes Indenture.
Other
The Company has lines of credit with foreign banks, which can also be used to provide
guarantees, in the amount of $3.5 million and $3.3 million as of March 31, 2011 and December 31,
2010, respectively. There were $2.4 million and $1.2 million of guarantees issued against these
lines of credit as of March 31, 2011 and December 31, 2010, respectively.
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Interest Expense
Interest expense consists of the following:
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Secured Term Loan USD tranche |
$ | 21.1 | $ | | ||||
Secured Term Loan Euro tranche |
4.5 | | ||||||
Interest Rate Caps USD and Euro |
0.3 | | ||||||
9 7/8 % Senior Notes |
19.8 | | ||||||
Amortization on original debt issuance
discount, deferred financing costs and other |
3.6 | 6.2 | ||||||
Predecessor term loans (a) |
| 3.5 | ||||||
Capital lease obligations |
2.4 | 2.5 | ||||||
Total |
$ | 51.7 | $ | 12.2 | ||||
(a) | The effective interest rate for the three month period ended March 31, 2010 for the Predecessor term loans was 4.7%. |
15
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Note 10. Fair Value Measurements
Fair Value Measurements
The following table presents financial assets and liabilities measured at fair value on a
recurring basis, which include derivatives designated as cash flow hedging instruments, derivatives
not designated as hedging instruments and other investments, which consist of money market accounts
and mutual funds held in a rabbi trust established by the Company to fund a portion of the
Companys current and future obligations under its Executive Retirement Plan, as well as their
location on the Companys condensed consolidated balance sheets as of March 31, 2011 and December
31, 2010:
As of March 31, 2011 | Fair Value Measurements at March 31, 2011 | |||||||||||||||||||||||||||
Carrying Value and Balance Sheet Location | Assets (Liabilities) | |||||||||||||||||||||||||||
Quoted Prices | ||||||||||||||||||||||||||||
in Active | Significant | |||||||||||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||||||||||
Prepaid and | Identical | Observable | Unobservable | |||||||||||||||||||||||||
Other Current | Other Accrued | Other | Instruments | Inputs | Inputs | |||||||||||||||||||||||
Description | Assets | Other Assets | Liabilities | liabilities | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Derivatives designated as cash
flow hedging instruments: |
||||||||||||||||||||||||||||
Interest rate caps |
$ | 1.0 | $ | 92.4 | $ | | $ | | $ | | $ | 93.4 | $ | | ||||||||||||||
Foreign currency forward
contracts (liability) |
| | (0.1 | ) | | | (0.l | ) | | |||||||||||||||||||
Total |
$ | 1.0 | $ | 92.4 | $ | (0.1 | ) | $ | | $ | | $ | 93.3 | $ | | |||||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | $ | (1.7 | ) | $ | | $ | | $ | (1.7 | ) | $ | | ||||||||||||
Foreign currency forward
contracts (asset) |
6.9 | | | | | 6.9 | | |||||||||||||||||||||
Foreign currency forward
contracts (liability) |
| | (6.3 | ) | | | (6.3 | ) | | |||||||||||||||||||
Total |
$ | 6.9 | $ | | $ | (8.0 | ) | $ | | $ | | $ | (1.1 | ) | $ | | ||||||||||||
Other investments: |
||||||||||||||||||||||||||||
Investments held in a rabbi trust |
$ | | $ | 21.5 | $ | | $ | | $ | 21.5 | $ | | $ | | ||||||||||||||
Total |
$ | | $ | 21.5 | $ | | $ | | $ | 21.5 | $ | | $ | | ||||||||||||||
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As of December 31, 2010 | Fair Value Measurements at December 31, 2010 | |||||||||||||||||||||||||||
Carrying Value and Balance Sheet Location | Assets (Liabilities) | |||||||||||||||||||||||||||
Quoted Prices | ||||||||||||||||||||||||||||
in Active | Significant | |||||||||||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||||||||||
Prepaid and | Identical | Observable | Unobservable | |||||||||||||||||||||||||
Other Current | Other Accrued | Other | Instruments | Inputs | Inputs | |||||||||||||||||||||||
Description | Assets | Other Assets | Liabilities | liabilities | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Derivatives designated as cash
flow hedging instruments: |
||||||||||||||||||||||||||||
Interest rate caps |
$ | 11.1 | $ | 80.0 | $ | | $ | | $ | | $ | 91.1 | $ | | ||||||||||||||
Foreign currency forward
contracts (asset) |
0.1 | | | | | 0.1 | | |||||||||||||||||||||
Total |
$ | 11.2 | $ | 80.0 | $ | | $ | | $ | | $ | 91.2 | $ | | ||||||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | $ | (2.6 | ) | $ | | $ | | $ | (2.6 | ) | $ | | ||||||||||||
Foreign currency forward
contracts (asset) |
7.8 | | | | | 7.8 | | |||||||||||||||||||||
Foreign currency forward
contracts (liability) |
| | (7.6 | ) | | | (7.6 | ) | | |||||||||||||||||||
Total |
$ | 7.8 | $ | | $ | (10.2 | ) | $ | | $ | | $ | (2.4 | ) | $ | | ||||||||||||
Other investments: |
||||||||||||||||||||||||||||
Investments held in a rabbi trust |
$ | | $ | 22.2 | $ | | $ | | $ | 22.2 | $ | | $ | | ||||||||||||||
Total |
$ | | $ | 22.2 | $ | | $ | | $ | 22.2 | $ | | $ | | ||||||||||||||
The Companys derivatives are valued using a discounted cash flow analysis that incorporates
observable market parameters, such as interest rate yield curves and currency rates, classified as
Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments
that are necessary to reflect the probability of default by the counterparty or the Company.
At March 31, 2011, the fair value of the Companys variable rate term debt and the Senior
Notes was estimated at $2,723.5 million, compared to a carrying amount of $2,662.7 million. At
December 31, 2010, the fair value of the Companys variable rate term debt and the Senior Notes
was estimated at $2,731.0 million, compared to a carrying amount of $2,624.1 million. Fair value
of variable rate term debt was estimated using inputs based on bid and offer prices and are Level 2
inputs within the fair value hierarchy. Fair value of the Senior Notes was estimated using quoted
market prices and are Level 1 inputs within the fair value hierarchy.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring
basis. These assets and liabilities are not measured at fair value on an ongoing basis but are
subject to periodic impairment tests. For the Company, these items primarily include long-lived
assets, the Brand and other intangible assets.
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Note 11. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
The Company enters into derivative instruments for risk management purposes, including
derivatives designated as hedging instruments and those utilized as economic hedges. The Company
uses derivatives to manage exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Caps
Following the Transactions, the Company entered into two deferred premium interest rate caps,
one of which was denominated in U.S. dollars (notional amount of $1.5 billion) and the other
denominated in Euros (notional amount of 250 million) (the Cap Agreements). The six year Cap
Agreements are a series of 25 individual caplets that reset and settle on the same dates as the
Term Loan Facility. The deferred premium associated with the Cap Agreements was $47.7 million for
the U.S. dollar denominated exposure and 9.4 million for the Euro denominated exposure. In
connection with the Amended Credit Agreement, the Company modified its interest rate cap
denominated in Euros to reduce its notional amount by 50 million throughout the life of the
caplets. Additionally, the Company entered into a new interest rate cap agreement denominated in
U.S. dollars (notional amount of $90 million) with a strike price of 1.50% (the New Cap
Agreement). The terms of the New Cap Agreement are substantially similar to those described above
and the Cap Agreements were not otherwise revised by these modifications.
Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets above a strike price of 1.75%
(1.50% for the New Cap Agreement), the Company will receive the net difference between the rate and
the strike price. In addition, on the quarterly settlement dates, the Company will remit the
deferred premium payment (plus interest) to the counterparty. If LIBOR/EURIBOR resets below the
strike price no payment is made by the counterparty. However, the Company would still be
responsible for the deferred premium and interest.
The interest rate cap contracts are designated as cash flow hedges and to the extent they are
effective in offsetting the variability of the variable rate interest payments, changes in the
derivatives fair value are not included in current earnings but are included in accumulated other
comprehensive income (AOCI) in the accompanying condensed consolidated balance sheets. At each cap maturity
date, the portion of fair value attributable to the matured cap will be reclassified from AOCI into
earnings as a component of interest expense.
Interest Rate Swaps
The Predecessor entered into receive-variable, pay-fixed interest rate swap contracts to
hedge a portion of the Predecessors forecasted variable-rate interest payments on its underlying
Term Loan A and Term Loan B-1 debt (the Predecessors Term Debt). Interest payments on the
Predecessors Term Debt were made quarterly and the variable rate on the Predecessors Term Debt
was reset at the end of each fiscal quarter. The interest rate swap contracts were designated as
cash flow hedges and to the extent they were effective in offsetting the variability of the
variable-rate interest payments, changes in the derivatives fair value were not included in
current earnings but in accumulated other comprehensive income (AOCI) in the accompanying
condensed consolidated balance
sheets. These changes in fair value were subsequently reclassified into earnings as a component of
interest expense each quarter as interest payments were made on the Predecessors Term Debt.
In connection with the Transactions, interest rate swaps with a notional value of $500
million were terminated by counterparties. The remaining interest rate swaps that were not
terminated by counterparties have a notional value of $75 million and remain classified as a
liability on the Companys condensed consolidated balance sheet as of March 31, 2011. Future fluctuations in
the fair value of remaining interest rate swaps will be included in the determination of net
income (loss) until the final contract expires in September 2011.
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Foreign Currency Forward Contracts
The Company enters into foreign currency forward contracts, which typically have maturities
between one and fifteen months, to economically hedge the remeasurement of certain foreign
currency-denominated intercompany loans receivable and other foreign-currency denominated assets
recorded in the Companys condensed consolidated balance sheets. Remeasurement represents changes
in the expected amount of cash flows to be received or paid upon settlement of the intercompany
loan receivables and other foreign-currency denominated assets and liabilities resulting from a
change in currency exchange rates. The Company also enters into foreign currency forward contracts
in order to manage the foreign exchange variability in forecasted royalty cash flows due to
fluctuations in exchange rates. Foreign currency forward contracts with a net notional amount of
$2.1 million were outstanding at March 31, 2011 and December 31, 2010. On October 19, 2010, the
Company notified certain counterparties to its foreign currency forward contracts that a
termination event had occurred, giving these counterparties the right to terminate the forward
contracts.
Credit Risk
By entering into derivative instrument contracts, the Company exposes itself, from time to
time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of a derivative contract is
in an asset position, the counterparty has a liability to the Company, which creates credit risk
for the Company. The Company attempts to minimize this risk by selecting counterparties with
investment grade credit ratings and regularly monitoring its market position with each
counterparty.
Credit-Risk Related Contingent Features
The Companys derivative instruments do not contain any credit-risk related contingent
features.
The following table presents the required quantitative disclosures for the Companys
derivative instruments:
Successor | Predecessor | |||||||||||||||||||||||||||
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||||||
Foreign | Foreign | |||||||||||||||||||||||||||
Currency | Currency | |||||||||||||||||||||||||||
Interest | Interest | Forward | Interest | Foward | ||||||||||||||||||||||||
Rate Caps | Rate Swaps | Contracts | Total | Rate Swaps | Contracts | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: |
||||||||||||||||||||||||||||
Gain (loss) recognized in other comprehensive income (effective
portion) |
$ | 4.2 | $ | | $ | (0.1 | ) | $ | 4.1 | $ | (4.1 | ) | $ | 0.2 | $ | (3.9 | ) | |||||||||||
Gain (loss) reclassified from AOCI into interest expense, net (1) |
$ | 1.0 | $ | | $ | 0.1 | $ | 1.1 | $ | (5.3 | ) | $ | | $ | (5.3 | ) | ||||||||||||
Gain (loss) reclassified from AOCI into royalty income |
$ | | $ | | $ | | $ | | $ | | $ | (0.3 | ) | $ | (0.3 | ) | ||||||||||||
Gain (loss) recognized in interest expense, net (ineffective portion)
(2) |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Gain (loss) recognized in royalty income, net (ineffective portion)(2) |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
$ | | $ | | |||||||||||||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||||||
Gain (loss) recognized in other operating expense, net |
$ | | $ | | $ | 0.2 | $ | 0.2 | $ | | $ | 21.7 | $ | 21.7 | ||||||||||||||
Gain (loss) recognized in interest expense, net |
$ | | $ | 1.0 | $ | | $ | 1.0 | $ | | $ | | $ | |
(1) | Includes zero in gains for the three months ended March 31, 2011 related to the terminated hedges, and $0.4 million for the three months ended March 31, 2010. | |
(2) | No ineffectiveness has been recorded in earnings related to the interest rate swap agreements during the three months ended March 31, 2011. The amount of ineffectiveness recorded in earnings related to interest rate swap agreements during the three months ended March 31, 2010 was not significant. |
19
Table of Contents
The
net amount of pre-tax gains and losses in accumulated other comprehensive income (loss) as of
March 31, 2011, that the Company expects to be reclassified into earnings within the next 12 months
is $0.9 million of gains.
Note 12. Income Taxes
The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:
Successor | Predecessor | ||||||||
Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
U.S. federal income tax rate |
35.0 | % | 35.0 | % | |||||
State income taxes, net of federal income tax benefit |
1.1 | 3.0 | |||||||
Costs/(Benefits) and taxes related to foreign
operations |
(25.9 | ) | 0.2 | ||||||
Foreign tax differential |
(23.7 | ) | (2.0 | ) | |||||
Foreign exchange differential on tax benefits |
1.3 | 0.7 | |||||||
Change in valuation allowance |
13.6 | 0.9 | |||||||
Change in accrual for tax uncertainties |
11.1 | 0.7 | |||||||
Other |
(2.0 | ) | 0.3 | ||||||
Effective income tax rate |
(10.5 | )% | 38.8 | % | |||||
Income tax benefit was $0.8 million for the three months ended March 31, 2011, resulting in an
effective tax rate of 10.5%, primarily as a result of the exclusion of the tax benefit of foreign
ordinary losses not expected to be realized, the current mix of income from multiple tax
jurisdictions and the resolution of state tax audits. Income tax expense was $26.0 million for the
three months ended March 31, 2010, resulting in an effective tax rate of 38.8%, primarily as a
result of the mix of income from multiple tax jurisdictions and currency fluctuations.
The Company had $10.5 million and $12.2 million of unrecognized tax benefits at March 31, 2011
and December 31, 2010, respectively, which if recognized, would affect the effective income tax
rate.
In the next twelve months, it is reasonably possible that the Companys unrecognized tax benefits
will not significantly change.
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. The total amount of accrued interest and penalties at March 31,
2011 and December 31, 2010 was $2.8 million and $3.2 million, respectively. Potential interest and
penalties associated with uncertain tax positions recognized during the three months ended March
31, 2011 and 2010 were $0.2 million and $0.1 million. To the extent interest and penalties are not
assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as
a reduction of the overall income tax provision.
The Company files income tax returns, including returns for its subsidiaries, with federal,
state, local and foreign jurisdictions. Generally, the Company is subject to routine examination by
taxing authorities in these jurisdictions, including significant international tax jurisdictions,
such as the United Kingdom, Germany, Spain, Switzerland, Singapore and Mexico. None of the foreign
jurisdictions should be individually material. The Company also has various state and foreign
income tax returns in the process of examination. From time to time, these audits result in
proposed assessments where the ultimate resolution may result in the Company owing additional
taxes. The Company believes that its tax positions comply with applicable tax law and that it has
adequately provided for these matters.
20
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Note 13. Retirement Plan and Other Postretirement Benefits
The Companys liability under its Executive Retirement Plan (the ERP liability) was $26.4
million and $27.0 million at March 31, 2011 and December 31, 2010, respectively. The value of
investments held in a rabbi trust (the rabbi trust) established to fund a portion of the ERP
liability was $21.5 million and $22.2 million at March 31, 2011 and December 31, 2010,
respectively.
A summary of the components of net periodic benefit cost for the Companys pension plans
(retirement benefits) is presented below:
Successor | Predecessor | ||||||||
Retirement Benefits | |||||||||
Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
(In millions) | |||||||||
Service cost-benefits earned during the period |
$ | 0.4 | $ | 0.9 | |||||
Interest costs on projected benefit obligations |
2.7 | 2.9 | |||||||
Expected return on plan assets |
(2.6 | ) | (2.6 | ) | |||||
Recognized net actuarial loss |
| (0.1 | ) | ||||||
Net periodic benefit cost |
$ | 0.5 | $ | 1.1 | |||||
Other benefits costs were less than $0.5 million for each of the three months ended March 31,
2011 and March 31, 2010, respectively.
Note 14. Other Operating (Income) Expense, Net
Successor | Predecessor | ||||||||
Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
(In millions) | |||||||||
Net (gains) losses on disposal of assets,
restaurant closures and
refranchisings |
$ | 0.4 | $ | (3.2 | ) | ||||
Litigation settlements and reserves, net |
0.4 | (0.6 | ) | ||||||
Foreign exchange net (gains) losses |
3.2 | (1.9 | ) | ||||||
Other, net |
1.0 | 1.2 | |||||||
Other operating (income) expense, net |
$ | 5.0 | $ | (4.5 | ) | ||||
21
Table of Contents
Note 15. Commitments and Contingencies
In some of the matters described below, loss contingencies are not both probable and estimable
in the view of management and, accordingly, reserves have not been established for those matters.
However, information is provided below or included in Note 21, Commitments and Contingencies to
the Consolidated Financial Statements contained in Part II, Item 8 of
the Companys Transition Report on Form 10-K for the
six-month period ended December 31, 2010 regarding the nature of the contingency and, where
specified, the amount of the claim associated with the loss contingency.
Litigation
On July 30, 2008, BKC was sued by four Florida franchisees over its decision to mandate
extended operating hours in the United States. The plaintiffs seek damages, declaratory relief and
injunctive relief. The court dismissed the plaintiffs original complaint in November 2008. In
December 2008, the plaintiffs filed an amended complaint. In August 2010, the court entered an
order reaffirming the legal bases for dismissal of the original complaint, again holding that BKC had the
authority under its franchise agreements to mandate extended operating hours. The court held a
hearing on December 7, 2010 and stated that, in light of the ruling that the hours clause was
unambiguous, it would grant BKCs motion to dismiss, with prejudice, on seven of the eight claims
in the amended complaint. The court denied the motion to dismiss on one claim in the amended
complaint, that the hours clause was unconscionable under Florida law. The case will now continue
through the discovery process on that remaining claim.
On September 10, 2008, a class action lawsuit was filed against the Company in the United
States District Court for the Northern District of California. The complaint alleged that all 96
Burger King restaurants in California leased by the Company and operated by franchisees violate
accessibility requirements under federal and state law. In September 2009, the court issued a
decision on the plaintiffs motion for class certification. In its decision, the court limited the
class action to the 10 restaurants visited by the named plaintiffs, with a separate class of
plaintiffs for each of the 10 restaurants and 10 separate trials. In March 2010, the Company agreed
to settle the lawsuit with respect to the 10 restaurants and, in July 2010, the court gave final
approval to the settlement. In February 2011, a class action lawsuit was filed with respect to the
other 86 restaurants. The Company intends to vigorously defend against all claims in the lawsuit,
but the Company is unable to predict the ultimate outcome of this litigation.
The National Franchisee Association, Inc. (NFA) and several individual franchisees filed two
class action lawsuits on November 10, 2009, and June 15, 2010, respectively, claiming to represent
Burger King franchisees. The lawsuits seek a judicial declaration that the franchise agreements
between BKC and its franchisees do not obligate the franchisees to comply with maximum price points
set by BKC for products on the BK Value Menu sold by the franchisees, specifically the 1/4 lb.
Double Cheeseburger and the Buck Double. The Family Dining plaintiffs also seek monetary
damages for financial loss incurred by franchisees who were required to sell those products for no
more than $1.00. In May 2010, the court entered an order in the National Franchisee Association
case granting in part BKCs motion to dismiss. The court held that BKC had the authority under its
franchise agreements to set maximum prices but that, for purposes of a motion to dismiss, the NFA
had asserted a plausible claim that BKCs decision may not have been made in good faith. Both
cases were consolidated into a single consolidated class action complaint which BKC moved to
dismiss on September 22, 2010. On November 19, 2010, the court issued an order granting BKCs
motion to dismiss on all claims in the consolidated complaint with prejudice. On December 14, 2010,
the plaintiffs filed a motion asking the court to reconsider its decision, and on December 17,
2010, the plaintiffs filed a notice of appeal to the U.S. Circuit Court of Appeals. On February 2,
2011, the court permitted the plaintiffs to file an amended complaint. On April 18, 2011, BKC and
the NFA agreed to settle the lawsuit. The settlement does not include any financial compensation to
either side.
On September 3, 2010, four purported class action complaints were filed in the Circuit Court
for the County of Miami-Dade, Florida, by purported shareholders of the Company, in connection with
the tender offer and the merger. Each of the four complaints (collectively, the Florida Actions)
names as defendants the Company, each member of the Companys board of directors (the Individual
Defendants) and 3G Capital. The suits generally allege that the Individual Defendants breached
their fiduciary duties to the Companys shareholders in connection with the proposed sale of the
Company and that 3G Capital and the Company aided and abetted the purported breaches of fiduciary
duties.
22
Table of Contents
On September 8, 2010, another putative shareholder class action suit was filed in the Delaware
Court of Chancery against the Individual Defendants, the Company, 3G, 3G Capital, Blue Acquisition
Holding Corporation and Blue Acquisition Sub, Inc. The complaint generally alleges that the
Individual Defendants breached their fiduciary duty to maximize shareholder value by entering into
the proposed transaction via an unfair process and at an unfair price, and that the merger
agreement contains provisions that unreasonably dissuade potential suitors from making competing
offers. On September 27, 2010, another putative shareholder class action suit was filed in the
Delaware Court of Chancery against the Individual Defendants. Like the first Delaware Action, the
Debardelaben complaint asserts that the Companys directors breached their fiduciary duties
in connection with the tender offer, and that the Company and 3G Capital aided and abetted that
breach. This action also seeks both monetary and injunctive relief. On September 29, 2010, the
Delaware court entered an order consolidating the Debardelaben and Queiroz actions
(Delaware Actions).
On December 30, 2010, a proposed settlement was reached with the plaintiffs in the Florida
Actions and Delaware Actions. The principal terms of the proposed settlement include additional
disclosures about the Merger that were provided to Burger King shareholders in the Companys 14D-9,
dismissal of the Florida and Delaware actions, mutual releases and the payment of up to $1 million
in attorneys fees and expenses to Plaintiffs counsel.
On
March 16, 2011, the Florida court gave preliminary approval of the proposed settlement.
The court has scheduled a hearing on June 15, 2011 to determine whether to finally approve the
settlement.
From time to time, the Company is involved in other legal proceedings arising in the ordinary
course of business relating to matters including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over our intellectual property.
At March 31, 2011 and December 31, 2010, liabilities totaling $3.5 million and $3.2 million,
respectively, were included in the Companys consolidated balance sheets to reflect the Companys
best estimate of the loss to be incurred in connection with the disposition of the matters noted
above. Although it is reasonably possible that the loss will exceed this amount, the Company does
not believe any such matter currently being reviewed will have a material adverse effect on its
financial condition or results of operations.
Note 16. Segment Reporting
The Company operates in the fast food hamburger restaurant category of the quick service
restaurant segment of the restaurant industry. Revenues include retail sales at Company
restaurants, franchise revenues, consisting of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees, and property revenues. The business
is managed in three distinct geographic segments: (1) United States (U.S.) and Canada; (2)
Europe, the Middle East and Africa and Asia Pacific (EMEA/APAC); and (3) Latin America.
The following tables present revenues and income from operations by geographic segment:
Successor | Predecessor | ||||||||
Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
(In millions) | |||||||||
Revenues: |
|||||||||
U.S. and Canada |
$ | 375.4 | $ | 407.1 | |||||
EMEA/APAC |
147.4 | 163.8 | |||||||
Latin America |
29.2 | 26.0 | |||||||
Total revenues |
$ | 552.0 | $ | 596.9 | |||||
23
Table of Contents
Other than the U.S., no other individual country represented 10% or more of the Companys
total revenue during the three months ended March 31, 2011. Other than the U.S. and Germany, no
other individual country represented 10% or more of the Companys total revenues during the three
months ended March 31, 2010. Revenues in the U.S. totaled $338.0 million and $372.0 million for the
three months ended March 31, 2011 and 2010, respectively. Revenues in Germany totaled $52.5 million
and $66.1 million for the three months ended March 31, 2011 and 2010, respectively.
The unallocated amounts reflected in the table below include corporate support costs in areas
such as facilities, finance, human resources, information technology, legal, marketing and supply
chain management, which benefit all of the Companys geographic segments and system wide
restaurants and are not allocated specifically to any of the geographic segments.
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Income from Operations: |
||||||||
U.S. and Canada |
$ | 70.2 | $ | 85.8 | ||||
EMEA/APAC |
18.8 | 16.6 | ||||||
Latin America |
13.3 | 8.5 | ||||||
Unallocated |
(39.9 | ) | (32.0 | ) | ||||
Total income from operations |
62.4 | 78.9 | ||||||
Interest expense, net |
50.4 | 11.9 | ||||||
Loss on early extinguishment of debt |
19.6 | | ||||||
Income before income taxes |
(7.6 | ) | 67.0 | |||||
Income tax expense (benefit) |
(0.8 | ) | 26.0 | |||||
Net income (loss) |
$ | (6.8 | ) | $ | 41.0 | |||
24
Table of Contents
Note 17. Supplemental Financial Information
On October 19, 2010, BKC issued the Senior Notes. The Senior Notes are irrevocably and
unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by the Company and
the domestic subsidiaries of BKC (the Guarantors).
The following is the condensed consolidating financial information for the Issuer, the
Guarantors and the non-U.S. subsidiaries of BKC (the Non-Guarantors), together with eliminations,
as of and for the periods indicated. The consolidating financial information may not necessarily be
indicative of the financial position, results of operations or cash flows had BKC, Guarantors and
Non-Guarantors operated as independent entities.
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of March 31, 2011
Condensed Consolidating Balance Sheet
As of March 31, 2011
(In millions)
(Unaudited)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 160.4 | $ | 0.7 | $ | 106.0 | | $ | 267.1 | |||||||||||
Trade and notes receivable, net |
86.4 | | 52.7 | | 139.1 | |||||||||||||||
Prepaids and other current assets |
150.8 | | 22.8 | | 173.6 | |||||||||||||||
Deferred income taxes, net |
25.5 | | 0.9 | | 26.4 | |||||||||||||||
Total current assets |
423.1 | 0.7 | 182.4 | | 606.2 | |||||||||||||||
Property and equipment, net of accumulated depreciation |
956.9 | | 214.8 | | 1,171.7 | |||||||||||||||
Intangible assets, net |
1,816.7 | | 1,160.1 | | 2,976.8 | |||||||||||||||
Goodwill |
529.0 | | | | 529.0 | |||||||||||||||
Net investment in property leased to franchisees |
126.6 | | 11.6 | | 138.2 | |||||||||||||||
Intercompany receivable |
384.6 | | | (384.6 | ) | | ||||||||||||||
Investment in subsidiaries |
962.9 | 1,495.5 | | (2,458.4 | ) | | ||||||||||||||
Other assets, net |
192.3 | | 38.8 | | 231.1 | |||||||||||||||
Total assets |
$ | 5,392.1 | $ | 1,496.2 | $ | 1,607.7 | $ | (2,843.0 | ) | $ | 5,653.0 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts and drafts payable |
$ | 40.6 | $ | | $ | 34.6 | | $ | 75.2 | |||||||||||
Accrued advertising |
60.3 | | 30.2 | | 90.5 | |||||||||||||||
Other accrued liabilities |
196.3 | | 67.3 | | 263.6 | |||||||||||||||
Current
portion of long-term debt and capital leases |
28.5 | | 1.9 | | 30.4 | |||||||||||||||
Total current liabilities |
325.7 | | 134.0 | | 459.7 | |||||||||||||||
Long-term debt, net of current portion |
2,689.4 | | | | 2,689.4 | |||||||||||||||
Capital leases, net of current portion |
44.2 | | 18.5 | | 62.7 | |||||||||||||||
Other liabilities, net |
182.0 | | 19.2 | | 201.2 | |||||||||||||||
Payables to affiliates |
| 0.7 | 383.9 | (384.6 | ) | | ||||||||||||||
Deferred income taxes, net |
655.3 | | 89.2 | | 744.5 | |||||||||||||||
Total liabilities |
3,896.6 | 0.7 | 644.8 | (384.6 | ) | 4,157.5 | ||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Additional paid-in capital |
1,562.5 | 1,563.5 | 965.7 | (2,528.2 | ) | 1,563.5 | ||||||||||||||
Accumulated deficit |
(111.4 | ) | (112.4 | ) | (17.5 | ) | 128.9 | (112.4 | ) | |||||||||||
Accumulated
other comprehensive income (loss) |
44.4 | 44.4 | 14.7 | (59.1 | ) | 44.4 | ||||||||||||||
Total stockholders equity |
1,495.5 | 1,495.5 | 962.9 | (2,458.4 | ) | 1,495.5 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 5,392.1 | $ | 1,496.2 | $ | 1,607.7 | $ | (2,843.0 | ) | $ | 5,653.0 | |||||||||
25
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31, 2010
(In millions)
Condensed Consolidating Balance Sheet
As of December 31, 2010
(In millions)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 132.9 | $ | 0.7 | $ | 73.4 | | $ | 207.0 | |||||||||||
Trade and notes receivable, net |
94.4 | | 53.6 | | 148.0 | |||||||||||||||
Prepaids and other current assets |
131.5 | | 27.7 | | 159.2 | |||||||||||||||
Deferred income taxes, net |
22.3 | | 0.9 | | 23.2 | |||||||||||||||
Total current assets |
381.1 | 0.7 | 155.6 | | 537.4 | |||||||||||||||
Property and equipment, net of accumulated depreciation |
973.8 | | 219.8 | | 1,193.6 | |||||||||||||||
Intangible assets, net |
1,817.0 | | 1,114.9 | | 2,931.9 | |||||||||||||||
Goodwill |
529.9 | | | | 529.9 | |||||||||||||||
Net investment in property leased to franchisees |
128.4 | | 11.6 | | 140.0 | |||||||||||||||
Intercompany receivable |
369.5 | | | (369.5 | ) | | ||||||||||||||
Investment in subsidiaries |
911.8 | 1,455.0 | | (2,366.8 | ) | | ||||||||||||||
Other assets, net |
194.5 | | 32.1 | | 226.6 | |||||||||||||||
Total assets |
$ | 5,306.0 | $ | 1,455.7 | $ | 1,534.0 | $ | (2,736.3 | ) | $ | 5,559.4 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts and drafts payable |
$ | 58.5 | $ | | $ | 31.7 | | $ | 90.2 | |||||||||||
Accrued advertising |
62.6 | | 19.9 | | 82.5 | |||||||||||||||
Other accrued liabilities |
166.3 | 0.1 | 83.0 | | 249.4 | |||||||||||||||
Current
portion of long-term debt and capital leases |
31.0 | | 1.9 | | 32.9 | |||||||||||||||
Total current liabilities |
318.4 | 0.1 | 136.5 | | 455.0 | |||||||||||||||
Long-term debt, net of current portion |
2,652.0 | | | | 2,652.0 | |||||||||||||||
Capital leases, net of current portion |
45.2 | | 18.5 | | 63.7 | |||||||||||||||
Other liabilities, net |
191.3 | 0.1 | 16.8 | | 208.2 | |||||||||||||||
Payables to affiliates |
| 0.5 | 369.0 | (369.5 | ) | | ||||||||||||||
Deferred income taxes, net |
644.1 | | 81.4 | | 725.5 | |||||||||||||||
Total liabilities |
3,851.0 | 0.7 | 622.2 | (369.5 | ) | 4,104.4 | ||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Additional paid-in capital |
1,562.5 | 1,563.5 | 965.7 | (2,528.2 | ) | 1,563.5 | ||||||||||||||
Accumulated deficit |
(104.6 | ) | (105.6 | ) | (23.6 | ) | 128.2 | (105.6 | ) | |||||||||||
Accumulated
other comprehensive income (loss) |
(2.9 | ) | (2.9 | ) | (30.3 | ) | 33.2 | (2.9 | ) | |||||||||||
Total stockholders equity |
1,455.0 | 1,455.0 | 911.8 | (2,366.8 | ) | 1,455.0 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 5,306.0 | $ | 1,455.7 | $ | 1,534.0 | $ | (2,736.3 | ) | $ | 5,559.4 | |||||||||
26
Table of Contents
Successor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2011
(In millions)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Company restaurant revenues |
$ | 248.9 | $ | | $ | 143.6 | $ | | $ | 392.5 | ||||||||||
Franchise revenues |
82.9 | | 49.3 | | 132.2 | |||||||||||||||
Intercompany revenues |
1.6 | | (1.6 | ) | | | ||||||||||||||
Property revenues |
20.8 | | 6.5 | | 27.3 | |||||||||||||||
Total revenues |
354.2 | | 197.8 | | 552.0 | |||||||||||||||
Company restaurant expenses: |
||||||||||||||||||||
Food, paper and product costs |
81.3 | | 45.4 | | 126.7 | |||||||||||||||
Payroll and employee benefits |
77.6 | | 42.4 | | 120.0 | |||||||||||||||
Occupancy and other operating costs |
65.7 | | 45.1 | | 110.8 | |||||||||||||||
Total company restaurant expenses |
224.6 | | 132.9 | | 357.5 | |||||||||||||||
Selling, general and administrative expenses |
71.5 | | 37.7 | | 109.2 | |||||||||||||||
Intercompany expenses |
(1.6 | ) | | 1.6 | | | ||||||||||||||
Property expenses |
11.8 | | 6.1 | | 17.9 | |||||||||||||||
Other operating (income) expense, net |
0.7 | | 4.3 | | 5.0 | |||||||||||||||
Total operating costs and expenses |
307.0 | | 182.6 | | 489.6 | |||||||||||||||
Income from operations |
47.2 | | 15.2 | | 62.4 | |||||||||||||||
Interest expense |
51.0 | | 0.7 | | 51.7 | |||||||||||||||
Intercompany interest (income) expense |
(2.2 | ) | | 2.2 | | | ||||||||||||||
Interest income |
(0.9 | ) | | (0.4 | ) | | (1.3 | ) | ||||||||||||
Total interest expense, net |
47.9 | | 2.5 | | 50.4 | |||||||||||||||
Loss on
early extinguishment of debt |
19.6 | | | | 19.6 | |||||||||||||||
Income (loss) before income taxes |
(20.3 | ) | | 12.7 | | (7.6 | ) | |||||||||||||
Income tax expense (benefit) |
(7.4 | ) | | 6.6 | | (0.8 | ) | |||||||||||||
Income (loss) from continuing operations |
(12.9 | ) | | 6.1 | | (6.8 | ) | |||||||||||||
Equity in earnings of subsidiaries |
6.1 | (6.8 | ) | | 0.7 | | ||||||||||||||
Net income (loss) |
$ | (6.8 | ) | $ | (6.8 | ) | $ | 6.1 | $ | 0.7 | $ | (6.8 | ) | |||||||
27
Table of Contents
Predecessor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2010
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2010
(In millions)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Company restaurant revenues |
$ | 278.1 | $ | | $ | 161.1 | $ | | $ | 439.2 | ||||||||||
Franchise revenues |
85.2 | | 44.7 | | 129.9 | |||||||||||||||
Intercompany revenues |
1.4 | | 1.6 | (3.0 | ) | | ||||||||||||||
Property revenues |
20.8 | | 7.0 | | 27.8 | |||||||||||||||
Total revenues |
385.5 | | 214.4 | (3.0 | ) | 596.9 | ||||||||||||||
Company restaurant expenses: |
||||||||||||||||||||
Food, paper and product costs |
88.7 | | 49.3 | | 138.0 | |||||||||||||||
Payroll and employee benefits |
86.4 | | 51.8 | | 138.2 | |||||||||||||||
Occupancy and other operating costs |
64.9 | | 48.4 | | 113.3 | |||||||||||||||
Total company restaurant expenses |
240.0 | | 149.5 | | 389.5 | |||||||||||||||
Selling, general and administrative expenses |
71.9 | | 45.9 | | 117.8 | |||||||||||||||
Intercompany expenses |
1.6 | | 1.4 | (3.0 | ) | | ||||||||||||||
Property expenses |
9.0 | | 6.2 | | 15.2 | |||||||||||||||
Other operating (income) expense, net |
(3.0 | ) | | (1.5 | ) | | (4.5 | ) | ||||||||||||
Total operating costs and expenses |
319.5 | | 201.5 | (3.0 | ) | 518.0 | ||||||||||||||
Income from operations |
66.0 | | 12.9 | | 78.9 | |||||||||||||||
Interest expense |
11.5 | | 0.7 | | 12.2 | |||||||||||||||
Intercompany interest (income) expense |
(2.4 | ) | | 2.4 | | | ||||||||||||||
Interest income |
0.3 | | (0.6 | ) | | (0.3 | ) | |||||||||||||
Total interest expense, net |
9.4 | | 2.5 | | 11.9 | |||||||||||||||
Income before income taxes |
56.6 | | 10.4 | | 67.0 | |||||||||||||||
Income tax expense |
23.3 | | 2.7 | | 26.0 | |||||||||||||||
Income from continuing operations |
33.3 | | 7.7 | | 41.0 | |||||||||||||||
Equity in earnings of subsidiaries |
7.7 | 41.0 | | (48.7 | ) | | ||||||||||||||
Net income |
$ | 41.0 | $ | 41.0 | $ | 7.7 | $ | (48.7 | ) | $ | 41.0 | |||||||||
28
Table of Contents
Successor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2011
(In millions)
(Unaudited)
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (6.8 | ) | $ | (6.8 | ) | $ | 6.1 | $ | 0.7 | $ | (6.8 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiary |
(6.1 | ) | 6.8 | | (0.7 | ) | | |||||||||||||
Depreciation and amortization |
27.1 | | 13.4 | | 40.5 | |||||||||||||||
Loss on early extinguishment of debt |
19.6 | | | | 19.6 | |||||||||||||||
Amortization of deferred financing cost and debt issuance discount |
3.3 | | | | 3.3 | |||||||||||||||
Loss on remeasurement of foreign denominated transactions |
0.5 | | 1.9 | | 2.4 | |||||||||||||||
Bad debt expense, net of recoveries |
0.2 | | (0.2 | ) | | | ||||||||||||||
Share-based compensation |
0.2 | | | | 0.2 | |||||||||||||||
Deferred income taxes |
13.1 | | | | 13.1 | |||||||||||||||
Changes in current assets and liabilities, excluding acquisitions and dispositions: |
||||||||||||||||||||
Trade and notes receivables |
8.3 | | 3.3 | | 11.6 | |||||||||||||||
Prepaids and other current assets |
(12.8 | ) | | 2.5 | | (10.3 | ) | |||||||||||||
Accounts and drafts payable |
(17.8 | ) | | 1.6 | | (16.2 | ) | |||||||||||||
Accrued advertising |
(2.4 | ) | | 9.0 | | 6.6 | ||||||||||||||
Other accrued liabilities |
22.8 | | (14.6 | ) | | 8.2 | ||||||||||||||
Other long-term assets and liabilities |
(10.6 | ) | | 3.5 | 0.9 | (6.2 | ) | |||||||||||||
Net cash provided by operating activities |
38.6 | | 26.5 | 0.9 | 66.0 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Payments for property and equipment |
(6.9 | ) | | (2.8 | ) | | (9.7 | ) | ||||||||||||
Proceeds from refranchisings, disposition of assets and restaurant closures |
1.0 | | 6.9 | | 7.9 | |||||||||||||||
Return of investment on direct financing leases |
2.0 | | | | 2.0 | |||||||||||||||
Other investing activities |
(0.1 | ) | | | | (0.1 | ) | |||||||||||||
Net cash
provided by (used for) investing activities |
(4.0 | ) | | 4.1 | | 0.1 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from term debt |
1,857.6 | | | | 1,857.6 | |||||||||||||||
Repayments of term debt and capital leases |
(1,843.5 | ) | | (0.5 | ) | | (1,844.0 | ) | ||||||||||||
Payment of
financing costs |
(23.1 | ) | | | | (23.1 | ) | |||||||||||||
Intercompany financing |
1.4 | | (0.5 | ) | (0.9 | ) | | |||||||||||||
Net cash
(used for) financing activities |
(7.6 | ) | | (1.0 | ) | (0.9 | ) | (9.5 | ) | |||||||||||
Effect of exchange rates on cash and cash equivalents |
0.5 | | 3.0 | | 3.5 | |||||||||||||||
Increase in cash and cash equivalents |
27.5 | | 32.6 | | 60.1 | |||||||||||||||
Cash and cash equivalents at beginning of period |
132.9 | 0.7 | 73.4 | | 207.0 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 160.4 | $ | 0.7 | $ | 106.0 | $ | | $ | 267.1 | ||||||||||
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Predecessor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2010
(In millions)
(Unaudited)
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2010
(In millions)
(Unaudited)
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 41.0 | $ | 41.0 | $ | 7.7 | $ | (48.7 | ) | $ | 41.0 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiary |
(7.7 | ) | (41.0 | ) | | 48.7 | | |||||||||||||
Depreciation and amortization |
20.1 | | 7.4 | | 27.5 | |||||||||||||||
Impairment on non-restaurant properties |
0.1 | | 0.1 | | 0.2 | |||||||||||||||
Gain on hedging activities |
(0.4 | ) | | | | (0.4 | ) | |||||||||||||
Amortization of deferred financing cost and debt issuance discount |
0.5 | | | | 0.5 | |||||||||||||||
Loss (gain) on remeasurement of foreign denominated transactions |
20.4 | | (0.1 | ) | | 20.3 | ||||||||||||||
Gain on refranchisings, dispositions of assets and release of unfavorable lease
obligation |
(2.5 | ) | | (0.3 | ) | | (2.8 | ) | ||||||||||||
Bad debt expense, net of recoveries |
| | 0.1 | | 0.1 | |||||||||||||||
Share-based compensation |
3.6 | | 0.7 | | 4.3 | |||||||||||||||
Deferred income taxes |
(1.7 | ) | | | | (1.7 | ) | |||||||||||||
Changes in current assets and liabilities, excluding acquisitions and dispositions: |
||||||||||||||||||||
Trade and notes receivables |
(4.4 | ) | | (3.4 | ) | | (7.8 | ) | ||||||||||||
Prepaids and other current assets |
(4.0 | ) | | 0.3 | | (3.7 | ) | |||||||||||||
Accounts and drafts payable |
(27.3 | ) | | (5.5 | ) | | (32.8 | ) | ||||||||||||
Accrued advertising |
11.7 | | 0.6 | | 12.3 | |||||||||||||||
Other accrued liabilities |
19.3 | | 5.7 | | 25.0 | |||||||||||||||
Other long-term assets and liabilities |
(2.6 | ) | | (1.7 | ) | (0.5 | ) | (4.8 | ) | |||||||||||
Net cash provided by operating activities |
66.1 | | 11.6 | (0.5 | ) | 77.2 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Payments for property and equipment |
(18.2 | ) | | (8.1 | ) | | (26.3 | ) | ||||||||||||
Proceeds from refranchisings, disposition of assets and restaurant closures |
3.7 | | 1.0 | | 4.7 | |||||||||||||||
Payments for acquired franchisee operations, net of cash acquired |
| | (12.8 | ) | | (12.8 | ) | |||||||||||||
Return of investment on direct financing leases |
2.0 | | 0.2 | | 2.2 | |||||||||||||||
Other investing activities |
0.9 | | | | 0.9 | |||||||||||||||
Net cash used for investing activities |
(11.6 | ) | | (19.7 | ) | | (31.3 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayments of term debt and capital leases |
(16.6 | ) | | (0.4 | ) | | (17.0 | ) | ||||||||||||
Borrowings under revolving credit facility |
9.0 | | | | 9.0 | |||||||||||||||
Repayments of revolving credit facility |
(9.0 | ) | | | | (9.0 | ) | |||||||||||||
Dividends paid on common stock |
| (8.5 | ) | | | (8.5 | ) | |||||||||||||
Proceeds from stock option exercises |
| 2.4 | | | 2.4 | |||||||||||||||
Excess tax benefits from share-based compensation |
1.1 | | | | 1.1 | |||||||||||||||
Intercompany financing |
(7.2 | ) | 6.1 | 0.6 | 0.5 | | ||||||||||||||
Net cash (used for) provided by financing activities |
(22.7 | ) | | 0.2 | 0.5 | (22.0 | ) | |||||||||||||
Effect of exchange rates on cash and cash equivalents |
| | (5.7 | ) | | (5.7 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents |
31.8 | | (13.6 | ) | | 18.2 | ||||||||||||||
Cash and cash equivalents at beginning of period |
4.3 | | 135.6 | | 139.9 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 36.1 | $ | | $ | 122.0 | $ | | $ | 158.1 | ||||||||||
30
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Note 18. Subsequent Event
On April 19, 2011, BKCH, the direct parent of the Company, and Burger King Capital Finance,
Inc., a Delaware corporation and another direct subsidiary of BKCH (BK Finance and, together with
BKCH, the Issuers) entered into an indenture with Wilmington Trust FSB, as trustee, pursuant to
which the Issuers sold $685 million in aggregate principal amount at maturity of 11.0% senior
discount notes due 2019 (the Discount Notes). The Discount Notes generated $401.5 million in
gross proceeds. Until April 15, 2016, no cash interest will accrue, but the Discount Notes will
accrete at a rate of 11.0% per annum compounded semi-annually such that the accreted value on April
15, 2016 will be equal to the principal amount at maturity. Thereafter, cash interest on the
Discount Notes will accrue at a rate equal to 11.0% per annum and will be payable semi-annually in
cash in arrears on April 15 and October 15 of each year, commencing on October 15, 2016. The
Discount Notes will mature on April 15, 2019. Neither the Company nor BKC is a guarantor of the
Discount Notes.
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Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our unaudited condensed consolidated
financial statements and the related notes thereto included in Part I, Item 1 Financial
Statements. In addition to historical consolidated financial information, this discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Actual results could
differ from these expectations as a result of factors including those described in our Transition
Report on Form 10-K for the six-month period ended December 31, 2010, and under Part II,
Item 1A Risk Factors, and Cautionary Note Regarding Forward-Looking Statements and elsewhere in
this report. Unless the context otherwise requires, all references to we, us, our and
Successor refer to Burger King Holdings, Inc. and its subsidiaries, including BKC, for the period
subsequent to the acquisition of BKH by an affiliate of 3G Capital on the Merger Date. All
references to our Predecessor refer to Burger King Holdings, Inc. and all its subsidiaries,
including BKC, for all periods prior to the Acquisition, which operated under a different ownership
and capital structure. In addition, the Acquisition was accounted for under the acquisition method
of accounting, which resulted in preliminary purchase price allocations that affect the
comparability of results of operations for periods before and after the Acquisition.
Operating results for any one quarter are not necessarily indicative of results to be expected
for any other quarter or for the fiscal year and our key business measures, as discussed below, for
any future period may decrease. Unless otherwise stated, comparable sales growth, average
restaurant sales and sales growth are presented on a system-wide basis, which means they include
sales at both Company restaurants and franchise restaurants. Franchise sales represent sales at all
franchise restaurants and revenues to our franchisees. We do not record franchise sales as
revenues; however, our franchise revenues include royalties based on a percentage of franchise
sales. System-wide results are driven primarily by our franchise restaurants, as approximately 90%
of our system-wide restaurants are franchised.
Overview
We operate in the fast food hamburger restaurant, or FFHR, category of the quick service
restaurant, or QSR, segment of the restaurant industry. We are the second largest FFHR chain in the
world as measured by the number of restaurants and system-wide sales. Our system of restaurants
includes restaurants owned by us, as well as by our franchisees. Our business operates in three
reportable segments: (1) the United States and Canada; (2) Europe, the Middle East, Africa and Asia
Pacific, or EMEA/APAC; and (3) Latin America.
Approximately 90% of our current restaurants are franchised, but we expect the percentage of
franchise restaurants to increase as we implement our portfolio management strategy of
refranchising up to half of our Company restaurants within the next three to five years. The
current 90/10 ratio of franchise restaurants to Company restaurants applies on a worldwide basis,
but may not reflect the ratio of franchise restaurants to Company restaurants in any specific
market or region. We believe a restaurant ownership mix that is heavily weighted to franchise
restaurants is beneficial to us because the capital required to grow and maintain our system is
funded primarily by franchisees while giving us a base of Company restaurants to demonstrate
credibility with franchisees in launching new initiatives. However, our franchise dominated
business model also presents a number of drawbacks and risks, such as our limited control over
franchisees and limited ability to facilitate changes in restaurant ownership. In addition, our
operating results are closely tied to the success of our franchisees, and we are dependent on
franchisees to open new restaurants as part of our growth strategy.
Our international operations are impacted by fluctuations in currency exchange rates. In
Company markets located outside of the United States, we generate revenues and incur expenses
denominated in local currencies. These revenues and expenses are translated using the average rates
during the period in which they are recognized, and are impacted by changes in currency exchange
rates. In many of our franchise markets, our franchisees pay royalties to us in currencies other
than the local currency in which they operate; however, as the royalties are calculated based on
local currency sales, our revenues are still impacted by fluctuations in currency exchange rates.
We review and analyze business results excluding the effect of currency translation and calculate
certain incentive compensation for management and corporate level employees based on these results
believing this better represents our underlying business trends.
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Table of Contents
Seasonality
Our business is moderately seasonal. Restaurant sales are typically higher in the spring and
summer months when weather is warmer than in the fall and winter months. Restaurant sales during
the winter are typically highest in December, during the holiday shopping season. Our restaurant
sales and Company restaurant margins are typically lowest during the winter months, which include
February, the shortest month of the year. Furthermore, adverse weather conditions which typically
occur in the winter months can have material adverse effects on restaurant sales. Because our
business is moderately seasonal, results for any one quarter are not necessarily indicative of the
results that may be achieved for any other quarter or for the full fiscal year. The timing of
religious holidays may also impact restaurant sales.
Key Business Measures
We use three key business measures as indicators of our operational performance: comparable
sales growth, average restaurant sales and sales growth. We believe that these measures are
important indicators of the overall direction, trends of sales and the effectiveness of our
advertising, marketing and operating initiatives and the impact of these on the entire Burger King®
system.
Comparable sales growth and sales growth are presented by reportable segment and are analyzed
on a constant currency basis, which means they are calculated by translating current year results
at prior year average exchange rates to remove the effects of currency fluctuations from these
trend analyses. We believe these constant currency measures provide a more meaningful analysis of
our business by identifying the underlying business trends, without distortion from the effect of
currency movements.
Comparable Sales Growth
Comparable sales growth refers to the change in restaurant sales in one period from the same
period in the prior year for restaurants that have been open for 13 months or longer as of the end
of the most recent period. Company comparable sales growth refers to comparable sales growth for
Company restaurants and franchise comparable sales growth refers to comparable sales growth for
franchise restaurants. We believe that comparable sales growth is a key indicator of our
performance, as influenced by our strategic initiatives and those of our competitors.
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Table of Contents
Successor | Predecessor | |||||||||
For the Three Months Ended |
||||||||||
March 31, | ||||||||||
2011 | 2010 | |||||||||
(In constant currencies) | ||||||||||
Company Comparable Sales Growth: |
||||||||||
U.S. and Canada |
(6.0 | )% | (4.0 | )% | ||||||
EMEA / APAC |
4.7 | % | (3.9 | )% | ||||||
Latin America |
(4.3 | )% | (5.2 | )% | ||||||
Total Company Comparable Sales Growth |
(3.6 | )% | (4.0 | )% | ||||||
Franchise Comparable Sales Growth: |
||||||||||
U.S. and Canada |
(6.0 | )% | (6.4 | )% | ||||||
EMEA / APAC |
1.4 | % | 1.7 | % | ||||||
Latin America |
4.5 | % | (1.4 | )% | ||||||
Total Franchise Comparable Sales Growth |
(2.8 | )% | (3.7 | )% | ||||||
Comparable Sales Growth: |
||||||||||
U.S. and Canada |
(6.0 | )% | (6.1 | )% | ||||||
EMEA/APAC |
1.7 | % | 1.1 | % | ||||||
Latin America |
4.0 | % | (1.6 | )% | ||||||
Total System-wide Comparable Sales Growth |
(2.8 | )% | (3.7 | )% |
We experienced negative system-wide comparable sales growth of 2.8% (in constant currencies)
for the three months ended March 31, 2011, compared to negative system-wide comparable sales growth
of 3.7% (in constant currencies) for the same period last year, primarily driven by negative
comparable sales growth in the U.S. and Canada, partially offset by positive comparable sales
growth in EMEA/APAC and Latin America for the period. Negative comparable sales in the U.S. and
Canada of 6.0% (in constant currencies) were largely due to lower traffic compared to the prior
period, when traffic was supported by value promotions, such as our 1/4 lb Dollar Double Cheeseburger
promotion. Positive comparable sales growth in EMEA/APAC was driven by positive results in Germany,
Turkey, Australia and China, partially offset by negative comparable
sales growth in the U.K. and
Spain. Positive comparable sales growth in Latin America was primarily due to positive results in
Brazil and Argentina, partially offset by negative comparable sales growth in Mexico.
Average Restaurant Sales
System-wide average restaurant sales at all Company and franchise restaurants, or ARS, is an
important measure of the financial performance of our restaurants and changes in the overall
direction and trends of sales. ARS is influenced by comparable sales performance and the timing of
restaurant openings and closures and includes the impact of movements in currency exchange rates.
Successor | Predecessor | Successor | Predecessor | |||||||||||||
For the Three Months Ended | For the Twelve Months | |||||||||||||||
March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
System-wide Average
Restaurant Sales |
$ | 293 | $ | 294 | $ | 1,224 | $ | 1,244 |
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Table of Contents
System-wide ARS decreased during the three months ended March 31, 2011, primarily as a result
of negative system-wide comparable sales growth, partially offset by $3,000 of favorable impact
from the movement of currency exchange rates.
System-wide ARS decreased during the twelve months ended March 31, 2011, due to negative
system-wide comparable sales growth. The impact from the movement of currency exchange rates was
not significant for this period.
Sales Growth
Sales growth refers to the change in sales at all Company and franchise restaurants in one
period from the same period in the prior year. We believe that sales growth is an important
indicator of the overall direction and trends of sales and income from operations on a system-wide
basis. Sales growth is influenced by the timing of restaurant openings and closures and comparable
sales growth, as well as the effectiveness of our advertising and marketing initiatives and
featured products.
Successor | Predecessor | ||||||||
For the Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
(In constant currencies) | |||||||||
Sales Growth: |
|||||||||
U.S. and Canada |
(5.1 | )% | (5.5 | )% | |||||
EMEA/APAC |
10.3 | % | 7.3 | % | |||||
Latin America |
18.9 | % | 3.0 | % | |||||
Total System-wide Sales Growth |
1.5 | % | (1.5 | )% |
System-wide sales growth for the three months ended March 31, 2011 was 1.5% (in constant
currencies) compared to negative 1.5% (in constant currencies) for the same period last year,
primarily as a result of a net increase of 186 restaurants during the trailing twelve months ended
March 31, 2011, partially offset by negative system-wide comparable sales growth. Negative sales
growth in the U.S. and Canada of 5.1% (in constant currencies) was primarily due to negative
system-wide comparable sales growth in the U.S. and Canada. Sales growth of 10.3% (in constant
currencies) in EMEA/APAC was primarily a result of a net increase of 156 restaurants during the
trailing twelve months ended March 31, 2011 and system-wide comparable sales growth of 1.7% (in
constant currencies). Sales growth of 18.9% (in constant currencies) in Latin America was primarily
a result of a net increase of 41 restaurants during the trailing twelve months ended March 31, 2011
and system-wide comparable sales growth of 4.0% (in constant currencies).
Factors Affecting Comparability of Results of Operations
The
Acquisition as described in Note 1 to the accompanying unaudited
condensed consolidated financial statements was accounted for using the acquisition method of
accounting, or acquisition accounting, in accordance with Financial Accounting Standard Board
(FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. Acquisition
accounting provides a measurement period of up to one year to obtain the information necessary to finalize the
fair value of all assets acquired and liabilities assumed on the Merger Date. As of March 31, 2011
and December 31, 2010 we have recorded preliminary acquisition accounting allocations. Acquisition
accounting resulted in certain items that affect the comparability of the results of operations
between us and our Predecessor, including changes in asset carrying values (and related
depreciation and amortization) and changes in favorable and unfavorable leases (and related
amortization).
35
Table of Contents
During the three months ended March 31, 2011 we incurred $13.0 million in expenses related to
the Transactions and global restructuring, including (1) $2.5 million of professional fees and (2)
$10.5 million of severance benefits and other severance-related costs. Expenses related to the
Transactions and global restructuring are included as components of our general and administrative
expenses.
Additionally, our interest expense is significantly higher following the Transactions than
experienced by our Predecessor in prior periods, primarily due to the higher principal amount of
debt outstanding following the Transactions.
Other Operating Data:
Successor | Predecessor | ||||||||
As of March 31, | |||||||||
2011 | 2010 | ||||||||
Restaurant Count Data: |
|||||||||
Number of Company restaurants: |
|||||||||
U.S. and Canada |
981 | 1,030 | |||||||
EMEA/APAC |
261 | 333 | |||||||
Latin America |
97 | 95 | |||||||
Total Company restaurants |
1,339 | 1,458 | |||||||
Number of franchise restaurants: |
|||||||||
U.S. and Canada |
6,565 | 6,527 | |||||||
EMEA/APAC |
3,344 | 3,116 | |||||||
Latin America |
1,053 | 1,014 | |||||||
Total franchise restaurants |
10,962 | 10,657 | |||||||
Total system-wide restaurants |
12,301 | 12,115 | |||||||
Successor | Predecessor | ||||||||
Three Months Ended March 31, 2011 | |||||||||
2011 | 2010 | ||||||||
Other Operating Data: |
|||||||||
Comparable sales growth |
(2.8 | )% | (3.7 | )% | |||||
Sales growth |
1.5 | % | (1.5 | )% | |||||
System-wide average restaurant
sales (in thousands) |
$ | 293.0 | $ | 294.0 |
36
Table of Contents
Results of Operations for the Three Months Ended March 31, 2011 and 2010
The following table presents our results of operations for the three months ended March 31,
2011 and 2010:
Successor | Predecessor | ||||||||||||
For the Three Months Ended March 31, | |||||||||||||
2011 | 2010 | ||||||||||||
Increase/ | |||||||||||||
Amount | Amount | (Decrease) | |||||||||||
(In millions) | |||||||||||||
Revenues: |
|||||||||||||
Company restaurant revenues |
$ | 392.5 | $ | 439.2 | (11 | )% | |||||||
Franchise revenues |
132.2 | 129.9 | 2 | % | |||||||||
Property revenues |
27.3 | 27.8 | (2 | )% | |||||||||
Total revenues |
552.0 | 596.9 | (8 | )% | |||||||||
Company restaurant expenses |
357.5 | 389.5 | (8 | )% | |||||||||
Selling, general and administrative expenses |
109.2 | 117.8 | (7 | )% | |||||||||
Property expenses |
17.9 | 15.2 | 18 | % | |||||||||
Other operating (income) expense, net |
5.0 | (4.5 | ) | NM | |||||||||
Total operating costs and expenses |
489.6 | 518.0 | (5 | )% | |||||||||
Income from operations |
62.4 | 78.9 | (21 | )% | |||||||||
Interest expense |
51.7 | 12.2 | 324 | % | |||||||||
Interest income |
(1.3 | ) | (0.3 | ) | 333 | % | |||||||
Interest expense, net |
50.4 | 11.9 | 324 | % | |||||||||
Loss on early extinguishment of debt |
19.6 | | NM | ||||||||||
Income (loss) before income taxes |
(7.6 | ) | 67.0 | (111 | )% | ||||||||
Income tax expense (benefit) |
(0.8 | ) | 26.0 | (103 | )% | ||||||||
Net income (loss) |
$ | (6.8 | ) | $ | 41.0 | (117 | )% | ||||||
NM- Not meaningful. |
Revenues
Company restaurant revenues
Total Company restaurant revenues decreased by $46.7 million, or 11%, to $392.5 million for
the three months ended March 31, 2011, compared to the same period in the prior year, primarily due
to a net decrease of 119 Company restaurants during the trailing twelve-month period, including the
net refranchising of 120 Company restaurants as part of our ongoing portfolio management
initiative, and negative worldwide Company comparable sales growth of 3.6% (in constant
currencies). These factors were partially offset by $3.6 million of favorable impact from the
movement of currency exchange rates.
In the U.S. and Canada, Company restaurant revenues decreased by $27.4 million, or 9%, to
$282.6 million for the three months ended March 31, 2011, compared to the same period in the prior
year. This decrease was the result of negative Company comparable sales growth in the U.S. and
Canada of 6.0% (in constant currencies) and a net decrease of 49 Company restaurants during the
trailing twelve-month period, including the net refranchising of 44 Company restaurants as part of
our ongoing portfolio management initiative. These factors were partially offset by $1.8 million
of favorable impact from the movement of currency exchange rates in Canada.
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Table of Contents
In EMEA/APAC, Company restaurant revenues decreased by $19.9 million, or 17%, to $94.5 million
for the three months ended March 31, 2011, compared to the same period in the prior year, primarily
due to a net decrease of 72 Company restaurants during the trailing twelve-month period ended March
31, 2011, including the net refranchising of 76 Company restaurants as part of our ongoing
portfolio management initiative. These factors were partially offset by Company comparable sales
growth of 4.7% (in constant currencies) and $1.0 million of favorable impact from the movement of
currency exchange rates.
In Latin America, where all Company restaurants are located in Mexico, Company restaurant
revenues increased by $0.6 million, or 4%, to $15.4 million for the three months ended March 31,
2011, compared to the same period in the prior year. The increase was primarily the result of a
net increase of two Company restaurants during the trailing twelve-month period ended March 31,
2011 and $0.8 million of favorable impact from the movement of currency exchange rates, partially
offset by negative Company comparable sales growth of 4.3% (in constant currencies).
Franchise revenues
Total franchise revenues increased by $2.3 million, or 2%, to $132.2 million for the three
months ended March 31, 2011, compared to the same period in the prior year, primarily due to a net
increase of 305 franchise restaurants during the trailing twelve-month period, including the net
refranchising of 120 Company restaurants, and $1.1 million of favorable impact from the movement of
currency exchange rates. These factors were partially offset by negative worldwide franchise
comparable sales growth of 2.8% (in constant currencies) and a $0.7 million decrease in renewal
franchise fees compared to the same period in the prior year.
In the U.S. and Canada, franchise revenues decreased by $4.5 million, or 6%, to $70.4 million
for the three months ended March 31, 2011, compared to the same period in the prior year. This
decrease was primarily the result of negative franchise comparable sales growth in the U.S. and
Canada of 6.0% (in constant currencies) and a $0.9 million reduction in renewal franchise fees.
These factors were partially offset by a net increase of 38 franchise restaurants during the
trailing twelve-month period, including the net refranchising of 44 Company restaurants. The impact
from the movement of currency exchange rates was not significant in this segment for the period.
Franchise revenues in EMEA/APAC increased by $4.2 million, or 10%, to $48.0 million for the
three months ended March 31, 2011, compared to the same period in the prior year. This increase was
primarily due to a net increase of 228 franchise restaurants during the trailing twelve-month
period ended March 31, 2011, including the net refranchising of 76 Company restaurants, franchise
comparable sales growth of 1.4% (in constant currencies) and $0.7 million of favorable impact from
the movement of currency exchange rates.
Latin
America franchise revenues increased by $2.6 million, or 23%, to $13.8 million for the
three months ended March 31, 2011, compared to the same period in the prior year. The increase was
primarily due to the recognition of $1.6 million in cumulative
royalties previously deferred, a net increase of 39 franchise restaurants during the trailing
twelve-month period ended March 31, 2011, franchise comparable sales growth of 4.5% (in constant
currencies) and $0.3 million of favorable impact from the movement of currency exchange rates.
Property Revenues
Total property revenues decreased by $0.5 million, or 2%, to $27.3 million for the three
months ended March 31, 2011, compared to the same period in the prior year. The decrease was
primarily driven by decreased revenues from percentage rents as a result of negative franchise
comparable sales growth in the U.S. The decrease was partially offset by the favorable impact of
changes to our portfolio of properties leased to franchisees, preliminary acquisition accounting
effects of $0.3 million and $0.2 million of favorable impact from the movement of currency exchange
rates.
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In
the U.S. and Canada, property revenues increased by $0.2 million, or 1%, to $22.4 million
for the three months ended March 31, 2011, compared to the same
period in the prior year. The increase was due to an increase in
the number of properties in our portfolio of properties leased to franchisees in the U.S., which
includes the impact of refranchising Company restaurants and opening new restaurants leased or
subleased to franchisees, and $0.3 million of preliminary
acquisition accounting effects, partially offset by decreased
revenues from percentage rent as a result of negative franchise
comparable sales growth in the U.S..
Property revenues in EMEA/APAC decreased by $0.7 million, or 13%, to $4.9 million for the
three months ended March 31, 2011, compared to the same period in the prior year, due to a
reduction in the number of properties in our portfolio of properties leased to franchisees. The
impact from the movement of currency exchange rates was not significant in this segment for the
period.
Operating Costs and Expenses
Food, paper and product costs
Total food, paper and product costs decreased by $11.3 million, or 8%, to $126.7 million
during the three months ended March 31, 2011, compared to the same period in the prior year,
primarily as a result of an 11% decrease in Company restaurant revenues and $0.1 million of
favorable impact from the movement of currency exchange rates. These factors were partially offset
by decreased food margins in the U.S. and Canada and EMEA/APAC segments.
As a percentage of Company restaurant revenues, total food, paper and product costs increased
by 0.9%, to 32.3% during the three months ended March 31, 2011, compared to the same period in the
prior year. The increase was driven by higher commodity prices in the U.S. and Canada and
EMEA/APAC segments, partially offset by a shift in product mix away from lower margin value menu
items in the U.S. and strategic pricing initiatives.
In the U.S. and Canada, food, paper and product costs decreased by $7.1 million, or 7%, to
$92.4 million during the three months ended March 31, 2011, compared to the same period in the
prior year, primarily as a result of a 9% decrease in Company restaurant revenues and $0.7 million
of favorable impact from the movement of currency exchange rates. These factors were partially
offset by decreased food margins in the U.S. Food, paper and product costs in the U.S. and Canada
as a percentage of Company restaurant revenues increased by 0.6% to 32.7%, primarily due to higher
commodity prices in the U.S., partially offset by a shift in product mix away from lower margin
value menu items and strategic pricing initiatives.
In EMEA/APAC, food, paper and product costs decreased by $4.3 million, or 13%, to $28.6
million for the three months ended March 31, 2011, compared to the same period in the prior year,
primarily as a result of a 17% decrease in Company restaurant revenues. These factors were
partially offset by decreased food margins in EMEA and $0.3 million of unfavorable impact from the
movement of currency exchange rates, primarily in APAC. Food, paper and product costs as a
percentage of Company restaurant revenues increased by 1.5% to 30.3%, primarily due to higher
commodity costs in EMEA.
In Latin America, food, paper and product costs increased by $0.1 million, or 2%, to $5.7
million for the three months ended March 31, 2011, compared to the same period in the prior year,
primarily as a result of a 4% increase in Company restaurant revenues and $0.3 million of
unfavorable impact from the movement of currency exchange rates. Food, paper and product costs as a
percentage of Company restaurant revenues decreased by 0.8% to 37.0% primarily due to a shift in
product mix and strategic pricing initiatives.
Payroll and employee benefits costs
Total payroll and employee benefits costs decreased by $18.2 million, or 13%, to $120.0
million during the three months ended March 31, 2011, compared to the same period in the prior
year. This decrease was primarily due to the net decrease of 119 Company restaurants during the
trailing twelve-month period ended March 31, 2011, including the net refranchising of 120 Company
restaurants, and improved labor margins. These factors were partially offset by $0.8 million of
unfavorable impact from the movement of currency exchange rates.
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As a percentage of Company restaurant revenues, total payroll and employee benefits costs
decreased by 0.9% to 30.6%, primarily due to improved labor margins in EMEA/APAC, this factor was
partially offset by the impact of sales deleverage on our fixed labor costs due to negative Company
comparable sales growth in the U.S., Canada and Mexico.
In the U.S. and Canada, payroll and employee benefits costs decreased by $8.4 million, or 9%,
to $88.9 million during the three months ended March 31, 2011, compared to the same period in the
prior year, primarily due to the net reduction of 49 Company restaurants during the trailing
twelve-month period ended March 31, 2011, including the net refranchising of 44 Company
restaurants. These factors were partially offset by $0.6 million of unfavorable impact from the
movement of currency exchange rates. As a percentage of Company restaurant revenues, payroll and
employee benefits costs increased by 0.1% to 31.5%.
In EMEA/APAC, payroll and employee benefits costs decreased by $9.9 million, or 25%, to $29.2
million during the three months ended March 31, 2011, compared to the same period in the prior
year, primarily due to the net decrease of 72 Company restaurants during the trailing twelve-month
period ended March 31, 2011, including the net refranchising of 76 Company restaurants. The impact
from the movement of currency exchange rates was not significant in this segment for the period. As
a percentage of Company restaurant revenues, payroll and employee benefit costs decreased by 3.3%
to 30.9%, primarily due to the acquisition of 35 restaurants in Singapore in March 2010, where
labor costs are generally lower.
In
Latin America, payroll and employee benefits costs remained
relatively unchanged at
$1.9 million during the three months ended March 31, 2011, compared to the same period in the prior
year, primarily as a result of improved labor efficiencies, partially offset by the net increase of
two Company restaurants during the trailing twelve-month period ended March 31, 2011. The impact
from the movement of currency exchange rates was not significant in this segment for the period. As
a percentage of Company restaurant revenues, payroll and employee benefits costs increased by 0.1%
to 12.3% driven by the impact of sales deleverage on our fixed labor costs due to negative Company
comparable sales growth in Mexico partially offset by improved labor efficiencies.
Occupancy and other operating costs
Total occupancy and other operating costs decreased by $2.5 million, or 2%, to $110.8 million
during the three months ended March 31, 2011, compared to the same period in the prior year,
primarily due to the net decrease of 119 Company restaurants during the trailing twelve-month
period ended March 31, 2011, including the net refranchising of 120 Company restaurants. This
factor was partially offset by a $3.5 million increase in depreciation and amortization driven by preliminary acquisition accounting
and $1.3 million of unfavorable impact from the movement of currency exchange rates.
As a percentage of Company restaurant revenues, total occupancy and other operating costs
increased by 2.4% to 28.2% during the three months ended March 31, 2011, compared to the same
period in the prior year, primarily as a result of the impact of sales deleverage on our fixed
occupancy and other operating costs due to negative Company comparable sales growth in the U.S.,
Canada and Mexico and preliminary acquisition accounting.
In
the U.S. and Canada, occupancy and other operating costs increased by $1.6 million, or 2%,
to $74.9 million during the three months ended March 31, 2011, compared to the same period in the
prior year. This increase was primarily due to a $2.8 million increase in depreciation and amortization driven by preliminary
acquisition accounting and $0.4 million of unfavorable impact from the movement of currency
exchange rates. These factors were
partially offset by the net reduction of 49 Company restaurants
during the trailing twelve months ended March 31, 2011, including the net refranchising of 44
Company
restaurants. As a percentage of Company restaurant revenues, occupancy and other operating costs
increased by 2.9% to 26.5%, primarily due the impact of sales deleverage on our fixed occupancy and
other operating costs and preliminary acquisition accounting.
In EMEA/APAC, occupancy and other operating costs decreased by $4.4 million, or 12%, to $31.0
million during the three months ended March 31, 2011, compared to the same period in the prior
year. The decrease was primarily due to a net decrease of 72 Company restaurants during the
trailing twelve-month period, including the net refranchising of 76 Company restaurants. These
factors were partially offset by a $0.6 million increase in depreciation and amortization driven by preliminary acquisition
accounting and $0.6 million of unfavorable impact from the movement of currency exchange rates,
primarily in APAC. As a percentage of Company restaurant revenues, occupancy and other operating
costs increased by 1.9% to 32.8%, primarily due to the acquisition of 35 restaurants in Singapore
in March 2010, where occupancy costs are generally higher, and preliminary acquisition accounting.
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In Latin America, occupancy and other operating costs increased by $0.3 million, or 7%, to
$4.9 million during the three months ended March 31, 2011, compared to the same period in the prior
year, primarily due to the net increase of two Company restaurants during the trailing twelve-month
period ended March 31, 2011 and $0.3 million of unfavorable impact from the movement of currency
exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs
increased by 0.7% to 31.8%, primarily as a result of the impact of sales deleverage on our fixed
occupancy and other operating costs.
Selling, general and administrative expenses
Our selling, general and administrative expenses were comprised of the following for the three
months ended March 31, 2011 and 2010:
Successor | Predecessor | ||||||||||||
Three Months Ended March 31, | |||||||||||||
2011 | 2010 | % Change | |||||||||||
(In millions) | |||||||||||||
Selling expenses |
$ | 19.0 | $ | 21.6 | (12 | )% | |||||||
General
and administrative expenses before non-cash and other items: |
62.9 | 85.4 | (26 | )% | |||||||||
Share-based compensation |
0.2 | 4.3 | (95 | )% | |||||||||
Depreciation and amortization |
14.1 | 6.5 | 117 | % | |||||||||
Transaction and global restructuring costs |
13.0 | | NM | ||||||||||
Total general and administrative expenses |
90.2 | 96.2 | (6 | )% | |||||||||
Selling, general and administrative expenses |
$ | 109.2 | $ | 117.8 | (7 | )% | |||||||
NM Not meaningful |
Selling expenses decreased by $2.6 million, or 12%, to $19.0 million for the three months
ended March 31, 2011, compared to the same period in the prior year, primarily due to a $1.9
million reduction in contributions to the marketing funds in our Company restaurant markets as a result of lower sales at our Company restaurants and a $0.7 million
decrease in local marketing expenditures. These factors were partially offset by $0.2 million of
unfavorable impact from the movement of currency exchange rates for the three months ended March
31, 2011.
General and administrative expenses include costs that are not directly linked to our Company
restaurant, franchise or property operations. These expenses include salary and employee related
costs for our non-restaurant employees, professional fees and general overhead for our corporate
offices, which include rent, maintenance and utilities for our restaurant service centers, travel
and meeting expenses, IT and technology costs and other general operating expenses. We refer to
these expenses as general and administrative expenses before non-cash and other items. General and
administrative expenses also include share-based compensation, depreciation and amortization,
consisting primarily of amortization of franchise agreement intangible assets, and costs associated
with unusual or non-recurring events that are classified as general and administrative expenses,
including Transaction and global restructuring costs.
Our general and administrative expenses before non-cash and other items decreased by $22.5
million, or 26%, to $62.9 million for the three months ended March 31, 2011, compared to the same
period in the prior year. This decrease was driven by a
$14.4 million decrease in salary and fringe benefits
and a $6.7 million decrease in professional fees, which
are directly attributable to the benefits derived from our global restructuring and implementation
of a Zero Based Budgeting (ZBB) program. These expense reductions are consistent with our
expectations that overall salary and fringe expense and other corporate non-personnel general and
administrative expenses included in general and administrative expenses will decrease on an annual
run rate basis by approximately $85 million to $110 million with our global restructuring and ZBB
program. If we are unable to maintain our operations with a reduced workforce, we may incur
additional general and administrative expenses and therefore may not be able to sustain these cost
reductions.
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Our total general
and administrative expenses decreased by $6.0 million, or 6%,
driven by a decrease in our general and administrative expenses
before non-cash and other items and a $4.1 million decrease in
share-based compensation partially offset by $13.0
million of expenses incurred in connection with the Transactions and our global restructuring and a
$7.6 million increase in depreciation and amortization resulting from preliminary acquisition
accounting. The impact from the movement of currency exchange
rates was not significant for the period.
Property Expenses
Total property expenses increased by $2.7 million, or 18%, to $17.9 million for the three
months ended March 31, 2011, compared to the same period in the prior year, primarily due to a $2.1
million increase in depreciation and amortization as result of preliminary acquisition accounting,
an increase in bad debt expense of $0.9 million and $0.1 million of unfavorable impact from the
movement of currency exchange rates. These factors were partially offset by decreased rent expense
from a reduction in the number of properties sub leased to franchisees in EMEA.
Other operating (income) expense, net
Successor | Predecessor | ||||||||
Three Months Ended | |||||||||
March 31, | |||||||||
2011 | 2010 | ||||||||
(In millions) | |||||||||
Net (gains) losses on disposal of assets,
restaurant closures and refranchisings |
$ | 0.4 | $ | (3.2 | ) | ||||
Litigation settlements and reserves, net |
0.4 | (0.6 | ) | ||||||
Foreign exchange net (gains) losses |
3.2 | (1.9 | ) | ||||||
Other, net |
1.0 | 1.2 | |||||||
Other operating (income) expense, net |
$ | 5.0 | $ | (4.5 | ) | ||||
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Income from Operations
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Income from Operations: |
||||||||
U.S. and Canada |
$ | 70.2 | $ | 85.8 | ||||
EMEA/APAC |
18.8 | 16.6 | ||||||
Latin America |
13.3 | 8.5 | ||||||
Unallocated |
(39.9 | ) | (32.0 | ) | ||||
Total income from operations |
$ | 62.4 | $ | 78.9 | ||||
Income from operations decreased by $16.5 million, or 21%, to $62.4 million during the three
months ended March 31, 2011, compared to the same period in the prior year, primarily as a result
of a $14.7 million decrease in Company restaurant margin, a $9.5 million decrease in other
operating income, net and a $3.2 million decrease in net
property income. These factors were
partially
offset by an $8.6 million decrease in selling, general and administrative expenses and a $2.3
million increase in franchise revenues. (See Note 16 to the accompanying unaudited condensed
consolidated financial statements for segment information disclosures).
For the three months ended March 31, 2011, the unfavorable impact on Company restaurant
expenses and selling, general and administrative expenses from the movement of currency exchange
rates was partially offset by the favorable impact of currency exchange rates on revenues,
resulting in a net favorable impact on income from operations of $1.7 million.
Interest Expense, net
Interest expense, net increased by $38.5 million during the three months ended March 31, 2011,
compared to the same period in the prior year, reflecting an increase in borrowings due to the
Transactions, as well as higher interest rates.
The weighted average interest rate for the three months ended March 31, 2011, related to the
$1,600.0 million tranche and 200.0 million tranche under the Term Loan Facility was 6.2% and 6.4%,
respectively, which included the effect of our interest rate caps. We expect the interest expense
associated with our Term Loan Facility to decrease as a result of the recent refinancing of this
facility, which lowered our interest rate margins. However, aggregate interest expense will be
significantly higher in future periods than experienced by our Predecessor in comparable periods as
a result of our increased indebtedness.
The weighted average interest rate for the three months ended March 31, 2010 was 4.7%, which
included the impact of interest rate swaps on 73% of our Predecessors term debt.
Loss on Early Extinguishment of Debt
We recorded a loss on early extinguishment of debt of $19.6 million for the three months ended
March 31, 2011, reflecting the write off deferred financing costs and fees incurred in conjunction
with the amendment of our credit facility as discussed in Note 9 to the accompanying unaudited
condensed consolidated financial statements.
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Income Tax Benefit/Expense
Income tax benefit was $0.8 million for the three months ended March 31, 2011, resulting in an
effective tax rate of 10.5%, primarily as a result of the exclusion of the tax benefit of foreign
ordinary losses not expected to be realized, the current mix of income from multiple tax
jurisdictions and the resolution of state tax audits. Income tax expense was $26.0 million for the
three months ended March 31, 2010, resulting in an effective tax rate of 38.8%, primarily as a
result of the mix of income from multiple tax jurisdictions and currency fluctuations.
Net Loss/Income
Our net income (loss) decreased by $47.8 million, or 117%, to a $6.8 million net loss during
the three months ended March 31, 2011, compared to the same period in the prior year, primarily as
a result of a $16.5 million decrease in income from operations, a $38.5 million increase in
interest expense, net and a $19.6 million loss on early extinguishment of debt, partially offset by
a $26.8 million decrease in income tax expense.
Liquidity and Capital Resources
At March 31, 2011, we had cash and cash equivalents of $267.1 million and working capital of
$146.5 million. In addition, at March 31, 2011, we had borrowing capacity of $124.0 million under
our Revolving Credit Facility. Cash provided by operations was $66.0 million for the three months
ended March 31, 2011 compared to $77.2 million for the three months ended March 31, 2010.
Our primary sources of liquidity are cash generated by operations and borrowings available
under our Revolving Credit Facility. Our primary uses of cash are debt service requirements,
payments due under lease agreements, capital expenditures and the payment of income taxes. Based
on our current level of operations and available cash, we believe our cash flow from operations,
combined
with availability under our Revolving Credit Facility, will provide sufficient liquidity to
fund our current obligations, debt service requirements and capital spending requirements over the
next twelve months and the foreseeable future. However, there can be no assurance that our business
will generate sufficient cash flows from operations or that future borrowings will be available to
us under our Revolving Credit Facility in an amount sufficient to enable us to pay our indebtedness
or to fund our other liquidity needs. Our ability to do so will depend on our achievement of
forecasted levels of revenue and cash flows, which are dependent on many factors, including our
marketing initiatives and restructuring activities designed to reduce our operating costs, as well
as on prevailing economic conditions, many of which are beyond our control. If our cash flow and
capital resources are insufficient to fund our debt service, lease and income tax obligations, we
may be forced to reduce planned capital expenditures, sell assets, seek additional capital or
restructure or refinance our indebtedness. However, in such an event, we may not be able to
mitigate a resource shortfall by selling assets or raising new capital, or restructure or refinance
any of our indebtedness, including our Term Loan Facility, Revolving Credit Facility or our Senior
Notes on commercially reasonably terms or at all. Any future acquisitions, joint ventures or other
similar transactions will likely require additional capital and there can be no assurance that any
such capital will be available to us on acceptable terms or at all. In addition, upon the
occurrence of certain events, such as a change in control, we could be required to repay or
refinance our indebtedness.
As a result of the Transactions, we are highly leveraged. Our liquidity requirements are
significant, primarily due to debt service requirements.
Indebtedness
Amended Credit Agreement
On February 15, 2011, BKC entered into a credit agreement dated as of October 19, 2011, as
amended and restated as of February 15, 2011 (the Amended Credit Agreement) with JPMorgan Chase
Bank, N.A., as administrative agent, Barclays Capital, as syndication agent, and the lenders party
thereto from time to time. Under the Amended Credit Agreement, the aggregate principal amount of
term loans denominated in U.S. dollars was increased to $1,600.0 million and the amount of term
loans denominated in Euros was reduced to 200.0 million (the Term Loan Facility). The Amended
Credit Agreement also provides for a senior secured revolving credit facility for up to $150.0
million of revolving extensions of credit outstanding at any time (including revolving loans,
swingline loans and letters of credit), the amount of which was unchanged by the February 15, 2011
amendment (the Revolving Credit Facility).
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Under the Amended Credit Agreement, at BKCs election, the interest rate per annum applicable
to the loans is based on a fluctuating rate of interest determined by reference to either (i) a
base rate determined by reference to the higher of (a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) the federal funds effective rate plus 0.50% and (c) the Eurocurrency rate applicable for an
interest period of one month plus 1.00%, plus an applicable margin equal to 2.00% for loans under
the U.S. dollar denominated tranche of the Term Loan Facility and 2.25% for loans under the
Revolving Credit Facility, or (ii) a Eurocurrency rate determined by reference to EURIBOR for the
Euro denominated tranche and LIBOR for the U.S. dollar denominated tranche and Revolving Credit
Facility, adjusted for statutory reserve requirements, plus an applicable margin equal to 3.25% for
loans under the Euro denominated tranche of the Term Loan Facility, 3.00% for loans under the U.S.
dollar denominated tranche of the Term Loan Facility and 3.25% for loans under the Revolving Credit
Facility. Term Loan borrowings under the Amended Credit Agreement are subject to a LIBOR floor of
1.50%.
The financial covenants, negative covenants, affirmative covenants, maturity dates, prepayment
events and events of default, as described in the Companys Transition Report on Form 10-K for the
six-month period ended December 31, 2010, were unchanged by the February 15, 2011 amendment. As of
March 31, 2011, the Company was in compliance with all covenants of the Amended Credit Agreement.
Senior Notes
On October 19, 2010, Merger Sub, as the initial issuer, and Wilmington Trust FSB, as trustee,
executed the Senior Notes Indenture pursuant to which the $800.0 million of 9 7/8% Senior Notes
were issued. Upon the consummation of the Merger, Merger Sub, BKC, the Company, as a guarantor, and
the other guarantors entered into a supplemental indenture (the Supplemental Indenture) pursuant
to which BKC assumed the obligations of Merger Sub under the Senior Notes Indenture and the Senior
Notes and the Company and the other guarantors guaranteed the Senior Notes on a senior basis. The
Senior Notes bear interest at a rate of
9.875% per annum, which is payable semi-annually on October 15 and April 15 of each year,
commencing on April 15, 2011. The Senior Notes mature on October 15, 2018. Based on the amount
outstanding at March 31, 2011, debt service for the next 12 months on the Senior Notes is $79
million in interest payments. No principal payments are due until maturity. At March 31, 2011, the
Senior Notes were recorded at a carrying value of $800.0 million.
The Senior Notes Indenture contains certain covenants that BKC must meet during the term of
the Senior Notes, including, but not limited to, limitations on restricted payments (as defined in
the Senior Notes Indenture), incurrence of indebtedness, issuance of disqualified stock and
preferred stock, asset sales, mergers and consolidations, transactions with affiliates, and
guarantees of indebtedness by subsidiaries. As of March 31, 2011, the Company was in compliance
with all covenants of our Senior Notes.
Interest Rate Cap Agreements
Following the Transactions, we entered into two deferred premium interest rate caps, one of
which was denominated in U.S. dollars (notional amount of $1.5 billion) and the other denominated
in Euros (notional amount of 250 million) (the Cap Agreements). The six year Cap Agreements are
a series of 25 individual caplets that reset and settle on the same dates as the Term Loan
Facility. The deferred premium associated with the Cap Agreements was $47.7 million for the U.S.
dollar denominated exposure and 9.4 million for the Euro denominated exposure. After we entered
into the Amended Credit Agreement, we modified our interest rate cap denominated in Euros to reduce
its notional amount by 50 million throughout the life of the caplets. Additionally, we entered
into a new interest rate cap agreement denominated in U.S. dollars
(notional amount of $90 million,
with a strike price of 1.50% (the New Cap Agreement). The terms of the New Cap Agreement are
substantially similar to those described above and the Cap Agreements were not otherwise revised by
these modifications.
Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets above a strike price of 1.75%
(1.50% for the New Cap Agreement), we will receive the net difference between the rate and the
strike price. In addition, on the quarterly settlement dates, we will remit the deferred premium
payment (plus interest) to the counterparty. If LIBOR/EURIBOR resets below the strike price no
payment is made by the counterparty. However, we would still be responsible for the deferred
premium and interest.
The interest rate cap contracts are designated as cash flow hedges and to the extent they are
effective in offsetting the variability of the variable interest payments, changes in the
derivatives fair value are not included in current earnings but are included in accumulated other
comprehensive income (AOCI) in the accompanying consolidated balance sheets. At each cap maturity
date, the portion of fair value attributable to the matured cap will be reclassified from AOCI into
earnings as a component of interest expense.
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Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $66.0 million during the three months ended March
31, 2011, compared to $77.2 million during the three months ended March 31, 2010. The decrease in
cash provided by operating activities during the three months ended March 31, 2011 resulted
primarily from a decrease in earnings, as adjusted for non-cash items, such as depreciation and
amortization gains and losses on the remeasurement of foreign denominated transactions and other
non-cash income and expenses.
Investing Activities
Cash provided by investing activities was $0.1 million during the three months ended March 31,
2011 compared to cash used for investing activities of $31.3 million during the three months ended March 31, 2010.
Capital expenditures for new restaurants include the costs to build new Company restaurants as
well as properties for new restaurants that we lease to franchisees. Capital expenditures for
existing restaurants consist of the purchase of real estate related to existing restaurants,
maintenance capital required for each Company restaurant to maintain its appearance in accordance
with our standards and
investments in new equipment and remodeling. Capital expenditures made for existing restaurants
also include investments we make in properties we lease or sublease to franchisees, including
contributions we make towards leasehold improvements completed by franchisees on properties we own.
Other capital expenditures include investments in information technology systems and corporate
furniture and fixtures. The following table presents capital expenditures, by type of expenditure:
Successor | Predecessor | |||||||
For the | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
New restaurants |
$ | 1.8 | $ | 6.7 | ||||
Existing restaurants |
7.5 | 15.9 | ||||||
Other, including corporate |
0.4 | 3.7 | ||||||
Total |
$ | 9.7 | $ | 26.3 | ||||
We expect cash capital expenditures of approximately $75 million to $85 million in 2011 to
fund new restaurant development, maintenance capital requirements, our restaurant reimaging
program, operational initiatives in our restaurants and other corporate expenditures. Our actual
capital expenditures may be affected by economic and other factors. We expect to continue to
review our level of capital expenditures throughout the remainder of 2011.
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Financing Activities
Cash
used for financing activities was $9.5 million during the three months ended March 31,
2011, compared to $22.0 million during the three months ended March 31, 2010. The primary use of
cash for financing activities during the three months ended March 31, 2011 was the payment of fees
and expenses related to the Amended Credit Agreement.
Commitments and Off-Balance Sheet Arrangements
For information on Commitments and Contingencies, see Note 15 to the accompanying unaudited
condensed consolidated financial statements and Note 21, Commitments and Contingencies to the
Consolidated Financial Statements contained in Part II, Item 8 of the Companys Transition Report on Form 10-K for the six-month
period ended December 31, 2010.
New Financial Accounting Standards Board (FASB) Accounting Standards Updates Issued But Not Yet
Adopted
In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses. This ASU amends ASC Topic 310 by requiring
additional disclosures about the credit quality of financing receivables and the related
allowance for credit losses. The disclosures required by this ASU are effective for non-public
entities for annual reporting periods ending on or after December 15, 2011, which for us will be
December 31, 2011. The amendments in this ASU will affect only disclosures and are not expected to
have a significant impact on the Company.
On December 20, 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts. This ASU is a consensus of the FASB Emerging Issues Task Force (EITF)
and requires an entity to perform Step 2 of the goodwill impairment test if it is more likely than
not that a goodwill impairment exists for reporting units with zero or negative carrying amounts.
An entity should consider whether there are any adverse qualitative factors indicating that
impairment may exist. If the entity determines that it is more likely than not that the goodwill is
impaired, Step 2 should be performed. Any resulting goodwill impairment should be recorded as a
cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any
impairments occurring after initial adoptions should be included in earnings. The amendments in
this ASU are effective for non-public entities for fiscal years, and interim periods, beginning
after December 15, 2011, which for us will be January 1, 2012. Early adoption is not permitted. We
have not yet determined the impact, if any, that the adoption of this ASU will have on the Company.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes during the three months ended March 31, 2011 to the disclosures
made in Part II, Item 7A of our Transition Report on Form 10-K for the six-month period ended
December 31, 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of management,
including the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
March 31, 2011. Based on that evaluation, the CEO and CFO concluded that the Companys disclosure
controls and procedures were effective as of such date.
Internal Control Over Financial Reporting
The Companys management, including the CEO and CFO, confirm that there were no changes in the
Companys internal control over financial reporting during the fiscal quarter ended March 31, 2011
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect managements expectations regarding future
events and economic performance are forward-looking in nature and, accordingly, are subject to
risks and uncertainties. These forward-looking statements include statements regarding our
expectations about the benefits of our highly franchised business model; our expectations regarding
our ability to refranchise up to half of the current Company restaurant portfolio within the next
three to five years; our expectations and belief regarding our ability to decrease overall salary
and fringe benefits and other corporate non-personnel general and administrative expenses on an
annual run rate basis by approximately $85 million to $110 million; our expectations and belief
regarding our ability to fund our current obligations, projected working capital requirements, debt
service requirements and capital spending requirements over the next twelve months and the
foreseeable future; our expectations regarding our exposure to changes in interest rates following
the Transactions and the impact of changes in interest rates on the amount of our interest
payments, future earnings and cash flows; our expectations regarding our ability to hedge interest
rate risk of our variable rate debt through the purchase of interest rate caps; and other
expectations regarding our future financial and operational results. These forward-looking
statements are only predictions based on our current expectations and projections about future
events. Important factors could cause our actual results, level of activity, performance or
achievements to differ materially from those expressed or implied by these forward-looking
statements.
These factors include those risk factors set forth in filings with the Securities and Exchange
Commission, including our annual and quarterly reports, and the following:
| Global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, increases in gas prices, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety, and the impact of negative sales and traffic on our business, including the risk that we will be required to incur non-cash impairment or other charges that reduce our earnings; | ||
| Risks related to our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations under our Credit Facilities and Senior Notes; | ||
| Risks related to the financial strength of our franchisees, which could result in, among other things, restaurant closures, delayed or reduced payments to us of royalties, advertising contributions and rents, and an inability to obtain financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all; |
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| Risks arising from the significant and rapid fluctuations in interest rates and in the currency exchange markets and the decisions and positions that we take to hedge such volatility; | ||
| Risks related to adverse weather conditions and other uncontrollable events, and the impact of such events on our operating results; | ||
| Our ability to compete domestically and internationally in an intensely competitive industry; | ||
| Our ability to successfully implement our domestic and international growth strategy and risks related to our international operations; | ||
| Risk related to the concentration of our restaurants in limited geographic areas, such as Germany, where we have experienced and may continue to experience declining sales and operating profits; | ||
| Our ability to realize anticipated cost savings and efficiencies, including those arising from our recent staff reductions and cost reduction plans and our ability to successfully implement our business strategy with reduced personnel; | ||
| Our ability to manage changing labor conditions and costs in the U.S. and internationally, including future mandated health care costs, if we or our franchisees choose not to pass, or cannot pass, these increased costs on to our guests; | ||
| Our ability and the ability of our franchisees to manage cost increases; | ||
| Our relationship with, and the success of, our franchisees and risks related to our restaurant ownership mix; | ||
| The effectiveness of our marketing and advertising programs and franchisee support of these programs; | ||
| Risks related to food safety, including foodborne illness and food tampering, and the safety of toys and other promotional items available in our restaurants; | ||
| Risks arising from the interruption or delay in the availability of our food or other supplies, including those that would arise from the loss of any of our major distributors, particularly in those international markets where we have a single distributor; | ||
| Our ability to successfully execute our portfolio management strategy to increase sales and profitability and to reposition our remodeling program to drive meaningful sales lifts and maximize return on capital; | ||
| Our ability to implement our growth strategy and strategic initiatives given restrictions imposed by our Amended Credit Agreement and Senior Notes Indenture; | ||
| Risks related to the ability of counterparties to our Credit Facilities, interest rate caps and foreign currency forward contracts to fulfill their commitments and/or obligations; | ||
| Risks related to interruptions or security breaches of our computer systems and risks related to the lack of integration of our worldwide technology systems; | ||
| Risks related to changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities and continued losses in certain international Company restaurant markets and changes resulting from the Transactions that could negatively impact our effective tax rate and our ability to utilize foreign tax credits to offset our U.S. income taxes; | ||
| Risks related to the reasonableness of our tax estimates, including sales, excise, GST, VAT and other taxes; |
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| Adverse legal judgments, settlements or pressure tactics; and | ||
| Adverse legislation or regulation. |
These risks are not exhaustive and may not include factors which could adversely impact our
business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness
of any of these forward-looking statements. You should not rely upon forward-looking statements as
predictions of future events. We do not undertake any responsibility to update any of these
forward-looking statements to conform our prior statements to actual results or revised
expectations.
Part II Other Information
Item 1. Legal Proceedings
Ramalco Corp. et al. v. Burger King Corporation, No. 09-43704CA05 (Circuit Court of
the Eleventh Judicial Circuit, Dade County, Florida). On July 30, 2008, BKC was sued by four
Florida franchisees over its decision to mandate extended operating hours in the United States. The
plaintiffs seek damages, declaratory relief and injunctive relief. The court dismissed the
plaintiffs original complaint in November 2008. In December 2008, the plaintiffs filed an amended
complaint. In August 2010, the court entered an order reaffirming the legal bases for dismissal of
the original complaint, again holding that BKC had the authority under its franchise agreements to
mandate extended operating hours. The court held a hearing on December 7, 2010 and stated that, in
light of the ruling that the hours clause was unambiguous, it would grant BKCs motion to dismiss,
with prejudice, on seven of the eight claims in the amended complaint. The court denied the motion
to dismiss on one claim in the amended complaint, that the hours clause was unconscionable under
Florida law. The case will now continue through the discovery process on that remaining claim.
Castenada v. Burger King Corp. and Burger King Corporation., No. CV08-4262 (U.S.
District Court for the Northern District of California). On September 10, 2008, a class action
lawsuit was filed against BKC in the United States District Court for the Northern District
of California. The complaint alleged that all 96 Burger King restaurants in California leased by BKC and operated by franchisees violate accessibility requirements under federal and state
law. In September 2009, the court issued a decision on the plaintiffs motion for class
certification. In its decision, the court limited the class action to the 10 restaurants visited by
the named plaintiffs, with a separate class of plaintiffs for each of the 10 restaurants and 10
separate trials. In March 2010, BKC agreed to settle the lawsuit with respect to the 10
restaurants and, in July 2010, the court gave final approval to the settlement. In February 2011, a
class action lawsuit styled Vallabhapurapu v. Burger King Corporation, No. C11-00667 (U.S.
District Court for the Northern District of California) was filed with respect to the other 86
restaurants. BKC intends to vigorously defend against all claims in the lawsuit, but BKC is unable to predict the ultimate outcome of this litigation.
National Franchisee Association v. Burger King Corporation, No. 09-CV-23435 (U.S.
District Court for the Southern District of Florida) and Family Dining, Inc. v. Burger King
Corporation, No. 10-CV-21964 (U.S. District Court for the Southern District of Florida). The
National Franchisee Association, Inc. (NFA) and several individual franchisees filed these class action
lawsuits on November 10, 2009, and June 15, 2010, respectively, claiming to represent Burger King
franchisees. The lawsuits seek a judicial declaration that the franchise agreements between BKC and
its franchisees do not obligate the franchisees to comply with maximum price points set by BKC for
products on the BK Value Menu sold by the franchisees, specifically the 1/4 lb. Double Cheeseburger
and the Buck Double. The Family Dining plaintiffs also seek monetary damages for financial
loss incurred by franchisees who were required to sell those products for no more than $1.00. In
May 2010, the court entered an order in the National Franchisee Association case granting in part
BKCs motion to dismiss. The court held that BKC had the authority under its franchise agreements
to set maximum prices but that, for purposes of a motion to dismiss, the NFA had asserted a
plausible claim that BKCs decision may not have been made in good faith. Both cases were
consolidated into a single consolidated class action complaint which BKC moved to dismiss on
September 22, 2010. On November 19, 2010, the court issued an order granting BKCs motion to dismiss on
all claims in the consolidated complaint with prejudice. On December 14, 2010, the plaintiffs filed
a motion asking the court to reconsider its decision, and on December 17, 2010, the plaintiffs
filed a notice of appeal to the U.S. Circuit Court of Appeals. On February 2, 2011, the court
permitted the plaintiffs to file an amended complaint. On April 18, 2011, BKC and the NFA agreed to
settle the lawsuit. The settlement does not include any financial compensation to either side.
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On September 3, 2010, four purported class action complaints were filed in the Circuit Court
for the County of Miami-Dade, Florida, captioned Darcy Newman v. Burger King Holdings, Inc. et.
al., Case No. 10-48422CA30, Belle Cohen v. David A. Brandon, et. al., Case No.
10-48395CA32, Melissa Nemeth v. Burger King Holdings, Inc. et. al., Case No. 10-48424CA05
and Vijayalakshmi Venkataraman v. John W. Chidsey, et. al., Case No. 10-48402CA13,
by purported shareholders of the Company, in connection with the tender offer and the Merger (as
defined below). Each of the four complaints (collectively, the Florida Actions) names as
defendants the Company, each member of the Companys board of directors (the Individual
Defendants) and 3G Capital. The suits generally allege that the Individual Defendants breached
their fiduciary duties to the Companys shareholders in connection with the proposed sale of the
Company and that 3G Capital and the Company aided and abetted the purported breaches of fiduciary
duties.
On September 8, 2010, another putative shareholder class action suit captioned Roberto S.
Queiroz v. Burger King Holdings, Inc., et al., Case No. 5808-VCP was filed in the Delaware
Court of Chancery against the Individual Defendants, the Company, 3G, 3G Capital, Blue Acquisition
Holding Corporation and Blue Acquisition Sub, Inc. The complaint generally alleges that the
Individual Defendants breached their fiduciary duty to maximize shareholder value by entering into
the proposed transaction via an unfair process and at an unfair price, and that the merger
agreement contains provisions that unreasonably dissuade potential suitors from making competing
offers. On September 27, 2010, another putative shareholder class action suit captioned Robert
Debardelaben v. Burger King Holdings, Inc., et al, Court of Chancery of the State of Delaware,
Case No. 5850-UA was filed in the Delaware Court of Chancery against the Individual Defendants.
Like the first Delaware Action, the Debardelaben complaint asserts that the Companys
directors breached their fiduciary duties in connection with the tender offer, and that the Company
and 3G Capital aided and abetted that breach. This action also seeks both monetary and injunctive
relief. On September 29, 2010, the Delaware court entered an order consolidating the
Debardelaben and Queiroz actions (Delaware Actions).
On December 30, 2010, a proposed settlement was reached with the plaintiffs in the Florida
Actions and Delaware Actions. The principal terms of the proposed settlement include additional
disclosures about the Merger that were provided to Burger King shareholders in the Companys
amended schedule 14D-9, dismissal of the Florida and Delaware actions, mutual releases and the
payment of up to $1 million in attorneys fees and expenses to Plaintiffs counsel.
On March 16, 2011, the Florida court gave preliminary approval to the proposed settlement. The
court has scheduled a hearing on June 15, 2011 to determine whether to finally approve the
settlement.
From time to time, we are involved in other legal proceedings arising in the ordinary course
of business relating to matters including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over our intellectual property.
Item 1A. Risk Factors
Item 1A of Part I of our Transition Report on Form 10-K for the six-month transition period
ended December 31, 2010, includes a detailed discussion of the risk factors that could materially
affect our business, financial condition or future prospects. We encourage you to read these risk
factors in their entirety.
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Item 5. Other Information
Adoption of 2011 Omnibus Incentive Plan
On February 2, 2011, the Board of Directors of Parent approved and adopted the Burger King
Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan (the Omnibus Incentive Plan). The following
summary describes the material terms of the Omnibus Incentive Plan. This summary is not a complete
description of all provisions of the Omnibus Incentive Plan and is qualified in its entirety by
reference to the Omnibus Incentive Plan, which is attached as Exhibit 10.76 to this report.
Authorized Shares. Parent established the Omnibus Incentive Plan to motivate participants
to perform to the best of their abilities and to align the interests of participants with the
interests of 3G Capital by giving participants an ownership interest in Parent through the
granting of awards under the Omnibus Incentive Plan. Awards with respect to a maximum of 5,000
full shares (5 million millishares, or .001 of one full share) of common stock of Parent (Parent
Common Stock) may be granted under the Omnibus Incentive Plan to any employee, director,
consultant or advisor of the Company or one of its subsidiaries. As of March 31, 2011, option
awards covering 3,634,616 millishares of Parent Common Stock had been granted under the Omnibus
Incentive Plan, of which 158,027 millishares were forfeited due to termination of employment.
Shares (or fractional shares) delivered pursuant to an award may consist, in whole or in part, of
authorized and unissued shares or of shares held in Parents treasury. Any shares that are
subject to an award that expires, terminates or is otherwise cancelled or settled without the
issuance of such shares will again be available for grant under the Omnibus Incentive Plan.
Administration. The Omnibus Incentive Plan is administered by the Compensation Committee of
the Board of Directors of Parent (the Committee) or such other committee of the Board of
Directors that the Board so designates. The Committee has authority to, among other things,
administer, construe and interpret the Omnibus Incentive Plan, select individuals for participation
in the Plan, make rules for carrying out the Plan and make all determinations and findings deemed
necessary or advisable for the administration of the Plan. The Committees decisions are
conclusive and binding upon all persons.
Types of Awards. The Omnibus Incentive Plan permits the grant of the following types of
awards:
| Investment Rights: an opportunity to purchase full or fractional shares of Parent Common Stock. Investment Rights entitle a participant to purchase for cash a stated number of millishares at a stated purchase price that is not less than the fair market value of a millishare as of the date of grant; | ||
| Options: an option or right to purchase full or fractional shares of Parent Common Stock for a stated price, subject to certain vesting and other conditions; | ||
| Restricted Stock Units: a contractual right (denominated in shares or fractional shares) which represents the right to receive a share (or fractional shares) or the value of a share (or fractional shares) at a future date, subject to certain vesting and other conditions; | ||
| Restricted Stock: a share (or fractional share) bearing a legend referring to the terms, conditions and restrictions applicable to such restricted stock. The Committee may impose limitations on the right to vote, receive dividends, transfer or such other restrictions as the Committee shall deem appropriate; | ||
| Stock Appreciation Rights (SARs): a right based on an increase in value of shares (or millishares) over a specific period of time, exercisable upon such terms and conditions set by the Committee. Freestanding SARs shall not have a term of greater than 10 years or, unless it is a substitute award, an exercise price less than 100% of the fair market value of the share on the date of grant; | ||
| Performance Awards: a right denominated as a cash amount, number of shares (or millishares) or a combination thereof, that is earned or becomes exercisable upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other award shall constitute a Performance Award by conditioning the right to exercise, settle or receive the award upon achievement or satisfaction of such performance and other conditions specified by the Committee. Performance measures may vary from Performance Award to Performance Award and from participant to participant, and may be established on a freestanding basis, in tandem or in the alternative; |
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| Dividend Equivalents: a right to receive cash, shares, other awards or other property equal in value to dividends paid with respect to shares (or millishares); and | ||
| Other Awards: other awards of cash, shares or other property as may be authorized by the Committee upon such other terms and conditions to be determined by the Committee and subject to limitations under applicable law. |
Transfer Restrictions. The transfer of any awards will be subject to any restrictions imposed
by the Committee in the applicable award agreement, management shareholders agreement or board
member shareholders agreement, as applicable, or in any other agreement applicable to the award.
Mergers, Consolidations and other Reorganizations; Changes in Control. If there is a merger,
consolidation or other reorganization, or in the event of any Change in Control (as defined in the
Omnibus Incentive Plan), or the sale of shares representing 25% or more of the combined voting
power of all of the then outstanding shares of Parent, BKC, the Company or any owner of Parent,
or if 3G no longer has the ability to appoint 25% or more of the directors of Parent, BKC, the
Company or any owner of Parent, then unless otherwise provided in any award agreement or any other
agreement between Parent or any subsidiary and the participant, outstanding awards may be dealt
with in accordance with the several approaches enumerated in the Omnibus Incentive Plan, as
determined by the agreement effectuating the transaction, or if, and to the extent not so
determined, as determined by the Committee, without obtaining the consent or agreement of the
participants. These approaches include: (a) the continuation of the outstanding awards by Parent, if Parent is the surviving entity, (b) the assumption or substitution for the
outstanding awards by the surviving entity, its parent or subsidiary, (c) full exercisability or
vesting and accelerated expiration of the outstanding awards, or (d) settlement of the value of the
outstanding awards in cash or cash equivalents or other property followed by cancellation of such
awards. If and to the extent that the approach chosen results in an acceleration or potential
acceleration of the exercisability, vesting or settlement of any award, the Committee may impose
such conditions, including without limitation a requirement that some or all of the proceeds from
the accelerated portion of the award be held in escrow and/or remain subject to risks of forfeiture
or other conditions as it shall determine, provided that those risks of forfeiture or other
conditions are not in the good faith judgment of the Committee more restrictive than those under
the original terms of the award agreement.
Restrictive Covenants. The Committee may provide in an award agreement that failure by a
participant to comply with any restrictive covenant contained in such agreement, including
non-competition, non-disclosure and non-solicitation covenants, may result in, among other things,
the forfeiture of awards or the obligation to repay any profits derived from such awards.
Share and Exercise Price Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, shares or other securities), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation or other similar corporate transaction or event
affects the shares or any award such that an adjustment is determined by the Committee to be
required in order to prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Omnibus Incentive Plan, the Committee shall, in such manner as it
may deem equitable, adjust any or all of (i) the number and type of shares which thereafter may be
made the subject of awards, (ii) the number and type of shares subject to outstanding awards, and
(iii) the grant, purchase or exercise price with respect to any award or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding award.
Amendment and Termination. The Board of Directors of Parent may amend, alter, suspend,
discontinue or terminate the Omnibus Incentive Plan, except that no amendment shall be made without
the approval of our stockholders (if the shares are principally traded or quoted on a stock
exchange and shareholder approval is required by the rules of the applicable exchange
or is required by applicable law), and no amendment may adversely affect the rights of a
participant without a participants consent, except to the extent such amendment is made to cause
the Omnibus Incentive Plan to comply with applicable laws, rules or regulations.
Duration of Omnibus Incentive Plan. The Omnibus Incentive Plan was effective on February 2,
2011. No award may be granted under the Plan after February 1, 2021. However, unless otherwise
expressly provided in the Omnibus Incentive Plan or in an applicable award agreement, any award
granted prior to this date may extend beyond such date, and the authority of the Committee to
administer and to amend, suspend or terminate any such award, or to waive any conditions or rights
under any such award, and the authority of the Board of Directors of Parent to amend the Plan,
will extend beyond such date.
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Annual Bonus Program
On February 2, 2011, the Committee approved, under the Omnibus Incentive Plan, the annual
bonus program for 2011 (the 2011 Bonus Program), which provides for performance-based cash bonus
awards for 2011 for certain executives, including the following named executive officers: Bernardo
Hees, our Chief Executive Officer, and Jonathan Fitzpatrick, our Executive Vice President and Chief
Brand and Operations Officer. The incentive payout for participants under the 2011 Bonus Program
is calculated for each eligible employee as a percentage of his or her base salary and is based on
Company business performance and individual performance. The formula for determining an eligible
employees cash incentive under the 2011 Bonus Program (the Bonus Payout) is:
Achievement | Global | |||||||||||
Target Bonus | X | Percentage | X | Multiplier | = | Bonus Payout |
Target Bonus: A participants Target Bonus is his or her current base salary, multiplied by
his or her target bonus percentage. The target bonus percentage is expressed as a percentage of
current base salary. Mr. Hees current base salary is $750,000 and his target bonus percentage is
200% of his base salary. Therefore, his target bonus is $1.5 million. In the case of Mr.
Fitzpatrick, on April 11, 2011, the Board of Directors of the Company approved an increase in his
base salary from $350,000 to $400,000, effective April 1, 2011, and an increase in his target bonus
percentage from 120% to 140% of his base salary, effective for the full 2011 calendar year.
Accordingly, Mr. Fitzpatricks target bonus is $560,000.
Achievement Percentage: An executives Achievement Percentage is made up of two components:
Business Achievement and Individual Achievement. Business Achievement means the level of
financial performance of the Company against worldwide, regional, country or division targets
established by the Company for that year based on the scope of a participants role within the
Company. EBITDA, subject to adjustment by the Company (Adjusted EBITDA), is the financial
measure used to evaluate Business Achievement. Adjusted EBITDA for each target measured with
respect to a participant must reach at least 80% of the target established by the Company for that
year in order for there to be a bonus payout attributable to that target.
Individual Achievement means a participants overall achievement of his or her MBOs, or
Management Business Objectives, expressed as a percentage of completion (100% being completion of
all MBOs). If a participants Individual Achievement is less than 50%, then he or she will not
receive a Bonus Payout for that year even if the Business Achievement target is met.
Business Achievement and Individual Achievement are each weighted 50% of the Achievement
Percentage.
Global Multiplier: The Company has established a minimum, target and maximum Global
Multiplier to adjust the Bonus Payout based upon performance against EBITDA growth targets
established by the Company (the Worldwide Plan). The minimum level represents an 80% payout,
the target level represents a 100% payout, and the maximum level represents up to a 120%
payout. To the extent achievement against the 2011 Worldwide Plan falls between the minimum level
and target level, the Global Multiplier would be between 80% and 100%. Likewise, to the extent
achievement against the 2011 Worldwide Plan falls between the target level and the maximum level,
the Global Multiplier would be between 100% and 120%. Subject to certain exceptions, the Company
must achieve at least 80% of the Worldwide Plan for any participant to receive a payout under the
2011 Bonus Program.
Overriding Payment Qualifiers. If the Company does not achieve the minimum free cash flow target
established by the Company for 2011, then the bonus payout for all participants will be reduced by
30%.
ZBB Qualifier: If the 2011 budget established by the Company for a function head or region is
exceeded, then no participant within that function or region, as applicable, will receive a Bonus
Payout for 2011.
A participant must be employed by the Company on the last day of 2011 to be entitled to
incentive compensation under the 2011 Bonus Program. A participant will generally be eligible to
receive a pro rata amount of the bonus if he or she dies prior to the end of 2011 or if his or her
employment terminates during 2011 and, upon such termination, he or she is eligible to receive
severance, provided that he or she was employed by the Company for at least six months during 2011.
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February 2011 and May 2011 Executive Equity Grants
On February 2, 2011, the Compensation Committee of the Board of Directors of Parent
approved, and on February 3, 2011, Parent granted, options to purchase an aggregate of
3,634,616 millishares (or .001 of one full share) of Parent Common Stock under the Omnibus
Incentive Plan to key employees and members of the Board of Directors of Parent, including
632,111 millishares to Mr. Hees and 126,422 to Mr. Fitzpatrick, the Companys remaining named
executive officers. Two other named executive officers, Anne Chwat, our former General Counsel and
Secretary, and Natalia Franco, our former Chief Global Marketing Officer, received option grants of
189,633 and 158,027 millishares, respectively, but these awards were forfeited upon termination of
their employment with the Company. The exercise price per millishare is $15.82, and the options
vest 100% on October 19, 2015, provided the employee is continuously employed by BKC or one of its
subsidiaries and the director remains on the board of Parent. The form of Option Award
Agreement issued in connection with these option grants is attached as Exhibit 10.77 to this
report.
On May 1, 2011, Parent made a special grant of options to purchase 63,211 millishares of
Parent Common Stock under the Omnibus Incentive Plan to Mr. Fitzpatrick. This special grant was
approved by the Board of Directors of the Company on April 11, 2011. The options have the same
exercise price and vesting schedule as the February 3, 2011 option grant. This special grant was
made in recognition of the additional responsibilities conferred upon Mr. Fitzpatrick in February
2011, when he assumed the newly created role of Executive Vice President, Chief Brand and
Operations Officer with responsibility for global operational standards, global product marketing
and innovation and global insights.
Investment Offer
On March 1, 2011, Parent offered officers of the Company who had proceeds from certain
equity grants made in August 2010 deposited into trust, a one-time
opportunity until April 19, 2011, to purchase millishares of Parent Common Stock under the Omnibus
Incentive Plan (Investment Shares) at a purchase price of $15.82 per millishare. An officer who
elects to purchase Investment Shares will also receive an option to purchase two millishares for
each Investment Share purchased, at an exercise price of $15.82 per millishare. Mr. Fitzpatrick was
one of the officers of the Company offered this investment opportunity.
Other Compensation Decisions
In recognition of Mr. Fitzpatricks expanded role, on April 11, 2011, the Board of Directors
of the Company approved an increase in his base salary from $350,000 to $400,000, effective April
1, 2011, and an increase in his target bonus percentage from 120% to 140% of his base salary,
effective for the full 2011 calendar year.
In addition, all officers of BKC and its subsidiaries will have the opportunity to use up to
50% of their pre-tax performance based bonus for calendar year 2012 and certain subsequent calendar
years (the Conversion Amount) to purchase millishares of Parent Common Stock. The minimum
Conversion Amount is $10,000. All applicable taxes will be paid on the bonus, and the purchase of
millishares will be made using after-tax dollars. An officer who elects to participate will receive a number
of millishares having a value, as of the last day of the calendar year for which the bonus is
earned (the Valuation Date), equal to the annual bonus amount foregone. The number of
millishares issued will be based on the Fair Market Value (as defined in the Omnibus Incentive
Plan) of a millishare on the Valuation Date, as determined by a third party appraisal.
Officers who elect to purchase millishares of Parent Common Stock in lieu of a portion of
their cash bonus will be eligible to receive a grant of options (Bonus Options) with respect to
millishares of Parent Common Stock having a Fair Market Value equal to two times the Option Match
(as defined below) in the case of officers who are executive vice presidents; 1.5x the Option
Match, in the case of officers who are senior vice presidents; and 1x the Option Match, in the case
of officers who are vice presidents.
The Option Match is equal to (i) a percentage calculated by dividing the Conversion Amount by
the after-tax bonus amount (not to exceed 50%), multiplied by (ii) the pre-tax bonus amount. The
exercise price of the Bonus Options will be based on the Fair Market Value of a millishare of
Parent Common Stock on the Valuation Date and the Bonus Options will cliff vest five years from the
grant date.
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Item 6. Exhibits
The exhibits listed in the accompanying index are filed as part of this report.
Exhibit | ||||
Number | Description | |||
10.76 | Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan |
|||
10.77 | Form of Option Award Agreement issued under Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan |
|||
31.1 | Certification of Chief Executive Officer of Burger King Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer of Burger King Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
BURGER KING HOLDINGS, INC. (Registrant) |
||||
Date: May 12, 2011 | By: | /s/ Daniel Schwartz | ||
Name: | Daniel Schwartz | |||
Title: | Chief Financial Officer (principal financial officer) (duly authorized officer) |
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INDEX TO EXHIBITS
Exhibit | ||||
Number | Description | |||
10.76 | Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan |
|||
10.77 | Form of Option Award Agreement issued under Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan |
|||
31.1 | Certification of Chief Executive Officer of Burger King Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer of Burger King Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
58