FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

 

¨ 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

(Registrant’s 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  ¨    No  x*

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  ¨    No  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    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  ¨    No  x

As of November 9, 2011, there were 100,000 shares of the Registrant’s Common Stock outstanding, all of which were owned by Burger King Capital Holdings, LLC, the Registrant’s parent holding company. The registrant’s 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.

 

 

 


Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page  
  PART I – Financial Information   

Item 1.

 

Financial Statements

     3   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     55   

Item 4.

 

Controls and Procedures

     55   
  PART II – Other Information   

Item 1A.

 

Risk Factors

     58   

Item 5.

 

Exhibits

     58   
 

Signatures

     59   
 

Index to Exhibits

     60   

 

2


Table of Contents

PART I — Financial Information

Item1. Financial Statements

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

     As of  
     September 30,     December 31,  
     2011     2010  
     (In millions, except share data)  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 468.5      $ 207.0   

Trade and notes receivable, net

     139.6        152.9   

Prepaids and other current assets, net (Note 5)

     71.5        159.2   

Deferred income taxes, net

     30.3        23.2   
  

 

 

   

 

 

 

Total current assets

     709.9        542.3   

Property and equipment, net of accumulated depreciation of $170.5 million and $81.7 million, respectively

     1,025.3        1,107.8   

Intangible assets, net

     2,864.9        2,893.9   

Goodwill

     690.2        690.2   

Net investment in property leased to franchisees

     250.2        250.3   

Other assets, net

     127.3        207.5   
  

 

 

   

 

 

 

Total assets

   $ 5,667.8      $ 5,692.0   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY     

Current liabilities:

    

Accounts and drafts payable

   $ 84.9      $ 90.5   

Accrued advertising

     86.9        82.5   

Other accrued liabilities

     237.4        249.0   

Current portion of long term debt and capital leases

     33.4        36.2   
  

 

 

   

 

 

 

Total current liabilities

     442.6        458.2   

Long-term debt, net of current portion

     2,664.1        2,652.0   

Capital leases, net of current portion

     94.7        103.9   

Other liabilities, net

     359.4        391.7   

Deferred income taxes, net

     613.5        633.5   
  

 

 

   

 

 

 

Total liabilities

     4,174.3        4,239.3   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 15)

    

Stockholder’s equity:

    

Common stock, $0.01 par value; 200,000 shares authorized at September 30, 2011 and December 31, 2010; 100,000 shares issued and outstanding at September 30, 2011 and December 31, 2010

  

 

—  

  

 

 

—  

  

Additional paid-in capital

     1,563.5        1,563.5   

(Accumulated deficit)

     (21.7     (103.1

Accumulated other comprehensive (loss)

     (48.3     (7.7
  

 

 

   

 

 

 

Total stockholder’s equity

     1,493.5        1,452.7   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,667.8      $ 5,692.0   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Successor          Predecessor     Successor          Predecessor  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  
     (In millions)  

Revenues:

              

Company restaurant revenues

   $ 422.6           $ 429.8      $ 1,234.2           $ 1,323.1   

Franchise revenues

     156.5             141.6        437.5             411.8   

Property revenues

     29.0             28.6        84.9             85.0   
  

 

 

        

 

 

   

 

 

        

 

 

 

Total revenues

     608.1             600.0        1,756.6             1,819.9   
   

Company restaurant expenses:

                  

Food, paper and product costs

     134.9             135.8        397.3             421.0   

Payroll and employee benefits

     122.3             128.9        364.5             406.4   

Occupancy and other operating costs

     112.4             106.6        332.7             339.1   
  

 

 

        

 

 

   

 

 

        

 

 

 

Total company restaurant expenses

     369.6             371.3        1,094.5             1,166.5   
   

Selling, general and administrative expenses

     110.2             127.8        319.9             366.7   

Property expenses

     18.4             15.5        54.8             45.4   

Other operating (income) expense, net

     (3.6          (5.4     7.5             (11.2
  

 

 

        

 

 

   

 

 

        

 

 

 

Total operating costs and expenses

     494.6             509.2        1,476.7             1,567.4   
  

 

 

        

 

 

   

 

 

        

 

 

 
   

Income from operations

     113.5             90.8        279.9             252.5   
  

 

 

        

 

 

   

 

 

        

 

 

 
   

Interest expense

     48.3             12.5        146.7             36.9   

Interest income

     (0.3          (0.2     (1.3          (0.7
  

 

 

        

 

 

   

 

 

        

 

 

 

Total interest expense, net

     48.0             12.3        145.4             36.2   

Loss on early extinguishment of debt

     —               —          19.6             —     
  

 

 

        

 

 

   

 

 

        

 

 

 

Income before income taxes

     65.5             78.5        114.9             216.3   

Income tax expense

     17.4             15.1        33.5             62.9   
  

 

 

        

 

 

   

 

 

        

 

 

 

Net income

   $ 48.1           $ 63.4      $ 81.4           $ 153.4   
  

 

 

        

 

 

   

 

 

        

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Successor          Predecessor  
     Nine Months Ended
September 30,
 
     2011          2010  
     (In millions)  

Cash flows from operating activities:

       

Net income

   $ 81.4           $ 153.4   

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

     101.5             84.9   

Loss on early extinguishment of debt

     19.6             —     

Loss (gain) on hedging activities

     0.3             (1.3

Amortization of deferred financing cost and debt issuance discount

     10.5             1.0   

Loss on remeasurement of foreign denominated transactions

     4.4             14.1   

Gain on refranchisings, dispositions of assets and release of unfavorable lease obligation

     (2.9          (11.5

Impairment on non-restaurant properties

     —               1.6   

Bad debt expense, net of recoveries

     3.9             2.0   

Share-based compensation

     0.9             13.3   

Deferred income taxes

     (16.3          4.1   

Changes in current assets and liabilities, excluding acquisitions and dispositions:

         

Trade and notes receivables

     8.6             (5.7

Prepaids and other current assets

     91.9             9.8   

Accounts and drafts payable

     (5.0          (10.9

Accrued advertising

     7.2             8.0   

Other accrued liabilities

     (9.0          18.6   

Other long-term assets and liabilities

     17.4             (11.0
  

 

 

        

 

 

 

Net cash provided by operating activities

     314.4             270.4   
  

 

 

        

 

 

 

Cash flows from investing activities:

         

Payments for property and equipment

     (42.0          (100.5

Proceeds from refranchisings, disposition of assets and restaurant closures

     23.2             25.7   

Investments in / advances to unconsolidated entities

     (4.5          —     

Payments for acquired franchisee operations, net of cash acquired

     —               (13.2

Return of investment on direct financing leases

     7.8             6.5   

Restricted cash

     (4.3          —     

Other investing activities

     0.5             (1.0
  

 

 

        

 

 

 

Net cash used for investing activities

     (19.3          (82.5
  

 

 

        

 

 

 

Cash flows from financing activities:

         

Proceeds from term debt

     1,860.0             —     

Repayments of term debt and capital leases

     (1,866.3          (57.2

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

     —               (25.3

Proceeds from stock option exercises

     —               7.0   

Repurchases of common stock

     —               (2.6

Excess tax benefits from share-based compensation

     —               3.7   
  

 

 

        

 

 

 

Net cash used for financing activities

     (29.4          (74.4
  

 

 

        

 

 

 

Effect of exchange rates on cash and cash equivalents

     (4.2          (5.5

Increase in cash and cash equivalents

     261.5             108.0   

Cash and cash equivalents at beginning of period

     207.0             139.9   
  

 

 

        

 

 

 

Cash and cash equivalents at end of period

   $ 468.5           $ 247.9   
  

 

 

        

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Condensed Consolidated Statements of Cash Flows (Continued)

Unaudited

 

Condensed Consolidated Statements of Cash Flows
     Successor          Predecessor  
     Nine Months Ended
September 30,
 
     2011          2010  
     (In millions)  

Supplemental cash flow disclosures:

       

Interest paid

   $ 119.0           $ 35.9   

Income taxes paid

   $ 21.4           $ 57.5   
 

Non-cash investing and financing activities:

         

Acquisition of property with capital lease obligations

   $ —             $ 1.8   

Net investment in direct financing leases

   $ 6.7           $ 11.9   

See accompanying notes to condensed consolidated financial statements.

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

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 Company’s equity (the “Acquisition”) and merged with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). Parent is owned 99.9% 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 all of its equity interests in BKH 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.

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 the Company’s 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 Standard 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.

During the quarter ended September 30, 2011, the Company adjusted its preliminary estimate of the fair value of net assets acquired. The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed remains preliminary and reflects various revised fair value estimates and analyses as of September 30, 2011, including work performed by third-party valuation specialists. The preliminary computations of the allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed as of September 30, 2011 are presented in the tables below and remain subject to revision as the fair values are pushed down into the applicable records.

 

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Table of Contents
     As of 10/19/2010  
     (In millions)  

Cash paid for shares outstanding (1)

   $ 3,277.3   

Settlement of outstanding stock-based compensation

     48.1   
  

 

 

 

Total consideration

   $ 3,325.4   
  

 

 

 

Preliminary Allocation of Consideration:

 

     As of 10/19/2010  
     (In millions)  

Current assets

   $ 508.1   

Property and equipment

     1,115.1   

Intangible assets

     2,946.0   

Net investment in property leased to franchisees

     258.2   

Other assets, net

     69.4   

Current liabilities

     (458.9

Term debt

     (667.4

Capital leases

     (106.8

Other liabilities

     (402.6

Deferred income taxes, net

     (625.9
  

 

 

 

Net assets acquired

   $ 2,635.2   
  

 

 

 

Excess purchase price attributed to goodwill

   $ 690.2   
  

 

 

 

 

(1) Represents cash paid, based on a $24.00 per share price, for 136,555,642 outstanding shares.

The adjustment to the Company’s preliminary estimate of net assets acquired resulted in a corresponding $55.8 million increase in estimated goodwill due to the following changes to preliminary estimates of fair values and allocation of purchase price (in millions):

 

     Increase (Decrease)
in Goodwill
 
     (In millions)  

Change in:

  

Property and equipment

   $ 53.6   

Intangible assets

     (16.6

Net investment in property leased to franchisees

     0.2   

Other assets, net

     18.0   

Current liabilities

     0.8   

Capital lease obligation

     6.9   

Deferred income taxes, net

     (19.1

Other, net

     12.0   
  

 

 

 

Total increase in goodwill

     55.8   
  

 

 

 

All purchase price allocation adjustments have been reflected on a retrospective basis as of the Merger Date. Additionally, the Company’s results of operations were retrospectively adjusted to reflect the effects of these revisions to the Company’s preliminary purchase price allocation.

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 our “Predecessor” refer to Burger King Holdings, Inc.

 

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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 Company’s 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.

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 of Parent. 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. If there is an event such as a dividend that is determined to be dilutive, the exercise price of the awards may be adjusted accordingly.

During the nine months ended September 30, 2011, Parent granted options to purchase up to 4,334,505 millishares to key employees 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 or the director remains on the board of Parent, as applicable. 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 and $0.9 million of share-based compensation expense in selling, general and administrative expenses for the three and nine months ended September 30, 2011, respectively. No stock options were exercised during the three and nine months ended September 30, 2011.

Predecessor

The Predecessor recorded $5.0 million and $13.3 million of share-based compensation expense for the three and nine months ended September 30, 2010, respectively, in selling, general and administrative expenses. Excess tax benefits from stock options exercised of $3.7 million in the nine months ended September 30, 2010 were reported as financing cash flows in the accompanying condensed consolidated statements of cash flows.

 

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Note 4. Restaurant Acquisitions, Closures and Dispositions

Acquisitions

Restaurant acquisitions are summarized as follows:

 

     Successor          Predecessor      Successor          Predecessor  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011          2010      2011          2010  
     (In millions, except restaurant count)  

Number of restaurants acquired

     —               1         2             37   

Prepaids and other current assets

   $ —             $ —         $ —             $ 1.8   

Property and equipment, net

     —               —           —               4.9   

Goodwill and other intangible assets

     —               —           —               6.8   

Other assets, net

     —               —           —               2.1   

Assumed liabilities

     —               —           —               (2.4
  

 

 

        

 

 

    

 

 

        

 

 

 

Total purchase price

   $ —             $ —         $ —             $ 13.2   
  

 

 

        

 

 

    

 

 

        

 

 

 

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     Successor          Predecessor  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  
     (In millions, except restaurant count)  

Number of restaurant closures

     3             7        15             23   

Number of refranchisings

     35             35        46             114   

Net (gains) losses on disposal of assets, restaurant closures and refranchisings

   $ (3.6        $ (4.1   $ (2.2        $ (7.2

Note 5. Prepaids and Other Current Assets, net

Prepaids and other current assets, net are composed of the following:

 

     As of  
     September 30,      December 31,  
     2011      2010  
     (In millions)  

Prepaid expenses

   $ 44.8       $ 38.7   

Restricted cash

     4.3         —     

Inventories

     13.0         15.6   

Foreign currency forward contracts

     —           7.9   

Interest Rate Cap Premium - current portion

     2.5         11.1   

Refundable income taxes

     6.9         85.9   
  

 

 

    

 

 

 

Total Prepaids and other current assets

   $ 71.5       $ 159.2   
  

 

 

    

 

 

 

 

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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 performed a valuation of the Brand and other identifiable intangible assets as of that date. The Brand, the Company’s only identifiable intangible asset with an indefinite life, had a carrying value of $2.2 billion as of both September 30, 2011 and December 31, 2010. As of September 30, 2011 and December 31, 2010, goodwill had a carrying value of $690.2 million. The goodwill is attributable to preliminary acquisition accounting and will be allocated to reporting units during the fourth quarter of 2011. The change in the carrying value of the Brand between December 31, 2010 and September 30, 2011 is attributable to foreign currency translation.

The tables below present intangible assets subject to amortization:

 

     As of  
     September 30,     December 31,  
     2011     2010  
     (In millions)  

Franchise agreements

   $ 488.1      $ 488.6   

Accumulated amortization

     (20.0     (4.3
  

 

 

   

 

 

 

Total, net

   $ 468.1      $ 484.3   
  

 

 

   

 

 

 

 

     As of  
     September 30,     December 31,  
     2011     2010  
     (In millions)  

Favorable leases

   $ 174.8      $ 175.8   

Accumulated amortization

     (17.9     (4.1
  

 

 

   

 

 

 

Total, net

   $ 156.9      $ 171.7   
  

 

 

   

 

 

 

The Company recorded amortization expense on intangible assets of $10.0 million and $30.3 million during the three and nine months ended September 30, 2011, respectively. The Predecessor recorded amortization expense on intangible assets of $2.3 million and $6.7 million during the three and nine months ended September 30, 2010, respectively.

Franchise agreements and favorable leases have weighted average amortization periods of approximately 23.3 years and 12.6 years, respectively. The total intangible asset weighted average amortization period is approximately 20.5 years.

Note 7. Comprehensive Income

The components of total comprehensive income are as follows:

 

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Table of Contents
     Successor          Predecessor     Successor          Predecessor  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  
     (In millions)  

Net income

   $ 48.1           $ 63.4      $ 81.4           $ 153.4   
   

Translation adjustment

     (6.8          8.6        (3.2          (0.8
   

Net change in fair value of derivatives (1)

     (23.4          1.1        (36.8          4.3   

Amounts reclassified to earnings during the period from terminated caps/swaps (2)

     —               —          (0.6          (1.0

Pension and post-retirement benefit plans (3)

     —               (0.7     —               (19.6
  

 

 

        

 

 

   

 

 

        

 

 

 

Total other comprehensive income (loss)

     (30.2          9.0        (40.6          (17.1
  

 

 

        

 

 

   

 

 

        

 

 

 

Total comprehensive income

   $ 17.9           $ 72.4      $ 40.8           $ 136.3   
  

 

 

        

 

 

   

 

 

        

 

 

 

 

(1) Amounts are presented net of tax of $14.9 million $0.7 million for the three months ended September 30, 2011 and 2010, respectively, and $23.9 million and $2.5 million for the nine months ended September 30, 2011 and 2010, respectively.
(2) Amounts are presented net of tax of $0.4 million and $0.6 million for the nine months ended September 30, 2011 and 2010, respectively.
(3) Amounts are presented net of tax of $0.4 million and $11.2 million for the three and nine months ended September 30, 2010, respectively.

Note 8. Other Accrued Liabilities and Other Liabilities

Included in other accrued liabilities (current), as of September 30, 2011 and December 31, 2010, were accrued payroll and employee-related benefits costs totaling $38.3 million and $30.6 million, respectively; accrued severance of $23.6 million and $42.8 million, respectively; interest payable of $36.9 million and $16.2 million, respectively; deferred income of $13.7 million and $8.3 million, respectively; liability under the Executive Retirement Plan (the “ERP” liability) of $3.4 million and $4.9 million, respectively; foreign currency forward contracts of zero and $7.6 million, respectively; gift card liabilities of $11.8 million and $17.4 million, respectively; and sales tax payable of $18.7 million and $12.6 million, respectively.

Included in other liabilities (non-current), as of September 30, 2011 and December 31, 2010, were accrued pension liabilities of $48.7 million and $59.3 million, respectively; liabilities for unfavorable leases of $212.1 million and $234.5 million, respectively; casualty insurance reserves of $22.1 million and $22.3 million, respectively; retiree health benefits of $26.2 million and $25.1 million, respectively; deferred income of $4.1 million and $0.5 million, respectively; ERP liability of $12.9 million and $22.1 million, respectively; and income tax payable of $22.1 million and $24.3 million, respectively.

Note 9. Long-Term Debt

Long-term debt is comprised of the following:

 

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Table of Contents
          Principal     Interest rates (a)  
          As of              
          September 30,     December 31,              
    Maturity
dates
    2011     2010     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
          (In millions)              

Secured Term Loan - USD tranche (b)

    2016      $ 1,588.0      $ 1,510.0        5.2     5.5

Secured Term Loan - Euro tranche (b)

    2016        265.9        334.2        5.3     5.7

9 7/8 % Senior Notes

    2018        800.0        800.0        10.1     10.1

Deferred Premiums on interest rate caps - USD (See Note 11)

    2016        37.4        42.4        2.5     2.5

Deferred Premiums on interest rate caps - EUR (See Note 11)

    2016        7.9        11.1        2.9     2.9

Revolving Credit Facility

    2015        —          —          N/A        N/A   

Other

    N/A        3.8        1.4       
   

 

 

   

 

 

     

Total debt

      2,703.0        2,699.1       

Less: current maturities of debt

      (24.3     (27.0    
   

 

 

   

 

 

     

Total long-term debt

    $ 2,678.7      $ 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 Company’s Secured Term Loans, the effect of interest rate caps.
(b) Principal face amount herein is presented gross of a 1% discount of $13.5 million on the USD tranche and revolving credit facility and $1.1 million on the Euro tranche at September 30, 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”). The maturity date of the Term Loan Facility is October 19, 2016 and the maturity date of the Revolving Credit Facility is October 19, 2015.

Under the Amended Credit Agreement, at BKC’s 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 B borrowings under the Amended Credit Agreement are subject to a LIBOR floor of 1.50%. BKC has elected to borrow at the three month Euro currency rate as noted in (ii) above.

In connection with the Amended Credit Agreement, the Company recorded a $19.6 million loss on early extinguishment of debt during the nine months ended September 30, 2011.

As of September 30, 2011, the Company had $28.5 million in irrevocable standby letters of credit outstanding, which were issued under the Revolving Credit Facility 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 Credit Facilities. As of September 30, 2011, no amounts had been drawn on any of these irrevocable standby letters of credit.

 

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Table of Contents

The financial covenants, negative covenants, affirmative covenants, maturity dates, prepayment events and events of default, as described in the Company’s 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 September 30, 2011, the Company was in compliance with all covenants of the Amended Credit Agreement.

9 7/8% Senior Notes

We currently have outstanding $800,000,000 aggregate principal amount of 9.875% senior notes due 2018 (the “Senior Notes”). 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 September 30, 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 $3.3 million as of September 30, 2011 and December 31, 2010. There were $2.3 million and $1.2 million of guarantees issued against these lines of credit as of September 30, 2011 and December 31, 2010, respectively.

Interest Expense

Interest expense consists of the following:

 

     Successor          Predecessor      Successor          Predecessor  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011          2010      2011          2010  
     (In millions)  

Secured Term Loan - USD tranche

   $ 18.2           $ —         $ 57.3           $ —     

Secured Term Loan - Euro tranche

     3.3             —           11.2             —     

Interest Rate Caps - USD and Euro

     0.3             —           0.9             —     

9 7/8 % Senior Notes

     19.9             —           59.0             —     

Amortization on original debt issuance discount, deferred financing costs and other

     4.7             6.0         12.6             18.4   

Predecessor term loans (a)

     —               4.0         —               10.9   

Capital lease obligations

     1.9             2.5         5.7             7.6   
  

 

 

        

 

 

    

 

 

        

 

 

 

Total

   $ 48.3           $ 12.5       $ 146.7           $ 36.9   
  

 

 

        

 

 

    

 

 

        

 

 

 

 

(a) The effective interest rates for the three and nine month periods ended September 30, 2010 for the Predecessor term loans were each 4.8% and 4.7%, respectively.

Note 10. Fair Value Measurements

 

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Table of Contents

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 Company’s current and future obligations under its Executive Retirement Plan (“ERP”), as well as their location on the Company’s condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010:

 

Description

   Prepaid and
Other
Current
Assets
     Other
Assets
     Other
Accrued
Liabilities
     Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In millions)  

Derivatives designated as cash flow hedging instruments:

                 

Interest rate caps

   $ 2.5       $ 25.9       $ —         $ —         $ 28.4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2.5       $ 25.9       $ —         $ —         $ 28.4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other investments:

                 

Investments held in a rabbi trust

   $ —         $ 11.0       $ —         $ 11.0       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 11.0       $ —         $ 11.0       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     As of December 31, 2010     Fair Value Measurements at December 31, 2010  
     Carrying Value and Balance Sheet Location     Assets (Liabilities)  

Description

   Prepaid and
Other
Current
Assets
     Other
Assets
     Other
Accrued
Liabilities
    Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(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 Company’s 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 September 30, 2011, the fair value of the Company’s variable rate term debt and the Senior Notes were estimated at $2,586.6 million, compared to a carrying amount of $2,639.3 million, net of original issue discount. At December 31, 2010, the fair value of the Company’s variable rate term debt and the Senior Notes were estimated at $2,731.0 million, compared to a carrying amount of $2,624.1 million, net of original issue discount. 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.

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

 

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Table of Contents

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. As disclosed in Note 9, the Company has elected its applicable rate per annum as Euro currency. 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 values 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.

Interest Rate Swaps

The Predecessor entered into receive-variable, pay-fixed interest rate swap contracts to hedge a portion of the Predecessor’s forecasted variable-rate interest payments on its underlying Term Loan A and Term Loan B-1 debt (the “Predecessor’s Term Debt”). Interest payments on the Predecessor’s Term Debt were made quarterly and the variable rate on the Predecessor’s 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). 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 Predecessor’s Term Debt.

In connection with the Transaction, interest rate swaps with a notional value of $500 million were terminated. The remaining interest rate swaps that were not terminated by counterparties had a notional value of $75 million and expired on September 30, 2011.

Foreign Currency Forward Contracts

The Company may enter 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 Company’s 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 may enter into foreign currency forward contracts from time to time in order to manage the foreign exchange variability in forecasted royalty cash flows due to fluctuations in exchange rates. The Company had no foreign currency forward contracts outstanding as of September 30, 2011. Foreign currency forward contracts with a net notional amount of $2.1 million were outstanding at December 31, 2010.

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 Company’s derivative instruments do not contain any credit-risk related contingent features.

The following table presents the required quantitative disclosures for the Company’s derivative instruments (in millions):

 

17


Table of Contents
     Successor          Predecessor  
     For the Three Months Ended
September 30, 2011
         For the Three Months Ended
September 30, 2010
 
   Interest
Rate
Caps
    Interest
Rate
Swaps
     Foreign
Currency
Forward
Contracts
     Total          Interest
Rate
Swaps
    Foreign
Currency
Forward
Contracts
    Total  
     (In millions)  

Derivatives designated as cash flow hedging instruments:

                   

Gain (loss) recognized in other comprehensive income (effective portion)

   $ (38.5   $ —         $ 0.1       $ (38.4        $ (2.9   $ (0.2   $ (3.1

Gain (loss) reclassified from AOCI into interest expense, net (1)

   $ (0.2   $ —         $ —         $ (0.2        $ (5.0   $ —        $ (5.0

Gain (loss) reclassified from AOCI into royalty income

   $ —        $ —         $ —         $ —             $ —        $ —        $ —     

Gain (loss) recognized in interest expense, net (ineffective portion) (2)

   $ —        $ —         $ —         $ —             $ —        $ —        $ —     
 

Derivatives not designated as hedging instruments:

                     

Gain (loss) recognized in other operating expense, net

   $ —        $ —         $ —         $ —             $ —        $ (34.5   $ (34.5

Gain (loss) recognized in interest expense, net

   $ —        $ —         $ —         $ —             $ —        $ —        $ —     

 

     Successor          Predecessor  
     For the Nine Months Ended
September 30, 2011
         For the Nine Months Ended
September 30, 2010
 
   Interest
Rate
Caps
    Interest
Rate
Swaps
    Foreign
Currency
Forward
Contracts
    Total          Interest
Rate
Swaps
    Foreign
Currency
Forward
Contracts
    Total  
     (In millions)  

Derivatives designated as cash flow hedging instruments:

                 

Gain (loss) recognized in other comprehensive income (effective portion)

   $ (60.7   $ —        $ —        $ (60.7        $ (10.8   $ (0.6   $ (11.4

Gain (loss) reclassified from AOCI into interest expense, net (1)

   $ 0.8      $ —        $ —        $ 0.8           $ (15.6   $ —        $ (15.6

Gain (loss) reclassified from AOCI into royalty income

   $ —        $ —        $ —        $ —             $ —        $ (0.3   $ (0.3

Gain (loss) recognized in interest expense, net (ineffective portion) (2)

   $ —        $ —        $ —        $ —             $ (0.2   $ —        $ (0.2
 

Derivatives not designated as hedging instruments:

                   

Gain (loss) recognized in other operating expense, net

   $ —        $ —        $ (0.3   $ (0.3        $ —        $ 17.1      $ 17.1   

Gain (loss) recognized in interest expense, net

   $ —        $ (0.1   $ —        $ (0.1        $ —        $ —        $ —     

 

(1) Includes zero in gains for the three and nine months ended September 30, 2011, respectively, and $0.4 million and $1.3 million in gains for the three and nine months ended September 30, 2010, respectively, related to the terminated hedges.
(2) No ineffectiveness has been recorded in earnings related to the interest rate swap agreements during the three and nine months ended September 30, 2011. The amount of ineffectiveness recorded in earnings related to interest rate swap agreements during the three and nine months ended September 30, 2010 was not significant.

The net amount of pre-tax gains and losses in accumulated comprehensive income (loss) as of September 30, 2011 that the Company expects to be reclassified into earnings within the next 12 months is $2.5 million of losses.

 

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Note 12. Income Taxes

The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:

 

     Successor          Predecessor     Successor          Predecessor  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  

U.S. federal income tax rate

     35.0          35.0     35.0          35.0

State income taxes, net of federal income tax benefit

     1.7             2.8        1.6             3.6   

Withholding and other taxes related to foreign operations

     12.3             (3.5     15.0             0.5   

Foreign tax differential

     (18.5          (6.3     (16.3          (6.4

Foreign exchange differential on tax benefits

     0.2             (0.5     (0.2          0.1   

Change in valuation allowance

     (1.0          (5.7     (2.6          (2.6

Change in accrual for tax uncertainties

     1.3             (2.8     —               (1.4

Foreign tax deductions

     (2.4          —          (2.4          —     

Other

     (2.0          0.2        (0.9          0.3   
  

 

 

        

 

 

   

 

 

        

 

 

 

Effective income tax rate

     26.6          19.2     29.2          29.1
  

 

 

        

 

 

   

 

 

        

 

 

 

Income tax expense was $17.4 million and $33.5 million for the three and nine months ended September 30, 2011, respectively, resulting in an effective tax rate of 26.6% and 29.2%, respectively, primarily as a result of the current mix of income from multiple tax jurisdictions. The Company had income tax expense of $15.1 million and $62.9 million for the three and nine months ended September 30, 2010, respectively, resulting in an effective tax rate of 19.2% and 29.1%, respectively, primarily as a result of the mix of income from multiple tax jurisdictions and currency fluctuations.

The Company had $19.4 million and $21.1 million of unrecognized tax benefits at September 30, 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 Company’s 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 September 30, 2011 and December 31, 2010 was $2.9 million and $3.2 million, respectively. Potential interest and penalties associated with uncertain tax positions recognized during the three months ended September 30, 2011 and the three months ended September 30, 2010 were not significant. Potential interest and penalties associated with uncertain tax positions recognized during the nine months ended September 30, 2011 and 2010 were $0.3 million and $0.6 million, respectively. 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.

Note 13. Retirement Plan and Other Postretirement Benefits

The Company’s liability under the ERP was $16.3 million and $27.0 million at September 30, 2011 and December 31, 2010, respectively.

A summary of the components of net periodic benefit cost for the Company’s defined benefit pension plans and other post-retirement benefits is presented below:

 

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Table of Contents
     Successor          Predecessor     Successor          Predecessor  
     Retirement Benefits  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  
     (In millions)  

Service cost-benefits earned during the period

   $ 0.6           $ 0.8      $ 1.7           $ 1.6   

Interest costs on projected benefit obligations

     3.0             3.0        9.1             8.4   

Expected return on plan assets

     (2.6          (2.7     (7.9          (7.4

Amortization of prior service cost

     —               0.1        —               0.1   

Recognized net actuarial loss

     —               0.6        (0.1          0.4   
  

 

 

        

 

 

   

 

 

        

 

 

 

Net periodic benefit cost

   $ 1.0           $ 1.8      $ 2.8           $ 3.1   
  

 

 

        

 

 

   

 

 

        

 

 

 

Other benefits costs were $0.4 million and $1.0 million for the three months ended September 30, 2011 and September 30, 2010, respectively, and $1.3 million and $1.7 million for the nine-months ended September 30, 2011 and 2010, respectively.

Note 14. Other Operating (Income) Expense, Net

 

     Successor          Predecessor     Successor          Predecessor  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  
     (In millions)  

Net (gains) losses on disposal of assets, restaurant closures and refranchisings

   $ (3.6        $ (4.1   $ (2.2        $ (7.2

Litigation settlements and reserves, net

     0.1             1.2        0.7             0.4   

Foreign exchange net (gains) losses

     (0.1          (1.5     6.7             (6.0

Other, net

     —               (1.0     2.3           $ 1.6   
  

 

 

        

 

 

   

 

 

        

 

 

 

Other operating (income) expense, net

   $ (3.6        $ (5.4   $ 7.5           $ (11.2
  

 

 

        

 

 

   

 

 

        

 

 

 

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 of the Company’s Transition Report on Form10-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 BKC’s 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. BKC has filed a motion for summary judgment on the remaining claim and is waiting for the court’s decision on the motion.

On September 10, 2008, a class action lawsuit was filed against the Company in the United States District Court for the Northern

 

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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 plaintiffs seek injunctive relief, statutory damages, attorneys’ fees and costs. 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.

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.

Other

During the three months ended September 30, 2010, the Company made a $1.5 million favorable adjustment to its self insurance reserve to adjust its IBNR confidence level and an additional adjustment of $3.3 million as a result of favorable developments in its claim trends. There were no comparable adjustments recorded during the current period.

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      Successor          Predecessor  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011          2010      2011          2010  
     (In millions)  

Revenues:

               

U.S. and Canada

   $ 406.5           $ 403.9       $ 1,187.6           $ 1,237.9   

EMEA/APAC

     167.8             167.5         473.7             498.5   

Latin America

     33.8             28.6         95.3             83.5   
  

 

 

        

 

 

    

 

 

        

 

 

 

Total revenues

   $ 608.1           $ 600.0       $ 1,756.6           $ 1,819.9   
  

 

 

        

 

 

    

 

 

        

 

 

 

Other than the U.S. and Germany, no other individual country represented 10% or more of the Company’s total revenues during the three and nine months ended September 30, 2011. The U.S. also represented 10% or more of the Company’s total revenues during the three and nine months ended September 30, 2010, and Germany represented 10% or more of the Company’s total revenues during the nine months ended September 30, 2010. Revenues in the U.S. totaled $364.5 million and $1.1 billion for the three and nine months ended September 30, 2011, respectively, as compared to $365.6 million and $1.2 billion during the three and nine months ended September 30, 2010, respectively. Revenues in Germany totaled $59.3 million and $167.3 million for the three and nine months ended September 30, 2011, respectively, compared to $56.0 million and $182.5 million for the three and nine months ended September 30, 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 Company’s geographic segments and system wide restaurants and are not allocated specifically to any of the geographic segments.

 

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Table of Contents
     Successor          Predecessor     Successor          Predecessor  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011          2010     2011          2010  
     (In millions)  

Income from Operations:

              

U.S. and Canada

   $ 84.9           $ 90.3      $ 243.8           $ 255.7   

EMEA/APAC

     44.4             30.6        92.3             72.4   

Latin America

     14.9             9.2        40.8             28.6   

Unallocated

     (30.7          (39.3     (97.0          (104.2
  

 

 

        

 

 

   

 

 

        

 

 

 

Total income from operations

     113.5             90.8        279.9             252.5   

Interest expense, net

     48.0             12.3        145.4             36.2   

Loss on early extinguishment of debt

     —               —          19.6             —     
  

 

 

        

 

 

   

 

 

        

 

 

 

Income before income taxes

     65.5             78.5        114.9             216.3   

Income tax expense

     17.4             15.1        33.5             62.9   
  

 

 

        

 

 

   

 

 

        

 

 

 

Net income

   $ 48.1           $ 63.4      $ 81.4           $ 153.4   
  

 

 

        

 

 

   

 

 

        

 

 

 

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 BKC, 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.

 

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Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of September 30, 2011

(In millions)

(Unaudited)

 

      Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  
Assets           

Current assets:

          

Cash and cash equivalents

   $ 304.2      $ —        $ 164.3      $ —        $ 468.5   

Trade and notes receivable, net

     90.5        —          49.1        —          139.6   

Prepaids and other current assets, net

     52.1        —          19.4        —          71.5   

Deferred income taxes, net

     28.8        —          1.5        —          30.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     475.6        —          234.3        —          709.9   

Property and equipment, net of accumulated depreciation

     840.6        —          184.7        —          1,025.3   

Intangible assets, net

     1,578.4        —          1,286.5        —          2,864.9   

Goodwill

     690.2        —          —          —          690.2   

Net investment in property leased to franchisees

     231.0        —          19.2        —          250.2   

Intercompany receivable

     362.6        —          —          (362.6     —     

Investment in subsidiaries

     1,103.4        1,493.5        —          (2,596.9     —     

Other assets, net

     95.5        —          31.8        —          127.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,377.3      $ 1,493.5      $ 1,756.5      $ (2,959.5   $ 5,667.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Stockholder’s Equity           

Current liabilities:

          

Accounts and drafts payable

   $ 64.0      $ —        $ 20.9      $ —        $ 84.9   

Accrued advertising

     59.7        —          27.2        —          86.9   

Other accrued liabilities

     175.5        —          61.9        —          237.4   

Current portion of long term debt and capital leases

     31.1        —          2.3        —          33.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     330.3        —          112.3        —          442.6   

Term debt, net of current portion

     2,664.1        —          —          —          2,664.1   

Capital leases, net of current portion

     70.0        —          24.7        —          94.7   

Other liabilities, net

     289.4        —          70.0        —          359.4   

Payables to affiliates

     —          —          362.6        (362.6     —     

Deferred income taxes, net

     530.0        —          83.5        —          613.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     3,883.8        —          653.1        (362.6     4,174.3   

Stockholder’s equity:

          

Additional paid-in capital

     1,562.5        1,563.5        1,087.2        (2,649.7     1,563.5   

(Accumulated deficit) / retained earnings

     (20.7     (21.7     51.1        (30.4     (21.7

Accumulated other comprehensive income (loss)

     (48.3     (48.3     (34.9     83.2        (48.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     1,493.5        1,493.5        1,103.4        (2,596.9     1,493.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,377.3      $ 1,493.5      $ 1,756.5      $ (2,959.5   $ 5,667.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of December 31, 2010

(In millions)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  
Assets           

Current assets:

          

Cash and cash equivalents

   $ 132.8      $ 0.7      $ 73.5      $ —        $ 207.0   

Trade and notes receivable, net

     99.2        —          53.7        —          152.9   

Prepaids and other current assets, net

     131.4        —          27.8        —          159.2   

Deferred income taxes, net

     22.3        —          0.9        —          23.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     385.7        0.7        155.9        —          542.3   

Property and equipment, net of accumulated depreciation

     888.0        —          219.8        —          1,107.8   

Intangible assets, net

     1,566.4        —          1,327.5        —          2,893.9   

Goodwill

     690.2        —          —          —          690.2   

Net investment in property leased to franchisees

     229.8        —          20.5        —          250.3   

Intercompany receivable

     370.4        —          —          (370.4     —     

Investment in subsidiaries

     1,064.6        1,452.7        —          (2,517.3     —     

Other assets, net

     175.1        —          32.4        —          207.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,370.2      $ 1,453.4      $ 1,756.1      $ (2,887.7   $ 5,692.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Stockholder’s Equity           

Current liabilities:

          

Accounts and drafts payable

   $ 58.8      $ —        $ 31.7      $ —        $ 90.5   

Accrued advertising

     62.6        —          19.9        —          82.5   

Other accrued liabilities

     164.2        0.7        84.1        —          249.0   

Current portion of long term debt and capital leases

     33.8        —          2.4        —          36.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     319.4        0.7        138.1        —          458.2   

Term debt, net of current portion

     2,652.0        —          —          —          2,652.0   

Capital leases, net of current portion

     75.8        —          28.1        —          103.9   

Other liabilities, net

     317.7        —          74.0        —          391.7   

Payables to affiliates

     —          —          370.4        (370.4     —     

Deferred income taxes, net

     552.6        —          80.9        —          633.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     3,917.5        0.7        691.5        (370.4     4,239.3   

Stockholder’s equity:

          

Additional paid-in capital

     1,562.5        1,563.5        1,058.7        (2,621.2     1,563.5   

(Accumulated deficit) retained earnings

     (102.1     (103.1     (24.2     126.3        (103.1

Accumulated other comprehensive loss

     (7.7     (7.7     30.1        (22.4     (7.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     1,452.7        1,452.7        1,064.6        (2,517.3     1,452.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,370.2      $ 1,453.4      $ 1,756.1      $ (2,887.7   $ 5,692.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Successor

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended September 30, 2011

(In millions)

(Unaudited)

 

     Issuer     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Company restaurant revenues

   $ 264.6      $ —         $ 158.0      $ —        $ 422.6   

Franchise revenues

     93.5        —           63.0        —          156.5   

Intercompany revenues

     1.9        —           —          (1.9     —     

Property revenues

     22.8        —           6.2        —          29.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     382.8        —           227.2        (1.9     608.1   

Company restaurant expenses:

           

Food, paper and product costs

     85.4        —           49.5        —          134.9   

Payroll and employee benefits

     78.7        —           43.6        —          122.3   

Occupancy and other operating costs

     67.9        —           44.5        —          112.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total company restaurant expenses

     232.0        —           137.6        —          369.6   

Selling, general and administrative expenses

     75.3        —           34.9        —          110.2   

Intercompany expenses

     —          —           1.9        (1.9     —     

Property expenses

     12.6        —           5.8        —          18.4   

Other operating (income) expense, net

     (2.5     —           (1.1     —          (3.6
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     317.4        —           179.1        (1.9     494.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     65.4        —           48.1        —          113.5   

Interest expense

     47.7        —           0.6        —          48.3   

Intercompany interest (income) expense

     —          —           —          —          —     

Interest income

     (0.2     —           (0.1     —          (0.3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense, net

     47.5        —           0.5        —          48.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Loss on early extinguishment

     —          —           —          —          —     

Income before income taxes

     17.9        —           47.6        —          65.5   

Income tax expense

     6.0        —           11.4        —          17.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     11.9        —           36.2        —          48.1   

Equity in earnings of subsidiaries

     36.2        48.1         —          (84.3     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 48.1      $ 48.1       $ 36.2      $ (84.3   $ 48.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

Successor

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Nine Months Ended September 30, 2011

(In millions)

(Unaudited)

 

     Issuer     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Company restaurant revenues

   $ 777.4      $ —         $ 456.8      $ —        $ 1,234.2   

Franchise revenues

     268.0        —           169.5        —          437.5   

Intercompany revenues

     5.3        —           (1.7     (3.6     —     

Property revenues

     66.1        —           18.8        —          84.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     1,116.8        —           643.4        (3.6     1,756.6   

Company restaurant expenses:

           

Food, paper and product costs

     253.3        —           144.0        —          397.3   

Payroll and employee benefits

     234.8        —           129.7        —          364.5   

Occupancy and other operating costs

     197.8        —           134.9        —          332.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total company restaurant expenses

     685.9        —           408.6        —          1,094.5   

Selling, general and administrative expenses

     211.4        —           108.5        —          319.9   

Intercompany expenses

     (1.7     —           5.3        (3.6     —     

Property expenses

     36.8        —           18.0        —          54.8   

Other operating (income) expense, net

     (1.0     —           8.5        —          7.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     931.4        —           548.9        (3.6     1,476.7   

Income from operations

     185.4        —           94.5        —          279.9   

Interest expense

     144.9        —           1.8        —          146.7   

Intercompany interest (income) expense

     (7.4     —           7.4        —          —     

Interest income

     (0.8     —           (0.5     —          (1.3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense, net

     136.7        —           8.7        —          145.4   

Loss on early extinguishment

     19.6        —           —          —          19.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     29.1        —           85.8        —          114.9   

Income tax expense

     5.9        —           27.6        —          33.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     23.2        —           58.2        —          81.4   

Equity in earnings of subsidiaries

     58.2        81.4         —          (139.6     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 81.4      $ 81.4       $ 58.2      $ (139.6   $ 81.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Predecessor

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended September 30, 2010

(In millions)

(Unaudited)

 

     Issuer     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Company restaurant revenues

   $ 267.5      $ —         $ 162.3      $ —        $ 429.8   

Franchise revenues

     90.3        —           51.3        —          141.6   

Intercompany revenues

     1.4        —           1.7        (3.1     —     

Property revenues

     21.7        —           6.9        —          28.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     380.9        —           222.2        (3.1     600.0   

Company restaurant expenses:

           

Food, paper and product costs

     85.6        —           50.2        —          135.8   

Payroll and employee benefits

     81.6        —           47.3        —          128.9   

Occupancy and other operating costs

     60.6        —           46.0        —          106.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total company restaurant expenses

     227.8        —           143.5        —          371.3   

Selling, general and administrative expenses

     83.8        —           44.0        —          127.8   

Intercompany expenses

     1.7        —           1.4        (3.1     —     

Property expenses

     9.3        —           6.2        —          15.5   

Other operating (income) expense, net

     (4.3     —           (1.1     —          (5.4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     318.3        —           194.0        (3.1     509.2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     62.6        —           28.2        —          90.8   

Interest expense

     11.7        —           0.8        —          12.5   

Intercompany interest (income) expense

     (2.4     —           2.4        —          —     

Interest income

     (0.2     —           —          —          (0.2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense, net

     9.1        —           3.2        —          12.3   

Income before income taxes

     53.5        —           25.0        —          78.5   

Income tax expense

     14.1        —           1.0        —          15.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     39.4        —           24.0        —          63.4   

Equity in earnings of subsidiaries

     24.0        63.4         —          (87.4     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 63.4      $ 63.4       $ 24.0      $ (87.4   $ 63.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

Predecessor

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Nine Months Ended September 30, 2010

(In millions)

(Unaudited)

 

     Issuer     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

           

Company restaurant revenues

   $ 832.5      $ —         $ 490.6      $ —        $ 1,323.1   

Franchise revenues

     268.8        —           143.0        —          411.8   

Intercompany revenues

     4.4        —           5.1        (9.5     —     

Property revenues

     64.3        —           20.7        —          85.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     1,170.0        —           659.4        (9.5     1,819.9   

Company restaurant expenses:

           

Food, paper and product costs

     269.4        —           151.6        —          421.0   

Payroll and employee benefits

     256.2        —           150.2        —          406.4   

Occupancy and other operating costs

     194.0        —           145.1        —          339.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total company restaurant expenses

     719.6        —           446.9        —          1,166.5   

Selling, general and administrative expenses

     230.4        —           136.3        —          366.7   

Intercompany expenses

     5.1        —           4.4        (9.5     —     

Property expenses

     27.2        —           18.2        —          45.4   

Other operating (income) expense, net

     (3.5     —           (7.7     —          (11.2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     978.8        —           598.1        (9.5     1,567.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     191.2        —           61.3        —          252.5   

Interest expense

     34.7        —           2.2        —          36.9   

Intercompany interest (income) expense

     (7.0     —           7.0        —          (0.0

Interest income

     0.2        —           (0.9     —          (0.7
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense, net

     27.9        —           8.3        —          36.2   

Income before income taxes

     163.3        —           53.0        —          216.3   

Income tax expense

     53.2        —           9.7        —          62.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     110.1        —           43.3        —          153.4   

Equity in earnings of subsidiaries

     43.3        153.4         —          (196.7     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 153.4      $ 153.4       $ 43.3      $ (196.7   $ 153.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Successor

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2011

(In millions)

(Unaudited)

 

    Issuer     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

 

Net income

  $ 81.4      $ 81.4      $ 58.2      $ (139.6   $ 81.4   

Adjustments to reconcile net income to net cash provided by operating activities:

         

Equity in earnings of subsidiary

    (58.2     (81.4     —          139.6        —     

Depreciation and amortization

    68.5        —          33.0        —          101.5   

Loss on early extinguishment of debt

    19.6        —          —          —          19.6   

Amortization of deferred financing cost and debt issuance discount

    10.5        —          —          —          10.5   

Loss on hedging activities

    0.3        —          —          —          0.3   

Loss on remeasurement of foreign denominated transactions

    3.2        —          1.2        —          4.4   

(Gain) loss on refranchisings, dispositions of assets and release of unfavorable lease obligation

    (4.3     —          1.4          (2.9

Impairment on non-restaurant properties

    —          —          —          —          —     

Bad debt expense, net of recoveries

    3.7        —          0.2        —          3.9   

Share based compensation

    0.9        —          —            0.9   

Deferred income taxes

    (16.3     —          —          —          (16.3

Changes in current assets and liabilities, excluding acquisitions and dispositions:

         

Trade and notes receivables

    3.9        —          4.7        —          8.6   

Prepaids and other current assets

    87.4        —          4.5        —          91.9   

Accounts and drafts payable

    5.3        —          (10.3     —          (5.0

Accrued advertising

    (0.4     —          7.6        —          7.2   

Other accrued liabilities

    12.8        —          (21.8     —          (9.0

Other long-term assets and liabilities

    (9.2     —          25.1        1.5        17.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    209.1        —          103.8        1.5        314.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Payments for property and equipment

    (30.2     —          (11.8     —          (42.0

Proceeds from refranchisings, disposition of assets and restaurant closures

    10.8        —          12.4        —          23.2   

Investments in / advances to unconsolidated entities

    —          —          (4.5     —          (4.5

Return of investment on direct financing leases

    8.6        —          (0.8     —          7.8   

Restricted Cash

    (4.3     —          —          —          (4.3

Other investing activities

    0.5        —          —          —          0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

    (14.6     —          (4.7     —          (19.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Proceeds from term debt

    1,860.0        —          —          —          1,860.0   

Repayments of term debt and capital leases

    (1,864.2     —