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 March 31, 2012

 

¨ 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

Incorporation or Organization)

 

(I.R.S. Employer

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 May 9, 2012, 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      34   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      52   

Item 4.

   Controls and Procedures      52   
PART II – Other Information   

Item 1A.

   Risk Factors      54   

Item 5.

   Exhibits      55   
   Signatures      56   
   Index to Exhibits      57   

 

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PART I — Financial Information

Item1. Financial Statements

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

     As of  
     March  31,
2012
    December  31,
2011
 
     (In millions, except share data)  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 429.8      $ 458.8   

Trade and notes receivable, net

     149.3        152.8   

Prepaids and other current assets, net

     93.9        68.0   

Deferred income taxes, net

     46.3        43.1   
  

 

 

   

 

 

 

Total current assets

     719.3        722.7   

Property and equipment, net of accumulated depreciation of $180.3 million and $150.1 million, respectively

     1,005.2        1,026.5   

Intangible assets, net

     2,842.2        2,823.3   

Goodwill

     663.1        657.7   

Net investment in property leased to franchisees

     239.2        242.2   

Other assets, net

     102.9        111.1   
  

 

 

   

 

 

 

Total assets

   $ 5,571.9      $ 5,583.5   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY     

Current liabilities:

    

Accounts and drafts payable

   $ 89.7      $ 98.4   

Accrued advertising

     96.3        97.4   

Other accrued liabilities

     227.3        242.2   

Current portion of long term debt and capital leases

     36.6        33.5   
  

 

 

   

 

 

 

Total current liabilities

     449.9        471.5   

Term debt, net of current portion

     2,547.8        2,585.9   

Capital leases, net of current portion

     119.4        95.4   

Other liabilities, net

     359.6        366.2   

Deferred income taxes, net

     594.5        615.3   
  

 

 

   

 

 

 

Total liabilities

     4,071.2        4,134.3   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 14)

    

Stockholder’s equity:

    

Common stock, $0.01 par value; 200,000 shares authorized at March 31, 2012 and December 31, 2011; 100,000 shares issued and outstanding at March 31, 2012 and December 31, 2011

     —          —     

Additional paid-in capital

     1,564.4        1,557.1   

Retained earnings

     12.6        5.4   

Accumulated other comprehensive loss

     (76.3     (113.3
  

 

 

   

 

 

 

Total stockholder’s equity

     1,500.7        1,449.2   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,571.9      $ 5,583.5   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months  Ended
March 31,
 
     2012      2011  
     (In millions)  

Revenues:

     

Company restaurant revenues

   $ 396.2       $ 392.5   

Franchise and property revenues

     173.7         159.5   
  

 

 

    

 

 

 

Total revenues

     569.9         552.0   

Company restaurant expenses:

     

Food, paper and product costs

     130.0         127.0   

Payroll and employee benefits

     119.5         120.0   

Occupancy and other operating costs

     104.5         109.7   
  

 

 

    

 

 

 

Total Company restaurant expenses

     354.0         356.7   

Franchise and franchise property expenses

     23.8         23.1   

Selling, general and administrative expenses

     93.7         100.4   

Other operating expenses, net

     13.0         7.8   
  

 

 

    

 

 

 

Total operating costs and expenses

     484.5         488.0   
  

 

 

    

 

 

 

Income from operations

     85.4         64.0   
  

 

 

    

 

 

 

Interest expense, net

     47.2         50.2   

Loss on early extinguishment of debt

     1.1         19.6   
  

 

 

    

 

 

 

Income (loss) before income taxes

     37.1         (5.8

Income tax expense

     12.1         0.1   
  

 

 

    

 

 

 

Net income (loss)

   $ 25.0       $ (5.9
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended
March  31,
 
     2012     2011  
     (In millions)  

Net income (loss)

   $ 25.0      $ (5.9

Foreign currency translation adjustment

     39.3        52.0   

Net change in fair value of net investment hedges (net of tax of $3.8 million)

     (5.9     —     

Net change in fair value of interest rate caps (net of tax of $1.0 million and $1.6 million, respectively)

     (2.7     2.3   

Amounts reclassified to earnings during the period from terminated caps/swaps (net of tax of $0.2 million and $0.4 million, respectively)

     (0.4     (0.6

Pension and post-retirement benefit plans (net of tax of $4.2 million)

     6.5        —     

Amortization of prior service costs (net of tax of $0.2 million)

     0.2        —     
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     37.0        53.7   
  

 

 

   

 

 

 

Total comprehensive income

   $ 62.0      $ 47.8   
  

 

 

   

 

 

 

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)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In millions)  

Cash flows from operating activities:

  

Net income (loss)

   $ 25.0      $ (5.9

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     34.0        35.0   

Loss on early extinguishment of debt

     1.1        19.6   

Amortization of deferred financing cost and debt issuance discount

     3.5        3.3   

Loss (gain) on remeasurement of foreign denominated transactions

     (0.3     2.4   

Amortization of prior service costs

     (0.4     —     

Realized loss on terminated caps/swaps

     0.6        0.6   

Loss (gain) on refranchisings and dispositions of assets

     8.9        (0.4

Bad debt expense, net of recoveries

     1.3        —     

Share-based compensation

     7.3        0.2   

Deferred income taxes

     (6.4     11.4   

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

    

Trade and notes receivables

     3.4        10.0   

Prepaids and other current assets

     (9.2     2.2   

Accounts and drafts payable

     (9.7     (16.2

Accrued advertising

     (6.2     6.6   

Other accrued liabilities

     (5.4     0.2   

Other long-term assets and liabilities

     2.5        (3.8
  

 

 

   

 

 

 

Net cash provided by operating activities

     50.0        65.2   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Payments for property and equipment

     (16.6     (9.7

Proceeds from refranchisings, disposition of assets and restaurant closures

     7.4        7.9   

Return of investment on direct financing leases

     3.1        2.0   

Other investing activities

     0.3        (0.1
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (5.8     0.1   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from term debt

     —          1,857.6   

Repayments of term debt and capital leases

     (11.5     (1,844.0

Extinguishment of debt

     (37.7     —     

Payment of financing costs

     —          (23.1

Dividend to Parent

     (17.8     —     
  

 

 

   

 

 

 

Net cash used for financing activities

     (67.0     (9.5
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     (6.2     4.3   

Increase (decrease) in cash and cash equivalents

     (29.0     60.1   

Cash and cash equivalents at beginning of period

     458.8        207.0   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 429.8      $ 267.1   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

Condensed Consolidated Statements of Cash Flows
     Three Months Ended
March  31,
 
     2012      2011  
     (In millions)  

Supplemental cash flow disclosures:

     

Interest paid

   $ 23.1       $ 29.5   

Income taxes paid

   $ 3.7       $ 6.6   

Non-cash investing and financing activities:

     

Acquisition of property with capital lease obligations

   $ 29.2       $ —     

Net investment in direct financing leases

   $ 3.1       $ 2.0   

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)

(Tabular amounts in millions of dollars unless noted otherwise)

Note 1. Organization

Burger King Holdings, Inc. (“BKH”, the “Company” or “we”) is a Delaware corporation formed on July 23, 2002. We are 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”). We are the world’s second largest fast food hamburger restaurant, or FFHR, chain as measured by the total number of restaurants. On October 19, 2010, we were acquired by 3G Special Situations Fund II, L.P. (“3G”), an affiliate of 3G Capital Partners, Ltd., an investment firm based in New York (“3G Capital”).

We generate revenues from two sources: (i) retail sales at company-owned restaurants (also referred to as “Company restaurants”) and (ii) franchise and property revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants, initial and renewal franchise fees paid by franchisees and property income from restaurants that we lease or sublease to franchisees.

On April 3, 2012, Burger King Worldwide Holdings, Inc., our parent holding company (“BKWWH”), Justice Holdings Limited (“Justice”), Justice Delaware Holding Inc., a wholly-owned subsidiary of Justice (“New Holdco”), and Justice Holdco LLC, a wholly-owned subsidiary of New Holdco (“Merger Sub LLC”), entered into a Business Combination Agreement and Plan of Merger (the “Business Combination Agreement”). See Note 17 for further information about the Business Combination Agreement.

New Accounting Pronouncements

During the three months ended March 31, 2012, we adopted an accounting standard update that amends accounting guidance to allow us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, we are not required to calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of this accounting standard update did not have an impact on our condensed consolidated financial statements.

During the three months ended March 31, 2012, we adopted an accounting standard update that amends accounting guidance to achieve common fair value measurement and disclosure requirements under United States generally accepted accounting principles (“GAAP”) and international financial reporting standards (“IFRS”). The amendments in this accounting standard clarify the Financial Accounting Standards Board’s intent about the application of existing fair value measurement requirements. The amendments change the wording used to describe many of the requirements in U.S. GAAP for disclosing information about fair value measurements. The adoption of this accounting standard update did not have a material effect on our consolidated financial statements but may result in additional disclosures.

During the three months ended March 31, 2012, we adopted an accounting standard update that requires us to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard eliminates the option to present the components of other comprehensive income as part of the statement of equity. The disclosures required by this accounting standard update are included in this Form 10-Q.

Note 2. Basis of Presentation and Consolidation

We have 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 GAAP for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in our Annual Report on Form 10-K for the twelve-month period ended December 31, 2011 filed with the SEC on March 14, 2012. 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 our accounts and the accounts of our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

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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 (loss).

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 our 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, 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. Prepaids and Other Current Assets, net

Prepaids and other current assets, net consist of the following:

 

     As of  
     March 31,
2012
     December 31,
2011
 

Prepaid expenses

   $ 62.9       $ 29.6   

Inventories

     17.1         13.7   

Interest rate cap - current portion

     4.7         3.6   

Refundable income taxes

     9.2         21.1   
  

 

 

    

 

 

 

Total Prepaids and other current assets

   $ 93.9       $ 68.0   
  

 

 

    

 

 

 

Note 4. Intangible Assets, net and Goodwill

Intangible assets, net and goodwill consist of the following:

 

     As of  
     March 31, 2012      December 31, 2011  
     Gross      Accumulated
Amortization
    Net      Gross      Accumulated
Amortization
    Net  

Identifiable assets subject to amortization:

               

Franchise agreements

   $ 487.3       $ (30.9   $ 456.4       $ 482.3       $ (25.8   $ 456.5   

Favorable leases

     175.5         (26.6     148.9         174.2         (22.0     152.2   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     662.8         (57.5     605.3         656.5         (47.8     608.7   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Brand

   $ 2,236.9       $ —        $ 2,236.9       $ 2,214.6       $ —        $ 2,214.6   
       

 

 

         

 

 

 

Intangible assets, net

        $ 2,842.2            $ 2,823.3   
       

 

 

         

 

 

 

Goodwill

   $ 663.1            $ 657.7        

We recorded amortization expense on intangible assets of $9.6 million for the three months ended March 31, 2012 and $10.1 million for the same period in the prior year.

 

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Note 5. Other Accrued Liabilities and Other Liabilities

Other accrued liabilities and other liabilities consist of the following:

 

     As of  
     March 31,
2012
     December 31,
2011
 

Current:

     

Accrued payroll and employee-related costs

   $ 39.2       $ 63.9   

Accrued severance and project costs

     26.5         33.4   

Withholding taxes

     7.8         9.0   

Interest payable

     36.8         17.1   

Casualty insurance

     8.8         8.7   

Gift card liabilities

     11.6         16.1   

Income tax payable

     4.5         3.1   

Sales tax payable

     25.8         22.0   

Other

     66.3         68.9   
  

 

 

    

 

 

 

Total current other accrued liabilities

     227.3         242.2   
  

 

 

    

 

 

 

Non-current:

     

Accrued pension

   $ 69.0       $ 71.3   

Unfavorable leases

     199.0         204.2   

Casualty insurance reserves

     22.4         22.2   

Retiree health benefits

     8.2         18.4   

Deferred compensation

     12.0         12.8   

Income tax payable

     23.8         23.4   

Other

     25.2         13.9   
  

 

 

    

 

 

 

Total non-current other accrued liabilities

     359.6         366.2   
  

 

 

    

 

 

 

Total other accrued liabilities and other liabilities

   $ 586.9       $ 608.4   
  

 

 

    

 

 

 

Note 6. Long-Term Debt

Long-term debt consists of the following:

 

            Principal     Interest rates (a)  
            As of     Three Months Ended  
     Maturity      March 31,     December 31,     March 31,  
     dates      2012     2011     2012     2011  

Secured Term Loan - USD tranche (b)

     2016       $ 1,495.7      $ 1,532.0        5.6     6.2

Secured Term Loan - Euro tranche (b)

     2016         249.4        247.8        5.8     6.4

9 7/8% Senior Notes

     2018         797.5        797.5        10.1     10.3

Deferred Premiums on interest rate caps

     2016         34.1        35.8        2.5     2.5

- USD (See Note 10)

           

Deferred Premiums on interest rate caps

     2016         7.0        7.3        2.9     2.9

- EUR (See Note 10)

           

Other

     N/A         1.1        3.2       
     

 

 

   

 

 

     

Total debt

        2,584.8        2,623.6       

Less: current maturities of debt

        (24.4     (24.2    
     

 

 

   

 

 

     

Total long-term debt

      $ 2,560.4      $ 2,599.4       
     

 

 

   

 

 

     

 

(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 our Secured Term Loans, the effect of interest rate caps.

 

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(b) Principal face amount herein is presented gross of a 1% discount of $11.7 million on the USD tranche and revolving credit facility and $0.9 million on the Euro tranche at March 31, 2012 and $12.5 million on the USD tranche and revolving credit facility and $1.0 million on the Euro tranche at December 31, 2011.

Credit Facilities

In connection with the acquisition of the Company by 3G, BKC entered into a credit agreement dated as of October 19, 2010, as amended and restated as of February 15, 2011 (the “Credit Agreement”). The Credit Agreement provides for (i) two tranches of term loans in aggregate principal amounts of $1,600.0 million and €200.0 million (the “Term Loans”), each under a term loan facility (the “Term Loan Facility”) and (ii) a senior secured revolving credit facility for up to $150 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters of credit) (the “Revolving Credit Facility,” and together with the Term Loan Facility, the “Credit Facilities”). The maturity date for the Term Loan Facility is October 19, 2016 and the maturity date for the Revolving Credit Facility is October 19, 2015.

The principal amount of the Term Loan Facility amortizes in quarterly installments equal to 0.25% of the original principal amount of the Term Loan Facility for the first five and three-quarter years, with the balance payable at maturity. The Credit Facilities contain customary provisions relating to mandatory prepayments, voluntary prepayments, affirmative covenants, negative covenants and events of default. All obligations under the Credit Facilities are guaranteed by BKH and each direct and indirect, existing and future, material domestic wholly-owned subsidiary of BKC.

Under the 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 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.

As of March 31, 2012, we had $14.5 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 March 31, 2012, no amounts had been drawn on any of these irrevocable standby letters of credit and our remaining borrowing capacity under the Revolving Credit Facility was $135.5 million. We may, from time to time, borrow from and repay the Revolving Credit Facility. Consequently, the amount outstanding under the Revolving Credit Facility at the end of a period may not be reflective of the total amounts outstanding during the period.

Following the end of each fiscal year, we are required to prepay the Term Loans in an amount equal to 50% of Excess Cash Flow (as defined in the Credit Agreement and with stepdowns to 25% and 0% based on achievement of specified total leverage ratios), minus the amount of any voluntary prepayments of the Term Loans during such fiscal year. Additionally, subject to certain exceptions, the Credit Facilities are subject to mandatory prepayment in the event of non-ordinary course or other dispositions of assets (subject to customary reinvestment provisions), or in the event of issuances or incurrence of debt by BKC or any of its subsidiaries (other than certain indebtedness permitted by the Credit Facilities).

We may prepay the Term Loans in whole or in part at any time. A 1% premium applies if the prepayment is made in connection with an interest rate re-pricing event. During the three months ended March 31, 2012, we made $37.7 million in voluntary prepayments of our Term Loans.

Under the Credit Facilities, BKC is required to comply with customary financial ratios, including a minimum Interest Coverage Ratio (the ratio of Consolidated EBITDA to Consolidated Interest Expense) and a maximum Total Leverage Ratio (the ratio of Consolidated Total Debt to Consolidated EBITDA). Consolidated EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for certain items, as specified in the Credit Agreement. Consolidated Interest Expense is defined in the Credit Agreement as cash payments for interest, including (net of) payments made (received) pursuant to interest rate derivatives with respect to Indebtedness, net of cash received for interest income and certain other items specified in the Credit Agreement. The Test Period is defined in the Credit Agreement as the most recently completed four consecutive fiscal quarters ending on such date.

 

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The Credit Facilities also contain a number of customary affirmative and negative covenants that, among other things, limit or restrict the ability of BKC and its subsidiaries to (i) incur additional indebtedness (including guarantee obligations) or liens, (ii) engage in mergers, consolidations, liquidations or dissolutions, sell assets (with certain exceptions, including sales of company-owned restaurants to franchisees), (iii) make capital expenditures, acquisitions, investments loans and advances, (iv) pay and modify the terms of certain indebtedness, (v) engage in certain transactions with affiliates, (vi) enter into certain speculative hedging arrangements, negative pledge clauses and clauses restricting subsidiary distributions and (vii) change its line of business. In addition, the ability of BKC and its subsidiaries to pay dividends or other distributions, or to repurchase, redeem or retire equity is restricted by the Credit Agreement, including the payment of dividends to BKH. At March 31, 2012, we were in compliance with all financial ratios and covenants of the Credit Agreement and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility.

BKC’s capital expenditures are limited to between $160.0 million and $220.0 million, with the annual limitation based on our Rent-Adjusted Leverage Ratio of our most recently ended fiscal year. Up to 50% of the unused amount for the prior fiscal year (less the amount carried forward into the prior fiscal year) is allowed to be carried forward into the next fiscal year.

The Credit Facilities contain customary events of default, including, but not limited to, nonpayment of principal, interest, fees or other amount, violation of a covenant, cross-default to material indebtedness, bankruptcy and a change of control. Our ability to borrow under the Credit Facilities will be dependent on, among other things, BKC’s compliance with the above-referenced financial ratios. Failure to comply with these ratios or other provisions of the credit agreement for the Credit Facilities (subject to grace periods) could, absent a waiver or an amendment from the lenders under such agreement, restrict the availability of the Revolving Credit Facility and permit the acceleration of all outstanding borrowings under such credit agreement.

In addition to paying interest on outstanding principal under the Credit Facilities, we are required to pay certain recurring fees with respect to the Credit Facilities, including (i) fees on the unused commitments of the lenders under the revolving facility, (ii) letters of credit fees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (iii) administration fees.

9 7/8% Senior Notes

At March 31, 2012 and December 31, 2011, we had outstanding $797.5 million of senior notes due 2018 that bear interest at a rate of 9.875% per annum, which is payable semi-annually on October 15 and April 15 of each year (the “Senior Notes”). The Senior Notes mature on October 15, 2018. During 2011, we repurchased and retired Senior Notes with an aggregate face value of $2.5 million for a purchase price of $2.7 million, including accrued interest.

The Senior Notes are general unsecured senior obligations of BKC that rank pari passu in right of payment with all our existing and future senior indebtedness. The Senior Notes are effectively subordinated to all our Secured Indebtedness (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.

At any time prior to October 15, 2013, we may redeem up to 35% of the original principal amount of the Senior Notes with the proceeds of certain equity offerings at a redemption price equal to 109.875% of the principal amount of the Senior Notes, together with any accrued and unpaid interest, if any, to the date of redemption. The Senior Notes are redeemable at our option, in whole or in part, at any time on or after October 15, 2014 at 104.938% of the principal amount, at any time on or after October 15, 2015 at 102.469% of the principal amount or at any time on or after October 15, 2016 at 100% of the principal amount.

The occurrence of a change in control will require us to offer to purchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount, together with accrued and unpaid interest, if any, to the date of purchase. Certain asset dispositions will also require us to use the proceeds from those asset dispositions to make an offer to purchase the Senior Notes at 100% of their principal amount, if such proceeds are not otherwise used within a specified period to repay indebtedness or to invest in capital assets related to our business or capital stock of a restricted subsidiary.

The Senior Notes were issued pursuant to an indenture (the “Senior Notes Indenture”), which contains certain covenants that we 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.

 

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The Senior Notes Indenture also includes customary events of default including, but not limited to, nonpayment of principal, interest, premiums or other amounts due under the Senior Notes Indenture, violation of a covenant, cross-default to material indebtedness, bankruptcy and a change of control. Failure to comply with the covenants or other provision of the Senior Notes Indenture (subject to grace periods) could, absent a waiver or an amendment from the lenders under such Senior Notes Indenture, permit the acceleration of all outstanding borrowings under such credit agreement.

At March 31, 2012, we were in compliance with all covenants of the Senior Notes Indenture.

Loss on Early Extinguishment of Debt

We recorded a loss on early extinguishment of debt of $1.1 million for the three months ended March 31, 2012 associated with the Term Loan prepayments. In connection with the amendment of our Credit Facility in February 2011, we recorded a $19.6 million loss on early extinguishment of debt. Loss on early extinguishment of debt consists principally of write-offs of deferred financing costs and original issue discount.

Other

We have lines of credit with foreign banks, which can also be used to provide guarantees, in the amount of $2.4 million as of March 31, 2012 and $3.2 million as of December 31, 2011. There were $1.4 million of guarantees issued against these lines of credit as of March 31, 2012 and $2.3 million as of December 31, 2011.

Interest Expense, net

Interest expense, net consists of the following:

 

     Three Months Ended
March  31,
 
     2012     2011  

Secured Term Loan - USD tranche

   $ 17.4      $ 21.1   

Secured Term Loan - Euro tranche

     3.1        4.5   

Interest Rate Caps - USD and Euro

     0.3        0.3   

9 7/8% Senior Notes

     19.7        19.8   

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

     4.8        3.9   

Capital lease obligations

     2.1        1.9   

Interest income

     (0.2     (1.3
  

 

 

   

 

 

 

Total

   $ 47.2      $ 50.2   
  

 

 

   

 

 

 

 

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Note 7. Income Taxes

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

 

     Three Months Ended
March 31,
 
     2012     2011  

U.S. Federal income tax rate

     35.0     35.0

State income taxes, net of federal income tax benefit

     1.8        0.9   

Costs/(Benefits) and taxes related to foreign operations

     6.9        (43.8

Foreign tax rate differential

     (13.1     (24.7

Foreign exchange differential on tax benefits

     (0.8     1.8   

Change in valuation allowance

     2.1        15.8   

Change in accrual for tax uncertainties

     0.4        14.4   

Other

     0.3        (1.1
  

 

 

   

 

 

 

Effective income tax rate

     32.6     (1.7 )% 
  

 

 

   

 

 

 

Income tax expense was $12.1 million for the three months ended March 31, 2012, resulting in an effective tax rate of 32.6%, primarily as a result of the current mix of income from multiple tax jurisdictions and the impact of share-based compensation expense not deductible for tax purposes. See Note 11 to our unaudited condensed consolidated financial statements. We had income tax expense of $0.1 million for the three months ended March 31, 2011, resulting in an effective tax rate of (1.7%), primarily as a result of the exclusion of the tax benefit of foreign ordinary losses not expected to be realized, the current mix of income from multiple tax jurisdictions and the resolution of state tax audits.

We had $22.0 million of unrecognized tax benefits at March 31, 2012 and $21.6 million at December 31, 2011, which if recognized, would affect the effective income tax rate.

In the next twelve months, it is reasonably possible that the total amounts of our unrecognized tax benefits will not significantly increase or decrease.

We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties at March 31, 2012 was $3.4 million and at December 31, 2011 was $3.2 million. Potential interest and penalties associated with uncertain tax positions recognized during the three months ended March 31, 2012 and 2011 were not significant. 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.

We file income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions. Generally, we are 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. We do not expect any of these foreign jurisdictions to be individually material. We also have 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 us owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.

Note 8. Retirement Plan and Other Postretirement Benefits

Pension Benefits

We sponsor noncontributory defined benefit pension plans for our salaried employees in the United States (the “U.S. Pension Plans”) and certain employees in the United Kingdom, Germany and Switzerland (the “International Pension Plans”). Effective December 31, 2005, all benefits accrued under the U.S. Pension Plans were frozen at the benefit level attained as of that date.

Postretirement Medical Benefits

Our postretirement medical plan (the “U.S. Retiree Medical Plan”) provides medical, dental and life insurance benefits to U.S. salaried retirees hired prior to June 30, 2001 and who were age 40 or older as of June 30, 2001, and their eligible dependents. The amount of retirement health care coverage an employee will receive depends upon the length of credited service. Effective September 30, 2011, the credited service for this plan was frozen for all participants. Beginning January 1, 2012, the annual employer-provided subsidy is $160 (pre-age 65) and $80 (post-age 65) per year of credited service for anyone not already receiving benefits prior to this date. In 2011, we recognized a reduction to the retiree medical plan liability as a result of a negative plan amendment of $7.1 million, with an offset to accumulated other comprehensive income (AOCI).

 

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During the three months ended March 31, 2012, we eliminated the option to delay enrollment for the U.S. Retiree Medical Plan. U.S. Retiree Medical Plan participants were required to make a onetime election to participate in the Plan by February 29, 2012. This change was accounted for as a negative plan amendment and resulted in reduction to the Retiree Medical Plan liability of $11.1 million. This reduction is being amortized as a reduction to net periodic benefit costs over 6 years, the average remaining years until expected retirement. This negative plan amendment will result in net periodic benefit cost reductions of approximately $1.5 million in 2012 and $1.8 million every year thereafter during the amortization period. The plan was re-measured using a discount rate of 4.4% at the time of the negative plan amendment.

Our liability under the Executive Retirement Plan (“ERP”) was $14.1 million at March 31, 2012 and $16.2 million at December 31, 2011.

Net periodic benefit cost for our defined benefit pension plans and other post-retirement benefits consists of the following:

 

     Retirement Benefits  
     Three Months Ended
March  31,
 
     2012     2011  

Service cost-benefits earned during the period

   $ 0.3      $ 0.4   

Interest costs on projected benefit obligations

     2.7        2.7   

Expected return on plan assets

     (2.4     (2.6

Amortization of prior service costs / (credit)

     (0.4     —     

Settlement expense / (income)

     0.1        —     
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 0.3      $ 0.5   
  

 

 

   

 

 

 

Other benefit costs were a credit of $0.3 million for the three months ended March 31, 2012 and an expense of less than $0.5 million for the three months ended March 31, 2011.

Note 9. 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 designated as net investment hedges, derivatives not designated as hedging instruments and other investments, which consist of money market accounts and mutual funds held in a rabbi trust established to fund a portion of our current and future obligations under our ERP, as well as their location on our condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011:

 

     As of March 31, 2012     Fair Value Measurements at March 31, 2012  
     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)
 

Derivatives designated as cash flow hedging instruments:

               

Interest rate caps

   $ 4.5       $ 13.7       $ —        $ —         $ 18.2      $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 4.5       $ 13.7       $ —        $ —         $ 18.2      $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Derivatives designated as net investment hedges:

               

Cross-currency rate swaps (notional amount at March 31, 2012: $230 million)

   $ —         $ —         $ (9.7   $ —         $ (9.7   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ —         $ —         $ (9.7   $ —         $ (9.7   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Other investments:

               

Investments held in a rabbi trust

   $ —         $ 8.4       $ —        $ 8.4       $ —        $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ —         $ 8.4       $ —        $ 8.4       $ —        $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     As of December 31, 2011      Fair Value Measurements at December 31, 2011  
     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)
 

Derivatives designated as cash flow hedging instruments:

                 

Interest rate caps

   $ 3.3       $ 18.6       $ —         $ —         $ 21.9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3.3       $ 18.6       $ —         $ —         $ 21.9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other investments:

                 

Investments held in a rabbi trust

   $ —         $ 10.8       $ —         $ 10.8       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 10.8       $ —         $ 10.8       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our 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 us or the counterparty.

At March 31, 2012, the fair value of our variable rate term debt and bonds was estimated at $2.6 billion, compared to a carrying amount of $2.5 billion, net of original issue discount. At December 31, 2011, the fair value of our variable rate term debt and bonds were estimated at $2.6 billion, compared to a carrying amount of $2.6 billion, 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. These items primarily include long-lived assets, the Brand and other intangible assets.

The fair value measurements for our long-lived assets held for sale are typically based on binding purchase prices from acquirers of Company restaurants that we plan to refranchise. In certain cases, our corporate development team may develop fair value estimates for assets held for sale for which there is no binding purchase price. These fair value measurements, which are based on Level 3 inputs, and changes in fair value measurements are reviewed and assessed each quarter for assets classified as held for sale by our corporate development team. Our corporate development team utilizes its knowledge of the FFHR industry and historical experience in refranchising transactions in establishing the valuation process, which is generally based on an income approach. Under the income approach, our corporate development team uses transaction multiples for refranchisings that were recently completed, adjusting where necessary for factors specific to the assets held for sale.

We assess the fair value less costs to sell of assets held for sale each reporting period they remain classified as held for sale. We report subsequent changes in the fair value less costs to sell of assets held for sale as an adjustment to the carrying amount of the assets held for sale. However, the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset at the time it was initially classified as held for sale. During the three months ended March 31, 2012, long-lived assets held for sale with a carrying amount of $11.1 million were written down to their fair values less cost to sell of $2.9 million, resulting in an $8.2 million impairment loss, which we classify as a loss on refranchising. We did not record any impairment charges associated with assets held for sale during the three months ended March 31, 2011.

Note 10. Derivative Instruments

We enter into derivative instruments for risk management purposes, including derivatives designated as hedging instruments, derivates designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage exposure to fluctuations in interest rates and currency exchange rates.

 

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Interest Rate Caps

At March 31, 2012 and December 31, 2011, we had deferred premium interest rate caps agreements, which are denominated in U.S. dollars (notional amount of $1.4 billion at March 31, 2012 and $1.5 billion at December 31, 2011) and Euros (notional amount of €187.0 million at March 31, 2012 and €193.6 million at December 31, 2011) (the “Cap Agreements”) to effectively cap the annual interest expense applicable to our borrowings under the Credit Agreement at a maximum of 4.75% for U.S. Dollar denominated borrowings and 5.0% for Euro denominated borrowings. The deferred premium associated with the Cap Agreements was $36.3 million for the U.S. Dollar denominated exposure and €5.6 million for the Euro denominated exposure at March 31, 2012 and $38.2 million for the U.S. Dollar denominated exposure and €6.0 million for the Euro denominated exposure at December 31, 2011.

Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets above a strike price, we will receive the net difference between the rate and the strike price. As disclosed in Note 6, we have elected our applicable rate per annum as Euro currency. In addition, on the quarterly settlement dates, we will remit the deferred premium payment (plus interest) to the counterparty, whether LIBOR/EURIBOR resets above or below the strike price.

The Cap Agreements 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.

From time to time as we prepay portions of the Term Loan, we may modify our interest rate cap to reduce the notional amount. The terms of the caps will not otherwise be revised by these modifications. On the modification date, the portion of fair value attributable to the modified cap will be reclassified from AOCI into earnings as a component of interest expense.

Cross-currency Rate Swaps

During the quarter ended March 31, 2012, we entered into cross-currency rate swaps with an aggregate notional value of $230 million to hedge the net investment in a European subsidiary, Burger King Europe. These swaps are contracts to exchange quarterly fixed-rate payments we make in Euros for quarterly fixed-rate payments we receive in U.S. dollars. Changes in the fair value of these instruments are immediately recognized in AOCI to offset the change in the carrying amount of the net investment being hedged. These instruments mature on October 19, 2016.

Currency effects of these hedges reflected in AOCI were an after-tax loss of $5.9 million for the three months ended March 31, 2012.

Interest Rate Swaps

In connection with 3G’s acquisition of our Company, 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

From time to time, we enter into foreign currency forward contracts to economically hedge the remeasurement of certain foreign currency-denominated intercompany loans receivable and other foreign-currency denominated assets recorded in our consolidated balance sheets. We had no foreign currency forward contracts outstanding as of March 31, 2012.

Credit Risk

By entering into derivative instrument contracts, we are exposed 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 us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.

Credit-Risk Related Contingent Features

Our derivative instruments do not contain any credit-risk related contingent features.

 

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Table of Contents

The following table presents the required quantitative disclosures for our derivative instruments:

 

     Three Months Ended March 31,  
     2012     2011  
     Interest
Rate
Caps
    Cross
Currency
Rate
Swaps
    Foreign
Currency
Forward
Contracts
     Total     Interest
Rate
Caps
     Interest
Rate
Swaps
     Foreign
Currency
Forward
Contracts
    Total  

Derivatives designated as cash flow hedging instruments:

                   

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

   $ (3.7   $ —        $ —         $ (3.7   $ 4.2       $ —         $ (0.1   $ 4.1   

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

   $ (0.6   $ —        $ —         $ (0.6   $ 1.0       $ —         $ 0.1      $ 1.1   

Derivatives designated as net investment hedges:

                   

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

   $ —        $ (9.7   $ —         $ (9.7   $ —         $ —         $ —        $ —     

Derivatives not designated as hedging instruments:

                   

Gain (loss) recognized in other operating expense, net

   $ —        $ —        $ —         $ —        $ —         $ —         $ 0.2      $ 0.2   

Gain (loss) recognized in interest expense, net

   $ —        $ —        $ —         $ —        $ —         $ 1.0       $ —        $ 1.0   

 

(1) Includes $0.1 million in losses for the three months ended March 31, 2012, and $1.0 million in gains for the three months ended March 31, 2011, related to the interest rate caps modified in connection with the amendment to the Credit Agreement.

The net amount of pre-tax gains and losses in accumulated comprehensive income (loss) as of March 31, 2012 that we expect to be reclassified into earnings within the next 12 months is $4.7 million of losses.

Note 11. Share-based Compensation

During the three months ended March 31, 2012, BKWWH granted options to purchase up to 2,058,590 millishares to key employees. With respect to 874,200 of the options, the exercise price per millishare is $11.89, and the options vest on October 19, 2015 or thereafter, provided the employee is continuously employed by BKC or one of its subsidiaries. With respect to 1,184,390 of the options, the exercise price per millishare is $13.34, and the options vest five years from the grant date, provided the employee is continuously employed by BKC or one of its subsidiaries. The grant date fair values of the options granted were from $5.30 to $16.77 per millishare and were estimated using the Black-Scholes option pricing model based on the following weighted-average input assumptions: exercise prices from $11.89 to $13.34 per share; risk-free interest rates from $0.87% to 1.07%; expected term of 5.5 years; expected volatility of 35.0%; and expected dividend yield of zero.

During the three months ended March 31, 2012, we granted approximately 45,512 restricted stock units (RSUs) to non-employee members of our Board of Directors as an annual grant. The RSU grant was fully vested on the grant date. All RSUs will settle and millishares of common stock will be issued upon termination of service by the board member.

We recorded $7.3 million of share-based compensation expense in selling, general and administrative expenses for the three months ended March 31, 2012 compared to $0.2 million for the three months ended March 31, 2011. No stock options were exercised during the three months ended March 31, 2012 or the three months ended March 31, 2011. The increases in share-based compensation and grant-date fair values of options granted during the three months ended March 31, 2012 were due to the increase in fair value of BKWWH equity implied by the Business Combination Agreement described in Note 17.

Note 12. Franchise and Property Revenues

Franchise and property revenues consist of the following:

 

     Three Months Ended
March  31,
 
     2012      2011  

Franchise royalties

   $ 139.6       $ 128.9   

Initial franchise fees

     2.7         1.8   

Renewal and other related franchise fees

     3.1         1.5   

Property revenues

     28.3         27.3   
  

 

 

    

 

 

 

Total

   $ 173.7       $ 159.5   
  

 

 

    

 

 

 

 

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Note 13. Other Operating (Income) Expense, Net

Other operating (income) expense, net consists of the following:

 

     Three Months Ended
March  31,
 
     2012      2011  

Net losses on disposal of assets, restaurant closures and refranchisings

   $ 9.8       $ 0.8   

Litigation settlements and reserves, net

     0.4         0.4   

Foreign exchange net losses

     0.6         5.5   

Loss from unconsolidated affiliates

     1.2         0.4   

Other, net

     1.0         0.7   
  

 

 

    

 

 

 

Other operating expense, net

   $ 13.0       $ 7.8   
  

 

 

    

 

 

 

During the three months ended March 31, 2012, we recorded losses of $8.2 million associated with long-lived assets for restaurants we classified as held for sale, which is included as a component of loss on refranchisings.

Closures and Dispositions

Gains and losses on closures and dispositions represent sales of Company properties and other costs related to restaurant closures and refranchisings, and are recorded in other operating (income) expenses, net in the accompanying condensed consolidated statements of operations. 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:

 

     Three Months Ended
March  31,
 
     2012      2011  

Number of restaurant closures

     6         7   

Number of refranchisings

     7         3   

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

   $ 9.8       $ 0.8   

Assets Held For Sale

We classify assets as held for sale when we commit to a plan to dispose of the assets by refranchising specific restaurants in their current condition at a price that is reasonable, and we believe completing the plan of sale within one year is probable without significant changes. Assets held for sale are recorded at the lower of their carrying value or fair value, less costs to sell and we cease depreciation on assets at the time they are classified as held for sale. We recognize impairment losses associated with restaurants held for sale as losses on refranchisings.

If we subsequently decide to retain a restaurant or group of restaurants previously classified as held for sale, the assets would be reclassified from assets held for sale at the lower of (a) their then-current fair value or (b) the carrying value at the date the assets were classified as held for sale, less the depreciation that would have been recorded since that date.

At March 31, 2012, assets held for sale totaled $2.9 million and consisted primarily of machinery and equipment to be sold in connection with refranchisings. We did not have assets classified as held for sale at December 31, 2011. Assets held for sale are included with Prepaids and Other Current Assets in our consolidated balance sheets.

Acquisitions

There were no significant acquisitions during the three months ended March 31, 2012.

 

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Note 14. 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 17, “Commitments and Contingencies” to the Consolidated Financial Statements of our Form 10-K for the twelve-month period ended December 31, 2011 regarding the nature of the contingency and, where specified, the amount of the claim associated with the loss contingency.

Litigation

On September 10, 2008, a class action lawsuit was filed against our Company in the United States District Court for the Northern District of California. The complaint alleged that all 96 Burger King restaurants in California leased by our 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, our 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. In January 2012, our Company agreed to settle the lawsuit. The parties are finalizing the terms of the proposed settlement which will be submitted to the court for approval.

From time to time, we are involved in other legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.

Note 15. Segment Reporting

We operate in the fast food hamburger restaurant category of the quick service restaurant segment of the restaurant industry. Revenues include retail sales at Company restaurants and franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees as well as property income we derive from properties we lease or sublease to our franchisees. Our business is managed in four distinct geographic segments: (1) United States (“U.S.”) and Canada; (2) Europe, the Middle East and Africa (“EMEA”); (3) Latin America and the Caribbean (“LAC”); and (4) Asia Pacific (“APAC”).

Revenues by geographic segment consist of the following:

 

     Three Months Ended
March 31,
 
     2012      2011  

Revenues:

     

U.S. and Canada

   $ 386.6       $ 375.5   

EMEA

     123.3         121.1   

LAC

     30.5         29.2   

APAC

     29.5         26.2   
  

 

 

    

 

 

 

Total revenues

   $ 569.9       $ 552.0   
  

 

 

    

 

 

 

Other than the U.S., no other individual country represented 10% or more of our total revenues during the three months ended March 31, 2012 and the three months ended March 31, 2011. Revenues in the U.S. totaled $349.7 million for the three months ended March 31, 2012, as compared to $338.2 million during the three months ended March 31, 2011.

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 our geographic segments and system wide restaurants and are not allocated specifically to any of the geographic segments.

 

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Table of Contents

A reconciliation of segment income to net income consists of the following:

 

     Three Months Ended
March 31,
 
     2012     2011  

Segment Income:

    

U.S. and Canada

   $ 113.1      $ 102.8   

EMEA

     32.8        26.7   

LAC

     15.9        15.2   

APAC

     7.8        6.3   

Unallocated Management G&A

     (26.2     (31.0
  

 

 

   

 

 

 

Adjusted EBITDA

     143.4        120.0   

Share-based compensation

     1.4        0.2   

Transaction costs

     —          0.8   

Global restructuring and related professional fees

     —          12.2   

Global portfolio realignment project

     3.7        —     

Business Combination Agreement expenses

     5.9        —     

Other operating (income) expenses, net

     13.0        7.8   
  

 

 

   

 

 

 

EBITDA

     119.4        99.0   

Depreciation and amortization

     34.0        35.0   
  

 

 

   

 

 

 

Income from operations

     85.4        64.0   

Interest expense, net

     47.2        50.2   

Loss on early extinguishment of debt

     1.1        19.6   

Income tax expense

     12.1        0.1   
  

 

 

   

 

 

 

Net income (loss)

     25.0        (5.9
  

 

 

   

 

 

 

Note 16. 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 us 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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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of March 31, 2012

(Unaudited)

 

      Issuer     Guarantors     Non-
Guarantors
     Eliminations     Consolidated  
ASSETS            

Current assets:

           

Cash and cash equivalents

   $ 239.8      $ —        $ 190.0       $ —        $ 429.8   

Trade and notes receivable, net

     89.0        —          60.3         —          149.3   

Prepaids and other current assets, net

     74.3        —          19.6         —          93.9   

Deferred income taxes, net

     45.1        —          1.2         —          46.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     448.2        —          271.1         —          719.3   

Property and equipment, net

     833.2        —          172.0         —          1,005.2   

Intangible assets, net

     1,566.4        —          1,275.8         —          2,842.2   

Goodwill

     392.3        —          270.8         —          663.1   

Net investment in property leased to franchisees

     219.2        —          20.0         —          239.2   

Intercompany receivable

     434.8        —          —           (434.8     —     

Investment in subsidiaries

     1,293.9        1,500.7        —           (2,794.6     —     

Other assets, net

     74.8        —          28.1         —          102.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,262.8      $ 1,500.7      $ 2,037.8       $ (3,229.4   $ 5,571.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY            

Current liabilities:

           

Accounts and drafts payable

   $ 54.3      $ —        $ 35.4       $ —        $ 89.7   

Accrued advertising

     56.4        —          39.9         —          96.3   

Other accrued liabilities

     171.9        —          55.4         —          227.3   

Current portion of long term debt and capital leases

     33.9        —          2.7         —          36.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     316.5        —          133.4         —          449.9   

Term debt, net of current portion

     2,547.8        —          —           —          2,547.8   

Capital leases, net of current portion

     94.5        —          24.9         —          119.4   

Other liabilities, net

     292.3        —          67.3         —          359.6   

Payables to affiliates

     —          —          434.8         (434.8     —     

Deferred income taxes, net

     511.0        —          83.5         —          594.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     3,762.1        —          743.9         (434.8     4,071.2   

Stockholder’s equity:

           

Additional paid-in capital

     1,563.4        1,564.4        1,160.0         (2,723.4     1,564.4   

Retained earnings (accumulated deficit)

     13.6        12.6        84.8         (98.4     12.6   

Accumulated other comprehensive income (loss)

     (76.3     (76.3     49.1         27.2        (76.3
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholder’s equity

     1,500.7        1,500.7        1,293.9         (2,794.6     1,500.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,262.8      $ 1,500.7      $ 2,037.8       $ (3,229.4   $ 5,571.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of December 31, 2011

 

      Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  
ASSETS           

Current assets:

          

Cash and cash equivalents

   $ 287.1      $ —        $ 171.7      $ —        $ 458.8   

Trade and notes receivable, net

     101.1        —          51.7        —          152.8   

Prepaids and other current assets, net

     54.6        —          13.4        —          68.0   

Deferred income taxes, net

     42.0        —          1.1        —          43.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     484.8        —          237.9        —          722.7   

Property and equipment, net of accumulated depreciation

     846.4        —          180.1        —          1,026.5   

Intangible assets, net

     1,572.4        —          1,250.9        —          2,823.3   

Goodwill

     657.7        —          —          —          657.7   

Net investment in property leased to franchisees

     222.9        —          19.3        —          242.2   

Intercompany receivable

     287.0        —          —          (287.0     —     

Investment in subsidiaries

     1,110.5        1,449.2        —          (2,559.7     —     

Other assets, net

     83.3        —          27.8        —          111.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,265.0      $ 1,449.2      $ 1,716.0      $ (2,846.7   $ 5,583.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY           

Current liabilities:

          

Accounts and drafts payable

   $ 61.6      $ —        $ 36.8      $ —        $ 98.4   

Accrued advertising

     71.2        —          26.2        —          97.4   

Other accrued liabilities

     162.6        —          79.6        —          242.2   

Current portion of long term debt and capital leases

     30.8        —          2.7        —          33.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     326.2        —          145.3        —          471.5   

Term debt, net of current portion

     2,585.9        —          —          —          2,585.9   

Capital leases, net of current portion

     70.6        —          24.8        —          95.4   

Other liabilities, net

     299.3        —          66.9        —          366.2   

Payables to affiliates

     —          —          287.0        (287.0     —     

Deferred income taxes, net

     533.8        —          81.5        —          615.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     3,815.8        —          605.5        (287.0     4,134.3   

Stockholder’s equity:

          

Additional paid-in capital

     1,556.1        1,557.1        1,138.4        (2,694.5     1,557.1   

Retained earnings (accumulated deficit)

     6.4        5.4        63.4        (69.8     5.4   

Accumulated other comprehensive loss

     (113.3     (113.3     (91.3     204.6        (113.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     1,449.2        1,449.2        1,110.5        (2,559.7     1,449.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,265.0      $ 1,449.2      $ 1,716.0      $ (2,846.7   $ 5,583.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2012

(Unaudited)

 

     Issuer      Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

Revenues:

             

Company restaurant revenues

   $ 253.7       $ —         $ 142.5       $ —        $ 396.2   

Franchise and property revenues

     112.4         —           61.3         —          173.7   

Intercompany revenues

     3.6         —           —           (3.6     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     369.7         —           203.8         (3.6     569.9   

Company restaurant expenses:

             

Food, paper and product costs

     83.6         —           46.4         —          130.0   

Payroll and employee benefits

     78.1         —           41.4         —          119.5   

Occupancy and other operating costs

     61.0         —           43.5         —          104.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Company restaurant expenses

     222.7         —           131.3         —          354.0   

Franchise and franchise property expenses

     15.3         —           8.5         —          23.8   

Selling, general and administrative expenses

     63.9         —           29.8         —          93.7   

Intercompany expenses

     —           —           3.6         (3.6     —     

Other operating expenses, net

     9.8         —           3.2         —          13.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     311.7         —           176.4         (3.6     484.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     58.0         —           27.4         —          85.4   

Interest expense, net

     44.7         —           2.5         —          47.2   

Loss on early extinguishment of debt

     1.1         —           —           —          1.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     12.2         —           24.9         —          37.1   

Income tax expense

     8.6         —           3.5         —          12.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

     3.6         —           21.4         —          25.0   

Equity in earnings of subsidiaries

     21.4         25.0         —           (46.4     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 25.0       $ 25.0       $ 21.4       $ (46.4   $ 25.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2011

(Unaudited)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

          

Company restaurant revenues

   $ 248.9      $ —        $ 143.6      $ —        $ 392.5   

Franchise and property revenues

     103.7        —          55.8        —          159.5   

Intercompany revenues

     1.6        —          (1.6     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     354.2        —          197.8        —          552.0   

Company restaurant expenses:

          

Food, paper and product costs

     81.6        —          45.4        —          127.0   

Payroll and employee benefits

     77.6        —          42.4        —          120.0   

Occupancy and other operating costs

     64.2        —          45.5        —          109.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Company restaurant expenses

     223.4        —          133.3        —          356.7   

Franchise and franchise property expenses

     14.3        —          8.8        —          23.1   

Selling, general and administrative expenses

     65.2        —          35.2        —          100.4   

Intercompany expenses

     (1.6     —          1.6        —          —     

Other operating expenses, net

     0.5        —          7.3        —          7.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     301.8        —          186.2        —          488.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     52.4        —          11.6        —          64.0   

Interest expense, net

     47.8        —          2.4        —          50.2   

Loss on early extinguishment of debt

     19.6        —          —          —          19.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (15.0     —          9.2        —          (5.8

Income tax expense (benefit)

     (2.6     —          2.7        —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (12.4     —          6.5        —          (5.9

Equity in earnings of subsidiaries

     6.5        (5.9     —          (0.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5.9   $ (5.9   $ 6.5      $ (0.6   $ (5.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2012

(Unaudited)

 

     Issuer     Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

Net income (loss)

   $ 25.0      $ 25.0       $ 21.4       $ (46.4   $ 25.0   

Foreign currency translation adjustment

     39.3        —           —           —          39.3   

Net change in fair value of net investment hedges, net of tax of $3.8 million

     (5.9     —           —           —          (5.9

Net change in fair value of interest rate caps, net of tax of $1.0 million

     (2.7     —           —           —          (2.7

Amounts reclassified to earnings during the period from terminated caps, net of tax of $0.2 million

     (0.4     —           —           —          (0.4

Pension and post-retirement benefit plans, net of tax of $4.2 million

     6.5        —           —           —          6.5   

Amortization of prior service costs, net of tax of $0.2 million

     0.2        —           —           —          0.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax

     (2.3     —           —           —          37.0   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 22.7      $ 25.0       $ 21.4       $ (46.4   $ 62.0   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2011

(Unaudited)

 

     Issuer     Guarantors     Non-
Guarantors
     Eliminations     Consolidated  

Net income (loss)

   $ (5.9   $ (5.9   $ 6.5       $ (0.6   $ (5.9

Foreign currency translation adjustment

     52.0        —          —           —          52.0   

Net change in fair value of interest rate caps, net of tax of $1.6 million

     2.3        —          —           —          2.3   

Amounts reclassified to earnings during the period from terminated swaps, net of tax of $0.4 million

     (0.6     —          —           —          (0.6
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of tax

     53.7        —          —           —          53.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 47.8      $ (5.9   $ 6.5       $ (0.6   $ 47.8   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Three Months Ended March 31, 2012

(Unaudited)

 

     Issuer     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 25.0      $ 25.0      $ 21.4      $ (46.4   $ 25.0   

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

          

Equity in earnings of subsidiary

     (21.4     (25.0     —          46.4        —     

Depreciation and amortization

     23.1        —          10.9        —          34.0   

Loss on early extinguishment of debt

     1.1        —          —          —          1.1   

Amortization of deferred financing cost and debt issuance discount

     3.5        —          —          —          3.5   

Loss (gain) on remeasurement of foreign denominated transactions

     (0.3     —          —          —          (0.3

Amortization of prior service costs

     (0.4     —          —          —          (0.4

Realized loss on terminated caps/swaps

     0.6        —          —          —          0.6   

Loss (gain) on refranchisings and dispositions of assets

     6.9        —          2.0        —          8.9   

Bad debt expense, net of recoveries

     0.6        —          0.7        —          1.3   

Share-based compensation

     7.4        —          (0.1     —          7.3   

Deferred income taxes

     (20.7     —          14.3        —          (6.4

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

          

Trade and notes receivables

     10.1        —          (6.7     —          3.4   

Prepaids and other current assets

     (3.4     —          (5.8     —          (9.2

Accounts and drafts payable

     (7.1     —          (2.6     —          (9.7

Accrued advertising

     (18.8     —          12.6        —          (6.2

Other accrued liabilities

     6.3        —          (11.7     —          (5.4

Other long-term assets and liabilities

     3.7        —          (1.2     —          2.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     16.2        —          33.8        —          50.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Payments for property and equipment

     (13.9     —          (2.7     —          (16.6

Proceeds from refranchisings, disposition of assets and restaurant closures

     1.3        —          6.1        —          7.4   

Return of investment on direct financing leases

     2.9        —          0.2        —          3.1   

Other investing activities

     0.3        —          —          —          0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (9.4     —          3.6        —          (5.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from term debt

     —          —          —          —          —     

Repayments of term debt and capital leases

     (10.9     —          (0.6     —          (11.5

Extinguishment of debt

     (37.7     —          —          —          (37.7

Dividend to Parent

     (17.8     —          —          —          (17.8

Intercompany financing

     12.3        —          (12.3     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (54.1     —          (12.9     —          (67.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     —          —          (6.2     —          (6.2

Increase (decrease) in cash and cash equivalents

     (47.3     —          18.3        —          (29.0

Cash and cash equivalents at beginning of period

     287.1        —          171.7        —          458.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 239.8      $ —        $ 190.0      $ —        $ 429.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Three Months Ended March 31, 2011

(Unaudited)

 

     Issuer     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (5.9   $ (5.9   $ 6.5      $ (0.6   $ (5.9

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

          

Equity in earnings of subsidiary

     (6.5     5.9        —          0.6        —     

Depreciation and amortization

     22.9        —          12.1        —          35.0   

Loss on early extinguishment of debt

     19.6        —          —          —          19.6   

Amortization of deferred financing cost and debt issuance discount

     3.3        —          —          —          3.3   

Loss (gain) on remeasurement of foreign denominated transactions

     0.5        —          1.9        —          2.4   

Realized loss on terminated caps/swaps

     0.6          —          —          0.6   

Loss (gain) on refranchisings and dispositions of assets

     (0.4     —          —          —          (0.4

Bad debt expense, net of recoveries

     0.2        —          (0.2     —          —     

Share-based compensation

     0.2        —          —          —          0.2   

Deferred income taxes

     11.4        —          —          —          11.4   

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

          

Trade and notes receivables

     8.2        —          1.8        —          10.0   

Prepaids and other current assets

     0.1        —          2.1        —          2.2   

Accounts and drafts payable

     (17.8     —          1.6        —          (16.2

Accrued advertising

     (2.4     —          9.0        —          6.6   

Other accrued liabilities

     14.6        —          (14.4     —          0.2   

Other long-term assets and liabilities

     (8.9     —          5.1        —          (3.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     39.7        —          25.5        —          65.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Payments for property and equipment

     (6.9     —          (2.8     —          (9.7

Proceeds from refranchisings, disposition of assets and restaurant closures

     1.0        —          6.9        —          7.9   

Return of investment on direct financing leases

     2.0        —          —          —          2.0   

Other investing activities

     (0.1     —          —          —          (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (4.0     —          4.1        —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from term debt

     1,857.6        —          —          —          1,857.6   

Repayments of term debt and capital leases

     (1,843.5     —          (0.5     —          (1,844.0

Payment of financing costs

     (23.1     —          —          —          (23.1

Intercompany financing

     0.9        —          (0.9     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used for) financing activities

     (8.1     —          (1.4     —          (9.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     —          —          4.3        —          4.3   

Increase (decrease) in cash and cash equivalents

     27.6        —          32.5        —          60.1   

Cash and cash equivalents at beginning of period

     132.8        0.7        73.5        —          207.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 160.4      $ 0.7      $ 106.0      $ —        $ 267.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

On April 19, 2011, BKCH, our direct parent, and Burger King Capital Finance, Inc., a Delaware corporation and another direct subsidiary of BKCH (“BK Finance” and, together with BKCH, the “Issuers”) entered into an indenture with Wilmington Trust FSB, as trustee, pursuant to which the Issuers sold $685 million in the aggregate principal amount at maturity of 11.0% senior discount notes due 2019 (the “Discount Notes”). The Discount Notes generated $401.5 million in gross proceeds. Until April 15, 2016, no cash interest will accrue, but the Discount Notes will accrete at a rate of 11.0% per annum compounded semi-annually such that the accreted value on April 15, 2016 will be equal to the principal amount at maturity. Thereafter, cash interest on the Discount Notes will accrue at a rate equal to 11.0% per annum and will be payable semi-annually in cash in arrears on April 15 and October 15 of each year, commencing on October 15, 2016. The Discount Notes will mature on April 15, 2019. Neither BKH nor BKC is a guarantor of the Discount Notes. Therefore, the Discount Notes are not reflected in our Consolidated Financial Statements. The Issuers have no operations or assets other than the interest in BKH held by BKCH. Accordingly, the cash required to service or repurchase the Discount Notes is expected to be funded through dividends from BKH, which derives its cash flows entirely through the operations of BKC. The payment of such dividends may be limited under terms of our Credit Agreement and Senior Notes Indenture.

 

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On October 19, 2011, the Board of Managers of BKCH approved a distribution to Parent. On December 16, 2011, the Board of Directors of Parent paid a return of capital distribution to the shareholders of Parent, including 3G, in the amount of $393.4 million, representing the net proceeds from the sale of the Discount Notes.

During the three months ended March 31, 2012, BKH made a dividend of $17.8 million to BKCH, which used the proceeds to repurchase Discount Notes with an aggregate face value of $31.3 million and aggregate carrying value of $20.3 million, net of unamortized original issue discount. We may make additional distributions or pay dividends to BKCH in the future subject to our future liquidity requirements, contractual restrictions under the Credit Agreement and Senior Notes Indenture and other factors.

We are presenting the following condensed consolidating financial information for us and the Issuers, together with eliminations, as of and for the periods indicated in accordance with the Indenture. The consolidating financial information may not necessarily be indicative of the financial position or results of operations had the Issuers operated as independent entities.

BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of March 31, 2012

(Unaudited)

 

     BKH     Issuers     Eliminations     Consolidated  
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 429.8      $ 0.2      $ —        $ 430.0   

Trade and notes receivable, net

     149.3        —          —          149.3   

Prepaids and other current assets

     93.9        1.1        —          95.0   

Deferred income taxes, net

     46.3        —          —          46.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     719.3        1.3        —          720.6   

Property and equipment, net

     1,005.2        —          —          1,005.2   

Intangible assets, net

     2,842.2        —          —          2,842.2   

Goodwill

     663.1        —          —          663.1   

Net investment in property leased to franchisees

     239.2        —          —          239.2   

Investment in subsidiaries

     —          1,500.7        (1,500.7     —     

Other assets, net

     102.9        18.3        —          121.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,571.9      $ 1,520.3      $ (1,500.7   $ 5,591.5   
  

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Accounts and drafts payable

   $ 89.7      $ —        $ —        $ 89.7   

Accrued advertising

     96.3        —          —          96.3   

Other accrued liabilities

     227.3        7.7        —          235.0   

Current portion of long term debt and capital leases

     36.6        —          —          36.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     449.9        7.7        —          457.6   

Term debt, net of current portion

     2,547.8        415.6        —          2,963.4   

Capital leases, net of current portion

     119.4        —          —          119.4   

Other liabilities, net

     359.6        —          —          359.6   

Deferred income taxes, net

     594.5        (11.8     —          582.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,071.2        411.5        —          4,482.7   

Stockholder’s equity:

        

Additional paid-in capital

     1,564.4        1,184.5        (1,564.4     1,184.5   

Retained earnings (accumulated deficit)

     12.6        0.6        (12.6     0.6   

Accumulated other comprehensive loss

     (76.3     (76.3     76.3        (76.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     1,500.7        1,108.8        (1,500.7     1,108.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,571.9      $ 1,520.3      $ (1,500.7   $ 5,591.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of December 31, 2011

(Unaudited)

 

     BKH     Issuers     Eliminations     Consolidated  
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 458.8      $ —        $ —        $ 458.8   

Trade and notes receivable, net

     152.8        —          —          152.8   

Prepaids and other current assets

     68.0        1.2        —          69.2   

Deferred income taxes, net

     43.1        —          —          43.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     722.7        1.2        —          723.9   

Property and equipment, net

     1,026.5        —          —          1,026.5   

Intangible assets, net

     2,823.3        —          —          2,823.3   

Goodwill

     657.7        —          —          657.7   

Net investment in property leased to franchisees

     242.2        —          —          242.2   

Investment in subsidiaries

     —          1,449.2        (1,449.2     —     

Other assets, net

     111.1        18.9        —          130.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,583.5      $ 1,469.3      $ (1,449.2   $ 5,603.6   
  

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY         

Current liabilities:

        

Accounts and drafts payable

   $ 98.4      $ —        $ —        $ 98.4   

Accrued advertising

     97.4        —          —          97.4   

Other accrued liabilities

     242.2        0.5        —          242.7   

Current portion of long term debt and capital leases

     33.5        —          —          33.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     471.5        0.5        —          472.0   

Term debt, net of current portion

     2,585.9        424.4        —          3,010.3   

Capital leases, net of current portion

     95.4        —          —          95.4   

Other liabilities, net

     366.2        —          —          366.2   

Deferred income taxes, net

     615.3        —          —          615.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,134.3        424.9        —          4,559.2   

Stockholder’s equity:

        

Additional paid-in capital

     1,557.1        1,172.3        (1,557.1     1,172.3   

Retained earnings (accumulated deficit)

     5.4        (14.6     (5.4     (14.6

Accumulated other comprehensive loss

     (113.3     (113.3     113.3        (113.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

     1,449.2        1,044.4        (1,449.2     1,044.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 5,583.5      $ 1,469.3      $ (1,449.2   $ 5,603.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2012

(Unaudited)

 

     BKH      Issuers     Eliminations     Consolidated  

Revenues:

         

Company restaurant revenues

   $ 396.2       $ —        $ —        $ 396.2   

Franchise and property revenues

     173.7         —          —          173.7   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     569.9         —          —          569.9   

Company restaurant expenses:

         

Food, paper and product costs

     130.0         —          —          130.0   

Payroll and employee benefits

     119.5         —          —          119.5   

Occupancy and other operating costs

     104.5         —          —          104.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total company restaurant expenses

     354.0         —          —          354.0   

Franchise and franchise property expenses

     23.8         —          —          23.8   

Selling, general and administrative expenses

     93.7         —          —          93.7   

Other operating expense, net

     13.0         —          —          13.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     484.5         —          —          484.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     85.4         —          —          85.4   

Interest expense, net

     47.2         14.3        —          61.5   

Loss on early extinguishment

     1.1         —          —          1.1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     37.1         (14.3     —          22.8   

Income tax expense (benefit)

     12.1         (4.6     —          7.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     25.0         (9.7     —          15.3   

Equity in earnings of subsidiaries

     —           25.0        (25.0     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 25.0       $ 15.3      $ (25.0   $ 15.3   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES