UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2015
or
(cid:133) 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: 001-36786
RESTAURANT BRANDS
INTERNATIONAL INC.
(Exact name of Registrant as Specified in Its Charter)
Canada
(State or Other Jurisdiction of
Incorporation or Organization)
226 Wyecroft Road
Oakville, Ontario
(Address of Principal Executive Offices)
98-1202754
(I.R.S. Employer
Identification No.)
L6K 3X7
(Zip Code)
(905) 845-6511
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, without par value
Name of each exchange on which registered
New York Stock Exchange
Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ⌧ No (cid:133)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:133) No ⌧
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 (cid:133)
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 (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:133)
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 ⌧
Non-accelerated filer (cid:133) (Do not check if a smaller reporting company)
Accelerated filer
(cid:133)
Smaller reporting company (cid:133)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:133) No ⌧
The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2015, computed by
reference to the closing price for such stock on the New York Stock Exchange on such date, was $7,407,938,149.
The number of shares outstanding of the registrant’s common shares as of February 12, 2016 was 231,667,965 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for the 2016 Annual and Special Meeting of Shareholders, which is to be filed
no later than 120 days after December 31, 2015, are incorporated by reference into Part III of this Form 10-K.
RESTAURANT BRANDS INTERNATIONAL INC.
2015 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
PART I
PART II
Page
4
11
26
26
26
26
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
27
30
32
53
59
122
122
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits and Financial Statement Schedules
PART IV
123
124
124
124
124
124
Tim Hortons®, Timbits®, TimCard® and Creamy Chocolate Chill® are trademarks of Tim Hortons Canadian IP Holdings
Limited Partnership. Burger King® and BK® are trademarks of Burger King Corporation. References to 2015, 2014, 2013, 2012
and 2011 are to the fiscal years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively. Unless the context otherwise
requires, all references to “we”, “us”, “our” and “Company” refer to Restaurant Brands International Inc. and its subsidiaries.
In this document, we rely on and refer to information regarding the restaurant industry, the quick service restaurant segment
and the fast food hamburger restaurant category that has been prepared by the industry research firm The NPD Group, Inc. (which
prepares and disseminates Consumer Reported Eating Share Trends, or CREST® data) or compiled from market research reports,
analyst reports and other publicly available information. All industry and market data that are not cited as being from a specified
source are from internal analysis based upon data available from known sources or other proprietary research and analysis.
2
Explanatory Note
On December 12, 2014, a series of transactions (the “Transactions”) were completed resulting in Burger King Worldwide,
Inc., a Delaware corporation (“Burger King Worldwide”), and Tim Hortons Inc., a Canadian corporation (“Tim Hortons”),
becoming indirect subsidiaries of the Company and Restaurant Brands International Limited Partnership (“Partnership”).
We are the sole general partner of Partnership, which is the indirect parent of Tim Hortons and Burger King Worldwide.
As a result of our controlling interest, we consolidate the financial results of Partnership and record a noncontrolling interest for the
portion of Partnership we do not own in our consolidated financial statements. Net income (loss) attributable to noncontrolling
interests on the consolidated statements of operations presents the portion of earnings or loss attributable to the economic interest in
Partnership owned by the holders of the noncontrolling interests. As sole general partner, we manage all of Partnership’s operations
and activities in accordance with the partnership agreement of Partnership (the “partnership agreement”). We have established a
conflicts committee composed entirely of “independent directors” (as such term is defined in the partnership agreement) in order to
consent to, approve or direct various enumerated actions on behalf of the Company (in its capacity as the general partner of
Partnership) in accordance with the terms of the partnership agreement.
Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are a
successor issuer to Burger King Worldwide. On December 15, 2014, our common shares began trading on the New York Stock
Exchange and the Toronto Stock Exchange under the ticker symbol “QSR”. In addition, the Class B exchangeable limited
partnership units of Partnership (the “Partnership exchangeable units”) are deemed to be registered under section 12(b) of the
Exchange Act, and Partnership is subject to the informational requirements of the Exchange Act and the rules and regulations
promulgated thereunder. On December 15, 2014, the Partnership exchangeable units began trading on the Toronto Stock Exchange
under the ticker symbol “QSP”.
Each of the Company and Partnership is a reporting issuer in each of the provinces and territories of Canada and, as a
result, is subject to Canadian continuous disclosure and other reporting obligations under applicable Canadian securities laws. This
Annual Report on Form 10-K constitutes the Company’s Annual Information Form for purposes of its Canadian continuous
disclosure obligations under National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”). Pursuant to an
application for exemptive relief made in accordance with National Policy 11-203 – Process for Exemptive Relief Applications in
Multiple Jurisdictions, Partnership has received exemptive relief dated October 31, 2014 from the Canadian securities regulators.
This exemptive relief exempts Partnership from the continuous disclosure requirements of NI 51-102, effectively allowing Partnership
to satisfy its Canadian continuous disclosure obligations by relying on the Canadian continuous disclosure documents filed by the
Company, for so long as certain conditions are satisfied. Among these conditions is a requirement that Partnership concurrently send
to all holders of the Partnership exchangeable units all disclosure materials that the Company sends to its shareholders and a
requirement that Partnership separately report all material changes in respect of Partnership that are not also material changes in
respect of the Company.
All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All
references to Canadian dollars or C$ are to the currency of Canada unless otherwise indicated.
3
Business
Company Overview
We are a Canadian corporation originally formed on August 25, 2014 to serve as the indirect holding company for Tim Hortons
and its consolidated subsidiaries and for Burger King Worldwide and its consolidated subsidiaries. We are one of the world’s largest
quick service restaurant (“QSR”) companies with over 19,000 restaurants in approximately 100 countries and U.S. territories as of
December 31, 2015. Our Tim Hortons® and Burger King® brands have similar franchise business models with complementary
daypart mixes. Our two iconic brands are managed independently while benefitting from global scale and sharing of best practices.
Our Tim Hortons Brand
Founded in 1964, the Tim Hortons brand is one of the largest restaurant chains in North America and the largest in Canada. As
of December 31, 2015, we owned or franchised a total of 4,413 Tim Hortons restaurants, including 3,650 in Canada, 650 in the
United States and 113 in the Middle East. Of these restaurants, 4,389 were franchised (approximately 100%) and 24 were company-
owned.
Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot
and cold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis, classic
sandwiches, wraps, soups and more.
Our Tim Hortons (“TH”) business generates revenue from four sources: (i) sales exclusive to Tim Hortons franchisees related to
our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers;
(ii) property revenues from properties we lease or sublease to franchisees; (iii) franchise revenues, consisting primarily of royalties
based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; and (iv) sales at Company
restaurants.
Our Burger King Brand
Founded in 1954, the Burger King brand is the world’s second largest fast food hamburger restaurant (FFHR) chain as measured
by total number of restaurants. As of December 31, 2015, we owned or franchised a total of 15,003 Burger King restaurants in
approximately 100 countries and U.S. territories worldwide. Of these restaurants, 14,927 were franchised (approximately 100%) and
76 were company-owned.
Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken and other specialty
sandwiches, french fries, soft drinks and other affordably-priced food items. Burger King restaurants appeal to a broad spectrum of
consumers, with multiple dayparts and product platforms appealing to different customer groups. During its over 60 years of
operating history, the Burger King brand has developed a scalable and cost-efficient QSR hamburger restaurant model that offers
guests fast and delicious food.
Our Burger King (“BK”) business generates revenue from three sources: (i) franchise revenues, consisting primarily of royalties
based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from
properties that we lease or sublease to franchisees; and (iii) sales at Company restaurants.
Our Industry
Both of our brands operate in the QSR segment of the restaurant industry. In the United States and Canada, the QSR segment is
the largest segment of the restaurant industry and has demonstrated growth over a long period of time. According to The NPD Group,
Inc. (“NPD Group”), which prepares and disseminates CREST® data, QSR consumer spending in the United States and Canada
totaled approximately $298 billion for the 12-month period ended November 2015.
Our Tim Hortons brand operates in the donut/coffee/tea category of the QSR segment. According to NPD Group, the
donut/coffee/tea category generated customer spending of approximately $8.7 billion in Canada for the 12-month period ended
November 2015, representing 35% of total QSR consumer spending. According to NPD Group, for the 12-month period ended
November 2015, Tim Hortons accounted for 45% of the Canadian QSR segment and 87% of the donut/coffee/tea category of the
Canadian QSR segment, in each case based on the number of guests served.
Our Burger King brand operates in the FFHR category of the QSR segment. According to NPD Group, the FFHR category is
the largest category in the QSR segment, generating consumer spending of $74.5 billion in the United States for the 12-month period
ended November 2015, representing 27% of total QSR consumer spending. According to NPD Group, for the 12-month period ended
November 2015, Burger King accounted for approximately 12% of total FFHR consumer spending in the United States.
4
We believe that we have created a financially strong company built upon a foundation of two strong, thriving, independent
brands with significant global growth potential and the opportunity to be one of the most efficient franchised QSR operators in the
world.
Our Business Strategy
•
Accelerate Global Restaurant Growth. We believe there is an attractive opportunity to grow the Tim Hortons and
Burger King brands around the world by expanding our presence in existing markets and entering new markets
where the brands are not present today. This strategy has been executed over the past five years with the Burger
King brand and has led to a significant acceleration in restaurant growth. We are pursuing a similar strategy at TH to
grow the brand’s presence globally.
•
Enhance Guest Service and Experience at Our Restaurants. Guest satisfaction and providing a positive experience
in our restaurants for our guests are integral to the success of our brands. We continue to focus on improving our
level of service through comprehensive training, improved restaurant operations, reimaged restaurants and appealing
menu options. Satisfied guests are more likely to return to our restaurants, which we believe will ultimately drive
increased sales and profitability for our franchisees.
•
Increase Restaurant Sales and Profitability. Restaurant sales and profitability are critical to the success of our
franchise partners and our ability to grow our brands around the world. We believe that a focus on relevant menu
innovation, operational simplification and excellence, compelling marketing communications and investment in a
modern image for our restaurant base will allow us to continue to grow the same store sales of our existing
restaurants. We are also focused on growing franchisee profitability by leveraging our global scale and using data to
benchmark performance and identify areas of focus for our teams.
•
Become the Most Efficient Franchised QSR Operator through a Constant Focus on Costs and Sharing Best
Practices. We have achieved significant cost efficiencies at TH and BK through a Zero Based Budgeting cost
management system. This annual planning method is designed to build a strong ownership culture by requiring
departmental budgets to estimate and justify costs and expenditures from a “zero base,” rather than focusing on the
prior year’s base. We have also begun to realize synergies across the two brands. We have implemented a global
shared services platform and sharing of other non-brand dedicated functions such as finance, human resources,
information technology, legal and others and the brands continue to share and leverage best practices.
•
Preserve Rich Heritages of Both Brands. Both Tim Hortons and Burger King continue to be managed as
independent brands with separately managed franchisee relationships. TH has its brand headquarters in Oakville,
Ontario and plays a prominent role in local communities through its work with certain charities such as the Tim
Hortons Children’s Foundation and the Timbits Minor Sports Program. The Burger King brand was founded in
Miami over 60 years ago, and BK maintains its brand headquarters in Miami, Florida. BK is an active contributor to
its local communities with a particular emphasis on education through the Burger King McLamore Foundation.
Our Global Restaurant Operations
Operating Segments
Our business consisted of two segments at December 31, 2015. Our TH business is managed in one segment and our BK
business is managed in the other segment. Additional financial information about segments can be found in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Note 26 to the accompanying consolidated financial
statements.
5
The table below sets forth our restaurant portfolio by segment for the periods indicated. Tim Hortons historical pre-combination
figures are shown for informational purposes only.
Number of system-wide restaurants:
TH (1)
BK
Total system-wide restaurants
December 31,
2015
December 31,
2014
December 31,
2013
4,413
15,003
19,416
4,258
14,372
18,630
4,114
13,667
17,781
(1) Excludes 398, 413 and 371 limited service kiosks as of December 31, 2015, 2014 and 2013, respectively. Commencing in the
fourth quarter of 2015, we revised our presentation of restaurant counts to exclude limited service kiosks, with the revision
applied retrospectively to the earliest period presented to provide period-to-period comparability.
Of the total number of Tim Hortons restaurants as of December 31, 2015, 82.7% were located in Canada, 14.7% in the U.S. and
2.6% in the Middle East. In the U.S., Tim Hortons restaurants are located in 18 states, concentrated in the Northeast in New York,
and in the Midwest in Michigan and Ohio. In Canada, Tim Hortons typically retains a controlling interest in the real estate for system
restaurants that it develops by either owning the land and building, leasing the land and owning the building, or leasing both the land
and building.
As part of our development approach for Tim Hortons in the U.S., we have granted limited exclusivity rights in specific areas to
developers in connection with area representative and area development agreements where the developers are investing their own
capital to develop restaurants. We entered into two area representative and development agreements for the Cincinnati and Columbus
designated market areas in 2015. We expect to enter into similar area development and area representative arrangements in the U.S.
in 2016. In Canada, we have not granted exclusive or protected areas to any Tim Hortons franchisees.
Historically, international activities have not contributed significantly to Tim Hortons financial results. We have agreements
with Apparel FZCO for the development and operation of Tim Hortons restaurants in the Middle East. We continue to work towards
leveraging our master franchise joint venture model, network of global partners and experienced global development teams to
substantially accelerate Tim Hortons international growth over time to bring this iconic brand to the rest of the world.
Of the total number of Burger King restaurants as of December 31, 2015, 47.5% were located in the U.S. and 52.5% were
located in our markets outside of the U.S. Since 2010, the Burger King brand has increased annual net restaurant growth by
approximately four times, reaching 631 net new units in 2015 from 173 new units in 2010 and making it one of the fastest growing
QSRs in the world.
As part of our international growth strategy for the Burger King brand, we have created strategic master franchise joint ventures
in a number of markets across Europe, the Middle East and Africa (“EMEA”), Asia Pacific (“APAC”) and Latin America and the
Caribbean (“LAC”) and received a meaningful minority equity stake in each joint venture. We have also entered into master franchise
and development agreements in a number of markets across EMEA, APAC and LAC with well-capitalized partners supported by
strong local management teams. Our partners make substantial upfront equity commitments and agree to aggressive development
targets. We will continue to evaluate opportunities to accelerate development of our Burger King brand, including through the
establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees. We
believe there are significant growth opportunities throughout EMEA, APAC and LAC.
Advertising and Promotions
In general, franchisees fund substantially all of the marketing programs for our Tim Hortons and Burger King brands by making
contributions ranging from 3.5% to 5.0% of gross sales to advertising funds that we manage. Advertising contributions are used to
pay for expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales
promotions and other support functions for the respective brands.
We manage the advertising funds for both of our brands in the U.S. and Canada, as well as in other markets where Burger King
Worldwide has historically operated Company restaurants. However, in many of BK’s international markets, including the markets
managed by master franchisees, franchisees make contributions into franchisee-managed advertising funds. As part of our global
marketing strategy, we provide Burger King franchisees with advertising support and guidance in order to deliver a consistent global
brand message.
6
Product Development
New product development is a key driver of the long-term success for both of our brands. We believe the development of new products
can drive traffic by expanding our customer base, allowing restaurants to expand into new dayparts, and continuing to build brand leadership
in food quality and taste. Product innovation begins with an intensive, data-driven research and development process that analyzes potential
new menu items, including extensive consumer testing and ongoing analysis of the economics of food cost, margin and final price point.
A core strategy and success for our Tim Hortons brand remains a strong pipeline of differentiated product innovation. In 2015, we
solidified previous innovation successes including Dark Roast Coffee and the Crispy Chicken Sandwich. In 2015, we had additional
innovation successes, including Nutella based products, our grilled wraps and the Creamy Chocolate Chill® beverage. We plan to maintain
brand focus on leveraging our strength in hot and cold beverage while expanding our daypart presence with exciting new food and baked
good offerings.
In 2015, we continued to implement our strategy for the Burger King brand of launching fewer, more impactful products to simplify
in-restaurant operations and reduce waste, focus the innovation pipeline and spend media dollars more wisely in a few high-impact areas.
We believe that we have had significant successes on each of these fronts and this, paired with our continued compelling value offerings,
have translated to significant momentum for the brand in 2015. This strategy will continue to be a focus of the brand for 2016 and beyond.
Operations Support
Our operations strategy is designed to deliver best-in-class restaurant operations by Tim Hortons and Burger King franchisees and
improve friendliness, cleanliness, speed of service and overall guest satisfaction to drive long-term growth. Both of our brands have uniform
operating standards and specifications relating to product quality, cleanliness and maintenance of the premises. In addition, Tim Hortons and
Burger King restaurants are required to be operated in accordance with quality assurance and health standards which each brand has
established, as well as standards set by applicable governmental laws and regulations. Each franchisee typically participates in initial and
ongoing training programs to learn all aspects of operating a Tim Hortons or Burger King restaurant in accordance with each brand’s
operating standards.
Manufacturing, Supply and Distribution
In general, we approve the manufacturers of the food, packaging and equipment products and other products used in our Tim Hortons
and Burger King restaurants. We have a comprehensive supplier approval process, which requires all products to pass our quality standards
and the supplier’s manufacturing process and facilities to pass on-site food safety inspections. Our franchisees are required to purchase
substantially all food and other products from approved suppliers and distributors.
Tim Hortons products are sourced from a combination of third-party suppliers and our own manufacturing facilities. We operate two
wholly-owned coffee roasting facilities in Hamilton, Ontario and Rochester, New York, where we blend all of the coffee for our Tim
Hortons restaurants to protect the proprietary blend of our premium restaurant coffee and, where practical, for our take home, packaged
coffee. Our fondant and fills manufacturing facility produces, and is the primary supplier of, the ready-to-use glaze, fondants and fills which
are used in connection with a number of Tim Hortons products. We currently purchase all of our donuts and Timbits® from a single supplier.
We sell most other raw materials and supplies, including coffee, sugar, paper goods and other restaurant supplies, to Tim Hortons
restaurants. We purchase those raw materials from multiple suppliers and generally have alternative sources of supply for each. While we
have multiple suppliers for coffee from various coffee-producing regions, the available supply and price for high-quality coffee beans can
fluctuate dramatically. Accordingly, we monitor world market conditions for green (unroasted) coffee and contract for future supply
volumes to obtain expected requirements of high-quality coffee beans at acceptable prices.
Our TH business has significant supply chain operations, including procurement, warehousing and distribution, to supply paper and dry
goods to a substantial majority of our Canadian restaurants, and procure and supply frozen baked goods and some refrigerated products to
most of our Ontario and Quebec restaurants. We act as a distributor to Tim Hortons restaurants in Canada through five distribution centers
located in Canada. We own or lease a significant number of trucks and trailers that regularly deliver to most of our Canadian restaurants. In
the U.S., we supply similar products to system restaurants through third-party distributors.
All of the products used in our Burger King restaurants are sourced from third-party suppliers. Restaurant Services, Inc. (“RSI”) is the
purchasing agent for the Burger King system in the United States and negotiates the purchase terms for most equipment, food, beverages
(other than branded soft drinks) and other products used in Burger King restaurants. RSI is also authorized to purchase and manage
distribution services on behalf of most of the Burger King restaurants in the United States. As of December 31, 2015, four distributors
serviced approximately 88.7% of U.S. system restaurants and the loss of any one of these distributors would likely adversely affect our
business.
7
In 2000, Burger King Corporation entered into long-term exclusive contracts with The Coca-Cola Company and Dr
Pepper/Snapple, Inc. to supply Burger King restaurants with their products and which obligate restaurants in the United States to
purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of
December 31, 2015, we estimate that it will take approximately 15 years to complete the Coca-Cola and Dr Pepper/Snapple, Inc.
purchase commitments. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately
$530 million as of December 31, 2015 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase
commitments, interest and certain other costs.
In 2014, Tim Hortons entered into an agreement with a supplier requiring minimum purchase obligations, within the normal course
of operations. As of December 31, 2015, there is a minimum purchase obligation based on a percentage of our requirements of
approximately $92 million remaining over a four year term.
Franchise Agreements and Other Arrangements
General. We grant franchises to operate restaurants using Tim Hortons and Burger King trademarks, trade dress and other
intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory
control and management. For each franchise restaurant, we generally enter into a franchise agreement covering a standard set of terms
and conditions. Recurring fees consist of periodic royalty and advertising payments. Franchisees report gross sales on a monthly or
weekly basis and pay royalties based on gross sales.
Franchise agreements are generally not assignable without our consent. Our Tim Hortons franchise agreements grant us the right to
reacquire a restaurant under certain circumstances, and our Burger King franchise agreements generally have a right of first refusal if a
franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising contributions, or failure to operate in
compliance with our standards) can lead to termination of the franchise agreement.
U.S. and Canada. Tim Hortons franchisees in the U.S. and Canada operate under several types of license agreements, with a
typical term for a standard restaurant of 10 years plus renewal period(s) of approximately 10 years in the aggregate. Tim Hortons
franchisees who lease land and/or buildings from us typically pay a royalty of 3.0% to 4.5% of weekly restaurant gross sales. Under a
separate lease or sublease, Tim Hortons franchisees typically pay monthly rent based on a percentage (usually 8.5% to 10.0%) of
monthly gross sales or flow through monthly rent based on the terms of an underlying lease. Where the franchisee owns the premises,
leases it from a third party or enters into a flow through lease with Tim Hortons, the royalty is typically increased. In addition, the
royalty rates under license agreements entered into in connection with non-standard restaurants, including self-serve kiosks and strategic
alliances with third parties, may vary from those described above and are negotiated on a case-by-case basis.
For some existing Tim Hortons franchisees in Canada and the U.S., we have entered into operator agreements, in which the
operator acquires the right to operate a Tim Hortons restaurant, but we continue to be the owner of the equipment, signage and trade
fixtures. Such arrangements usually require the operator to pay approximately 20% of the restaurant’s weekly gross sales to us. These
operators also make the required contributions to our advertising funds, described above. In any such arrangement, we and the operator
each have the option to terminate the agreement upon 30 days’ notice.
The typical Burger King franchise agreement in the U.S. and Canada has a 20-year term (for both initial grants and renewals of
franchises) and contemplates a one-time franchise fee which must be paid in full before the restaurant opens for business, or in the case
of renewal, before expiration of the current franchise term. Subject to the incentive programs described below, most new Burger King
franchise restaurants pay a royalty of 4.5% in the United States.
In an effort to improve the image of our restaurants in the United States, we offered Burger King franchisees in the U.S. reduced
up-front franchise fees and limited-term royalty and advertising fund rate reductions to remodel restaurants to our modern image during
2014 and 2015 and we plan to continue to offer remodel incentives to U.S. franchisees during 2016. At December 31, 2015,
approximately 50% of the U.S. system was on the modern image. These limited-term incentive programs are expected to negatively
impact our effective royalty rate until 2021. However, we expect this impact to be partially mitigated as we will also be entering into
new franchise agreements for Burger King restaurants in the United States with a 4.5% royalty rate.
International. Historically, we entered into franchise agreements for each Burger King restaurant in our international markets with
up-front franchise fees and monthly royalties and advertising contributions each of up to 5.0% of gross sales. However, as part of our
international growth strategy, we have increasingly entered into master franchise agreements or development agreements that grant
franchisees exclusive development rights and, in some cases, require them to provide support services to other franchisees in their
markets. The up-front franchise fees and royalty rate paid by master franchisees vary from country to country, depending on the facts
and circumstances of each market. We have agreements with Apparel FZCO for the development and operation of Tim Hortons
restaurants in the Middle East. Under these agreements, Apparel pays us up-front franchise fees upon the opening of each location,
monthly royalties, and product and equipment sales.
8
Franchise Restaurant Leases. We leased or subleased 3,565 properties to Tim Hortons franchisees and 1,847 properties to
Burger King franchisees as of December 31, 2015 pursuant to separate lease agreements with these franchisees. For properties that
we lease from third-party landlords and sublease to franchisees, our leases generally provide for fixed rental payments and may
provide for contingent rental payments based on a restaurant’s annual gross sales. Franchisees who lease land only or land and
building from us do so on a “triple net” basis. Under these triple net leases, the franchisee is obligated to pay all costs and expenses,
including all real property taxes and assessments, repairs and maintenance and insurance.
Intellectual Property
We own valuable intellectual property relating to our Tim Hortons and Burger King brands, including trademarks, service
marks, patents, copyrights, trade secrets and other proprietary information. We have established the standards and specifications for
most of the goods and services used in the development, improvement and operation of our Tim Hortons and Burger King restaurants.
These proprietary standards, specifications and restaurant operating procedures are our trade secrets. Additionally, we own certain
patents of varying duration relating to equipment used in Burger King restaurants.
As of December 31, 2015, we owned 491 Tim Hortons trademark and service mark registrations and applications and 592
domain name registrations around the world, some of which are of material importance to our TH business. As of December 31,
2015, we owned 4,604 Burger King trademark and service mark registrations and applications and approximately 1,044 domain name
registrations around the world, some of which are of material importance to our BK business.
Competition
Our Tim Hortons and Burger King brands compete in the United States, Canada and internationally with many well-established
food service companies on the basis of product choice, quality, affordability, service and location. Our competitors include a variety
of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises.
We also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative
menus, (ii) casual and “fast casual” restaurant chains and (iii) convenience stores and grocery stores. Tim Hortons competitors range
from small local independent operators to well-capitalized national and regional chains, such as Dunkin’ Donuts, McDonald’s,
Starbucks, Panera Bread, Subway and Wendy’s. Additionally, Tim Hortons competes with alternative methods of brewed coffee for
home use. In the FFHR industry, Burger King’s principal competitors are McDonald’s and Wendy’s, as well as regional hamburger
restaurant chains, such as Carl’s Jr., Jack in the Box and Sonic.
The restaurant industry has few barriers to entry, and therefore new competitors may emerge at any time.
Government Regulations and Affairs
General. As manufacturers and distributors of food products, we and our franchisees are subject to licensing and regulation by
federal, state, provincial, and/or municipal departments relating to the environment, health, food preparation, sanitation and safety
standards and, for our distribution business, traffic and transportation regulations; federal, provincial, and state labor laws (including
applicable minimum wage requirements, temporary foreign workers, overtime, working and safety conditions and employment
eligibility requirements); federal, provincial, and state laws prohibiting discrimination; federal, provincial, state and local tax laws and
regulations; and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990, the
Accessibility for Ontarians with Disabilities Act and similar Canadian federal and provincial legislation that can have a significant
impact on our franchisees and our performance. These regulations include food safety regulations, including supervision by the U.S.
Food and Drug Administration and its international equivalents, which govern the manufacture, labeling, packaging and safety of
food. In addition, we are or may become subject to legislation or regulation seeking to tax and/or regulate high-fat, high-calorie and
high-sodium foods, particularly in Canada, the United States, the United Kingdom and Spain. Certain counties, states and
municipalities have approved menu labeling legislation that requires restaurant chains to provide caloric information on menu boards,
and menu labeling legislation has also been adopted on the federal level.
U.S. and Canada. We and our franchisees are subject to Canadian and U.S. laws affecting the operation of their restaurants and
their business. Each Tim Hortons and Burger King restaurant must comply with licensing requirements and regulations by a number
of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which
the restaurant is located. We and our franchisees are also subject to laws governing union organizing, working conditions, work
authorization requirements, health insurance, overtime and wages.
In the U.S., we are subject to federal franchising laws adopted by the U.S. Federal Trade Commission (“FTC”). In addition, a
number of states in the U.S., and the provinces of Ontario, Alberta, Prince Edward Island, Manitoba, New Brunswick and British
Columbia, have enacted or are in the final stages of enacting legislation that affects companies involved in franchising. Much of
the legislation and rules adopted have been aimed at providing detailed disclosure to a prospective franchisee, duties of good faith as
between the franchisor and the franchisee, and/or periodic registration by the franchisor with applicable regulatory agencies.
Additionally, some U.S. states have enacted or are considering enacting legislation that governs the termination or non-renewal of a
franchise agreement and other aspects of the franchise relationship.
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International. Internationally, we and our franchisees are subject to national and local laws and regulations that often are similar
to those affecting them and their franchisees in Canada and the U.S., including laws and regulations concerning franchising, zoning,
health, safety, sanitation, and building and fire codes. We and our franchisees are also subject to a variety of tariffs and regulations on
imported commodities and equipment and laws regulating foreign investment.
Environmental Matters
We and our franchisees are subject to various federal, state, provincial and local environmental regulations. Various laws
concerning the handling, storage and disposal of hazardous materials and restaurant waste and the operation of restaurants in
environmentally sensitive locations may impact aspects of our operations and the operations of our franchisees; however, compliance
with applicable environmental regulations is not believed to have a material effect on capital expenditures, financial condition, results
of operations, or our competitive position. Increased focus by U.S. and overseas governmental authorities on environmental matters is
likely to lead to new governmental initiatives, particularly in the area of climate change. To the extent that these initiatives cause an
increase in our supply or distribution costs, they may impact our business both directly and indirectly. Furthermore, climate change
may exacerbate adverse weather conditions, which could adversely impact our operations and/or increase the cost of our food and
other supplies in ways that we cannot predict at this time.
Seasonal Operations
Our TH and BK businesses are moderately seasonal. Our Tim Hortons and Burger King restaurant sales are typically higher in
the spring and summer months when the weather is warmer than in the fall and winter months. Our restaurant sales are typically
lowest during the winter months, which include February, the shortest month of the year. Furthermore, adverse weather conditions
can have material adverse effects on restaurant sales. The timing of holidays may also impact restaurant sales. Because our businesses
are moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other
quarter or for the full fiscal year.
As of December 31, 2015, we had approximately 4,300 employees in our restaurant support centers, regional offices,
distribution centers, manufacturing facilities, field operations and Company restaurants. Our franchisees are independent business
owners so their employees are not our employees and therefore are not included in our employee count.
Our Employees
Available Information
We make available free of charge on or through the Investor Relations section of our internet website at www.rbi.com, all
materials that we file electronically with the Securities and Exchange Commission (the “SEC”), including this report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable
after electronically filing or furnishing such material with the SEC and with the Canadian Securities Administrators. This information
is also available at www.sec.gov, an internet site maintained by the SEC that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC, and on the System for Electronic Document Analysis and
Retrieval (“SEDAR”) at www.sedar.com, a website maintained by the Canadian Securities Administrators. The material may also be
read and copied by visiting the Public Reference Room of the SEC at 100 F. Street, NE, Washington, D.C. 20549. Information on the
operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The references to our website
address, the SEC’s website address and the website maintained by the Canadian Securities Administrators do not constitute
incorporation by reference of the information contained in these websites and should be not considered part of this document.
A copy of our Corporate Governance Guidelines, Code of Business Ethics and Conduct for Non-Restaurant Employees, Code of
Ethics for Executive Officers, Code of Conduct for Directors and the Charters of the Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee of our board of directors are posted in the Investor Relations section of our
website, www.rbi.com.
Our principal executive offices are located at 226 Wyecroft Road, Oakville, ON, Canada. Our telephone number is (905) 845-
6511.
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Item 1A. Risk Factors
Risks Related to our Business
Our success depends on our ability to compete with our major competitors, many of which may have greater resources than we
do.
The restaurant industry is intensely competitive and we compete in Canada, the United States and internationally with many well-
established food service companies that compete on the basis of product choice, quality, affordability, service and location. Our
competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international
restaurant chains and franchises. Furthermore, the restaurant industry has few barriers to entry, and therefore new competitors may
emerge at any time.
For our Tim Hortons and Burger King brands, our principal competitors are McDonald’s, Wendy’s, Starbucks, Subway, Dunkin
Donuts and Panera Bread as well as, in the case of our Burger King brand, regional hamburger restaurant chains, such as Carl’s Jr., Jack
in the Box and Sonic. To a lesser extent, our Tim Hortons and Burger King brands also compete for consumer dining dollars with
national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual” restaurant chains, and
(iii) convenience stores and grocery stores.
Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products
and product line extensions, to effectively respond to consumer preferences and to manage the complexity of restaurant operations as
well as the impact of our competitors’ actions. Some of our competitors have substantially greater financial resources, higher revenues
and greater economies of scale than we do. These advantages may allow them to (1) react to changes in pricing, marketing and the quick
service restaurant segment in general more quickly and more effectively than we can, (2) rapidly expand new product introductions,
(3) spend significantly more on advertising, marketing and other promotional activities than we do, which may give them a competitive
advantage through higher levels of brand awareness among consumers and (4) devote greater resources to accelerate their restaurant
remodeling efforts. Moreover, certain of our major competitors have completed the reimaging of a significant percentage of their store
base. These competitive advantages arising from greater financial resources and economies of scale may be exacerbated in a difficult
economy, thereby permitting our competitors to gain market share. If we are unable to maintain our competitive position, we could
experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business
opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees in the future.
Our success depends on the value of our brands and the failure to preserve their value and relevance, either through our
actions or those of our franchisees and other partners, could have a negative impact on our financial results.
We depend in large part on the value of the Tim Hortons and Burger King brands. To be successful in the future, we must
preserve, enhance and leverage the value of our brands. Brand value is based in part on consumer tastes, preferences and perceptions on
a variety of factors, including the nutritional content and preparation of our food. Consumer acceptance of our products may be
influenced or subject to change for a variety of reasons. For example, adverse publicity associated with nutritional, health and other
scientific studies and conclusions, which constantly evolve and often have contradictory implications, may drive popular opinion against
quick service restaurants in general, which may impact the demand for our products. In addition, adverse publicity related to litigation
and regulation (including initiatives intended to drive consumer behavior) may impact the value of our brands by discouraging
customers from buying our products.
Moreover, health campaigns against products we offer in favor of foods that are perceived as healthier may affect consumer
perception of our product offerings and impact the value of our brands. Perceptions may also be affected by activist campaigns to
promote adverse perceptions of the quick service restaurant industry or our brands and/or our operations, suppliers, franchisees or other
partners. If we are unsuccessful in addressing consumer adverse perceptions, our brands and our financial results may suffer.
Economic conditions have, and may continue to, adversely affect consumer discretionary spending which could negatively
impact our business and operating results.
We believe that our sales, guest traffic and profitability are strongly correlated to consumer discretionary spending, which is
influenced by general economic conditions, unemployment levels, the availability of discretionary income and, ultimately, consumer
confidence. A protracted economic slowdown, increased unemployment and underemployment of our customer base, decreased salaries
and wage rates, increased energy prices, inflation, foreclosures, rising interest rates or other industry-wide cost pressures adversely
affect consumer behavior by weakening consumer confidence and decreasing consumer spending for restaurant dining occasions. As a
result of these factors, during recessionary periods we may experience reduced revenues and sales deleverage, spreading fixed costs
across a lower level of sales and causing downward pressure on our profitability and the profitability of our franchisees. These factors
may also reduce sales at franchise restaurants, resulting in lower royalty payments from franchisees.
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Our substantial leverage and obligations to service our debt and preferred shares could adversely affect our business.
As of December 31, 2015, we had aggregate outstanding indebtedness of $8,725.6 million, including a senior secured term loan
facility in an aggregate principal amount of $5,097.7 million, senior secured first lien notes in an aggregate principal amount of
$1,250.0 million and senior secured second lien notes in an aggregate principal amount of $2,250.0 million. As of December 31,
2015, we also had outstanding 68.5 million Class A 9.0% cumulative compounding perpetual voting preferred shares entitling the
holders thereof to receive cumulative cash dividends at an annual rate of 9.0% on the amount of the purchase price per preferred
share, payable quarterly in arrears, and potentially to receive make-whole dividend payments. Subject to restrictions set forth in these
instruments, we may also incur significant additional indebtedness in the future, some of which may be secured debt. This may have
the effect of increasing our total leverage.
Our substantial leverage could have important potential consequences, including, but not limited to:
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increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry
conditions;
requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and
interest on, indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital
expenditures, acquisitions, joint ventures, product research, dividends, share repurchases and development or other
corporate purposes;
increasing our vulnerability to, and limiting our flexibility to plan for, or react to, changes in our business and the
competitive environment and the industry in which we operate;
increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds,
liquidity and access to capital markets;
placing us at a competitive disadvantage as compared to our competitors, to the extent that they are not as highly
leveraged;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
exposing us to the risk of increased interest rates as borrowings under our credit facilities are subject to variable
rates of interest;
making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;
limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; and
exposing us to risks related to fluctuations in foreign currency as we earn profits in a variety of currencies around
the world and substantially all of our debt is denominated in U.S. dollars.
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to
us to enable us to pay our indebtedness or dividends on preferred shares or to fund other needs. As a result, we may need to refinance
all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our
indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable
terms could have a material adverse effect on our financial condition.
We are subject to restrictive debt covenants, which limit our ability to take certain actions and perform certain corporate
functions.
The terms of our indebtedness include a number of restrictive covenants that, among other things, limit our ability to:
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incur additional indebtedness or guarantee indebtedness;
pay dividends on, repurchase or make distributions in respect of capital stock;
make investments or acquisitions;
create liens or use assets as security in other transactions;
consolidate, merge, sell or otherwise dispose of substantially all of our or our subsidiaries’ assets;
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enter into agreements restricting the ability to pay dividends or make other intercompany transactions;
enter into transactions with affiliates; and
prepay certain kinds of indebtedness.
We cannot assure you that any of these limitations will not hinder our ability to finance future operations and capital needs and our
ability to pursue business opportunities and activities that may be in our interest. In addition, our ability to comply with these covenants
and restrictions may be affected by events beyond our control.
A breach of the covenants under our indebtedness could result in an event of default under the applicable agreement. Such a default
could allow the holders of such indebtedness to accelerate the repayment of such debt and may result in the acceleration of the repayment
of any other debt to which cross-acceleration or cross-default provision applies. In addition, an event of default under our senior secured
credit facilities would also permit the lenders thereunder to terminate all other commitments to extend additional credit under the senior
secured credit facilities.
Furthermore, if we were unable to repay the amounts due under our secured indebtedness, the holders of such indebtedness could
proceed against the collateral that secures such indebtedness. In the event our creditors accelerate the repayment of our indebtedness, we
and our subsidiaries may not have sufficient assets to repay that indebtedness.
The terms of our indebtedness and preferred shares are subject to mandatory redemption or repayment upon a change of
control, and such terms could have the effect of delaying or preventing a future change of control.
In connection with any future change of control of the Company, subject to important exceptions contained in the instruments
governing our indebtedness and preferred shares, (i) the terms of the credit agreement governing the senior secured term loan facility and
the senior secured revolving credit facility will require repayment by the Company in the event of a change of control; (ii) the indenture
governing the senior secured first lien and second lien notes will require the issuer thereof to make an offer to repurchase the notes in
connection with a change of control; and (iii) the terms of the preferred shares will require, if requested by the holders of not less than a
majority of the outstanding preferred shares, the preferred shares to be redeemed in full by the Company as a result of a change of control.
In addition, other existing or future indebtedness of the Company may also be subject to mandatory repurchase or repayment upon a
future change of control. Accordingly, a future change of control of the Company would require these and possibly other obligations to
become subject to repurchase, repayment and/or redemption. In any such event, the Company may not have sufficient resources to
repurchase, repay and redeem these obligations, as applicable. Moreover, if such financing is required to be repurchased, repaid or
redeemed, other third-party financing may be required in order to provide the funds necessary for the Company to satisfy such
obligations, and the Company may not be able to obtain such additional financing on terms favorable to it or at all.
Any of these provisions may also discourage a potential acquirer from proposing or completing a transaction that may otherwise
have presented a premium to the Company’s shareholders.
Our fully franchised business model presents a number of disadvantages and risks.
Substantially all Tim Hortons and Burger King restaurants are owned and operated by franchisees. Under our fully franchised
business model, our future prospects depend on (1) our ability to attract new franchisees for both of our brands that meet our criteria and
(2) the willingness of franchisees to open restaurants in existing and new markets. There can be no assurance that we will be able to
identify franchisees who meet our criteria, or if we identify such franchisees, that they will successfully implement their expansion plans.
Our fully franchised business model presents a number of other drawbacks, such as limited influence over franchisees and reliance
on franchisees to implement major initiatives, limited ability to facilitate changes in restaurant ownership, limitations on enforcement of
franchise obligations due to bankruptcy or insolvency proceedings and inability or unwillingness of franchisees to participate in our
strategic initiatives.
Our principal competitors that have a significantly higher percentage of company-operated restaurants than we do may have greater
influence over their respective restaurant systems and greater ability to implement operational initiatives and business strategies,
including their marketing and advertising programs.
Our operating results are closely tied to the success of our franchisees; however, our franchisees are independent operators and
we have limited influence over their restaurant operations.
We receive revenues in the form of royalties, fees and other amounts from our franchisees. As a result, our operating results are
closely tied to the success of our franchisees. However, our franchisees are independent operators and we cannot control many factors
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that impact the profitability of their restaurants. If sales trends or economic conditions worsen for franchisees, their financial results
may deteriorate, which could result in, among other things, restaurant closures, delayed or reduced payments to us of royalties,
advertising contributions, rents and, in the case of the Tim Hortons brand, delayed or reduced payments for products and supplies,
and an inability for such franchisees to obtain financing to fund development, restaurant remodels or equipment initiatives on
acceptable terms or at all. Furthermore, franchisees may not be willing or able to renew their franchise agreements with us due to low
sales volumes, or high real estate costs, or may be unable to renew due to the failure to secure lease renewals. If our franchisees fail to
renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our business
and operating results.
A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s
franchise agreements and, if applicable, lease agreements with us. In a Canadian or U.S. franchisee bankruptcy, the debtor in
possession or bankruptcy trustee may reject its franchise arrangements under applicable bankruptcy law, in which case there would be
no further royalty payments, rent payments or, in the case of the Tim Hortons brand, payments for products and supplies from such
franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of
such franchisee in connection with a damage claim resulting from such rejection.
Under our franchise agreements, we can, among other things, mandate menu items, signage, equipment, hours of operation and
value menu, establish operating procedures and approve suppliers, distributors and products. However, the quality of franchise
restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not
successfully operate restaurants in a manner consistent with our standards and requirements or standards set by applicable law. In
addition, franchisees may not hire and train qualified managers and other restaurant personnel. Any operational shortcoming of a Tim
Hortons or Burger King franchise restaurant is likely to be attributed by guests to the entire brand, thus damaging the brand’s
reputation and potentially affecting our revenues and profitability. While we ultimately can take action to terminate franchisees that
do not comply with the standards contained in our franchise agreements and our operating standards, we may not be able to identify
problems and take action quickly enough and, as a result, our image and reputation may suffer, and our franchise revenues and results
of operations could decline.
Our operating results could be impacted by changes in consumer behavior that are the result of advances in technologies
and alternative delivery methods.
If the behavior or preferences of our guests change as a result of advances in technologies or alternative delivery methods or
channels and we are not able to respond to these changes, or our competitors respond to these changes more effectively, then our
business and operating results could be materially harmed.
Our operating results depend on the effectiveness of our marketing and advertising programs and the successful
development and launch of new products.
Our revenues are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and
innovative products and product extensions. Our marketing and advertising programs may not be successful or we may fail to develop
commercially successful new products, which may lead us to fail to attract new guests and retain existing guests. If our marketing and
advertising programs are unsuccessful or if we fail to develop commercially successful new products, our results of operations could
be materially and adversely affected. Moreover, because franchisees contribute to our advertising fund based on a percentage of gross
sales at their franchise restaurants, our advertising fund expenditures are dependent upon sales volumes at system-wide restaurants. If
system-wide sales decline, there will be a reduced amount available for our marketing and advertising programs. In addition, we have
emphasized certain value offerings in our marketing and advertising programs to drive traffic at our stores. The disadvantage of value
offerings is that the low-price offerings may condition our guests to resist higher prices in a more favorable economic environment.
Franchisee support for our marketing and advertising programs is critical for our long-term success.
The support of our franchisees is critical for the success of our marketing and advertising programs and any new capital
intensive or other strategic initiatives that we seek to undertake, and the successful execution of these initiatives will depend on our
ability to maintain alignment with our franchisees. While we can mandate certain strategic initiatives through enforcement of our
franchise agreements, we will need the active support of our franchisees if the implementation of these initiatives is to be successful.
In addition, efforts to build alignment with franchisees may result in a delay in the implementation of planned marketing and
advertising programs and other key initiatives. Franchisees may not continue to support our marketing programs and strategic
initiatives. The failure of these franchisees to support our marketing programs and strategic initiatives could adversely affect our
ability to implement our business strategy and could materially harm our business, results of operations and financial condition.
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The success of our Tim Hortons brand depends substantially on the performance of our Canadian business.
The financial performance of our Tim Hortons brand is highly dependent on the performance of the restaurants in Canada,
which accounted for the substantial majority of its revenues and operating income in 2015. Accordingly, any substantial or sustained
decline in Tim Hortons Canadian business or the value of the Canadian dollar would materially and adversely affect our financial
results.
Our future growth and profitability will depend on our ability to successfully accelerate international development with
strategic partners and joint ventures.
We believe that the future growth and profitability of both of our brands will depend on our ability to successfully accelerate
international development with strategic partners and joint ventures in new and existing international markets. New markets may have
different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, new
restaurants in those markets may have lower average restaurant sales than restaurants in existing markets and may take longer than
expected to reach target sales and profit levels (or may never do so). We will need to build brand awareness in those new markets we
enter through advertising and promotional activity, and those activities may not promote our brands as effectively as intended, if at
all.
For the past several years, Burger King Worldwide has used a master franchise development model, which in markets with
strong growth potential may include participating in strategic joint ventures with little to no upfront investment, to accelerate
international growth. We plan to use a similar strategy with the Tim Hortons brand to grow the brand’s presence globally through
partnerships with local restaurant operators or local entrepreneurs as franchisees. These new arrangements may give our joint venture
and/or master franchise partners the exclusive right to develop and manage our restaurants in a specific country or countries. A joint
venture partnership involves special risks, such as our joint venture partners may at any time have economic, business or legal
interests or goals that are inconsistent with those of the joint venture or us, or our joint venture partners may be unable to meet their
economic or other obligations and we may be required to fulfill those obligations alone. Our master franchise arrangements present
similar risks and uncertainties. We cannot control the actions of our joint venture partners or master franchisees, including any
nonperformance, default or bankruptcy of joint venture partners or master franchisees. In addition, the termination of an arrangement
with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation of the
development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets. We may not
be able to find another operator to resume development activities in such market or markets. Any such delay, discontinuation or
interruption could materially and adversely affect our business and operating results.
While we believe that our joint venture and master franchise arrangements provide us with experienced local business partners
in foreign countries, events or issues, including disagreements with our partners, may occur that require attention of our senior
executives and may result in expenses or losses that erode the profitability of our international operations.
In addition, the U.S. Foreign Corrupt Practices Act, the Corruption of Foreign Public Officials Act (Canada) and similar
worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government
officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. Despite our compliance
programs, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent
acts committed by our strategic partners and joint venturers or their employees or agents. Violations of these laws, or allegations of
such violations, may have a negative effect on our results of operations, financial condition and reputation.
If we are unable to effectively manage our growth, it could adversely affect our business and operating results.
As a result of the Transactions, we became the indirect holding company for Tim Hortons and Burger King Worldwide and their
respective consolidated subsidiaries with over 19,000 restaurants. In addition, as described elsewhere in this report, our growth
strategy includes strategic expansion in existing and new markets, and contemplates a significant acceleration in the growth in the
number of new restaurants. As our franchisees are independent third parties, we have and may need to continue to expend substantial
financial and managerial resources to enhance our existing restaurant management systems, financial and management controls,
information systems and personnel to accurately capture and reflect the financial and operational activities at our franchise
restaurants. On occasion we have encountered, and may in the future encounter, challenges in receiving these results from our
franchisees in a consistent and timely manner. If we are not able to effectively manage the management and information demands
associated with the significant growth of our franchise system, then our business and operating results could be negatively impacted.
Sub-franchisees could take actions that could harm our business and that of our master franchisees.
Our business model contemplates us entering into agreements with master franchisees and other partners that permit them to
develop and operate restaurants in defined geographic areas. As permitted by certain of these agreements, master franchisees or
partners may elect to sub-franchise rights to develop and operate Burger King or Tim Hortons restaurants, as applicable in the
geographic area covered by the agreement. These agreements contractually obligate our master franchisees or partners, as
applicable, to operate their restaurants in accordance with specified operations, safety and health standards and also require that any
sub-franchise agreement contain similar requirements. However, we are not party to the agreements with the sub-franchisees and, as a
result, are dependent upon our master franchisees and partners to enforce these standards with respect to sub-franchised restaurants.
As a result, the ultimate success and quality of any sub-franchised restaurant rests with the master franchisee or partner and the
sub-franchisee. If sub-franchisees do not successfully operate their restaurants in a manner consistent with required standards,
franchise fees and royalty income ultimately paid to us could be adversely affected, and our brand image and reputation may be
harmed, which could materially and adversely affect our business and operating results.
Our international operations subject us to additional risks and costs and may cause our profitability to decline.
Our operations outside of the U.S. and Canada are exposed to risks inherent in foreign operations. These risks, which can vary
substantially by market, are described in many of the risk factors discussed in this section and include the following:
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governmental laws, regulations and policies adopted to manage national economic conditions, such as increases in
taxes, austerity measures that impact consumer spending, monetary policies that may impact inflation rates and
currency fluctuations;
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the risk of markets in which we have granted exclusive development and subfranchising rights;
the effects of legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign
laws;
changes in the laws and policies that govern foreign investment and trade in the countries in which we operate;
risks and costs associated with political and economic instability, corruption, anti-American sentiment and social
and ethnic unrest in the countries in which we operate;
the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the
interpretation, application and enforceability of laws and regulations and the enforceability of contract rights and
intellectual property rights;
risks arising from the significant and rapid fluctuations in currency exchange markets and the decisions and
positions that we take to hedge such volatility;
changing labor conditions and difficulties experienced by our franchisees in staffing their international operations;
the impact of labor costs on our franchisees’ margins given our labor-intensive business model and the long-term
trend toward higher wages in both mature and developing markets and the potential impact of union organizing
efforts on day-to-day operations of our franchisees’ restaurants; and
the effects of increases in the taxes we pay and other changes in applicable tax laws.
These factors may increase in importance as we expect franchisees of both of our brands to open new restaurants in international
markets as part of our growth strategy.
Our operations are subject to fluctuations in foreign currency exchange and interest rates.
We report our results in U.S. dollars, which is our reporting currency. The operations of each of TH and BK that are
denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency
regulations. The majority of TH’s operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which
we translate to U.S. dollars for our financial reporting purposes. Royalty payments from BK franchisees in our European markets and
in certain other countries are denominated in currencies other than U.S. dollars. Furthermore, franchise royalties from each of TH’s
and BK’s international franchisees are calculated based on local currency sales; consequently, franchise revenues are still impacted by
fluctuations in currency exchange rates. Revenues and expenses of TH and BK that are denominated in currencies other than the U.S.
dollar are translated using the average rates during the period in which they are recognized and are impacted by changes in currency
exchange rates.
We enter into forward contracts to reduce our exposure to volatility from foreign currency fluctuations associated with certain
foreign currency-denominated assets. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies.
Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the
foreign currency impact on our operating results for one period may not be indicative of future results. We also use forward currency
contracts to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee and certain
intercompany purchases, made by our TH Canadian operations.
Fluctuations in interest rates may also affect our combined business. We attempt to minimize this risk and lower overall
borrowing costs through the utilization of derivative financial instruments. We primarily utilize interest rate swaps to attempt to
minimize this risk and lower our overall borrowing costs. These instruments are entered into with financial institutions and have reset
dates and critical terms that match those of our forecasted interest payments. Accordingly, any changes in interest rates we pay are
partially offset by changes in the market value associated with derivative financial instruments.
As a result of entering into these hedging contracts with major financial institutions, we may be subject to counterparty
nonperformance risk. Should there be a counterparty default, we could be exposed to the net losses on the hedged arrangements or be
unable to recover anticipated net gains from the transactions.
Increases in food and commodity costs could harm our operating results and the results of our franchisees.
Our profitability and the profitability of our franchisees will depend in part on our ability to anticipate and react to changes in
food and commodity and supply costs. With respect to our TH business, volatility in connection with certain key commodities that we
purchase in the ordinary course of business, such as coffee, wheat, edible oils and sugar, can impact our revenues, costs and margins.
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If commodity prices rise, franchisees may experience reduced sales due to decreased consumer demand at retail prices that have been
raised to offset increased commodity prices, which may reduce franchisee profitability. In addition, with respect to our BK business, the
market for beef and chicken is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate
conditions, demand for corn (a key ingredient of cattle and chicken feed), corn ethanol policy, industry demand, international
commodity markets, food safety concerns, product recalls, government regulation and other factors, all of which are beyond its control
and, in many instances unpredictable. If the price of beef, chicken or other products that we use in our Company restaurants increases in
the future and we choose not to pass, or cannot pass, these increases on to our guests, our operating margins would decrease for as long
as we operate Company restaurants. Any such decline in franchisee sales will reduce our royalty income, which in turn may materially
and adversely affect our business and operating results.
If the supply or quality of food or commodities fails to meet demand or the quality standards of our guests, our franchisees may
experience reduced sales which, in turn, would reduce rents and royalty revenues as well as supply chain sales. Such a reduction in rents
and royalty revenues and supply chain sales may adversely impact our business and financial results.
Our vertically integrated supply chain operations, including manufacturing, warehouse and distribution activities, subject us to
additional risks and may cause our profitability to decline.
We operate a vertically integrated supply chain for our TH business in which we manufacture, warehouse, and distribute certain
food and restaurant supplies to our franchise and Company restaurants. There are certain risks associated with this vertical integration
growth strategy, including:
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delays and/or difficulties associated with owning a manufacturing, warehouse and distribution business;
maintenance, operations and/or management of the facilities, equipment, employees and inventories;
limitations on the flexibility of controlling capital expenditures and overhead;
the need for skills and techniques that are outside our traditional core expertise;
increased transportation, shipping, food and other supply costs;
inclement weather or extreme weather events;
shortages or interruptions in the availability or supply of high-quality coffee beans, perishable food products and/or
their ingredients;
variations in the quality of food and beverage products and/or their ingredients; and
political, physical, environmental, labor, or technological disruptions in our or our suppliers’ manufacturing and/or
warehousing plants, facilities, or equipment.
If we do not adequately address the challenges related to these vertically integrated operations or the overall level of utilization or
production decreases for any reason, our results of operations and financial condition may be adversely impacted. Moreover, shortages
or interruptions in the availability and delivery of food, beverages and other suppliers to our restaurants may increase costs or reduce
revenues.
Our success is dependent on securing desirable restaurant locations for both of our brands, and competition for these locations
may impact our ability to effectively grow our restaurant portfolios.
The success of any restaurant depends in substantial part on its location. There can be no assurance that the current locations of our
restaurants will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where restaurants are
located could decline in the future, thus resulting in potentially reduced sales in those locations. Competition for restaurant locations can
also be intense and there may be delay or cancellation of new site developments by developers and landlords, which may be exacerbated
by factors related to the commercial real estate or credit markets. If franchisees cannot obtain desirable locations for their restaurants at
reasonable prices due to, among other things, higher than anticipated acquisition, construction and/or development costs of new
restaurants; difficulty negotiating leases with acceptable terms; onerous land use or zoning restrictions; or challenges in securing
required governmental permits; then their ability to execute their respective growth strategies may be adversely affected.
The market for retail real estate is highly competitive. Based on their size advantage and/or their greater financial resources, some
of our competitors may have the ability to negotiate more favorable lease terms than we can and some landlords and developers may
offer priority or grant exclusivity to some of our competitors for desirable locations. As a result, we or our franchisees may not be able
to obtain new leases or renew existing leases on acceptable terms, if at all, which could adversely affect our sales and brand-building
initiatives.
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Our ownership and leasing of significant amounts of real estate exposes us to possible liabilities, losses, and risks.
Many of our system restaurants are presently located on leased premises. As leases underlying our Company and franchise
restaurants expire, we or our franchisees may be unable to negotiate a new lease or lease extension, either on commercially acceptable
terms or at all, which could cause us or our franchisees to close restaurants in desirable locations. As a result, our sales and our brand
building initiatives could be adversely affected. Furthermore, we cannot cancel existing leases; therefore, if an existing or future
restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable
lease including, among other things, paying the base rent for the balance of the lease term. In addition, the value of our owned real estate
assets could decrease, and/or our costs could increase, because of changes in the investment climate for real estate, demographic trends,
demand for restaurant sites and other retail properties, and exposure to or liability associated with environmental contamination and
reclamation.
Typically the costs of insurance, taxes, maintenance, utilities, and other property-related costs due under a prime lease with a
third-party landlord are passed through to the franchisee under our sublease. If a franchisee fails to perform the obligations passed
through under the sublease, we will be required to perform these obligations resulting in an increase in our leasing and operational costs
and expenses. In addition, the rent a franchisee pays us under the sublease is generally based on a percentage of gross sales. If gross
sales at a certain restaurant are less than we project we may pay more rent to a third-party landlord under the prime lease than we receive
from the franchisee under the sublease. These events could result in an inability to fully recover from the franchisee expenses incurred
on leased properties, resulting in increased leasing and operational costs to us.
If we fail to successfully implement our store image and renovation initiatives, our ability to increase revenues and our
profitability may be adversely affected.
Our restaurant reimaging initiatives depend on the ability and willingness of franchisees to remodel their existing restaurants. Even
if they are willing to remodel their restaurants, many of our franchisees will need to borrow funds in order to finance these capital
expenditures. If our franchisees are unable to obtain financing at commercially reasonable rates, or not at all, they may be unwilling or
unable to invest in the reimaging of their existing restaurants, and our future growth could be adversely affected.
Food safety and food-borne illness concerns may have an adverse effect on our business.
Food safety is a top priority for us and we dedicate substantial resources to ensure that our customers enjoy safe, high-quality food
products. However, food-borne illnesses, such as E. coli, salmonella, and other food safety issues have occurred in the food industry in
the past and could occur in the future. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that
food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a
single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could
arise, such as mad cow disease, which could give rise to claims or allegations on a retroactive basis. Any report or publicity, including
through social media, linking us or one of our franchisees or suppliers to instances of food-borne illness or other food safety issues,
including food tampering, adulteration or contamination, could adversely affect our brands and reputation as well as our revenues and
profits. Outbreaks of disease, as well as influenza, could reduce traffic in our stores. If our customers become ill from food-borne
illnesses, we could also be forced to temporarily close some restaurants. In addition, instances of food-borne illness, food tampering or
food contamination occurring solely at restaurants of competitors could adversely affect our sales as a result of negative publicity about
the foodservice industry generally.
The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected
ingredients, which could result in disruptions in our supply chain, significantly increase our costs and/or lower margins for us and our
franchisees. In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or guests, such as the
addition of foreign objects in the food that we sell. Reports, whether or not true, of injuries caused by food tampering have in the past
severely injured the reputations of restaurant chains in the quick service restaurant segment and could affect us in the future as well.
Furthermore, increased use of social media may strengthen the effects of any such negative publicity.
Our results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, terrorist
attacks or threats or catastrophic events.
Unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events, can adversely impact our
restaurant sales. Natural disasters such as earthquakes, hurricanes, and severe adverse weather conditions and health pandemics whether
occurring in Canada, the United States or abroad, can keep customers in the affected area from dining out and result in lost opportunities
for our restaurants. Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to
combat terrorism or heightened security requirements will have on our future operations. Because a significant portion of our restaurant
operating costs is fixed or semi-fixed in nature, the loss of sales during these periods hurts our operating margins and can result in
restaurant operating losses.
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The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business and
inhibit our ability to operate and grow successfully.
We are dependent on the efforts and abilities of our senior management, including the executives managing both of our brands, and our
success will also depend on our ability to attract and retain additional qualified employees. Failure to attract personnel sufficiently qualified to
execute our strategy, or to retain existing key personnel, could have a material adverse effect on our business.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in Canada, the United States, and numerous foreign jurisdictions. A taxation authority may
disagree with certain of our collective views, including, for example, the allocation of profits by tax jurisdiction, and the deductibility of our
interest expense, and may take the position that material income tax liabilities, interests, penalties, or other amounts are payable by us, in
which case, we expect to contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful, the
implications could be materially adverse to us and affect our effective tax rate or operating income.
From time to time, we are subject to additional state and local income tax audits, international income tax audits and sales, franchise and
value-added-tax tax audits. Our effective income tax rate and tax payments in the future could be adversely affected by a number of factors,
including: changes in the mix of earnings in countries with different statutory tax rates; changes in the valuation of deferred tax assets and
liabilities; continued losses in certain international markets that could trigger a valuation allowance; changes in tax laws; the outcome of
income tax audits in various jurisdictions around the world; taxes imposed upon sales of Company restaurants to franchisees; and any
repatriation of earnings or our determination that unremitted earnings from foreign subsidiaries for which we have not previously provided for
taxes were no longer permanently reinvested.
Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially
different from our historical income tax provisions and accruals. There can be no assurance that the Canada Revenue Agency (the “CRA”),
the U.S. Internal Revenue Service (the “IRS”) and/or foreign tax authorities will agree with our interpretation of the tax aspects of
reorganizations, initiatives, transactions, or any related matters associated therewith that we have undertaken.
The results of a tax audit or related litigation could have a material effect on our income tax provision, net income (loss) or cash flows in
the period or periods for which that determination is made. The CRA or the IRS may take the position that material Canadian or U.S. federal
income tax liabilities, interest and penalties, respectively, are payable or that our tax positions or views are invalid. If we are unsuccessful in
disputing the CRA’s or the IRS’ assertions, we may not be in a position to take advantage of the effective tax rates and the level of benefits
that we anticipated to achieve as a result of corporate reorganizations, initiatives and transactions, and the implications could be materially
adverse to us, including an increase in our effective tax rate. Even if we are successful in maintaining our positions, we may incur significant
expense in contesting positions asserted or claims made by tax authorities that could have a material impact on our financial position and
results of operations.
The Company and Partnership may be treated as a U.S. corporation for U.S. federal income tax purposes, which could subject us
and Partnership to substantial additional U.S. taxes.
As Canadian entities, the Company and Partnership generally would be classified as foreign entities (and, therefore, non-U.S. tax
residents) under general rules of U.S. federal income taxation. Section 7874 of the Internal Revenue Code, as amended (the “Code”),
however, contains rules that result in a non-U.S. corporation being taxed as a U.S. corporation for U.S. federal income tax purposes, unless
certain tests, applied at the time of the acquisition, regarding ownership of such entities (as relevant here, ownership by former Burger King
Worldwide shareholders) or level of business activities (as relevant here, business activities in Canada by us and our affiliates, including
Partnership), were satisfied at such time. The U.S. Treasury Regulations apply these same rules to non-U.S. publicly traded partnerships, such
as Partnership. These statutory and regulatory rules are relatively new, their application is complex and there is little guidance regarding their
application.
If it were determined that we and/or Partnership should be taxed as U.S. corporations for U.S. federal income tax purposes, we and
Partnership could be liable for substantial additional U.S. federal income tax. For Canadian tax purposes, we and Partnership are expected,
regardless of any application of Section 7874 of the Code, to be treated as a Canadian resident company and partnership, respectively.
Consequently, if we and/or Partnership did not satisfy either of the applicable tests, we might be liable for both Canadian and U.S. taxes,
which could have a material adverse effect on our financial condition and results of operations.
Future changes to U.S. and non-U.S. tax laws could materially affect the Company and/or Partnership, including their status as
foreign entities for U.S. federal income tax purposes, and adversely affect their anticipated financial positions and results.
Changes to the rules in section 7874 of the Code or the Treasury Regulations promulgated thereunder, or other changes in law, could
adversely affect our and/or Partnership’s status as a non-U.S. entity for U.S. federal income tax purposes, our effective tax rate
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or future planning based on current law, and any such changes could have prospective or retroactive application to us and/or Partnership.
For example, recent legislative proposals have aimed to expand the scope of section 7874 of the Code, or otherwise address certain
perceived issues arising in connection with so-called inversion transactions. It is presently uncertain whether any such legislative
proposals will be enacted into law and, if so, what impact such legislation would have on us. In addition, the U.S. Treasury has indicated
that it is considering possible regulatory action in connection with so-called inversion transactions, including, most recently, in Notices
2015-79 and 2014-52. The timing and substance of any such action is presently uncertain. Any such change of law or regulatory action
which could apply retroactively or prospectively, could adversely impact our tax position as well as our financial position and results in a
material manner. The precise scope and application of the regulatory proposals will not be clear until proposed Treasury Regulations are
actually issued, and, accordingly, until such regulations are promulgated and fully understood, we cannot be certain that there will be no
such impact.
Moreover, the U.S. Congress, the Organization for Economic Co-operation and Development and other government agencies in
jurisdictions where the Company and its affiliates do business have had an extended focus on issues related to the taxation of
multinational corporations. In particular, specific attention has been paid to “base erosion and profit shifting”, where payments are made
between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the U.S. and
other countries in which we do business could change on a prospective or retroactive basis, and any such change could adversely affect
us.
We may not be able to adequately protect our intellectual property, which could harm the value of our brand and branded
products and adversely affect our business.
We depend in large part on the value of the Tim Hortons and Burger King brands, which represent 44.9% of the total assets on our
balance sheet as of December 31, 2015. We believe that our brands are very important to our success and our competitive position. We
rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our
brands and the respective branded products. The success of our business depends on our continued ability to use our existing trademarks
and service marks in order to increase brand awareness and further develop our branded products in both domestic and international
markets. We have registered certain trademarks and have other trademark registrations pending in the United States, Canada and foreign
jurisdictions. Not all of the trademarks that our brands currently use have been registered in all of the countries in which we do business,
and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks, and our use of these
trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. The steps we have taken to
protect our intellectual property in Canada, the United States and in foreign countries may not be adequate and our proprietary rights
could be challenged, circumvented, infringed or invalidated. In addition, the laws of some foreign countries do not protect intellectual
property rights to the same extent as the laws of Canada and the United States.
We may not be able to prevent third parties from infringing on our intellectual property rights, and we may, from time to time, be
required to institute litigation to enforce our trademarks or other intellectual property rights or to protect our trade secrets. Further, third
parties may assert or prosecute infringement claims against us and we may or may not be able to successfully defend these claims. Any
such litigation could result in substantial costs and diversion of resources and could negatively affect our revenue, profitability and
prospects regardless of whether we are able to successfully enforce our rights.
We have been, and in the future may be, subject to litigation that could have an adverse effect on our business.
We may from time to time, in the ordinary course of business, be subject to litigation relating to matters including, but not limited
to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. Some of these claims
are incidental to our business, such as “slip and fall” accidents at franchise or company-operated restaurants, claims and disputes in
connection with site development and construction of system restaurants and employment claims.
Whether or not any claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend,
harm our reputation and divert resources away from our operations and negatively impact our reported earnings. Furthermore, legal
proceedings against a franchisee or its affiliates by third parties, whether in the ordinary course of business or otherwise, may include
claims against us by virtue of our relationship with the franchisee.
Furthermore, in certain of our agreements, we may agree to indemnify our business partners against any losses or costs incurred in
connection with claims by a third party alleging that our services infringe the intellectual property rights of the third-party. Companies
have increasingly become subject to infringement threats from non-practicing organizations filing lawsuits for patent infringement. We,
or our business partners, may become subject to claims for infringement and we may be required to indemnify or defend our business
partners from such claims. We are also exposed to a wide variety of falsified or exaggerated claims due to our size and brand recognition.
All of these types of matters have the potential to unduly distract management’s attention and increase costs, including costs associated
with defending such claims. Our current exposure with respect to legal matters pending against us could change if determinations by
judges and other finders of fact are not in accordance with management’s evaluation of the claims. Should
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management’s evaluations prove incorrect and such claims are successful, our exposure could exceed expectations and have a
material adverse effect on our business, financial condition and results of operations. Although some losses may be covered by
insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are
insufficient to offset our losses fully, our consolidated financial condition or results of operations may be adversely affected.
Public and private concerns about the health risks associated with fast food may adversely affect our financial results.
Class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among
other things, that quick service restaurants have failed to disclose the health risks associated with high-fat or high-sodium foods and
that quick service restaurant marketing practices have targeted children and encouraged obesity. Adverse publicity about these
allegations may negatively affect us and our franchisees, regardless of whether the allegations are true, by discouraging customers
from buying our products. In addition, we face the risk of lawsuits and negative publicity resulting from illnesses and injuries,
including injuries to infants and children, allegedly caused by our products, toys and other promotional items available in our
restaurants or our playground equipment. In addition to decreasing our revenue and profitability and diverting our management
resources, adverse publicity or a substantial judgment against us could negatively impact our business, results of operations, financial
condition and brand reputation, hindering our ability to attract and retain franchisees and grow our business in Canada, the United
States and internationally.
Changes in regulations may adversely affect restaurant operations and our financial results.
Our franchise and Company restaurants are subject to licensing and regulation by health, sanitation, safety and other agencies in
the state, province and/or municipality in which the restaurant is located. Federal, state, provincial and local government authorities
may enact laws, rules or regulations that impact restaurant operations and the cost of conducting those operations. In many of our
markets, including Canada, the United States and Europe, we and our franchisees are subject to increasing regulation regarding our
operations which may significantly increase the cost of doing business. In developing markets, we face the risks associated with new
and untested laws and judicial systems. Among the more important regulatory risks regarding our operations are the following:
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the impact of the Fair Labor Standards Act, and similar Canadian legislation, which governs such matters as
minimum wage, overtime and other working conditions, family leave mandates and a variety of other laws enacted
that govern these and other employment matters;
the risk of franchisors being considered a joint employer with franchisees;
the impact of changes in employment eligibility requirements, the cessation or limitation of access to federal, state
or provincial labor programs, including amendments to the Temporary Foreign Worker Program of the Federal
Government of Canada;
the impact of immigration and other local and foreign laws and regulations on our business;
disruptions in our operations or price volatility in a market that can result from governmental actions, including
price controls, currency and repatriation controls, limitations on the import or export of commodities we use or
government-mandated closure of our or our vendors’ operations;
the impact of the United States federal menu labeling law, and similar Canadian legislation, which requires the
listing of specified nutritional information on menus and menu boards on consumer demand for our products;
the risks of operating in foreign markets in which there are significant uncertainties, including with respect to the
application of legal requirements and the enforceability of laws and contractual obligations;
the impact of the Patient Protection and Affordable Care Act on the businesses of our U.S. franchisees, many of
whom are small business owners who may have significant difficulty absorbing the increased costs or may need to
revise the ways in which they conduct their business; and
the impact of costs of compliance with privacy, consumer protection and other laws, the impact of costs resulting
from consumer fraud and the impact on our margins as the use of cashless payments increases.
We are subject to various provincial, state and foreign laws that govern the offer and sale of a franchise, including in the U.S., to
a Federal Trade Commission (“FTC”) rule. Various state and foreign laws regulate certain aspects of the franchise relationship,
including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction
or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines and
penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating
results. We could also face lawsuits by franchisees based upon alleged violations of these laws.
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The Americans with Disabilities Act (“ADA”), and similar Canadian legislation, prohibits discrimination on the basis of disability in
public accommodations and employment. We have, in the past, been required to make certain modifications to our restaurants pursuant to the
ADA. In addition, future mandated modifications to their facilities to make different accommodations for disabled persons and modifications
required under the ADA could result in material unanticipated expense to us and our franchisees.
Additionally, we are required to comply with a number of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, the
Corruption of Foreign Public Officials Act (Canada) and The Bribery Act of 2010 (U.K.), which prohibit improper payments to foreign
officials for the purpose of obtaining or retaining business. The scope and enforcement of anti-corruption laws and regulations may vary.
There can be no assurance that our employees, contractors, licensees or agents will not violate these laws and regulations. Violations of these
laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations.
Furthermore, certain changes to accounting standards, or changes to the interpretation of accounting standards applicable to us, could
also materially affect our future results.
If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions. In
addition, our and our franchisees’ capital expenditures could increase due to remediation measures that may be required if we are found to be
noncompliant with any of these laws or regulations.
The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation, results
of operation and financial condition.
In the ordinary course of our business, we collect, process, transmit and retain personal information regarding our employees and their
families, our franchisees, vendors and consumers, which can include social security numbers, social insurance numbers, banking and tax
identification information, health care information and credit card information. Some of this personal information is held and managed by
certain of our vendors. Although we use security and business controls to limit access and use of personal information, a third-party may be
able to circumvent those security and business controls, which could result in a breach of employee, consumer or franchisee privacy. A major
breach, theft or loss of personal information regarding our employees and their families, our franchisees, vendors or consumers that is held by
us or our vendors could result in substantial fines, penalties and potential litigation against us which could negatively impact our results of
operations and financial condition. Furthermore, as a result of legislative and regulatory rules, we may be required to notify the owners of the
personal information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or actions
by regulatory authorities.
Information technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us
to increased operating costs and expose us to litigation.
We rely heavily on our computer systems and network infrastructure across operations including, but not limited to, point-of-sale
processing at our restaurants. Despite our implementation of security measures, all of our technology systems are vulnerable to damage,
disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal
and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. If any of our
technology systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in its operations.
Furthermore, if unauthorized access to or use of our systems were to occur, data related to our proprietary information could be compromised.
The occurrence of any of these incidents could have a material adverse effect on our future financial condition and results of operations. To
the extent that some of our worldwide reporting systems require or rely on manual processes, it could increase the risk of a breach.
In addition, a number of our systems and processes are not fully integrated worldwide and, as a result, require us to manually estimate
and consolidate certain information that we use to manage our business. To the extent that we are not able to obtain transparency into our
operations from our systems, it could impair the ability of our management to react quickly to changes in the business or economic
environment.
Compliance with or cleanup activities required by environmental laws may hurt our business.
We are subject to various federal, state, provincial, local and foreign environmental laws and regulations regarding climate change,
energy consumption and our management, handling, release and/or disposal of water resources, air resources, hazardous or toxic substances,
solid waste and other environmental matters. These laws and regulations provide for significant fines and penalties for noncompliance. If we
fail to comply with these laws or regulations, we could be fined or otherwise sanctioned by regulators. Third parties may also make personal
injury, property damage or other claims against us associated with releases of, or actual or alleged exposure to, hazardous substances at, on or
from our properties. Environmental conditions relating to prior, existing or future restaurants or restaurant sites, including franchised sites,
may have a material adverse effect on us. Moreover, the adoption of new or more stringent environmental laws or regulations could result in a
material environmental liability to us and the current environmental condition of the properties could be harmed by tenants or other third
parties or by the condition of land or operations in the vicinity of our properties.
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We outsource certain aspects of our business to third-party vendors which subjects us to risks, including disruptions in our
business and increased costs.
We have outsourced certain administrative functions for our business, including account payment and receivable processing, to
a third-party service provider. We also outsource certain information technology support services and benefit plan administration. In
the future, we may outsource other functions to achieve cost savings and efficiencies. If the service providers to which we outsource
these functions do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional
costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business
disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual property
through security breach, and the loss of sensitive data through security breach or otherwise. Any such damage or interruption could
have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm
our reputation with our customers or prevent us from paying our collective suppliers or employees or receiving payments on a timely
basis.
We are not in compliance with certain “best practices” established by Canadian securities regulators in respect of corporate
governance.
The chairman of our board of directors is not “independent” for purposes of Canadian securities laws, and our nominating and
corporate governance and compensation committees are not composed solely of independent directors. Accordingly, we are not in
compliance with certain governance best practices set forth in National Policy 58-201 – Corporate Governance Guidelines and
National Instrument 58-101 – Disclosure of Corporate Governance Practices with respect to standards of director independence.
Accordingly, our shareholders will not have the same protections afforded to security holders of reporting issuers that are in
compliance with the corporate governance best practices established by the Canadian Securities Administrators.
Canadian legislation contains provisions that may have the effect of delaying or preventing a change in control.
We are a Canadian entity. The Investment Canada Act requires that a “non-Canadian,” as defined therein, file an application for
review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a
Canadian business, where prescribed financial thresholds are exceeded. This may discourage a potential acquirer from proposing or
completing a transaction that may otherwise present a premium to shareholders. Otherwise, there are no limitations either under the
laws of Canada or in our articles regarding the rights of non-Canadians to hold or vote our common shares.
Risks Related to our Common shares
3G owns 43.1% of the combined voting power with respect to the Company, and its interests may conflict with or differ from
the interests of the other shareholders.
3G Restaurant Brands Holdings LP (“3G”) currently owns approximately 43.1% of the combined voting power with respect to
the Company. The interests of 3G and its principals may not always be aligned with the interests of the other shareholders of the
Company. So long as 3G continues to directly or indirectly own a significant amount of the voting power of the Company, it will
continue to be able to strongly influence or effectively control the business decisions of the Company. 3G and its principals may have
interests that are different from those of the other shareholders of the Company, and 3G may exercise its voting and other rights in a
manner that may be adverse to the interests of such shareholders.
In addition, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise
discouraging a potential acquirer from attempting to obtain control of the Company, which could cause the market price of the
Company’s common shares to decline or prevent the Company’s shareholders from realizing a premium over the market price for
their common shares or Partnership exchangeable units.
3G is affiliated with 3G Capital Partners, Ltd. a New York private equity firm (“3G Capital”). 3G Capital is in the business of
making investments in companies and may from time to time in the future acquire or develop controlling interests in businesses
engaged in the QSR industry that complement or directly or indirectly compete with certain portions of our business. In addition, 3G
Capital may pursue acquisitions or opportunities that may be complementary to our business and, as a result, those acquisition
opportunities may not be available to us.
23
Our stock price may be volatile or may decline regardless of our operating performance.
The market price of our common shares may fluctuate materially from time to time in response to a number of factors, many of which we
cannot control, including those described under “Risk Factors – Risks Related to Our Business”. In addition, the stock market in general has
experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed
companies. These broad market and industry factors may materially harm the market price of our common shares, regardless of our operating
performance. In addition, our share price may be dependent upon the valuations and recommendations of the analysts who cover our business,
and if our results do not meet the analysts’ forecasts and expectations, our share price could decline as a result of analysts lowering their
valuations and recommendations or otherwise. In the past, following periods of volatility in the market, securities class-action litigation has often
been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s
attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.
Future sales of our common shares in the public market could cause volatility in the price of our common shares or cause the share
price to fall.
Sales of a substantial number of our common shares in the public market, or the perception that these sales might occur, could depress the
market price of our common shares, and could impair our ability to raise capital through the sale of additional equity securities.
Certain holders of our common shares have required and others may require us to register their shares for resale under the U.S. and
Canadian securities laws under the terms of certain separate registration rights agreements between us and the holders of these securities.
Registration of those shares would allow the holders thereof to immediately resell their shares in the public market. Any such sales, or
anticipation thereof, could cause the market price of our common shares to decline.
In addition, we have registered common shares that are reserved for issuance under our incentive plans.
Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce the influence of our
shareholders over matters on which our shareholders vote.
Our board of directors has the authority, without action or vote of our shareholders, to issue an unlimited number of common shares. For
example, we may issue our securities in connection with investments and acquisitions. The number of common shares issued in connection with
an investment or acquisition could constitute a material portion of the then-outstanding common shares and could materially dilute the ownership
of our shareholders. Issuances of common shares would reduce the influence of our common shareholders over matters on which our
shareholders vote.
There is no assurance that we will pay any cash dividends on our common shares in the future.
Although our board of directors declared a cash dividend on our common shares for each quarter of 2015, any future dividends on our
common shares will be determined at the discretion of our board of directors and will depend upon results of operations, financial condition,
contractual restrictions, including the terms of our preferred shares and agreements governing our debt and any future indebtedness we may
incur, restrictions imposed by applicable law and other factors that our board of directors deems relevant. Realization of a gain on an investment
in our common shares and in Partnership exchangeable units will depend on the appreciation of the price of our common shares and Partnership
exchangeable units, which may never occur.
Additional Factors Relating to Partnership Exchangeable Units
An active trading market for Partnership exchangeable units may not be sustained.
Partnership exchangeable units are not listed on a national exchange in the United States. Although Partnership exchangeable units are
listed on the Toronto Stock Exchange, an active public market for Partnership exchangeable units may not be sustained, and such market is not as
liquid as for the Company common shares. If an active public market is not sustained, it may be difficult for investors who hold Partnership
exchangeable units to sell their exchangeable units at a price that is attractive to them, or at all.
Partnership exchangeable units may not trade equally with the Company common shares.
Although now exchangeable, the Partnership exchangeable units are distinct securities from the Company’s common shares. The
Partnership exchangeable units and Company common shares will at all times trade separately, and the public market for Partnership
exchangeable units is not as liquid as for the Company common shares. In addition, if a holder of Partnership exchangeable units exercises its
exchange right, the Company, in its capacity as the general partner of Partnership and in its sole discretion, may cause Partnership to repurchase
each Partnership exchangeable unit submitted for exchange in consideration for cash (in an amount determined in accordance with the terms of
the partnership agreement) in lieu of exchanging for common shares. As such, Partnership exchangeable units may not trade equally with the
Company common shares, and could trade at a discount to the market price of the Company common shares, which discount could possibly be
material.
24
The exchange of Partnership exchangeable units into Company common shares is subject to certain restrictions and the
value of the Company common shares received in any exchange may fluctuate.
Beginning on December 12, 2015, holders of Partnership exchangeable units became entitled to require Partnership to exchange
all or any portion of such holder’s Partnership exchangeable units for Company common shares at a ratio of one Company common
share for each Partnership exchangeable unit, subject to the right of the Company, in its capacity as the general partner of Partnership
and in its sole discretion, to cause Partnership to repurchase the Partnership exchangeable units for cash (in an amount determined in
accordance with the terms of the partnership agreement) in lieu of exchanging for Company common shares.
The Company common shares for which Partnership exchangeable units may be exchanged may be subject to significant
fluctuations in value for many reasons, including:
•
•
•
•
•
•
our operating and financial performance and prospects;
general market conditions;
the risks described in this report;
changes to the competitive landscape in the industries or markets in which we operate;
the arrival or departure of key personnel; and
speculation in the press or the investment community.
If a holder of Partnership exchangeable units elects to exchange his or her Partnership exchangeable units for Company common
shares, the exchange generally will be taxable for Canadian and U.S. federal income tax purposes.
In certain circumstances, a Limited Partner may lose its limited liability status.
The Limited Partnerships Act (Ontario) (the “Ontario Limited Partnerships Act”) provides that a limited partner benefits from
limited liability unless, in addition to exercising rights and powers as a limited partner, such limited partner takes part in the control of
the business of a limited partnership of which such limited partner is a partner. Subject to the provisions of the Ontario Limited
Partnerships Act and of similar legislation in other jurisdictions of Canada, the liability of each limited partner for the debts, liabilities
and obligations of Partnership will be limited to the limited partner’s capital contribution, plus the limited partner’s share of any
undistributed income of Partnership. However, pursuant to the Ontario Limited Partnerships Act, where a limited partner has received
the return of all or part of that limited partner’s capital contribution, the limited partner would be liable to Partnership or, where
Partnership is dissolved, to its creditors, for any amount, not in excess of the amount of capital contribution returned with interest,
necessary to discharge the liabilities of Partnership to all creditors who extended credit or whose claims otherwise arose before the
return of the capital contribution. A limited partner holds as trustee for the limited partnership any money or other property that is
paid or conveyed to the limited partner as a return of the limited partner’s contribution that is made contrary to the Ontario Limited
Partnerships Act.
The limitation of liability conferred under the Ontario Limited Partnerships Act may be ineffective outside Ontario except to the
extent it is given extra-territorial recognition or effect by the laws of other jurisdictions. There may also be requirements to be
satisfied in each jurisdiction to maintain limited liability. If limited liability is lost, limited partners may be considered to be general
partners (and therefore be subject to unlimited liability) in such jurisdiction by creditors and others having claims against Partnership.
25
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
In 2015, we completed the move to our newly renovated corporate headquarters and TH global restaurant support center which
is located in Oakville, Ontario in Canada and consists of approximately 96,000 square feet which we own. Related to the TH
business, we own five distribution centers, two manufacturing centers, one warehouse and four offices throughout Canada. In
addition, we lease one office and one distribution center in Canada, one manufacturing center in the U.S., one office in the Middle
East and one office in Luxembourg.
Our U.S. headquarters and BK global restaurant support center is located in Miami, Florida and consists of approximately
213,000 square feet which we lease. We lease properties for our Burger King EMEA headquarters in Zug, Switzerland and our
Burger King APAC headquarters in Singapore. We also lease additional BK support offices in Madrid, Spain and own BK support
offices in Slough, United Kingdom.
We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.
As of December 31, 2015, Tim Hortons franchisees operated 4,389 restaurants across Canada, the U.S. and the Middle East, of
which 783 were sites owned by us and leased to franchisees, 2,782 were leased by us, and in turn, subleased to franchisees, with the
remainder either owned or leased directly by the franchisees. In addition, we operated 24 Company restaurants, of which 6 were sites
owned by us and 18 were leased by us.
As of December 31, 2015, Burger King franchisees operated 14,927 Burger King restaurants across the U.S. and Canada,
EMEA, APAC and LAC, of which 733 were sites owned by us and leased to franchisees, 1,114 were leased by us, and in turn,
subleased to franchisees, with the remainder either owned or leased directly by the franchisees. In addition, we operated 76 Company
restaurants, of which 15 were sites owned by us and 61 were leased by us.
Item 3.
Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including,
but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.
Item 4.
Mine Safety Disclosures
Not applicable.
26
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Shares
Our common shares trade on the New York Stock Exchange (“NYSE”) and Toronto Stock Exchange (“TSX”) under the ticker
symbol “QSR”. The Class B exchangeable limited partnership units of Partnership (the “Partnership exchangeable units”) trade on the
TSX under the ticker symbol “QSP”. Trading of our common shares and the Partnership exchangeable units commenced on
December 15, 2014. Effective as of the close of trading on December 12, 2014, the common stock of Burger King Worldwide, our
predecessor entity, ceased trading on the NYSE and Tim Hortons common shares ceased trading on the TSX and NYSE. As of
February 12, 2016, there were 18,686 holders of record of our common shares and approximately 13,111 former Tim Hortons
shareholders who are entitled to receive common shares of the Company but who have not submitted letters of transmittal to
exchange their Tim Hortons common shares.
The following table sets forth for the periods indicated the high and low closing sales prices of our common shares on the NYSE
and TSX, the Partnership exchangeable units on the TSX and Burger King Worldwide common stock on the NYSE and dividends
declared per common share of the Company and share of common stock of Burger King Worldwide and distributions declared on
Partnership exchangeable units by Partnership.
2015
First Quarter - QSR
Second Quarter - QSR
Third Quarter - QSR
Fourth Quarter - QSR
First Quarter - QSP
Second Quarter - QSP
Third Quarter - QSP
Fourth Quarter - QSP
2014
First Quarter - BKW
Second Quarter - BKW
Third Quarter - BKW
Fourth Quarter - BKW (1)
Fourth Quarter - QSR (2)
Fourth Quarter - QSP (2)
NYSE (U.S. $)
High
Low
TSX (C$)
High
Low
Dividends / Distributions
per Common Share /
Partnership Unit (U.S $)
$44.67
$42.42
$43.91
$40.96
$ —
$ —
$ —
$ —
$27.68
$27.26
$33.82
$36.66
$41.90
$ —
$37.80 C$55.91 C$44.48
$37.10 C$51.04 C$45.65
$34.71 C$57.92 C$46.60
$34.66 C$53.99 C$46.05
$ — C$53.50 C$42.75
$ — C$49.00 C$43.40
$ — C$55.96 C$45.25
$ — C$53.14 C$44.50
—
$22.16
—
$25.00
—
$26.05
—
$28.48
$35.29 C$47.03 C$41.14
$ — C$45.95 C$41.85
—
—
—
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.09
0.10
0.12
0.13
0.09
0.10
0.12
0.13
0.07
0.07
0.08
0.08
—
—
(1) Represents period from October 1, 2014 through December 12, 2014.
(2) Represents period from December 15, 2014 through the end of the quarter.
Dividend Policy
On February 16, 2016, our board of directors declared a cash dividend of $0.14 per common share, which will be paid on
April 4, 2016, to common shareholders of record on March 3, 2016. Partnership will also make a distribution in respect of each
Partnership exchangeable unit in the amount of $0.14 per exchangeable unit, and the record date and payment date for distributions
on Partnership exchangeable units are the same as the record date and payment date set forth above. On February 15, 2016, our board
of directors also declared a cash dividend of $0.98 per share of Class A 9.0% cumulative compounding perpetual voting preferred
shares of the Company (the “Preferred Shares”), for a total dividend of $67.5 million which will be paid to the holder of the Preferred
Shares on April 1, 2016. Because we are a holding company, our ability to pay cash dividends on our common shares may be limited
by restrictions under the terms of the Preferred Shares and agreements governing our debt. Although we do not have a dividend
policy, our board of directors may, subject to compliance with the covenants contained under the terms of the Preferred Shares and
agreements governing our debt and other considerations, determine to pay dividends in the future.
27
Issuer Purchases of Equity Securities
During the fourth quarter of 2015, Partnership received exchange notices representing 31,302,135 Partnership exchangeable
units. Pursuant to the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 8,150,003
Partnership exchangeable units for approximately $293.7 million in cash and exchanging 23,152,132 Partnership exchangeable units
for the same number of newly issued Company common shares. Pursuant to the terms of the partnership agreement, the purchase
price for the Partnership exchangeable units was based on the weighted average trading price of the Company’s common shares on
the NYSE for the 20 consecutive trading days ending on the last business day prior to December 14, 2015, which was the exchange
date for the units repurchased for cash. Upon the exchange of Partnership exchangeable units, each such Partnership exchangeable
unit was automatically deemed cancelled concurrently with such exchange.
Securities Authorized for Issuance under Equity Compensation Plans
The following table presents information regarding equity awards outstanding under our compensation plans as of December 31,
2015 (amounts in thousands):
Plan Category
Equity Compensation
Plans Approved by
Security Holders
Equity Compensation
Plans Not Approved
by Security Holders
Total
(a)
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities Remaining
Available for Future Issuance under
Equity Compensation Plans (Excluding
Securities Reflected in Column (a))
24,016
—
24,016
$
$
28
16.28
—
16.28
9,803
—
9,803
Stock Performance Graph
The graph shows the Company’s cumulative shareholder returns over the period from June 20, 2012, the date Burger King
Worldwide common stock was listed on the NYSE, to December 31, 2015. The graph reflects total shareholder returns for Burger
King Worldwide from June 20, 2012 to December 12, 2014, and for the Company from December 15, 2014 to December 31, 2015.
December 12, 2014 was the last day of trading on the NYSE of Burger King Worldwide common stock and December 15, 2014 was
the first day of trading on the NYSE and TSX of the Company’s common shares. The graph shows combined Burger King
Worldwide and the Company shareholder returns because the Company has less than two years of history as a public company. The
following graph depicts the total return to shareholders from June 20, 2012 through December 31, 2015, relative to the performance
of the Standard & Poor’s 500 Index and the Standard & Poor’s Restaurant Index, a peer group. The graph assumes an investment of
$100 in Burger King Worldwide common stock and each index on June 20, 2012 and the reinvestment of dividends paid since that
date. The stock price performance shown in the graph is not necessarily indicative of future price performance.
Restaurant Brands International (NYSE)
S&P 500 Index
S&P Restaurant Index
6/20/2012
100
$
100
$
100
$
12/31/2012
110
$
105
$
99
$
12/31/2013
153
$
136
$
121
$
12/31/2014
261
$
151
$
123
$
12/31/2015
$
$
$
250
150
151
29
Item 6.
Selected Financial Data
Our selected historical consolidated financial data reflects the consolidation of Tim Hortons beginning on December 12, 2014,
the closing date of the Transactions, and the consolidation of the noncontrolling interest in Partnership beginning on December 12,
2014.
We are the sole general partner of Partnership, which is the indirect parent of Tim Hortons and Burger King Worldwide. As a
result of our controlling interest, we consolidate the financial results of Partnership and record a noncontrolling interest for the
portion of Partnership we do not own in our consolidated financial statements. Net income (loss) attributable to noncontrolling
interests on the consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest
in Partnership owned by the holders of the noncontrolling interests.
Unless the context otherwise requires, all references to “we”, “us” or “our” refer to Restaurant Brands International Inc. and
its subsidiaries, collectively.
All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All
references to Canadian dollars or C$ are to the currency of Canada unless otherwise indicated.
The following tables present our selected historical consolidated financial and other data as of the dates and for each of the
periods indicated. All references to 2015, 2014, 2013, 2012 and 2011 in this section are for the years ended December 31,
2015, December 31, 2014, December 31, 2013, December 31, 2012 and December 31, 2011, respectively. The selected historical
financial data as of December 31, 2015 and December 31, 2014 and for 2015, 2014 and 2013 have been derived from our audited
consolidated financial statements and notes thereto included in this report. The selected historical financial data as of December 31,
2013, December 31, 2012 and December 31, 2011 and for 2012 and 2011 have been derived from our audited consolidated financial
statements and notes thereto, which are not included in this report, and reflects the reclassification of debt issuance costs from assets
to liabilities as a result of the adoption of an accounting standards update during 2015 that changed the presentation of debt issuance
costs in the financial statements. The other operating data for 2015, 2014 and 2013 have been derived from our internal records.
The selected consolidated financial and other operating data presented below contain all normal recurring adjustments that, in
the opinion of management, are necessary to present fairly our financial position and results of operations as of and for the periods
presented. The selected historical consolidated financial and other operating data included below and elsewhere in this report are not
necessarily indicative of future results. The information presented below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and “Financial Statements and
Supplementary Data” in Part II, Item 8 of this report.
Statement of Operations Data:
Revenues:
Sales
Franchise and property revenues
Total revenues
Income from operations (2)
Net income (loss) (2)
Earnings (loss) per common share:
Basic
Diluted (3)
Dividends per common share
Other Financial Data:
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activities
Net cash provided by (used for) financing activities
Capital expenditures
2014 (1)
2013
(In millions, except per share data)
2012
2011
2015
$ 2,169.0 $
1,883.2
4,052.2
1,192.2
$
$
$
$
1,031.4
1,198.8
181.1
167.4 $ 222.7 $1,169.0 $1,638.7
701.2
2,339.9
362.5
88.1
801.9
1,970.9
417.7
923.6
1,146.3
522.2
511.7 $ (269.3) $ 233.7 $ 117.7 $
0.51 $
0.50 $
0.44 $
(1.16) $
(2.32) $
0.30 $
0.67 $
0.65 $
0.24 $
0.34 $
0.33 $
0.04 $
0.25
0.25
1.13
$ 1,204.8 $
(61.5)
(2,115.2)
115.3
30
259.3 $ 325.2 $ 224.4 $ 406.2
(41.4)
(108.0)
82.1
33.6
(174.6)
70.2
43.0
(132.7)
25.5
(7,790.8)
8,565.6
30.9
Balance Sheet Data:
Cash and cash equivalents
Total assets
Total debt and capital lease obligations
Total liabilities
Redeemable preferred stock
Total equity
December 31,
2015
December 31,
2014 (1)
December 31,
2013
(In millions)
December 31,
2012
December 31,
2011
$
757.8
18,411.1
8,721.8
12,201.4
3,297.0
2,912.7
$
1,803.2
21,343.0
10,199.0
13,706.6
3,297.0
4,339.4
$
786.9
5,785.5
2,994.0
4,269.3
—
1,516.2
$
546.7
5,513.0
2,998.3
4,338.0
—
1,175.0
$
459.0
5,541.6
3,072.4
4,492.4
—
1,049.2
Other Operating Data:
System-wide sales growth (4)(5)
Tim Hortons (7)
Burger King
Comparable sales growth (4)(5)(6)
Tim Hortons (7)
Burger King
System-wide sales ($ in million) (5)
Tim Hortons (7)
Burger King
2015
2014
2013
9.3%
10.3%
5.6%
5.4%
6.6%
6.8%
3.1%
2.1%
4.7%
4.2%
1.2%
0.5%
$ 6,349.8
$17,303.7
$ 6,616.0
$17,017.1
$ 6,606.7
$16,301.0
(1) On December 12, 2014, we acquired Tim Hortons. Statement of operations data and other financial data include TH results from
the acquisition date through December 28, 2014, the end of Tim Hortons 2014 fiscal year. Balance sheet data includes TH data
as of December 28, 2014.
(2) Amount includes $116.7 million of TH transaction and restructuring costs and $0.5 million of acquisition accounting impact on
cost of sales for 2015. Amount includes $125.0 million of TH transaction and restructuring costs, $11.8 million of acquisition
accounting impact on cost of sales and $290.9 million of net losses on derivatives for 2014. Amount includes $26.2 million of
global portfolio realignment project costs for 2013. Amount includes $30.2 million of global portfolio realignment project costs
and $27.0 million of business combination agreement expenses for 2012. Amount includes $3.7 million of costs in connection
with the acquisition of Burger King Holdings, Inc. by 3G, $46.5 million of global restructuring and related professional fees,
$10.6 million of field optimization project costs and $7.6 million of global portfolio realignment project costs for 2011.
(3) For 2015 and 2014, the diluted earnings per share calculation assumes conversion of 100% of our Partnership exchangeable
units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the
holders of noncontrolling interests.
(4) Comparable sales growth and system-wide sales growth are analyzed on a constant currency basis, which means they are
calculated by translating prior year results at current year average exchange rates, to remove the effects of currency fluctuations
from these trend analyses. We believe these constant currency measures provide a more meaningful analysis of our business by
identifying the underlying business trends, without distortion from the effect of foreign currency movements.
(5) Unless otherwise stated, comparable sales growth and system-wide sales growth are presented on a system-wide basis, which
means they include Company restaurants and franchise restaurants. Franchise sales represent sales at all franchise restaurants
and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues are calculated
based on a percentage of franchise sales. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Key Business Metrics” in Part II, Item 7 of this report.
(6) Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for restaurants
that have been opened for thirteen months or longer.
(7) Tim Hortons 2014 annual figures and historical pre-combination figures are shown for informational purposes only.
31
Restaurant Brands International Inc. and Subsidiaries Restaurant Count
The table below sets forth our restaurant portfolio by segment for the periods indicated. Tim Hortons historical pre-combination
figures are shown for informational purposes only.
Number of system-wide restaurants:
TH (1)
BK
Total system-wide restaurants
December 31,
2015
December 31,
2014
December 31,
2013
4,413
15,003
19,416
4,258
14,372
18,630
4,114
13,667
17,781
(1) Excludes 398, 413 and 371 limited service kiosks as of December 31, 2015, 2014 and 2013, respectively. Commencing in the fourth
quarter of 2015, we revised our presentation of restaurant counts to exclude limited service kiosks, with the revision applied
retrospectively to the earliest period presented to provide period-to-period comparability.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
On December 12, 2014, a series of transactions (the “Transactions”) were completed resulting in Burger King Worldwide, Inc., a
Delaware corporation (“Burger King Worldwide”), and Tim Hortons Inc., a Canadian corporation (“Tim Hortons”), becoming indirect
subsidiaries of Restaurant Brands International Inc., a Canadian corporation (the “Company”), and Restaurant Brands International
Limited Partnership, an Ontario limited partnership (“Partnership”).
Our consolidated financial data reflects the consolidation of Tim Hortons and the consolidation of the noncontrolling interest in
Partnership beginning on December 12, 2014, the closing date of the Transactions.
We are the sole general partner of Partnership. As a result of our controlling interest, we consolidate the financial results of
Partnership and record noncontrolling interests for the portion of Partnership we do not own in our consolidated financial statements.
Net income (loss) attributable to noncontrolling interests on the consolidated statements of operations represent the portion of earnings
or loss attributable to the economic interest in Partnership owned by the holders of the noncontrolling interests. As sole general partner,
we manage all of Partnership’s operations and activities in accordance with the partnership agreement of Partnership (the “partnership
agreement”).
You should read the following discussion together with Part II, Item 6 “Selected Financial Data” of our Annual Report for the year
ended December 31, 2015 (our “Annual Report”) and our audited Consolidated Financial Statements and the related notes thereto
included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report.
The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations,
and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under
“Special Note Regarding Forward-Looking Statements” that is set forth below. Actual results may differ materially from the results
discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed in the
“Special Note Regarding Forward-Looking Statements” below. In addition, please refer to the risks set forth under the caption “Risk
Factors” included in our Annual Report for a further description of risks and uncertainties affecting our business and financial results.
Historical trends should not be taken as indicative of future operations and financial results. Other than as required under the U.S.
Federal securities laws or the Canadian securities laws, we do not assume a duty to update these forward-looking statements, whether as
a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S.
GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also
contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either
exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with
GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and
presented in accordance with U.S. GAAP and a reconciliation to GAAP measures.
Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” or “our” are to the Company
and its subsidiaries, collectively. Unless otherwise stated, comparable sales growth and sales growth are presented on a system-wide
basis, which means that these measures include sales at both restaurants owned by us (“Company restaurants”) and franchise
restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record
32
franchise sales as revenues; however, our franchise revenues include royalties based on franchise sales. System-wide results are
driven by our franchise restaurants, as approximately 100% of current Tim Hortons and Burger King system-wide restaurants are
franchised.
Overview
We are a Canadian corporation originally formed on August 25, 2014 to serve as the indirect holding company for Tim Hortons
and its consolidated subsidiaries and Burger King Worldwide and its consolidated subsidiaries. We are one of the world’s largest
quick service restaurant (“QSR”) companies with over 19,000 restaurants in approximately 100 countries and U.S. territories as of
December 31, 2015 and over 110 years of combined brand heritage. Our Tim Hortons® and Burger King® brands have similar
franchised business models with complementary daypart mixes. Our two iconic brands are managed independently while benefitting
from global scale and sharing of best practices.
Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot
and cold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis,
classic sandwiches, wraps, soups and more. Burger King restaurants are quick service restaurants that feature flame-grilled
hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other affordably-priced food items.
We generate revenue from four sources: (i) sales exclusive to Tim Hortons franchisees related to our supply chain operations,
including manufacturing, procurement, warehousing and distribution, as well as sales to retailers; (ii) property revenues from
properties we lease or sublease to franchisees; (iii) franchise revenues, consisting primarily of royalties based on a percentage of sales
reported by franchise restaurants and franchise fees paid by franchisees; and (iv) sales at Company restaurants.
As discussed in Note 26 to the accompanying consolidated financial statements, we completed an internal reorganization of our
business following the Transactions that resulted in two operating and reportable segments: (1) Tim Hortons (“TH”) and (2) Burger
King (“BK”). This change had no effect on our previously reported consolidated results of operations, financial position or cash
flows. In connection with this change, we have reclassified historical amounts to conform to our current segment presentation.
Operating Metrics and Key Financial Measures
We evaluate our restaurants and assess our business based on the following operating metrics and key financial measures:
•
•
•
•
System-wide sales growth refers to the change in sales at all franchise restaurants and Company restaurants in one
period from the same period in the prior year.
System-wide sales represent sales at all franchise restaurants and Company restaurants. We do not record franchise
sales as revenues; however, our franchise revenues include royalties based on a percentage of franchise sales.
Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for
restaurants that have been opened for thirteen months or longer.
Net restaurant growth (“NRG”) represents the opening of new restaurants (other than limited service kiosks) during
a stated period, net of closures. Commencing in the fourth quarter of 2015, we revised our presentation of NRG to
exclude limited service kiosks, with the revision applied retrospectively to the earliest period presented to provide
period-to-period comparability.
•
Adjusted EBITDA, which represents earnings (net income or loss) before interest, taxes, depreciation and
amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our
core operations. See Non-GAAP Reconciliations.
System-wide sales growth and comparable sales growth are measured on a constant currency basis, which means the results
exclude the effect of foreign currency translation (“FX impact”). For system-wide sales growth and comparable sales growth, we
calculate FX impact by translating prior year results at current year monthly average exchange rates. For items included in our results
of operations, we calculate the FX impact by translating current year results at prior year monthly average exchange rates. We
analyze certain financial measures on a constant currency basis as this helps identify underlying business trends, without distortion
from the effects of currency movements.
33
Recent Events and Factors Affecting Comparability
Tim Hortons Acquisition
We have consolidated the results of operations of our TH business commencing on the acquisition date of December 12, 2014,
and the changes in our results of operations for 2015 as compared to 2014 are largely driven by the inclusion of the results of
operations of Tim Hortons for a full year in 2015 compared to the period of December 12, 2014 through December 28, 2014 in 2014.
The TH statement of operations data for 2015 and the period of December 12, 2014 through December 28, 2014, the end of Tim
Hortons 2014 fiscal year, is summarized as follows:
Tim Hortons Impact (millions)
Revenues:
Sales
Franchise and property revenues
Total revenues
Cost of sales
Franchise and property expenses
Selling, general and administrative expenses (1)
(Income) loss from equity method investments
Other operating expenses (income), net
Total operating costs and expenses
Income from operations
December 12,
2014 through
December 28,
2014
$
$
92.8
50.8
143.6
92.1
26.1
78.4
(0.3)
1.1
197.4
(53.8)
2015
$2,074.3
882.6
2,956.9
1,728.1
360.7
172.9
(7.9)
20.9
2,274.7
$ 682.2
(1) Tim Hortons selling, general and administrative expenses for 2015 and the period from December 12, 2014 through
December 28, 2014 include (i) $58.5 million and $63.9 million, respectively, of transaction and restructuring costs associated
with the Transactions, which are included in the amounts discussed below, and (ii) $13.8 million and $7.7 million, respectively,
of share-based compensation expense associated with the remeasurement of liability-classified stock options to fair value.
TH Transaction and Restructuring Costs
In connection with the Transactions and a series of post-closing transactions during 2015 that resulted in changes to our legal
and capital structure, we incurred certain non-recurring selling, general and administrative expenses during 2015 and 2014, consisting
of the following:
•
Financing, legal and advisory fees, share-based compensation expense due to accelerated vesting of equity awards as a
result of the Transactions and integration costs related to a realignment of our global structure to better accommodate the
needs of the combined business, totaling $83.4 million and $108.7 million during 2015 and 2014, respectively;
•
Severance benefits, other compensation costs and training expenses of approximately $31.1 million and $16.3 million
during 2015 and 2014, respectively, related to a restructuring plan we implemented following the Transactions, which
resulted in work force reductions throughout our TH business; and
•
Financing, legal and advisory fees totaling $2.2 million during 2015, in connection with issuing $1,250.0 million of
4.625% first lien senior secured notes due January 15, 2022 and entering into a first amendment to our credit agreement in
May 2015.
34
Other Factors
In addition to the impact of consolidating TH results of operations commencing on the acquisition date of December 12, 2014
and TH transaction and restructuring costs, we also recorded losses on derivatives, incremental interest expense related to new
borrowings and a loss on early extinguishment of debt in connection with the Transactions. See Results of Operations – Other
operating expenses (income), net, –Interest expense, net and – Loss on early extinguishment of debt.
Global Portfolio Realignment Project
During 2011, we initiated a project to realign our global restaurant portfolio by selling our BK company restaurants to
franchisees, which we refer to as our “refranchising initiative”, and establishing strategic partnerships to accelerate development
through joint ventures and master franchise and development agreements (the “global portfolio realignment project”). As a result of
the global portfolio realignment project, we incurred $26.2 million of general and administrative expenses consisting of professional
fees and severance in 2013. We completed our global portfolio realignment project, including our refranchising initiative, in 2013. As
such, we did not incur any expenses related to the global portfolio realignment project during 2015 and 2014.
As a result of the global portfolio realignment project, our BK restaurant revenues and BK restaurant expenses have
significantly decreased while our BK franchise and property revenues and BK franchise and property expenses have increased.
Additionally, our BK selling expenses have decreased as a result of a decrease in advertising fund contributions for Burger King
Company restaurants following the refranchisings.
35
Results of Operations
Tabular amounts in millions of dollars unless noted otherwise.
Consolidated
Revenues:
Sales
Franchise and property revenues
Total revenues
Cost of sales
Franchise and property expenses
Selling, general and administrative expenses
(Income) loss from equity method investments
Other operating expenses (income), net
Total operating costs and expenses
Income from operations
Interest expense, net
Loss on early extinguishment of debt
Income (loss) before income taxes
Income tax expense
Net income (loss)
Net income (loss) attributable to noncontrolling interests
Preferred shares dividends
Accretion of preferred shares to redemption value
Net income (loss) attributable to common shareholders
NM - Not Meaningful
BK Segment FX Impact Favorable/(Unfavorable)
Consolidated total revenues
Consolidated franchise and property expenses
Consolidated SG&A
Consolidated income from operations
Consolidated net income
Consolidated Adjusted EBITDA
Key Business Metrics
System-wide sales growth
TH (a)
BK
System-wide sales
TH (a)
BK
Comparable sales growth
TH (a)
BK
System Net Restaurant Growth (NRG)
TH (a)
BK
Restaurant counts at period end
TH (b)
BK
System
2015
2014
2013
2015
Compared
to 2014
2014
Compared
to 2013
Favorable / (Unfavorable)
$2,169.0 $ 167.4
1,031.4
1,198.8
1,883.2
4,052.2
$ 222.7 $ 2,001.6 $
923.6
1,146.3
851.8
2,853.4
(55.3)
107.8
52.5
1,809.5
503.2
437.7
4.1
105.5
2,860.0
1,192.2
478.3
40.0
673.9
162.2
511.7
136.6
271.2
—
156.4
179.0
345.4
9.5
327.4
1,017.7
181.1
279.7
155.4
(254.0)
15.3
(269.3)
(430.7)
13.8
546.4
$ 103.9 $ (398.8)
195.3
152.4
242.4
12.7
21.3
624.1
522.2
200.0
—
322.2
88.5
233.7
—
—
—
$ 233.7 $
38.9
(1,653.1)
(26.6)
(324.2)
(103.0)
(92.3)
3.2
5.4
(306.1)
221.9
(393.6)
(1,842.3)
(341.1)
1,011.1
(79.7)
(198.6)
(155.4)
115.4
(576.2)
927.9
73.2
(146.9)
(503.0)
781.0
430.7
(567.3)
(13.8)
(257.4)
546.4
(546.4)
502.7 $ (632.5)
2015
2014
2013
$
(69.8)
4.8
7.8
(66.4)
(62.9)
(61.9)
$
(14.6)
—
0.8
(15.5)
(14.7)
(14.7)
$
(7.5)
0.3
(1.2)
(8.7)
(8.6)
(8.6)
2015
2014
2013
9.3%
10.3%
6.6%
6.8%
n/a
4.2%
$ 6,349.8
$17,303.7
$ 6,616.0
$17,017.1
n/a
$16,301.0
5.6%
5.4%
155
631
3.1%
2.1%
144
705
n/a
0.5%
n/a
670
4,413
15,003
19,416
4,258
14,372
18,630
n/a
13,667
13,667
TH 2014 annual figures are shown for informational purposes only.
(a)
(b) Excludes 398 and 413 limited service kiosks at December 31, 2015 and 2014, respectively. Commencing in the fourth quarter of 2015, we
revised our presentation of restaurant counts to exclude limited service kiosks, with the revision applied retrospectively to the earliest
period presented to provide period-to-period comparability.
36
Comparable Sales Growth
TH global system comparable sales growth of 5.6% for 2015 was driven by continued strength in beverages and innovative new
product launches, such as grilled breakfast and lunch wraps and Nutella baked goods.
BK global system comparable sales growth of 5.4% and 2.1% for 2015 and 2014, respectively, reflects the impact of successful
new products and promotions.
Sales and Cost of Sales
Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products,
supplies and restaurant equipment as well as sales to retailers, other than equipment sales related to initial restaurant establishment or
renovations that are shipped directly from our warehouses or by third-party distributors to restaurants or retailers. Sales from
Company restaurants, including sales by our consolidated TH Restaurant VIEs (see Note 3 to the accompanying consolidated
financial statements for additional information on Restaurant VIEs), represent restaurant-level sales to our guests.
Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and
depreciation, as well as the cost of goods delivered by third-party distributors to the restaurants for which we manage the supply chain
logistics, and for products sold through grocery stores. Cost of sales also includes food, paper and labor costs of Company restaurants,
which are principally costs incurred by our consolidated TH Restaurant VIEs.
During 2015, the increase in sales was driven primarily by the inclusion of $2,074.3 million of TH sales for a full year compared
to $92.8 million in 2014 as a result of the Transactions.
During 2014, the decrease in sales was driven by a $148.1 million decrease in BK Company restaurant sales primarily due to the
net refranchising of 360 BK Company restaurants during 2013. These factors were partially offset by $92.8 million of TH sales as a
result of the Transactions.
During 2015, the increase in cost of sales was driven primarily by the inclusion of $1,728.1 million of TH cost of sales for a full
year compared to $92.1 million in 2014 as a result of the Transactions.
During 2014, the decrease in cost of sales was driven by a $131.0 million decrease in BK Company restaurant cost of sales
primarily due to the net refranchising of 360 BK Company restaurants during 2013. These factors were partially offset by $92.1
million of TH cost of sales as a result of the Transactions.
Franchise and Property
Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or
subleased to franchisees, franchise fees, revenues derived from equipment packages at establishment of a restaurant and in connection
with renewal or renovation, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased
to franchisees, rental expense associated with properties subleased to franchisees, costs of equipment packages sold at establishment
of a restaurant and in connection with renewal or renovation, amortization of franchise agreements and bad debt expense (recoveries).
During 2015, the increase in franchise and property revenues was driven by the inclusion of $882.6 million of TH franchise and
property revenues for a full year compared to $50.8 million in 2014 as a result of the Transactions. To a lesser extent, the increase in
franchise and property revenues, excluding FX impact, was driven by a $89.0 million increase in BK franchise and property revenues
due primarily to (i) an increase of $75.6 million in BK franchise royalties driven by NRG and comparable sales growth during 2015
and (ii) an increase of $13.7 million in BK franchise fees and other revenue driven primarily by an increase in renewal franchise fees.
During 2015, franchise and property revenues had a $69.0 million unfavorable FX impact related to our BK segment.
37
During 2014, the increase in franchise and property revenues, excluding FX impact, was driven by a $71.6 million increase in
BK franchise and property revenues due primarily to (i) an increase of $47.8 million in BK franchise royalties driven by worldwide
net restaurants growth of 705 restaurants during 2014, the net refranchising of 360 BK Company restaurants during 2013 and
comparable sales growth, (ii) an increase of $21.7 million in BK franchise fees and other revenue driven primarily by an increase in
renewal franchise fees, and (iii) an increase of $2.1 million in BK property revenue. Additionally, franchise and property revenues
increased due to $50.8 million of TH franchise and property revenues as a result of the Transactions. During 2014, franchise and
property revenues had a $14.6 million unfavorable FX impact related to our BK segment.
During 2015, the increase in franchise and property expenses was driven primarily by the inclusion of $360.7 million of TH
franchise and property expenses for a full year compared to $26.1 million in 2014 as a result of the Transactions.
During 2014, the increase in franchise and property expenses was driven primarily by the inclusion of $26.1 million of TH
franchise and property expenses in 2014 as a result of the Transactions.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were comprised of the following:
2015
2014
2013
2015 Compared to 2014
%
$
2014 Compared to 2013
$
%
Selling expenses
Management general and administrative expenses 238.5 166.7 181.0
Share-based compensation and non-cash incentive
$ 13.7 $ 2.4 $ 6.2 $
compensation expense
Depreciation and amortization
TH transaction and restructuring costs
Global portfolio realignment project costs
Total general and administrative expenses
Selling, general and administrative expenses
37.3
14.0
17.6
51.8
17.0
11.4
116.7 125.0 —
— —
26.2
424.0 343.0 236.2
$437.7 $345.4 $242.4 $
(11.3)
(71.8)
(14.5)
(3.0)
8.3
—
(81.0)
(92.3)
Favorable / (Unfavorable)
NM
$
(43.1)%
3.8
14.3
61.3%
7.9%
(19.7) (111.9)%
(38.9)%
(22.8)%
(2.6)
(21.4)%
NM
(125.0)
NM
NM
26.2
NM
(45.2)%
(106.8)
(23.6)%
(42.5)%
(26.7)% $ (103.0)
NM – Not Meaningful
Selling expenses consist primarily of Company restaurant advertising fund contributions and the increase in selling expenses for
2015 was primarily a result of advertising fund contributions from TH Restaurant VIEs. During 2014, selling expenses decreased
primarily as a result of the net refranchisings of 360 BK Company restaurants during 2013.
Management general and administrative expenses (“Management G&A”) are comprised primarily of salary and employee
related costs for our non-restaurant employees, professional fees, information technology systems, and general overhead for our
corporate offices. During 2015, the increase in Management G&A was driven primarily by the inclusion of $79.7 million of TH
Management G&A for a full year compared to $5.6 million in 2014 as a result of the Transactions, partially offset by favorable FX
impact related to our BK segment. The decrease in Management G&A in 2014 was driven primarily by a decrease in BK salary and
fringe benefits, professional services and favorable FX impact, partially offset by the inclusion of $5.6 million of TH Management
G&A.
During 2015, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to
additional stock options granted during 2015, an increase in non-cash incentive compensation of $4.0 million and a $6.1 million
increase in share-based compensation expense to $16.2 million related to the remeasurement of stock options that are liability-
classified or granted to non-employees to fair value. During 2015, the Company modified a portion of liability-classified awards that
resulted in a change in classification of the awards from liability to equity and as such these modified awards will no longer be
revalued after the modification date.
During 2014, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to
additional stock options granted during 2014, a $6.4 million increase in stock option modifications compared to 2013 and a $10.5
million increase in share-based compensation expense to $12.3 million related to the remeasurement of stock options that are
liability-classified or granted to non-employees to fair value, including $7.7 million for liability-classified Tim Hortons stock options.
38
During 2015, the increase in depreciation and amortization expense is primarily due to the inclusion of the TH business for a full
year as a result of the Transactions. During 2014, the increase in depreciation and amortization expenses is primarily due to corporate
capital expenditures.
(Income) Loss from Equity Method Investments
(Income) loss from equity method investments reflects our share of investee net income or loss. (Income) loss from equity
method investments from these investments is considered to be an integrated part of our business operations, and is therefore included
in operating income.
During 2015, the (income) loss from equity method investments includes $7.9 million of investee net income from TH equity
method investments. During 2015, we also recorded a $10.9 million noncash dilution gain included in (income) loss from equity
method investments on the issuance of capital stock by BK Brasil Operacao E Assesoria A Restaurantes S.A., our Brazilian joint
venture and one of our equity method investees. The investee net income from TH equity method investments and dilution gain are
offset by net losses from other BK equity method investments.
During 2014, we recorded a $5.8 million noncash dilution gain included in (income) loss from equity method investments on the
issuance of stock by Carrols Restaurant Group, Inc. (“Carrols”), one of our equity method investees. The dilution gain is offset by net
losses from BK equity method investments.
Other Operating Expenses (Income), net
Our other operating expenses (income), net were comprised of the following:
Net losses (gains) on disposal of assets, restaurant closures and refranchisings
Litigation settlements and reserves, net
Net losses on derivatives
Foreign exchange net losses (gains)
Other, net
Other operating expenses (income), net
2015
2014
2013
$ 22.0 $ 25.4 $ 0.7
7.6
—
7.4
5.6
$105.5 $327.4 $21.3
4.0
290.9
(3.8)
10.9
1.3
37.3
46.7
(1.8)
Net losses on disposal of assets, restaurant closures and refranchisings represent sales of properties and other costs related to
restaurant closures and refranchisings, and are recorded in other operating expenses (income), net in the accompanying consolidated
statements of operations. Gains and losses recognized in the current period may reflect certain costs related to closures and
refranchisings that occurred in previous periods.
During 2015, net losses on disposal of assets, restaurant closures and refranchisings consisted of net losses associated with
refranchisings of $2.6 million and net losses associated with asset disposals and restaurant closures of $19.4 million.
During 2014, net losses on disposal of assets, restaurant closures and refranchisings consisted of net losses associated with
refranchisings of $10.5 million and net losses associated with asset disposals and restaurant closures of $14.9 million.
During 2013, net losses on disposal of assets, restaurant closures and refranchisings consisted of net gains associated with
refranchisings of $5.3 million, net losses from sale of subsidiaries of $1.0 million and net losses associated with asset disposals and
restaurant closures of $5.0 million.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
During 2015, net losses on derivatives primarily reflects the reclassification of losses on cash flow hedges from accumulated
other comprehensive income (loss) to earnings as a result of de-designation and settlement of certain interest rate swaps.
During 2014, we entered into foreign currency forward and foreign currency option contracts to hedge our exposure to the
volatility of the Canadian dollar in connection with the cash portion of the purchase price of the Tim Hortons acquisition. We
recorded a net loss on derivatives of $133.0 million related to the change in fair value on these instruments and an expense of $59.9
million related to the premium on the foreign currency option contracts. These instruments were settled in the fourth quarter of 2014.
39
Additionally, as a result of discontinuing hedge accounting on our interest rate caps and forward-starting interest rate swaps, we
recognized a loss of $34.5 million related to the change in fair value related to both instruments and a net gain of $13.4 million related
to the reclassification of amounts from AOCI into earnings related to both instruments. These instruments were settled in the fourth
quarter of 2014. Additionally, during the fourth quarter of 2014 we entered into a series of forward-starting interest rate swaps to
economically hedge the variability in the interest payments associated with our 2014 Term Loan Facility (as defined below) and
recorded a gain of $88.9 million related to the change in fair value related to these instruments. Lastly, during the fourth quarter of
2014 we entered into a series of cross-currency rate swaps to protect the value of our investments in our foreign operations against
adverse changes in foreign currency exchange rates and recorded a loss of $165.8 million related to the change in fair value on these
instruments. See Note 17 to the accompanying consolidated financial statements for additional information about accounting for our
derivative instruments.
Interest Expense, net
Interest expense, net
Weighted average interest rate on long-term debt
2015
$478.3
5.2%
2014
$279.7
2013
$200.0
6.0%
6.6%
During 2015, interest expense, net increased compared to 2014 primarily due to an increase in outstanding debt for a full year as
a result of the Transactions in December 2014, partially offset by a reduction in our weighted average interest rate.
During 2014, interest expense, net increased compared to 2013 primarily due to an increase in outstanding debt as a result of the
Transactions in December 2014. In connection with the Transactions, we incurred $6,750.0 million of term loans on October 27, 2014
and $2,250.0 million of senior notes on October 8, 2014, with interest expense beginning to accrue from each respective date. See
Note 12 to the accompanying consolidated financial statements for additional information on interest expense, net.
Loss on Early Extinguishment of Debt
In connection with the refinancing and prepayment of a portion of the term loans outstanding under our 2014 Credit Facilities as
well as the redemption of a portion of our Tim Hortons Notes (as such terms are defined below), we recorded a $40.0 million loss on
early extinguishment of debt in 2015. The loss on early extinguishment of debt primarily reflects the write-off of unamortized debt
issuance costs and discounts.
In connection with the refinancing of term loans outstanding under the 2012 Credit Agreement, as well as the redemptions of
our 2011 Discount Notes and 2010 Senior Notes (as such terms are defined below), we recorded a $155.4 million loss on early
extinguishment of debt in 2014. The loss on early extinguishment of debt reflects the write-off of unamortized debt issuance costs, the
write-off of unamortized discounts, commitment fees associated with the bridge loan available at the closing of the Transactions, and
the payment of premiums to redeem the 2011 Discount Notes and 2010 Senior Notes.
Income Tax Expense
During 2015 and 2014, we completed a series of transactions which resulted in a change to our legal and capital structure. The
restructuring impacts the comparability of the current period effective tax rate to prior periods.
Our effective tax rate was 24.1% in 2015, primarily a result of the mix of income from multiple tax jurisdictions, partially offset
by the favorable impact from intercompany financing.
Our effective tax rate was a negative 6.0% in 2014, primarily due to the impact of the Transactions, including non-deductible
transaction related costs, and the mix of income from multiple tax jurisdictions.
Our effective tax rate was 27.5% in 2013, primarily as a result of the mix of income from multiple tax jurisdictions and the
impact of non-deductible expenses related to our global portfolio realignment project, partially offset by a favorable impact from the
sale of foreign subsidiaries and a reduction in the state effective tax rate related to our global portfolio realignment project.
40
Net Income (Loss)
We reported net income of $511.7 million during 2015, compared to a net loss of $269.3 million during 2014, primarily as a
result of an increase in income from operations of $1,011.1 million and a decrease in loss on early extinguishment of debt of $115.4
million, partially offset by an increase in interest expense, net of $198.6 million and an increase in income tax expense of $146.9
million. The increase in income from operations was driven by an increase in sales, an increase in franchise and property revenues
and a decrease in other operating expenses (income), net, partially offset by an increase in cost of sales, an increase in franchise and
property expenses, and an increase in selling, general and administrative expenses, as discussed above.
We reported a net loss of $269.3 million during 2014, compared to net income of $233.7 million during 2013, primarily as a
result of a $341.1 million decrease in income from operations, which was driven by an increase in other operating expenses (income),
net, an increase in selling, general and administrative expenses, a decrease in sales and an increase in franchise and property
expenses, partially offset by an increase in franchise and property revenues, a decrease in cost of sales and a decrease in (income) loss
from equity method investments. Additionally, our net loss was also impacted by an increase in interest expense, net of $79.7 million
and the recognition of loss on early extinguishment of debt of $155.4 million, partially offset by a decrease in income tax expense of
$73.2 million.
Non-GAAP Reconciliations
The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. EBITDA is
defined as earnings (net income or loss) before interest, loss on early extinguishment of debt, taxes, and depreciation and
amortization. Adjusted EBITDA is defined as EBITDA excluding the impact of share-based compensation and non-cash incentive
compensation expense, other operating expenses (income), net, (income) loss from equity method investments, net of cash
distributions received from equity method investments, and all other specifically identified costs associated with non-recurring
projects, including acquisition accounting impact on cost of sales and TH transaction and restructuring costs. Adjusted EBITDA is
used by management to measure operating performance of the business, excluding specifically identified items that management
believes do not directly reflect our core operations, and represents our measure of segment income.
Segment income:
TH
BK
Adjusted EBITDA
Share-based compensation and non-cash incentive compensation
expense
Acquisition accounting impact on cost of sales
TH transaction and restructuring costs
Global portfolio realignment project costs
Impact of equity method investments (a)
Other operating expenses (income), net
EBITDA
Depreciation and amortization
Income from operations
Interest expense, net
Loss on early extinguishment of debt
Income tax expense
Net income (loss)
NM – Not Meaningful
2015
2014
2013
2015
2014
Compared
Compared
to 2014
to 2013
Favorable / (Unfavorable)
$ 906.7 $ 34.9
726.0
760.9
759.5
1,666.2
$ — $
665.6
665.6
871.8 $
33.5
905.3
34.9
60.4
95.3
51.8
0.5
116.7
—
17.7
105.5
1,374.0
181.8
1,192.2
478.3
40.0
162.2
37.3
11.8
125.0
—
9.5
327.4
249.9
68.8
181.1
279.7
155.4
15.3
$ 511.7 $(269.3)
17.6
—
—
26.2
12.7
21.3
587.8
65.6
522.2
200.0
—
88.5
$233.7 $
(19.7)
(14.5)
(11.8)
11.3
(125.0)
8.3
26.2
—
3.2
(8.2)
(306.1)
221.9
(337.9)
1,124.1
(3.2)
(113.0)
(341.1)
1,011.1
(79.7)
(198.6)
(155.4)
115.4
(146.9)
73.2
781.0 $ (503.0)
(a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method
investments. Cash distributions received from our equity method investments are included in segment income.
The increase in Adjusted EBITDA for 2015 primarily reflects consolidation of TH for a full year in 2015 and, to a lesser extent,
an increase in segment income in our BK segment. The increase in Adjusted EBITDA for 2014 primarily reflects an increase in
segment income in our BK segment as well as the impact of the consolidation of Tim Hortons beginning in December 2014.
41
The increase in EBITDA for 2015 primarily reflects consolidation of TH for a full year in 2015, an increase in BK segment income, a
decrease in other operating expenses (income), net, a decrease in TH transaction and restructuring costs and a decrease in acquisition
accounting impact on cost of sales, partially offset by an increase in share-based compensation and non-cash incentive compensation expense.
EBITDA for 2014 decreased primarily from an increase in other operating expenses (income), net, the incurrence of TH transaction and
restructuring costs, the acquisition accounting impact on cost of sales and an increase in share-based compensation and non-cash incentive
compensation expenses, partially offset by the factors described above that resulted in an increase in Adjusted EBITDA as well as the non-
recurrence of global portfolio realignment project costs.
Segment Results for 2015
Franchise:
2015
2014
BK Segment
Favorable /(Unfavorable)
Total
TH Segment BK Segment
Total
TH Segment
BK Segment
$
%
Franchise and property revenues $1,883.2 $
503.2
Franchise and property expenses
882.6 $ 1,000.6 $1,031.4 $
142.5
360.7
179.0
50.8 $
26.1
980.6 $
152.9
20.0
10.4
2.0%
6.8%
Sales and cost of sales (1):
Sales
Cost of sales
Segment SG&A (2)
Segment depreciation and
amortization (3)
Segment income (4)
2,169.0
1,809.5
2,074.3
1,728.1
94.7
81.4
167.4
156.4
92.8
92.1
74.6
64.3
20.1
(17.1)
26.9%
(26.6)%
252.2
93.2
159.0
169.1
6.6
162.5
3.5
2.2%
164.8
1,666.2
117.7
906.7
47.1
759.5
54.8
760.9
4.3
34.9
50.5
726.0
3.4
33.5
6.7%
4.6%
(1)
(2)
(3)
Includes Restaurant VIEs.
Segment selling, general and administrative expenses (“Segment SG&A”) consists of segment selling expenses and management general
and administrative expenses.
Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property
expenses.
(4) TH segment income for 2015 excludes $0.5 million of acquisition acounting impact on cost of sales and includes $13.6 million of cash
distributions received from equity method investments. TH segment income for 2014 excludes $11.8 million of acquisition acounting
impact on cost of sales.
Results of Operations for TH Segment for 2015
Results of operations for our TH segment reflect consolidation of TH for a full year in 2015 compared to the period of December 12, 2014
through December 28, 2014 in 2014, as a result of the Transactions in December 2014.
Results of Operations for BK Segment for 2015
Franchise and Property
During 2015, the increase in franchise and property revenues, excluding FX impact, was due primarily to (i) an increase of $75.6 million
in franchise royalties primarily driven by NRG and comparable sales growth and (ii) an increase of $13.7 million in franchise fees and other
revenue driven by an increase in renewal franchise fees. During 2015, franchise and property revenues had a $69.0 million unfavorable FX
impact.
During 2015, the decrease in franchise and property expenses was primarily related to a decrease in property expenses and a $4.8 million
favorable FX impact.
Segment SG&A
During 2015, the decrease in Segment SG&A was driven primarily by favorable FX impact.
Segment Income
During 2015, segment income increased primarily due to an increase in franchise and property revenues net of expenses, an increase in
sales net of cost of sales and a decrease in Segment SG&A.
42
Segment Results for 2014
Franchise:
2014
Total
TH Segment
BK Segment
2013
BK Segment
BK Segment
Favorable /(Unfavorable)
$
%
Franchise and property revenues
Franchise and property expenses
$1,031.4 $
179.0
50.8 $
26.1
980.6 $
152.9
923.6 $
152.4
57.0
(0.5)
6.2%
(0.3)%
Sales and cost of sales (1):
Sales
Cost of sales
Segment SG&A (2)
Segment depreciation and amortization (3)
Segment income (4)
167.4
156.4
169.1
54.8
760.9
92.8
92.1
6.6
4.3
34.9
74.6
64.3
162.5
50.5
726.0
222.7
195.3
187.2
54.2
665.6
(148.1)
131.0
(66.5)%
67.1%
24.7
3.7
60.4
13.2%
6.8%
9.1%
Results of Operations for BK Segment for 2014
Franchise and Property
During 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to (i) an increase of
$47.8 million in franchise royalties primarily driven by NRG, the net refranchising of 360 BK Company restaurants during 2013 and
comparable sales growth, (ii) an increase of $21.7 million in franchise fees and other revenue driven primarily by an increase in
renewal franchise fees, and (iii) an increase of $2.1 million in BK property revenue. During 2014, franchise and property revenues
had a $14.6 million unfavorable FX impact.
During 2014, the change in franchise and property expenses from the prior year was not meaningful.
Segment SG&A
During 2014, the decrease in Segment SG&A was driven primarily by a decrease in salary and fringe benefits.
Segment Income
During 2014, segment income increased primarily due to an increase in franchise and property revenues net of expenses and a
decrease in Segment SG&A.
43
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving
Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal
payments, to make Preferred Share dividends, to repurchase our common shares, to repurchase Partnership exchangeable units of
Partnership, to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund our investing activities and to
pay dividends on our common shares. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are
significant, primarily due to debt service and the cash dividend requirements of our Preferred Shares.
At December 31, 2015, we had cash and cash equivalents of $757.8 million and working capital of $248.5 million. In addition,
at December 31, 2015, we had borrowing availability of $496.2 million under our Revolving Credit Facility. Based on our current
level of operations and available cash, we believe our cash flow from operations, combined with availability under our Revolving
Credit Facility, will provide sufficient liquidity to fund our current obligations, Preferred Share dividends, debt service requirements
and capital spending over the next twelve months.
At December 31, 2015, approximately 22% of our consolidated cash and cash equivalents balances were held in tax jurisdictions
other than Canada and the U.S. Undistributed earnings of our foreign subsidiaries for periods prior to the Transactions are considered
indefinitely reinvested for U.S. income tax purposes. Subsequent to the Transactions, we record a deferred tax liability for earnings of
foreign subsidiaries with U.S. parent companies when such amounts are not considered permanently reinvested and would be subject
to tax in the U.S. upon repatriation of cash.
Debt Instruments and Debt Service Requirements
Our long-term debt is comprised primarily of borrowings under our 2015 Amended Credit Agreement, amounts outstanding
under our 2015 Senior Notes, 2014 Senior Notes and Tim Hortons Notes (each defined below), and obligations under capital leases.
For further information about our long-term debt, see Note 12 to the accompanying consolidated financial statements included in
Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report.
On May 22, 2015, two of our subsidiaries (the “Borrowers”) issued $1,250.0 million of 4.625% first lien senior secured notes
due January 15, 2022 (the “2015 Senior Notes”) and entered into a first amendment to our credit agreement dated October 27, 2014
(the “2015 Amended Credit Agreement”). Under the 2015 Amended Credit Agreement, (1) the aggregate principal amount of the
secured term loans (the “Term Loan Facility”) was decreased to $5,140.4 million as a result of the repayment of $1,550.0 million
from the net proceeds from the offering of the 2015 Senior Notes and cash on hand and (2) the interest rate applicable to the Term
Loan Facility was reduced to, at our option, either (i) a base rate plus an applicable margin equal to 1.75% or (ii) a Eurocurrency rate
plus an applicable margin equal to 2.75%. The 2015 Amended Credit Agreement also provides for a senior secured revolving credit
facility for up to $500.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans
and letters of credit), the amount of which was unchanged by the May 22, 2015 amendment (the “Revolving Credit Facility,” together
with the Term Loan Facility, the “Credit Facilities”).
2015 Amended Credit Agreement
As of December 31, 2015, there was $5,097.7 million outstanding principal amount under the Term Loan Facility. As of
December 31, 2015, the interest rate was 3.75% on our Term Loan Facility. Based on the amounts outstanding under the Term Loan
Facility and the three-month LIBOR rate as of December 31, 2015, subject to a floor of 1.00%, required debt service for the next
twelve months is estimated to be approximately $194.1 million in interest payments and $34.4 million in principal payments. In
addition, as of December 31, 2015, net cash settlements that we expect to pay on our $2,500.0 million interest rate swap are estimated
to be approximately $7.6 million for the next twelve months.
As of December 31, 2015, we had no amounts outstanding under the Revolving Credit Facility. Funds available under the
Revolving Credit Facility for future borrowings may be used to repay other debt, finance debt or share repurchases, acquisitions,
capital expenditures and other general corporate purposes. We have a $125.0 million letter of credit sublimit as part of the Revolving
Credit Facility, which reduces our borrowing capacity under this facility by the cumulative amount of outstanding letters of credit. As
of December 31, 2015, we had $3.8 million of letters of credit issued against the Revolving Credit Facility and our borrowing
availability was $496.2 million.
The obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent
company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including Tim Hortons, Burger King
Worldwide and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed
under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and
future property (subject to certain exceptions) of each Borrower and Credit Guarantor.
44
The Term Loan Facility matures on December 12, 2021 and the Revolving Credit Facility matures on December 12, 2019. The
principal amount of the 2014 Term Loan Facility amortizes in quarterly installments equal to 0.25% of the aggregate principal
amount of the Term Loan Facility as of May 22, 2015, with the balance payable at maturity. Any prepayments made on the Term
Loan Facility will reduce the quarterly installments. As a result of the prepayments made during 2015, the annual principal amount
due during 2016 was reduced from $51.4 million to $34.4 million.
We may prepay the Term Loan Facility in whole or in part at any time. Additionally, subject to certain exceptions, the Term
Loan Facility is subject to mandatory prepayments in amounts equal to (1) 100% of the net cash proceeds from any non-ordinary
course sale or other disposition of assets (including as a result of casualty or condemnation); (2) 100% of the net cash proceeds from
issuances or incurrences of debt by the Company or any of its restricted subsidiaries (other than indebtedness permitted by the Credit
Facilities); and (3) 50% (with stepdowns to 25% and 0% based upon achievement of specified first lien senior secured leverage
ratios) of annual excess cash flow of the Company and its subsidiaries.
2015 Senior Notes
The Borrowers are party to an indenture, dated as of May 22, 2015 (the “2015 Senior Notes Indenture”), in connection with the
issuance of the 2015 Senior Notes. The 2015 Senior Notes bear interest at a rate of 4.625% per annum and are payable semi-annually
on January 15 and July 15 of each year. The net proceeds from the offering of the 2015 Senior Notes, together with cash on hand,
were used to repay $1,550.0 million of the outstanding borrowings under our Term Loan Facility and to pay related premiums, fees
and expenses. Based on the amount outstanding at December 31, 2015, required debt service for the next twelve months on the 2015
Senior Notes is $57.8 million in interest payments. No principal payments are due until maturity.
The 2015 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of
their Canadian and U.S. subsidiaries, including Tim Hortons, Burger King Worldwide and substantially all of their respective
Canadian and U.S. subsidiaries (the “Note Guarantors”). The 2015 Senior Notes are secured by a first priority lien, subject to certain
exceptions and permitted liens, on all of the Borrowers’ and the Note Guarantors’ present and future property that secures the Credit
Facilities and any outstanding Tim Hortons Notes (as defined below).
The Borrowers may redeem some or all of the 2015 Senior Notes at any time prior to October 1, 2017 at a price equal to 100%
of the principal amount redeemed plus a “make whole” premium and accrued and unpaid interest, if any. The 2015 Senior Notes are
redeemable at our option, in whole or in part, at any time during the twelve-month period beginning on October 1, 2017 at 102.313%
of the principal amount redeemed, at any time during the twelve-month period beginning on October 1, 2018 at 101.156% of the
principal amount redeemed or at any time on or after October 1, 2019 at 100.0% of the principal amount redeemed. In addition, at any
time prior to October 1, 2017, up to 40% of the aggregate principal amount of the 2015 Senior Notes may be redeemed with the net
proceeds of certain equity offerings, at a redemption price equal to 104.625% of the principal amount of the 2015 Senior Notes plus
accrued and unpaid interest, if any, to the redemption date. In connection with any tender offer for the 2015 Senior Notes, including a
change of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2015 Senior Notes at a redemption price
equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2015 Senior
Notes validly tender and do not withdraw such 2015 Senior Notes in such tender offer. If the Borrowers experience a change of
control, the holders of the 2015 Senior Notes will have the right to require the Borrowers to repurchase the 2015 Senior Notes at a
purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts (as
defined in the 2015 Senior Notes Indenture), if any, to the date of such repurchase.
2014 Senior Notes
The Borrowers are parties to an indenture, dated as of October 8, 2014 (the “2014 Senior Notes Indenture”) in connection with
the issuance of $2,250.0 million of 6.00% second lien senior secured notes due April 1, 2022 (the “2014 Senior Notes”) by the
Borrowers. The 2014 Senior Notes bear interest at a rate of 6.00% per annum, payable semi-annually on April 1 and October 1 of
each year. Based on the amount outstanding at December 31, 2015, required debt service for the next twelve months on the 2014
Senior Notes is $135.0 million in interest payments. No principal payments are due until maturity.
45
The 2014 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 2014 Senior
Notes are secured by a second-priority lien, subject to certain exceptions and permitted liens, on all of the Borrowers’ and the Note
Guarantors’ present and future property that secures the 2014 Credit Facilities and any outstanding Tim Hortons Notes, to the extent
of the value of the collateral securing such first-priority senior secured debt.
The Borrowers may redeem some or all of the 2014 Senior Notes at any time prior to October 1, 2017 at a price equal to 100%
of the principal amount of the Notes redeemed plus a “make whole” premium and, at any time on or after October 1, 2017, at the
redemption prices set forth in the 2014 Senior Notes Indenture. In addition, at any time prior to October 1, 2017, up to 40% of the
aggregate principal amount of the 2014 Senior Notes may be redeemed with the net proceeds of certain equity offerings, at the
redemption price specified in the 2014 Senior Notes Indenture. In connection with any tender offer for the 2014 Senior Notes,
including a change of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2014 Senior Notes at a
redemption price equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding
2014 Senior Notes validly tender and do not withdraw such 2014 Senior Notes in such tender offer. If the Borrowers experience a
change of control, the holders of the 2014 Senior Notes will have the right to require the Borrowers to repurchase the 2014 Senior
Notes at a purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts
(as defined in the 2014 Senior Notes Indenture), if any, to the date of such repurchase.
Tim Hortons Notes
At December 31, 2015, we had notes outstanding with the following carrying values and terms: (i) C$48.0 million of 4.20%
Senior Unsecured Notes, Series 1, due June 1, 2017, (ii) C$2.6 million of 4.52% Senior Unsecured Notes, Series 2, due December 1,
2023 and (iii) C$3.9 million of 2.85% Senior Unsecured Notes, Series 3, due April 1, 2019 (collectively, the “Tim Hortons Notes”).
Based on the amounts outstanding at December 31, 2015, required debt service for the next twelve months on the Tim Hortons Notes
is C$2.2 million in interest payments. No principal payments are due until maturity.
Restrictions and Covenants
The 2014 Credit Facilities contain a number of customary affirmative and negative covenants that, among other things, limit or
restrict the ability of the Borrowers and certain of their subsidiaries to: incur additional indebtedness; make investments; incur liens;
engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of
capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; engage in certain transactions
with affiliates. In addition, the Borrowers are not permitted to exceed a specified first lien senior secured leverage ratio when the sum
of the amount of letters of credit in excess of $50,000,000 (other than those that are cash collateralized), any loans under the
Revolving Credit Facility and any swingline loans outstanding as of the end of any fiscal quarter exceeds 30% of the commitments
under the Revolving Credit Facility.
The terms of the 2015 Senior Notes Indenture and 2014 Senior Notes Indenture, among other things, limit the ability of the
Borrowers and their restricted subsidiaries to: incur additional indebtedness; create liens or use assets as security in other transactions;
declare or pay dividends, redeem stock or make other distributions to stockholders; make investments; merge or consolidate, or sell,
transfer, lease or dispose of substantially all of the Borrowers’ assets; enter into transactions with affiliates; sell or transfer certain
assets; and agree to certain restrictions of the ability of restricted subsidiaries to make payments to us. These covenants are subject to
a number of important qualifications, limitations and exceptions that are described in the 2015 Senior Notes Indenture and 2014
Senior Notes Indenture.
The restrictions under the 2015 Amended Credit Agreement, the 2015 Senior Notes Indenture and the 2014 Senior Notes
Indenture have resulted in substantially all of our consolidated assets being restricted.
As of December 31, 2015, we were in compliance with all covenants of the 2015 Amended Credit Agreement, the 2015 Senior
Notes Indenture, the 2014 Senior Notes Indenture and the indenture governing the Tim Hortons Notes, and there were no limitations
on our ability to draw on our Revolving Credit Facility.
Preferred Shares
In connection with the Transactions, Berkshire Hathaway Inc. (“Berkshire”) and the Company entered into a Securities Purchase
Agreement (the “Securities Purchase Agreement”) pursuant to which National Indemnity Company, a wholly owned subsidiary of
Berkshire, purchased for an aggregate purchase price of $3,000.0 million, (a) 68.5 million Class A 9.0% cumulative compounding
perpetual voting preferred shares of the Company (the “Preferred Shares”) and (b) a warrant (the “Warrant”) to purchase common
46
shares of the Company, at an exercise price of $0.01 per common share of the Company, representing 1.75% of the fully-diluted common
shares of the Company as of the closing of the Transactions, including the common shares of the Company issuable upon the exercise of the
Warrant, upon the terms and subject to the conditions set forth therein. On December 15, 2014, National Indemnity Company exercised the
Warrant in full and received 8,438,225 common shares of the Company. Our articles provide that the maximum number of Preferred Shares
that we are authorized to issue is limited to 68,530,939 Preferred Shares, which is the number of Preferred Shares issued to National
Indemnity Company in connection with the Transactions.
Dividend Entitlements
The holders of the Preferred Shares are entitled to receive, as and when declared by our board of directors, cumulative cash dividends at
an annual rate of 9.0% on the amount of the purchase price per Preferred Share, payable quarterly in arrears (“regular quarterly
dividends”). Such dividends accrue daily on a cumulative basis, whether or not declared by our board of directors. If any such dividend or
make-whole dividend (defined below) is not paid in full on the scheduled payment date or the required payment date, as applicable (the
unpaid portion, “past due dividends”), additional cash dividends (“additional dividends”) shall accrue daily on a cumulative basis on past due
dividends at an annual rate of 9.0%, compounded quarterly, whether or not such additional dividends are declared by our board of directors,
until the date the same are declared by our board of directors and paid in cash to the holders of the Preferred Shares. While our board of
directors has declared, and we have paid, regular quarterly dividends on our Preferred Shares every quarter since the three months ended
March 31, 2015, the board can elect not to declare such dividends in the future and, in such event, additional dividends will accrue on any past
due dividends as set forth above.
For each fiscal year of the Company during which any Preferred Shares are outstanding, beginning with the year that includes the third
anniversary of the original issue date of such shares, in addition to the regular quarterly dividends, we are required to pay to the holder of the
Preferred Shares an additional amount (a “make-whole dividend”). The amount of the make-whole dividend is determined by a formula
designed to ensure that on an after tax basis the net amount of the dividends received by the holder on the Preferred Shares from the original
issue date is the same as it would have been had we been a U.S. corporation. The make-whole dividend can be paid, at our option, in cash,
common shares or a combination of both. If, however, the common shares issued to the holder would be “restricted securities” within the
meaning of Rule 144(a)(3) of the Securities Act, then the resale of such common shares must be covered by an effective registration
statement. In addition, any common shares so issued will be valued for purposes of the make-whole dividend at 97% of the average volume
weighted average price of our common shares over each of the five consecutive trading days prior to the delivery of such shares. The make-
whole dividends are payable not later than 75 days after the close of each fiscal year starting with the fiscal year that includes the third
anniversary of the original issue date. The right to receive the make-whole dividends shall terminate if and at the time that 100% of the
outstanding Preferred Shares are no longer held by Berkshire or any one of its subsidiaries; provided, however, that in the event of a
redemption of Preferred Shares or a liquidation, dissolution or winding up of our affairs, a final make-whole dividend for the year of
redemption or liquidation will be computed and paid with respect to all Preferred Shares subject to the redemption, and in the case of a
liquidation, with respect to all Preferred Shares.
Voting Rights
Except as otherwise provided by law, the holders of Preferred Shares are entitled to (i) receive notice of and to attend all shareholder
meetings that the holders of the common shares of the Company are entitled to attend, (ii) receive copies of all notices and other materials sent
by the Company to its shareholders relating to such meetings, and (iii) vote at such meetings. At any such meeting, holders of the Preferred
Shares are entitled to cast one vote for each Preferred Share. Berkshire has agreed with us that (i) with respect to Preferred Shares representing
10% of the total votes attached to all voting shares of the Company, Berkshire may vote such shares with respect to matters on which it votes
as a class with all the Company voting shares, in any manner it wishes and (ii) with respect to Preferred Shares representing in excess of 10%
of the total votes attached to all voting shares of the Company, Berkshire will vote such shares with respect to matters on which it votes as a
class with all the Company voting shares in a manner proportionate to the manner in which the other holders of voting shares voted in respect
of such matter. This voting agreement does not apply with respect to certain special approval matters.
Redemption
The Preferred Shares may be redeemed at our option, in whole or in part, at any time on and after the third anniversary of their original
issuance on the closing date of the Transactions. After the tenth anniversary of the original issue date, holders of not less than a majority of the
outstanding Preferred Shares may cause us to redeem the Preferred Shares at a 109.9% premium, or a redemption price of $48.109657 per
Preferred Share (the “Call Amount), plus accrued and unpaid dividends and unpaid make-whole dividends. Holders of Preferred Shares also
hold a contingently exercisable option to cause us to redeem their Preferred Shares at the redemption price in the event of a triggering event
(as defined below). In the event that a triggering event is announced, the holders of not less than a majority of the Preferred Shares may
require us, to the fullest extent permitted by law, to redeem all of the outstanding Preferred Shares of such holders at a price equal to the
redemption price for each redeemed share on the date of the consummation of the triggering event. For this purpose, a “triggering event”
means the occurrence of one or more of the following: (i) the acquisition of the Company by another entity by means any transaction or series
of transactions (including, without limitation, any merger, amalgamation, arrangement, consolidation or reorganization) if the Company’s
shareholders constituted immediately prior to such
47
transaction or series of related transactions hold less than 50% of the voting power of the surviving or acquiring entity; (ii) the closing of
the transfer, in one transaction or a series of related transactions, to a person or entity (or a group of persons or entities) of the
Company’s securities if, after such closing, the Company’s shareholders constituted immediately prior to such transaction or series of
related transactions hold less than 50% of the voting power of the Company or its successor; or (iii) a sale, license or other disposition
(in one transaction or a series of related transactions) of all or substantially all of the assets of the Company. Since the redemption
features are not solely within the control of the Company, the Preferred Shares are classified as temporary equity. Once a Preferred
Share has been redeemed and all payments and dividends to the holder have been made in full, it must be cancelled and may not be
reissued.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, holders
of Preferred Shares shall be entitled to receive for each Preferred Share, out of the assets of the Company or proceeds thereof available
for distribution to shareholders of the Company, and after satisfaction of all liabilities and obligations to creditors of the Company,
before any distribution of such assets or proceeds is made to or set aside for the holders of common shares of the Company, junior
shares or any other shares of the Company ranking junior to the Preferred Shares as to such distribution, payment in full in cash in an
amount equal to the sum of (i) for each Preferred Share that has not been redeemed, the Call Amount, plus (ii) for each Preferred Share
that is issued and not yet cancelled, the accrued and unpaid dividends per share, including any and all past due dividends and additional
dividends on such past due dividends, in each case, whether or not declared, to each date of payment, and unpaid make-whole dividends
for all prior fiscal years and a final make-whole dividend payment, as well as past due dividends in respect thereof and amounts accrued
thereon, in each case, whether or not declared. If such liquidation preference is paid in full on all Preferred Shares the holders of other
shares of the Company shall be entitled to receive all remaining assets of the Company (or proceeds thereof) according to their
respective rights and obligations.
Transfer
The Preferred Shares are subject to restrictions on transfer. Berkshire has agreed in the Securities Purchase Agreement that, until
the fifth anniversary of the closing of the Transactions, it may not transfer the Preferred Shares without the consent of the holders of at
least 25% of our common shares (except to a subsidiary in which it owns at least 80% of the equity interests). On or after such fifth
anniversary, Berkshire (or any such subsidiary) may transfer the Preferred Shares provided that any such transfer must be in minimum
increments of at least $600,000,000 of aggregate liquidation value.
Cash Dividends
On February 15, 2016, our board of directors declared a cash dividend of $0.98 per Preferred Share, for a total dividend of $67.5
million which will be paid to the holder of the Preferred Shares on April 1, 2016. The dividend on the Preferred Shares includes the
amount due for the first calendar quarter of 2016. We expect to make quarterly dividend payments of $67.5 million ($270.0 million per
year) on the Preferred Shares. The quarterly dividend on the Preferred Shares is due on April 1st, July 1st, October 1st and January 1st of
each year.
On February 16, 2016, our board of directors declared a dividend of $0.14 per common share, which will be paid on April 4, 2016
to common shareholders of record on March 3, 2016. Partnership will also make a distribution in respect of each Partnership
exchangeable unit in the amount of $0.14 per Partnership exchangeable unit, and the record date and payment date for distributions on
Partnership exchangeable units are the same as the record date and payment date set forth above.
No dividend may be declared or paid on common shares of the Company until a dividend is declared or paid on the Preferred
Shares. In addition, if holders of at least a majority of the outstanding Preferred Shares have delivered a notice to exercise their right to
have the Company redeem the Preferred Shares, no dividend may be declared or paid on our common shares (except that dividends
declared on our common shares prior to the date of such delivery may be paid) unless on the date of such declaration or payment all
Preferred Shares subject to such notice have been redeemed in full.
In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by
restrictions under our debt agreements. Although we do not have a dividend policy, our board of directors may, subject to compliance
with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to
pay for all dividends from cash generated from our operations.
Outstanding Security Data
As of February 12, 2016, we had outstanding 231,667,965 common shares, 68,530,939 Preferred Shares and one special voting
share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of
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common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast
such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting
of the Company, holders of our common shares vote together as a single class with the Preferred Shares and the special voting share
except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note
20 to the accompanying consolidated financial statements in Part II, Item 8 of our Annual Report.
There were 227,992,722 Partnership exchangeable units outstanding as of February 12, 2016. Since December 12, 2015, the
holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s
Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our
right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares.
Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $1,204.8 million in 2015, compared to $259.3 million in 2014. The increase in cash
provided by operating activities was driven primarily by an increase in net income, excluding non-cash adjustments, as a result of the
Transactions in December 2014, changes in working capital driven by increases in accounts and drafts payable and the
reclassification of restricted cash to cash and cash equivalents during 2015.
Cash provided by operating activities was $259.3 million in 2014, compared to $325.2 million in 2013. The decrease in cash
provided by operating activities was driven primarily by a decrease in net income, excluding non-cash adjustments, primarily driven
by transaction costs and an increase in cash interest payments.
Investing Activities
Cash used in investing activities was $61.5 million in 2015, compared to cash used in investing activities of $7,790.8 million in
2014. The change in investing activities was driven primarily as a result of the acquisition of Tim Hortons in 2014, payments for the
settlement/sale of derivatives in 2014, partially offset by an increase in capital expenditures in 2015.
Cash used in investing activities was $7,790.8 million in 2014, compared to cash provided by investing activities of $43.0
million in 2013. The change in investing activities was driven primarily as a result of the acquisition of Tim Hortons, payments for
the settlement/sale of derivatives, a decrease in proceeds from refranchisings, net, and an increase in capital expenditures, partially
offset by a decrease in payments for acquired franchisee operations.
Capital expenditures have historically been comprised primarily of (i) costs to build new Company restaurants and new
restaurants that we lease to franchisees, (ii) costs to maintain the appearance of existing restaurants in accordance with our standards,
including investments in new equipment and remodeling, and restaurant replacements and (iii) investments in replacement and
expansion projects at our distribution facilities, investments in information technology systems and other corporate needs. The
following table presents capital expenditures, by type of expenditure:
New restaurants
Existing restaurants
Other, including corporate
Total
2015
$ 17.8
64.3
33.2
$115.3
2014
$ 4.5
12.4
14.0
$30.9
2013
$ 1.1
11.2
13.2
$25.5
While we expect to have capital expenditures during 2016, we did not have any material capital expenditure commitments as of
December 31, 2015. We do not expect capital expenditures in 2016 to be material to our financial position and plan to fund these
expenditures from cash on hand and cash flow from operations.
Financing Activities
Cash used for financing activities was $2,115.2 million in 2015, compared to cash provided by financing activities of $8,565.6
million in 2014. The cash used for financing activities in 2015 was driven primarily by the $1,550.0 million repayment of the 2014
Term Loan Facility, the redemption of a portion of the Tim Hortons Notes, the repurchase of Partnership exchangeable units and
dividend payments on common shares and Preferred Shares, partially offset by proceeds from the offering of the 2015 Senior Notes.
Cash provided by financing activities in 2014 is described below.
49
Cash provided by financing activities was $8,565.6 million in 2014, compared to cash used for financing activities of $132.7
million in 2013. The increase in cash provided by financing activities was primarily a result of borrowings under the 2014 Term Loan
Facility, the issuance of the Preferred Shares and the issuance of the 2014 Senior Notes to fund the Transactions. These increases in
cash were partially offset by the principal repayment of the 2012 Term Loan Facility, the redemption of our 2010 Senior Notes and
2011 Discount Notes as a result of the Transactions, payments for financing costs and an increase in dividend payments.
Contractual Obligations and Commitments
Our significant contractual obligations and commitments as of December 31, 2015 are shown in the following table.
Payment Due by Period
Contractual Obligations
Credit Facilities, including interest (1)
2015 Senior Notes, including interest
2014 Senior Notes, including interest
Tim Hortons Notes, including interest
Other long-term debt
Preferred Shares dividends (2)
Operating lease obligations
Purchase commitments (3)
Capital lease obligations
Unrecognized tax benefits (4)
Total
Less Than
1 Year
More Than
5 Years
Total
1-3 Years 3-5 Years
(In millions)
$ 6,241.6 $ 231.0 $ 489.5 $ 479.5 $ 5,041.6
1,310.2
2,452.5
2.1
61.3
1,080.0
794.8
2.6
189.8
—
$16,280.0 $1,433.1 $1,908.5 $1,748.8 $10,934.9
115.6
115.6
270.0
270.0
3.0
35.2
11.9
10.2
540.0
540.0
243.0
300.0
35.8
90.6
57.4
50.0
— —
1,599.2
3,127.5
41.9
87.8
2,430.0
1,503.4
665.7
328.2
254.7
57.8
135.0
1.6
4.4
270.0
165.6
536.7
31.0
—
(1) We have estimated our interest payments through the maturity of our Credit Facilities based on current LIBOR rates.
(2) Represents dividend payments on our Preferred Shares.
(3)
Includes open purchase orders, as well as commitments to purchase certain food ingredients and advertising expenditures, and
obligations related to information technology and service agreements.
(4) We have provided only a total in the table above since the timing of the unrecognized tax benefit payments is unknown.
Other Commercial Commitments and Off-Balance Sheet Arrangements
During the fiscal year ended June 30, 2000, we entered into long-term, exclusive contracts with soft drink vendors to supply
Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a
specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit and as of December 31,
2015, we estimate it will take approximately 15 years for these purchase commitments to be completed. If these agreements were
terminated, we would be obligated to pay an aggregate amount equal to approximately $530 million as of December 31, 2015 based
on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs.
In 2014, Tim Hortons entered into an agreement with a supplier requiring minimum purchase obligations, within the normal
course of operations. As of December 31, 2015, there is a minimum purchase obligation based on a percentage of our requirements of
approximately $92 million remaining over a four year term.
From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As
of December 31, 2015, there were $119.1 million of loans outstanding to Burger King franchisees that we had guaranteed under six
such programs, with additional franchisee borrowing capacity of approximately $235.5 million remaining. Our maximum guarantee
liability under these six programs is limited to an aggregate of $42.5 million, assuming full utilization of all borrowing capacity. We
record a liability in the period the loans are funded and the maximum term of the guarantee is approximately ten years. As of
December 31, 2015, the liability reflecting the fair value of these guarantee obligations was $4.4 million. In addition to these six
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programs, as of December 31, 2015, we also had a liability of $0.1 million, with a potential maximum guarantee exposure of $2.5
million, in connection with Tim Hortons franchisee loan guarantees. No significant payments have been made by us in connection
with these guarantees through December 31, 2015.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results of operations is based on our audited consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). The preparation of these financial statements requires our management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we
deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Volatile credit, equity, foreign currency and energy markets, and
declines in consumer spending have increased and may continue to create uncertainty inherent in such estimates and assumptions. As
future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Changes in our estimates could materially impact our results of operations and financial condition in any particular period.
We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity
in their application:
Business Combinations
The acquisition of Tim Hortons was accounted for using the acquisition method of accounting, or acquisition accounting, in
accordance with ASC Topic 805, Business Combinations. The acquisition method of accounting involves the allocation of the
purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of
estimates and assumptions to derive fair values and to complete the allocation. Acquisition accounting allows for up to one year to
obtain the information necessary to finalize the fair values of all assets acquired and liabilities assumed at the acquisition date. As of
December 31, 2015, we have recorded final acquisition accounting allocations related to the acquisition of Tim Hortons.
See Note 2 of the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and
Supplementary Data” for additional information about accounting for the Transactions.
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection
with the Transactions and the 2010 acquisition of Burger King Holdings, Inc. by 3G. Our indefinite-lived intangible assets consist of
the Tim Hortons brand and the Burger King brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested
for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change, which
indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative
assessments, as further described below. We may elect to bypass the qualitative assessment and proceed directly to a two-step
quantitative impairment test, for any reporting unit or either Brand, in any period. We can resume the qualitative assessment for any
reporting unit or Brand in any subsequent period.
Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-
not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting
units, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its
fair value, we perform a two-step quantitative goodwill impairment test. The first step requires us to estimate the fair value of the
reporting unit. If the fair value of the reporting unit is less than its carrying amount, the estimated fair value of the reporting unit is
allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based
on their fair value. If necessary, goodwill is then written down to its implied fair value.
Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-
not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for either Brand, or if a
qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we
estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment
loss is recognized in an amount equal to that excess.
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We completed our impairment tests for goodwill and the Brands as of October 1, 2015, 2014 and 2013 and no impairment
resulted. During 2015, we elected to perform a quantitative impairment review of goodwill for all of our reporting units. Significant
changes in the estimates used in our analysis, such as system-wide sales, cash flows and discount rates, could result in an impairment
charge related to goodwill and/or intangible assets not subject to amortization.
See Note 3 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and
Supplementary Data” of our Annual Report for additional information about goodwill and intangible assets not subject to
amortization.
Long-lived Assets
Long-lived assets (including intangible assets subject to amortization) are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped for recognition and
measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other
assets.
Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:
•
•
•
•
bankruptcy proceedings or other significant financial distress of a lessee;
significant negative industry or economic trends;
knowledge of transactions involving the sale of similar property at amounts below our carrying value; or
our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not
meet the criteria to be classified as “held for sale.”
The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net
carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual
disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated
future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair
value.
When assessing the recoverability of our long-lived assets, we make assumptions regarding estimated future cash flows and
other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment
conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of rental
income, capital requirements for maintaining property and residual values of asset groups. We formulate estimates from historical
experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and
competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an
impairment charge.
See Note 3 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and
Supplementary Data” of our Annual Report for additional information about accounting for long-lived assets.
Accounting for Income Taxes
We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or
liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit
carry-forwards. When considered necessary, we record a valuation allowance to reduce deferred tax assets to the balance that is more
likely than not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning
strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine
that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the
change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are
involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments
could result in adjustments to this valuation allowance.
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We file income tax returns, including returns for our subsidiaries, with federal, provincial, state, local and foreign jurisdictions.
We are subject to routine examination by taxing authorities in these jurisdictions. We apply a two-step approach to recognizing and
measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more likely than not that
an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position.
The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the
uncertain tax position.
Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed
assessments where the ultimate resolution may result in us owing additional taxes. We adjust our uncertain tax positions in light of
changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an
estimate, and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions
comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax
outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the
period in which such determination is made.
We use an estimate of the annual effective tax rate at each interim period based on the facts and circumstances available at that
time, while the actual effective tax rate is calculated at year-end.
See Note 14 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and
Supplementary Data” of our Annual Report for additional information about accounting for income taxes.
Investments in Unconsolidated Entities
We evaluate the recoverability of the carrying amount of our equity investments accounted for using the equity method when
there is an indication of potential impairment. When an indication of potential impairment is present, we record a write-down of the
equity investment if and when the amount of its estimated realizable value falls below the carrying amount and we determine that this
shortfall is other-than-temporary. Indications of a potential impairment that would cause us to perform this evaluation include, but are
not necessarily limited to, an inability of the investee to sustain an earnings capacity that would justify the carrying amount of the
investment or a quoted market price per share that remains significantly below our carrying amount per share for a sustained period of
time. In determining whether a decline in the investment’s estimated realizable value is other-than-temporary, we consider the length
of time and the extent to which such value has been less than the carrying amount, the financial condition and prospects of the
investee, and our ability and intent to retain our equity investment for a period of time sufficient to allow for any anticipated recovery
in value. In the event that we determine that a decline in value is other-than-temporary, we recognize an impairment charge for the
reduction in the value of the equity investment.
If we need to assess the recoverability of our equity method investments, we will make assumptions regarding estimated future
cash flows and other factors. Some of these assumptions will involve a high degree of judgment and also bear a significant impact on
the assessment conclusions. We will formulate estimates from historical experience and assumptions of future performance, based on
business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or
related assumptions change in the future, we may be required to record an impairment charge.
New Accounting Pronouncements
See Note 3, “Summary of Significant Accounting Policies – New Accounting Pronouncements,” in the Notes to the
accompanying consolidated financial statements for a discussion of new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to market risks associated with currency exchange rates, interest rates, commodity prices and inflation. In the
normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may
include the use of derivative financial instruments to hedge our underlying exposures. Our policies prohibit the use of derivative
instruments for speculative purposes, and we have procedures in place to monitor and control their use.
53
Currency Exchange Risk
We report our results in U.S. dollars, which is our reporting currency. The operations of each of TH and BK that are
denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency
regulations. The majority of TH’s operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which
we translate to U.S. dollars for financial reporting purposes. Royalty payments from BK franchisees in our European markets and in
certain other countries are denominated in currencies other than U.S. dollars. Furthermore, franchise royalties from each of TH’s and
BK’s international franchisees are calculated based on local currency sales; consequently franchise revenues are still impacted by
fluctuations in currency exchange rates. Each of their respective revenues and expenses are translated using the average rates during
the period in which they are recognized and are impacted by changes in currency exchange rates.
We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency
exchange rates. We have entered into cross-currency rate swaps to hedge a portion of our net investment in such foreign operations
against adverse movements in foreign currency exchange rates. We designated cross-currency rate swaps with a notional value of
$5,000.0 million between Canadian dollar and U.S. dollar and cross-currency rate swaps with a notional value of $1,200.0 million
between the Euro and U.S. dollar, as net investment hedges of a portion of our equity in foreign operations in those currencies. The
fair value of the cross-currency rate swaps is calculated each period with changes in the fair value of these instruments reported in
accumulated other comprehensive income (loss) to economically offset the change in the value of the net investment in these
designated foreign operations driven by changes in foreign currency exchange rates. The net fair value of these derivative instruments
totaled $824.6 million as of December 31, 2015. The unrealized gains, net of tax, related to these derivative instruments included in
accumulated other comprehensive income (loss) totaled $684.8 million as of December 31, 2015. Such amounts will remain in
accumulated other comprehensive income (loss) until the complete or substantially complete liquidation of our investment in the
underlying foreign operations.
We enter into forward contracts to reduce our exposure to volatility from foreign currency fluctuations associated with certain
foreign currency-denominated assets. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies.
Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the
foreign currency impact on our operating results for one period may not be indicative of future results. We also use forward currency
contracts to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee and certain
intercompany purchases, made by our TH Canadian operations.
During 2015, income from operations would have decreased or increased approximately $93.0 million if all foreign currencies
uniformly weakened or strengthened 10% relative to the U.S. dollar, holding other variables constant, including sales volumes. The
effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating
income. Actual results will differ as foreign currencies may move in uniform or different directions and in different magnitudes.
Interest Rate Risk
We are exposed to changes in interest rates related to our 2014 Term Loan Facility and 2014 Revolving Credit Facility, which
bear interest at LIBOR/EURIBOR plus a spread, subject to a LIBOR/EURIBOR floor. Generally, interest rate changes could impact
the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are held constant. To
mitigate the impact of changes in LIBOR/EURIBOR on interest expense for a portion of our variable rate debt, we have entered into
interest rate swaps. We account for these derivatives as cash flow hedges, and as such, the effective portion of unrealized changes in
market value has been recorded in accumulated other comprehensive income (loss) and is reclassified to earnings during the period in
which the hedge transaction affects earnings. At December 31, 2015, we had a series of receive-variable, pay-fixed interest rate swaps
to hedge the variability in the interest payments on $2,500.0 million of our 2014 Term Loan Facility beginning May 28, 2015,
through the expiration of the final swap on March 31, 2021. The notional value of the swaps is $2,500.0 million. There are six
sequential interest rate swaps to achieve the hedged position. Each year on March 31, the existing interest rate swap is scheduled to
expire and be immediately replaced with a new interest rate swap until the expiration of the final swap on March 31, 2021. At
inception, these interest rate swaps were designated as a cash flow hedge for hedge accounting, and as such, the effective portion of
unrealized changes in market value are recorded in accumulated other comprehensive income (loss) and reclassified to earnings
during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are
recognized in current earnings.
Based on the portion of our variable rate debt balance in excess of the notional amount of the interest rate swaps and LIBOR as
of December 31, 2015, a hypothetical 1.00% increase in the three-month LIBOR would increase our annual interest expense by
approximately $15.9 million.
54
Commodity Price Risk
We purchase certain products, including beef, chicken, cheese, French fries, tomatoes, coffee, wheat, edible oils, sugar and other
commodities, which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered
predictable or within our control. However, in our TH business, we employ various purchasing and pricing contract techniques, such as setting
fixed prices for periods of up to one year with suppliers, in an effort to minimize volatility of certain of these commodities. Given that we
purchase a significant amount of green coffee, we typically have purchase commitments fixing the price for a minimum of six to twelve months
depending upon prevailing market conditions. We also typically hedge against the risk of foreign exchange on green coffee prices.
Additionally, our ability to recover increased costs is typically limited by the competitive environment in which we operate. We
occasionally take forward pricing positions through our suppliers to manage commodity prices. As a result, we purchase beef and other
commodities at market prices, which fluctuate on a daily basis and may differ between different geographic regions, where local regulations may
affect the volatility of commodity prices.
We do not make use of financial instruments to hedge commodity prices. As we make purchases beyond our current commitments, we may
be subject to higher commodity prices depending upon prevailing market conditions at such time. Generally, increases and decreases in
commodity costs are largely passed through to franchisees owners, resulting in higher or lower revenues and higher or lower costs of sales from
our business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up. We and our
franchisees have some ability to increase product pricing to offset a rise in commodity prices, subject to acceptance by franchisees and guests.
Impact of Inflation
We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation did not have a
material impact on our operations in 2015, 2014 or 2013. Several factors tend to reduce the impact of inflation for our business: inventories
approximate current market prices, property holdings at fixed costs are substantial, and there is some ability to adjust prices. However, severe
increases in inflation could affect the global, Canadian and U.S. economies and could have an adverse impact on our business, financial condition
and results of operations. If several of the various costs in our business experience inflation at the same time, such as commodity price increases
beyond our ability to control and increased labor costs, we and our franchisees may not be able to adjust prices to sufficiently offset the effect of
the various cost increases without negatively impacting consumer demand.
Disclosures Regarding Partnership Pursuant to Canadian Exemptive Relief
The Company is the sole general partner of Partnership. To address certain disclosure conditions to the exemptive relief that Partnership
received from the Canadian securities regulatory authorities, we are providing a summary of certain terms of the Partnership exchangeable
units. This summary is not complete and is qualified in its entirety by the complete text of the Amended and Restated Limited Partnership
Agreement, dated December 11, 2014, between the Company, 8997896 Canada Inc. and each person who is admitted as a Limited Partner in
accordance with the terms of the agreement (the “partnership agreement”) and the Voting Trust Agreement, dated December 12, 2014, between
the Company, Partnership and Computershare Trust Company of Canada (the “voting trust agreement”), copies of which are available on
SEDAR at www.sedar.com and at www.sec.gov. For a description of the Company’s common shares and Preferred Shares, see the Company’s
Registration Statement on Form S-4 (File No. 333-198769).
The Partnership Exchangeable Units
The capital of Partnership consists of three classes of units: the common units, the preferred units and the Partnership exchangeable units.
The interest of the Company, as the sole general partner of Partnership, is represented by common units and preferred units. The interests of the
limited partners is represented by the Partnership exchangeable units.
Summary of Economic and Voting Rights
The Partnership exchangeable units are intended to provide economic rights that are substantially equivalent, and voting rights with respect
to the Company that are equivalent, to the corresponding rights afforded to holders of our common shares. Under the terms of the partnership
agreement, the rights, privileges, restrictions and conditions attaching to the Partnership exchangeable units include the following:
•
The Partnership exchangeable units are exchangeable at any time, at the option of the holder (the “exchange right”), on a one-for-one
basis for common shares of the Company (the “exchanged shares”), subject to our right as the general partner (subject to the approval
of the conflicts committee in certain circumstances) to determine to settle any such exchange for a cash payment in lieu of our
common shares. If we elect to make a cash payment in lieu of issuing common shares, the amount of the cash payment will be the
weighted average trading price of the common shares on the NYSE for the 20 consecutive trading days ending on the last business
day prior to the exchange date (the “exchangeable units cash amount”). Written notice of the determination of the form of
consideration shall be given to the holder of the Partnership exchangeable units exercising the exchange right no later than ten
business days prior to the exchange date.
55
•
If a dividend or distribution has been declared and is payable in respect of a common share of the Company, Partnership
will make a distribution in respect of each Partnership exchangeable unit in an amount equal to the dividend or distribution
in respect of a common share. The record date and payment date for distributions on the Partnership exchangeable units
will be the same as the relevant record date and payment date for the dividends or distributions on our common shares.
•
If we issue any common shares in the form of a dividend or distribution on the common shares of the Company,
Partnership will issue to each holder of Partnership exchangeable units, in respect of each exchangeable unit held by such
holder, a number of Partnership exchangeable units equal to the number of common shares issued in respect of each
common share.
•
If we issue or distribute rights, options or warrants or other securities or assets of the Company to all or substantially all of
the holders of our common shares, Partnership is required to make a corresponding distribution to holders of the
Partnership exchangeable units.
•
•
•
No subdivision or combination of our outstanding common shares is permitted unless a corresponding subdivision or
combination of Partnership exchangeable units is made.
We and our board of directors are prohibited from proposing or recommending an offer for our common shares or for the
Partnership exchangeable units unless the holders of the Partnership exchangeable units and the holders of common shares
are entitled to participate to the same extent and on equitably equivalent basis.
Upon a dissolution and liquidation of Partnership, if Partnership exchangeable units remain outstanding and have not been
exchanged for our common shares, then the distribution of the assets of Partnership between holders of our common shares
and holders of Partnership exchangeable units will be made on a pro rata basis based on the numbers of common shares
and Partnership exchangeable units outstanding. Assets distributable to holders of Partnership exchangeable units will be
distributed directly to such holders. Assets distributable in respect of our common shares will be distributed to us. Prior to
this pro rata distribution, Partnership is required to pay to us sufficient amounts to fund our expenses or other obligations
(to the extent related to our role as the general partner or our business and affairs that are conducted through Partnership or
its subsidiaries) to ensure that any property and cash distributed to us in respect of the common shares will be available for
distribution to holders of common shares in an amount per share equal to distributions in respect of each Partnership
exchangeable unit. The terms of the Partnership exchangeable units do not provide for an automatic exchange of
Partnership exchangeable units into common shares of the Company upon a dissolution or liquidation of Partnership or the
Company.
•
Approval of holders of the Partnership exchangeable units is required for an action (such as an amendment to the
partnership agreement) that would affect the economic rights of an exchangeable unit relative to a common share of the
Company.
The holders of Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of our
common shares are entitled to vote, including in respect of the election of our directors, through a special voting share of the
Company. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of
common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast
such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. The trustee will exercise
each vote attached to the special voting share only as directed by the relevant holder of Partnership exchangeable units and, in the
absence of instructions from a holder of an exchangeable unit as to voting, will not exercise those votes. Except as otherwise required
by the partnership agreement, voting trust agreement or applicable law, the holders of the Partnership exchangeable units are not
directly entitled to receive notice of or to attend any meeting of the unitholders of Partnership or to vote at any such meeting.
Exercise of Optional Exchange Right
In order to exercise the exchange right referred to above, a holder of Partnership exchangeable units must deliver to
Partnership’s transfer agent a duly executed exchange notice together with such additional documents and instruments as the transfer
agent and Partnership may reasonably require. The exchange notice must (i) specify the number of Partnership exchangeable units in
respect of
56
which the holder is exercising the exchange right and (ii) state the business day on which the holder desires to have Partnership
exchange the subject units, provided that the exchange date must not be less than 15 business days nor more than 30 business days
after the date on which the exchange notice is received by Partnership. If no exchange date is specified in an exchange notice, the
exchange date will be deemed to be the 15th business day after the date on which the exchange notice is received by Partnership. An
exercise of the exchange right may be revoked by the exercising holder by notice in writing given to Partnership before the close of
business on the fifth business day immediately preceding the exchange date. On the exchange date, Partnership will deliver or cause
the transfer agent to deliver to the relevant holder, as applicable (i) the applicable number of exchanged shares, or (ii) a cheque
representing the applicable exchangeable units cash amount, in each case, less any amounts withheld on account of tax.
Offers for Units or Shares
The partnership agreement contains provisions to the effect that if a take-over bid is made for all of the outstanding Partnership
exchangeable units and not less than 90% of the Partnership exchangeable units (other than units of Partnership held at the date of the
take-over bid by or on behalf of the offeror or its associates or associates) are taken up and paid for by the offeror, the offeror will be
entitled to acquire the Partnership exchangeable units held by unitholders who did not accept the offer on the terms offered by the
offeror. The partnership agreement further provides that for so long as Partnership exchangeable units remain outstanding, (i) the
Company will not propose or recommend a formal bid for the Company’s common shares, and no such bid will be effected with the
consent or approval of the Company’s board of directors, unless holders of Partnership exchangeable units are entitled to participate
in the bid to the same extent and on an equitably equivalent basis as the holders of the Company’s common shares, and (ii) the
Company will not propose or recommend a formal bid for Partnership exchangeable units, and no such bid will be effected with the
consent or approval of the Company’s board of directors, unless holders of the Company’s common shares are entitled to participate
in the bid to the same extent and on an equitably equivalent basis as the holders of Partnership exchangeable units. Canadian
securities regulatory authorities may intervene in the public interest (either on application by an interested party or by staff of a
Canadian securities regulatory authority) to prevent an offer to holders of common shares of the Company, Preferred Shares or
Partnership exchangeable units being made or completed where such offer is abusive of the holders of one of those security classes
that are not subject to that offer.
Merger, Sale or Other Disposition of Assets
As long as any Partnership exchangeable units are outstanding, the Company cannot consummate a transaction in which all or
substantially all of its assets would become the property of any other person or entity. This does not apply to a transaction if such
other person or entity becomes bound by the partnership agreement and assumes the Company’s obligations, as long as the
transaction does not impair in any material respect the rights, duties, powers and authorities of other parties to the partnership
agreement.
Mandatory Exchange
Partnership may cause a mandatory exchange of the outstanding Partnership exchangeable units into the Company’s common
shares in the event that (1) at any time there remain outstanding fewer than 5% of the number of Partnership exchangeable units
outstanding as of the effective time of the Merger (other than Partnership exchangeable units held by the Company and its
subsidiaries and as such number of Partnership exchangeable units may be adjusted in accordance with the partnership agreement);
(2) any one of the following occurs: (i) any person, firm or corporation acquires directly or indirectly any voting security of the
Company and immediately after such acquisition, the acquirer has voting securities representing more than 50% of the total voting
power of all the then outstanding voting securities of the Company on a fully diluted basis, (ii) the shareholders of the Company shall
approve a merger, consolidation, recapitalization or reorganization of the Company, other than any transaction which would result in
the holders of outstanding voting securities of the Company immediately prior to such transaction having at least a majority of the
total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction, with the
voting power of each such continuing holder relative to other continuing holders not being altered substantially in the transaction; or
(iii) the shareholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or
disposition of the Company of all or substantially all of the Company’ assets, provided that, in each case, the Company, in its capacity
as the general partner of Partnership, determines, in good faith and in its sole discretion, that such transaction involves a bona fide
third-party and is not for the primary purpose of causing the exchange of the exchangeable units in connection with such transaction;
or (3) a matter arises in respect of which applicable law provides holders of Partnership exchangeable units with a vote as holders of
units of Partnership in order to approve or disapprove, as applicable, any change to, or in the rights of the holders of, the Partnership
exchangeable units, where the approval or disapproval, as applicable, of such change would be required to maintain the economic
equivalence of the Partnership exchangeable units and the common shares of the Company, and the holders of the Partnership
exchangeable units fail to take the necessary action at a meeting or other vote of holders of Partnership exchangeable units to approve
or disapprove, as applicable, such matter in order to maintain economic equivalence of the Partnership exchangeable units and the
common shares of the Company.
57
Special Note Regarding Forward-Looking Statements
Certain information contained in our Annual Report, including information regarding future financial performance and plans,
targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws.
We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly,
are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as
“believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”,
“potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding
(i) the benefits of our fully franchised business model; (ii) the domestic and international growth opportunities for the Tim Hortons
and Burger King brands, both in existing and new markets, including through area representative and area development agreements;
(iii) our ability to accelerate international development through joint venture structures and master franchise and development
agreements; (iv) the impact of our four pillar strategy on same store sales, the growth of our Burger King and Tim Hortons brands
and our profitability; (v) the success of our strategy for the Burger King brand of launching fewer more impactful products to
simplify in-restaurant operations and reduce waste, focus the innovation pipeline and spend media dollars more wisely in a few high-
impact areas and our continued focus on this strategy; (vi) our financial strength based on our combined brands and potential for
future growth and operating efficiencies; (vii) the correlation between our sales, guest traffic and profitability to consumer
discretionary spending and the factors that influence spending; (viii) the amount and timing of additional G&A expenses associated
with restructuring activities following the consummation of the Transactions and the anticipated benefits that we will recognize from
such restructuring; (ix) our focus with respect to our product offerings and emphasis on streamlining restaurant execution and
reducing operational complexity; (x) the benefits accrued from sharing and leveraging best practices among our Burger King and
Tim Hortons brands; (xi) the drivers of the long-term success for both of our brands as well as increased sales and profitability of
our franchisees; (xii) the impact of our implementation of our Zero Based Budgeting (ZBB) initiative at TH; (xiii) the continued use
of certain franchise incentives and their impact on our financial results; (xiv) our future financial obligations, including annual debt
service requirements, capital expenditures and dividend payments, and our ability to meet such obligations; (xv) our exposure to
changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency
exchange rates on the amount of our interest payments, future earnings and cash flows; (xvi) our tax positions and their compliance
with applicable tax laws; (xvii) certain accounting and tax matters; (xviii) the impact of inflation on our results of operations; and
(xix) our future financial and operational results.
These forward looking statements represent management’s expectations as of the date hereof. These forward-looking statements
are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends,
current conditions and expected future developments, as well as other factors it believes are appropriate in the
circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may
differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of
activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements
include, among other things, risks related to: (1) our substantial indebtedness, which could adversely affect our financial condition
and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of
our customers to purchase our products such as inflationary pressures, high unemployment levels, declines in median income growth,
consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety;
(3) our relationship with, and the success of, our franchisees and risks related to our restaurant ownership mix; (4) the effectiveness
of our marketing and advertising programs and franchisee support of these programs; (5) significant and rapid fluctuations in
interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (6) our ability to successfully
implement our domestic and international growth strategy for both of our brands and risks related to our international operations;
(7) our reliance on master franchisees and subfranchisees to accelerate restaurant growth; (8) the ability of our credit facilities’ and
derivatives’ counterparties to fulfill their commitments and/or obligations; (9) our ability to successfully apply the ZBB model to the
TH’s operations and to achieve the anticipated synergies through shared services; (10) the restructuring activities that we have and
will continue to implement in connection with the Transactions; and (11) changes in applicable tax laws or interpretations thereof.
Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in
the section entitled “Item 1A - Risk Factors” of our Annual Report as well as other materials that we from time to time file with, or
furnish to, the SEC or file with Canadian securities regulatory authorities on SEDAR. All forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere
in this annual report. Other than as required under securities laws, we do not assume a duty to update these forward-looking
statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
58
Item 8.
Financial Statements and Supplementary Data
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
59
Page
60
61
64
65
66
67
68
69
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, related notes
and other information included in this annual report. The financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America and include certain amounts based on management’s estimates and assumptions.
Other financial information presented in the annual report is derived from the financial statements.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2015. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2015 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management
determined that the Company’s internal control over financial reporting was effective as of December 31, 2015.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by KPMG
LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein.
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Restaurant Brands International Inc.:
We have audited the accompanying consolidated balance sheets of Restaurant Brands International Inc. and subsidiaries (the
Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Restaurant Brands International Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Restaurant Brands International Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Miami, Florida
February 26, 2016
Certified Public Accountants
(signed) KPMG LLP
61
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Restaurant Brands International Inc.:
We have audited Restaurant Brands International Inc. and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Restaurant Brands International Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
62
Restaurant Brands International Inc.
February 26, 2016
Page 2 of 2
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Restaurant Brands International Inc. and subsidiaries as of December 31, 2015 and 2014, and the
related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2015 and our report dated February 26, 2016 expressed an unqualified opinion on those
consolidated financial statements.
Miami, Florida
February 26, 2016
Certified Public Accountants
(signed) KPMG LLP
63
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash and cash equivalents
Trade and notes receivable, net of allowance of $14.2 million and $20.1 million, respectively
Inventories and other current assets, net
Advertising fund restricted assets
Deferred income taxes, net
Total current assets
Property and equipment, net of accumulated depreciation of $339.3 million and $225.1 million,
respectively
Intangible assets, net
Goodwill
Net investment in property leased to franchisees
Other assets, net
Total assets
LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts and drafts payable
Accrued advertising
Other accrued liabilities
Gift card liability
Advertising fund liabilities
Current portion of long term debt and capital leases
Total current liabilities
Term debt, net of current portion
Capital leases, net of current portion
Other liabilities, net
Deferred income taxes, net
Total liabilities
Commitments and Contingencies (Note 24)
Redeemable preferred shares; $43.775848 par value; 68,530,939 shares authorized, issued and
outstanding at December 31, 2015 and December 31, 2014
Shareholders’ Equity:
Common shares, no par value; unlimited shares authorized at December 31, 2015 and
December 31, 2014; 225,707,588 shares issued and outstanding at December 31, 2015;
202,052,741 shares issued and outstanding at December 31, 2014
Retained earnings
Accumulated other comprehensive income (loss)
Total Restaurant Brands International Inc. shareholders’ equity
Noncontrolling interests
Total shareholders’ equity
Total liabilities, redeemable preferred shares and shareholders’ equity
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board of Directors:
By: /s/ Alexandre Behring
Alexandre Behring, Executive Chairman
By: /s/ Paul J. Fribourg
Paul J. Fribourg, Director
64
As of
December 31,
2015
December 31,
2014
$
757.8
—
422.0
132.2
57.5
—
1,369.5
$
1,803.2
84.5
441.2
172.3
53.0
86.6
2,640.8
2,150.6
9,147.8
4,574.4
117.2
1,051.6
$ 18,411.1
2,436.5
10,445.1
5,235.7
140.5
444.4
$ 21,343.0
$
361.5
45.2
441.3
168.5
48.4
56.1
1,121.0
$
223.0
25.9
335.6
187.0
45.5
1,128.8
1,945.8
8,462.3
203.4
795.9
1,618.8
12,201.4
8,826.5
243.7
707.8
1,982.8
13,706.6
3,297.0
3,297.0
1,824.5
245.8
(733.7)
1,336.6
1,576.1
2,912.7
$ 18,411.1
1,755.0
231.0
(107.8)
1,878.2
2,461.2
4,339.4
$ 21,343.0
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
Revenues:
Sales
Franchise and property revenues
Total revenues
Cost of sales
Franchise and property expenses
Selling, general and administrative expenses
(Income) loss from equity method investments
Other operating expenses (income), net
Total operating costs and expenses
Income from operations
Interest expense, net
Loss on early extinguishment of debt
Income (loss) before income taxes
Income tax expense
Net income (loss)
Net income (loss) attributable to noncontrolling interests (Note 19)
Preferred shares dividends
Accretion of preferred shares to redemption value
Net income (loss) attributable to common shareholders
Earnings (loss) per common share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Dividends per common share
2015
2014
2013
$2,169.0 $ 167.4 $ 222.7
923.6
1,031.4
1,146.3
1,198.8
195.3
156.4
152.4
179.0
242.4
345.4
12.7
9.5
21.3
327.4
624.1
1,017.7
522.2
181.1
200.0
279.7
—
155.4
322.2
(254.0)
88.5
15.3
233.7
(269.3)
—
(430.7)
—
13.8
—
546.4
$ 103.9 $ (398.8) $ 233.7
1,883.2
4,052.2
1,809.5
503.2
437.7
4.1
105.5
2,860.0
1,192.2
478.3
40.0
673.9
162.2
511.7
136.6
271.2
—
$
$
0.51 $ (1.16) $
0.50 $ (2.32) $
0.67
0.65
203.5
476.0
343.7
358.2
$
0.44 $
0.30 $
351.0
357.8
0.24
See accompanying notes to consolidated financial statements.
65
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
Net income (loss)
Foreign currency translation adjustment
Reclassification of foreign currency translation adjustment into net income
Net change in fair value of net investment hedges, net of tax of $(111.7), $(20.9), and $5.7
Net change in fair value of cash flow hedges, net of tax of $29.0, $57.6, and $(65.8)
Amounts reclassified to earnings of cash flow hedges, net of tax of $(7.5), $2.7, and $(2.3)
Pension and post-retirement benefit plans, net of tax of $7.0, $12.3, and $(10.7)
Amortization of prior service (credits) costs, net of tax of $1.1, $1.1, $1.2
Amortization of actuarial (gains) losses, net of tax of $(1.1), $0.0, $(0.4)
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income attributable to preferred shareholders
Comprehensive income (loss) attributable to common shareholders
2015
2014
2013
$
511.7 $(269.3)
$233.7
(1,830.8)
—
686.8
(81.0)
19.8
(13.8)
(1.8)
1.5
(1,219.3)
(707.6)
(552.8)
271.2
(219.1)
—
45.4
(98.7)
(4.1)
(23.8)
(1.8)
(1.0)
(303.1)
(572.4)
(457.9)
560.2
$ (426.0) $(674.7)
50.1
(3.0)
(9.1)
103.3
3.8
20.8
(1.8)
0.8
164.9
398.6
—
—
$398.6
See accompanying notes to consolidated financial statements.
66
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except per share data)
Issued Common Shares
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Noncontrolling
Interests
Total
Balances at December 31, 2012
Stock option exercises
Stock option tax benefits
Share-based compensation
Issuance of shares
Treasury stock purchases
Dividends paid on common
shares ($0.24 per share)
Net income
Other comprehensive income
(loss)
Balances at December 31, 2013
Stock option exercises
Stock option tax benefits
Share-based compensation
Issuance of shares
Dividends paid on common
shares ($0.30 per share)
Retirement of treasury stock
Transfer of additional paid-in
capital balance to common
shares
Transfers to noncontrolling
interests
Issuance of warrant
Accretion of preferred shares to
redemption value
Preferred share dividends
Issuance of 106,565,335 shares
from acquisition of Tim
Hortons
Noncontrolling interest from
acquisition of Tim Hortons
Exercise of warrant
Net income (loss)
Other comprehensive income
(loss)
Balances at December 31, 2014
Stock option exercises
Stock option tax benefits
Share-based compensation
Issuance of shares
Modification of equity awards
Dividends declared on common
shares ($0.44 per share)
Distributions declared by
Partnership on partnership
exchangeable units ($0.44 per
unit) (Note 19)
Preferred share dividends
Repurchase of Partnership
exchangeable units
Exchange of Partnership
350.2 $
1.7
—
—
0.3
—
3.5 $ 1,205.7 $ 76.1 $
—
—
—
—
—
6.0 —
10.1 —
14.6 —
3.5 —
— —
—
—
—
—
—
—
(84.3)
233.7
—
352.2 $
0.1
—
—
0.1
— —
—
3.5 $ 1,239.9 $ 225.5 $
—
—
—
—
0.4 —
— —
25.8 —
3.3 —
—
(0.3)
—
—
—
(105.6)
(7.3) —
(110.3) $ — $
—
—
—
—
(7.3)
—
—
—
—
—
—
—
164.9
54.6 $
—
—
—
—
—
—
—
—
—
(7.3) $
—
—
—
—
—
7.3
— $ 1,175.0
6.0
—
10.1
—
14.6
—
3.5
—
(7.3)
—
—
—
(84.3)
233.7
—
164.9
— $ 1,516.2
0.4
—
—
—
25.8
—
3.3
—
—
—
(105.6)
—
— 1,262.1 (1,262.1) —
—
—
—
—
(265.0) (3,003.0)
247.6
—
—
(28.5)
— —
—
—
(538.4)
—
—
—
(8.0)
(13.8)
113.5
—
—
—
—
—
—
—
2,918.0
—
—
247.6
—
—
(546.4)
(13.8)
106.6 3,783.1
— —
—
—
—
3,783.1
—
8.4
—
—
0.1
—
— —
— —
161.4
—
—
—
—
—
—
—
1.1
—
(430.7)
1.1
0.1
(269.3)
—
202.1 $ 1,755.0 $ — $ 231.0 $
— —
—
0.3
—
—
0.1
—
4.9
0.5
33.0
6.9
10.2
— —
— —
— —
— —
— —
(275.9) —
(107.8) $ — $
—
—
—
—
—
—
—
—
—
—
(27.2)
(303.1)
2,461.2 $ 4,339.4
4.9
0.5
33.0
6.9
10.2
—
—
—
—
—
—
—
—
(89.1)
—
—
—
(89.1)
—
—
—
—
— —
(271.2)
—
—
—
—
—
(116.6)
—
(116.6)
(271.2)
—
(213.6)
— —
(25.0) —
(55.1)
(293.7)
exchangeable units for RBI common
shares
23.2
—
Restaurant VIE distributions
Net income (loss)
—
Other comprehensive income (loss) —
Balances at December 31, 2015
227.6
—
—
—
— —
— —
—
375.1
— —
—
—
(71.0) —
—
—
(529.9) —
(733.7) $ — $
—
(156.6)
(4.0)
(4.0)
511.7
136.6
(689.4)
(1,219.3)
1,576.1 $ 2,912.7
225.7 $ 1,824.5 $ — $ 245.8 $
See accompanying notes to consolidated financial statements.
67
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
511.7
$ (269.3)
$ 233.7
2015
2014
2013
Depreciation and amortization
Loss on early extinguishment of debt
Amortization of deferred financing costs and debt issuance discount
(Income) loss from equity method investments
Loss (gain) on remeasurement of foreign denominated transactions
Amortization of defined benefit pension and postretirement items
Net losses (gains) on derivatives
Net losses (gains) on refranchisings and dispositions of assets
Bad debt expense (recoveries), net
Share-based compensation expense
Acquisition accounting impact on cost of sales
Deferred income taxes
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Restricted cash and cash equivalents
Trade and notes receivable
Inventories and other current assets
Accounts and drafts payable
Accrued advertising
Other accrued liabilities
Other long-term assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Payments for property and equipment
Proceeds (payments) from refranchisings, disposition of assets and restaurant closures
Net payments for acquired and disposed franchisee operations, net of cash acquired
Net payment for purchase of Tim Hortons, net of cash acquired
Return of investment on direct financing leases
Settlement/sale of derivatives, net
Other investing activities, net
Net cash provided by (used for) investing activities
Cash flows from financing activities:
Proceeds from term debt
Proceeds from Senior Notes
Proceeds from issuance of preferred shares, net
Repayments of term debt, Senior Notes, Discount Notes and capital leases
Payment of financing costs
Dividends paid on common shares and preferred shares
Repurchase of Partnership exchangeable units
Proceeds from stock option/warrant exercises
Proceeds from issuance of shares
Excess tax benefits from share-based compensation
Repurchases of common stock
Other financing activities, net
Net cash provided by (used for) financing activities
Effect of exchange rates on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
182.0
40.0
34.9
4.1
37.0
(0.4)
53.6
5.4
4.1
50.8
0.5
(32.3)
79.2
(26.5)
9.2
191.2
32.9
56.2
(28.8)
1,204.8
(115.3)
19.6
—
—
16.3
14.2
3.7
(61.5)
—
1,250.0
—
(2,627.8)
(81.3)
(362.4)
(293.7)
3.0
2.1
0.5
—
(5.6)
(2,115.2)
(73.5)
(1,045.4)
1,803.2
757.8
68.8
127.3
60.2
9.5
(6.2)
(3.9)
297.5
17.6
1.9
43.1
11.8
(61.9)
(36.4)
(24.5)
(24.1)
(17.9)
(35.9)
123.1
(21.4)
259.3
(30.9)
(7.8)
(3.9)
(7,374.7)
15.5
(388.9)
(0.1)
(7,790.8)
6,682.5
2,250.0
2,998.2
(3,102.0)
(158.0)
(105.6)
—
0.5
—
—
—
—
8,565.6
(17.8)
1,016.3
786.9
$ 1,803.2
65.8
—
56.3
12.7
0.3
(2.1)
6.1
(3.9)
2.0
14.8
—
32.1
—
(7.6)
(7.8)
(30.6)
(10.6)
(5.4)
(30.6)
325.2
(25.5)
64.8
(11.9)
—
15.4
—
0.2
43.0
—
—
—
(57.2)
—
(84.3)
—
6.0
—
10.1
(7.3)
—
(132.7)
4.7
240.2
546.7
$ 786.9
Supplemental cashflow disclosures:
Interest paid
Income taxes paid
$
$
408.3
208.3
$
$
199.9
35.2
$ 139.1
$ 35.6
Non-cash investing and financing activities:
Investments in unconsolidated affiliates
Acquisition of property with capital lease obligations
$ —
16.7
$
$ —
$ —
$ 17.8
1.0
$
See accompanying notes to consolidated financial statements.
68
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Description of Business and Organization
Description of Business
Restaurant Brands International Inc. (the “Company”, “we”, “us” or “our”) was originally formed on August 25, 2014 and
continued under the laws of Canada. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended, the Company
is a successor issuer to Burger King Worldwide, Inc. The Company serves as the sole general partner of Restaurant Brands
International Limited Partnership (the “Partnership”), the indirect parent of The TDL Group Corp. (f/k/a Tim Hortons ULC and Tim
Hortons Inc.), a limited company existing under the laws of British Columbia that franchises and operates quick service restaurants
serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), and Burger
King Worldwide, Inc., a Delaware corporation that franchises and operates fast food hamburger restaurants principally under the
Burger King® brand (“Burger King Worldwide”, “Burger King” or “BK”). We are one of the world’s largest quick service restaurant,
or QSR, chains as measured by total number of restaurants. As of December 31, 2015, we franchised or owned a total of 19,416
restaurants in approximately 100 countries and U.S. territories worldwide. Approximately 100% of current Tim Hortons and Burger
King system-wide restaurants are franchised.
The following table outlines our restaurant count, by brand and consolidated, and restaurant activity for the periods indicated.
Tim Hortons Restaurants
Total restaurants – beginning of period
Openings
Closures
Total systemwide restaurants – end of period
Burger King Restaurants
Total restaurants – beginning of period
Openings
Closures
Total restaurants – end of period
System Wide Restaurants
Total restaurants – beginning of period
Openings
Closures
Total systemwide restaurants – end of period
2014
2015
4,258
227
(72)
4,413 4,258
2015
2014
2013
14,372 13,667 12,991
882
(206)
15,003 14,372 13,667
999
(368)
999
(294)
2014
2015
18,630
1,226
(440)
19,416 18,630
Excluded from the table above are 398 and 413 of Tim Hortons limited service kiosks in Canada and the U.S. as of
December 31, 2015 and 2014, respectively, and licensed Tim Hortons locations in the Republic of Ireland and the United Kingdom.
Commencing in the fourth quarter of 2015, we revised our presentation of restaurant counts to exclude limited service kiosks, with
the revision applied retrospectively to the earliest period presented to provide period-to-period comparability.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to Canadian
dollars or C$ are to the currency of Canada unless otherwise indicated.
Note 2. The Transactions
On December 12, 2014 (the “Closing Date”), pursuant to the Arrangement Agreement and Plan of Merger (the “Arrangement
Agreement”), dated as of August 26, 2014, by and among Tim Hortons, Burger King Worldwide, the Company, Partnership, Blue
Merger Sub, Inc., a wholly owned subsidiary of Partnership (“Merger Sub”), and 8997900 Canada Inc., a wholly owned subsidiary of
Partnership (“Amalgamation Sub”), Amalgamation Sub acquired all of the outstanding shares of Tim Hortons pursuant to a plan of
69
arrangement under Canadian law, which resulted in Tim Hortons becoming an indirect subsidiary of both us and Partnership (the
“Arrangement”) and Merger Sub merged with and into Burger King Worldwide, with Burger King Worldwide surviving the merger
as an indirect subsidiary of both us and Partnership (the “Merger” and, together with the Arrangement, the “Transactions”). The
Arrangement was accounted for as a business combination using the acquisition method of accounting and Burger King Worldwide
was determined to be the accounting acquirer. The primary reason for the acquisition was to create one of the world’s largest quick
service restaurant companies.
In connection with the Transactions, the former holders of Burger King Worldwide common stock received 87.0 million newly
issued common shares of the Company and 265.0 million newly issued Class B exchangeable limited partnership units of Partnership
(the “Partnership exchangeable units”), which are intended to provide economic rights that are substantially equivalent, and voting
rights with respect to the Company that are equivalent, to the corresponding rights afforded to the holders of the Company’s common
shares (resulting in a 65.7% voting interest in the Company) in exchange for their holdings of Burger King Worldwide common
stock. Former holders of Tim Hortons common shares received 106.6 million newly issued common shares of the Company
(representing a 19.9% voting interest in the Company) as a component of consideration in the acquisition of Tim Hortons.
Additionally, we issued a warrant to purchase 8,438,225 common shares of the Company (the “Warrant”) to a subsidiary of Berkshire
Hathaway, Inc. in connection with the issuance of 9.0% cumulative compounding perpetual voting preferred shares (the “Preferred
Shares”), which was exercised on December 15, 2014 (such common shares, together with voting rights of the Preferred Shares,
representing a 14.4% voting interest in the Company). The Company’s common shares trade on the New York Stock Exchange and
Toronto Stock Exchange under the ticker symbol “QSR”. The Partnership exchangeable units trade on the Toronto Stock Exchange
under the ticker symbol “QSP”.
In 2014, fees and expenses related to the Transactions and related financings totaled $238.4 million, including (1) $70.0 million
consisting principally of investment banking fees and legal fees (which are classified as selling, general and administrative expenses),
(2) compensation related expenses of $55.0 million (which are classified as selling, general and administrative expenses)
(3) commitment fees of $28.1 million associated with the bridge loan available at the closing of the Transactions (which are classified
as loss on early extinguishment of debt) and (4) the payment of premiums of $85.3 million to redeem the Burger King Worldwide
notes (which are classified as loss on early extinguishment of debt). Debt issuance costs capitalized in connection with the issuance of
debt to fund the Transactions and refinancing of Burger King Worldwide indebtedness (see Note 12, Long-term debt) totaled $160.2
million and are classified as a reduction to term debt, net of current portion.
The total consideration paid in connection with the acquisition of Tim Hortons was approximately $11.3 billion. This
consideration paid, along with repayment of Burger King Worldwide indebtedness (see Note 12, Long-term debt) and the payment of
transaction expenses was funded through (i) our issuance of 106.6 million of common shares of the Company to Tim Hortons
shareholders, (ii) $6,750.0 million of proceeds from borrowings by subsidiaries of Partnership under a new term loan credit facility
(the “Term Loan Facility”), (iii) $2,250.0 million of proceeds from the issuance of second lien secured senior notes by subsidiaries of
Partnership, and (iv) $3,000.0 million of proceeds from our issuance of the Preferred Shares and the Warrant.
As discussed in Note 20, Share-based Compensation, at the time of the Transactions, we assumed the obligation for all
outstanding Burger King Worldwide stock options and RSUs. Additionally, pursuant to the Arrangement Agreement, we assumed the
obligation for each vested and unvested Tim Hortons stock option with tandem SARs that was not surrendered in connection with the
Arrangement on the same terms and conditions of the original awards, adjusted by an exchange ratio of 2.41.
The computation of consideration paid and the final allocation of consideration to the net tangible and intangible assets acquired
are presented in the tables that follow (in millions).
Cash consideration (a)
Share consideration (b)
Total consideration paid
$ 7,516.7
3,778.2
$11,294.9
Includes $13.9 million for the settlement of share-based compensation.
(a)
(b) Calculated as 106,565,335 shares issued to former holders of Tim Hortons common shares, multiplied by $35.50, which was the
closing price of a share of Burger King Worldwide common stock on the Closing Date, reduced by post-combination expense of
approximately $4.9 million associated with accelerated vesting and recognition of certain Tim Hortons share-based
compensation.
70
Total current assets
Property and equipment
Tim Hortons Brand
Other intangible assets
Other assets, net
Accounts payable
Advertising fund liabilities
Other accrued liabilities
Total debt and capital lease obligations
Other liabilities, net
Deferred income taxes, net
Total identifiable net assets
Noncontrolling interest
Goodwill
Total
December 12, 2014
654.7
$
1,672.3
7,255.0
564.3
146.2
(228.2)
(49.7)
(223.0)
(1,346.0)
(375.3)
(1,415.2)
6,655.1
(1.1)
4,640.9
11,294.9
$
All final purchase price allocation adjustments have been reflected on a retrospective basis as of the Closing Date. Additionally,
our statements of operations, comprehensive income (loss), shareholders’ equity and cash flows were retrospectively adjusted to
reflect the effects of the measurement period adjustments.
The Tim Hortons brand has been assigned an indefinite life and, therefore, will not be amortized, but tested annually for
impairment. Other intangible assets include $228.0 million related to franchise agreements and $336.3 million related to favorable
leases. Franchise agreements have a weighted average amortization period of 28 years. Favorable leases have a weighted average
amortization period of 11 years.
All of the goodwill from the Transactions was assigned to our TH operating segment. The goodwill attributable to the
Transactions will not be amortizable or deductible for tax purposes. Goodwill is considered to represent the value associated with the
workforce and synergies the two companies anticipate realizing as a combined company.
The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the
Transactions as if they had occurred on January 1, 2013 (in millions, except per share amounts):
Total Revenues
Net income
Net income (loss) attributable to non-controlling interests
Net income attributable to Restaurant Brands International Inc.
Preferred shares dividends
Accretion of preferred shares to redemption value
Net income (loss) attributable to common shareholders
Earnings (loss) per common share:
Basic
Diluted
Pro Forma -Unaudited
2013
2014
$4,316.2
$4,221.6
32.4
301.7
(451.6)
20.7
484.0
281.0
270.0
270.0
546.4
—
$ (332.4)
11.0
$
$
$
0.06
0.06
$ (1.72)
$ (1.72)
The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of
accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the
Transactions had been completed on the date indicated, nor is it indicative of our future operating results. The unaudited consolidated
pro forma information for 2013 includes certain non-recurring costs as a result of the Transactions, consisting primarily of transaction
costs of approximately $223.0 million, loss on early extinguishment of debt of approximately $155.0 million and transaction related
derivative losses of approximately $148.0 million. These costs were recorded net of tax, utilizing a tax rate of 26.5%.
71
The unaudited pro forma results do not reflect future events that either have occurred or may occur after the Transactions,
including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also
do not give effect to certain charges that we incurred in 2015 related to a strategic realignment of our global structure to better
accommodate the needs of the combined business and support successful global growth.
Note 3.
Summary of Significant Accounting Policies
Fiscal Year
We operate on a monthly calendar, with a fiscal year that ends on December 31. Prior to December 31, 2015, the fiscal year of
our Tim Hortons subsidiaries ended on the Sunday nearest to December 31 which was December 28 in 2014. The effect of changing
the fiscal year of our Tim Hortons subsidiaries during 2015 did not have a material impact on our consolidated results of operations,
financial position or cash flows.
Basis of Presentation and Consolidation
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission. All material
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. We consolidate
entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All
material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned
50% or less where we have significant influence are accounted for by the equity method.
We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control,
administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject
to the terms of the partnership agreement and applicable laws. As a result, we consolidate the results of Partnership and record a
noncontrolling interest in our consolidated balance sheets and statements of operations with respect to the remaining economic
interest in Partnership we do not hold.
We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be
achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is
required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the
activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to
receive benefits from the VIE that are significant to it. Our most significant variable interests are in entities that operate restaurants
under our subsidiaries’ franchise arrangements and certain equity method investees that operate as master franchisees. Our maximum
exposure to loss resulting from involvement with potential VIEs is attributable to trade and notes receivable balances, outstanding
loan guarantees and future lease payments, where applicable.
We do not have any ownership interests in our franchisees’ businesses, except for investments in various entities that are
accounted for under the equity method. Tim Hortons has historically entered into certain arrangements in which an operator acquires
the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. In these arrangements, Tim Hortons has the ability to
determine which operators manage the restaurants and for what duration. Tim Hortons previously also entered into interest-free
financing in connection with a Franchise Incentive Program (“FIP”) with certain U.S. restaurant owners whereby restaurant owners
finance the initial franchise fee and purchase of restaurant assets. In both operator and FIP arrangements (“FIP Notes”), we perform
an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also
determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). Additionally, Tim Hortons participates in advertising
funds which, on behalf of Tim Hortons Company and franchise restaurants, collect contributions and administer funds for advertising
and promotional programs. Tim Hortons is the sole shareholder (Canada) and sole member (U.S.) in these funds, and is the primary
beneficiary of these funds (the “Advertising VIEs”). As Burger King franchise and master franchise arrangements provide the
franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance,
we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.
72
Certain prior year amounts in the accompanying consolidated financial statements and notes to the consolidated financial
statements (the “Notes”) have been reclassified in order to be comparable with the current year classifications. These reclassifications
had no effect on previously reported net income.
Concentrations of Risk
As of December 31, 2015, we franchised or owned a total of 19,416 restaurants in approximately 100 countries and U.S.
territories worldwide. Approximately 100% of current Tim Hortons and Burger King system-wide restaurants are franchised.
Four distributors currently service approximately 88.7% of our U.S. Burger King system restaurants and the loss of any one of
these distributors would likely adversely affect our business. In many of our international markets, a single distributor services all the
Burger King restaurants in the market. The loss of any of one of these distributors would likely have an adverse effect on the market
impacted, and depending on the market, could have an adverse impact on our financial results. In addition, we have moved to a
business model in our international markets (for both TH and BK) and our U.S. market (for TH) in which we enter into exclusive
agreements with master franchisees and area developers to develop and operate restaurants, and, in the case of our international
markets, subfranchise to third parties the right to develop and operate restaurants in defined geographic areas. The termination of an
arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation
of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in our consolidated 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.
Foreign Currency Translation
Our functional currency is the U.S. dollar, as our redeemable Preferred Shares and related preferred dividends, our term loan,
first lien senior secured notes, and second lien senior secured notes are denominated in U.S. dollars, and the principal market for our
common shares is the U.S. The functional currency of each of our operating subsidiaries is generally the local currency. Foreign
currency balance sheets are translated using the end-of-period exchange rates, and statements of operations and statements of cash
flows are translated at the average exchange rates for each period. The translation adjustments resulting from the translation of
foreign currency financial statements are recorded in other comprehensive income (loss) in the consolidated statements of
comprehensive income (loss).
Foreign Currency Transaction Gains or Losses
Foreign currency transaction gains or losses resulting from the re-measurement of our foreign-denominated assets and liabilities
or our subsidiaries are reflected in earnings in the period when the exchange rates change and are included within other operating
expenses (income), net in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid investments with original maturities of three months or less and
credit card receivables.
Restricted Cash and Cash Equivalents
During the year ended December 31, 2015, amounts classified as restricted cash as of December 31, 2014 were reclassified to
cash and cash equivalents as a result of the restructuring of banking arrangements and our intent to no longer classify this cash as
restricted. This reclassification is reflected as a source of cash provided by operating activities in the consolidated statement of cash
flows for the year ended December 31, 2015.
As of December 31, 2014, proceeds from the initial sale or reloading of the Tim Hortons Tim Card® quick-pay cash card
program (“Tim Card”) were classified as restricted cash and cash equivalents in the consolidated balance sheets along with a
corresponding obligation.
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Notes Receivable
Notes receivable represent loans made to franchisees arising from refranchisings of Company restaurants, sales of property and
FIP Notes. In certain cases, past due trade receivables from franchisees are restructured into an interest-bearing note, which are
generally already fully reserved, and as a result, are transferred to notes receivable at a net carrying value of zero. Notes receivable
with a carrying value greater than zero are written down to net realizable value when it is likely that we are unable to collect all
amounts due under the contractual terms of the loan agreement.
Allowance for Doubtful Accounts
We evaluate the collectability of our trade accounts receivable from franchisees based on a combination of factors, including the
length of time the receivables are past due and the probability of collection from litigation or default proceedings, where applicable.
We record a specific allowance for doubtful accounts in an amount required to adjust the carrying values of such balances to the
amount that we estimate to be net realizable value. We write off a specific account when (a) we enter into an agreement with a
franchisee that releases the franchisee from outstanding obligations, (b) franchise agreements are terminated and the projected cost of
collections exceeds the benefits expected to be received from pursuing the balance owed through legal action, or (c) franchisees do
not have the financial wherewithal or unprotected assets from which collection is reasonably assured.
Inventories
Inventories are carried at the lower of cost or net realizable value and consist primarily of raw materials such as green coffee
beans and finished goods such as new equipment, parts, paper supplies and restaurant food items. The moving average method is used
to determine the cost of raw material inventories and finished goods inventories held for sale to Tim Hortons franchisees.
Property and Equipment, net
We record property and equipment at historical cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the following estimated useful lives of the assets.
Land
Buildings and improvements
Restaurant equipment
Furniture, fixtures, and other
Manufacturing equipment
Capital Leases
Depreciation Periods
(up to 40 years)
(up to 18 years)
(up to 10 years)
(up to 30 years)
(up to 40 years or lease term)
Leasehold improvements to properties where we are the lessee are amortized over the lesser of the remaining term of the lease
or the estimated useful life of the improvement.
We are considered to be the owner of certain restaurants leased from an unrelated lessor because Tim Hortons constructed some
of the structural elements of those restaurants. Accordingly, we have included these restaurant properties in Property and equipment,
net in the consolidated balance sheet and recognized the lessor’s contributions to the construction costs for these restaurants as other
debt.
Major improvements are capitalized, while maintenance and repairs are expensed when incurred.
Assets Held For Sale
We classify assets as held for sale when we commit to a plan to dispose of the assets 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 classify impairment losses associated with restaurants held for sale as losses on refranchisings.
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If we subsequently decide to retain assets 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.
Leases
We define a lease term as the initial term of the lease plus any renewals covered by bargain renewal options or that are
reasonably assured of exercise because non-renewal would create an economic penalty plus any periods that the Company has use of
the property but is not charged rent by a landlord (“rent holiday”).
Assets we acquire as lessee under capital leases are stated at the lower of the present value of future minimum lease payments or
fair market value at the date of inception of the lease. Capital lease assets are depreciated using the straight-line method over the
shorter of the useful life of the asset or the underlying lease term.
We also have net investments in properties leased to franchisees, which meet the criteria of direct financing leases. Investments
in direct financing leases are recorded on a net basis, consisting of the gross investment and residual value in the lease less the
unearned income. Unearned income is recognized over the lease term yielding a constant periodic rate of return on the net investment
in the lease. Direct financing leases are reviewed for impairment whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable based on the payment history under the lease.
We record rent expense and income from operating leases that contain rent holidays or scheduled rent increases on a straight-
line basis over the lease term. Contingent rentals are generally based on a percentage of restaurant sales or as a percentage of
restaurant sales in excess of stipulated amounts, and thus are not considered minimum lease payments at lease inception.
Favorable and unfavorable operating leases are recorded in connection with the acquisition method of accounting. We amortize
favorable and unfavorable leases on a straight-line basis over the remaining term of the leases, as determined at the acquisition date.
Upon early termination of a lease, the write-off of the favorable or unfavorable lease carrying value associated with the lease is
recognized as a loss or gain within other operating expenses (income), net in the consolidated statements of operations. Amortization
of favorable and unfavorable leases on Company restaurants is included in costs of sales in the consolidated statements of operations.
Amortization of favorable and unfavorable income leases is included in franchise and property revenues in the consolidated
statements of operations. Amortization of favorable and unfavorable commitment leases for franchise restaurants is included in
franchise and property expenses in the consolidated statements of operations.
Lease incentives we provide to our lessees are recorded as a lease incentive asset and amortized as a reduction of rental income
on a straight-line basis over the lease term. Lease incentives we receive from a landlord are recognized as a liability and amortized as
a reduction of rent expense over the lease term.
We recognize a loss on leases and subleases and a related lease liability when expenses to be recorded under the lease exceed
future minimum rents to us under the lease or sublease. The lease liability is amortized on a straight-line basis over the lease term as a
reduction of property expense.
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection
with the Transactions and the 2010 acquisition of Burger King Holdings, Inc. by 3G. Our indefinite-lived intangible assets consist of
the Tim Hortons brand and the Burger King brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested
for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change, which
indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative
assessments, as further described below. We may elect to bypass the qualitative assessment and proceed directly to a two-step
quantitative impairment test, for any reporting unit or either Brand, in any period. We can resume the qualitative assessment for any
reporting unit or Brand in any subsequent period.
Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-
not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting
unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its
fair value, we perform a two-step quantitative goodwill impairment test. The first step requires us to estimate the fair value of the
reporting unit. If the fair value of the reporting unit is less than its carrying amount, the estimated fair value of the reporting unit is
allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based
on their fair value. If necessary, goodwill is then written down to its implied fair value.
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Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-
not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for either Brand, or if a
qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we
estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment
loss is recognized in an amount equal to that excess.
We completed our impairment tests for goodwill and the Brands as of October 1, 2015, 2014 and 2013 and no impairment
resulted. During 2015, we elected to perform a quantitative impairment review of goodwill for all of our reporting units and the
Brands.
When we dispose of a restaurant business within six months of acquisition, the goodwill recorded in connection with the
acquisition is written off. Otherwise, goodwill is written off based on the relative fair value of the business sold to the reporting unit
when disposals occur more than six months after acquisition. The sale of Company restaurants to franchisees is referred to as a
“refranchising.”
Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are tested for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Some of the
events or changes in circumstances that would trigger an impairment review include, but are not limited to, bankruptcy proceedings
or other significant financial distress of a lessee; significant negative industry or economic trends; knowledge of transactions
involving the sale of similar property at amounts below the carrying value; or our expectation to dispose of long-lived assets before
the end of their estimated useful lives. The impairment test for long-lived assets requires us to assess the recoverability of long-lived
assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and
arising from use and eventual disposition of the assets. Long-lived assets are grouped for recognition and measurement of impairment
at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the net carrying value
of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we must record an impairment
charge equal to the excess, if any, of net carrying value over fair value.
Equity Method Investments
Equity investments in which we have significant influence but not control are accounted for using the equity method and are
included in other assets, net in our consolidated balance sheets. Our share of investee net income or loss is classified as (income) loss
from equity method investments in our consolidated statements of operations. The difference between the carrying value of our equity
investment and the underlying equity in the historical net assets of the investee is accounted for as if the investee were a consolidated
subsidiary. Accordingly, the carrying value difference is amortized over the estimated lives of the assets of the investee to which such
difference would have been allocated if the equity investment were a consolidated subsidiary. To the extent the carrying value
difference represents goodwill or indefinite lived assets, it is not amortized. During 2015, we recorded $3.6 million of basis difference
amortization related to equity method investments. We did not record basis difference amortization related to equity method
investments for 2014 and 2013. We evaluate our investments in equity method investments for impairment whenever events occur or
circumstances change in a manner that indicates our investment may not be recoverable. We did not record impairment charges
related to equity method investments for 2015, 2014 and 2013.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are included in comprehensive income
(loss), but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity, net of
tax. Our other comprehensive income (loss) is comprised of unrealized gains and losses on foreign currency translation adjustments,
unrealized gains and losses on hedging activity, net of tax, and minimum pension liability adjustments, net of tax.
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Derivative Financial Instruments
We recognize and measure all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets.
We may enter into derivatives that are not initially designated as hedging instruments for accounting purposes, but which largely
offset the economic impact of certain transactions.
Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other
comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings,
depending on the purpose of the derivatives and whether they qualify for, and we have applied, hedge accounting treatment. The
ineffective portion of gains or losses on derivatives is reported in current earnings.
When applying hedge accounting, our policy is to designate, at a derivative’s inception, the specific assets, liabilities or future
commitments being hedged, and to assess the hedge’s effectiveness at inception and on an ongoing basis. We discontinue hedge
accounting when: (i) we determine that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a
hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction
will occur; or (iv) management determines that designation of the derivatives as a hedge instrument is no longer appropriate. We do
not enter into or hold derivatives for speculative purposes.
Disclosures About Fair Value
Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain
circumstances. These items primarily include: (i) assets acquired and liabilities assumed initially measured at fair value in connection
with the application of acquisition accounting; (ii) long-lived assets, reporting units with goodwill and intangible assets for which fair
value is determined as part of the related impairment tests; and (iii) asset retirement obligations initially measured at fair value. At
December 31, 2015 and December 31, 2014, there were no significant adjustments to fair value or fair value measurements required
for non-financial assets or liabilities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability
at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the
asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the
calculation, as follows:
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or
indirectly.
Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or
liability.
Certain of our derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable
market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy.
Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or
us.
The carrying amounts for cash and equivalents, trade accounts and notes receivable and accounts and drafts payable
approximate fair value based on the short-term nature of these amounts.
Restricted investments, consisting of investment securities held in a rabbi trust to invest compensation deferred under our
Executive Retirement Plan and fund future deferred compensation obligations, are carried at fair value, with net unrealized gains and
losses recorded in our consolidated statements of operations. The fair value of these investment securities are determined using
quoted market prices in active markets classified as Level 1 within the fair value hierarchy.
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.
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The determinations of fair values of certain tangible and intangible assets for purposes of the application of the acquisition
method of accounting to the acquisition of Tim Hortons were based upon Level 3 inputs. The determination of fair values of our
reporting units and the determination of the fair value of the Brands for our 2015 and 2014 annual impairment evaluations of
goodwill and brand intangible assets, respectively, were based upon Level 3 inputs.
Revenue Recognition
Sales include supply chain sales and sales from Company restaurants. Supply chain sales represent sales of products, supplies
and restaurant equipment as well as sales to retailers, other than equipment sales related to initial restaurant establishment or
renovations that are shipped directly from our warehouses or by third-party distributors to restaurants or retailers. Revenues from
supply chain sales are recognized upon delivery. Sales at Company restaurants (including Restaurant VIEs) represent restaurant-level
sales to our guests and are recognized at the point of sale.
Franchise and property revenues include franchise revenues, consisting primarily of royalties, initial and renewal franchise fees
paid by franchisees, revenues derived from equipment sales at establishment of a restaurant and in connection with a restaurant
renewal or renovation and property revenues from properties we lease or sublease to franchisees.
Royalties are based on a percentage of gross sales at franchise restaurants and are recognized when earned and collectability is
reasonably assured. Initial franchise fees and equipment sales are recognized as revenue when the related restaurant begins operations
and our completion of all material services and conditions. Fees collected in advance are deferred until earned. Renewal franchise
fees are recognized as revenue upon receipt of the non-refundable fee and execution of a new franchise agreement. Upfront fees paid
by franchisees in connection with development agreements are deferred when the development agreement includes a minimum
number of restaurants to be opened by the franchisee. The deferred amounts are recognized as franchise fee revenue on a pro rata
basis as the franchisee opens each respective restaurant. The cost recovery accounting method is used to recognize revenues for
franchisees for which collectability is not reasonably assured.
Rental income for base rentals is recorded on a straight-line basis over the term of the lease and earned income on direct
financing leases are recognized when earned and collectability is reasonably assured. Contingent rent is recognized on an accrual
basis as earned, and any amounts received from lessees in advance of achieving stipulated thresholds are deferred until such threshold
is actually achieved.
Our businesses are moderately seasonal. Our restaurant sales are typically higher in the spring and summer months when
weather is warmer than in the fall and winter months. Because our businesses are moderately seasonal, results for any one quarter are
not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Advertising and Promotional Costs
Company restaurants and franchise restaurants contribute to advertising funds that our subsidiaries manage in the United States
and Canada and certain other international markets. Under our franchise agreements, advertising contributions received from
franchisees must be spent on advertising, product development, marketing and related activities. Since we act as an agent for these
specifically designated contributions, the revenues and expenses of the advertising funds are generally netted in our consolidated
statements of operations and cash flows.
The advertising funds expense the production costs of advertising when the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period incurred.
Advertising expense, which primarily consists of advertising contributions by Company restaurants (including Restaurant VIEs)
based on a percentage of gross sales, totaled $13.7 million for 2015, $2.4 million for 2014 and $6.2 million for 2013 and is included
in selling, general and administrative expenses in the accompanying consolidated statements of operations.
As of the balance sheet date, contributions received may not equal advertising and promotional expenditures for the period due
to the timing of advertising promotions. To the extent that contributions received exceed advertising and promotional expenditures,
the excess contributions are accounted for as a deferred liability and are recorded in accrued advertising in the accompanying
consolidated balance sheets. To the extent that advertising and promotional expenditures temporarily exceed contributions received,
the excess expenditures are accounted for as a receivable from the fund and are recorded in prepaids and other current assets, net in
the accompanying consolidated balance sheets.
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For our Burger King business, in Canada and most of our international markets, franchisees contribute to advertising funds that
are not managed by us. Such contributions and related fund expenditures are not reflected in our results of operations or financial
position.
Insurance Reserves
We carry insurance to cover claims such as workers’ compensation, general liability, automotive liability, executive risk and
property, and we are self-insured for healthcare claims for eligible participating employees. Through the use of insurance program
deductibles (up to $5.0 million) and self-insurance, we retain a significant portion of the expected losses under these programs.
Insurance reserves have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, on an undiscounted
basis, both reported and incurred-but-not-reported (“IBNR”).
Litigation Accruals
From time to time, we are subject to proceedings, lawsuits and other claims related to competitors, customers, employees,
franchisees, government agencies and suppliers. We are required to assess the likelihood of any adverse judgments or outcomes to
these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these
contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments
in settlement strategy in dealing with these matters.
Guarantees
We record a liability to reflect the estimated fair value of guarantee obligations at the inception of the guarantee. Expenses
associated with the guarantee liability, including the effects of any subsequent changes in the estimated fair value of the liability, are
classified as other operating income (expenses), net in our consolidated statements of operations.
Income Taxes
Amounts in the financial statements related to income taxes are calculated using the principles of Accounting Standards
Codification (“ASC”) 740, Income Taxes. Under these principles, deferred tax assets and liabilities reflect the impact of temporary
differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for
tax purposes, as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently
enacted tax rates. A deferred tax asset is recognized when it is considered more-likely-than-not to be realized. The effects of changes
in tax rates on deferred tax assets and liabilities are recognized in income in the year in which the law is enacted. A valuation
allowance reduces deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be
recognized.
Income tax benefits credited to stockholders’ equity relate to tax benefits associated with amounts that are deductible for income
tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of nonqualified stock
options and settlement of restricted stock awards.
We recognize positions taken or expected to be taken in a tax return in the financial statements when it is more-likely-than-not
(i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement.
Transaction gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities denominated in a
currency other than the functional currency are classified as other operating expenses (income), net in the consolidated statements of
operations.
Share-based Compensation
We use the Black-Scholes option pricing model to value stock options, which requires the use of observable and unobservable
assumptions. These assumptions include the estimated length of time employees will retain their stock options before exercising them
(the “expected term”), the expected volatility of our common share price over the expected term, the risk-free interest rate, the
dividend yield and the forfeiture rate. With the exception of stock options issued with tandem stock appreciation rights (“SARs”) (see
below), we recognize share-based compensation cost based on the grant date estimated fair value of each award, net of estimated
forfeitures.
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In connection with the Transactions, the Company issued stock options with tandem SARs in exchange for historical vested and
unvested Tim Hortons stock options issued with SARs not surrendered as part of the Transactions. These stock options with tandem
SARs are accounted for as cash settled awards, as these tandem awards allow the employee to exercise the stock option to receive
common shares or to exercise the SAR and receive a cash payment in an amount equal to the difference between the market price of
the common share on the exercise date and the exercise price of the stock option. The accounting for stock options with tandem SARs
results in a revaluation of the liability to fair value at the end of each reporting period, which is generally classified as selling, general
and administrative expenses in the consolidated statements of operations.
Share-based compensation cost is recognized over the employee’s requisite service period, which is generally the vesting period
of the equity grant. For awards that have a cliff-vesting schedule, share-based compensation cost is recognized ratably over the
requisite service period.
Restructuring
The determination of when we accrue for employee involuntary termination benefits depends on whether the termination
benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. We record charges for ongoing
benefit arrangements in accordance with ASC 712, Nonretirement Postemployment Benefits. We record charges for one-time benefit
arrangements in accordance with ASC 420, Exit or Disposal Cost Obligations.
Retirement Plans
The funded status of our defined benefit pension plans and postretirement benefit plans are recognized in the consolidated
balance sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at
December 31, the measurement date. The fair value of plan assets represents the current market value of contributions made to
irrevocable trust funds, held for the sole benefit of participants, which are invested by the trust funds. For defined benefit pension
plans, the benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement. For postretirement
benefit plans, the benefit obligation represents the actuarial present value of postretirement benefits attributed to employee services
already rendered. Gains or losses and prior service costs or credits related to our pension plans are being recognized as they arise as a
component of other comprehensive income (loss) to the extent they have not been recognized as a component of net periodic benefit
cost.
We sponsor a pension plan for employees of Tim Hortons (the “Canadian Plan”), a defined contribution pension plan under the
provisions of the Income Tax Act (Canada) and the Ontario Pension Benefits Act. All of our Tim Hortons Canadian employees
meeting the eligibility requirements, including executives, are required to participate. A participant contributes 2% of their base
salary, while we contribute an amount equal to 5% of their base salary. Participants can make voluntary additional contributions,
which we match up to an additional 1% of base salary, subject to legislative maximum limits.
We also sponsor two defined contribution benefit plans for U.S. employees of Tim Hortons (the “U.S. Plans”), under the
provisions of Section 401(k) of the U.S. Internal Revenue Code. The U.S. Plans are voluntary and provided to all our Tim Hortons
U.S. employees who meet the eligibility requirements. The participant can contribute up to 75% of their base salary, subject to IRS
limits, and we contribute a specified percentage and match a specified percentage of employees contributions, based on their
eligibility under the specific plan.
We also sponsor the Burger King Savings Plan (the “Savings Plan”), a defined contribution plan under the provisions of
Section 401(k) of the U.S. Internal Revenue Code. The Savings Plan is voluntary and is provided to all employees who meet the
eligibility requirements. A participant can elect to contribute up to 50% of their compensation, subject to IRS limits, and we match
100% of the first 4% of employee compensation.
Aggregate amounts recorded in the consolidated statements of operations representing our contributions to the Canadian Plan,
U.S. Plans and Savings Plan on behalf of restaurant and corporate employees was $6.9 million for 2015, $1.3 million for 2014 and
$1.0 million for 2013. Our contributions made on behalf of restaurant employees are classified as cost of sales in our consolidated
statements of operations, while our contributions made on behalf of corporate employees are classified as selling, general and
administrative expenses in our consolidated statements of operations.
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New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that amended
accounting guidance on revenue recognition. Under this guidance, an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to
understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the
FASB issued an accounting standards update which deferred the effective date for adoption of the new revenue standard by one year.
As such, this standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
Early adoption of the accounting standard is allowed as of the original effective date, which is for fiscal years, and interim periods
within those years, beginning after December 15, 2016. The accounting standards update permits the use of either the retrospective or
cumulative effect transition method. We are evaluating the impact of this accounting standards update on our consolidated financial
statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the accounting
standards update on our ongoing financial reporting.
In February 2015, the FASB issued an accounting standards update that changed the analysis that a reporting entity must
perform to determine whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the
revised consolidation model. This guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2015, with early adoption permitted. We expect the adoption of this guidance to have no significant impact on our
consolidated financial position or results of operations.
In April 2015, the FASB issued an accounting standards update that changed the presentation of debt issuance costs in financial
statements. Under the new guidance, an entity presents such costs in the balance sheet as a direct deduction from the related debt
liability rather than as an asset. Amortization of the costs is reported as interest expense. During 2015 we adopted this updated
standard, which required retrospective application and resulted in the reclassification of debt issuance costs of $20.5 million from
Inventories and other current assets, net and $129.6 million from Other assets, net to a reduction of $150.1 million in Term debt, net
of current portion in our consolidated balance sheet as of December 31, 2014. Other than this change in presentation, this accounting
standards update did not have an impact on our consolidated financial position, results of operations or cash flows. See Note 12,
Long-term debt for more information.
In July 2015, the FASB issued an accounting standards update to simplify the measurement of inventory and to change the
measurement from lower of cost or market to lower of cost or net realizable value. The update does not apply to inventory that is
measured using last-in, first out (“LIFO”) or the retail inventory method. This guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2016, with early adoption permitted. We expect the adoption of this
guidance to have no significant impact on our consolidated financial position or results of operations.
In September 2015, the FASB issued an accounting standards update that amended accounting guidance related to restating
prior periods to reflect adjustments made to provisional amounts recognized in a business combination. The update requires that an
acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in
which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the
accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition
date must be disclosed by income statement line item either on the face of the income statement or in the notes. This guidance is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.
The new guidance must be applied prospectively to adjustments to provisional amounts that occur after the effective date. The
adoption is not expected to have a significant impact on our consolidated financial position or results of operations.
In November 2015, the FASB issued an accounting standards update to simplify the presentation of deferred income taxes.
Under the new guidance, an entity presents all deferred tax assets and liabilities as noncurrent in a classified statement of financial
position. The requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a
single amount is not affected by the update. This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016, with early adoption permitted. We adopted this updated standard during the three months ended
December 31, 2015. The guidance allows for prospective application of this change in accounting principle. As such, prior periods’
balances have not been adjusted.
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Note 4. Earnings per Share
Basic earnings per common share is determined by dividing net income (loss) attributable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net
income (loss) attributable to common shareholders and noncontrolling interests by the weighted average number of common shares
outstanding, assuming all potentially dilutive shares were issued.
For the period of January 1, 2014, through December 11, 2014 and 2013, prior to the Transactions, our equity reflected 100%
ownership by Burger King Worldwide shareholders. For 2015 and the period of December 12, 2014, through December 31, 2014, our
equity reflected majority ownership through Company common shares. Basic and diluted earnings per share is computed using the
weighted average number of shares outstanding for Burger King Worldwide shareholders for 2013 and the period of January 1, 2014,
through December 11, 2014, and the Company’s shareholders for the period of December 12, 2014, through December 31, 2014 and
2015. Additionally, beginning on December 12, 2014, an economic interest in Partnership common equity is held by the holders of
Partnership exchangeable units. Since December 12, 2015, the one year anniversary of the effective date of the Transactions, the
holders of Partnership exchangeable units each have the right to require Partnership to exchange all or any portion of such holder’s
Partnership exchangeable units on a one-for-one basis for Company common shares, subject to RBI’s right as the general partner of
Partnership, at the Company’s sole discretion, to deliver a cash payment in lieu of Company common shares. See Note 19,
Shareholders’ Equity.
We apply the treasury stock method to determine the dilutive weighted average common shares represented by Partnership
exchangeable units and outstanding stock options, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share
calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the
numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests.
The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts):
Numerator-Basic:
Net income (loss) attributable to common shareholders
Numerator-Diluted:
Net income (loss) attributable to common shareholders
Add: Net income (loss) attributable to noncontrolling interests
Dilutive net income (loss) available to common shareholders and
noncontrolling interests
Denominator:
Weighted average common shares-basic
Exchange of noncontrolling interests for common shares (Note 19)
Effect of other dilutive securities (a)
Weighted average common shares-diluted
Basic earnings (loss) per share
Diluted earnings (loss) per share
Anti-dilutive stock options outstanding
2015
2014
2013
$103.9
$(398.8)
$233.7
$103.9
133.2
$(398.8)
(430.7)
$233.7
—
$237.1
$(829.5)
$233.7
203.5
263.5
9.0
476.0
343.7
14.5
—
358.2
$ 0.51
$ 0.50
5.0
$ (1.16)
$ (2.32)
21.3
351.0
—
6.8
357.8
$ 0.67
$ 0.65
2.9
(a) There is no effect of other dilutive securities for the year ended December 31, 2014 because a net loss was reported during this
period causing any potentially dilutive securities to be anti-dilutive. Therefore, 21.3 million shares of potentially dilutive
securities were excluded in the calculation of diluted earnings (loss) per share since their impact would have been anti-dilutive.
82
Note 5. Trade and Notes Receivable, net
Trade and notes receivable, net, consists of the following (in millions):
Trade accounts receivable
Notes receivable, current portion
Allowance for doubtful accounts
Total, net
The change in allowances for doubtful accounts is as follows (in millions):
Beginning balance
Bad debt expense, net
Write-offs and other, net
Ending balance
Note 6.
Inventories and Other Current Assets, net
Inventories and other current assets, net consist of the following (in millions):
Raw materials
Finished goods
Total Inventory
Refundable and prepaid income taxes
Prepaid rent
Prepaids and other current assets
Inventories and other current assets, net
83
As of December 31,
2015
2014
$434.5 $448.1
13.2
461.3
(20.1)
$422.0 $441.2
1.7
436.2
(14.2)
As of December 31,
2015
$ 20.1
4.1
(10.0)
$ 14.2
2014
$ 15.8
1.9
2.4
$ 20.1
As of December 31,
2015
$ 22.7
58.6
81.3
21.5
10.6
18.8
$132.2
2014
$ 26.3
71.5
97.8
18.3
13.4
42.8
$172.3
Note 7.
Property and Equipment, net
Property and equipment, net, consist of the following (in millions):
Land
Buildings and improvements
Restaurant equipment
Furniture, fixtures, and other
Manufacturing equipment
Capital leases
Construction in progress
Accumulated depreciation and amortization
Property and equipment, net
As of December 31,
2014
2015
$ 969.6 $1,040.0
1,115.5
156.1
81.2
32.8
199.2
36.8
2,661.6
(225.1)
$2,150.6 $2,436.5
1,055.6
118.8
91.4
28.9
180.3
45.3
2,489.9
(339.3)
Construction in progress represents new restaurant and equipment construction, reimaging of restaurants and software.
Depreciation and amortization expense on property and equipment totaled $154.9 million for 2015, $51.2 million for 2014 and
$49.7 million for 2013.
Assets leased under capital leases and included in property and equipment, net consist of the following (in million):
Buildings and improvements
Other
Accumulated depreciation
Assets leased under capital leases, net
As of December 31,
2015
2014
$174.3 $190.5
8.7
199.2
(15.9)
$152.8 $183.3
6.0
180.3
(27.5)
Note 8.
Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):
Identifiable assets subject to
amortization:
Franchise agreements
Favorable leases
Subtotal
Indefinite lived intangible assets:
Tim Hortons brand
Burger King brand
Subtotal
Intangible assets, net
Goodwill
As of December 31,
2015
2014
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Weighted
Average Life as
of December 31,
2015
$ 653.0 $
436.5
1,089.5
(106.8) $ 546.2 $ 696.8 $
329.0
(107.5)
490.7
875.2 1,187.5
(214.3)
(83.1) $
(62.8)
(145.9)
613.7 21.5 Years
427.9 10.4 Years
1,041.6 17.1 Years
$6,175.4 $
2,097.2
8,272.6
— $6,175.4 $7,236.5 $
—
—
2,097.2 2,167.0
8,272.6 9,403.5
$9,147.8
— $ 7,236.5
2,167.0
—
9,403.5
—
$10,445.1
$4,574.4
$5,235.7
84
We recorded amortization expense on intangible assets of $78.3 million for 2015, $35.9 million for 2014 and $36.3 million for
2013. The increase in amortization expense during 2015 from the prior year was due to amortization recorded on intangible assets
acquired in connection with the Acquisition. Identifiable assets subject to amortization also decreased as a result of foreign currency
translation effect. The change in the Brands and goodwill balances for the year ended December 31, 2015 was due to foreign currency
translation effect.
As of December 31, 2015, the estimated future amortization expense on identifiable assets subject to amortization is as follows
(in millions):
Twelve-months ended December 31,
2016
2017
2018
2019
2020
Thereafter
Total
Amount
$ 70.5
67.8
64.4
61.0
56.1
555.4
$875.2
The changes in the carrying amount of goodwill during 2015 and 2014 by operating segment (Tim Hortons, “TH” and Burger
King, “BK”) are as follows (in millions):
TH
BK
Total
Balances at December 31, 2013
Purchase of Tim Hortons
Effects of foreign currency adjustments
Balances at December 31, 2014
Effects of foreign currency adjustments
Balances at December 31, 2015
Note 9. Other Assets, net
Other assets, net consist of the following (in millions):
$ — $630.0 $ 630.0
4,640.9
(35.2)
5,235.7
(661.3)
$3,988.1 $586.3 $4,574.4
4,640.9
(10.1)
4,630.8
(642.7)
—
(25.1)
604.9
(18.6)
Derivative assets-noncurrent
Equity method investments
Other assets
Other assets, net
85
As of December 31,
2015
$ 830.9
139.0
81.7
$1,051.6
2014
$164.8
169.7
109.9
$444.4
Note 10. Equity Method Investments
The aggregate carrying amount of our equity method investments was $139.0 million as of December 31, 2015 and $169.7
million as of December 31, 2014 and is included as a component of Other assets, net in our consolidated balance sheets. Below are
the names of the entities, country of operation and our equity interest in our significant equity method investments based on the
carrying value as of December 31, 2015.
Entity
Carrols Restaurant Group, Inc.
Operadora de Franquicias Alsea S.A.P.I. de C.V.
Pangaea Foods (China) Holdings, Ltd.
TIMWEN Partnership
Country
United States
Mexico
China
Canada
Equity
Interest
21.35%
20.00%
27.50%
50.00%
The aggregate market value of our equity interest in Carrols Restaurant Group, Inc. (“Carrols”), based on the quoted market
price on December 31, 2015, is approximately $110.5 million. No quoted market prices are available for our remaining equity method
investments.
With respect to our BK operations, most of the entities in which we have an equity interest own or franchise Burger King
restaurants. Franchise and property revenue we recognized from franchisees that are owned or franchised by entities in which we
have an equity interest consist of the following (in millions):
Revenues from affiliates:
Franchise royalties
Property revenues
Franchise fees and other revenue
Total
2015
2014
2013
$ 93.2
27.7
13.1
$134.0
$ 88.5
29.2
11.3
$129.0
$57.2
26.3
6.6
$90.1
With respect to our TH business, the most significant equity investment is our 50% joint-venture interest with The Wendy’s
Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. During 2015,
TH received $12.7 million in distributions and recognized $20.8 million of contingent rent expense associated with this joint venture.
At December 31, 2015 and December 31, 2014, we had $23.9 million and $22.6 million, respectively, of accounts receivable
from our equity method investments which were recorded in Trade and notes receivable, net in our consolidated balance sheets.
(Income) loss from equity method investments reflects our share of investee net income or loss. During 2015, we recorded a
$10.9 million noncash dilution gain included in (Income) loss from equity method investments on the issuance of capital stock by BK
Brasil Operacao E Assesoria A Restaurantes S.A. (“Brazil JV”), one of our equity method investees. This issuance of capital stock
reduced our ownership interest in the Brazil JV. The dilution gain reflects an adjustment to the difference between the amount of our
underlying equity in the net assets of the Brazil JV before and after the issuance of capital stock. During 2014, we recorded a $5.8
million noncash dilution gain included in (Income) loss from equity method investments on the issuance of stock by Carrols, one of
our equity method investees. This issuance of common stock reduced our ownership interest in Carrols. The dilution gain reflects an
adjustment to the difference between the carrying value of our investment in Carrols and the amount of our underlying equity in the
net assets of Carrols.
86
Note 11. Other Accrued Liabilities and Other Liabilities
Other accrued liabilities (current) and Other liabilities, net (non-current) consist of the following (in millions):
Current:
Taxes payable - current
Accrued compensation and benefits
Interest payable
Restructuring and other provisions
Deferred income - current
Closed property reserve
Dividend payable
Other
Other accrued liabilities
Non-current:
Unfavorable leases
Accrued pension
Taxes payable - noncurrent
Lease liability - noncurrent
Share-based compensation liability
Deferred income - noncurrent
Derivatives liabilities - noncurrent
Other
Other liabilities, net
As of December 31,
2015
2014
$ 46.9
62.5
63.1
13.5
33.5
14.0
128.3
79.5
$441.3
$322.0
80.2
236.7
29.5
5.5
23.7
47.3
51.0
$795.9
$ 79.2
39.4
36.3
29.5
19.8
15.2
13.8
102.4
$335.6
$428.5
62.9
50.3
35.2
34.8
18.9
25.6
51.6
$707.8
Note 12. Long-Term Debt
Long-term debt is comprised of the following (in millions):
2014 Term Loan Facility
2015 Senior Notes
2014 Senior Notes
Tim Hortons Notes
Other
Less: unamortized discount and deferred financing
costs
Total debt, net
Less: current maturities of debt
Total long-term debt
Maturity dates
December 12, 2021
January 15, 2022
April 1, 2022
various
N/A
As of
$
December 31,
2015
5,097.7
1,250.0
2,250.0
39.4
88.5
$
December 31,
2014
6,750.0
—
2,250.0
1,044.8
107.9
(224.3)
8,501.3
(39.0)
8,462.3
(217.3)
9,935.4
(1,108.9)
8,826.5
$
$
As of December 31, 2015 and 2014, unamortized discount included $43.2 million and $67.2 million, respectively, related to the
2014 Term Loan Facility.
As of December 31, 2015, deferred financing costs included $131.3 million related to the 2014 Term Loan Facility (as defined
below), $9.0 million related to the 2015 Senior Notes (as defined below) and $40.8 million related to the 2014 Senior Notes (as
defined below). As of December 31, 2014, deferred financing costs included $104.1 million related to the 2014 Term Loan Facility
and $46.0 million related to the 2014 Senior Notes. Deferred financing costs are amortized over the term of the debt into interest
expense using the effective interest method. The amortization of deferred financing costs included in Interest expense, net was $26.8
million for 2015, $9.7 million for 2014 and $8.9 million for 2013.
87
2015 Amended Credit Agreement
On May 22, 2015, two of our subsidiaries (the “Borrowers”) entered into a first amendment (the “2015 Amended Credit
Agreement”) to the credit agreement dated as of October 27, 2014. Under the 2015 Amended Credit Agreement, the aggregate
principal amount of secured term loans (the “2014 Term Loan Facility”) was decreased to $5,140.4 million as a result of the
repayment of $1,550.0 million from the net proceeds from the offering of the 2015 Senior Notes (as defined below) and cash on hand,
and the interest rate applicable to the 2014 Term Loan Facility was reduced to, at the Borrowers’ option, either (i) a base rate plus an
applicable margin equal to 1.75% or (ii) a Eurocurrency rate plus an applicable margin equal to 2.75%. The 2015 Amended Credit
Agreement also provides for a senior secured revolving credit facility for up to $500.0 million of revolving extensions of credit
outstanding at any time (including revolving loans, swingline loans and letters of credit), the amount of which was unchanged by the
May 22, 2015 amendment (the “2014 Revolving Credit Facility,” together with the 2014 Term Loan Facility, the “2014 Credit
Facilities”).
The obligations under the 2014 Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct
parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including Burger King
Worldwide, Tim Hortons and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts
borrowed under the 2014 Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the
present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor.
The 2014 Term Loan Facility matures on December 12, 2021 and the 2014 Revolving Credit Facility matures on December 12,
2019. The principal amount of the 2014 Term Loan Facility amortizes in quarterly installments equal to 0.25% of the aggregate
principal amount of the 2014 Term Loan Facility as of May 22, 2015, with the balance payable at maturity. Any prepayments made
on the 2014 Term Loan Facility will reduce the quarterly installments.
We may prepay the 2014 Term Loan Facility in whole or in part at any time. Additionally, subject to certain exceptions, the
2014 Term Loan Facility is subject to mandatory prepayments in amounts equal to (1) a percentage, as defined in the Credit
Agreement, of the net cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of casualty
or condemnation); (2) 100% of the net cash proceeds from issuances or incurrences of debt by the Company or any of its restricted
subsidiaries (other than indebtedness permitted by the 2014 Credit Facilities); and (3) 50% (with stepdowns to 25% and 0% based
upon achievement of specified first lien senior secured leverage ratios) of annual excess cash flow of the Company and its
subsidiaries.
Under the 2015 Amended Credit Agreement, at the Borrowers’ option, the interest rate per annum applicable to the 2014 Credit
Facilities is based on a fluctuating interest rate determined by reference to either (i) a base rate determined by reference to the highest
of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus 0.50%, (c) the Eurocurrency rate
applicable for an interest period of one month plus 1.00% and (d) in respect of the 2014 Term Loan Facility, 2.00% per annum (“Base
Rate Loans”), plus an applicable margin equal to 1.75% for the 2014 Term Loan Facility and 2.00% for loans under the 2014
Revolving Credit Facility, or (ii) a Eurocurrency rate determined by reference to LIBOR, adjusted for statutory reserve requirements
(“Eurocurrency Rate Loans”), plus an applicable margin equal to 2.75% for any 2014 Term Loan Facility and 2.50% to 3.00% for
loans under the 2014 Revolving Credit Facility. Borrowings under the 2014 Credit Facilities will be subject to a floor of 1.00% in the
case of Eurocurrency Rate Loans and 2.00% in the case of Base Rate Loans. We have elected our applicable rate per annum as
Eurocurrency rate determined by reference to LIBOR. As of December 31, 2015, the interest rate on our 2014 Term Loan Facility
was 3.75%.
We are required to pay certain recurring fees with respect to the 2015 Amended 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. Amounts outstanding under the 2014 Revolving
Credit Facility bear interest at a rate of LIBOR plus an applicable margin equal to 2.5% to 3.0%, depending on our leverage ratio, on
the amount drawn under each letter of credit that is issued and outstanding under the 2014 Revolving Credit Facility. The interest rate
on the unused portion of the 2014 Revolving Credit Facility ranges from 0.375% to 0.50%, depending on our leverage ratio, and our
current rate is 0.50%.
As of December 31, 2015, we had no amounts outstanding under the 2014 Revolving Credit Facility. Funds available under the
2014 Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, to fund acquisitions or capital
expenditures and for other general corporate purposes. We have a $125.0 million letter of credit sublimit as part of the 2014
Revolving Credit Facility, which reduces our borrowing availability under this facility by the cumulative amount of outstanding
letters of credit. As of December 31, 2015, we had $3.8 million of letters of credit issued against the 2014 Revolving Credit Facility
and our borrowing availability was $496.2 million.
88
2015 Senior Notes
The Borrowers are party to an indenture, dated as of May 22, 2015 (the “2015 Senior Notes Indenture”) in connection with the
issuance of $1,250.0 million of 4.625% first lien senior secured notes due January 15, 2022 (the “2015 Senior Notes”). The 2015
Senior Notes bear interest at a rate of 4.625% per annum, payable semi-annually on January 15 and July 15 of each year. No principal
payments are due until maturity. The net proceeds from the offering of the 2015 Senior Notes, together with cash on hand, were used
to repay $1,550.0 million of the outstanding borrowings under our 2014 Term Loan Facility and to pay related premiums, fees and
expenses.
The 2015 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of
their Canadian and U.S. subsidiaries, including Burger King Worldwide, Tim Hortons and substantially all of their respective
Canadian and U.S. subsidiaries (the “Note Guarantors”).
The 2015 Senior Notes are first lien senior secured obligations and rank (i) equal in right of payment with all of the existing and
future senior debt of Borrowers and Note Guarantors, including borrowings under and guarantees of the 2014 Credit Facilities and the
2014 Senior Notes (as defined below); (ii) equal in right of payment with all of the existing and future first-priority senior secured
debt of Borrowers and Note Guarantors, including the borrowings under and guarantees of the 2014 Credit Facilities, to the extent of
the value of the collateral securing such debt; (iii) equal in right of payment with the Tim Hortons Notes (as defined below) to the
extent of the value of the Tim Hortons collateral securing such debt; (iv) effectively senior in the right of payment to all of the
existing and future unsecured senior debt and junior lien debt of Borrowers and Note Guarantors, including the 2014 Senior Notes, to
the extent of the value of collateral securing the 2015 Senior Notes; (v) senior in right of payment to all of the existing and future
subordinated debt of Borrowers and Note Guarantors; and (vi) structurally subordinated to all existing and future liabilities of the
Borrowers’ non-guarantor subsidiaries.
The Borrowers may redeem some or all of the 2015 Senior Notes at any time prior to October 1, 2017 at a price equal to 100%
of the principal amount redeemed plus a “make whole” premium and accrued and unpaid interest, if any. The 2015 Senior Notes are
redeemable at our option, in whole or in part, at any time during the twelve-month period beginning on October 1, 2017 at 102.313%
of the principal amount redeemed, at any time during the twelve-month period beginning on October 1, 2018 at 101.156% of the
principal amount redeemed or at any time on or after October 1, 2019 at 100.0% of the principal amount redeemed. In addition, at any
time prior to October 1, 2017, up to 40% of the aggregate principal amount of the 2015 Senior Notes may be redeemed with the net
proceeds of certain equity offerings, at a redemption price equal to 104.625% of the principal amount of the 2015 Senior Notes plus
accrued and unpaid interest, if any, to the redemption date. In connection with any tender offer for the 2015 Senior Notes, including a
change of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2015 Senior Notes at a redemption price
equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2015 Senior
Notes validly tender and do not withdraw such 2015 Senior Notes in such tender offer. If the Borrowers experience a change of
control, the holders of the 2015 Senior Notes will have the right to require the Borrowers to repurchase the 2015 Senior Notes at a
purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts (as
defined in the 2015 Senior Notes Indenture), if any, to the date of such repurchase.
2014 Senior Notes
The Borrowers are party to an indenture, dated as of October 8, 2014 (the “2014 Senior Notes Indenture”) in connection with
the issuance of $2,250.0 million of 6.00% second lien senior secured notes due April 1, 2022 (the “2014 Senior Notes”). The 2014
Senior Notes bear interest at a rate of 6.00% per annum, payable semi-annually on April 1 and October 1 of each year. No principal
payments are due until maturity.
The 2014 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 2014 Senior
Notes are secured by a second-priority lien, subject to certain exceptions and permitted liens, on all of the Borrowers’ and the Note
Guarantors’ present and future property that secures the Credit Facilities and any outstanding Tim Hortons Notes, to the extent of the
value of the collateral securing such first-priority senior secured debt.
The Borrowers may redeem some or all of the 2014 Senior Notes at any time prior to October 1, 2017 at a price equal to 100%
of the principal amount of the 2014 Senior Notes redeemed plus a “make whole” premium and, at any time on or after October 1,
2017, at the redemption prices set forth in the 2014 Senior Notes Indenture. In addition, at any time prior to October 1, 2017, up to
40% of the aggregate principal amount of the 2014 Senior Notes may be redeemed with the net proceeds of certain equity offerings,
at the redemption price specified in the Indenture. In connection with any tender offer for the 2014 Senior Notes, including a change
of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2014 Senior Notes at a redemption price equal
to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2014 Senior Notes
validly tender and do not withdraw such 2014 Senior Notes in such tender offer. If the Borrowers experience a change of control, the
holders
89
of the 2014 Senior Notes will have the right to require the Borrowers to repurchase the 2014 Senior Notes at a purchase price equal to
101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts (as defined in the Indenture), if any,
to the date of such repurchase.
2012 Credit Agreement
On September 28, 2012, Burger King Corporation (“BKC”) and Burger King Holdings, Inc. (“Holdings”) entered into a Credit
Agreement (the “2012 Credit Agreement”) to refinance amounts borrowed under the 2011 Amended Credit Agreement (as defined
below). The 2012 Credit Agreement provided for (i) tranche A term loans in the aggregate principal amount of $1,030.0 million (the
“Tranche A Term Loans”), (ii) tranche B term loans in the aggregate principal amount of $705.0 million (the “Tranche B Term Loans”),
in each case under the senior secured term loan facility (the “2012 Term Loan Facility”), and (iii) a senior secured revolving credit facility
for up to $130.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters
of credit) (the “2012 Revolving Credit Facility” and, together with the 2012 Term Loan Facility, the “2012 Credit Facilities”). The
Tranche A Term Loans had a maturity date of September 28, 2017, the Tranche B Term Loans had a maturity date of September 28, 2019
and the 2012 Revolving Credit Facility had a maturity date of October 19, 2015. Borrowings under the 2012 Credit Agreement were
refinanced by the 2015 Amended Credit Agreement, as described above.
Under the 2012 Credit Agreement, BKC was required to comply with customary financial ratios and the 2012 Credit Agreement
also contained a number of customary affirmative and negative covenants. BKC was in compliance with all 2012 Credit Agreement
financial ratios and covenants at the time of the refinancing in December 2014.
Tim Hortons Notes
At the time of the Transactions, Tim Hortons had the following Canadian dollar denominated senior unsecured notes
outstanding: (i) C$300.0 million aggregate principal amount of 4.20% Senior Unsecured Notes, Series 1, due June 1, 2017 (“Series 1
Notes”), (ii) C$450.0 million aggregate principal amount of 4.52% Senior Unsecured Notes, Series 2, due December 1, 2023 (“Series 2
Notes”) and (iii) C$450.0 million aggregate principal amount of 2.85% Senior Unsecured Notes, Series 3, due April 1, 2019 (“Series 3
Notes”) (collectively, the “Tim Hortons Notes”). During 2015, Tim Hortons accepted for purchase, and settled for cash, the following:
(i) C$252.6 million principal amount of Series 1 Notes; (ii) C$447.4 million principal amount of Series 2 Notes and (iii) C$446.1 million
principal amount of Series 3 Notes, pursuant to tender offers made following the Transactions.
At December 31, 2014, the entire outstanding amount of the Tim Hortons Notes was classified within current liabilities, as we
expected to fully redeem the Tim Hortons Notes during the first quarter of 2015. At December 31, 2015, the Tim Hortons Notes that
remain outstanding, and therefore not redeemed, are classified within long-term liabilities, as we intend to leave these outstanding until
maturity.
On March 12, 2015, we made a mandatory prepayment on the 2014 Term Loan Facility of $42.7 million equal to the U.S. dollar
equivalent of the principal amount of Tim Hortons Notes that remained outstanding after 90 days following the Closing Date.
Restrictions and Covenants
The 2014 Credit Facilities contain a number of customary affirmative and negative covenants that, among other things, will limit or
restrict the ability of the Borrowers and certain of their subsidiaries to: incur additional indebtedness; incur liens; engage in mergers,
consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make
investments, loans and advances; pay or modify the terms of certain indebtedness; engage in certain transactions with affiliates. In
addition, the Borrowers are not permitted to exceed a specified first lien senior secured leverage ratio when the sum of the amount of
letters of credit in excess of $50,000,000 (other than those that are cash collateralized), any loans under the 2014 Revolving Credit
Facility and any swingline loans outstanding as of the end of any fiscal quarter exceeds 30% of the commitments under the 2014
Revolving Credit Facility.
The terms of the 2015 Senior Notes Indenture and 2014 Senior Notes Indenture, among other things, limit the ability of the
Borrowers and their restricted subsidiaries to: incur additional indebtedness; create liens or use assets as security in other transactions;
declare or pay dividends, redeem stock or make other distributions to stockholders; make investments; merge or consolidate, or sell,
transfer, lease or dispose of substantially of the Borrowers’ assets; enter into transactions with affiliates; sell or transfer certain assets; and
agree to certain restrictions of the ability of restricted subsidiaries to make payments to us. These covenants are subject to a number of
important qualifications, limitations and exceptions that are described in the 2015 Senior Notes Indenture and 2014 Senior Notes
Indenture.
As of December 31, 2015, we were in compliance with all covenants of the 2015 Amended Credit Agreement, the 2015 Senior
Notes Indenture, the 2014 Senior Notes Indenture and the indenture governing the Tim Hortons Notes, and there were no limitations on
our ability to draw on the remaining availability under our 2014 Revolving Credit Facility.
90
Other Debt
Included in other debt as of December 31, 2015 and 2014 is debt of $85.2 million and $102.6 million, respectively, recognized
in accordance with applicable lease accounting rules. We are considered to be the owner of certain restaurants leased by us from an
unrelated lessor because we constructed some of the structural elements of those restaurants, and records the lessor’s contributions to
the construction costs for these restaurants as other debt.
Debt Issuance Costs
In connection with entering into the 2015 Amended Credit Agreement and issuing the 2015 Senior Notes, we incurred an
aggregate of $80.3 million of costs that were recorded as deferred financing costs and included as a component of term debt, net of
current portion within our consolidated balance sheets.
In connection with the 2014 Credit Agreement and the 2014 Senior Notes, we incurred an aggregate of $160.2 million of
deferred financing costs.
Loss on Early Extinguishment of Debt
In connection with the 2015 Amended Credit Agreement and the related repayment of a portion of the 2014 Term Loan Facility,
we recorded a $40.0 million loss on early extinguishment of debt during 2015. The loss on early extinguishment of debt primarily
reflects the write-off of unamortized debt issuance costs and the write-off of unamortized discounts.
In connection with the refinancing of term loans outstanding under the 2012 Credit Agreement, as well as the redemptions of
our 2011 Discount Notes and 2010 Senior Notes, we recorded a $155.4 million loss on early extinguishment of debt in 2014. The loss
on early extinguishment of debt reflects the write-off of unamortized debt issuance costs, the write-off of unamortized discounts,
commitment fees associated with the bridge loan available at the closing of the Transactions, and the payment of premiums to redeem
the 2011 Discount Notes and 2010 Senior Notes.
Maturities
The aggregate maturities of long-term debt as of December 31, 2015 are as follows (in millions):
Year Ended December 31,
2016
2017
2018
2019
2020
Thereafter
Total
91
Principal Amount
39.0
$
90.6
56.9
60.1
57.6
8,421.4
8,725.6
$
Interest Expense, net
Interest expense, net consists of the following (in millions):
2014 Term Loan Facility
2015 Senior Notes
2014 Senior Notes
Tim Hortons Notes
2012 Term Loan Facility
Interest Rate Caps
2010 Senior Notes
2011 Discount Notes
Amortization of deferred financing costs and debt issuance discount
Capital lease obligations
Other
Interest income
Interest expense, net
2015
2014
2013
$250.3 $ 54.8 $ —
—
—
—
52.9
6.8
78.5
46.0
10.3
6.4
1.7
(2.6)
$478.3 $279.7 $200.0
35.2
135.0
3.7
—
—
—
—
34.9
20.8
2.6
(4.2)
—
31.1
1.8
47.5
7.1
74.3
48.5
11.7
5.7
0.9
(3.7)
Note 13. Leases
As of December 31, 2015, we leased or subleased 5,412 restaurant properties to franchisees and 87 non-restaurant properties to
third parties under direct financing leases and operating leases, where we are the lessor. Initial lease terms generally range from 10 to
20 years. Most leases to franchisees provide for fixed monthly payments and many of these leases provide for future rent escalations
and renewal options. Certain leases also include provisions for contingent rent, determined as a percentage of sales, generally when
annual sales exceed specific levels. The lessees bear the cost of maintenance, insurance and property taxes.
Assets leased to franchisees and other third parties under operating leases, where we are the lessor, that are included within our
Property and equipment, net was as follows (in millions):
Land
Buildings and improvements
Restaurant equipment
Gross property and equipment leased
Accumulated depreciation
Net property and equipment leased
92
As of December 31,
2014
2015
$ 888.7 $ 941.4
1,081.8
36.5
2,059.7
(153.5)
$1,751.7 $1,906.2
1,066.3
24.7
1,979.7
(228.0)
Our net investment in direct financing leases was as follows (in millions):
Future rents to be received
Future minimum lease receipts
Contingent rents(1)
Estimated unguaranteed residual value
Unearned income
Allowance on direct financing leases
Current portion included within trade receivables
Net investment in property leased to franchisees
As of December 31,
2015
2014
$126.6 $154.4
78.1
22.2
(97.1)
(0.3)
157.3
(16.8)
$117.2 $140.5
63.7
20.7
(75.7)
(0.3)
135.0
(17.8)
(1) Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting.
In addition, we lease land, building, equipment, office space and warehouse space, including 710 restaurant buildings under
capital leases. Land and building leases generally have an initial term of 10 to 30 years, while land-only lease terms can extend
longer, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal
options and certain leases also include provisions for contingent rent, determined as a percentage of sales, generally when annual
sales exceed specific levels. Most leases also obligate us to pay the cost of maintenance, insurance and property taxes.
As of December 31, 2015, future minimum lease receipts and commitments were as follows (in millions):
Lease Receipts
Lease Commitments (a)
2016
2017
2018
2019
2020
Thereafter
Total minimum payments
Less amount representing interest
Present value of minimum capital lease payments
Current portion of capital lease obligation
Long-term portion of capital lease obligation
Direct
Financing
Leases
$
21.6
20.9
19.6
16.3
9.7
38.5
$ 126.6
Operating
Leases
$ 338.7
313.4
286.2
258.8
229.2
1,461.0
$2,887.3
Capital
Leases
$ 31.0
29.5
27.9
26.0
24.0
189.8
$ 328.2
(107.7)
220.5
(17.1)
$ 203.4
Operating Leases
$
165.6
156.4
143.6
127.9
115.1
794.8
1,503.4
$
(a) Lease commitments under operating leases have not been reduced by minimum sublease rentals of $1,636.7 million due in the
future under noncancelable subleases.
93
Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases
with franchisees as follows (in millions):
Rental income:
Minimum
Contingent
Amortization of favorable and unfavorable income lease contracts,
net
Total rental income
Earned income on direct financing leases
Total property revenues
2015
2014
2013
$453.9
281.7
$182.1
38.1
$165.9
25.0
11.0
746.6
13.6
$760.2
7.2
227.4
15.3
$242.7
5.6
196.5
17.2
$213.7
Rent expense associated with the lease commitments is as follows (in millions):
Rental expense:
Minimum
Contingent
Amortization of favorable and unfavorable payable lease contracts,
net
Total rental expense (a)
2015
2014
2013
$199.5
73.1
$109.1
8.0
$115.0
4.9
10.1
$282.7
3.5
$120.6
0.9
$120.8
(a) Amounts include rental expense related to properties subleased to franchisees of $267.0 million for 2015, $103.3 million for
2014 and $94.0 million for 2013.
The impact of favorable and unfavorable lease amortization on operating income is as follows (in millions):
Franchise and property revenues
Cost of sales
Franchise and property expenses
2015
$11.0
—
10.1
2014
$ 7.2
(0.3)
3.8
2013
$ 5.6
(1.3)
2.2
Estimated future amortization of favorable and unfavorable lease contracts subject to amortization are as follows (in millions):
2016
2017
2018
2019
2020
Thereafter
Total
Cost of Sales
Favorable Unfavorable
0.2 $
$
0.2
0.2
0.2
0.2
2.1
3.1 $
(0.2)
(0.2)
(0.1)
(0.1)
(0.1)
(0.4)
(1.1)
$
Franchise and Property Revenue
Unfavorable
Favorable
Franchise and Property Expenses
Unfavorable
Favorable
16.4
15.5
14.3
13.1
11.6
55.4
126.3
$
$
(25.3)
(24.0)
(22.5)
(20.6)
(17.6)
(75.9)
(185.9)
$
$
27.0 $
25.3
23.1
20.8
17.5
85.9
199.6 $
(18.4)
(17.0)
(15.6)
(13.7)
(12.1)
(58.2)
(135.0)
$
$
94
Note 14.
Income Taxes
As a result of the Transactions entered in December 2014, the tables below were prepared considering the following: (i) the
Domestic figures represent Canada for 2015 and 2014, and the U.S. for 2013; (ii) the statutory rate is the Canadian rate of 26.5% for
2015 and 2014, and the U.S. rate of 35.0% for 2013; and (iii) costs and taxes related to foreign operations consists of non-Canadian
jurisdictions for 2015 and 2014, and non-U.S. jurisdictions for 2013.
Income (loss) before income taxes, classified by source of income (loss), is as follows (in millions):
Domestic
Foreign
Income (loss) before income taxes
2015
$546.9
127.0
$673.9
2014
$(261.7)
7.7
$(254.0)
2013
$127.4
194.8
$322.2
Income tax expense (benefit) attributable to income from continuing operations consists of the following (in millions):
Current:
Canada
U.S. Federal
U.S. state, net of federal income tax benefit
Other Foreign
Deferred:
Canada
U.S. Federal
U.S. state, net of federal income tax benefit
Other Foreign
Total
The statutory rate reconciles to the effective tax rate as follows:
Statutory rate
U.S. state income taxes, net of U.S. federal income tax benefit
Costs and taxes related to foreign operations
Foreign exchange gain (loss)
Foreign tax rate differential (1)
Taxes provided on earnings due to Transactions
Change in valuation allowance
Change in accrual for tax uncertainties
Deductible FTC
Non deductible Transaction costs
Impact of Transactions
Capital gain (loss) rate differential
Intercompany financing
Other
Effective income tax rate
2015
2014
2013
$107.2
46.1
4.1
37.1
$194.5
$ (48.1)
21.0
(7.5)
2.3
$ (32.3)
$162.2
$ 25.9
16.1
(0.3)
35.5
$ 77.2
$(29.8)
(28.4)
(4.1)
0.4
$(61.9)
$ 15.3
$ 0.5
29.9
3.7
22.3
$56.4
$ (4.5)
27.8
(1.2)
10.0
$32.1
$88.5
2015
26.5%
—
16.7
(1.9)
(5.4)
—
4.7
0.7
—
—
0.7
—
(20.2)
2.3
24.1%
2014
26.5%
—
(9.8)
(2.2)
29.8
(22.3)
(3.0)
(0.3)
3.7
(4.9)
(14.5)
(8.6)
—
(0.4)
(6.0)%
2013
35.0%
0.5
6.2
—
(14.6)
—
0.6
1.5
(1.9)
0.3
—
—
—
(0.1)
27.5%
(1) Amounts reflect statutory rates in jurisdictions in which we operate outside of Canada for 2015 and 2014 and outside of the U.S.
for 2013.
95
Our effective tax rate was 24.1% for 2015, primarily due to the mix of income from multiple tax jurisdictions, partially offset by
the favorable impact from intercompany financing. Our effective tax rate was (6.0)% for 2014, primarily due to the impact of the
Transactions, including non-deductible transaction related costs, and the mix of income from multiple tax jurisdictions. Our effective
tax rate was 27.5% for 2013, primarily as a result of the mix of income from multiple tax jurisdictions and the impact of non-
deductible expenses related to our refranchisings, partially offset by a favorable impact from the sale of a foreign subsidiary and a
reduction in the U.S. state effective tax rate related to our refranchisings.
The following table provides the amount of income tax expense (benefit) allocated to continuing operations and amounts
separately allocated to other items (in millions):
Income tax expense from continuing operations
Cash flow hedge in accumulated other comprehensive income (loss)
Net investment hedge in accumulated other comprehensive income (loss)
Pension liability in accumulated other comprehensive income (loss)
Stock option tax benefit in additional paid-in capital
Total
2015
2014
2013
$162.2 $ 15.3 $ 88.5
68.1
(5.7)
9.9
(10.1)
$244.9 $(37.5) $150.7
(60.3)
20.9
(13.4)
—
(21.5)
111.7
(7.0)
(0.5)
The significant components of deferred income tax expense (benefit) attributable to income from continuing operations are as
follows (in millions):
Deferred income tax (benefit) expense
Change in valuation allowance
Change in effective U.S. state income tax rate
Change in effective foreign income tax rate
Total
96
2015
$(51.9)
31.8
(7.2)
(5.0)
$(32.3)
2014
$(71.9)
6.7
3.0
0.3
$(61.9)
2013
$ 9.9
22.6
(4.0)
3.6
$32.1
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
are presented below (in millions):
As of December 31,
2014
2015
Deferred tax assets:
Trade and notes receivable, principally due to allowance for doubtful
accounts
Accrued employee benefits
Unfavorable leases
Liabilities not currently deductible for tax
Tax loss and credit carryforwards
Other
Total gross deferred tax assets
Valuation allowance
Net deferred tax assets
Less deferred tax liabilities:
Property and equipment, principally due to differences in
$
7.3 $
66.1
162.0
45.1
287.3
1.2
569.0
(124.6)
444.4
11.6
53.1
132.5
52.0
215.5
—
464.7
(68.8)
395.9
depreciation
Intangible assets
Leases
Statutory impairment
Derivatives
Outside basis difference
Other
Total gross deferred tax liabilities
Net deferred tax liability
46.0
1,633.9
161.2
24.3
90.2
98.9
—
2,054.5
48.4
1,800.7
117.3
8.0
28.1
272.3
16.8
2,291.6
$1,610.1 $1,895.7
The valuation allowance had a net increase of $55.8 million during 2015 primarily due to current year losses and true-up
adjustments related to prior year ordinary and capital losses.
Changes in the valuation allowance are as follows (in millions):
Beginning balance
Additions due to Tim Hortons acquisition
Change in estimates recorded to deferred income tax expense
Expiration of foreign tax credits and capital losses
Changes from foreign currency exchange rates
True-ups from changes in ordinary and capital losses
Sale of foreign subsidiaries
Ending balance
97
2015
$ 68.8
—
31.8
(3.2)
(8.2)
35.4
—
$124.6
2014
$ 97.7
19.5
6.7
(11.3)
(2.1)
(41.7)
—
$ 68.8
2013
$ 93.3
—
22.6
—
0.1
—
(18.3)
$ 97.7
The gross amount and expiration dates of operating loss and tax credit carryforwards as of December 31, 2015 are as follows (in
millions):
Canadian net operating loss carryforwards
Canadian capital loss carryforwards
U.S. federal net operating loss carryforwards
U.S. state net operating loss carryforwards
U.S. capital loss carryforwards
U.S. foreign tax credits
Other foreign net operating loss carryforwards
Other foreign net operating loss carryforwards
Other foreign capital loss carryforward
Other
Total
Amount
$ 197.9
278.0
198.4
326.9
59.4
33.9
131.8
1.5
34.7
3.6
$1,266.1
Expiration Date
2024-2035
Indefinite
2034
2016-2034
2018
2020-2035
Indefinite
2016-2034
Indefinite
Indefinite
Income taxes have not been provided on the excess of the amount for financial reporting over the tax basis of investment in
foreign subsidiaries that are considered indefinitely reinvested. Determination of the amount of unrecognized deferred income tax
liabilities on this temporary difference is not practical because of the complexity of the hypothetical calculation. Income taxes of
approximately $98.9 million have been recognized on foreign unremitted earnings that are expected to be repatriated.
We had $238.6 million of unrecognized tax benefits at December 31, 2015, which if recognized, would favorably affect the
effective income tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in
millions):
Beginning balance
Additions on tax position related to the current year
Additions for tax positions of prior years
Additions due to acquisitions (1)
Reductions for tax positions of prior year
Reductions for settlement
Reductions due to statute expiration
Ending balance
(1) Positions taken in conjunction with the Transactions.
2015
$ 41.6
0.8
4.3
202.5
(2.8)
(7.4)
(0.4)
$238.6
2014
$27.7
2.7
2.5
13.4
(3.6)
(0.3)
(0.8)
$41.6
2013
$23.3
2.2
2.4
—
(0.1)
(0.1)
—
$27.7
During the twelve months beginning January 1, 2016, it is reasonably possible we will reduce unrecognized tax benefits by
approximately $7.0 million, primarily as a result of the expiration of certain statutes of limitations and the resolution of audits.
We recognize interest and penalties related to unrecognized tax benefits in Income tax expense. The total amount of accrued
interest and penalties was $16.1 million and $12.8 million at December 31, 2015 and 2014, respectively. Potential interest and
penalties associated with uncertain tax positions recognized was $3.3 million during the year ended December 31, 2015, $0.5 million
during the year ended December 31, 2014, and $0.6 million during the year ended December 31, 2013. 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 with Canada and its provinces and territories. Generally we are subject to routine examinations by
the Canada Revenue Agency (“CRA”). The CRA is conducting examinations of the 2010 through 2013 taxation years. Additionally,
income tax returns filed with various provincial jurisdictions are generally open to examination for periods of three to five years
subsequent to the filing of the respective return. The appeals for tax years 2005 through 2009 were successfully resolved during 2015.
A hearing at the federal court of appeal with respect to the tax year 2002 was heard in early 2016. We are awaiting a decision. At this
time, we believe that we have complied with all applicable Canadian tax laws and that we have adequately provided for these matters.
98
We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and foreign jurisdictions.
Generally we are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as other foreign tax
jurisdictions, such as the United Kingdom, Germany, Spain, Switzerland and Singapore. None of the foreign jurisdictions should be
individually material. The examination phase of our U.S. federal income tax returns for fiscal 2009, 2010, the period July 1, 2010
through October 18, 2010 and the period October 19, 2010 through December 31, 2010 was completed during 2015. Various tax
positions related to those years are currently under appeals. We have various U.S. 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 owing
additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these
matters.
Note 15. Pension and Post Retirement Medical Benefits
Pension Benefits
We sponsor noncontributory defined benefit pension plans for our 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 Burger King 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. In
2011, the credited service for this plan was frozen for all participants. Beginning January 1, 2012, the annual employer-provided
subsidy will be $160 (pre-age 65) and $80 (post-age 65) per year of credited service for anyone not already receiving benefits prior to
this date.
99
Obligations and Funded Status
The following table sets forth the change in benefit obligations, fair value of plan assets and amounts recognized in the balance
sheets for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan (in millions):
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Actuarial (gains) losses
Benefits paid
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status of plan
Amounts recognized in the consolidated balance sheet
Current liabilities
Noncurrent liabilities
Net pension liability, end of fiscal year
Amounts recognized in accumulated other comprehensive
income (AOCI)
Prior service cost / (credit)
Unrecognized actuarial loss (gain)
Total AOCI (before tax)
U.S. Pension Plans
2014
2015
U.S. Retiree Medical Plan
2015
2014
$231.7
9.1
0.6
(17.0)
$224.4
$193.6
9.2
38.1
(9.2)
$231.7
$
$
9.2
0.4
(0.6)
(0.6)
8.4
$
$
7.9
0.4
1.5
(0.6)
9.2
$172.9
(8.4)
1.1
(17.0)
$148.6
$ (75.8)
$159.6
17.3
5.2
(9.2)
$172.9
$ (58.8)
$ —
—
0.6
(0.6)
$ —
$
(8.4)
$ —
—
0.6
(0.6)
$ —
(9.2)
$
$ (0.8)
(75.0)
$ (75.8)
$ (0.8)
(58.0)
$ (58.8)
$ —
42.5
$ 42.5
$ —
27.1
$ 27.1
$
$
$
$
(0.7)
(7.7)
(8.4)
(6.5)
(1.0)
(7.5)
$
$
$
$
(0.7)
(8.5)
(9.2)
(9.5)
(0.4)
(9.9)
Benefit obligation at end of year
Fair value of plan assets at end of year
Funded status of plan
Amounts recognized in the consolidated balance sheet
Current assets
Noncurrent assets
Noncurrent liabilities
Net pension liability, end of fiscal year
Amounts recognized in accumulated other comprehensive
income (AOCI)
Unrecognized actuarial loss (gain)
Total AOCI (before tax)
100
International Pension Plans
2015
2014
$
$
34.9
29.7
(5.2)
$ —
—
(5.2)
(5.2)
$
$
$
3.1
3.1
$
$
$
$
$
$
33.4
30.8
(2.6)
0.3
2.0
(4.9)
(2.6)
(0.3)
(0.3)
Additional Year-end Information for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan
with Accumulated Benefit Obligations in Excess of Plan Assets
The following sets forth the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the
U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan (in millions):
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Components of Net Periodic Benefit Cost
U.S. Pension Plans
As of December 31,
2014
2015
U.S. Retiree Medical Plan
As of December 31,
International Pension Plans
As of December 31,
2015
2014
2015
2014
8.4
$ 224.4 $ 231.7 $
$ 224.4 $ 231.7 $
8.4
$ 148.6 $ 172.9 $ —
9.2 $
$
$
9.2 $
$ — $
34.9 $
24.2 $
29.7 $
33.4
24.0
30.8
The following sets forth the net periodic benefit costs (income) for the U.S. Pension Plans and U.S. Retiree Medical Plan for the
periods indicated (in millions):
Interest costs on projected benefit obligations
Expected return on plan assets
Amortization of prior service costs (credit)
Amortization of actuarial losses (gains)
Net periodic benefit costs (income)
2015
$ 9.1
(9.1)
U.S. Pension Plans
2014
$ 9.2
(8.3)
(9.2)
— — —
1.2
U.S. Retiree Medical Plan
2013
2013
2014
2015
$ 0.3
$ 8.4 $ 0.3 $ 0.4
— —
—
(2.9)
(2.9)
(2.9)
(0.1)
(0.2)
—
$ (2.7)
$ 1.3 $ (2.6) $ (2.7)
2.7 —
$—
$ 2.7
The net periodic benefit costs (income) for our International Pension Plans was not significant for any comparative period.
Other Changes in Plan Assets and Projected Benefit Obligation Recognized in Other Comprehensive Income
U.S. Pension Plans
2014
2015
2013
U.S. Retiree Medical Plan
2013
2014
2015
Unrecognized actuarial (gain) loss
(Gain) loss recognized due to settlement
Amortization of prior service (cost) credit
Amortization of actuarial gain (loss)
Total recognized in OCI
Unrecognized actuarial (gain) loss
Amortization of actuarial gain (loss)
Total recognized in OCI
$18.1 $30.0 $(26.2) $ (0.5) $ 1.5 $ (0.6)
— —
— —
(0.3)
2.9
2.9
— — —
0.1
0.2
(1.2)
$15.4 $30.0 $(27.7) $ 2.4 $ 4.6 $ 2.4
—
2.9
—
(2.7) —
International Pension Plans
2014
$ 4.9
0.4
$ 5.3
2015
$ 2.6
0.2
$ 2.8
2013
$ (4.4)
—
$ (4.4)
As of December 31, 2015, for the combined U.S. Pension Plans, U.S. Retiree Medical Plan, and International Pension Plans, we
expect to amortize during 2016 from Accumulated other comprehensive income (loss) (“AOCI”) into net periodic pension cost an
estimated $2.9 million of net prior service credit and $2.4 million of net actuarial loss.
101
Assumptions
The weighted-average assumptions used in computing the benefit obligations of the U.S. Pension Plans, International Pension
Plans and U.S. Retiree Medical Plan are as follows:
U.S. Pension Plans:
Discount rate as of year-end
U.S. Retiree Medical Plan:
Discount rate as of year-end
International Pension Plans:
Discount rate as of year-end
Range of compensation rate increase
2015
2014
2013
4.35%
4.03%
4.84%
4.35%
4.03%
4.84%
3.34%
3.49%
3.57%
3.36%
4.70%
3.52%
The discount rate used in the calculation of the benefit obligation at December 31, 2015 and December 31, 2014 for the
U.S. Plans is derived from a yield curve comprised of the yields of approximately 768 and 774 market-weighted corporate bonds,
respectively, rated AA on average by Moody’s, Standard & Poor’s, and Fitch, matched against the cash flows of the U.S. Plans. The
discount rate used in the calculation of the benefit obligation at December 31, 2015 and December 31, 2014 for the International
Pension Plans is primarily derived from the yields on Swiss government bonds with a maturity matched against the cash flows of the
International Pension Plans.
The weighted-average assumptions used in computing the net periodic benefit cost of the U.S. Pension Plans, International
Pension Plans and the U.S. Retiree Medical Plan are as follows:
U.S. Pension Plans:
Discount rate
Expected long-term rate of return on plan assets
U.S. Retiree Medical Plan:
Discount rate
Expected long-term rate of return on plan assets
International Pension Plans:
Discount rate
Range of compensation rate increase
Expected long-term rate of return on plan assets
2015
2014
2013
4.03%
5.95%
4.84%
6.20%
4.04%
6.05%
4.03%
N/A
4.84%
N/A
4.04%
N/A
3.59%
3.40%
4.50%
4.67%
3.52%
4.58%
4.18%
3.27%
5.64%
The expected long-term rate of return on plan assets is determined by expected future returns on the asset categories in target
investment allocation. These expected returns are based on historical returns for each asset’s category adjusted for an assessment of
current market conditions.
The assumed healthcare cost trend rates are as follows:
Healthcare cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2015
7.00%
5.00%
2020
2014
8.00%
5.00%
2020
2013
8.00%
5.00%
2020
Assumed healthcare cost trend rates do not have a significant effect on the amounts reported for the postretirement healthcare
plans, since a one-percentage point increase or decrease in the assumed healthcare cost trend rate would have a minimal effect on
service and interest cost for the postretirement obligation.
102
Plan Assets
The fair value of the major categories of pension plan assets for U.S. and International Pension Plans at December 31, 2015 and
December 31, 2014 is presented below (in millions):
Level 1
Cash and cash equivalents
Level 2
Cash and cash equivalents (a)
Equity Securities (b):
U.S.
Non - U.S.
Fixed Income (b) :
Corporate bonds and notes
U.S. Government treasuries
International debt
Mortgage-backed securities
U.S. Government agencies
Non- U.S. bonds
Other (c)
U.S.
Pension Plans
International
Pension Plan
U.S.
Pension Plans
International
Pension Plan
As of December 31,
2015
2014
$
—
$
—
$
3.0
$
—
2.5
0.2
2.8
38.3
32.7
51.2
19.4
3.3
0.5
2.4
—
(1.7)
148.6
$
5.7
14.7
—
—
4.3
—
—
4.5
0.3
29.7
47.7
36.3
57.1
17.0
4.6
0.2
3.4
—
0.8
172.9
$
$
0.2
3.0
18.1
—
—
4.5
—
—
4.7
0.3
30.8
Total fair value of plan assets
$
(a) Short-term investments in money market funds and short term receivables for investments sold
(b) Securities held in common commingled trust funds
(c) Other securities held in common commingled trust funds including interest rate swaps and foreign currency contracts
We categorize plan assets within a three level fair value hierarchy as described in Note 3. Pooled funds are primarily classified
as Level 2 and are valued using net asset values of participation units held in common collective trusts, as reported by the managers
of the trusts and as supported by the unit prices of actual purchase and sale transactions.
The investment objective for the U.S. Pension Plans and International Pension Plans is to secure the benefit obligations to
participants while minimizing our costs. The goal is to optimize the long-term return on plan assets at an average level of risk. The
Investment Committee developed a strategic allocation policy for the U.S. Pension Plan to reduce return seeking assets and increase
fixed income assets as the plan’s funded status improves. The portfolio of equity securities, currently targeted at 50% for
U.S. Pension Plan and 70% for International Pension Plan, includes primarily large-capitalization companies with a mix of small-
capitalization U.S. and foreign companies well diversified by industry. The portfolio of fixed income asset allocation, currently
targeted at 50% for U.S. Pension Plan and 30% for International Pension Plan, is actively managed and consists of long duration fixed
income securities primarily in U.S. debt markets and non-U.S. bonds with long-term maturities that help to reduce exposure to
interest variation and to better correlate asset maturities with obligations.
103
Estimated Future Cash Flows
Total contributions to the U.S. Pension Plans and International Pension Plans were $1.8 million for 2015, $6.1 million for 2014 and $8.2
million for 2013.
The U.S. and International Pension Plans’ and U.S. Retiree Medical Plan’s expected contributions to be paid in the next year, the
projected benefit payments for each of the next five years and the total aggregate amount for the subsequent five years are as follows (in
millions):
Estimated Net Contributions During Year Ended 2016
Estimated Future Benefit Payments During Years Ended:
2016
2017
2018
2019
2020
2021 - 2025
U.S. Pension
Plans
International
Pension
Plans
$
$
$
$
$
$
$
4.6
10.8
11.1
11.2
11.6
12.3
68.8
$
$
$
$
$
$
$
0.1
0.2
0.2
0.2
0.2
0.3
1.5
U.S. Retiree
Medical Plan
$
0.7
$
$
$
$
$
$
0.7
0.7
0.6
0.6
0.6
2.7
Note 16. Fair Value Measurements
Fair Value Measurements
The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure
fair value, which include derivatives designated as cash flow hedging instruments, derivatives designated as net investment hedges, derivatives
not designated as hedging instruments, investments held in a rabbi trust which consist of money market accounts and mutual funds established
to fund a portion of our current and future obligations under the Burger King Executive Retirement Plan (“ERP”), and ERP liabilities as well as
their location on our condensed consolidated balance sheets as of December 31, 2015 and December 31, 2014:
Assets:
Derivatives designated as cash flow hedges
Balance Sheet Location
Fair Value Measurements
at December 31, 2015
(Level 2)
Total
(Level 1)
Fair Value Measurements
at December 31, 2014
(Level 1) (Level 2)
Total
Foreign currency
Trade and notes receivable, net
$ — $
6.6 $
6.6 $ — $
6.0 $ 6.0
Derivatives designated as net investment
hedges
Foreign currency
Foreign currency
Derivatives not designated as hedging
instruments
Interest rate
Other
Inventories and other current assets, net — — — —
830.9 830.9 —
Other assets, net
—
2.1
75.9
2.1
75.9
Other assets, net
— — — —
88.9
88.9
Investments held in a rabbi trust
Investments held in a rabbi trust
Inventories and other current assets, net
Other assets, net
0.9 —
4.3 —
0.9
4.3
1.1 —
5.2 —
1.1
5.2
Total assets at fair value
Liabilities:
Derivatives designated as cash flow hedges
Interest rate
Derivatives designated as net investment
hedges
Foreign currency
Other
ERP liabilities
ERP liabilities
Total liabilities at fair value
$
5.2 $ 837.5 $842.7 $
6.3 $ 172.9 $179.2
Other liabilities, net
$ — $ 40.9 $ 40.9 $ — $ 25.6 $ 25.6
Other liabilities, net
—
6.3
6.3 — — —
Other accrued liabilities
Other liabilities, net
104
—
—
1.1
5.2
$ — $ 52.4 $ 52.4 $ — $ 31.9 $ 31.9
0.9 —
4.3 —
0.9
4.3
1.1
5.2
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.
Investments held in a Rabbi trust consist of money market funds and mutual funds and the fair value measurements are derived
using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy. The fair
value measurements of the ERP liabilities are derived principally from observable market data which are based on Level 2 inputs of
the fair value hierarchy.
At December 31, 2015, the fair value of our variable rate term debt and bonds was estimated at $8.7 billion, compared to a
principal carrying amount of $8.6 billion. At December 31, 2014, the fair value of our variable rate term debt and bonds was
estimated at $10.1 billion, compared to a principal carrying amount of $10.0 billion. Fair value of variable rate term debt and fixed
rate debt was estimated using inputs based on bid and offer prices and are Level 2 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, goodwill, the Brand and other intangible assets. Refer to Note 3 for inputs and valuation techniques used to measure fair value
of these nonfinancial assets.
Note 17. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges,
derivatives 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. See Note 16 for fair value measurements of our derivative instruments.
Interest Rate Swaps – Outstanding as of December 31, 2015
During May 2015, we entered into a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the
interest payments on $2,500.0 million of our 2014 Term Loan Facility beginning May 28, 2015, through the expiration of the final
swap on March 31, 2021. The notional value of the swaps is $2,500.0 million. There are six sequential interest rate swaps to achieve
the hedged position. Each year on March 31, the existing interest rate swap is scheduled to expire and be immediately replaced with a
new interest rate swap until the expiration of the final swap on March 31, 2021. At inception, these interest rate swaps were
designated as a cash flow hedge for hedge accounting, and as such, the effective portion of unrealized changes in market value are
recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains
and losses from hedge ineffectiveness are recognized in current earnings.
Interest Rate Swaps – Settled Prior to December 31, 2015
The following derivative instruments were settled during May 2015. During November 2014, we entered into a series of
receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments associated with our 2014 Term Loan
Facility beginning April 1, 2015, through the expiration of the final swap on March 31, 2021. The initial notional value of the swaps
was $6,733.1 million, which initially aligned with the outstanding principal balance of the 2014 Term Loan Facility as of April 1,
2015, and was to be reduced quarterly in accordance with the principal repayments of the 2014 Term Loan Facility. There were six
sequential interest rate swaps to achieve the hedged position. Each year on March 31, the existing interest rate swap was scheduled to
expire and be immediately replaced with a new interest rate swap until the expiration of the arrangement on March 31, 2021. At
inception, these interest rate swaps were designated as a cash flow hedge for hedge accounting, and as such, the effective portion of
unrealized changes in market value were recorded in AOCI and reclassified into earnings during the period in which the hedged
forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness were recognized in earnings. During the first
quarter of 2015, we temporarily discontinued hedge accounting on the entire balance of these interest rate swaps as a result of the
$42.7 million mandatory prepayment of our 2014 Term Loan Facility as well as changes to forecasted cash flows and settled $42.7
million of these instruments equal to the amount of the mandatory prepayment of our 2014 Term Loan Facility. During this same
period, of the remaining $6,690.4 million of notional outstanding, we re-designated $5,690.4 million of notional amount as a cash
flow hedge for hedge accounting and $1,000.0 million of notional amount was not designated for hedge accounting and as such
changes in fair value on this portion of the interest rate swaps were recognized in earnings. During April 2015, in order to offset the
105
cash flows associated with our $1,000.0 million notional value receive-variable, pay-fixed interest rate swap that was not designated
for hedge accounting, we entered into a pay-variable, receive-fixed mirror interest rate swap with a notional value of $1,000.0 million
and a maturity date of March 31, 2021.
The following derivative instruments were settled during May 2015. During October 2014, we entered into a series of receive-
variable, pay-fixed interest rate swaps with a combined initial notional value of $6,750.0 million that was amortized each quarter at
the same rate of the 2014 Term Loan Facility. To offset the cash flows associated with these interest rate swaps, in November 2014
we entered into a series of receive-fixed, pay-variable mirror interest rate swaps with a combined initial notional value of $6,750.0
million that was amortized each quarter at the same rate of the 2014 Term Loan Facility. For all of these derivative instruments, each
year on March 31, the existing interest rate swap was scheduled to expire and be immediately replaced with a new interest rate swap
until the expiration of the arrangement on March 31, 2021. These interest rate swaps were not designated for hedge accounting and as
such changes in fair value were recognized in earnings.
In connection with the foregoing interest rate swaps settled during May 2015, we paid $36.2 million that is reflected as a use of
cash within investing activities in the consolidated statement of cash flows for 2015. The net unrealized loss remaining in AOCI
totaled $84.6 million at the date of settlement and will be reclassified into Interest expense, net as the original hedged forecasted
transaction affects earnings. The amount of pre-tax losses in AOCI as of December 31, 2015 that we expect to be reclassified into
interest expense within the next 12 months is $12.7 million.
Interest Rate Swaps – Settled Prior to December 31, 2014
During 2012, we entered into three forward-starting interest rate swaps with a total notional value of $2,300.0 million to hedge
the variability of forecasted interest payments on our forecasted debt issuance attributable to changes in LIBOR. These swaps were
settled during the fourth quarter of 2014. The forward-starting interest rate swaps fixed LIBOR on $1,000.0 million of floating-rate
debt beginning 2015 and an additional $1,300.0 million of floating-rate debt starting 2016. During 2014, we discontinued hedge
accounting on our forward-starting interest rate swaps as it was probable at the time that the forecasted transactions will not occur
since we intended to repay our outstanding 2012 Term Loan Facility concurrently with the Transactions and did not anticipate issuing
new debt in 2015 or 2016. Whenever hedge accounting is discontinued and the derivative remains outstanding, we continue to carry
the derivative at its fair value on the balance sheet and recognize any subsequent changes in fair value in earnings. When it is no
longer probable that a forecasted transaction will occur, we discontinue hedge accounting and recognize immediately in earnings any
gains and losses, attributable to those forecasted transactions that are probable not to occur, that were recorded in AOCI related to the
hedging relationship. Prior to the discontinuance of hedge accounting, we accounted for these swaps as cash flow hedges, and as
such, the effective portion of unrealized changes in market value was recorded in AOCI and was to be reclassified into earnings
during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are
recognized in earnings.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we
may, from time to time, hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate
swaps. At December 31, 2015, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar
and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in
those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by
changes in foreign exchange rates are economically offset by movements in the fair value of our cross currency swap contracts. The
fair value of the swaps is calculated each period with changes in fair value reported in AOCI net of tax. Such amounts will remain in
AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
At December 31, 2015, we had outstanding cross-currency rate swaps in which we pay quarterly between 4.802% and 7.002%
on a tiered payment structure per annum on the Canadian dollar notional amount of C$5,641.7 million and receive quarterly between
3.948% and 6.525% on a tiered payment structure per annum on the U.S. dollar notional amount of $5,000.0 million through the
maturity date of March 31, 2021. At inception, these derivative instruments were not designated for hedge accounting and, as such,
changes in fair value were initially recognized in earnings. Beginning with the closing of the Transactions on December 12, 2014, we
designated these cross-currency rate swaps as hedges and began accounting for these derivative instruments as net investment hedges.
At December 31, 2015, we also had outstanding a cross-currency rate swap in which we pay quarterly fixed-rate interest
payments on the Euro notional amount of €1,107.8 million and receive quarterly fixed-rate interest payments on the U.S. dollar
notional amount of $1,200.0 million through the maturity date of March 31, 2021. At inception, this cross-currency rate swap was
designated as a hedge and is accounted for as a net investment hedge.
106
During 2015, we terminated our cross-currency rate swaps entered into prior to the Transactions with an aggregate notional
value of $315.0 million. In connection with this termination, we received $52.1 million which is reflected as a source of cash
provided by investing activities in the consolidated statement of cash flows for 2015. The net unrealized gains totaled $31.8 million as
of December 31, 2015. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment
in the underlying foreign operations. At inception, these cross-currency rate swaps were designated as a hedge and were accounted
for as net investment hedges. A total notional value of $115.0 million of these swaps were contracts to exchange quarterly fixed-rate
interest payments we make in Euros for quarterly fixed-rate interest payments we receive in U.S. dollars and had an original maturity
of October 19, 2016. A total notional value of $200.0 million of these swaps were contracts to exchange quarterly floating-rate
interest payments we make in Euros based on EURIBOR for quarterly floating-rate interest payments we receive in U.S. dollars
based on LIBOR and had an original maturity of September 28, 2017. These cross-currency rate swaps also required the exchange of
Euros and U.S. dollar principal payments upon maturity.
Foreign Currency Exchange Contracts
In connection with the Transactions, we were exposed to foreign currency risk as the cash consideration paid to Tim Hortons
shareholders in connection with the Transactions was denominated in Canadian dollars. As such, during 2014 we entered into foreign
currency forward and foreign currency option contracts to hedge our exposure to the volatility of the Canadian dollar. We had
outstanding foreign currency forward contracts to effectively exchange $9,000.0 million U.S. dollars for C$9,971.8 million Canadian
dollars and foreign currency option contracts to exchange $5,230.0 million U.S. dollars for C$5,635.3 million Canadian dollars that
were settled during the fourth quarter of 2014. At any point in time, the aggregate notional value of these derivative instruments never
exceeded $9,230.0 million U.S. dollars. The foreign currency option contracts had a total premium of $59.9 million that was paid at
expiration. These derivative instruments did not qualify for hedge accounting and changes in fair values were immediately recognized
in Other operating expenses (income), net in current earnings.
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases
and payments, such as coffee made by our Canadian Tim Hortons operations. At December 31, 2015, we had outstanding forward
currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $170.0 million
with maturities to March 2017. We have designated these instruments as cash flow hedges, and as such, the effective portion of
unrealized changes in market value are recorded in AOCI and are reclassified into earnings during the period in which the hedged
forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
Interest Rate Caps
During 2010, we entered into interest rate cap agreements (the “Cap Agreements”) to manage interest rate risk related to our
variable rate debt. The six year Cap Agreements were a series of individual caplets that reset and settle quarterly with an original
maturity of October 19, 2016, consistent with the payment dates of our LIBOR-based term debt. The Cap Agreements were
designated as cash flow hedges and, to the extent they were effective in offsetting the variability of the variable rate interest
payments, changes in the derivatives’ fair values were not included in earnings but were included in AOCI. At each cap maturity date,
the portion of the fair value attributable to the matured cap was reclassified from AOCI into earnings as a component of Interest
expense, net.
During 2014, we terminated the Cap Agreements and discontinued hedge accounting for our Cap Agreements in connection
with the repayment of the 2012 Term Loans, 2010 Senior Notes and 2011 Discount Notes concurrently with the Transactions.
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.
107
Credit-Risk Related Contingent Features
Our derivative instruments do not contain any credit-risk related contingent features.
The following tables present the required quantitative disclosures for our derivative instruments (in millions):
Derivatives designated as cash flow hedges:
Interest rate caps
Forward-starting interest rate swaps
Forward-currency contracts
Derivatives designated as net investment hedges:
Cross-currency rate swaps
Classification on Condensed Consolidated Statements of Operations
Interest expense, net
Other operating expenses (income), net
Cost of sales
Derivatives not designated as hedging instruments:
Interest rate caps
Interest rate swaps
Cross-currency rate swaps
Ineffectiveness of cash flow hedges:
Interest rate swaps
Gain (Loss) Recognized in
Other Comprehensive Income (Loss)
(effective portion)
2014
2015
2013
$ — $
(1.9) $ —
$ (128.2) $ (155.5) $ 169.1
1.1 $ —
$
18.2 $
$ 798.5 $
66.3 $ (14.8)
Gain (Loss) Reclassified from AOCI into
Earnings
2014
2015
2013
$
$
$
(12.0)
(27.6)
12.3
(6.6)
$
$
13.4
$ —
(6.1)
$
$ —
$ —
Gain (Loss) Recognized in
Other operating expenses (income), net
2014
2015
2013
$ —
$ (12.4)
$
4.3
$
(1.6)
$
$
$
$
(1.0)
55.4
(358.7)
$ —
$ —
$ (0.4)
—
$ —
Note 18. Redeemable Preferred Shares
In connection with the Transactions, we issued (a) 68,530,939 Class A 9.0% cumulative compounding perpetual voting
preferred shares (the “Preferred Shares”) at a purchase price of $43.775848 per share (the “Purchase Price”) and (b) a warrant to
purchase 8,438,225 of our common shares, at an exercise price of $0.01 per common share (the “Warrant”), for an aggregate
purchase price of $3,000.0 million. The proceeds, net of issuance costs, were used to finance a portion of the Transactions and were
allocated to the Preferred Shares ($2,750.6 million) and the Warrant ($247.6 million) on a relative fair value basis. On December 15,
2014, upon exercise of the Warrant in full, we issued 8,438,225 of our common shares.
The 9.0% annual dividend will accrue whether or not declared by our board of directors and will be payable, quarterly in arrears,
only when declared and approved by our board of directors. The purchaser of the Preferred Shares has agreed with us that (i) with
respect to the Preferred Shares representing 10% of the total votes attached to all voting shares, the holder may vote such shares in
any manner it wishes, and (ii) with respect to Preferred Shares representing in excess of 10% of the total votes attached to all voting
shares, the holder will vote such shares in a manner proportionate to the manner in which the other holders of shares voted in respect
of such matter. This voting agreement does not apply with respect to certain special approval matters.
In addition to the preferred dividends, we are required to pay the holder of the Preferred Shares an additional amount (the
“make-whole dividend”) determined by a formula designed to ensure that on an after-tax basis, the net amount of the dividends
received by the holder of the Preferred Shares from the original issue date is the same as it would have been if we were a U.S.
corporation. The
108
make-whole dividend can be paid, at our option, in cash, common shares or any combination thereof. The make-whole dividends are
payable not later than 75 days after the close of each fiscal year, beginning with the fiscal year ended December 31, 2017. The right
to receive the make-whole dividends will terminate if and at the time that 100% of the outstanding Preferred Shares are no longer
held by the original purchaser or any of its subsidiaries.
The Preferred Shares may be redeemed at our option on and after the third anniversary of the original issue date. After the tenth
anniversary of the original issue date, holders of not less than a majority of the outstanding Preferred Shares may cause us to redeem
their Preferred Shares. In either case, the fixed redemption price is $48.109657 per Preferred Share plus accrued and unpaid dividends
and unpaid make-whole dividends (the “redemption price”). Holders of the Preferred Shares also hold a contingently exercisable
option to cause us to redeem their Preferred Shares at the redemption price in the event of a change in control.
Holders of the Preferred Shares have voting rights equal to one vote per each Preferred Share. Except as otherwise provided,
holders of the Preferred Shares and common shares vote together as a single class.
In the event of any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, holders of the
Preferred Shares shall be entitled to receive payment in full in cash equal to $48.109657 per Preferred Share, plus accrued and unpaid
dividends and unpaid make-whole dividends, after satisfaction of all liabilities and obligations to our creditors and before any
distributions to our common shareholders (the “Class A Liquidation Preference”). If the Class A Liquidation Preference has been paid
in full on all Preferred Shares, the holders of our other shares shall be entitled to receive all of our remaining assets (or proceeds
thereof) according to their respective rights and preferences.
Since the redemption features of the Preferred Shares are not solely within our control, we classified the Preferred Shares as
temporary equity. Additionally, during 2014, we adjusted the carrying value of the Preferred Shares to their redemption price, which
is reflected as a $546.4 million reduction in net income (loss) attributable to common shareholders and common shareholders’ equity.
Note 19. Shareholders’ Equity
For the period of January 1, 2014, through December 11, 2014 (i.e., prior to the Closing Date), our common equity reflected
100% ownership by Burger King Worldwide common shareholders. As a result of the Transactions that closed on the Closing Date,
our ownership interest changed and both Burger King Worldwide and Tim Hortons became indirect subsidiaries of us and
Partnership, and we became the sole general partner of Partnership. Consequently, the number of our common shares outstanding
decreased from 352,042,242 Burger King Worldwide shares on December 11, 2014 to 193,565,794 common shares of the Company
on December 12, 2014. As a result, the carrying amount of equity attributable to us was adjusted to reflect the change in our
ownership interest of our subsidiaries. Additionally, we reflect a noncontrolling interest, which represents the interests of the holders
of Partnership exchangeable units in Partnership that are not held by us, as further described below.
Noncontrolling Interests
Noncontrolling interests represent equity interests in consolidated subsidiaries that are not attributable to us. The holders of
Partnership exchangeable units held an economic interest of approximately 50.9% and 56.7% in Partnership common equity through
the ownership of 233,739,648 and 265,041,783 Partnership exchangeable units as of December 31, 2015 and 2014, respectively.
Since the Partnership exchangeable units were issued to former holders of Burger King Worldwide common stock, the carrying
amount of equity attributable to us was adjusted to reflect this transfer and the resulting noncontrolling interest held by the holders of
Partnership exchangeable units in Partnership.
Pursuant to the terms of the partnership agreement, each holder of a Partnership exchangeable unit is entitled to distributions
from Partnership in an amount equal to any dividends or distributions that we declare and pay with respect to our common shares.
Distributions declared by Partnership on partnership exchangeable units was $116.6 million during 2015. Additionally, each holder of
a Partnership exchangeable unit is entitled to vote in respect of matters on which holders of our common shares are entitled to vote
through the special voting share of the Company. Since December 12, 2015, the one year anniversary of the effective date of the
Transactions, the holder of a Partnership exchangeable unit may require Partnership to exchange all or any portion of such holder’s
Partnership exchangeable units for our common shares at a ratio of one common share for each Partnership exchangeable unit, subject
to our right as the general partner of Partnership, in our sole discretion, to deliver a cash payment in lieu of our common shares. If we
elect to make a cash payment in lieu of issuing common shares, the amount of the payment will be the weighted average trading price
of the common shares on the New York Stock Exchange for the 20 consecutive trading days ending on the last business day prior to
the exchange date.
109
During 2015, Partnership received exchange notices representing 31,302,135 Partnership exchangeable units. Pursuant to the
terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 8,150,003 Partnership exchangeable
units for approximately $293.7 million in cash and exchanging 23,152,132 Partnership exchangeable units for the same number of
newly issued Company common shares. The exchanges represented increases in our ownership interest in Partnership and were
accounted for as equity transactions, with no gain or loss recorded in the consolidated statement of operations. Pursuant to the terms
of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is
automatically deemed cancelled concurrently with such exchange.
Partnership issued preferred units to us in connection with the Transactions and our issuance of the Preferred Shares. Under the
terms of the partnership agreement, Partnership will make a preferred unit distribution to us in amounts equal to (i) dividends we pay
on the Preferred Shares and (ii) in the event we redeem the Preferred Shares, the redemption amount of the Preferred Shares.
Although the Partnership preferred units and related distributions eliminate in consolidation, they affect the amount of Net income
(loss) attributable to noncontrolling interests that we report. Net income (loss) attributable to noncontrolling interests for 2015
represents the noncontrolling interests’ portion of (a) Partnership net income (loss) for 2015 less (b) preferred unit dividends accrued
by Partnership. Net income (loss) attributable to noncontrolling interests for 2014 represents the noncontrolling interests’ portion of
(a) Partnership net income (loss) from the Closing Date through December 31, 2014, less (b) preferred unit dividends accrued and
preferred unit accretion recorded by Partnership of $317.6 million.
The noncontrolling interest recognized in connection with the Restaurant VIEs of Tim Hortons was $0.7 million and $1.3
million at December 31, 2015 and 2014, respectively.
We adjust the Net income (loss) in our consolidated statement of operations to exclude the noncontrolling interests’
proportionate share of results. Also, we present the proportionate share of equity attributable to the noncontrolling interests as a
separate component of shareholders’ equity within our consolidated balance sheet.
Warrant
On December 12, 2014, we issued a warrant to purchase 8,438,225 of our common shares at an exercise price of $0.01 per share
(the “Warrant”) to the purchaser of our Preferred Shares. We determined the value of the Warrant using the Black-Scholes model and
allocated proceeds to the Preferred Shares and Warrant on a relative fair value basis, which resulted in $247.6 million of proceeds
attributed to the Warrant. On December 15, 2014, upon exercise of the Warrant in full, we issued 8,438,225 of our common shares.
See Note 18, Redeemable Preferred Shares.
Dividends Declared
Dividends declared to shareholders of Company common shares were $89.1 million in 2015. Dividends paid to shareholders of
Burger King Worldwide common stock were $105.6 million in 2014 and $84.3 million in 2013.
Although we do not currently have a dividend policy, we may declare dividends periodically if our board of directors determines
that it is in the best interests of the shareholders. The terms of the Preferred Shares and the 2015 Amended Credit Agreement, 2015
Senior Notes Indenture and 2014 Senior Notes Indenture and applicable Canadian law limit our ability to pay cash dividends in
certain circumstances. In addition, because we are a holding company, our ability to pay cash dividends on our common shares
(including fractional shares) may be limited by restrictions on our ability to obtain sufficient funds through dividends from our
subsidiaries, including the restrictions under the 2015 Amended Credit Agreement, 2015 Senior Notes Indenture and 2014 Senior
Notes Indenture. Subject to the foregoing, the payment of cash dividends on our common shares in the future, if any, will be at the
discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial
condition and any other factors deemed relevant by our board of directors.
110
Annual Bonus Election
We have a bonus program under which eligible employees may elect to use a portion of their annual bonus compensation to
purchase our common shares, and prior to the Transactions, Burger King Worldwide common stock. During 2015, we issued
approximately 0.1 million shares of our common shares to participants in this program, for aggregate consideration of $6.9 million.
During 2014, we issued approximately 0.1 million shares of Burger King Worldwide common stock to participants in this program,
for aggregate consideration of $3.3 million. During 2013, we issued approximately 0.3 million shares of Burger King Worldwide
common stock to participants in this program, for aggregate consideration of $3.5 million.
Accumulated Other Comprehensive Income (Loss)
The following table displays the change in the components of Accumulated other comprehensive income (loss) (in millions):
Balances at December 31, 2012
Foreign currency translation adjustment
Reclassification of foreign currency translation
adjustment into net income
Net change in fair value of derivatives, net of tax
Amounts reclassified to earnings of cash flow hedges,
net of tax
Pension and post-retirement benefit plans, net of tax
Amortization of prior service (credits) costs, net of tax
Amortization of actuarial (gains) losses, net of tax
Balances at December 31, 2013
Foreign currency translation adjustment
Net change in fair value of derivatives, net of tax
Amounts reclassified to earnings of cash flow hedges,
net of tax
Pension and post-retirement benefit plans, net of tax
Amortization of prior service (credits) costs, net of tax
Amortization of actuarial (gains) losses, net of tax
Transfer to noncontrolling interests
OCI attributable to noncontrolling interests
Balances at December 31, 2014
Foreign currency translation adjustment
Net change in fair value of derivatives, net of tax
Amounts reclassified to earnings of cash flow hedges,
net of tax
Pension and post-retirement benefit plans, net of tax
Amortization of prior service (credits) costs, net of tax
Amortization of actuarial (gains) losses, net of tax
OCI attributable to noncontrolling interests
Balances at December 31, 2015
Derivatives
$
(29.2)
—
Pensions
$ (3.8)
—
—
94.2
3.8
—
—
—
68.8
—
(53.3)
(4.1)
—
—
—
3.6
(10.3)
4.7
—
605.8
19.8
—
—
—
(312.3)
318.0
—
—
—
20.8
(1.8)
0.8
$ 16.0
—
—
—
(23.8)
(1.8)
(1.0)
6.1
—
$ (4.5)
—
—
—
(13.8)
(1.8)
1.5
6.3
$ (12.3)
$
$
$
111
Foreign Currency
Translation
Accumulated
Other
Comprehensive
Income (Loss)
$
$
$
$
(77.3) $
50.1
(110.3)
50.1
(3.0)
—
—
—
—
—
(30.2) $
(219.1)
—
—
—
—
—
103.8
37.5
(108.0) $
(1,830.8)
—
—
—
—
—
899.4
(1,039.4) $
(3.0)
94.2
3.8
20.8
(1.8)
0.8
54.6
(219.1)
(53.3)
(4.1)
(23.8)
(1.8)
(1.0)
113.5
27.2
(107.8)
(1,830.8)
605.8
19.8
(13.8)
(1.8)
1.5
593.4
(733.7)
The following table displays the reclassifications out of Accumulated other comprehensive income (loss):
Details about AOCI Components
Gains (losses) on cash flow hedges:
Interest rate derivative contracts
Interest rate derivative contracts
Forward-currency contracts
Defined benefit pension:
Amortization of prior service credits(costs)
Amortization of actuarial gains(losses)
Foreign currency translation adjustment into net income:
Sale of foreign entity
Total reclassifications
Affected Line Item in the
Statements of Operations
Amounts Reclassified from AOCI
2015
2014
2013
$
Interest expense, net
Other operating expenses (income), net
Cost of sales
Total before tax
Income tax (expense) benefit
Net of tax
$
(6.6) $ (6.1)
(12.0) $
13.4 —
(27.6)
12.3 — —
(6.1)
6.8
(27.3)
(2.7)
7.5
2.3
4.1 $ (3.8)
(19.8) $
SG&A (1)
SG&A (1)
Total before tax
Income tax (expense) benefit
Net of tax
$
2.9 $
(2.6)
0.3
—
0.3 $
$
2.9 $
1.0
3.9
(1.1)
2.8 $
3.0
(1.2)
1.8
(0.8)
1.0
Other operating expenses (income), net — —
Net of tax
$
(19.5) $
(3.0)
6.9 $ (5.8)
(1) Refers to Selling, general and administrative expenses in the consolidated statements of operations.
Note 20. Share-based Compensation
On February 2, 2011, the board of directors of Burger King Worldwide Holdings, Inc. (“Worldwide”) approved and adopted the
Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan (the “2011 Omnibus Plan”). The 2011 Omnibus Plan generally
provided for the grant of awards to employees, directors, consultants and other persons who provide services to Worldwide and its
subsidiaries.
On June 20, 2012, the board of directors of Burger King Worldwide adopted the Burger King Worldwide, Inc. 2012 Omnibus
Incentive Plan (the “2012 Omnibus Plan”). The 2012 Omnibus Plan generally provided for the grant of awards to employees,
directors and other persons who provide services to Burger King Worldwide and its subsidiaries. All stock options and restricted
stock units (RSUs) under the 2011 Omnibus Plan outstanding on June 20, 2012 were assumed by Burger King Worldwide and
converted into stock options to acquire common stock and RSUs of Burger King Worldwide, and Burger King Worldwide assumed
all of the obligations of Worldwide under the 2011 Omnibus Plan. The Board also froze the 2011 Omnibus Plan. Subsequently, the
board of directors of Burger King Worldwide adopted the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus
Incentive Plan (“Amended and Restated 2012 Omnibus Incentive Plan”) which increased the shares available for issuance. The
Amended and Restated 2012 Omnibus Incentive Plan was approved by Burger King Worldwide stockholders at its annual meeting on
May 15, 2013.
On December 12, 2014, our board of directors adopted the Restaurant Brands International Inc. 2014 Omnibus Incentive Plan
(the “2014 Omnibus Plan”). The 2014 Omnibus Plan generally provides for the grant of awards to employees, directors, consultants
and other persons who provide services to us and our subsidiaries. The 2014 Omnibus Plan was approved by the shareholders of the
Company at the Company’s 2015 annual and special meeting held on June 17, 2015. We are currently issuing stock awards under the
2014 Omnibus Plan and the number of shares available for issuance under such Plan as of December 31, 2015 was 9,802,906.
On December 12, 2014, in connection with the Transactions, we assumed and amended the 2011 Omnibus Plan and Amended
and Restated 2012 Omnibus Plan, assumed the obligation for all Burger King Worldwide stock options and RSUs outstanding under
the 2011 Omnibus Plan and Amended and Restated 2012 Omnibus Plan at December 12, 2014 and froze the Amended and Restated
2012 Omnibus Plan. Additionally, we assumed and amended two legacy Tim Hortons plans and assumed the obligation for each
vested and unvested Tim Hortons stock option with tandem SARs that was not surrendered in connection with the Transactions on the
same terms and conditions of the original awards, adjusted by an exchange ratio of 2.41. The assumed Tim Hortons awards vest
ratably over a three year period commencing on the grant date and no new awards under these legacy Tim Hortons plans may be
granted.
112
The 2014 Omnibus Plan permits the grant of several types of awards with respect to our common shares, including stock
options, restricted stock units, restricted stock and performance shares. Stock option awards are granted with an exercise price or
market value equal to the last sales price of our common shares on the trading day preceding the date of grant. We satisfy stock
option exercises through the issuance of authorized but previously unissued common shares. New stock option grants generally cliff
vest five years from the original grant date, provided the employee is continuously employed by us or one of our subsidiaries, and the
stock options expire ten years following the grant date. Additionally, if we terminate the employment of a stock option holder without
cause prior to the vesting date, or if the employee retires or becomes disabled, the employee will become vested in the number of
stock options as if the stock options vested 20% on each anniversary of the grant date. If the employee dies, the employee will
become vested in the number of stock options as if the stock options vested 20% on the first anniversary of the grant date, 40% on the
second anniversary of the grant date and 100% on the third anniversary of the grant date. If there is an event such as a return of
capital or dividend that is determined to be dilutive, the exercise price of the awards will be adjusted accordingly.
During 2015, the Company granted a total of 198,065 performance based stock options and 262,889 performance based
restricted stock units (the “Performance Awards”). The Performance Awards will vest one-third each on September 30,
2017, September 30, 2018 and September 30, 2019, respectively, if the performance condition is met. The Black-Scholes option-
pricing model was used to determine the fair value of performance based stock options at the date of grant. The fair value of the
performance based restricted stock units is based on the last sales price of our common shares on the trading day preceding the date of
grant. Share-based compensation expense for the Performance Awards is recognized on a straight-line basis by tranche over the
vesting period, once it is determined that it is probable that the performance condition will be met.
Share-based compensation expense consisted of the following for the periods presented:
Stock options, stock options with tandem SARs and restricted stock units (a)
Accelerated vesting of Tim Hortons restricted stockunits and performance
stock units (b)
Total share-based compensation expense (c)
2015
$50.8
2014
$43.1
2013
$14.8
—
$50.8
14.8
$57.9
—
$14.8
(a)
Includes (i) $5.1 million and $9.8 million due to accelerated vesting of awards due to terminations in 2015 and 2014,
respectively, and (ii) $9.0 million, $10.4 million and $4.0 million in 2015, 2014 and 2013, respectively, due to modification of
awards.
(b) Represents expense attributed to the post-combination service associated with the accelerated vesting of restricted and
performance stock units in connection with the Transactions. See Note 2, The Transactions.
(c) Generally classified as selling, general and administrative expenses in the consolidated statements of operations.
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option
awards at the grant date and, for stock options issued with tandem SARs, at each subsequent re-measurement date:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
2015
1.17% - 2.07%
3.53 - 7.35
24.0% - 25.0%
1.00% - 1.09%
2014
0.96% - 2.11%
1.00 - 6.71
20.0% - 25.0%
1.00% - 1.03%
2013
1.26%
6.83
30.0%
1.10%
The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the
expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a three to five-year
vesting period coupled with our expectations of exercise activity. Expected volatility was based on a review of the equity volatilities
of publicly-traded guideline companies. The expected dividend yield is based on the annual dividend yield at the time of grant.
113
The following is a summary of stock option activity under our plans for the year ended December 31, 2015:
Total Number of
Options (in 000’s)
Weighted Average
Exercise Price
Aggregate Intrinsic
Value (1)
(in 000’s)
Weighted Average
Remaining
Contractual Term
(Yrs)
Outstanding at January 1, 2015
Granted
Exercised
Forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Vested or expected to vest at December 31, 2015
21,328 $
5,046 $
(1,703) $
(655) $
24,016 $
8,120 $
21,765 $
11.42
41.34
16.95
31.75
16.28 $
4.69 $
15.71 $
521,555
265,297
484,263
6.8
5.0
6.8
(1) The intrinsic value represents the amount by which the fair value of our stock exceeds the option exercise price at December 31,
2015.
The weighted-average grant date fair value per stock option granted was $10.12, $7.17 and $5.23 during 2015, 2014 and 2013,
respectively. The total intrinsic value of stock options exercised was $40.3 million during 2015, $4.9 million during 2014 and $25.3
million during 2013. As of December 31, 2015, total unrecognized compensation cost related to stock options outstanding was $56.5
million and is expected to be recognized over a weighted-average period of approximately 2.2 years.
The total fair value for liability classified stock options with SARs outstanding was $5.5 million and $34.8 million at
December 31, 2015 and December 31, 2014, respectively, and is classified as Other liabilities, net in the consolidated balance sheets.
During 2015, the Company modified a portion of these awards to remove the SAR and such SARs were cancelled as a result. The
modification to remove the SARs resulted in a change in classification of the awards from liability to equity and a corresponding
reclassification of $10.2 million from Other liabilities, net to common shares in the consolidated balance sheets. As such these awards
will no longer be remeasured to fair value after the modification date. Cash settlements of stock options with SARs was $30.6 million
in 2015. There were no cash settlements of stock options with SARs in 2014 or 2013.
RSUs are measured at fair value based on the closing price of the Company’s common shares on the first business day
preceding the grant date. RSUs are expensed on a straight-line basis over the vesting period except that during 2014 and 2013 grants
to non-employee members of our board of directors were expensed immediately. We grant RSUs to non-employee members of our
board of directors in lieu of a cash retainer and committee fees. All RSUs will settle and common shares of the Company will be
issued upon termination of service by the board member. The following is a summary of RSU activity for the year ended
December 31, 2015:
Outstanding at January 1, 2015
Granted
Vested & Settled
Forfeited
Outstanding at December 31, 2015
Total Number of
Shares
(in 000’s)
Weighted Average
Grant Date Fair
Value
287
299
—
—
586
$
$
$
18.23
35.00
—
—
26.61
The weighted average grant date fair value per RSU granted was $35.00 during 2015, $38.99 during 2014 and $22.74 during
2013. No RSUs settled during 2015 and 2014. The total intrinsic value of RSUs which settled was $0.8 million during 2013. As of
December 31, 2015, total unrecognized compensation cost related to RSUs outstanding was $8.7 million and is expected to be
recognized over a weighted-average period of approximately 2.7 years.
114
Note 21. Sales and Cost of Sales
Sales and cost of sales consists of the following (in millions):
Supply chain sales
Company restaurant sales (a)
Sales
(a)
Includes Restaurant VIEs’ sales.
Supply chain cost of sales
Company restaurant expenses (b)
Cost of sales
(b)
Includes Restaurant VIEs’ cost of sales.
Note 22. Franchise and Property Revenues
Franchise and property revenues consist of the following (in millions):
Franchise royalties
Property revenues
Franchise fees and other revenue
Franchise and property revenues
Refer to Note 13 for the components of property revenues.
2015
$1,828.4
340.6
$2,169.0
2014
$ 79.4
88.0
$167.4
2013
$ —
222.7
$222.7
2015
$1,525.5
284.0
$1,809.5
2014
$ 80.5
75.9
$156.4
2013
$ —
195.3
$195.3
2015
$ 936.5
760.2
186.5
$1,883.2
2014
$ 701.1
242.7
87.6
$1,031.4
2013
$657.0
213.7
52.9
$923.6
Note 23. Other Operating Expenses (Income), net
Other operating expenses (income), net, consist of the following (in millions):
Net losses (gains) on disposal of assets, restaurant closures and refranchisings
Litigation settlements and reserves, net
Net losses on derivatives
Foreign exchange net losses (gains)
Other, net
Other operating expenses (income), net
2015
2014
2013
$ 22.0 $ 25.4 $ 0.7
7.6
—
7.4
5.6
$105.5 $327.4 $21.3
4.0
290.9
(3.8)
10.9
1.3
37.3
46.7
(1.8)
Closures and Dispositions
Net losses (gains) on disposal of assets, restaurant closures and refranchisings represent sales of properties and other costs
related to restaurant closures and refranchisings, and are recorded in Other operating expenses (income), net in the accompanying
consolidated statements of operations. Gains and losses recognized in the current period may reflect certain costs related to closures
and refranchisings that occurred in previous periods.
During 2015, net losses (gains) on disposal of assets, restaurant closures and refranchisings consisted of net losses associated
with refranchisings of $2.6 million and net losses associated with asset disposals and restaurant closures of $19.4 million.
During 2014, net losses (gains) on disposal of assets, restaurant closures and refranchisings consisted of net losses associated
with refranchisings of $10.5 million and net losses associated with asset disposals and restaurant closures of $14.9 million.
115
During 2013, net losses (gains) on disposal of assets, restaurant closures and refranchisings consisted of net gains associated with
refranchisings of $5.3 million, net losses from sale of subsidiaries of $1.0 million and net losses associated with asset disposals and
restaurant closures of $5.0 million.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
During 2015, net losses on derivatives primarily reflects the reclassification of losses on cash flow hedges from accumulated other
comprehensive income (loss) to earnings as a result of de-designation and settlement of certain interest rate swaps.
During 2014, we entered into foreign currency forward and foreign currency option contracts to hedge our exposure to the volatility
of the Canadian dollar in connection with the cash portion of the purchase price of the Tim Hortons acquisition. We recorded a net loss on
derivatives of $133.0 million related to the change in fair value on these instruments and an expense of $59.9 million related to the
premium on the foreign currency option contracts. These instruments were settled in the fourth quarter of 2014. Additionally, as a result
of discontinuing hedge accounting on our interest rate caps and forward-starting interest rate swaps, we recognized a loss of $34.5 million
related to the change in fair value related to both instruments and a net gain of $13.4 million related to the reclassification of amounts
from AOCI into earnings related to both instruments. These instruments were settled in the fourth quarter of 2014. Additionally, during
the fourth quarter of 2014, we entered into a series of forward-starting interest rate swaps to hedge the variability in the interest payments
associated with our 2014 Term Loan Facility and recorded a gain of $88.9 million related to the change in fair value related to these
instruments. Lastly, during the fourth quarter of 2014, we entered into a series of cross-currency rate swaps to protect the value of our
investments in our foreign operations against adverse changes in foreign currency exchange rates and recorded a loss of $165.8 million
related to the change in fair value on these instruments. See Note 17, Derivative Instruments for additional information about accounting
for our derivative instruments.
Note 24. Commitments and Contingencies
Guarantees
We guarantee certain lease payments of franchisees arising from leases assigned in connection with sales of Company restaurants to
franchisees, by remaining secondarily liable for base and contingent rents under the assigned leases of varying terms. The maximum
contingent rent amount is not determinable as the amount is based on future revenues. In the event of default by the franchisees, we have
typically retained the right to acquire possession of the related restaurants, subject to landlord consent. The potential amount of
undiscounted payments we could be required to make in the event of non-payment by the franchisee arising from these assigned lease
guarantees, excluding contingent rents, was $18.6 million as of December 31, 2015, expiring over an average period of four years.
From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of
December 31, 2015, there were $119.1 million of loans outstanding to Burger King franchisees that we had guaranteed under six such
programs, with additional franchisee borrowing capacity of approximately $235.5 million remaining. Our maximum guarantee liability
under these six programs is limited to an aggregate of $42.5 million, assuming full utilization of all borrowing capacity. We record a
liability in the period the loans are funded and the maximum term of the guarantee is approximately ten years. As of December 31, 2015,
the liability reflecting the fair value of these guarantee obligations was $4.4 million. In addition to these six programs, as of December 31,
2015, we also had a liability of $0.1 million, with a potential maximum guarantee exposure of $2.5 million, in connection with Tim
Hortons franchisee loan guarantees. No significant payments have been made by us in connection with these guarantees through
December 31, 2015.
Letters of Credit
As of December 31, 2015, we had $25.8 million in irrevocable standby letters of credit outstanding, which were issued primarily to
certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability
insurance. Of these letters of credit outstanding, $3.8 million are secured by the collateral under our 2014 Revolving Credit Facility and
the remainder are secured by cash collateral. As of December 31, 2015, no amounts had been drawn on any of these irrevocable standby
letters of credit.
Vendor Relationships
During the fiscal year ended June 30, 2000, we entered into long-term, exclusive contracts with soft drink vendors to supply
Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a specified
number of gallons of soft drink syrup. These volume commitments are not subject to any time limit and as of December 31, 2015, we
estimate it will take approximately 15 years for these purchase commitments to be completed. In the event of early termination of this
arrangement, we may be required to make termination payments that could be material to our financial position, results of operations and
cash flows.
116
We have separate arrangements for telecommunication services with an aggregate contractual obligation of $78.9 million over
the next five years with no early termination fee.
We also enter into commitments to purchase advertising. As of December 31, 2015, commitments to purchase advertising
totaled $224.3 million and run through December 2016.
Litigation
On March 1, 2013, a putative class action lawsuit was filed against BKC in the U.S. District Court of Maryland. The complaint
alleges that BKC and/or its agents sent unsolicited advertisements by fax to thousands of consumers in Maryland and elsewhere in the
United States to promote its home delivery program in violation of the Telephone Consumers Protection Act. The plaintiff sought
monetary damages and injunctive relief. On August 19, 2014, BKC agreed to pay $8.5 million to settle the lawsuit. On December 2,
2014, the parties finalized a settlement agreement which received final court approval on April 15, 2015.
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.
New BK Global Headquarters
In November 2015, we entered into an agreement to lease a building in Miami, Florida, to serve as our U.S. headquarters and
BK global restaurant support center beginning in 2018. The initial term of the lease is for 15 years with two 5-year renewal options.
The annual base rent steps up over the term of the lease from $1.8 million in the first year to $4.9 million in the final year.
Insurance Programs
We carry insurance programs to cover claims such as workers’ compensation, general liability, automotive liability, executive
risk and property, and are self-insured for healthcare claims for eligible participating employees. Through the use of insurance
program deductibles (up to $5.0 million) and self-insurance, we retain a significant portion of the expected losses under these
programs.
Insurance reserves have been recorded based on our estimate of the anticipated ultimate costs to settle all claims, both reported
and incurred-but-not-reported (IBNR), and such reserves include judgments and independent actuarial assumptions about economic
conditions, the frequency or severity of claims and claim development patterns, and claim reserve, management and settlement
practices. We had $9.8 million in accrued liabilities as of December 31, 2015 and $12.8 million as of December 31, 2014 for these
claims.
117
Note 25. Variable Interest Entities
VIEs for Which We Are the Primary Beneficiary
We consolidate 141 and 270 Restaurant VIEs at December 31, 2015 and 2014, respectively, where TH is the restaurants’
primary beneficiary and Advertising VIEs. During the year ended December 31, 2015, sales and operating costs and expenses
associated with Restaurant VIEs were $226.9 million and $222.8 million, respectively, prior to consolidation adjustments. During the
year ended December 31, 2014, sales and operating costs and expenses associated with Restaurant VIEs were $12.6 million and $12.4
million, respectively, prior to consolidation adjustments.
The balance sheet data associated with Restaurant VIEs and Advertising VIEs presented on a gross basis, prior to consolidation
adjustments, are as follows:
Cash and cash equivalents
Inventories and other current assets, net
Advertising fund restricted assets – current
Property and equipment, net
Other assets, net
Total assets
Notes payable to Tim Hortons – current (1)
Other accrued liabilities
Advertising fund liabilities – current
Notes payable to Tim Hortons – long-term (1)
Long-term debt
Other liabilities, net
Total liabilities
Equity of VIEs
Total liabilities and equity
As of December 31, 2015
As of December 31, 2014
Restaurant
VIE’s
$
$
$
$
2.8
2.5
—
4.9
0.1
10.3
4.6
3.6
—
—
1.1
0.3
9.6
0.7
10.3
Advertising
VIE’s
$ —
—
57.5
37.4
0.1
95.0
$
$
$
9.6
0.1
49.1
30.2
—
6.0
95.0
—
95.0
Restaurant
VIE’s
$
$
$
$
5.9
5.2
—
10.7
0.2
22.0
9.2
7.5
—
0.3
—
3.9
20.9
1.1
22.0
Advertising
VIE’s
$ —
—
53.0
55.7
0.4
109.1
$
$
$
11.4
0.2
45.5
45.5
—
6.5
109.1
—
109.1
(1) Various assets and liabilities are eliminated upon the consolidation of these VIEs.
The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general
assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of
consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally
included within our general assets.
VIEs for Which We Are Not the Primary Beneficiary
We have investments in certain TH real estate ventures and certain BK master franchisees, which were determined to be VIEs of
which we are not the primary beneficiary. We do not consolidate these entities as control is considered to be shared by both TH and
the other joint owners in the case of the TH real estate ventures, or control rests with other parties in the case of BK master franchisee
VIEs.
118
Note 26. Segment Reporting
Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant
industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the
restaurant industry. We generate revenue from four sources: (i) sales exclusive to Tim Hortons franchisees related to our supply chain
operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers; (ii) property revenues
from properties we lease or sublease to franchisees; (iii) franchise revenues, consisting primarily of royalties based on a percentage of
sales reported by franchise restaurants and franchise fees paid by franchisees; and (iv) sales at Company restaurants.
Prior to 2015, we had five operating segments consisting of TH and four geographical regions of BK. We completed an internal
reorganization of our business following the Transactions, which resulted in two brand presidents, both of whom report to our chief
operating decision maker (“CODM”), who is our Chief Executive Officer. This reorganization changed the way our CODM manages
and evaluates our business. Accordingly, during the first quarter of 2015, we determined we had two operating segments: (1) TH,
which includes all operations of our Tim Hortons brand and (2) BK, which includes all operations of our Burger King brand.
We also determined that our two operating segments represent our reportable segments. This change had no effect on our
previously reported consolidated results of operations, financial position or cash flows. In connection with this change, we have
reclassified historical amounts to conform to our current segment presentation.
The following tables present revenues, segment income, depreciation and amortization, (income) loss from equity method
investments, capital expenditures, assets, and long-lived assets by segment (in millions):
Revenues:
TH
BK
Total revenues
2015
2014
2013
$2,956.9
1,095.3
$4,052.2
$ 143.6
1,055.2
$1,198.8
$ —
1,146.3
$1,146.3
Total revenues in Canada were $2,623.2 million in 2015, $152.0 million in 2014, and $60.9 million in 2013. Total revenues
outside of Canada were $1,429.0 million in 2015, $1,046.8 million in 2014, and $1,085.4 million in 2013.
The United States represented 10% or more of our total revenues in each period presented. Total revenues in the United States
were $982.2 million in 2015, $630.9 million in 2014, and $604.4 million in 2013.
119
Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before
interest, loss on early extinguishment of debt, taxes, depreciation and amortization, adjusted to exclude the impact of share-based
compensation and non-cash incentive compensation expense, other operating expenses (income), net, (income) loss from equity
method investments, net of cash distributions received from equity method investments, and all other specifically identified items that
management believes do not directly reflect our core operations. Adjusted EBITDA assists management in comparing segment
performance by removing the impact of such items, including acquisition accounting impact on cost of sales and TH transaction and
restructuring costs. A reconciliation of segment income to net income (loss) consists of the following:
Segment Income:
TH
BK
Adjusted EBITDA
Share-based compensation and non-cash incentive compensation
expense
Acquisition accounting impact on cost of sales
TH transaction and restructuring costs
Global portfolio realignment project costs
Impact of equity method investments (a)
Other operating expenses (income), net
EBITDA
Depreciation and amortization
Income from operations
Interest expense, net
Loss on early extinguishment of debt
Income tax expense
Net income (loss)
2015
2014
2013
$ 906.7
759.5
1,666.2
$ 34.9
726.0
760.9
51.8
0.5
116.7
—
17.7
105.5
1,374.0
181.8
1,192.2
478.3
40.0
162.2
$ 511.7
37.3
11.8
125.0
—
9.5
327.4
249.9
68.8
181.1
279.7
155.4
15.3
$(269.3)
$ —
665.6
665.6
17.6
—
—
26.2
12.7
21.3
587.8
65.6
522.2
200.0
—
88.5
$233.7
(a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method
investments. Cash distributions received from our equity method investments are included in segment income.
Depreciation and Amortization:
TH
BK
Total depreciation and amortization
(Income) Loss from Equity Method Investments:
TH
BK
Total (income) loss from equity method investments
Capital Expenditures:
TH
BK
Total capital expenditures
120
2015
2014
2013
$121.4
60.4
$181.8
$ 4.5
64.3
$68.8
$ —
65.6
$65.6
2015
2014
2013
$ (7.9)
12.0
$ 4.1
$ (0.3)
9.8
$ 9.5
$ —
12.7
$12.7
2015
2014
2013
$ 88.1
27.2
$115.3
$ 8.0
22.9
$30.9
$ —
25.5
$25.5
TH
BK
Unallocated
Total
Assets
As of December 31,
2015
2014
Long-Lived Assets
As of December 31,
2014
2015
$12,646.8 $14,814.4 $1,407.5 $1,667.0
910.0
—
$18,411.1 $21,343.0 $2,267.8 $2,577.0
860.3
—
5,277.6
1,251.0
4,693.1
1,071.2
Long-lived assets include Property and equipment, net, and Net investment in property leased to franchisees. Long-lived assets
in Canada totaled $1,056.9 million as of December 31, 2015 and $1,288.8 million as of December 31, 2014. Long-lived assets in the
United States totaled $1,187.0 million as of December 31, 2015 and $1,261.3 million as of December 31, 2014. Only Canada and the
United States represented 10% or more of our total long-lived assets as of December 31, 2015 and December 31, 2014.
Note 27. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data (in millions, except per share data):
Revenues
Income from operations
Net income
Basic (loss) earnings per share
Diluted (loss) earnings per share
Revenues
Income (loss) from operations
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Note 28. Subsequent Event
Dividends
Quarters Ended
March 31,
2015
$ 933.3
$ 224.1
$
50.6
$ (0.04)
$ (0.04)
June 30,
2015
$1,042.1
$ 302.1
93.7
$
0.05
$
0.05
$
September 30,
2015
1,019.8
344.2
182.9
0.25
0.24
$
$
$
$
$
December 31,
2015
1,057.0
321.8
184.5
0.25
0.25
$
$
$
$
$
Quarters Ended
March 31,
2014
$ 240.9
$ 131.3
60.4
$
0.17
$
0.17
$
June 30,
2014
$ 261.2
$ 151.5
75.1
$
$
0.21
$ 0.21
September 30,
2014
278.9
0.9
(23.5)
(0.07)
(0.07)
$
$
$
$
$
December 31,
2014
417.8
(102.6)
(381.3)
(1.60)
(2.50)
$
$
$
$
$
On January 5, 2016, we paid a cash dividend of $0.13 per common share to common shareholders of record on November 25,
2015. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $0.13 per
exchangeable unit to holders of record on November 25, 2015. On January 4, 2016, we paid a cash dividend of $0.98 per Preferred
Share, for a total dividend of $67.5 million, to the holder of the Preferred Shares. The dividend on the Preferred Shares included the
amount due for the fourth calendar quarter of 2015.
On February 16, 2016, our board of directors declared a cash dividend of $0.14 per common share, which will be paid on
April 4, 2016, to common shareholders of record on March 3, 2016. Partnership will also make a distribution in respect of each
Partnership exchangeable unit in the amount of $0.14 per exchangeable unit, and the record date and payment date for distributions
on Partnership exchangeable units are the same as the record date and payment date set forth above. On February 15, 2016, our board
of directors declared a cash dividend of $0.98 per Preferred Share, for a total dividend of $67.5 million which will be paid to the
holder of the Preferred Shares on April 1, 2016. The dividend on the Preferred Shares includes the amount due for the first calendar
quarter of 2016.
121
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of the Company’s management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of December 31, 2015. Based on that evaluation, the CEO and CFO concluded that the
Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
Internal Control over Financial Reporting
The Company’s management, including the CEO and CFO, confirm that there were no changes in the Company’s internal
control over financial reporting during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and the report of Independent Registered Public
Accounting Firm are set forth in Part II, Item 8 of this Form 10-K.
122
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item, other than the information regarding our executive officers set forth below required by
Item 401 of Regulation S-K, is incorporated herein by reference from the Company’s definitive proxy statement to be filed no later
than 120 days after December 31, 2015. We refer to this proxy statement as the Definitive Proxy Statement.
Executive Officers of the Registrant
Set forth below is certain information about our executive officers. Ages are as of February 26, 2016. For purposes of Canadian
securities laws, our chair and vice-chair are deemed to be executive officers; however, given that these individuals are not employees
of the Company and do not meet the definition of “executive officer” set out in Rule 3b-7 under the Exchange Act, they are not
included below.
Name
Daniel S. Schwartz
Joshua Kobza
José E. Cil
Elias Diaz Sesé
Heitor Gonçalves
Jacqueline Friesner
Jill Granat
Position
Age
35 Chief Executive Officer
29 Chief Financial Officer
46 President, Burger King
42 President, Tim Hortons
50 Chief Information and Performance Officer and Chief People Officer
43 Controller and Chief Accounting Officer
50 General Counsel and Corporate Secretary
Daniel S. Schwartz. Mr. Schwartz was appointed Chief Executive Officer and a director of the Company on December 12,
2014. From June 2013 until December 2014, Mr. Schwartz served as Chief Executive Officer, from April 2013 until June 2013, he
served as Chief Operating Officer and from January 1, 2011 until April 2013, he served as Chief Financial Officer of Burger King
Worldwide and its predecessor. Mr. Schwartz joined Burger King Worldwide in October 2010 as Executive Vice President, Deputy
Chief Finance Officer and was appointed as Executive Vice President and Chief Financial Officer in December 2010, effective
January 1, 2011. Since January 2008, Mr. Schwartz has been a partner with 3G Capital, where he was responsible for managing 3G
Capital’s private equity business. He joined 3G Capital in January 2005 as an analyst and worked with the firm’s public and private
equity investments until October 2010. From March 2003 until January 2005, Mr. Schwartz worked for Altair Capital Management, a
hedge fund located in Stamford, Connecticut and served as an analyst in the mergers and acquisitions group at Credit Suisse First
Boston from June 2001 to March 2003. Mr. Schwartz is a director of 3G Capital.
Joshua Kobza. Mr. Kobza was appointed Chief Financial Officer of the Company on December 15, 2014. From April 11, 2013 until
December 14, 2014, Mr. Kobza served as Executive Vice President and Chief Financial Officer of Burger King Worldwide.
Mr. Kobza joined Burger King Worldwide in June 2012 as Director, Investor Relations, and was promoted to Senior Vice President,
Global Finance in December 2012. From January 2011 until June 2012, Mr. Kobza worked at SIP Capital, a Sao Paulo based private
investment firm, where he evaluated investments across a number of industries and geographies. From July 2008 until December
2010, Mr. Kobza served as an analyst in the corporate private equity area of the Blackstone Group in New York City.
José Cil. Mr. Cil was appointed President, Burger King on December 15, 2014. Mr. Cil served as Executive Vice President and
President of Europe, the Middle East and Africa for Burger King Worldwide and its predecessor from November 2010 until
December 2014. Prior to this role, Mr. Cil was Vice President and Regional General Manager for Wal-Mart Stores, Inc. in Florida
from February 2010 to November 2010. From September 2008 to January 2010, Mr. Cil served as Vice President of Company
Operations of Burger King Corporation and from September 2005 to September 2008, he served as Division Vice President,
Mediterranean and NW Europe Divisions, EMEA of a subsidiary of Burger King Corporation. Mr. Cil is a director of Carrols
Restaurant Group, Inc., the Company’s largest franchisee.
Elias Diaz Sesé. Mr. Diaz Sesé was appointed President, Tim Hortons on December 15, 2014. From January 2012 to December 2014,
he was the president of BK AsiaPac, Pte. Ltd. located in Singapore. From August 2011 to December 2011, he was a Senior Vice
President Continental Europe for Burger King Europe GmbH located in Zug, Switzerland. Between January 2011 and August 2011,
Mr. Díaz Sesé served as a Vice President Franchise and Emerging Markets for Burger King Europe GmbH. From August 2008 to
December 2010, he served as General Manager for Burger King’s operations in Spain and Portugal.
Heitor Gonçalves. Mr. Gonçalves was appointed Chief Information and Performance Officer and Chief People Officer of the
Company on December 15, 2014. Mr. Gonçalves served as Executive Vice President, Chief Information and Performance Officer of
Burger King Worldwide and its predecessor from October 2010 until December 2012, assuming the additional role of Chief People
123
Officer in April 2013. Prior to joining Burger King Worldwide, Mr. Gonçalves served in multiple strategic roles for Anheuser-Busch
InBev from October 2008 to March 2010, including global M&A director and head of Western Europe logistics. From November
2004 to September 2008, Mr. Gonçalves served as VP, Global Rewards at InBev. He served in positions of increasing responsibility
at Brahma, a brewing company, and at its successor, AmBev, from September 1995 until October 2004.
Jacqueline Friesner. Ms. Friesner was appointed Principal Accounting Officer and Controller of the Company on December 15,
2014. Ms. Friesner served as Vice President, Controller and Chief Accounting Officer of Burger King Worldwide and its predecessor
from March 2011 until December 2014. Prior thereto, Ms. Friesner served as Senior Director, Global Accounting and Reporting of
Burger King from December 2010 until March 2011 and as Director, Global and Technical Accounting from November 2008 until
December 2010. From October 2002 until December 2010, Ms. Friesner served in positions of increasing responsibility with Burger
King Corporation. Before joining Burger King Corporation in October 2002, she was an audit manager at Pricewaterhouse Coopers in
Miami, Florida.
Jill Granat. Ms. Granat was appointed General Counsel and Corporate Secretary on December 15, 2014. Ms. Granat served as Senior
Vice President, General Counsel and Secretary of Burger King Worldwide and its predecessor since February 2011. Prior to her
appointment, Ms. Granat was Vice President and Assistant General Counsel of Burger King Corporation from July 2009 until March
2011. Ms. Granat joined BKC in 1998 as a member of the legal department and served in positions of increasing responsibility with
the company.
Item 11. Executive Compensation
The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by
reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by
reference.
Item 14.
Principal Accountant Fees and Services
The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by
reference.
Item 15. Exhibits and Financial Statement Schedules
(1) All Financial Statements
Part IV
Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.
(2) Financial Statement Schedules
No schedules are required because either the required information is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in the consolidated financial statements or the notes
thereto.
124
(3) Exhibits
The exhibits listed in the accompanying index are filed as part of this report.
Exhibit
Number
2.1
2.2
2.3
Description
Incorporated by Reference
Business Combination Agreement and Plan of Merger,
dated April 3, 2012, by and among Justice Holdings
Limited, Justice Delaware Holdco Inc., Justice Holdco LLC
and Burger King Worldwide Holdings, Inc.
Contingent Contribution Agreement, dated April 3, 2012,
by and among Justice Holdings Limited, Justice Delaware
Holdco Inc., and each of the other parties set forth on the
signature pages thereto.
Arrangement Agreement and Plan of Merger, dated
August 26, 2014, by and among Burger King Worldwide,
Inc., 1011773 B.C. Unlimited Liability Company, New Red
Canada Partnership, Blue Merger Sub, Inc., 8997900
Canada Inc., and Tim Hortons Inc.
Incorporated herein by reference to Exhibit 2.1 to Burger
King Holdings, Inc.’s Form 8-K filed on April 10, 2012.
Incorporated herein by reference to Exhibit 2.2 to Burger
King Worldwide, Inc.’s Form S-1 (File No. 333-181261).
Incorporated herein by reference to Exhibit 2.1 to Burger
King Worldwide, Inc.’s Form 8-K filed on August 29,
2014.
2.4
Plan of Arrangement under Section 192 of the Canada
Business Corporations Act.
Incorporated herein by reference to Exhibit 2.2 to
Registrant’s Form 8-K filed on December 12, 2014.
3.1
Articles of Incorporation of the Registrant, as amended.
3.2
Amended and Restated By-Law 1 of the Registrant.
Incorporated herein by reference to Exhibit 3.1 to
Registrant’s Form 10-K filed on March 2, 2015.
Incorporated herein by reference to Exhibit 3.4 to
Registrant’s Form 8-K filed on December 12, 2014.
4.1
4.2
4.3(a)
4.3(b)
4.3(c)
Registration Rights Agreement between Burger King
Worldwide, Inc., and 3G Special Situations Fund II, L.P.
Incorporated herein by reference to Exhibit 4.3 to Burger
King Worldwide, Inc.’s Form S-8 (File No. 333-182232).
Registration Rights Agreement between Burger King
Worldwide Inc., and Pershing Square, L.P., Pershing
Square II, L.P., Pershing Square International, Ltd. and
William Ackman.
Indenture, dated October 8, 2014, between 1011778 B.C.
Unlimited Liability Company, as Issuer, New Red Finance,
Inc., as Co-Issuer, the Guarantors party thereto, and
Wilmington Trust, National Association, as Trustee and
Collateral Agent.
Incorporated herein by reference to Exhibit 4.4 to Burger
King Worldwide, Inc.’s Form S-8 (File No. 333-182232).
Incorporated herein by reference to Exhibit 4.1 to
Registrant’s Form S-4 (File No. 333-198769).
Form of 6.00% Second Lien Senior Secured Notes due
2022 (included in Exhibit 4.3(a)).
Incorporated herein by reference to Exhibit 4.1 to
Registrant’s Form S-4 (File No. 333-198769).
Supplemental Indenture, dated December 12, 2014, by and
among 1011778 B.C. Unlimited Liability Company, New
Red Finance, Inc., the parties that are signatories thereto as
Guarantors, and Wilmington Trust National Association, as
Trustee and Collateral Agent.
125
Incorporated herein by reference to Exhibit 4.2 to
Registrant’s Form 8-K filed on December 12, 2014.
4.4
4.5(a)
4.5(b)
4.5(c)
4.5(d)
4.5(e)
4.5(f)
4.5(g)
4.5(h)
4.5(i)
4.5(j)
4.6(a)
Securities Purchase Agreement, dated August 26, 2014,
between 1011778 B.C. Unlimited Liability Company and
Berkshire Hathaway Inc.
Trust Indenture, dated June 1, 2010, by and between the
Tim Hortons Inc. and BNY Trust Company of Canada, as
trustee.
First Supplemental Trust Indenture, dated June 1, 2010, by
and between the Tim Hortons Inc. and BNY Trust
Company of Canada, as trustee.
First (Reopening) Supplemental Trust Indenture, dated
December 1, 2010, by and between the Tim Hortons Inc.
and BNY Trust Company of Canada, as trustee.
Incorporated herein by reference to Exhibit 4.3 to
Registrant’s Form 8-K filed on December 12, 2014.
Incorporated herein by reference to Exhibit 4.1 to the
Form 8-K of Tim Hortons Inc. filed on June 1, 2010.
Incorporated herein by reference to Exhibit 4.2 to the
Form 8-K of Tim Hortons Inc. filed on June 1, 2010.
Incorporated herein by reference to Exhibit 4.1 to the
Form 8-K of Tim Hortons Inc. filed on December 1, 2010.
Supplement to Guarantee, dated December 1, 2010, from
The TDL Group Corp.
Incorporated herein by reference to Exhibit 4.2 to the
Form 8-K of Tim Hortons Inc. filed on December 1, 2010.
Second Supplemental Trust Indenture, dated November 29,
2013, by and between Tim Hortons Inc. and BNY Trust
Company of Canada, as trustee.
Supplement to Guarantee, dated November 29, 2013, from
The TDL Group Corp. in favor of BNY Trust Company of
Canada, as trustee.
Third Supplemental Trust Indenture, dated March 28, 2014,
by and between Tim Hortons Inc. and BNY Trust Company
of Canada, as trustee.
Supplement to Guarantee, dated March 28, 2014, from The
TDL Group Corp. in favor of BNY Trust Company of
Canada, as trustee.
Fourth Supplemental Trust Indenture, dated December 12,
2014, by and between Tim Hortons Inc. and BNY Trust
Company of Canada, as trustee.
Deed of Guarantee dated April 16, 2015 by Restaurant
Brands International Inc., as general partner of Restaurant
Brands International Limited Partnership, in favor of BNY
Trust Company of Canada.
Indenture, dated as of May 22, 2015, between 1011778
B.C. Unlimited Liability Company, as Issuer, New Red
Finance, Inc., as Co-Issuer, the Guarantors party thereto,
and Wilmington Trust, National Association, as Trustee and
Collateral Agent.
Incorporated herein by reference to Exhibit 4.1 to the
Form 8-K of Tim Hortons Inc. filed on December 5, 2013.
Incorporated herein by reference to Exhibit 4.2 to the
Form 8-K of Tim Hortons Inc. filed on December 5, 2013.
Incorporated herein by reference to Exhibit 4.1 to the
Form 8-K of Tim Hortons Inc. filed on March 28, 2014.
Incorporated herein by reference to Exhibit 4.2 to the
Form 8-K of Tim Hortons Inc. filed on March 28, 2014.
Incorporated herein by reference to Exhibit 4.5(i) to
Registrant’s Form 10-K filed on March 2, 2015.
Incorporated herein by reference to Exhibit 4.5(j) to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 4.1 to
Registrant’s Form 8-K filed on May 26, 2015.
4.6(b)
Form of 4.625% Senior Notes due 2022 (included as
Exhibit A to Exhibit 4.6(a)).
Incorporated herein by reference to Exhibit 4.2 to
Registrant’s Form 8-K filed on May 26, 2015.
4.7
Form of Senior Indenture
Incorporated herein by reference to Exhibit 4.6 to
Registrant’s Form S-3ASR filed on December 3, 2015
126
4.8
Form of Subordinated Indenture
4.9
9.1
Registration Rights Agreement dated as of December 12,
2014 by and among Restaurant Brands International Inc.
and National Indemnity Company
Voting Trust Agreement, dated December 12, 2014,
between Restaurant Brands International Inc., Restaurant
Brands International Limited Partnership, and
Computershare Trust Company of Canada.
10.1*
Burger King Savings Plan, including all amendments
thereto.
Incorporated herein by reference to Exhibit 4.7 to
Registrant’s Form S-3ASR filed on December 3, 2015
Filed herewith
Incorporated herein by reference to Exhibit 3.6 to
Registrant’s Form 8-K filed on December 12, 2014.
Incorporated herein by reference to Exhibit 10.40 to
Burger King Holdings, Inc.’s Registration Statement on
Form S-8 (File No. 333-144592).
10.2(a)*
2011 Omnibus Incentive Plan, as amended effective
December 12, 2014.
Incorporated herein by reference to Exhibit 99.4 to
Registrant’s Form S-8 (File No. 333-200997).
10.2(b)*
Form of Option Award Agreement under the Burger King
Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan.
10.3(a)*
Employment Agreement by and between Burger King
Corporation and Jose Cil, dated November 2, 2010.
Incorporated herein by reference to Exhibit 10.77 to
Burger King Holdings, Inc.’s Form 10-Q filed on May 12,
2011.
Incorporated herein by reference to Exhibit 10.78 to
Burger King Holdings, Inc.’s Form 10-K filed on
March 14, 2012.
10.3(b)*
Assignment Letter from Jose Tomas, Chief Human
Resources Officer, Burger King Corporation to Jose Cil
dated November 2, 2010.
Incorporated herein by reference to Exhibit 10.79 to
Burger King Holdings, Inc.’s Form 10-K filed on
March 14, 2012.
10.4(a)*
Amended and Restated 2012 Omnibus Incentive Plan, as
amended effective December 12, 2014.
Incorporated herein by reference to Exhibit 99.2 to
Registrant’s Form S-8 (File No. 333-200997).
10.4(b)*
Form of Option Award Agreement under the Burger King
Worldwide, Inc. 2012 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.25 to
Burger King Worldwide, Inc.’s Form 10-K filed on
February 22, 2013.
10.4(c)*
Form of Matching Option Award Agreement under the
Burger King Worldwide, Inc. 2012 Omnibus Incentive
Plan.
Incorporated herein by reference to Exhibit 10.26 to
Burger King Worldwide, Inc.’s Form 10-K filed on
February 22, 2013.
10.4(d)*
Form of Amendment to Option Award Agreement.
Incorporated herein by reference to Exhibit 10.28 to
Burger King Worldwide, Inc.’s Form 10-Q filed on
April 26, 2013.
10.4(e)*
10.4(f)*
Form of Option Award Agreement under the Burger King
Worldwide, Inc. Amended and Restated 2012 Omnibus
Incentive Plan.
Incorporated herein by reference to Exhibit 10.29 to
Burger King Worldwide, Inc.’s Form 10-Q filed on
July 31, 2013.
Form of Board Member Option Award Agreement under
the Burger King Worldwide, Inc. Amended and Restated
2012 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.30 to
Burger King Worldwide, Inc.’s Form 10-Q filed on
July 31, 2013.
127
10.4(g)*
Form of Option Award Agreement under the Amended and
Restated 2012 Omnibus Incentive Plan.
10.4(h)*
Form of Board Member Option Award Agreement under
the Amended and Restated 2012 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.32 to
Burger King Worldwide, Inc.’s Form 10-Q filed on
October 28, 2013.
Incorporated herein by reference to Exhibit 10.33 to
Burger King Worldwide, Inc.’s Form 10-Q filed on
October 28, 2013.
10.4(i)*
Form of Board Member Restricted Stock Unit Award
Agreement under the Amended and Restated 2012
Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.35 to
Burger King Worldwide, Inc.’s Form 10-K filed on
February 21, 2014.
10.4(j)*
Form of Matching Option Award Agreement under the
Amended and Restated 2012 Omnibus Incentive Plan.
10.5
Burger King Form of Director Indemnification Agreement.
Incorporated herein by reference to Exhibit 10.36 to
Burger King Worldwide, Inc.’s Form 10-K filed on
February 21, 2014.
Incorporated herein by reference to Exhibit 10.1 to Burger
King Worldwide, Inc.’s Form 8-K filed on June 25, 2012.
10.6(a)*
10.6(b)*
Amended and Restated Option Award Agreement between
Flavia Faugeres and Burger King Worldwide, Inc. under
2011 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.37 to
Burger King Worldwide, Inc.’s Form 10-K filed on
February 21, 2014.
Amended and Restated Option Award Agreement between
Flavia Faugeres and Burger King Worldwide, Inc. under
2012 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.38 to
Burger King Worldwide, Inc.’s Form 10-K filed on
February 21, 2014.
10.7*
Burger King Corporation U.S. Severance Pay Plan.
Incorporated herein by reference Exhibit 10.31 to Burger
King Worldwide, Inc.’s Form 10-Q filed on October 28,
2013.
10.8
10.9
10.10(a)
10.10(b)
Voting Agreement, dated August 26, 2014, by and among
Tim Hortons Inc. and 3G Special Situations Fund II, L.P.
Incorporated herein by reference to Exhibit 10.1 to
Registrant’s Form S-4 (File No. 333-198769).
Form of Lock-Up Agreement between Tim Hortons
Directors and Burger King Worldwide, Inc.
Incorporated herein by reference to Exhibit 10.4 to
Registrant’s Form S-4 (File No. 333-198769).
Credit Agreement, dated October 27, 2014, among
1011778 B.C. Unlimited Liability Company, as the Parent
Borrower, New Red Finance, Inc., as the Subsidiary
Borrower, 1013421 B.C. Unlimited Liability Company, as
Holdings, JPMorgan Chase Bank, N.A., as Administrative
Agent and Collateral Agent, the Lenders Party thereto,
Wells Fargo Bank, National Association, as Syndication
Agent, the Parties listed thereto as Co-Documentation
Agents, J.P. Morgan Securities LLC, and Wells Fargo
Securities LLC, as Joint Lead Arrangers, and J.P. Morgan
Securities LLC, Wells Fargo Securities LLC, and Merrill
Lynch, Pierce, Fenner and Smith, Incorporated, as Joint
Book Runners.
Guaranty, dated December 12, 2014, among 1013421 B.C.
Unlimited Liability Company, as Guarantor, Certain
Subsidiaries defined therein, as Guarantors, and JPMorgan
Chase Bank, N.A., as Collateral Agent.
128
Incorporated herein by reference to Exhibit 4.2 to
Registrant’s Form S-4 (File No. 333-198769).
Incorporated herein by reference to Exhibit 10.2 to
Registrant’s Form 8-K filed on December 12, 2014.
10.10(c)
Amendment No. 1, dated May 22, 2015, to the Credit
Agreement dated as of October 27, 2014, among 1011778
B.C. Unlimited Liability Company, an unlimited liability
company organized under the laws of British Columbia,
New Red Finance, Inc., a Delaware corporation, 1013421
B.C. Unlimited Liability Company, an unlimited liability
company organized under the laws of British Columbia,
the other guarantors party thereto, JPMorgan Chase Bank,
N.A., as administrative agent, collateral agent and swing
line lender and each L/C issuer and lender from time to
time party thereto.
Incorporated herein by reference to Exhibit 10.1 to
Registrant’s Form 8-K filed on May 26, 2015.
10.11(a)*
2014 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 99.1 to
Registrant’s Form S-8 (File No. 333-200997).
10.11(b)*
Form of Option Award Agreement under the 2014
Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.11(b) to
Registrant’s Form 10-K filed on March 2, 2015.
10.11(c)*
Form of Base Matching Option Award Agreement under
the 2014 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.11(c) to
Registrant’s Form 10-K filed on March 2, 2015.
10.11(d)*
Form of Additional Matching Option Award Agreement
under the 2014 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.11(d) to
Registrant’s Form 10-K filed on March 2, 2015.
10.11(e)*
Form of Board Member Option Award Agreement under
the 2014 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.11(e) to
Registrant’s Form 10-K filed on March 2, 2015.
10.11(f)*
Form of Board Member Restricted Stock Unit Award
Agreement under the 2014 Omnibus Incentive Plan.
Incorporated herein by reference to Exhibit 10.11(f) to
Registrant’s Form 10-K filed on March 2, 2015.
10.12
10.13
10.14*
10.15
Amended and Restated Limited Partnership Agreement,
dated December 11, 2014, between Restaurant Brands
International Inc., 8997896 Canada Inc. and each person
who is admitted as a Limited Partner in accordance with
the terms of the agreement.
Incorporated herein by reference to Exhibit 3.5 to
Registrant’s Form 8-K filed on December 12, 2014.
Restaurant Brands International Inc. Form of Director
Indemnification Agreement.
Incorporated herein by reference to Exhibit 10.13 to
Registrant’s Form 10-K filed on March 2, 2015.
Consulting Agreement, dated December 15, 2014, between
Restaurant Brands International Inc. and Marc Caira.
Incorporated herein by reference to Exhibit 10.14 to
Registrant’s Form 10-K filed on March 2, 2015.
Tim Hortons Inc. Form of Indemnification Agreement for
directors, officers and others, as applicable.
Incorporated herein by reference to Exhibit 10.2 to the
Form 8-K of Tim Hortons Inc. filed on September 28,
2009.
10.16(a)*
2006 Stock Incentive Plan, as amended effective
December 12, 2014.
Incorporated herein by reference to Exhibit 99.5 to
Registrant’s Form S-8 (File No. 333-200997).
10.16(b)*
10.16(c)*
Tim Hortons Inc. Form of Nonqualified Stock Option
Award Agreement under the 2006 Stock Incentive Plan
(2010 Award).
Tim Hortons Inc. Form of Nonqualified Stock Option
Award Agreement under the 2006 Stock Incentive Plan
(2011 Award).
Incorporated herein by reference to Exhibit 10(b) to the
Form 10-Q of Tim Hortons Inc. filed on August 12, 2010.
Incorporated herein by reference to Exhibit 10(b) to the
Form 10-Q of Tim Hortons Inc. filed on August 11, 2011.
129
10.17(a)*
2012 Stock Incentive Plan, as amended effective
December 12, 2014.
Incorporated herein by reference to Exhibit 99.3 to
Registrant’s Form S-8 (File No. 333-200997).
10.17(b)*
10.17(c)*
10.17(d)*
Tim Hortons Inc. Form of Nonqualified Stock Option
Award Agreement under the 2012 Stock Incentive Plan
(2012 Award).
Tim Hortons Inc. Form of Nonqualified Stock Option
Award Agreement under the 2012 Stock Incentive Plan
(2013 Award).
Tim Hortons Inc. Form of Nonqualified Stock Option
Award Agreement under the 2012 Stock Incentive Plan
(2014 Award).
Incorporated herein by reference to Exhibit 10(c) to the
Form 10-Q of Tim Hortons Inc. filed on August 9, 2012.
Incorporated herein by reference to Exhibit 10(c) to the
Form 10-Q of Tim Hortons Inc. filed on May 8, 2013.
Incorporated herein by reference to Exhibit 10(c) to the
Form 10-Q of Tim Hortons Inc. filed on August 6, 2014.
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
Tim Hortons Inc. Nonqualified Stock Option Award
Agreement, dated August 13, 2013, between Tim Hortons
Inc. and Marc Caira.
Incorporated herein by reference to Exhibit 10(a) to the
Form 10-Q of Tim Hortons Inc. filed on November 7,
2013.
Employment and Post-Covenants Agreement dated as of
February 9, 2015 between Restaurant Brands International
Inc. and Daniel S. Schwartz.
Employment and Post-Covenants Agreement dated as of
February 9, 2015 between Burger King Corporation and
Daniel S. Schwartz.
Employment and Post-Covenants Agreement dated as of
February 9, 2015 between The TDL Group Corp. and
Daniel S. Schwartz.
Employment and Post-Covenants Agreement dated as of
February 3, 2015 between Restaurant Brands International
Inc. and Joshua Kobza.
Employment and Post-Covenants Agreement dated as of
February 3, 2015 between Burger King Corporation and
Joshua Kobza.
Employment and Post-Covenants Agreement dated as of
February 3, 2015 between The TDL Group Corp. and
Joshua Kobza.
Employment and Post-Covenants Agreement dated as of
February 3, 2015 between Restaurant Brands International
Inc. and Heitor Gonçalves.
Employment and Post-Covenants Agreement dated as of
February 3, 2015 between Burger King Corporation and
Heitor Gonçalves.
Employment and Post-Covenants Agreement dated as of
February 9, 2015 between The TDL Group Corp. and
Heitor Gonçalves.
Amended and Restated Consulting Agreement dated as of
March 31, 2015 between Restaurant Brands International
Inc. and Marc Caira.
130
Incorporated herein by reference to Exhibit 10.19 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.20 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.21 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.22 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.23 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.24 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.25 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.26 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.27 to
Registrant’s Form 10-Q filed on May 5, 2015.
Incorporated herein by reference to Exhibit 10.28 to
Registrant’s Form 10-Q filed on May 5, 2015.
10.29
10.30*
10.31*
10.32*
10.33*
10.34
Purchase Agreement dated May 14, 2015 among J.P.
Morgan Securities LLC, as representative of the Initial
Purchasers (as defined therein), the Issuers (as defined
therein) and the Guarantors (as defined therein).
Award Agreement Amendment dated August 12, 2015
between Restaurant Brands International Inc. and Marc
Caira.
Incorporated herein by reference to Exhibit 10.29 to
Registrant’s Form 10-Q filed on July 31, 2015.
Incorporated herein by reference to Exhibit 10.30 to
Registrant’s Form 10-Q filed on October 30, 2015.
Tax Equalization Letter dated July 1, 2015 between
Restaurant Brands International Inc. and Elias Diaz-Sese
Incorporated herein by reference to Exhibit 10.31 to
Registrant’s Form 10-Q filed on October 30, 2015.
Form of Non-Compete, Non-Solicitation and
Confidentiality Agreement
Incorporated herein by reference to Exhibit 10.32 to
Registrant’s Form 10-Q filed on October 30, 2015.
Restaurant Brands International Inc. 2015 Employee Share
Purchase Plan.
Incorporated by reference to Exhibit 10.30 to Registrant’s
Form S-8 filed September 1, 2015
Underwriting Agreement dated December 9, 2015 among
Restaurant Brands International Inc., Morgan Stanley &
Co. LLC, Morgan Stanley Canada Limited and Holdings
L115 LP
Incorporated herein by reference to Exhibit 1.1 to
Registrant’s Form 8-K filed on December 10, 2015.
21.1
List of Subsidiaries of the Registrant.
23.1
Consent of KPMG LLP.
31.1
31.2
32.1
32.2
Certification of Chief Executive Officer of Restaurant
Brands International, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of Restaurant
Brands International, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer of Restaurant
Brands International, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of Restaurant
Brands International, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
101.INS XBRL Instance Document
Filed herewith.
101.SCH XBRL Taxonomy Extension Schema Document.
Filed herewith.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Document.
Filed herewith.
Filed herewith.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
Filed herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document.
Filed herewith.
* Management contract or compensatory plan or arrangement
131
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signatures
Restaurant Brands International Inc.
By: /s/ Daniel Schwartz
Name: Daniel Schwartz
Title: Chief Executive Officer
Date: February 26, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Daniel Schwartz
Daniel Schwartz
/s/ Joshua Kobza
Joshua Kobza
/s/ Jacqueline Friesner
Jacqueline Friesner
/s/ Alexandre Behring
Alexandre Behring
Marc Caira
/s/ Martin Franklin
Martin Franklin
/s/ Paul J. Fribourg
Paul J. Fribourg
Alan Parker
/s/ Carlos Alberto Sicupira
Carlos Alberto Sicupira
/s/ Roberto Thompson Motta
Roberto Thompson Motta
/s/ Alexandre Van Damme
Alexandre Van Damme
/s/ Thomas Milroy
Thomas Milroy
/s/ John Lederer
John Lederer
Chief Executive Officer and Director
(principal executive officer)
Chief Financial Officer
(principal financial officer)
Controller and Chief Accounting Officer
(principal accounting officer)
February 26, 2016
February 26, 2016
February 26, 2016
Executive Chairman
February 26, 2016
Vice Chairman
Director
Director
Director
Director
Director
Director
Director
Director
132
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
Exhibit
Number
4.9
21.1
23.1
31.1
31.2
32.1
32.2
EXHIBIT INDEX
Description
Registration Rights Agreement dated as of December 12, 2014 by and among Restaurant Brands International Inc. and
National Indemnity Company
List of Subsidiaries of the Registrant
Consent of KPMG LLP
Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
133
Exhibit 4.9
Execution Version
REGISTRATION RIGHTS AGREEMENT
by and among
Restaurant Brands International Inc.,
and
National Indemnity Company
Dated as of December 12, 2014
TABLE OF CONTENTS
Section 1. Certain Definitions
Section 2. Demand Registration
Section 3. Piggyback Registrations
Section 4. S-3 Shelf Registration
Section 5. Canadian Registration Rights
Section 6. Holdback Agreements
Section 7. Suspension Periods; Other
Section 8. Registration Procedures
Section 9. Registration Expenses
Section 10. Indemnification
Section 11. Securities Act Restrictions
Section 12. Transfers of Rights
Section 13. Miscellaneous
Page
1
6
8
9
10
13
14
15
18
19
20
20
21
THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”), is made and entered into as of December 12, 2014, by
and among Restaurant Brands International Inc. Inc., a corporation organized under the laws of Canada (f/k/a 1011773 B.C.
Unlimited Liability Company) (the “Company”), and National Indemnity Company (“Investor” and together with its Permitted
Transferees that become a party to this Agreement in accordance with Section 12, an “Investor” and, collectively, the “Investors”).
WHEREAS, pursuant to a Securities Purchase Agreement, dated August 26, 2014, as amended (the “Securities Purchase
Agreement”), Berkshire Hathaway Inc. (“Berkshire”) has committed to purchase $3,000,000,000 in an aggregate amount of equity
securities of the Company concurrently with the execution and delivery of an Arrangement Agreement and Plan of Merger (the
“Arrangement Agreement”), by and among the Company, Restaurant Brands International L.P., a limited partnership organized under
the laws of Ontario (f/k/a New Red Canada Partnership), Burger King Worldwide, Inc., a corporation organized under the laws of
Delaware, Blue Merger Sub, Inc., a corporation incorporated under the laws of Delaware and a wholly-owned subsidiary of
Partnership, 8997900 Canada Inc., a corporation organized under the laws of Canada and a wholly-owned subsidiary of Partnership
and Tim Horton’s Inc., a corporation organized under the laws of Canada, pursuant to which 8997900 Canada Inc. will acquire all of
the issued and outstanding shares of Tim Horton’s Inc. pursuant to and in the manner provided for by the Arrangement (as defined in
the Arrangement Agreement) and Blue Merger Sub, Inc. will be merged with and into Burger King Worldwide, Inc., with Burger
King Worldwide, Inc. surviving the Merger (as defined in the Arrangement Agreement) as a wholly-owned subsidiary of the
Company (such transactions, the “Combination”);
WHEREAS, as part of Berkshire’s $3,000,000,000 commitment under the Securities Purchase Agreement, Investor will
purchase from the Company and the Company has agreed to issue to Investor 68,530,939 Class A 9.00% Cumulative Compounding
Perpetual Preferred Shares in the capital of the Company (the “Preferred Shares”) and a warrant (the “Warrant”) to purchase common
shares in the capital of the Company (the “Common Shares”); and
WHEREAS, the parties desire to enter into this Agreement in order to create certain registration rights for the Investors as set
forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valid
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:
Section 1. Certain Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the
following meanings:
“Affiliate” of any Person means any other Person which, directly or indirectly, through one or more intermediaries, controls, or
is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlling,” “controlled”
and “under common control with”) as used with respect to any Person means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract
or otherwise.
“Agreement” means this Registration Rights Agreement, including all amendments, modifications and supplements and any
exhibits or schedules to any of the foregoing, and shall refer to this Registration Rights Agreement as the same may be in effect at the
time such reference becomes operative.
“Articles” means the Company’s Articles of Incorporation, as amended or restated from time to time.
“Automatic Shelf Registration Statement” has the meaning set forth in Section 2(a).
“beneficially own” means, with respect to any Person, securities of which such Person or any of such Person’s Affiliates,
directly or indirectly, has “beneficial ownership” as determined pursuant to Rule 13d-3 and Rule 13d-5 of the Exchange Act,
including securities beneficially owned by others with whom such Person or any of its Affiliates has agreed to act together for the
purpose of acquiring, holding, voting or disposing of such securities; provided that a Person shall not be deemed to “beneficially
own” (i) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates until such
tendered securities are accepted for payment, purchase or exchange, (ii) any security as a result of an oral or written agreement,
arrangement or understanding to vote such security if such agreement, arrangement or understanding: (a) arises solely from a
revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable
provisions of the Exchange Act, and (b) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report). Without limiting the foregoing, a Person shall be deemed to be the beneficial owner of all
Registrable Shares owned of record by any majority-owned subsidiary of such Person.
“Board of Directors” means the board of directors of the Company, including any duly authorized committee thereof.
“Business Day” means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed
in the City of New York, New York or the City of Toronto, Canada.
“Common Shares” has the meaning set forth in the Recitals hereto.
“Company” has the meaning set forth in the introductory paragraph hereto.
“Demand Registration” has the meaning set forth in Section 2(a).
“Demand Registration Statement” has the meaning set forth in Section 2(a).
“Effectiveness Deadline” shall mean, with respect to any Registration Statement required to be filed to cover the resale by an
Investor of the Registrable Shares, (i) the date such Registration Statement is filed, if the Company is a WKSI as of such date and
such Registration Statement is an Automatic Shelf Registration Statement eligible to become immediately effective upon filing
pursuant to Rule 462, or (ii) if the Company is not a WKSI as of the date such Registration Statement is filed, the 5th Business Day
following the date on which the Company is notified by the SEC that such Registration Statement will not be reviewed or is not
subject to further review and comments and will be declared effective upon request by the Company.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations
promulgated thereunder.
“Exercise Shares” means the Common Shares acquired by Investor upon exercise of the Warrant.
“Filing Deadline” shall mean, with respect to any Registration Statement required to be filed to cover the resale by an Investor
of the Registrable Shares, (i) 15 days following a Request, if the Company is a WKSI as of the date of such Request, or (ii) if the
Company is not a WKSI as of the date of such
2
Request, (x) 20 days following such Request if the Company is then eligible to register for resale of the Registrable Shares on Form
S-3 or (y) if the Company is not then eligible to use Form S-3, 45 days following such Request, provided that, to the extent that the
Company has not been provided the information regarding an Investor and the Registrable Shares required to be included in such
Registration Statement at least two Business Days prior to the applicable Filing Deadline, then such Filing Deadline shall be extended
to the second Business Day following the date on which such information is provided to the Company.
“FINRA” means the Financial Industry Regulatory Authority Inc. or any successor thereof.
“Form S-3” means a registration statement on Form S-3 under the Securities Act or such successor forms thereto permitting
registration of securities under the Securities Act.
“Governmental Entity” means any national, federal, state, provincial, municipal, local, territorial, foreign or other government or
any department, commission, board, bureau, agency, regulatory authority or instrumentality thereof, or any court, judicial,
administrative or arbitral body or public or private tribunal.
“Holdback Agreement” has the meaning set forth in Section 6.
“Holdback Period” has the meaning set forth in Section 6.
“Investors” has the meaning set forth in the introductory paragraph hereto. References herein to an Investor shall apply to
Permitted Transferees who become Investors pursuant to Section 12, provided that for purposes of all thresholds and limitations
herein, the actions of each Permitted Transferee shall be aggregated with the Investor who was a shareholder of the Company and
from whom such Permitted Transferee directly or indirectly acquired Registrable Shares.
“Investor” has the meaning set forth in the introductory paragraph hereto.
“Long-Form Registration” has the meaning set forth in Section 2(a).
“Make Whole Dividend Shares” means the Common Shares acquired by Investor pursuant to any “Make Whole Dividend” (as
defined in the Preferred Share Terms of the Company).
“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, incorporated
organization, association, corporation, institution, public benefit corporation, Governmental Entity or any other entity.
“Permitted Transfer” shall mean:
(i) a Transfer of Registrable Shares by any shareholder who is a natural person (or a trustee of a trust for the benefit of a natural
person) to (a) such shareholder’s spouse, children (including legally adopted children and stepchildren), spouses of children,
grandchildren (including legally adopted children or stepchildren of such shareholder’s children), spouses of grandchildren, parents or
siblings (collectively, the “Immediate Family”), (b) a trustee of a trust for the benefit of the shareholder and/or any of the Persons
described in clause (a), or (c) a corporation, limited partnership or limited liability company whose sole shareholders, partners or
members, as the case may be, are the shareholder and/or any of the Persons described in clause (a) or clause (b); provided, that in any
of clauses (a), (b) (other than in the case of a Transfer of Registrable Shares to any such trust that is, as of the date of such Transfer, a
shareholder, or a shareholder otherwise retains exclusive power to exercise all rights on behalf of such
3
trust under this Agreement) or (c), the shareholder transferring such Registrable Shares shall retain exclusive power to exercise all
rights under this Agreement and shall retain a proxy to vote the Registrable Shares they have transferred;
(ii) a Transfer of Registrable Shares by a shareholder upon death or incapacity to such shareholder’s estate, executors, trustees,
administrators and personal representatives, and then to such shareholder’s legal representatives, heirs, beneficiaries or legatees
(whether or not such recipients are a spouse, children, spouses of children, grandchildren, spouses of grandchildren, parents or
siblings of such shareholder); and
(iii) a Transfer of Registrable Shares by an Investor to any Affiliate of an Investor or any of the employees, partners or members
of such Persons; provided, that any such Transfer of Registrable Shares to a limited partner or member shall be by means of
distribution of Registrable Shares to such Person, with no value paid by such limited partner or member in exchange for distribution
of such Registrable Shares; provided, further, that an Investor shall not avoid the foregoing provisions by making one or more
Transfers to one or more Permitted Transferees and then disposing of all or any portion of such party’s interest in any such Permitted
Transferee. On subsequent Transfers by a Permitted Transferee, the determination of whether the transferee is a Permitted Transferee
shall be determined by reference to the shareholder who was an original party to this Agreement, not by reference to the transferring
Permitted Transferee in such subsequent Transfer. If at any time after a Permitted Transfer, a transferee ceases to be a Permitted
Transferee of the shareholder who Transferred the Registrable Shares to the transferee, then such transferee must Transfer the
Registrable Shares to such shareholder or a Permitted Transferee of such shareholder as promptly as practicable. No Permitted
Transfer shall conflict with or result in any violation of a judgment, order, decree, statute, law, ordinance, rule or regulation.
“Permitted Transferee” shall mean any Person who shall have acquired and who shall hold Registrable Shares pursuant to a
Permitted Transfer.
“Piggyback Registration” has the meaning set forth in Section 3(a).
“Preferred Shares” has the meaning set forth in the Recitals hereto.
“Prospectus” means the prospectus or prospectuses (whether preliminary or final) included in any Registration Statement and
relating to Registrable Shares, as amended or supplemented and including all material incorporated by reference in such prospectus or
prospectuses.
“Redemption Offering” shall mean a primary offering of Common Shares by the Company, the proceeds of which shall be used
solely to redeem any Preferred Shares.
“Registrable Shares” means, at any time, (i) the Common Shares issued pursuant to the Securities Purchase Agreement, (ii) the
Exercise Shares, (iii) the Make Whole Dividend Shares, and (iv) any securities issued by the Company after the date hereof in respect
of the Common Shares by way of a share dividend or share split or in connection with a combination of shares, recapitalization,
merger, arrangement, amalgamation, consolidation or other reorganization, but excluding (v) any and all Common Shares and other
securities referred to in clauses (i) - (iv) that at any time after the date hereof (a) have been sold pursuant to an effective registration
statement or Rule 144 under the Securities Act, (b) have been sold in a transaction where a subsequent public distribution of such
securities would not require registration under the Securities Act, (c) are eligible for sale pursuant to Rule 144 under the Securities
Act without limitation thereunder on volume or manner of sale, (d) are not outstanding or (e) have been transferred in violation of
Section 11 hereof (or any combination of clauses (a), (b), (c), (d) and (e)). It is understood and agreed that, once a security of the kind
described in clause (i) - (iv) above becomes a
4
security of the kind described in clause (v) above, such security shall cease to be a Registrable Share for all purposes of this
Agreement and the Company’s obligations regarding Registrable Shares hereunder shall cease to apply with respect to such security.
“Registration Expenses” has the meaning set forth in Section 9(a).
“Registration Statement” means any registration statement of the Company which covers any of the Registrable Shares pursuant
to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement,
including post-effective amendments, all exhibits and all documents incorporated by reference in such Registration Statement.
“Request” has the meaning set forth in Section 2(a).
“S-3 Shelf Registration” has the meaning set forth in Section 2(a).
“S-3 Shelf Registration Statement” has the meaning set forth in Section 4(a).
“SEC” means the Securities and Exchange Commission or any successor agency.
“Securities Act” means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations
promulgated thereunder.
“Securities Purchase Agreement” has the meaning set forth in the Recitals hereto.
“Shares” means any common shares in the capital of the Company.
“Shelf Takedown” has the meaning set forth in Section 4(b).
“Short-Form Registrations” has the meaning set forth in Section 2(a).
“Suspension Period” has the meaning set forth in Section 7(a).
“Termination Date” means the first date on which there are no Registrable Shares held by any Investor.
“Transfer” shall mean to transfer, sell, assign, pledge, hypothecate, give, create a security interest in or lien on, place in trust
(voting or otherwise), assign or in any other way encumber or dispose of (including any deprivation or divestiture of any right, title or
interest), directly or indirectly and whether or not by operation of law or for value, any legal, economic or beneficial interest in
Registrable Shares.
“underwritten offering” means a registered offering in which securities of the Company are sold to one or more underwriters on
a firm-commitment basis for reoffering to the public, and “underwritten Shelf Takedown” means an underwritten offering effected
pursuant to an S-3 Shelf Registration.
“Warrant” has the meaning set forth in the Recitals hereto.
“WKSI” shall mean a “well known seasoned issuer” as defined in Rule 405 under the Securities Act.
5
In addition to the above definitions, unless the context requires otherwise:
(i) any reference to any statute, regulation, rule or form as of any time shall mean such statute, regulation, rule or form as
amended or modified and shall also include any successor statute, regulation, rule or form, as amended, from time to time;
(ii) “including” shall be construed as inclusive without limitation, in each case notwithstanding the absence of any express
statement to such effect, or the presence of such express statement in some contexts and not in others;
(iii) references to “Section” are references to Sections of this Agreement;
(iv) words such as “herein”, “hereof”, “hereinafter” and “hereby” when used in this Agreement refer to this Agreement as a
whole; and
(v) references to “dollars” and “$” mean U.S. dollars.
Section 2. Demand Registration.
(a) Right to Request Registration. Subject to the provisions hereof, until the Termination Date, each Investor or any group of
Investors shall have the right to make requests in writing (each, a “Request”) (which Request shall specify the Registrable Shares
intended to be disposed and the intended method of distribution thereof) that the Company register all or part of the Registrable
Shares held by such Investor(s) on Form S-1 or any similar long-form registration (“Long-Form Registrations”) or Form S-3 or any
similar short-form registration (“Short-Form Registrations”), if available, provided that, in either case, the number of Registrable
Shares included in the Request (i) would, if fully sold, yield gross proceeds to the Investor(s) making the Request of at least
$75,000,000 (based on the then-current market prices) or (ii) consists of all Registrable Shares then owned by the Investor. The
Investor(s) making any Request shall send a copy of such Request to the other Investors at the same time as it is sent to the Company,
and each other Investor may elect to include Registrable Shares owned by it in the same registration by providing written notice of
such election to the Company and the Investor(s) making the Request within ten (10) days of receiving the Request (which notice
shall specify the Registrable Shares intended to be included). All registrations requested pursuant to this Section 2(a) are referred to
herein as “Demand Registrations.” Each Investor may request that the registration be made pursuant to Rule 415 under the Securities
Act (an “S-3 Shelf Registration”) and, if the Company is a WKSI at the time any request for a Registration Statement is submitted
pursuant to this Section 2(a) (a “Demand Registration Statement”) to the Company, that such S-3 Shelf Registration be an automatic
shelf registration statement (as defined in Rule 405 under the Securities Act) (an “Automatic Shelf Registration Statement”). The
Company shall file such Registration Statement as promptly as practicable, but no later than the applicable Filing Deadline, and shall
use its best efforts to cause the Registration Statement to be declared effective or otherwise become effective under the Securities Act
as promptly as practicable but, in any event, no later than the Effectiveness Deadline.
(b) Number of Demand Registrations. Subject to the limitations of Sections 2(a), 2(d) and 4(a), Investors shall be entitled to
request up to three Demand Registrations in the aggregate; provided, however that a registration shall not count as a Demand
Registration pursuant to this Section 2 unless the holders of Registrable Shares are able to register and sell at least 90% of the
Registrable Shares requested to be included in such registration. Demand Registrations shall be Short-Form Registrations whenever
the Company is permitted to use any applicable short form and if the managing underwriter, if any, agrees to the use of a Short-Form
Registration. After the Company has become subject to the reporting requirements of the Exchange Act, the Company shall use its
reasonable best efforts to make Short-Form Registrations available for the sale of Registrable Shares.
6
(c) Priority on Demand Registrations. The Company may include Shares other than Registrable Shares in a Demand
Registration for any accounts (including for the account of the Company) on the terms provided below if such Demand Registration is
an underwritten offering, and only with the consent of the managing underwriters of such offering. If the managing underwriters of
the requested Demand Registration advise the Company and the Investors participating in such Demand Registration that in their
opinion the number of Shares proposed to be included in the Demand Registration exceeds the number of Shares which can be sold in
such underwritten offering without delaying or otherwise affecting the success of the offering (including the price per share of the
Shares proposed to be sold in such underwritten offering), the Company shall include in such Demand Registration (i) first, the
number of Registrable Shares that the Investors propose to sell, and (ii) second, unless any additional Shares exceed the amount that
the managing underwriter(s) determine can be sold without delaying or otherwise adversely affecting the success of the offering, the
number of Shares proposed to be included therein by any other Persons (including Shares to be sold for the account of the Company)
allocated among such other Persons in such manner as the Company may determine. If more than one Investor is participating in such
Demand Registration, and the number of Shares which can be sold, as so determined by the managing underwriters, is less than the
number of Shares proposed to be registered pursuant to clause (i) above by the Investor(s), then the Registrable Shares that are
included in such Demand Registration shall be allocated pro rata among the participating Investors on the basis of the number of
Registrable Shares owned by each such Investor.
(d) Restrictions on Demand Registrations. Notwithstanding any contrary provision of this Agreement, no Investor shall be
entitled to request a Demand Registration at any time when (i) the Company is diligently pursuing a Redemption Offering, or (ii) the
Company is diligently pursuing a primary or secondary underwritten offering pursuant to a Piggyback Registration, unless, in the case
of this clause (ii), the offering to be effected pursuant to the requested Demand Registration can be effected pursuant to an S-3 Shelf
Registration and the Company, in accordance with Section 4, effects or has effected an S-3 Shelf Registration pursuant to which such
offering can be effected.
(e) Underwritten Offerings. An Investor or group of Investors making a Request shall only be entitled to request an underwritten
offering pursuant to a Demand Registration (subject to the same minimum proceeds test set forth in subsection (a) above) if the
request is not made within 120 days after such Investor(s) (or the Investor from which Registrable Shares were acquired directly or
indirectly by any such Investor, or any Permitted Transferee who acquired its Registrable Shares directly or indirectly from any such
Investor) have sold at least 90% of the Shares requested to be included in an underwritten offering pursuant to a Demand Registration
or an S-3 Shelf Registration. The Investor shall (i) select the investment banking firm or firms to act as the managing underwriter or
underwriters in connection with such offering, and (ii) otherwise mutually manage and direct all decisions required for effecting such
Demand Registration.
(f) Effective Period of Demand Registrations. Upon the date of effectiveness of any Demand Registration for an underwritten
offering and if such offering is priced promptly on or after such date, the Company shall use reasonable best efforts to keep such
Demand Registration Statement effective for a period equal to 120 days from such date or such shorter period which shall terminate
when all of the Registrable Shares covered by such Demand Registration have been sold by the participating Investor(s).
(g) Other Registration Rights. Other than registration rights granted in connection with the Combination, the Company shall not
grant to any Persons the right to request the Company to register any equity securities of the Company, or any securities convertible
or exchangeable into or exercisable for such securities, without the prior written consent of Investor (as long as it and/or its Permitted
Transferees hold Registrable Shares); provided that the Company may grant rights to employees of the Company and its subsidiaries
who are not Affiliates of the Investor, and not persons eligible to acquire Registrable
7
Shares from an Investor in a Permitted Transfer, to participate in Piggyback Registrations so long as such rights are subordinate to the
rights of the Investor with respect to such Piggyback Registrations as provided in Section 3 below and so long as such rights shall not
restrict the right of the Company to undertake a merger, arrangement, amalgamation, sale or similar transaction involving the sale of
all or substantially all of the assets of the Company.
Section 3. Piggyback Registrations.
(a) Subject Section 3(b), whenever prior to the Termination Date the Company proposes to register any Shares under the
Securities Act (other than on a registration statement on Form S-8, F-8, S-4 or F-4), whether for its own account or for the account of
one or more holders of Shares (other than the Investors), and the form of registration statement to be used may be used for any
registration of Registrable Shares (a “Piggyback Registration”), the Company shall give written notice to each Investor of its intention
to effect such a registration and, subject to Sections 3(b) and 3(c), shall include in such registration statement and in any offering of
Shares to be made pursuant to that registration statement all Registrable Shares with respect to which the Company has received a
written request for inclusion therein from an Investor within 10 days after such Investor’s receipt of the Company’s notice or, in the
case of a primary offering, such shorter time as is reasonably specified by the Company in light of the circumstances (provided that
only Registrable Shares of the same class or classes as the Shares being registered may be included). The provisions of this Section 3
(a) shall apply without regard to whether the Company proposes to register such Shares at its own option, as set forth in any other
agreement by which the Company is bound. This Agreement alone shall not be interpreted to impose on the Company any obligation
to proceed with any Piggyback Registration and the Company may abandon, terminate and/or withdraw such registration for any
reason at any time prior to the pricing thereof. If the Company or any other Person other than an Investor proposes to sell Shares in an
underwritten offering pursuant to a registration statement on Form S-3 under the Securities Act, such offering shall be treated as a
primary or secondary underwritten offering pursuant to a Piggyback Registration.
(b) Priority on Primary Piggyback Registrations. If a Piggyback Registration is initiated as a primary underwritten offering on
behalf of the Company, and the managing underwriters advise the Company that in their opinion the number of Shares proposed to be
included in such offering exceeds the number of Shares (of any class) which can be sold in such offering without delaying or
otherwise adversely affecting the success of the offering (including the price per share of the Shares proposed to be sold in such
offering), the Company shall include in such registration and offering (i) first, the number of Shares that the Company proposes to
sell, and (ii) second, the number of Shares requested to be included therein by the Investors, pro rata among such Investors on the
basis of the number of Registrable Shares owned by each such Investor up to such number, if any, that the managing underwriters
determine can be included in such offering without delaying or otherwise adversely affecting the success of the offering.
Notwithstanding the foregoing, if a Piggyback Registration is a Redemption Offering, Investors shall only be permitted to include
Shares in such Piggyback Registration if and to the extent the managing underwriters conclude that Shares can be sold in excess of
the Shares proposed by Investor(s) to be sold in such Redemption Offering without delaying or otherwise adversely affecting the
success of the Redemption Offering (including the price per share of the Shares proposed to be sold in such Redemption Offering). If
the managing underwriters so conclude that excess Shares can be sold by Investors in a Redemption Offering without delaying or
otherwise adversely affecting the success of the Redemption Offering, the Company shall include in such Redemption Offering the
number of Registrable Shares requested to be included by any Investors, pro rata among such Investors on the basis of the number of
Registrable Shares owned by each such Investor up to such number, if any, that the managing underwriters determine can be included
in such offering without delaying or otherwise adversely affecting the success of the offering.
8
(c) Priority on Secondary Piggyback Registrations. If a Piggyback Registration is not a Redemption Offering and is initiated as
an underwritten registration on behalf of a holder of Shares other than the Investors, and the managing underwriters advise the
Company that in their opinion the number of Shares proposed to be included in such registration exceeds the number of Shares (of
any class) which can be sold in such offering without delaying or otherwise adversely affecting the success of the offering (including
the price per share of the Shares to be sold in such offering), then the Company shall include in such registration (i) first, the number
of Shares requested to be included therein by the holder(s) requesting such registration, (ii) second, the number of Shares requested to
be included therein by the Investors pro rata among such Investors on the basis of the number of Registrable Shares owned by each
such Investor and (iii) third, the number of Shares proposed to be included therein by any other Persons (including Shares to be sold
for the account of the Company) allocated among such other Persons in such manner as the Company may determine.
(d) Selection of Underwriters. If any Piggyback Registration is a primary or secondary underwritten offering, the Company shall
have the right to select the managing underwriter or underwriters to administer any such offering.
(e) Basis of Participations. No Investor may sell Registrable Shares in any offering pursuant to its right to participate in a
Piggyback Registration unless it (a) agrees to sell such Shares on the same basis provided in the underwriting or other distribution
arrangements approved by the Company and that apply to the Company or any other holders involved in such Piggyback Registration
and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, lockups and other
documents required under the terms of such arrangements.
Section 4. S-3 Shelf Registration.
(a) Right to Request Registration. Subject to provisions hereof and the Company’s eligibility to use Form S-3, as promptly as
practicable after the Company receives written notice of a request for an S-3 Shelf Registration from one or more Investors, the
Company shall file with the SEC a registration statement under the Securities Act for the S-3 Shelf Registration (a “S-3 Shelf
Registration Statement”). A request for an S-3 Shelf Registration Statement may not be made within 120 days after the requesting
Investor (or any Permitted Transferees who acquired their Registrable Shares directly or indirectly from such original Investor) has
sold at least 90% of the Shares requested to be included in a Demand Registration or at any time when an S-3 Shelf Registration
covering Shares of the requesting Investor or any of its direct or indirect Permitted Transferees is in effect. Once effective, the
Company shall cause such S-3 Shelf Registration Statement to remain continuously effective for such time period as is specified in
such request but for no time period longer than the period ending on the earliest of (A) the date on which all Registrable Shares
covered by such S-3 Shelf Registration have been sold pursuant to the S-3 Shelf Registration, (B) the date as of which there are no
longer any Registrable Shares covered by such S-3 Shelf Registration in existence and (C) the date on which such S-3 Shelf
Registration Statement expires, provided that the Company shall renew such S-3 Shelf Registration Statement upon such
expiration. If permitted under the Securities Act, such Registration Statement shall be an Automatic Shelf Registration Statement. The
right to request an S-3 Shelf Registration hereunder is in addition to the rights of Investors under Section 2 with respect to Demand
Registrations. The right to request an S-3 Shelf Registration hereunder may be exercised no more than once by the Investors;
provided that if the Company does not meet the eligibility requirements of Form S-3 or loses its eligibility to use Form S-3, then the
Investors shall (subject to satisfying the conditions to a Demand Registration set forth in Section 2) be entitled to request up to three
additional Demand Registrations in the aggregate per year, until such time as the Company meets the eligibility requirements of Form
S-3; provided, further that if the Investors have used the right to a S-3 Shelf Registration pursuant to this Section 4 and have
(inclusive of direct and indirect Permitted Transferees who have become Investors under Section 12 below) exercised
9
fewer than three Demand Registrations, then the Investors may elect a second S-3 Shelf Registration and, upon such election, the
number of Demand Registrations available to it and its direct and indirect Permitted Transferees who have become Investors under
Section 12 below shall be reduced by one.
(b) Right to Effect Shelf Takedowns. Subject to Section 6, each Investor shall be entitled, at any time and from time to time
when an S-3 Shelf Registration Statement is effective and until the Termination Date, to sell such Registrable Shares as are then
registered pursuant to such S-3 Shelf Registration Statement (each, a “Shelf Takedown”), but only upon not less than three business
days’ prior written notice to the Company (if such takedown is to be underwritten). Such Investor or a group of Investors shall be
entitled to request that a Shelf Takedown be an underwritten offering; provided, however, that the number of Registrable Shares
included in each such underwritten Shelf Takedown (i) would reasonably be expected to yield gross proceeds to such Investor(s) of at
least $50,000,000 (based on the then-current market prices), or (ii) consists of all Registrable Shares then owned by the Investors, and
provided further that such Investor(s) shall not be entitled to request any underwritten Shelf Takedown within 120 days after any such
Investor (or the Investor from which Registrable Shares were acquired directly or indirectly by such Investor, or any Permitted
Transferee who acquired its Registrable Shares directly or indirectly from such Investor) have sold at least 90% of the Shares
requested to be included in a Demand Registration or S-3 Shelf Registration. Such Investor(s) shall give the Company prompt written
notice of the consummation of each Shelf Takedown (whether or not underwritten).
(c) Priority on Underwritten Shelf Takedowns. The Company may include Shares other than Registrable Shares in an
underwritten Shelf Takedown for any accounts on the terms provided below, but only with the consent of the managing underwriters
of such offering, and whichever of the Investors has requested such Shelf Takedown (such consent not to be unreasonably withheld or
delayed). If the managing underwriters of the requested underwritten Shelf Takedown advise the Company and the requesting
Investors that in their opinion the number of Shares proposed to be included in the underwritten Shelf Takedown exceeds the number
of Shares which can be sold in such offering without delaying or otherwise adversely affecting the success of the offering (including
the price per share of the Shares proposed to be sold in such offering), the Company shall include in such underwritten Shelf
Takedown (i) first, the number of Shares that the requesting Investor(s) proposes to sell, and (ii) second, the number of Shares
proposed to be included therein by any other Persons (including Shares to be sold for the account of the Company) allocated among
such other Persons in such manner as the Company may determine. If the number of Shares which can be sold without delaying or
otherwise adversely affecting the success of the offering is less than the number of Registrable Shares proposed to be included in the
underwritten Shelf Takedown pursuant to clause (i) above, the amount of Shares to be so sold shall be allocated to the Investors pro
rata according to the number of Registrable Shares owned by each such Investor. The provisions of this paragraph (c) apply only to a
Shelf Takedown that an Investor has requested be an underwritten offering.
(d) Selection of Underwriters. If any of the Registrable Shares are to be sold in an underwritten Shelf Takedown initiated by an
Investor, the Investor requesting the Shelf Takedown shall have the right to select the investment banker(s) and manager(s) to
administer the offering, subject to the other Investors’ approval (provided that the Company shall select the investment banker(s) and
manager(s) if the Investors cannot agree on such selection), if the other Investors are participating in such Shelf Takedown (which
approval shall not be unreasonably withheld or delayed).
Section 5. Canadian Registration Rights. Right to Concurrent Canadian Registration. In the event that (1) the form and manner
of any distribution to be made by an Investor or any group of Investors in connection with any Demand Registration (x) contemplates
a concurrent distribution of Registrable Shares in any or all of the provinces and territories of Canada or would otherwise be a
Canadian Distribution and (y) may be qualified by the Company by way of a Canadian Prospectus and otherwise
10
effected in accordance with Applicable Canadian Securities Laws or (2) the Company proposes to extend any distribution that is the
subject of a Piggyback Registration to permit the offer and sale of Shares by way of a Canadian Prospectus in any or all of the
provinces and territories of Canada and the form of Canadian Prospectus to be used may be used for the qualification of a distribution
of Registrable Shares under Applicable Canadian Securities Laws in such provinces and territories:
(i) in the case of clause (1), such Investor (or group of Investors) shall have the right to Request (which Request shall
specify the Registrable Shares intended to be disposed and the intended method of distribution thereof, including the provinces
and territories in which the distribution is to be made) that the Company qualify such distribution by way of a Canadian
Prospectus (which shall be a Canadian Short Form Prospectus, to the extent available for such distribution, if the Company is
Short-Form Eligible) (a “Canadian Demand Registration”); and
(ii) in the case of clause (2), the Company shall qualify with such Canadian Prospectus, and in any offering of Shares to be
made pursuant thereto, all Registrable Shares that an Investor has requested (pursuant to its written request provided under
Section 3(a) in connection with the Piggyback Registration) for inclusion therein (provided that only Registrable Shares of the
same class or classes as the non-Investor Shares being qualified may be included) (a “Canadian Piggyback Registration”).
(b) Subject to clause (c) below, the terms and conditions of this Agreement in respect of any Demand Registration shall apply,
mutatis mutandis, to any associated Canadian Demand Registration and the terms and conditions of this agreement in respect of the
associated Piggyback Registration shall apply, mutatis mutandis, to the associated Canadian Piggyback Registration, including in
each case the applicable time frames for notices, requests, filings and effectiveness (provided, however, that clause (i) in each of the
definitions of Filing Deadline and Effectiveness Deadline shall not apply in the context of a Canadian Registration). For this purpose,
exclusively in the context of any Canadian Registration, terms and concepts defined with reference to U.S. securities laws (excluding
references to the Exchange Act) shall be replaced (or interpreted in accordance) with the equivalent terms and concepts under
Applicable Canadian Securities Laws, including but not limited to the following:
(i) the terms “effectiveness” and “effective” shall mean, in respect of any Canadian Prospectus, obtaining (or, as
applicable, maintaining the effectiveness of) a final receipt for such Canadian Prospectus from the applicable Canadian
Securities Commissions;
(ii) the term “Long-Form Registration” shall mean Canadian Registration qualified by a “long-form prospectus” pursuant
to NI 41-101 and the term “Short-Form Registration” shall mean a Canadian Registration qualified by a Canadian Short Form
Prospectus;
(iii) references to “register”, “registered” and “registration” shall mean the qualification of a distribution of Registrable
Shares under Applicable Canadian Securities Laws in any or all of the provinces and territories of Canada by filing a Canadian
Prospectus for such distribution;
(iv) references to “registration statement” and “Registration Statement” (or to the “prospectus” or “Prospectus” included in
either) shall mean a Canadian Prospectus; and
(v) references to the “SEC” shall be to applicable Canadian Securities Commissions and references to the “Securities Act”
shall be to Applicable Canadian Securities Laws.
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(c) The parties acknowledge that certain U.S. terms and concepts in this agreement do not have an equivalent meaning under
Applicable Canadian Securities Laws, including “automatic shelf registration statement”, “issuer free writing prospectus” and
“WKSI”, and that it may not be permitted or practicable under Applicable Canadian Securities Laws to effect a Canadian Registration
on equivalent terms to those contemplated herein for a Demand Registration or Piggyback Registration or at all. Whether a Canadian
Registration will be available will depend on, among other things, the form and manner of the proposed distribution. Notwithstanding
Sections 2(b) and 4(a), the Company is not under any obligation to become or remain Short Form Eligible, and no additional Demand
Registrations shall be granted if the Company fails to become or remain Short Form Eligible.
(d) In connection with a Canadian Registration, the Company will, if required, prepare and file the relevant Canadian Prospectus
in both the English and French language and obtain opinions of Quebec counsel to the Company and the auditors of the Company
addressed to each participating Investor and any underwriters of such distribution confirming the translation of the Canadian
Prospectus and compliance with French language laws.
(e) A Canadian Registration shall be considered to part of the associated Demand Registration or Piggyback Registration unless
the context requires otherwise, and a Canadian Registration shall not count as a separate Demand Registration for purposes of Section
2(b).
(f) After the Company has become a “reporting issuer” subject to the reporting requirements under Applicable Canadian
Securities Laws, the Company agrees to make all filings and take all actions required to maintain that reporting issuer status; provided
that this covenant shall not restrict the right of the Company to undertake a merger, arrangement, amalgamation, sale or similar
transaction involving the sale of all or substantially all of the assets of the Company as a result of which the Company ceases to be a
reporting issuer.
(g) For purposes of this Section 5, the following terms shall have the following meanings:
(i) “Applicable Canadian Securities Laws” means the applicable securities laws of each of the relevant provinces and
territories of Canada, as the context dictates, and the respective rules and regulations under such laws, together with applicable
published policy statements, instruments, companion policies, blanket orders, blanket rulings and applicable notices of or
administered by the relevant Canadian Securities Commissions and applicable discretionary blanket rulings or blanket orders
issued by the relevant Canadian Securities Commissions pursuant to such laws, rules and regulations, together with the
published policies, rules and regulations of any Canadian stock exchange or over-the-counter market on which the Shares are
then listed or quoted, all as amended and in effect from time to time;
(ii) “Canadian Distribution” means a distribution that is subject to a prospectus requirement under Applicable Canadian
Securities Laws unless effected pursuant to the Control Person Exemption, an exemption under NI 45-106 or any other
exemption to the prospectus requirements provided for under Applicable Canadian Securities Laws;
(iii) “Canadian Prospectus” means any prospectus of the Company (including, where applicable, a Canadian Short Form
Prospectus or a Canadian Shelf Prospectus and associated prospectus supplement) prepared and filed with the applicable
Canadian Securities Commissions under the Applicable Canadian Securities Laws for the purposes of qualifying the distribution
of Registrable Shares in any or all of the provinces and territories of Canada, and shall include all amendments and supplements
thereto and all material incorporated by reference (or deemed to be incorporated by reference) therein;
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(iv) “Canadian Registration “ means a Canadian Demand Registration or a Canadian Piggyback Registration, or both, as
applicable;
(v) “Canadian Securities Commissions” means the securities commission or similar securities regulatory authority in each
of the provinces and territories of Canada;
(vi) “Canadian Shelf Prospectus” means a “base shelf prospectus” prepared in accordance with NI 44-102 and all other
applicable requirements of Applicable Canadian Securities Laws;
(vii) “Canadian Short Form Prospectus” means a “short form prospectus” prepared in accordance with NI 44-101 and all
other applicable requirements of Applicable Canadian Securities Laws;
(viii) “Control Person Exemption” means the exemption from the prospectus requirement for a control distribution set out
in section 2.8 of NI 45-102 or any successor exemption;
(ix) “NI 41-101” means National Instrument 41-101 of the Canadian Securities Administrators and any successor policy,
rule, regulation or similar instrument;
(x) “NI 44-101” means National Instrument 44-101 of the Canadian Securities Administrators and any successor policy,
rule, regulation or similar instrument;
(xi) “NI 44-102” means National Instrument 44-102 of the Canadian Securities Administrators and any successor policy,
rule, regulation or similar instrument;
(xii) “NI 45-102” means National Instrument 45-102 of the Canadian Securities Administrators and any successor policy,
rule, regulation or similar instrument;
(xiii) “NI 45-106” means National Instrument 45-106 of the Canadian Securities Administrators and any successor policy,
rule, regulation or similar instrument; and
(xiv) “Short-Form Eligible” means the Company meets the eligibility criteria set out in NI 44-101 for the use of a
Canadian Short Form Prospectus in connection with the applicable distribution.
Section 6. Holdback Agreements. The restrictions in this Section 6 shall apply for as long as any Investor is the beneficial owner
of any Registrable Shares. (1) In connection with a Redemption Offering, (2) if the Company sells Shares or securities convertible
into or exchangeable for (or otherwise representing a right to acquire) Shares in any other primary underwritten offering pursuant to
any registration statement under the Securities Act (but only if the Investors are provided their piggyback rights, if any, in accordance
with Sections 3(a) and 3(b)), or (3) if any other Person sells Shares in a secondary underwritten offering pursuant to a Piggyback
Registration in accordance with Sections 3(a) and 3(b), and if the managing underwriters for such offering (under any of clauses (1),
(2) or (3)) advise the Company (in which case the Company promptly shall notify each Investor) that a public sale or distribution of
Shares outside such offering would adversely affect such offering, then, if requested by the Company, each Investor shall agree, as
contemplated in this Section 6, not to (and to cause its majority-controlled Affiliates not to) sell, transfer, pledge, issue, grant or
otherwise dispose of, directly or indirectly (including by means of any short sale), or request the registration of, any Registrable
Shares (or any securities of any Person that are convertible into or exchangeable for, or otherwise represent a right to
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acquire, any Registrable Shares) for a period (each such period, a “Holdback Period”) beginning on the 10th day before the pricing
date for the Redemption Offering or other applicable offering and extending through the earlier of (i) the 90th day after such pricing
date (subject to customary automatic extension in the event of the release of earnings results of or material news relating to the
Company) and (ii) such earlier day (if any) as may be designated for this purpose by the managing underwriters for such offering
(each such agreement of each Investor, a “Holdback Agreement”). Each Holdback Agreement shall be in writing in form and
substance reasonably satisfactory to the Company and the managing underwriters and, in the case of a Redemption Offering, Investor.
Notwithstanding the foregoing, no Investor shall be obligated to make any Holdback Agreement unless the Company and each selling
shareholder in such offering also execute agreements substantially similar to such Holdback Agreements. A Holdback Agreement
shall not apply to (i) the exercise of any warrants or options to purchase shares of the Company (provided that such restrictions shall
apply with respect to the securities issuable upon such exercise) or (ii) any Shares included in the underwritten offering giving rise to
the application of this Section 6.
Section 7. Suspension Periods; Other.
(a) The Company may (i) delay the filing or effectiveness of a Registration Statement in conjunction with a Demand
Registration or an S-3 Shelf Registration or (ii) prior to the pricing of any underwritten offering or other offering of Registrable
Shares pursuant to a Demand Registration or an S-3 Shelf Registration, delay such underwritten or other offering (and, if it so
chooses, withdraw any registration statement that has been filed and, if such registration is withdrawn, such registration shall not
count against the limitation on the number of such registrations set forth in Section 2 or Section 4), but in each case described in
clauses (i) and (ii) only if the Company determines in its sole discretion (x) that proceeding with such an offering would require the
Company to disclose material information that would not otherwise be required to be disclosed at that time and that the disclosure of
such information at that time would not be in the Company’s best interests, or (y) that the registration or offering to be delayed
would, if not delayed, materially adversely affect the Company and its subsidiaries taken as a whole or delay or otherwise materially
adversely affect the success of, any pending or proposed material transaction, including any debt or equity financing, any acquisition
or disposition, any recapitalization or reorganization or any other material transaction, whether due to commercial reasons, a desire to
avoid premature disclosure of information or any other reason. Any period during which the Company has delayed a filing, an
effective date or an offering pursuant to this Section 7 is herein called a “Suspension Period”. If pursuant to this Section 7 the
Company delays or withdraws a Demand Registration or S-3 Shelf Registration requested by an Investor, such Investor shall be
entitled to withdraw such request and, if it does so, such request shall not count against the limitation on the number of such
registrations set forth in Section 2 or Section 4. The Company shall provide prompt written notice to any effected Investor of the
commencement and termination of any Suspension Period (and any withdrawal of a registration statement pursuant to this Section 7),
but shall not be obligated under this Agreement to disclose the reasons therefor. Each Investor who becomes aware of a Suspension
Period shall keep the existence of each Suspension Period confidential and refrain from making offers and sales of Registrable Shares
(and direct any other Persons making such offers and sales to refrain from doing so) during each Suspension Period. In no event (i)
may the Company deliver notice of a Suspension Period to an Investor more than twice in any calendar year and (ii) shall a
Suspension Period or Suspension Periods be in effect for an aggregate of 120 days or more in any calendar year.
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Section 8. Registration Procedures.
(a) Subject to the limitations set forth herein, whenever an Investor requests that any Registrable Shares be registered pursuant
to this Agreement, the Company shall use reasonable best efforts to effect, as soon as practical as provided herein, the registration and
the sale of such Registrable Shares in accordance with the intended methods of disposition thereof, and, pursuant thereto, the
Company shall, as soon as practical as provided herein:
(i) subject to the other provisions of this Agreement, use reasonable best efforts to prepare and file with the SEC a
Registration Statement with respect to such Registrable Shares and cause such Registration Statement to become effective
(unless it is automatically effective upon filing);
(ii) use reasonable best efforts to prepare and file with the SEC such amendments and supplements to such Registration
Statement and the Prospectus used in connection therewith as may be necessary to comply with the applicable requirements of
the Securities Act and to keep such Registration Statement effective for the relevant period required hereunder, but no longer
than is necessary to complete the distribution of the Shares covered by such Registration Statement, and to comply with the
applicable requirements of the Securities Act with respect to the disposition of all the Shares covered by such Registration
Statement during such period in accordance with the intended methods of disposition set forth in such Registration Statement;
(iii) use reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration
Statement, or the lifting of any suspension of the qualification or exemption from qualification of any Registrable Shares for sale
in any jurisdiction in the United States;
(iv) deliver, without charge, such number of copies of the preliminary and final Prospectus and any supplement thereto as
each participating Investor may reasonably request in order to facilitate the disposition of the Registrable Shares of such
Investor covered by such Registration Statement in conformity with the requirements of the Securities Act;
(v) use reasonable best efforts to register or qualify such Registrable Shares under such other securities or blue sky laws of
such U.S. jurisdictions as any participating Investor reasonably requests and continue such registration or qualification in effect
in such jurisdictions for as long as the applicable Registration Statement may be required to be kept effective under this
Agreement (provided that the Company will not be required to (I) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph (v), (II) subject itself to taxation in any such jurisdiction or
(III) consent to general service of process in any such jurisdiction);
(vi) notify each participating Investor and each distributor of such Registrable Shares identified by such Investor, at any
time when a Prospectus relating thereto would be required under the Securities Act to be delivered by such distributor, of the
occurrence of any event as a result of which the Registration Statement or the Prospectus included in such Registration
Statement contains an untrue statement of a material fact or omits a material fact that is required to be stated or necessary to
make the statements therein, in light of the circumstances under which they were made, not misleading, and, at the request of
such Investor, the Company shall use reasonable best efforts to prepare, as soon as practical, a supplement or amendment to
such Prospectus so that, as thereafter delivered to any prospective purchasers of such Registrable Shares, such Prospectus shall
not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
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(vii) in the case of an underwritten offering in which an Investor participates pursuant to a Demand Registration, a
Piggyback Registration or an S-3 Shelf Registration, enter into a customary underwriting agreement for offerings of that kind,
containing such provisions (including provisions for indemnification, lockups, opinions of counsel and comfort letters), and take
all such other customary and reasonable actions as the managing underwriters of such offering may request in order to facilitate
the disposition of such Registrable Shares (including, making members of senior management of the Company available at
reasonable times and places to participate in “road-shows” that the managing underwriter determines are necessary to effect the
offering);
(viii) in the case of an underwritten offering in which an Investor participates pursuant to a Demand Registration, a
Piggyback Registration or an S-3 Shelf Registration, and to the extent not prohibited by applicable law, (A) make reasonably
available, for inspection by the managing underwriters of such offering and one law firm and accounting firm acting for such
managing underwriters, pertinent corporate documents and financial and other records of the Company and its subsidiaries and
controlled Affiliates, (B) cause the Company’s officers and employees to supply information reasonably requested by such
managing underwriters or law firm in connection with such offering, (C) make the Company’s independent accountants
available for any such managing underwriters’ due diligence and have them provide customary comfort letters to such
underwriters in connection therewith; and (D) cause the Company’s counsel to furnish customary legal opinions to such
underwriters in connection therewith; provided, however, that such records and other information shall be subject to such
confidential treatment as is customary for underwriters’ due diligence reviews;
(ix) use reasonable best efforts to cause all such Registrable Shares to be listed on each primary securities exchange (if
any) on which securities of the same class issued by the Company are then listed;
(x) provide a transfer agent and registrar for all such Registrable Shares not later than the effective date of such
Registration Statement and, a reasonable time before any proposed sale of Registrable Shares pursuant to a Registration
Statement, provide the transfer agent with printed certificates for the Registrable Shares to be sold, subject to the provisions of
Section 12;
(xi) make generally available to its shareholders a consolidated earnings statement (which need not be audited) for a period
of 12 months beginning after the effective date of the Registration Statement as soon as reasonably practicable after the end of
such period, which earnings statement shall satisfy the requirements of an earnings statement under section 11(a) of the
Securities Act and Rule 158 thereunder; and
(xii) promptly notify each participating Investor, as applicable, and the managing underwriters of any underwritten
offering:
(1) when the Registration Statement, any pre-effective amendment, the Prospectus or any Prospectus supplement or
any post-effective amendment to the Registration Statement has been filed and, with respect to the Registration Statement
or any post-effective amendment, when the same has become effective;
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(2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for any
additional information regarding such Investor;
(3) of the notification to the Company by the SEC of its initiation of any proceeding with respect to the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement; and
(4) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable
Shares for sale under the applicable securities or blue sky laws of any jurisdiction.
For the avoidance of doubt, the provisions of clauses (vii), (viii), (xi) and (xii) of this Section 8(a) shall apply only in respect of
an underwritten offering and only if the number of Registrable Shares to be sold in the offering would reasonably be expected to yield
gross proceeds to the participating Investor(s) of at least $75,000,000 (based on the then-current market prices) in a Demand
Registration pursuant to Section 2 or $50,000,000 (based on the then-current market prices) in an S-3 Shelf Takedown pursuant to
Section 4.
(b) No Registration Statement (including any amendments thereto) shall contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein, or necessary to make the statements therein not misleading, and no Prospectus
(including any supplements thereto) shall contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were made, not misleading, in each case, except for any
untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact made in reliance on
and in conformity with written information furnished to the Company by or on behalf of an Investor or any underwriter or other
distributor specifically for use therein.
(c) At all times after the Company has filed a registration statement with the SEC pursuant to the requirements of the Securities
Act and until the Termination Date, the Company shall use reasonable best efforts to continuously maintain in effect the registration
statement of Shares under section 12 of the Exchange Act and to use reasonable best efforts to file all reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder, all to the extent required
to enable each applicable Investor to be eligible to sell Registrable Shares (if any) pursuant to Rule 144 under the Securities Act;
provided that this covenant shall not restrict the right of the Company to undertake a merger, arrangement, amalgamation, sale or
similar transaction involving the sale of all or substantially all of the assets of the Company as a result of which the Company ceases
to be subject to the reporting requirements of the Exchange Act.
(d) The Company may require each applicable Investor and each distributor of Registrable Shares as to which any registration is
being effected to furnish to the Company information regarding such Person and the distribution of such securities as the Company
may from time to time reasonably request in connection with such registration.
(e) Each Investor agrees by having its Common Shares treated as Registrable Shares hereunder that, upon being advised in
writing by the Company of the occurrence of an event pursuant to Section 8(a)(vi), such Investor will immediately discontinue (and
direct any other Persons making offers and sales of Registrable Shares to immediately discontinue) offers and sales of Registrable
Shares pursuant to any Registration Statement (other than those pursuant to a plan that is in effect prior to such time and that complies
with Rule 10b5-1 of the Exchange Act) until it is advised in writing by the
17
Company that the use of the Prospectus may be resumed and is furnished with a supplemented or amended Prospectus as
contemplated by Section 8(a)(vi), and, if so directed by the Company, each Investor will deliver to the Company all copies, other than
permanent file copies then in such Investor’s possession, of the Prospectus covering such Registrable Shares current at the time of
receipt of such notice.
(f) The Company may prepare and deliver an issuer free-writing prospectus (as such term is defined in Rule 405 under the
Securities Act) in lieu of any supplement to a prospectus, and references herein to any “supplement” to a Prospectus shall include any
such issuer free-writing prospectus. No Investor nor any other seller of Registrable Shares may use a free-writing prospectus to offer
or sell any such shares unless it has been provided by the Company or unless the Investor has received the Company’s prior written
consent.
(g) It is understood and agreed that any failure of the Company to file a registration statement or any amendment or supplement
thereto or to cause any such document to become or remain effective or usable within or for any particular period of time as provided
in Sections 2, 4 or 8 or otherwise in this Agreement, due to reasons that are not reasonably within its control, or due to any refusal of
the SEC to permit a registration statement or prospectus to become or remain effective or to be used because of unresolved SEC
comments thereon (or on any documents incorporated therein by reference) despite the Company’s good faith and reasonable best
efforts to resolve those comments, shall not be a breach of this Agreement.
(h) It is further understood and agreed that the Company shall not have any obligations under this Section 8 at any time on or
after the Termination Date, unless an underwritten offering initiated pursuant to this Agreement has been priced but not completed
prior to the Termination Date, in which event the Company’s obligations under this Section 8 shall continue with respect to such
offering until it is so completed (but not more than 120 days after the commencement of the offering).
Section 9. Registration Expenses.
(a) All expenses incident to the Company’s performance of or compliance with this Agreement, including all registration and
filing fees, fees and expenses of compliance with securities or blue sky laws, FINRA fees, listing application fees, printing expenses,
transfer agent’s and registrar’s fees, cost of distributing Prospectuses in preliminary and final form as well as any supplements
thereto, and fees and disbursements of counsel for the Company and one counsel for the participating Investors and all independent
certified public accountants and other Persons retained by the Company (all such expenses being herein called “Registration
Expenses”) (but not including any underwriting discounts or commissions attributable to the sale of Registrable Shares or fees and
expenses of counsel and any other advisor representing any underwriters or other distributors), shall be borne by the Company. Each
Investor shall bear the cost of all underwriting discounts and commissions associated with any sale of its Registrable Shares, pro rata
based on the number of Registrable Shares being sold by that Investor, and shall pay all of its own costs and expenses.
(b) The obligation of the Company to bear the expenses described in Section 9(a) shall apply irrespective of whether a
registration, once properly demanded or requested becomes effective or is withdrawn or suspended, provided that the Registration
Expenses for any Registration Statement withdrawn solely at the request of one or more Investors (unless withdrawn following
commencement of a Suspension Period) shall be borne by such Investor(s).
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Section 10. Indemnification.
(a) The Company shall indemnify, to the fullest extent permitted by law, each Investor and each Person who controls such
Investor (within the meaning of the Securities Act) against all losses, claims, damages, liabilities, judgments, costs (including
reasonable costs of investigation) and expenses (including reasonable attorneys’ fees) arising out of or based upon any untrue or
alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or any amendment thereof or
supplement thereto or arising out of or based upon any omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the same are made in reliance and in conformity with
information furnished in writing to the Company by such Investor expressly for use therein. In connection with an underwritten
offering in which an Investor participates conducted pursuant to a registration effected hereunder, the Company shall indemnify each
participating underwriter and each Person who controls such underwriter (within the meaning of the Securities Act) to the same
extent as provided above with respect to the indemnification of such Investor.
(b) In connection with any Registration Statement in which an Investor is offering Shares, such Investor shall furnish to the
Company in writing such information as the Company reasonably requests for use in connection with any such Registration
Statement or Prospectus, or amendment or supplement thereto, and shall indemnify, to the fullest extent permitted by law, the
Company, its officers and directors and each Person who controls the Company (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities, judgments, costs (including reasonable costs of investigation) and expenses (including reasonable
attorneys’ fees) arising out of or based upon any untrue or alleged untrue statement of material fact contained in the Registration
Statement or Prospectus, or any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission
of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that
the same are made in reliance and in conformity with information furnished in writing to the Company by or on behalf of such
Investor expressly for use therein.
(c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying Person of any
claim with respect to which it seeks indemnification and (ii) permit such indemnifying Person to assume the defense of such claim
with counsel reasonably satisfactory to the indemnified Person. Failure so to notify the indemnifying Person shall not relieve it from
any liability that it may have to an indemnified Person except to the extent that the indemnifying Person is materially and adversely
prejudiced thereby. The indemnifying Person shall not be subject to any liability for any settlement made by the indemnified Person
without its consent (but such consent will not be unreasonably withheld). An indemnifying Person who is entitled to, and elects to,
assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel (in addition to one local
counsel) for all Persons indemnified (hereunder or otherwise) by such indemnifying Person with respect to such claim (and all other
claims arising out of the same circumstances), unless in the reasonable judgment of any indemnified Person there may be one or more
legal or equitable defenses available to such indemnified Person which are in addition to or may conflict with those available to
another indemnified Person with respect to such claim, in which case such maximum number of counsel for all indemnified Persons
shall be two rather than one). If an indemnifying Person is entitled to, and elects to, assume the defense of a claim, the indemnified
Person shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above,
the indemnifying Person shall not be obligated to reimburse the indemnified Person for the costs thereof. The indemnifying Person
shall not consent to the entry of any judgment or enter into or agree to any settlement relating to a claim or action for which any
indemnified Person would be entitled to indemnification by any indemnified Person hereunder unless such judgment or settlement
imposes no ongoing obligations on any such indemnified Person and includes as an unconditional term the giving, by all relevant
claimants and plaintiffs to such indemnified Person, a release, reasonably satisfactory in form and substance to such indemnified
Person,
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from all liabilities in respect of such claim or action for which such indemnified Person would be entitled to such
indemnification. The indemnifying Person shall not be liable hereunder for any amount paid or payable or incurred pursuant to or in
connection with any judgment entered or settlement effected with the consent of an indemnified Person unless the indemnifying
Person has also consented to such judgment or settlement.
(d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified Person or any officer, director or controlling Person of such indemnified Person and shall
survive the transfer of securities and the Termination Date but only with respect to offers and sales of Registrable Shares made before
the Termination Date or during the period following the Termination Date referred to in Section 8(h).
(e) If the indemnification provided for in or pursuant to this Section 10 is due in accordance with the terms hereof, but is held by
a court to be unavailable or unenforceable in respect of any losses, claims, damages, liabilities or expenses referred to herein, then
each applicable indemnifying Person, in lieu of indemnifying such indemnified Person, shall contribute to the amount paid or payable
by such indemnified Person as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying Person on the one hand and of the indemnified Person on the other in connection with the
statements or omissions which result in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable
considerations. The relative fault of the indemnifying Person on the one hand and of the indemnified Person on the other shall be
determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the indemnifying Person or by the indemnified Person, and
by such Person’s relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
In no event shall the liability of the indemnifying Person be greater in amount than the amount for which such indemnifying Person
would have been obligated to pay by way of indemnification if the indemnification provided for under Section 10(a) or 10(b) hereof
had been available under the circumstances.
Section 11. Securities Act Restrictions. The Registrable Shares are restricted securities under the Securities Act and may not be
offered or sold except pursuant to an effective registration statement or an available exemption from registration under the Securities
Act. Accordingly, no Investor shall, directly or through others, offer or sell any Registrable Shares except pursuant to a Registration
Statement as contemplated herein or pursuant to Rule 144 or another exemption from registration under the Securities Act, if
available. Prior to any transfer of Registrable Shares other than pursuant to an effective registration statement, the Investor desiring to
transfer such Registrable Shares shall notify the Company of such transfer and the Company may require such Investor to provide,
prior to such transfer, such evidence that the transfer will comply with the Securities Act (including written representations or an
opinion of counsel) as the Company may reasonably request. The Company may impose stop-transfer instructions with respect to any
Registrable Shares that are to be transferred in contravention of this Agreement. Any certificates representing the Registrable Shares
may bear a legend (and the Company’s share registry may bear a notation) referencing the restrictions on transfer contained in this
Agreement, until such time as such securities have ceased to be (or are to be transferred in a manner that results in their ceasing to be)
Registrable Shares. Subject to the provisions of this Section 11, the Company will replace any such legended certificates with
unlegended certificates promptly upon surrender of the legended certificates to the Company or its designee and cause shares that
cease to be Registrable Shares to bear a general unrestricted CUSIP number, in order to facilitate a lawful transfer or at any time after
such shares cease to be Registrable Shares.
Section 12. Transfers of Rights. If an Investor transfers Registrable Shares to a Permitted Transferee such Permitted Transferee
shall, together with such Investor and all other such Permitted
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Transferees, also have the rights of an Investor under this Agreement, but only if the Permitted Transferee signs and delivers to the
Company a written acknowledgment (in form and substance satisfactory to the Company and the Investor) that it has joined as a party
to this Agreement and has assumed the rights and obligations of an Investor hereunder with respect to the rights transferred to it by an
Investor. Each such transfer shall be effective when (but only when) the Permitted Transferee has signed and delivered the written
acknowledgment to the Company. Upon any such effective transfer, the Permitted Transferee shall automatically have the rights so
transferred, and the obligations of an Investor under this Agreement. Notwithstanding any other provision of this Agreement, no
Person who acquires securities transferred in violation of this Agreement or the Articles, or who acquires securities that are not or
upon acquisition cease to be Registrable Shares, shall have any rights under this Agreement with respect to such securities as an
Investor or otherwise, and such securities shall not have the benefits afforded hereunder to Registrable Shares.
Section 13. Miscellaneous.
(a) Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing
and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of
receipt, or (b) on the first business day following the date of dispatch if sent by a recognized next day courier service. All notices
hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to
receive such notice.
If to the Company:
Restaurant Brands International Inc.
874 Sinclair Road
Oakville, Ontario
Canada L6K 2Y1
Attention: Legal Department
Facsimile: (305) 378-7868
with copies (which shall not constitute notice) to:
Kirkland & Ellis LLP
601 Lexington Avenue
New York, New York 10022
Attention: Joshua N. Korff
William B. Sorabella
Facsimile: (212) 446-6460
and
Davies Ward Phillips and Vineberg LLP
155 Wellington Street West
Toronto, Ontario
Canada M5V 3J7
Attention: Patricia Olasker
Cameron Rusaw
Steven Harris
Facsimile: (416) 863-0871
21
If to Investor:
c/o Berkshire Hathaway Inc.
3555 Farnam Street
Omaha, NE 68131
Attention: Marc D. Hamburg
Facsimile: (402) 346-3375
with a copy (which shall not constitute notice) to:
Munger, Tolles & Olson LLP
355 S. Grand Avenue, 35th Floor
Los Angeles, California 90071
Attention: Mary Ann Todd
Robert E. Denham
Facsimile: (213) 687-3702
and
Cassels Brock & Blackwell LLP
40 King Street West
Toronto, Ontario
Canada M5H 3C2
Attention: Chris Hersh; Lawrence Wilder
Facsimile: (416) 640-3017
If to any other Investor, to such address and facsimile number as is designated in the agreement to be delivered to the Company
pursuant to Section 12.
(b) No Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right,
power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided
by law.
(c) Assignment. Neither this Agreement nor any right, remedy, obligation nor liability arising hereunder or by reason hereof
shall be assignable by any party hereto without the prior written consent of the other parties, and any attempt to assign any right,
remedy, obligation or liability hereunder without such consent shall be void, except (i) an assignment, in the case of a merger,
amalgamation, arrangement or consolidation where such party is not the surviving entity, or a sale of substantially all of its assets, to
the entity which is the survivor of such merger, amalgamation, arrangement or consolidation or the purchaser in such sale or (ii) an
assignment by an Investor to a Permitted Transferee in accordance with Section 12. In the event of any merger or consolidation by the
Company, where the Company is not the surviving entity, or a sale of substantially all of the assets of the Company to an entity which
is the survivor of such merger or consolidation or the purchaser in such sale, the Company shall cause the surviving entity in such
merger, consolidation or purchase to assume this Agreement and all rights, remedies, obligations and liabilities of the Company
hereunder.
(d) No Third-Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any
person or entity other than the Company and the Investors any benefits, rights, or remedies (except as specified in Section 10 hereof).
22
(e) Governing Law; Submission to Jurisdiction; Waiver of Jury Trial, Etc. The corporate law of the State of Delaware
shall govern all issues and questions concerning the relative rights of the Company and its stockholders. All other issues and
questions concerning the construction, validity, interpretation and enforceability of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving
effect to any choice of law or conflict of law rules or provisions (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the State of Delaware. Each of the parties hereto
irrevocably and unconditionally submits to the exclusive jurisdiction of the Court of Chancery of the State of Delaware, or, if
the Court of Chancery of the State of Delaware declines to accept jurisdiction over a particular matter, any federal court
within the State of Delaware, or, if both the Court of Chancery of the State of Delaware and the federal courts within the
State of Delaware decline to accept jurisdiction over a particular matter, any other state court within the State of Delaware,
and, in each case, any appellate court therefrom (together, the “Chosen Courts”), for the purposes of any suit, action or other
proceeding arising out of this Agreement (and agrees that no such action, suit or proceeding relating to this Agreement shall
be brought by it except in such courts). Each of the parties further agrees that, to the fullest extent permitted by applicable
law, service of any process, summons, notice or document by U.S. registered mail to such person’s respective address set forth
in Section 13(a) shall be effective service of process for any action, suit or proceeding in the State of Delaware with respect to
any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence. Each of the
parties hereto irrevocably and unconditionally waives (and agrees not to plead or claim) any objection to the laying of venue
of any action, suit or proceeding arising out of this Agreement in the Chosen Courts, or that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum. To the extent permitted by applicable law,
each of the parties hereto hereby unconditionally waives trial by jury in any legal action or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
(f) Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts (including by e-mail or
facsimile) and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same
document. Each such counterparts shall be deemed an original, shall be construed together with the other such originals and shall
constitute one and the same instrument. This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
(g) Entire Agreement. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes and replaces all other prior agreements, written or oral, among the parties hereto with respect to the subject
matter hereof.
(h) Captions. The headings and other captions in this Agreement are for convenience and reference only and shall not be used in
interpreting, construing or enforcing any provision of this Agreement.
(i) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a
determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally
contemplated to the fullest extent possible.
23
(j) Amendments. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof may not be given without the prior written consent of
the Company and Investor as long as it and/or its Permitted Transferees hold Registrable Shares).
[Signature Page Follows]
24
IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by each of the parties hereto as of the
date first written above.
Restaurant Brands International Inc.
/s/ Jill Granat
By:
Name: Jill Granat
Title: Authorized Signatory
National Indemnity Company
/s/ Marc D. Hamburg
By:
Name: Marc D. Hamburg
Title: Attorney-In-Fact
[Signature Page to Registration Rights Agreement]
RESTAURANT BRANDS INTERNATIONAL INC.
List of Subsidiaries
Exhibit 21.1
Canada
Restaurant Brands International Limited Partnership
1039596 B.C. Unlimited Liability Company
8997896 Canada Inc.
1013414 B.C. Unlimited Liability Company
1013421 B.C. Unlimited Liability Company
1011778 B.C. Unlimited Liability Company
1014364 B.C. Unlimited Liability Company
1014369 B.C. Unlimited Liability Company
1019334 B.C. Unlimited Liability Company
1016864 B.C. Unlimited Liability Company
P11 Limited Partnership
1016872 B.C. Unlimited Liability Company
P22 Limited Partnership
1016878 B.C. Unlimited Liability Company
P33 Limited Partnership
1016883 B.C. Unlimited Liability Company
P44 Limited Partnership
1024670 B.C. Unlimited Liability Company
1024678 B.C. Unlimited Liability Company
1026672 B.C. Unlimited Liability Company
1028539 B.C. Unlimited Liability Company
1029261 B.C. Unlimited Liability Company
1016869 B.C. Unlimited Liability Company
1016893 B.C. Unlimited Liability Company
1057463 B.C. Unlimited Liability Company
1057730 B.C. Ltd.
1057639 B.C. Unlimited Liability Company
1057772 B.C. Unlimited Liability Company
1057837 B.C. Unlimited Liability Company
1057490 B.C. Unlimited Liability Company
1057448 B.C. Unlimited Liability Company
Burger King Canada Holdings Inc.
Burger King Saskatchewan Holdings Inc.
CLP-lax Limited Partnership
GPAir Limited
Grange Castle Holdings Limited
The TDL Group Corp.
Tim Hortons Canadian IP Holdings Limited Partnership
Tim Hortons Advertising and Promotion Fund (Canada) Inc.
Argentina
BK Argentina Servicios, S.A.
Brazil
Burger King du Brasil Assessoria a Restaurantes Ltda.
China
BK (Shanghai) Business Information Consulting Co., Ltd.
Burger King (Shanghai) Commercial Consulting Co. Ltd.
Germany
Burger King Beteiligungs GmbH
BK Grundstuecksverwaltung Beteiligungs GmbH
BK Grundstuecksverwaltung GmbH & Co. KG
Hong Kong
Ansons Holding Limited
Israel
Burger King Israel Ltd.
Italy
Burger King Italia S.r.l.
Japan
BK ASIAPAC (JAPAN) Y.K.
Luxembourg
Burger King (Luxembourg) 2 S.a.r.l
Burger King (Luxembourg) 3 S.a.r.l
Burger King (Luxembourg) S.a.r.l
Tim Hortons International S.A.
Malaysia
BK ASIAPAC (M) SDN BHD.
Mexico
Adminstracion de Comidas Rapidas, SA de CV
Inmobiliaria Burger King, S. de R.I. de C.V.
Netherlands
Burger King Nederland Services B.V.
Puerto Rico
Burger King de Puerto Rico, Inc.
Singapore
BK AsiaPac, Pte. Ltd.
South Africa
Burger King South Africa Holdings (Pty) Ltd.
Spain
Burger King General Service Company, S.L.
Sweden
Burger King AB
Switzerland
Burger King Schweiz GmbH
Burger King Europe GmbH
Taiwan
Home Chain Food Ltd.
Turkey
Burger King Gida Sanayi Ve Ticaret Limited Sirketi
United Kingdom
BurgerKing Ltd.
Burger King (United Kingdom) Ltd.
BK (UK) Company Limited
Hayescrest Ltd.
Huckleberry’s Ltd.
Mini Meals Limited
Burger King UK Pension Plan Trustee Company Limited
Tim Hortons (Ireland) Limited
U.S.A.
BK Acquisition, Inc.
BK CDE, Inc.
BK Whopper Bar, LLC
Blue Holdco 1, LLC
Blue Holdco 2, LLC
Blue Holdco 3, LLC
Blue Holdco 4 LLC
Blue Holdco 22, LLC
Blue Holdco 44, LLC
Blue Holdco 99, LLC
Blue Holdco 440, LLC
Burger King Capital Holdings, LLC
Burger King Capital Finance, Inc.
Burger King Corporation
Burger King Holdings, Inc.
Burger King Holdco, LLC
Burger King Interamerica, LLC
Burger King Sweden Inc.
Burger King Worldwide, Inc.
Distron Transportation Systems, Inc.
Moxie’s, Inc.
New Red Finance Inc.
SBFD Holding Co.
Tim Donut U.S. Limited, Inc.
Tim Hortons USA Inc.
Tim Hortons (New England), Inc.
THD Coffee Co.
The Melodie Corporation
The Tim’s National Advertising Program, Inc.
TPC Number Four, Inc.
TQW Company
Uruguay
Jolick Trading, S.A.
Venezuela
BK Venezuela Servicios C.A.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Restaurant Brands International Inc.:
We consent to the incorporation by reference in the Registration Statement Nos. 333-206712 and 333-200997 on Form S-8 and
No. 333-208319 on Form S-3 of Restaurant Brands International Inc. of our reports dated February 26, 2016, with respect to the
consolidated balance sheets of Restaurant Brands International Inc. and subsidiaries as of December 31, 2015 and 2014, and the
related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2015, and the effectiveness of internal control over financial reporting as of
December 31, 2015.
Miami, Florida
February 26, 2016
Certified Public Accountants
(signed) KPMG LLP
I, Daniel Schwartz, certify that:
CERTIFICATION
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Restaurant Brands International Inc.:
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Dated: February 26, 2016
/s/ Daniel Schwartz
Daniel Schwartz
Chief Executive Officer
I, Joshua Kobza, certify that:
CERTIFICATION
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Restaurant Brands International Inc.:
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Dated: February 26, 2016
/s/ Joshua Kobza
Joshua Kobza
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Restaurant Brands International Inc. (the “Company”) for the year ended
December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel Schwartz,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 26, 2016
/s/ Daniel Schwartz
Daniel Schwartz
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Restaurant Brands International Inc. (the “Company”) for the year ended
December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joshua Kobza, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 26, 2016
/s/ Joshua Kobza
Joshua Kobza
Chief Financial Officer