20-F 1 dp29967_20f.htm FORM 20-F


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
(Mark One) 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report
Commission file number: 001-35129
ARCOS DORADOS HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation)
Roque Saenz Peña 432
B1636FFB Olivos, Buenos Aires, Argentina
(Address of principal executive offices)
Juan David Bastidas
Chief Legal Officer
Arcos Dorados Holdings Inc.
Roque Saenz Peña 432
B1636FFB Olivos, Buenos Aires, Argentina
Telephone: +54 (11) 4711-2504
Fax: +54 (11) 4711-2094 (ext. 2504)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
(Title of Class)

Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A shares, no par value
 
New York Stock Exchange

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report.
Class A shares: 129,529,412
Class B shares: 80,000,000
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o  Yes       x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 o Yes      x  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.
 x Yes      o  No
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 x Yes       o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer  o
Non-accelerated filer x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other  o
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
o  Item 17       o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes     x No
 


 
 
 

 
ARCOS DORADOS HOLDINGS INC.
 
 


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All references to “U.S. dollars,” “dollars,” “U.S.$” or “$” are to the U.S. dollar. All references to “Argentine pesos” or “ARS$” are to the Argentine peso. All references to “Brazilian reais” or “R$” are to the Brazilian real. All references to “Mexican pesos” or “Ps.” are to the Mexican peso. All references to “Venezuelan bolívares fuertes” or “Bs.F” are to the Venezuelan bolívar fuerte, the legal currency in Venezuela. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls” for information regarding exchange rates for the Argentine, Brazilian, Mexican and Venezuelan currencies since January 1, 2007.
 
Definitions
 
In this annual report, unless the context otherwise requires, all references to “Arcos Dorados” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Arcos Dorados Holdings Inc., together with its subsidiaries. All references to “systemwide” refer only to the system of McDonald’s-branded restaurants operated by us or our franchisees in 20 countries and territories in Latin America and the Caribbean, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago (since June 3, 2011), Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela, which we refer to as the Territories, and do not refer to the system of McDonald’s-branded restaurants operated by McDonald’s Corporation, its affiliates or its franchisees (other than us).
 
We own our McDonald’s franchise rights pursuant to a Master Franchise Agreement for all of the Territories, except Brazil, which we refer to as the MFA, and a separate, but substantially identical, Master Franchise Agreement for Brazil, which we refer to as the Brazilian MFA. We refer to the MFA and the Brazilian MFA, as amended or otherwise modified to date, collectively as the MFAs. We commenced operations on August 3, 2007, as a result of our purchase of McDonald’s operations and real estate in the Territories (except for Trinidad and Tobago), which we refer to collectively as the McDonald’s LatAm business, and the acquisition of McDonald’s franchise rights pursuant to the MFAs, which together with the purchase of the McDonald’s LatAm business, we refer to as the Acquisition.
 
Financial Statements
 
We maintain our books and records in U.S. dollars and prepare our financial statements in accordance with accounting principles and standards generally accepted in the United States, or U.S. GAAP.
 
The financial information contained in this annual report includes our consolidated financial statements at December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009, which have been audited by Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, as stated in their report included elsewhere in this annual report.
 
We were incorporated on December 9, 2010 as a direct, wholly-owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. The merger was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interest and the consolidated financial statements reflect the historical consolidated operations of Arcos Dorados Limited as if the reorganization structure had existed since Arcos Dorados Limited was incorporated in July 2006.
 
Our fiscal year ends December 31. References in this annual report to a fiscal year, such as “fiscal year 2011,” relate to our fiscal year ended on December 31 of that calendar year.
 
See Note 21 to our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Comparability of Results—Impact of Venezuelan Currency Controls and Related Accounting Changes on Our Results of Operations” for information regarding the translation and remeasurement of the results of our Venezuelan operations.
 
 
Operating Data
 
We divide our operations into four geographical divisions: Brazil; the Caribbean division, consisting of Aruba, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago and the U.S. Virgin Islands of St. Croix and St. Thomas; NOLAD, consisting of Costa Rica, Mexico and Panama; and SLAD, consisting of Argentina, Chile, Colombia, Ecuador, Peru, Uruguay and Venezuela.
 
We operate McDonald’s-branded restaurants under two different operating formats: those directly operated by us, or Company-operated restaurants, and those operated by franchisees, or franchised restaurants. All references to “restaurants” are to our freestanding, food court, in-store and mall store restaurants and do not refer to our McCafé locations or Dessert Centers. Systemwide data represents measures for both our Company-operated restaurants and our franchised restaurants.
 
We are the majority stakeholder in several joint ventures with third parties that collectively own 24 restaurants. We consider these restaurants to be Company-operated restaurants. We also have granted developmental licenses to 12 restaurants. Developmental licensees own or lease the land and buildings on which their restaurants are located and pay a franchise fee to us in addition to the continuing franchise fee due to McDonald’s. We consider these restaurants to be franchised restaurants.
 
Other Financial Measures
 
We disclose in this annual report a financial measure titled Adjusted EBITDA. We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is defined as our operating income plus depreciation and amortization plus/minus the following losses/gains included within other operating expenses, net and within general and administrative expenses in our statement of income: compensation expense related to an award granted to our CEO, incremental compensation expense related to our 2008 long-term incentive plan, gains from sale of property and equipment, write-off of property and equipment, contract termination losses, impairment of long-lived assets and goodwill, stock-based compensation related to the special awards under the 2011 Equity Incentive Plan and bonuses granted in connection with our initial public offering.
 
We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations such as capital structures (affecting net interest expense and other financial charges), taxation (affecting income tax expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. In addition, we exclude compensation expense related to the award granted to our CEO due to its special nature; gains from sale of property and equipment not related to our core business; write-offs of property and equipment and impairment of long-lived assets and goodwill that do not result in cash payments; contract termination losses due to its infrequent nature; stock-based compensation related to the special awards under the 2011 Equity Incentive Plan; and bonuses granted in connection with our initial public offering due to its special nature. In addition, in 2010 and 2011 we excluded the incremental compensation expense that resulted from the remeasurement of our liability under our 2008 long-term incentive plan because of our decision in 2011 to replace the existing formula for determining the current value of the award with the quoted market price of our shares. While a GAAP measure for purposes of our segment reporting, Adjusted EBITDA is a non-GAAP measure for reporting our total Company performance. Our management believes, however, that disclosure of Adjusted EBITDA provides useful information to investors, financial analysts and the public in their evaluation of our operating performance.
 
Market Share and Other Information
 
Market data and certain industry forecast data used in this annual report were obtained from internal reports and studies, where appropriate, as well as estimates, market research, publicly available information (including information available from the United States Securities and Exchange Commission website) and industry publications, including Euromonitor, Millward Brown Optimor, the United Nations Economic Commission for
 
 
Latin America and the Caribbean and the CIA World Factbook. Industry publications generally state that the information they include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal reports and studies, estimates and market research, which we believe to be reliable and accurately extracted by us for use in this annual report, have not been independently verified. However, we believe such data is accurate and agree that we are responsible for the accurate extraction of such information from such sources and its correct reproduction in this annual report.
 
Basis of Consolidation
 
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Rounding
 
We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
 
 
 
This annual report contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.
 
Forward-looking statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified in “Item 3. Key Information—D. Risk Factors” in this annual report. These risks and uncertainties include factors relating to:
 
 
·
general economic, political, demographic and business conditions in Latin America and the Caribbean;
 
 
·
fluctuations in inflation and exchange rates in Latin America and the Caribbean;
 
 
·
our ability to implement our growth strategy;
 
 
·
the success of operating initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
 
 
·
our ability to compete and conduct our business in the future;
 
 
·
changes in consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, french fries or other foods or the effects of health pandemics and food-borne illnesses such as “mad cow” disease and avian influenza or “bird flu,” and changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home;
 
 
·
the availability, location and lease terms for restaurant development;
 
 
·
our intention to focus on our restaurant reimaging plan;
 
 
 
·
our franchisees, including their business and financial viability and the timely payment of our franchisees’ obligations due to us and to McDonald’s;
 
 
·
our ability to comply with the requirements of the MFAs, including McDonald’s standards;
 
 
·
our decision to own and operate restaurants or to operate under franchise agreements;
 
 
·
the availability of qualified restaurant personnel for us and for our franchisees, and the ability to retain such personnel;
 
 
·
changes in commodity costs, labor, supply, fuel, utilities, distribution and other operating costs;
 
 
·
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to our restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
 
 
·
changes in government regulation;
 
 
·
other factors that may affect our financial condition, liquidity and results of operations; and
 
 
·
other risk factors discussed under “Item 3. Key Information—D. Risk Factors.”
 
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
 
 
 
We are incorporated under the laws of the British Virgin Islands with limited liability. We are incorporated in the British Virgin Islands because of certain benefits associated with being a British Virgin Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, British Virgin Islands companies may not have standing to sue before the federal courts of the United States.
 
A majority of our directors and officers, as well as certain of the experts named herein, reside outside of the United States. A substantial portion of our assets and several of such directors, officers and experts are located principally in Argentina, Brazil and Uruguay. As a result, it may not be possible for investors to effect service of process outside Argentina, Brazil and Uruguay upon such directors or officers, or to enforce against us or such parties in courts outside Argentina, Brazil and Uruguay judgments predicated solely upon the civil liability provisions of the federal securities laws of the United States or other non-Argentine, Brazilian or Uruguayan regulations, as applicable. In addition, local counsel to the Company have advised that there is doubt as to whether the courts of Argentina, Brazil or Uruguay would enforce in all respects, to the same extent and in as timely a manner as a U.S. court or non-Argentine, Brazilian or Uruguayan court, an original action predicated solely upon the civil liability provisions of the U.S. federal securities laws or other non-Argentine, Brazilian or Uruguayan regulations, as applicable; and that the enforceability in , Brazilian or Uruguayan courts of judgments of U.S. courts or non-Argentine, Brazilian or Uruguayan courts predicated upon the civil liability provisions of the U.S. federal securities laws or other non-Argentine, Brazilian or Uruguayan regulations, as applicable, will be subject to compliance with certain requirements under Argentine, Brazilian or Uruguayan law, including the condition that any such judgment does not violate Argentine, Brazilian or Uruguayan public policy.
 
 
We have been advised by Maples and Calder, our counsel as to British Virgin Islands law, that the United States and the British Virgin Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be automatically enforceable in the British Virgin Islands. We have been advised by Maples and Calder that a final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the British Virgin Islands under British Virgin Islands common law.
 
 

 
 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
Not applicable.
 
 
 
Not applicable.
 
 
Not applicable.
 
 
 
The selected balance sheet data as of December 31, 2011 and 2010 and the income statement data for the years ended December 31, 2011, 2010 and 2009 of Arcos Dorados Holdings Inc. are derived from the consolidated financial statements included elsewhere in this annual report, which have been audited by Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global. The selected balance sheet data as of December 31, 2009, 2008 and 2007 and the income statement data for the years ended December 31, 2008 and 2007 of Arcos Dorados Holdings Inc. are derived from consolidated financial statements audited by Pistrelli, Henry Martin y Asociados S.R.L., which are not included herein.
 
We were incorporated on December 9, 2010 as a direct, wholly-owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. The merger was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interest and the consolidated financial statements reflect the historical consolidated operations of Arcos Dorados Limited as if the reorganization structure had existed since Arcos Dorados Limited was incorporated in July 2006. We did not commence operations until the Acquisition on August 3, 2007. Consequently, the income statement data for the year ended December 31, 2007 only includes five months of operations.
 
Included below is historical financial information of McDonald’s LatAm business prior to the date of the Acquisition. This financial information presents the combined results of operations and financial condition of McDonald’s LatAm business (as our predecessor business). The selected income statement data for the seven-month period ended July 31, 2007 are derived from the combined financial statements of McDonald’s LatAm business, which have been audited by Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, and are not included herein.
 
 
We maintain our books and records in U.S. dollars and prepare our consolidated financial statements in accordance with U.S. GAAP. This financial information should be read in conjunction with “Presentation of Financial and Other Information,” “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, including the notes thereto, included elsewhere in this annual report.
 
See Note 21 to our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Comparability of Results—Impact of Venezuelan Currency Controls and Related Accounting Changes on Our Results of Operations” for information regarding the translation and remeasurement of the results of our Venezuelan operations, which affects the comparability of our results of operations in 2010 compared to 2009. In particular, currency controls in Venezuela and related accounting changes have a significant effect on our results of operations and greatly impact the comparability of our results of operations from period to period.
 
 
 
   
Arcos Dorados
   
Predecessor(1)
 
   
For the Years Ended December 31,
   
January 1, 2007 to
July 31, 2007
 
   
2011
   
2010
   
2009
   
2008
   
2007(2)
 
   
(in thousands of U.S. dollars, except for share data)
 
Income Statement Data:
                                   
Sales by Company-operated restaurants
  $ 3,504,128     $ 2,894,466     $ 2,536,655     $ 2,480,897     $ 895,429     $ 1,078,194  
Revenues from franchised restaurants
    153,521       123,652       128,821       125,945       45,910       46,881  
Total revenues
    3,657,649       3,018,118       2,665,476       2,606,842       941,339       1,125,075  
Company-operated restaurant expenses:
                                               
Food and paper
    (1,216,141 )     (1,023,464 )     (929,718 )     (902,305 )     (332,547 )     (416,615 )
Payroll and employee benefits
    (701,278 )     (569,084 )     (491,214 )     (461,602 )     (161,871 )     (196,510 )
Occupancy and other operating expenses
    (918,102 )     (765,777 )     (667,438 )     (647,152 )     (238,765 )     (307,391 )
Royalty fees
    (170,400 )     (140,973 )     (121,901 )     (118,980 )     (44,878 )     (40,660 )
Franchised restaurants—occupancy expenses
    (51,396 )     (37,634 )     (42,327 )     (42,416 )     (13,979 )     (18,491 )
General and administrative expenses
    (334,914 )     (254,165 )     (189,507 )     (186,098 )     (71,898 )     (78,081 )
Other operating expenses, net
    (14,665 )     (22,464 )     (16,562 )     (26,095 )     (6,310 )     (16,015 )
Total operating costs and expenses
    (3,406,896 )     (2,813,561 )     (2,458,667 )     (2,384,648 )     (870,248 )     (1,073,763 )
Operating income
    250,753       204,557       206,809       222,194       71,091       51,312  
Net interest expense
    (60,749 )     (41,613 )     (52,473 )     (26,272 )     (13,978 )     (33,363 )
Loss from derivative instruments
    (9,237 )     (32,809 )     (39,935 )     (2,620 )     (13,672 )      
Foreign currency exchange results(3)
    (23,926 )     3,237       (14,098 )     (74,884 )     (3,542 )      
Other non-operating income (expenses), net(3)
    3,562       (23,630 )     (1,240 )     (1,934 )     (43 )     (2,095 )
Income before income taxes
    160,403       109,742       99,063       116,484       39,856       15,854  
Income tax expense
    (44,603 )     (3,450 )     (18,709 )     (12,067 )     (17,511 )     (31,922 )
Net income (loss)
    115,800       106,292       80,354       104,417       22,345       (16,068 )
Less: Net income attributable to non-controlling interests
    (271 )     (271 )     (332 )     (1,375 )     (43 )      
Net income (loss) attributable to Arcos Dorados Holdings Inc./Predecessor
    115,529       106,021       80,022       103,042       22,302       (16,068 )
Earnings per share:
                                               
Basic net income per common share attributable to Arcos Dorados Holdings Inc.
  $ 0.54     $ 0.44     $ 0.33     $ 0.43     $     $  
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.
  $ 0.54     $ 0.44     $ 0.33     $ 0.43     $     $  

   
As of December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in thousands of U.S. dollars, except for share data)
 
Balance Sheet Data(4):
                             
Cash and cash equivalents
  $ 176,301     $ 208,099     $ 167,975     $ 105,982     $ 92,580  
Total current assets
    588,614       552,355       394,011       380,275       382,801  
Property and equipment, net
    1,023,180       911,730       785,862       709,667       724,673  
Total non-current assets
    1,286,792       1,231,911       1,088,937       923,488       862,797  
Total assets
    1,875,406       1,784,266       1,482,948       1,303,763       1,245,598  
Accounts payable
    184,113       186,700       124,560       126,403       125,495  
Short-term debt and current portion of long-term debt
    3,811       17,947       11,046       15,306       216  
Total current liabilities
    589,292       605,148       396,810       388,357       375,566  
Long-term debt, excluding current portion
    525,951       451,423       454,461       351,870       352,460  
Total non-current liabilities
    606,485       629,923       632,092       474,654       462,253  
Total liabilities
    1,195,777       1,235,071       1,028,902       863,011       837,819  
Total common stock
    484,569       377,546       377,546       377,546       377,546  
Total equity
    679,629       549,195       454,046       440,752       407,779  
Total liabilities and equity
    1,875,406       1,784,266       1,482,948       1,303,763       1,245,598  
Shares outstanding(5)
    209,529,412       241,882,966       241,882,966       241,882,966       241,882,966  
 
 
   
For the Years Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007(2)
 
   
(in thousands of U.S. dollars, except percentages)
 
                               
Other Data:
                             
Total Revenues
                             
Brazil
  $ 1,890,824     $ 1,595,571     $ 1,200,742     $ 1,237,208     $ 461,868  
Caribbean division
    267,701       260,617       244,774       231,734       90,796  
NOLAD
    355,265       305,017       240,333       232,083       91,932  
SLAD(6)
    1,143,859       856,913       979,627       905,817       296,743  
Total
    3,657,649       3,018,118       2,665,476       2,606,842       941,339  
                                         
Operating Income
                                       
Brazil
  $ 246,926     $ 208,102     $ 127,291     $ 102,819     $ 23,846  
Caribbean division
    (5,244 )     11,189       10,448       12,454       8,602  
NOLAD
    (8,709 )     (16,718 )     (17,252 )     (4,863 )     2,536  
SLAD(6)
    99,813       66,288       108,261       119,716       29,642  
Corporate and others and purchase price allocation
    (82,033 )     (64,304 )     (21,939 )     (7,932 )     6,465  
Total
    250,753       204,557       206,809       222,194       71,091  
                                         
Operating Margin(7)
                                       
Brazil
    13.1 %     13.0 %     10.6 %     8.3 %     5.2 %
Caribbean division
    (2.0 )     4.3       4.3       5.4       9.5  
NOLAD
    (2.5 )     (5.5 )     (7.2 )     (2.1 )     2.8  
SLAD(6)
    8.7       7.7       11.1       13.2       10.0  
Total
    6.9       6.8       7.8       8.5       7.6  
                                         
Adjusted EBITDA(8)
                                       
Brazil
  $ 289,462     $ 250,606     $ 160,037     $ 144,965     $ 39,800  
Caribbean division
    9,493       23,556       21,167       22,013       13,099  
NOLAD
    19,551       15,400       3,918       15,961       10,655  
SLAD(6)
    121,475       83,998       129,889       138,683       36,530  
Corporate and others
    (100,193 )     (74,446 )     (48,628 )     (33,648 )     (9,187 )
Total
    339,788       299,114       266,383       287,974       90,897  
                                         
Adjusted EBITDA Margin(9)
                                       
Brazil
    15.3 %     15.7 %     13.3 %     11.7 %     8.6 %
Caribbean division
    3.5       9.0       8.6       9.5       14.4  
NOLAD
    5.5       5.0       1.6       6.9       11.6  
SLAD(6)
    10.6       9.8       13.3       15.3       12.3  
Total
    9.3       9.9       10.0       11.0       9.7  
                                         
Other Financial Data:
                                       
Working capital(10)
  $ (678 )   $ (52,793 )   $ (2,799 )   $ (8,082 )   $ 7,235  
Capital expenditures(11)
    325,852       176,173       101,166       167,893       45,174  
Dividends declared per common share
  $ 0.24     $ 0.17     $     $     $  
                                         
Other Operating Data:
                                       
Systemwide comparable sales growth(12)(13)
    13.7 %     14.9 %     5.5 %            
Brazil
    9.3       17.5       2.7              
Caribbean division
    (0.6 )     4.7       4.2              
NOLAD
    8.5       9.1       (1.7 )            
SLAD
    29.6       16.1       12.2              
Systemwide average restaurant sales(13)(14)
  $ 2,648     $ 2,288     $ 2,147     $ 2,186     $  
Systemwide sales growth(13)(15)
    21.1 %     10.2 %     0.9 %            
Brazil
    19.2       34.3       (2.4 )            
Caribbean division
    1.4       3.8       4.6              
NOLAD
    14.9       19.2       (12.3 )            
SLAD
    34.5       (20.2 )     9.2              
 
 
   
As of December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Number of systemwide restaurants
    1,840       1,755       1,680       1,640       1,593  
Brazil
    662       616       578       564       553  
Caribbean division
    147       142       145       145       142  
NOLAD
    484       476       456       448       427  
SLAD
    547       521       501       483       471  
Number of Company-operated restaurants
    1,358       1,292       1,226       1,155       1,092  
Brazil
    488       453       432       426       422  
Caribbean division
    96       91       93       89       87  
NOLAD
    314       310       289       242       195  
SLAD
    460       438       412       398       388  
Number of franchised restaurants
    482       463       454       485       501  
Brazil
    174       163       146       138       131  
Caribbean division
    51       51       52       56       55  
NOLAD
    170       166       167       206       232  
SLAD
    87       83       89       85       83  
 

(1)
The financial data for our predecessor is not directly comparable to our financial data for several reasons, including:
 
 
·
Predecessor data does not include the effect of the purchase accounting due to the Acquisition, which has reduced the accounting value of our long-lived assets and goodwill and the related depreciation and amortization expense.
 
 
·
Predecessor data includes royalties that are lower as a percentage of sales than the royalties we are required to pay pursuant to the MFAs.
 
 
·
Predecessor data does not include general and administrative expenses related to corporate functions.
 
 
·
Predecessor data does not include interest expense related to our long-term debt which resulted from the partial financing of the Acquisition and the subsequent increase in interest expense resulting from the issuance of senior notes for an aggregate principal amount of $450 million by our subsidiary, Arcos Dorados B.V., under an indenture dated October 1, 2009, which we refer to as the 2019 notes, and the issuance in July 2011 of R$400 million aggregate principal amount of notes due 2016 bearing interest of 10.25% per year, payable in U.S. dollars, which we refer to as the 2016 notes. Predecessor data does include interest expense related to intercompany loans, which we eliminate in consolidation.
 
 
·
Predecessor data includes foreign exchange results related to intercompany loans within the translation adjustment in the other comprehensive income component of shareholders’ equity, while we generally report these results as a component of our earnings since generally we do not consider intercompany loans to be of a long-term nature.
 
(2)
Data for the year ended December 31, 2007 includes only five months of operations, beginning August 3, 2007, the date on which we commenced operations in the Territories.
 
(3)
For the seven months ended July 31, 2007, “Other non-operating income (expenses), net” includes “Foreign currency exchange results.”
 
(4)
The balance sheet data as of December 31, 2010, 2009, 2008 and 2007 does not reflect the split-off of Axionlog business, formerly known as Axis. See “Item 4. Information on the Company—B. Business Overview—Our Operations—Supply and Distribution.”
 
(5)
Data as of December 2010, 2009, 2008 and 2007 was adjusted to reflect the stock split approved on March 14, 2011. See Note 22 to our consolidated financial statements for details.
 
(6)
Currency controls in Venezuela and related accounting changes have a significant effect on our results of operations and impact the comparability of our results of operations in 2010 compared to 2009. See “Item 5. Operating and Financial Review and Prospects―A. Operating Results—Factors Affecting Comparability of Results—Impact of Venezuelan Currency Controls and Related Accounting Changes on Our Results of Operations” for information regarding the translation and remeasurement of the results of our Venezuelan operations.
 
(7)
Operating margin is operating income divided by total revenues, expressed as a percentage.
 
(8)
Adjusted EBITDA is a measure of our performance that is reviewed by our management. Adjusted EBITDA does not have a standardized meaning and, accordingly, our definition of Adjusted EBITDA may not be comparable to Adjusted EBITDA as used by other companies. Total Adjusted EBITDA is a non-GAAP measure. For our definition of Adjusted EBITDA, see “Presentation of Financial and Other Information—Other Financial Measures.”
 
 
Presented below is the reconciliation between net income and Adjusted EBITDA:
 
   
For the Years Ended December 31,
 
 
Consolidated Adjusted EBITDA Reconciliation
 
 
2011
   
2010
   
2009
   
2008
   
2007(2)
 
   
(in thousands of U.S. dollars)
 
Net income attributable to Arcos Dorados Holdings Inc.
  $ 115,529     $ 106,021     $ 80,022     $ 103,042     $ 22,302  
Plus (Less):
                                       
Net interest expense
    60,749       41,613       52,473       26,272       13,978  
Loss from derivative instruments
    9,237       32,809       39,935       2,620       13,672  
Foreign currency exchange results
    23,926       (3,237 )     14,098       74,884       3,542  
Other non-operating (income) expenses, net
    (3,562 )     23,630       1,240       1,934       43  
Income tax expense
    44,603       3,450       18,709       12,067       17,511  
Net income attributable to non-controlling interests
    271       271       332       1,375       43  
Operating income
    250,753       204,557       206,809       222,194       71,091  
Plus (Less):
                                       
Items excluded from computation that affect operating income:
                                       
Depreciation and amortization
    68,971       60,585       54,169       49,496       18,263  
Compensation expense related to the award right granted to the CEO
    2,214       16,392       4,334       11,060        
Gains from sale of property and equipment
    (7,123 )     (5,299 )     (8,465 )     (4,592 )      
Write-offs of property and equipment
    3,570       2,635       9,434       5,144       1,543  
Impairment of long-lived assets
    1,715       4,668                    
Stock-based compensation related to the special awards in connection with the initial public offering under the 2011 Plan
    5,703                          
Cash bonus related to the initial public offering
    1,382                          
Incremental compensation expense related to the Arcos Dorados B.V. long-term incentive plan
    10,526       15,576                    
Contract termination losses
                      3,606        
Impairment of goodwill
    2,077             102       1,066        
Adjusted EBITDA
    339,788       299,114       266,383       287,974       90,897  
 

(9)
Adjusted EBITDA margin is Adjusted EBITDA divided by total revenues, expressed as a percentage.
 
(10)
Working capital equals current assets minus current liabilities.
 
(11)
Includes property and equipment expenditures and purchase of restaurant businesses.
 
(12)
Systemwide comparable sales growth refers to the change in our restaurant sales in one period from a comparable period for restaurants that have been open for thirteen months or longer. Systemwide comparable sales growth is provided and analyzed on a constant currency basis, which means it is calculated using the same exchange rate over the periods under comparison to remove the effects of currency fluctuations from this trend analysis. We believe this constant currency measure provides a more meaningful analysis of our business by identifying the underlying business trend, without distortion from the effect of foreign currency movements.
 
(13)
Systemwide comparable sales growth, systemwide average restaurant sales and systemwide sales growth are presented on a systemwide basis, which means they include sales by our Company-operated restaurants and our franchised restaurants. While sales by our franchisees are not recorded as revenues by us, we believe the information is important in understanding our financial performance because these sales are the basis on which we calculate and record franchised revenues and are indicative of the financial health of our franchisee base.
 
(14)
Systemwide average restaurant sales is calculated by dividing our sales for the relevant period by the arithmetic mean of the number of our restaurants at the beginning and end of such period.
 
(15)
Systemwide sales growth refers to the change in sales by all of our restaurants, whether operated by us or by our franchisees, from one period to another.
 
 
Exchange Rates and Exchange Controls
 
In 2011, 82.8% of our total revenues was derived from our restaurants in Argentina, Brazil, Mexico, Puerto Rico and Venezuela. While we maintain our books and records in U.S. dollars, our revenues are conducted in the local currency of the territories in which we operate, and as such may be affected by changes in the local exchange rate to the U.S. dollar.
 
Argentina
 
On January 6, 2002, the Argentine federal congress ended ten years of U.S. dollar-Argentine peso parity, eliminating the requirement that the Central Bank of Argentina maintain a certain level of reserves and granting the executive branch the power to set the exchange rate between the Argentine peso and foreign currencies and issue regulations related to the foreign exchange market. As of January 11, 2002, the Argentine peso/U.S. dollar exchange rate floated freely.
 
Heightened demand for limited U.S. dollars caused the Argentine peso to trade well above the rate of one Argentine peso per one U.S. dollar that had been previously established. Since the economic crisis in Argentina that began in December 2001, the Argentine peso/U.S. dollar exchange rate has fluctuated considerably. In 2002, an executive order was enacted that established a single free foreign exchange market that required all foreign exchange transactions to be carried out at a rate agreed upon between parties in accordance with the requirements of the Central Bank of Argentina. The Argentine peso depreciated 2.3% against the U.S. dollar in 2007, 9.6% in 2008, 9.9% in 2009, 4.7% in 2010 and 8.2% in 2011.
 
For the last few years, the Argentine government has maintained a policy of intervention in the foreign exchange markets, conducting periodic transactions for the purchase or sale of U.S. dollars. For example, in the third quarter of 2008, following the Argentine government’s decision to nationalize privately-owned pension funds, the Central Bank of Argentina purchased Argentine pesos in the market in order to limit depreciation of the Argentine peso against the U.S. dollar. We cannot assure you that the Argentine government will maintain its current policies with regard to the Argentine peso or that the Argentine peso will not further depreciate or appreciate significantly in the future.
 
The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Argentine pesos per U.S. dollar. The average rate is calculated by using the average of Argentina’s Central Bank reported exchange rates on each day during a monthly period and on the last day of each month during an annual or interim period. As of April 16, 2012 the exchange rate for the purchase of U.S. dollars as reported by Argentina’s Central Bank was ARS$4.395 per U.S. dollar.
 
   
Period-End
   
Average for Period
   
Low
   
High
 
   
(Argentine pesos per U.S. dollar)
 
   
ARS$
   
ARS$
   
ARS$
   
ARS$
 
Year Ended December 31:
                       
2007
    3.151       3.120       3.055       3.180  
2008
    3.454       3.162       3.013       3.454  
2009
    3.797       3.729       3.450       3.855  
2010
    3.976       3.912       3.794       3.986  
2011
    4.303       4.130       3.972       4.304  
Quarter Ended:
                               
March 31, 2012
    4.379       4.341       4.305       4.379  
 
 
   
Period-End
   
Average for Period
   
Low
   
High
 
   
(Argentine pesos per U.S. dollar)
 
   
ARS$
   
ARS$
   
ARS$
   
ARS$
 
Month Ended:
                               
September 30, 2011
    4.205       4.204       4.191       4.217  
October 31, 2011
    4.236       4.222       4.205       4.236  
November 30, 2011
    4.281       4.260       4.238       4.281  
December 31, 2011
    4.303       4.289       4.278       4.304  
January 31, 2012
    4.336       4.321       4.305       4.338  
February 29, 2012
    4.357       4.345       4.334       4.357  
March 31, 2012
    4.379       4.356       4.335       4.379  
April 30, 2012 (through April 16, 2012)
    4.395       4.388       4.380       4.395  

Exchange Controls
 
Prior to December 1989, the Argentine foreign exchange market was subject to exchange controls. From December 1989 until April 1991, Argentina had a freely floating exchange rate for all foreign currency transactions, and the transfer of dividend payments in foreign currency abroad and the repatriation of capital were permitted without prior approval of the Central Bank of Argentina. From April 1, 1991, when the Convertibility Law became effective, until December 2001, when the Central Bank of Argentina decided to close the foreign exchange market, the Argentine currency was freely convertible into U.S. dollars.
 
In January 2002, the Argentine government imposed a number of monetary and currency exchange control measures through Decree 1570/01, which included restrictions on the free disposition of funds deposited with banks and tight restrictions on transferring funds abroad without the Central Bank of Argentina’s prior authorization subject to specific exceptions for transfers related to foreign trade. As of September 2002, the Argentine government instituted restrictions on capital flows into Argentina, which mainly consisted of the mandatory settlement (i.e., transfer into Argentina and exchange for Argentine pesos) of the loan proceeds from foreign indebtedness of the non-financial private sector, and a prohibition against the transfer abroad of any funds until 180 days after their entry into the country. Beginning in January 2003, the Central Bank of Argentina has gradually eased some of these restrictions and expanded the list of transfers of funds abroad that do not require its prior authorization.
 
In June 2005, the Argentine government issued Decree 616/05, which established additional restrictions over all capital flows that could result in future payment obligations of foreign currency by residents to non-residents. Pursuant to the decree, all private sector indebtedness of physical persons or corporations in Argentina are required to be agreed upon and repaid not prior to 365 days from the date of entry of the funds into Argentina, regardless of the form of repayment. The decree outlines several types of transactions that are exempt from its requirements, including foreign trade financings and primary offerings of debt securities issued pursuant to a public offering and listed on a self-regulated market.
 
In addition, section 3 of the decree stipulates that all capital inflows within the private sector to the local exchange market due to foreign indebtedness of physical persons or corporations within Argentina (excluding foreign trade financings and primary offerings of debt securities issued pursuant to a public offering and listed on a self-regulated market), as well as all capital inflows of non-residents received by the local exchange market destined for local money holdings, all kinds of financial assets or liabilities of the financial and non-financial private sector (excluding foreign direct investment and primary offerings of debt securities issued pursuant to a public offering and listed on a self-regulated market) and investments in securities issued by the public sector that are acquired in secondary markets, must meet certain requirements described in section 4 of the decree, as outlined below:
 
 
·
the funds may only be transferred outside the local exchange market after a 365-day period from the date of entry of the funds into Argentina;
 
 
·
any amounts resulting from the exchange of the funds are to be credited to an account within the Argentine banking system;
 
 
 
·
a non-transferable, non-interest-bearing deposit must be maintained for a term of 365 calendar days, in an amount equal to 30% of any inflow of funds to the local foreign exchange market; and
 
 
·
the deposit shall be in U.S. dollars in any of the financial entities of Argentina and may not be used as collateral or guaranty for any credit transaction. Any breach to the provisions of Decree 616/05 is subject to criminal penalties of the exchange regime.
 
In addition, on November 16, 2005, the Ministry of Economy and Production issued Resolution 637/05, providing that any inflow of funds to the local exchange market in connection with an initial offering of securities, bonds or certificates issued by a trustee under a trust, whether or not such securities, bonds or certificates are publicly offered and listed in a self-regulated market, shall comply with all requirements provided for section 4 of Decree 616/05 whenever those requirements are applicable to the inflow of funds to the local exchange market in connection with the acquisition of any of the assets under the trust.
 
Regarding payment by local residents of services rendered to them, access to the local exchange market for payment of services rendered by non-residents is subject to filing with the intervening bank of documentation evidencing the nature of the service rendered, that it was indeed rendered by a non-resident to a local resident and the amounts due for such services which are to be transferred abroad.  If the service rendered is not directly related to the activities of the local resident, an auditor’s report must also be filed with the intervening bank, certifying that the service was in fact rendered and detailing the back-up information reviewed for such purpose.  Additionally, depending on the nature of the service, an affidavit may need to be filed with the Argentine tax authority (AFIP) pursuant to the terms of AFIP General Resolution No. 3276.
 
Interest Payments. Foreign currency necessary to pay interest on foreign indebtedness may be purchased and transferred abroad:
 
 
(a)
up to 5 days in advance of the relevant interest payment date and to pay interest accrued within such interest period;
 
 
(b)
to pay interest accrued as from the date of settlement of the disbursed funds through the local foreign exchange market; or
 
 
(c)
to pay interest accrued during the period between the date of disbursement of the funds and the date of settlement of the disbursed funds through the local foreign exchange market; provided that the funds disbursed abroad were credited in correspondent accounts of entities authorized to settle such funds through the local exchange market, within 48 business hours as from the date of their disbursement (Communication “A” 5264, as amended by Communication “A” 5295).
 
In order to proceed with remittances abroad for debt interest payments of all types, the entities involved must first verify that the debtor has complied with the reporting requirements imposed under Communication “A” 3602 dated May 7, 2002 and under Communication “A” 4237 dated November 10, 2004 in case the lender is part of the debtor’s economic group, and meets all other requirements set forth in Communication “A” 5264 (as amended).
 
Principal Repayments. Foreign currency necessary to pay principal on foreign indebtedness owed by the private non-financial sector may be acquired:
 
 
(a)
within 30 days prior to the stated maturity of the applicable obligation; provided that the funds disbursed under such obligation have remained in Argentina for at least 365 days; or
 
 
(b)
within the term necessary for performing the payment obligations, when such payment obligations depend on the occurrence of specific conditions set forth in the related contracts, such as a cash flow excess clause or automatic cash reinvestment clause.
 
Principal Prepayments. The foreign currency required to prepay principal on foreign indebtedness may be acquired to make partial or full payments more than 30 days prior to the stated maturity of the relevant obligation, provided that (x) the funds disbursed under the debt facility have remained in Argentina for at least 365 days; (y) the amount in foreign currency to be prepaid does not exceed the current value of the portion of the debt being prepaid
 
 
or (z) if the prepayment is financed totally or partially with a new cross-border loan or is made as part of a restructuring process with foreign creditors, the terms and conditions of the new financing and the net cash prepayment must not result in an increase in the present value of the debt being refinanced.
 
Foreclosure of Local Guarantees. Access to the local foreign exchange market for payment of foreign indebtedness is limited to the resident debtor.  In such sense, any guarantor of any cross-border financing that is an Argentine resident may not have access to the local foreign exchange market in order to make payments or transfer funds abroad pursuant to the guarantee, or may be subject to maximum thresholds for any such payment or transfer abroad.  As of the date hereof, free transfer of funds abroad by local residents is subject to prior approval by the Argentine tax authority and limited to U.S$2,000,000 per calendar month.
 
Dividends. Additionally, access to the local foreign exchange market is permitted for remittances abroad to pay earnings and dividends in so far as they arise from closed and fully audited balance sheets (Communication “A” 5264, as amended by Communication “A” 5295). Moreover, by General Resolution (GR) number 3210 and 3212 issued by the tax authority (AFIP) on October 31, 2011, a new system of restrictions on the purchase of U.S. dollars was imposed.  Accordingly, all U.S. dollar purchases must be registered with AFIP, which requires the purchaser to state the use of the proceeds. Purchases of foreign currency by local residents for the formation of off-shore assets are not only subject to registration but also prior approval from AFIP. Under the new system, AFIP and the Central Bank of Argentina have direct access to the same data in order to monitor cash movements.
 
These exchange controls impact our ability to transfer funds abroad and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina.
 
Brazil
 
On March 4, 2005, the Brazilian Monetary Council issued Resolution No. 3,265, providing for several changes in Brazilian foreign exchange regulation, including the unification of the foreign exchange markets into a single exchange market; the easing of several rules for acquisition of foreign currency by Brazilian residents; and the extension of the term for converting foreign currency derived from Brazilian exports. On May 29, 2008, the Brazilian Monetary Council issued Resolution No. 3,568, which expressly revoked Resolution 3,265 but maintained many of the regulatory aspects concerning the monetary policies already set by the revoked resolution. Resolution No. 3,568 also included in the Brazilian Exchange Market the operations related to receipts, payments and transfers to and from abroad through the use of debit and credit cards, as well as the transactions related to international postal transfers of money, including postal vouchers, and international postal reimbursements.
 
Resolution 3,568 established that, without prejudice to the duty of identifying customers, operations of foreign currency purchase or sale up to $3,000 or its equivalent in other currencies are not required to submit documentation relating to legal transactions underlying these foreign exchange operations. According to Resolution 3,568, the Central Bank of Brazil may define simplified forms to record operations of foreign currency purchases and sales of up to $3,000 or its equivalent in other currencies.
 
The Brazilian Monetary Council may issue further regulations in relation to foreign exchange transactions, as well as on payments and transfers of Brazilian currency between Brazilian residents and non-residents (such transfers being commonly known as the international transfer of reais), including those made through the so-called non-resident accounts.
 
According to the Central Bank of Brazil, in 2004, 2005, 2006 and 2007, the Brazilian real appreciated in relation to the U.S. dollar 8.8%, 13.4%, 9.5% and 20.5%, respectively. In 2008, the Brazilian real depreciated 31.9% in relation to the U.S. dollar, and in 2009, 2010 and 2011 the Brazilian real appreciated 34.2%, 4.3% and 12.6%, respectively, in relation to the U.S. dollar.
 
Although the Central Bank of Brazil has intervened occasionally to control movements in the foreign exchange rates, the exchange market may continue to be volatile as a result of capital movements or other factors, and, therefore, the Brazilian real may substantially decline or appreciate in value in relation to the U.S. dollar in the future.
 
 
The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Brazilian reais per U.S. dollar as reported by the Central Bank of Brazil. As of April 16, 2012, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Brazil was R$1.837 per U.S. dollar.
 
   
Period-End
   
Average for Period
   
Low
   
High
 
   
(Brazilian reais per U.S. dollar)
 
    R$     R$     R$     R$  
Year Ended December 31:
                       
2007
    1.771       1.944       1.733       2.156  
2008
    2.337       2.030       1.559       2.500  
2009
    1.741       1.994       1.702       2.422  
2010
    1.666       1.759       1.655       1.881  
2011
    1.876       1.675       1.535       1.902  
Quarter Ended:
                               
March 31, 2012
    1.822       1.770       1.702       1.868  
Month Ended:
                               
September 30, 2011
    1.854       1.750       1.604       1.902  
October 31, 2011
    1.689       1.773       1.689       1.886  
November 30, 2011
    1.811       1.790       1.727       1.894  
December 31, 2011
    1.876       1.837       1.783       1.876  
January 31, 2012
    1.739       1.790       1.739       1.868  
February 29, 2012
    1.709       1.718       1.702       1.738  
March 31, 2012
    1.822       1.795       1.715       1.833  
April 30, 2012 (through April 16, 2012)
    1.837       1.831       1.826       1.837  


Mexico
 
For the last few years, the Mexican government has maintained a policy of non-intervention in the foreign exchange markets, other than conducting periodic auctions for the purchase of U.S. dollars, and has not had in effect any exchange controls (although these controls have existed and have been in effect in the past). We cannot assure you that the Mexican government will maintain its current policies with regard to the Mexican peso or that the Mexican peso will not further depreciate or appreciate significantly in the future.
 
The following table sets forth, for the periods indicated, the high, low, average and period-end free-market exchange rate for the purchase of U.S. dollars, expressed in nominal Mexican pesos per U.S. dollar, as reported by the Central Bank of Mexico in the Federal Official Gazette. All amounts are stated in Mexican pesos per U.S. dollar. The annual and interim average rates reflect the average of month-end rates, and monthly average rates reflect the average of daily rates. As of April 16, 2012, the free-market exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Mexico in the Federal Official Gazette as the rate of payment of obligations denominated in non-Mexican currency payable in Mexico was Ps.12.85 per U.S. dollar.
 
   
Period-End
   
Average for Period
   
Low
   
High
 
   
(Mexican pesos per U.S. dollar)
 
   
Ps.
   
Ps.
   
Ps.
   
Ps.
 
Year Ended December 31:
                       
2007
    10.90       10.94       10.66       11.27  
2008
    13.77       11.14       9.92       13.92  
2009
    13.07       13.50       12.60       15.37  
2010
    12.36       12.64       12.16       13.18  
2011
    13.98       12.43       11.50       14.24  
 
 
   
Period-End
   
Average for Period
   
Low
   
High
 
   
(Mexican pesos per U.S. dollar)
 
   
Ps.
   
Ps.
   
Ps.
   
Ps.
 
Quarter Ended:
                               
March 31, 2012
    12.85       13.02       12.63       13.98  
Month Ended:
                               
September 30, 2011
    13.42       12.92       12.26       13.89  
October 31, 2011
    13.20       13.47       13.20       13.97  
November 30, 2011
    14.03       13.64       13.11       14.24  
December 31, 2011
    13.98       13.75       13.48       13.99  
January 31, 2012
    12.95       13.49       12.93       13.98  
February 29, 2012
    12.88       12.80       12.65       13.01  
March 31, 2012
    12.85       12.76       12.63       12.98  
April 30, 2012 (through April 16, 2012)
    12.85       12.89       12.73       13.16  

 
Venezuela
 
Venezuela suspended foreign exchange trading on January 23, 2003 in response to a significant decrease in the amount of foreign currency generated from the sale of oil and an increase in the demand for foreign currency, which produced a decline in Venezuela’s reserves of international currencies. On February 5, 2003, the Venezuelan government adopted a series of exchange agreements, decrees and regulations establishing a new exchange control regime. The Comisión de Administración de Divisas, or CADIVI, administers, manages and controls the new exchange control regime. Purchases and sales of foreign currencies are centralized in the Central Bank of Venezuela. The Ministry of Finance and the Central Bank of Venezuela are responsible for setting the exchange rate with respect to the U.S. dollar and other currencies.
 
The following table sets forth, for the periods indicated, the exchange rates set by the Ministry of Finance and the Central Bank of Venezuela for the purchase and sale of U.S. dollars and the payment of external public debt in U.S. dollars, in each case expressed in nominal Venezuelan bolívares fuertes per U.S. dollar.
 
   
Purchase
   
Sale
   
Payment of External Public Debt
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
Period:
 
Bs.F
   
Bs.F
   
Bs.F
 
March 3, 2005 through December 31, 2007(1)
    2.1446       2.1500       2.1500  

   
Purchase
   
Sale
   
Payment of External Public Debt
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
   
Bs.F
   
Bs.F
   
Bs.F
 
January 1, 2008 through January 7, 2010
    2.1446       2.1500       2.1500  

 
   
Essential Goods
   
Non-essential Goods
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
   
Bs.F
   
Bs.F
 
January 8, 2010 through December 31, 2010
    2.60       4.30  
 
 
   
Purchase
   
Sale
   
Payment of External Public Debt
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
   
Bs.F
   
Bs.F
   
Bs.F
 
January 1, 2011 through April 16, 2012
    4.2893       4.3000       4.3000  
 

(1)
Effective January 1, 2008, the currency of Venezuela was converted to the bolívar fuerte, which represents one thousand bolívares. The exchange rates for the period from March 3, 2005 through December 31, 2007 have been translated from bolívares per U.S. dollar to bolívares fuertes per U.S. dollar at a 1,000-to-1 ratio to facilitate comparison with later periods.
 
The exchange control regime provides that all foreign currency generated through public or private sector operations must be sold to the Central Bank of Venezuela at the established exchange rate. In addition, all foreign currency that enters the country must be registered through banks and financial institutions authorized by CADIVI. If the acquisition of foreign currency by a private sector entity must be approved by CADIVI, the entity must prove, among other things, that its social security contributions and tax payments are up to date. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Comparability of Results—Impact of Venezuelan Currency Controls and Related Accounting Changes on Our Results of Operations.”
 
These approvals have become more difficult to obtain over time, which led to the development of a bond-based exchange process under which bolívar fuerte-denominated bonds are purchased in Venezuela and then are immediately exchanged outside Venezuela for bonds denominated in U.S. dollars at a specified, and less favorable, parallel market exchange rate.
 
During 2009, our access to the official exchange rate for purposes of paying for imports was more limited than in 2008 due to an increase in restrictions and a more rigorous approval process. In addition, we historically have not been able to access the official exchange rate for royalty payments, and have instead utilized the parallel exchange market to make our royalty payments, honor other foreign debts and pay intercompany loans. In 2009 and 2008, we exchanged bonds for $37.1 million and $38.0 million, respectively (at an average exchange rate of Bs.F5.19 and Bs.F3.76 per U.S. dollar in 2009 and 2008, respectively) and recorded a loss of $52.5 million and $28.5 million, respectively, in connection with the payment of intercompany loans.
 
On January 8, 2010, the Venezuelan government announced the devaluation of the bolívar fuerte and the creation of a two-tiered official exchange rate system. The official exchange rate moved from 2.15 bolívares fuertes per U.S. dollar to 2.60 bolívares fuertes per U.S. dollar for essential goods and to 4.30 bolívares fuertes per U.S. dollar for non-essential goods.
 
On December 30, 2010, the Venezuelan government announced the elimination of the official exchange rate for essential goods. Effective January 1, 2011, each U.S. dollar is valued at 4.2893 bolívares fuertes for purchases and 4.3000 bolívares fuertes for sales. In addition, the exchange rate is set at 4.3000 bolívares fuertes per U.S. dollar for the payment of external public debt.
 
In May 2010, the Central Bank of Venezuela increased its control of the bond-based exchange process and, as a result, bond-based exchanges may solely be conducted by the Central Bank of Venezuela. Consequently, the parallel exchange market in Venezuela ended, limiting companies’ ability to obtain foreign currency other than through foreign currency trades approved by and conducted through CADIVI or the Central Bank of Venezuela through the System for Transactions with Securities in Foreign Currency, which we refer to as SITME. Pursuant to the new system, companies without access to CADIVI can access SITME to convert a maximum cash equivalent of up to $50,000 per day or $350,000 per month of foreign currency at an exchange rate based on the range of prices for the purchase and sale of bonds published daily by the Central Bank of Venezuela. At December 31, 2011, this exchange rate was 5.3000 bolívares fuertes per U.S. dollar. As a result of the foregoing, the acquisition of foreign currency by Venezuelan companies to honor foreign debt, pay dividends or otherwise move capital out of Venezuela is subject to the approval of CADIVI or the Central Bank of Venezuela, and to the availability of foreign currency within the guidelines set forth by the Venezuelan National Executive Power for the allocation of foreign currency.
 
 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our class A shares could decline, and you could lose all or part of your investment. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company or investments in Latin America and the Caribbean described below and elsewhere in this annual report.
 
Certain Factors Relating to Our Business
 
Our rights to operate and franchise McDonald’s-branded restaurants are dependent on the MFAs, the expiration of which would adversely affect our business, results of operations, financial condition and prospects.
 
Our rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore our ability to conduct our business, derive exclusively from the rights granted to us by McDonald’s in the MFAs through 2027. The initial term of the franchise for French Guiana, Guadeloupe and Martinique expires in 2017, which we may extend for an additional 10-year term at our sole discretion. As a result, our ability to continue operating in our current capacity following the initial term of the MFAs is dependent on the renewal of our contractual relationship with McDonald’s.
 
McDonald’s has the right, in its reasonable business judgment based on our satisfaction of certain criteria set forth in the MFA, to grant us an option to extend the term of the MFAs with respect to all Territories for an additional period of 10 years after the expiration of the initial term of the MFAs upon such terms as McDonald’s may determine. Pursuant to the MFAs, McDonald’s will determine whether to grant us the option to renew between August 2020 and August 2024. If McDonald’s grants us the option to renew and we elect to exercise the option, then we and McDonald’s will amend the MFAs to reflect the terms of such renewal option, as appropriate. We cannot assure you that McDonald’s will grant us an option to extend the term of the MFAs or that the terms of any renewal option will be acceptable to us, will be similar to those contained in the MFAs or that the terms will not be less favorable to us than those contained in the MFAs.
 
If McDonald’s elects not to grant us the renewal option or we elect not to exercise the renewal option, we will have a three-year period in which to solicit offers for our business, which offers would be subject to McDonald’s approval. Upon the expiration of the MFAs, McDonald’s has the option to acquire all of our non-public shares and all of the equity interests of our wholly owned subsidiary Arcos Dourados Comercio de Alimentos Ltda., the master franchisee of McDonald’s for Brazil, at their fair market value.
 
In the event McDonald’s does not exercise its option to acquire LatAm, LLC and Arcos Dourados Comercio de Alimentos Ltda., the MFAs would expire and we would be required to cease operating McDonald’s-branded restaurants, identifying our business with McDonald’s and using any of McDonald’s intellectual property. Although we would retain our real estate and infrastructure, the MFAs prohibit us from engaging in certain competitive businesses, including Burger King, Subway, KFC or any other QSR business, or duplicating the McDonald’s system at another restaurant or business during the two-year period following the expiration of the MFAs. As the McDonald’s brand and our relationship with McDonald’s are among our primary competitive strengths, the expiration of the MFAs for any of the reasons described above would materially and adversely affect our business, results of operations, financial condition and prospects.
 
 
Our business depends on our relationship with McDonald’s and changes in this relationship may adversely affect our business, results of operations and financial condition.
 
Our rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore our ability to conduct our business, derive exclusively from the rights granted to us by McDonald’s in the MFAs. As a result, our revenues are dependent on the continued existence of our contractual relationship with McDonald’s.
 
Pursuant to the MFAs, McDonald’s has the ability to exercise substantial influence over the conduct of our business. For example, under the MFAs, we are not permitted to operate any other quick-service restaurant, or QSR, chains, we must comply with McDonald’s high quality standards, we must own and operate at least 50% of all McDonald’s-branded restaurants in the Territories, we must maintain certain guarantees in favor of McDonald’s, including a standby letter of credit (or other similar financial guarantee acceptable to McDonald’s) in an amount of $80.0 million, to secure our payment obligations under the MFAs and related credit documents, we cannot incur debt above certain financial ratios, we cannot transfer the equity interests of our subsidiaries, any significant portion of their assets or any of the real estate properties we own without McDonald’s consent, and McDonald’s has the right to approve the appointment of our chief executive officer and chief operating officer. In addition, the MFAs require us to reinvest a significant amount of money on reimaging our existing restaurants, opening new restaurants and advertising, which plans McDonald’s has the right to approve. We are required under the MFAs to spend $180 million from 2011 through 2013 (i.e., $60 million per year) to satisfy our reinvestment commitments. In addition, we estimate that the cost to comply with our restaurant opening commitments under the MFAs from 2011 to 2013 will be between $100 million and $250 million depending on, among other factors, the type and location of the restaurants we open. These amounts are in addition to our capital expenditure program agreed upon with McDonald’s for the opening and reimaging of restaurants with the proceeds of the 2016 notes. We cannot assure you that we will have available the funds necessary to finance these commitments, and their satisfaction may require us to incur additional indebtedness, which could adversely affect our financial condition. Moreover, we may not be able to obtain additional indebtedness on favorable terms, or at all. Failure to comply with these commitments could constitute a material breach of the MFAs and may lead to a termination by McDonald’s of the MFAs.
 
Notwithstanding the foregoing, McDonald’s has no obligation to fund our operations. In addition, McDonald’s does not guarantee any of our financial obligations, including trade payables or outstanding indebtedness, and has no obligation to do so.
 
If the terms of the MFAs excessively restrict our ability to operate our business or if we are unable to satisfy our restaurant opening and reinvestment commitments under the MFAs, our business, results of operations and financial condition would be materially and adversely affected.
 
McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.
 
Pursuant to the MFAs, McDonald’s has the right to acquire our non-public shares or our interests in one or more Territories upon the occurrence of certain events, including the death or permanent incapacity of our controlling shareholder or a material breach of the MFAs. In the event McDonald’s were to exercise its right to acquire all of our non-public shares, our public shareholders would own an aggregate of 60.0% of our economic interests and 23.7% of our voting interests.
 
McDonald’s has the option to acquire all, but not less than all, of our non-public shares at 100% of their fair market value during the twelve-month period following the eighteenth-month anniversary of the death or permanent incapacity of Mr. Staton, our Chairman, CEO and controlling shareholder. In addition, if there is a material breach that relates to one or more Territories in which there are at least 100 restaurants in operation, McDonald’s has the right either to acquire all of our non-public shares or our interests in our subsidiaries in such Territory or Territories. By contrast, if the initial material breach of the MFAs affects or is attributable to any of the Territories in which there are less than 100 restaurants in operation, McDonald’s only has the right to acquire the equity interests of any of our subsidiaries in the relevant Territory. For example, since we have more than 100 restaurants in Mexico, if a Mexican subsidiary were to materially breach the MFA, McDonald’s would have the right either to acquire our entire business throughout Latin America and the Caribbean or just our Mexican operations, whereas upon a similar breach by our Ecuadorean subsidiary, McDonald’s would only have the right to acquire our interests in our operations in Ecuador.
 
 
McDonald’s was granted a perfected security interest in the equity interests of LatAm, LLC, Arcos Dourados Comercio de Alimentos Ltda. and certain of their subsidiaries to protect this right. In the event this right is exercised as a result of a material breach of the MFAs, the amount to be paid by McDonald’s would be equal to 80% of the fair market value of the acquired equity interests. If McDonald’s exercises its right to acquire our interests in one or more Territories as a result of a material breach, our business, results of operations and financial condition would be materially and adversely affected.
 
We have experienced rapid growth in recent years. The failure to successfully manage this or any future growth may adversely affect our results of operations.
 
Our business has grown significantly in recent years, largely due to the opening of new restaurants in existing and new markets within the Territories, and also from an increase in comparable store sales. Our total number of restaurant locations has increased from 1,569 at the date of the Acquisition to 1,840 as of December 31, 2011.
 
Our growth is, to a certain extent, dependent on new restaurant openings. There are many obstacles to opening new restaurants, including determining the availability of desirable locations, securing reliable suppliers, hiring and training new personnel and negotiating acceptable lease terms, and, in times of adverse economic conditions, franchisees may be more reluctant to provide the investment required to open new restaurants and may have difficulty obtaining sufficient financing. In addition, our growth in comparable store sales is dependent on continued economic growth in the countries in which we operate as well as our ability to continue to predict and satisfy changing consumer preferences. It is therefore possible that we may not be able to successfully maintain our recent growth rate.
 
We plan our capital expenditures on an annual basis, taking into account historical information, regional economic trends, restaurant opening and reimaging plans, site availability and the investment requirements of the MFAs in order to maximize our returns on invested capital. The success of our investment plan may, however, be harmed by factors outside our control, such as changes in macroeconomic conditions, changes in demand and construction difficulties that could jeopardize our investment returns and our future results and financial condition.
 
We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.
 
Supply chain management is an important element of our success and a crucial factor in optimizing our profitability. We use McDonald’s centralized supply chain management model, which relies on approved third-party suppliers and distributors for goods, and we generally use several suppliers to satisfy our needs for goods. This system encompasses selecting and developing suppliers of core products—beef, chicken, buns, produce, cheese, dairy mixes, beverages and toppings—who are able to comply with McDonald’s high quality standards, and establishing sustainable relationships with these suppliers. McDonald’s standards include cleanliness, product consistency, timeliness, following internationally recognized manufacturing practices, meeting or exceeding all local food regulations and compliance with our Hazard Analysis Critical Control Plan, a systematic approach to food safety that emphasizes protection within the processing facility, rather than detection, through analysis, inspection and follow-up.
 
Our 25 largest suppliers account for approximately 80% of our purchases. Very few of our suppliers have entered into written contracts with us as we only have oral agreements with a vast majority of them. Our supplier approval process is thorough and lengthy in order to ensure compliance with McDonald’s high quality standards. We therefore tend to develop strong relationships with approved suppliers and, given our importance to them, have found that oral agreements with them are generally sufficient to ensure a reliable supply of quality products. While we source our supplies from many approved suppliers in Latin America and the Caribbean, thereby reducing our dependence on any one supplier, the informal nature of the majority of our relationships with suppliers means that we may not be assured of long-term or reliable supplies of products from those suppliers.
 
 
In addition, certain supplies, such as beef, must often be locally sourced due to restrictions on their importation. In light of these restrictions, as well as the MFAs’ requirement to purchase certain core supplies from approved suppliers, we may not be able to quickly find alternate or additional supplies in the event a supplier is unable to meet our orders.
 
If our suppliers fail to provide us with products in a timely manner due to unanticipated demand, production or distribution problems or financial distress, if our suppliers decide to terminate their relationship with us or if McDonald’s determines that any product or service offered by an approved supplier is not in compliance with its standards and we are obligated to terminate our relationship with such supplier, we may have difficulty finding replacement suppliers because of the requirement that we only use approved suppliers. As a result, we may face inventory shortages that could negatively affect our operations.
 
Our financial condition and results of operations depend, to a certain extent, on the financial condition of our franchisees and their ability to fulfill their obligations under their franchise agreements.
 
Approximately 26.2% of our restaurants were franchised as of December 31, 2011. Under our franchise agreements, we receive monthly payments which are, in most cases, the greater of a fixed rent or a certain percentage of the franchisee’s gross sales. Franchisees are independent operators over whom we exercise control through the franchise agreements, by owning or leasing the real estate upon which their restaurants are located and through our operating manual that specifies items such as menu choices, permitted advertising, equipment, food handling procedures, product quality and approved suppliers. Our operating results depend to a certain extent on the restaurant profitability and financial viability of our franchisees. The concurrent failure by a significant number of franchisees to meet their financial obligations to us could jeopardize our ability to meet our obligations.
 
In addition, we are liable for our franchisees’ monthly payment of a continuing franchise fee to McDonald’s, which represents a percentage of those franchised restaurants’ gross sales. To the extent that our franchisees fail to pay this fee in full, we are responsible for any shortfall. As such, the concurrent failure by a significant number of franchisees to pay their continuing franchise fees could have a material adverse effect on our results of operations and financial condition.
 
We do not have full operational control over the businesses of our franchisees.
 
We are dependent on franchisees to maintain McDonald’s quality, service and cleanliness standards, and their failure to do so could materially affect the McDonald’s brand and harm our future growth. Although we exercise significant control over franchisees through the franchise agreements, franchisees have some flexibility in their operations, including the ability to set prices for our products in their restaurants, hire employees and select certain service providers. In addition, it is possible that some franchisees may not operate their restaurants in accordance with our quality, service and cleanliness, health or product standards. Although we take corrective measures if franchisees fail to maintain McDonald’s quality, service and cleanliness standards, we may not be able to identify and rectify problems with sufficient speed and, as a result, our image and operating results may be negatively affected.
 
Ownership and leasing of a broad portfolio of real estate exposes us to potential losses and liabilities.
 
As of December 31, 2011, we owned the land for 509 of our 1,840 restaurants and the buildings for all but 12 of our restaurants. The value of these assets could decrease or rental costs could increase due to changes in local demographics, the investment climate and increases in taxes.
 
The majority of our restaurant locations, or those operated by our franchisees, are subject to long-term leases. We may not be able to renew leases on acceptable terms or at all, in which case we would have to find new locations to lease or be forced to close the restaurants. If we are able to negotiate a new lease at an existing location, we may be subject to a rent increase. In addition, current restaurant locations may become unattractive due to changes in neighborhood demographics or economic conditions, which may result in reduced sales at these locations.
 
 
The success of our business is dependent on the effectiveness of our marketing strategy.
 
Market awareness is essential to our continued growth and financial success. Pursuant to the MFAs, we create, develop and coordinate marketing plans and promotional activities throughout the Territories, and franchisees contribute a percentage of their gross sales to our marketing plan. In addition, we are required under the MFAs to spend at least 5% of our sales on advertising and promotional activities. In addition, pursuant to the MFAs, McDonald’s has the right to review and approve our marketing plans in advance and may request that we cease using the materials or promotional activities at any time if McDonald’s determines that they are detrimental to its brand image. We also participate in global and regional marketing activities undertaken by McDonald’s and pay McDonald’s up to 0.2% of our sales in order to fund such activities. If our advertising programs are not effective, or if our competitors begin spending significantly more on advertising than we do, we may be unable to attract new customers or existing customers may not return to our restaurants and our operating results may be negatively affected.
 
We use non-committed lines of credit to partially finance our working capital needs.
 
We use non-committed lines of credit to partially finance our working capital needs. Given the nature of these lines of credit, they could be withdrawn and no longer be available to us, or their terms, including the interest rate, could change to make the terms no longer acceptable to us. The availability of these lines of credit depends on the level of liquidity in financial markets, which can vary based on events outside of our control, including financial or credit crises. Any inability to draw upon our non-committed lines of credit could have an adverse effect on our working capital, financial condition and results of operations.
 
Covenants and events of default in the agreements governing our outstanding indebtedness could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
 
As of December 31, 2011, we had $532.3 million in total outstanding indebtedness, consisting of $0.8 million in short-term debt, $528.9 million in long-term debt and $2.6 million related to the fair market value of our outstanding derivative instruments. The agreements governing our outstanding indebtedness contain negative and financial covenants and events of default that may limit our financial flexibility and ability to undertake certain types of transactions. For instance, we are subject to negative covenants that restrict our activities, including restrictions on:
 
 
·
incurring additional indebtedness;
 
 
·
paying dividends;
 
 
·
redeeming, repurchasing or retiring our capital stock;
 
 
·
making investments;
 
 
·
creating liens;
 
 
·
creating limitations on the ability of our restricted subsidiaries to pay dividends, make loans or transfer property to us;
 
 
·
engaging in transactions with affiliates;
 
 
·
engaging in substantially different lines of business;
 
 
·
selling assets, including capital stock of our subsidiaries; and
 
 
·
consolidating, merging or transferring assets.
 
If we fail to satisfy the covenants set forth in these agreements or another event of default occurs under the agreements, our outstanding indebtedness under the agreements could become immediately due and payable. If our outstanding indebtedness become immediately due and payable and we do not have sufficient cash on hand to pay all amounts due, we could be required to sell assets, to refinance all or a portion of our indebtedness or to obtain additional financing. Refinancing may not be possible and additional financing may not be available on commercially acceptable terms, or at all.
 
 
 
Our inability to attract and retain qualified personnel may affect our growth and results of operations.
 
We have a strong management team with broad experience in product development, supply chain management, operations, finance, marketing and training. Our significant growth places substantial demands on our management team, and our continued growth could increase those demands. In addition, pursuant to the MFAs, McDonald’s is entitled to approve the appointment of our chief executive officer and chief operating officer. Our ability to manage future growth will depend on the adequacy of our resources and our ability to continue to identify, attract and retain qualified personnel. Failure to do so could have a material adverse effect on our business, financial condition and results of operations.
 
Also, the success of our operations depends in part on our ability to attract and retain qualified regional and restaurant managers and general staff. If we are unable to recruit and retain our employees, or fail to motivate them to provide quality food and service, our image, operations and growth could be adversely affected.
 
The resignation, termination, permanent incapacity or death of our CEO could adversely affect our business, results of operations, financial condition and prospects.
 
Due to Mr. Staton’s unique experience and leadership capabilities, it would be difficult to find a suitable successor for him if he were to cease serving as our CEO and Chairman for any reason. In addition, pursuant to the MFAs, McDonald’s is entitled to approve the appointment of our chief executive officer. If we and McDonald’s have not agreed upon a successor CEO after six months, McDonald’s may designate a temporary CEO in its sole discretion pending our submission of information relating to a further candidate and McDonald’s approval of that candidate. In the event of Mr. Staton’s death or permanent incapacity, McDonald’s has the right to acquire all of our non-public shares during the twelve-month period beginning on the eighteenth-month anniversary of his death or incapacity. A delay in finding a suitable successor CEO could adversely affect our business, results of operations, financial condition and prospects.
 
Labor shortages or increased labor costs could harm our results of operations.
 
Our operations depend in part on our ability to attract and retain qualified restaurant managers and crew. While the turnover rate varies significantly among categories of employees, due to the nature of our business we traditionally experience a high rate of turnover among our crew and we may not be able to replace departing crew with equally qualified or motivated staff.
 
As of December 31, 2011, we had 91,482 employees. Controlling labor costs is critical to our results of operations, and we closely monitor those costs. Some of our employees are paid minimum wages; any increases in minimum wages or changes to labor regulations in the Territories could increase our labor costs. For example, a law enacted in November 2010 in Argentina requires companies to pay overtime to all employees (except directors and managers) working on weekends, and a proposed bill in Argentina would require companies to distribute 10 percent of their profits to employees. These or similar regulations, if adopted, may have an adverse impact on our results of operations. Competition for employees could also cause us to pay higher wages.
 
A failure by McDonald’s to protect its intellectual property rights, including its brand image, could harm our results of operations.
 
The profitability of our business depends in part on consumers’ perception of the strength of the McDonald’s brand. Under the terms of the MFAs, we are required to assist McDonald’s with protecting its intellectual property rights in the Territories. Nevertheless, any failure by McDonald’s to protect its proprietary rights in the Territories or elsewhere could harm its brand image, which could affect our competitive position and our results of operations.
 
Under the MFAs, we may use, and grant rights to franchisees to use, McDonald’s intellectual property in connection with the development, operation, promotion, marketing and management of our restaurants. McDonald’s has reserved the right to use, or grant licenses to use, its intellectual property in Latin America and the Caribbean for all other purposes, including to sell, promote or license the sale of products using its intellectual property. If we or
 
 
McDonald’s fail to identify unauthorized filings of McDonald’s trademarks and imitations thereof, and we or McDonald’s do not adequately protect McDonald’s trademarks and copyrights, the infringement of McDonald’s intellectual property rights by others may cause harm to McDonald’s brand image and decrease our sales.
 
Any tax increase or change in tax legislation may adversely affect our results of operations.
 
Since we conduct our business in many countries in Latin America and the Caribbean, we are subject to the application of multiple tax laws and multinational tax conventions. Our effective tax rate therefore depends on the effectiveness of our tax planning abilities. Our income tax position and effective tax rate is subject to uncertainty as our income tax position for each year depends on the profitability of Company-operated restaurants and on the profitability of franchised restaurants operated by our franchisees in tax jurisdictions that levy a broad range of income tax rates. It is also dependent on changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules, changes to these rules and tax laws and examinations by various tax authorities. If our actual tax rate differs significantly from our estimated tax rate, this could have a material impact on our financial condition. In addition, any increase in the rates of taxes, such as income taxes, excise taxes, value added taxes, import and export duties, and tariff barriers or enhanced economic protectionism could negatively affect our business. We cannot assure you that any governmental authority in any country in which we operate will not increase taxes or impose new taxes on our products in the future.
 
Negative resolution of disputes with taxing authorities in any of the jurisdictions in which we operate may negatively affect our business and results of operations.
 
We and our predecessor company have in the past been engaged in tax disputes with Venezuelan tax authorities that culminated in temporary closures of our restaurants in Venezuela in 2005 and 2008. On October 10, 2008, government tax officials closed all of our 115 restaurants for a period of 48 hours because they believed our record of purchases was not properly organized in chronological order. However, no finding was made that we had improperly paid taxes nor were any fines imposed on us as a result. Subsequent closures or disagreements with Venezuelan tax authorities could materially and adversely affect our results of operations and financial condition.
 
We are engaged in several disputes and are currently party to a number of tax proceedings with Brazilian tax authorities and liability for certain of these proceedings was retained by McDonald’s as part of the Acquisition. We cannot assure you, however, that we will not be involved in similar disputes or proceedings in the future, in which case we may be solely liable for the defense thereof and any resulting liability. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
 
Litigation and other pressure tactics could expose our business to financial and reputational risk.
 
Given that we conduct our business in many countries, we may be subject to multi-jurisdictional private and governmental lawsuits, including but not limited to lawsuits relating to labor and employment practices, taxes, trade and business practices, franchising, intellectual property, consumer, real property, landlord tenant, environmental, advertising, nutrition and antitrust matters. In the past, QSR chains, including McDonald’s Corporation, have been subject to class-action lawsuits claiming that their food products and promotional strategies have contributed to the obesity of some customers. We cannot guarantee that we will not be subject to these types of lawsuits in the future. We may also be the target of pressure tactics such as strikes, boycotts and negative publicity from suppliers, distributors, employees, special interest groups and customers that may negatively affect our reputation.
 
Certain Factors Relating to Our Industry
 
The food services industry is intensely competitive and we may not be able to continue to compete successfully.
 
Although competitive conditions in the QSR industry vary in each of the countries in which we conduct our operations, we compete with many well-established restaurant companies on price, brand image, quality, sales promotions, new product development and restaurant locations. Since the restaurant industry has few barriers to entry, our competitors are diverse and range from national and international restaurant chains to individual, local restaurant operators. Our largest competitors include Burger King, which as of December 31, 2011 operated 1,222 restaurants throughout Latin America, Yum! Brands, which as of December 31, 2011 operated 605 KFC restaurants
 
 
and 712 Pizza Hut and Pizza Hut Express restaurants in Latin America and the Caribbean, and Subway, which as of December 31, 2011, operated 1,831 restaurants in Latin America and the Caribbean, in each case according to preliminary estimates from Euromonitor. In Brazil, we also compete with Habib’s, a Brazilian QSR chain that focuses on Middle Eastern food, which as of December 31, 2011 operated 463 restaurants, and Bob’s, a primarily Brazilian QSR chain that focuses on hamburger product offerings, which as of December 31, 2011 operated 463 restaurants, in each case according to preliminary estimates from Euromonitor. We also face strong competition from street vendors of limited product offerings, including hamburgers, hot dogs, pizzas and other local food items. Euromonitor forecasts that street vendors will represent 7.6% of the Latin American and Caribbean total eating out segment in 2012. We expect competition to increase as our competitors continue to expand their operations, introduce new products and aggressively market their brands.
 
If any of our competitors offers products that are better priced or more appealing to the tastes of consumers, increases its number of restaurants, obtains more desirable restaurant locations, provides more attractive financial incentives to management personnel, franchisees or hourly employees or has more effective marketing initiatives than we do in any of the markets in which we operate, this could have a material adverse effect on our results of operations.
 
Increases in commodity prices or other operating costs could harm our operating results.
 
Food and paper costs represented 33% of our total revenues in 2011, and we import approximately 30% of the food and paper products used in our restaurants (including 100% of the toys distributed in our restaurants). We rely on, among other commodities, beef, chicken, produce, dairy mixes, beverages and toppings. The cost of food and supplies depends on several factors, including global supply and demand, new product offerings, weather conditions, fluctuations in energy costs and tax incentives, all of which makes us susceptible to substantial price and currency fluctuations and other increased operating costs. Due to the competitive nature of the restaurant industry, we may be unable to pass increased operating costs on to our customers, which could have an adverse effect on our results of operations.
 
Demand for our products may decrease due to changes in consumer preferences or other factors.
 
Our competitive position depends on our continued ability to offer items that have a strong appeal to consumers. If consumer dining preferences change due to dietary inclinations and our consumers begin to seek out alternative restaurant options, our financial results might be adversely affected. In addition, negative publicity surrounding our products could also materially affect our business and results of operations.
 
Recently, along with several of our competitors, we have introduced (and expect to continue to introduce) new product offerings to appeal to consumers who seek products that are lower in calories and fat content. Our success in responding to consumer demands depends in part on our ability to anticipate these demands and to introduce new items to address these demands in a timely fashion.
 
Our business activity may be negatively affected by disruptions, catastrophic events or health pandemics.
 
Unpredictable events beyond our control, including war, terrorist activities, and natural disasters, could disrupt our operations and those of our franchisees, suppliers or customers, have a negative effect on consumer spending or result in political or economic instability. These events could reduce demand for our products or make it difficult to ensure the regular supply of products through our distribution chain.
 
In addition, incidents of health pandemics, food-borne illnesses or food tampering could reduce sales in our restaurants. Widespread illnesses such as avian influenza, the H1N1 influenza virus (or swine flu), e-coli, bovine spongiform encephalopathy (or “mad cow” disease), hepatitis A or salmonella could cause customers to avoid meat or fish products. For example, the swine flu outbreak in Argentina and Mexico in 2009 significantly impacted our sales in those countries. Furthermore, our reliance on third-party food suppliers and distributors increases the risk of food-borne illness incidents being caused by third-party food suppliers and distributors who operate outside of our control and/or multiple locations being affected rather than a single restaurant. Media reports of health pandemics or food-borne illnesses found in the general public or in any QSR could dramatically affect restaurant sales in one or several countries in which we operate, or could force us to temporarily close an undetermined number of restaurants.
 
 
 
 
As a restaurant company, we depend on consumer confidence in the quality and safety of our food. Any illness or death related to food that we serve could substantially harm our operations. While we maintain extremely high standards for the quality of our food products and dedicate substantial resources to ensure that these standards are met, the spread of these illnesses is often beyond our control and we cannot assure you that new illnesses resistant to any precautions we may take will not develop in the future.
 
In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or customers, such as the addition of foreign objects to the food that we sell. Reports, whether true or not, of injuries caused by food tampering have in the past negatively affected the reputations of QSR chains and could affect us in the future. Instances of food tampering, even those occurring solely at competitor restaurants could, by causing negative publicity about the restaurant industry, adversely affect our sales on a local, regional, national or systemwide basis. A decrease in customer traffic as a result of public health concerns or negative publicity could materially affect our business, results of operations and financial condition.
 
Restrictions on promotions and advertisements directed at families with children and regulations regarding the nutritional content of children’s meals may harm McDonald’s brand image and our results of operations.
 
A significant portion of our business depends on our ability to make our product offerings appealing to families with children. Argentina, Brazil, Chile, Colombia, Mexico, Uruguay and Venezuela are considering imposing restrictions on the ways in which we market our products, including proposals restricting our ability to sell toys in conjunction with food. In Brazil, the Federal Department of Justice filed suit in 2009 seeking to enjoin various QSRs, including us, from selling toys. As of the date of this annual report, this legal proceeding is still pending and the outcome is uncertain. In addition, certain jurisdictions in the United States are considering curtailing or have curtailed food retailers’ ability to sell meals to children including toys if these meals do not meet certain nutritional criteria. Similar restrictions, if imposed in the Territories, may have a negative impact on our results of operations. In general, regulatory developments that adversely impact our ability to promote and advertise our business and communicate effectively with our target customers, including restrictions on the use of licensed characters, may have a negative impact on our results of operations.
 
Environmental laws and regulations may affect our business.
 
We are subject to various environmental laws and regulations. These laws and regulations govern, among other things, discharges of pollutants into the air and water and the presence, handling, release and disposal of and exposure to, hazardous substances. These laws and regulations provide for significant fines and penalties for noncompliance. Third parties may also assert personal injury, property damage or other claims against owners or operators of properties associated with release of, or actual or alleged exposure to, hazardous substances at, on or from our properties.
 
Liability from environmental conditions relating to prior, existing or future restaurants or restaurant sites, including franchised restaurant 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.
 
We may be adversely affected by legal actions, claims or damaging publicity with respect to our products.
 
We could be adversely affected by legal actions and claims brought by consumers or regulatory authorities in relation to the quality of our products and eventual health problems or other consequences caused by our products or by any of their ingredients. We could also be affected by legal actions and claims brought against us for products made in a jurisdiction outside the jurisdictions where we are operating. An array of legal actions, claims or damaging publicity may affect our reputation as well as have a material adverse effect on our revenues and businesses.
 
 
Certain Factors Relating to Latin America and the Caribbean
 
Our business is subject to the risks generally associated with international business operations.
 
We engage in business activities throughout Latin America and the Caribbean. In 2011, 82.8% of our revenues were derived from Brazil, Argentina, Mexico, Puerto Rico and Venezuela. As a result, our business is and will continue to be subject to the risks generally associated with international business operations, including:
 
 
·
governmental regulations applicable to food services operations;
 
 
·
changes in social, political and economic conditions;
 
 
·
transportation delays;
 
 
·
power and other utility shutdowns or shortages;
 
 
·
limitations on foreign investment;
 
 
·
restrictions on currency convertibility and volatility of foreign exchange markets;
 
 
·
import-export quotas and restrictions on importation;
 
 
·
changes in local labor conditions;
 
 
·
changes in tax and other laws and regulations;