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Arcos Dorados Holdings Inc. – ‘20-F’ for 12/31/12

On:  Friday, 4/26/13, at 6:27am ET   ·   For:  12/31/12   ·   Accession #:  950103-13-2563   ·   File #:  1-35129

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/26/13  Arcos Dorados Holdings Inc.       20-F       12/31/12   15:7.2M                                   Davis Polk &...LLP 01/FA

Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   2.54M 
 2: EX-4.18     Instrument Defining the Rights of Security Holders  HTML     33K 
 3: EX-4.19     Instrument Defining the Rights of Security Holders  HTML    127K 
 4: EX-4.20     Instrument Defining the Rights of Security Holders  HTML     91K 
 5: EX-4.21     Instrument Defining the Rights of Security Holders  HTML     53K 
 6: EX-4.22     Instrument Defining the Rights of Security Holders  HTML     49K 
 7: EX-4.23     Instrument Defining the Rights of Security Holders  HTML    461K 
 8: EX-4.24     Instrument Defining the Rights of Security Holders  HTML     72K 
 9: EX-8.1      Opinion re: Tax Matters                             HTML     20K 
10: EX-12.1     Statement re: Computation of Ratios                 HTML     17K 
11: EX-12.2     Statement re: Computation of Ratios                 HTML     17K 
12: EX-13.1     Annual or Quarterly Report to Security Holders      HTML     10K 
13: EX-13.2     Annual or Quarterly Report to Security Holders      HTML     10K 
14: EX-15.1     Letter re: Unaudited Interim Financial Information  HTML     11K 
15: EX-15.2     Letter re: Unaudited Interim Financial Information  HTML     11K 


20-F   —   Annual Report of a Foreign Private Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Presentation of Financial and Other Information
"Forward-Looking Statements
"Enforcement of Judgments
"Part I
"Item 1. Identity of Directors, Senior Management and Advisers
"Directors and Senior Management
"Advisers
"Auditors
"Item 2. Offer Statistics and Expected Timetable
"Offer Statistics
"Method and Expected Timetable
"Item 3. Key Information
"Selected Financial Data
"Capitalization and Indebtedness
"Reasons for the Offer and Use of Proceeds
"Risk Factors
"Item 4. Information on the Company
"History and Development of the Company
"Business Overview
"Organizational Structure
"Property, Plants and Equipment
"Item 4A. Unresolved Staff Comments
"Item 5. Operating and Financial Review and Prospects
"Operating Results
"Liquidity and Capital Resources
"Research and Development, Patents and Licenses, etc
"Trend Information
"Off-Balance Sheet Arrangements
"Tabular Disclosure of Contractual Obligations
"Safe Harbor
"Item 6. Directors, Senior Management and Employees
"Compensation
"Board Practices
"Employees
"Share Ownership
"Item 7. Major Shareholders and Related Party Transactions
"Major Shareholders
"Related Party Transactions
"Interests of Experts and Counsel
"Item 8. Financial Information
"Consolidated Statements and Other Financial Information
"Significant Changes
"Item 9. the Offer and Listing
"Offering and Listing Details
"Plan of Distribution
"Markets
"Selling Shareholders
"Dilution
"Expenses of the Issue
"Item 10. Additional Information
"Share Capital
"Memorandum and Articles of Association
"Material Contracts
"Exchange Controls
"Taxation
"Dividends and Paying Agents
"Statement by Experts
"Documents on Display
"Subsidiary Information
"Item 11. Quantitative and Qualitative Disclosures About Market Risk
"Item 12. Description of Securities Other Than Equity Securities
"Debt Securities
"Warrants and Rights
"Other Securities
"American Depositary Shares
"Part Ii
"Item 13. Defaults, Dividend Arrearages and Delinquencies
"Defaults
"Arrears and Delinquencies
"Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
"Material Modifications to Instruments
"Material Modifications to Rights
"Withdrawal or Substitution of Assets
"Change in Trustees or Paying Agents
"Use of Proceeds
"Item 15. Controls and Procedures
"Disclosure Controls and Procedures
"Management's Annual Report on Internal Control over Financial Reporting
"Attestation Report of the Registered Public Accounting Firm
"Changes in Internal Control over Financial Reporting
"Item 16. [Reserved
"Item 16A. Audit Committee Financial Expert
"Item 16B. Code of Ethics
"Item 16C. Principal Accountant Fees and Services
"Item 16D. Exemptions From the Listing Standards for Audit Committees
"Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
"Item 16F. Change in Registrant's Certifying Accountant
"Item 16G. Corporate Governance
"Item 16H. Mine Safety Disclosure
"Part Iii
"Item 17. Financial Statements
"Item 19. Exhibits
"Report of Independent Registered Public Accounting Firm
"Consolidated Statements of Income for the fiscal years ended December 31, 2012, 2011 and 2010
"Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2012, 2011 and 2010
"Consolidated Balance Sheets as of December 31, 2012 and 2011
"Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2012, 2011 and 2010
"Consolidated Statements of Changes in Equity for the fiscal years ended December 31, 2012, 2011 and 2010
"Notes to the Consolidated Financial Statements as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012

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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, 2012
 
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:
Title of each class
 
Name of each exchange on which registered
Class A shares, no par value
 
New York Stock Exchange
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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.
x  Yes      o  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  x
Accelerated filer  o
Non-accelerated filer  o
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).
o  Yes       x No
 
 


 
 
 

 
ARCOS DORADOS HOLDINGS INC.
 
TABLE OF CONTENTS
 

 
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
 
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, 2008.
 
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, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010, 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 2012,” relate to our fiscal year ended on December 31 of that calendar year.
 
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. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Segment Presentation” for a description of changes we have made in the
 
 
 
 
iii

 
 
structure of our geographical divisions effective January 1, 2013. The discussion of our financial condition and results of operations in this annual report does not reflect this change and is based on the structure prevailing as of December 31, 2012.
 
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 27 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 a special 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
 
 
 
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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.
 
 
FORWARD-LOOKING STATEMENTS
 
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;
 
 
 
 
v

 
 
 
 
·
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.
 
 
ENFORCEMENT OF JUDGMENTS
 
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 Argentine, 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.
 

 
 
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PART I
 
ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
A.   Directors and Senior Management
 
Not applicable.
 
B.    Advisers
 
Not applicable.
 
C.   Auditors
 
Not applicable.
 
ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE
 
A.    Offer Statistics
 
Not applicable.
 
B.    Method and Expected Timetable
 
Not applicable.
 
ITEM 3.  KEY INFORMATION
 
A.    Selected Financial Data
 
The selected balance sheet data as of December 31, 2012 and 2011 and the income statement data for the years ended December 31, 2012, 2011 and 2010 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, 2010, 2009 and 2008 and the income statement data for the years ended December 31, 2009 and 2008 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.
 
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.
 
 
 
 

 
 
 
   
Arcos Dorados
 
   
For the Years Ended December 31,
 
       
2011
   
2010
   
2009
   
2008
 
         
(in thousands of U.S. dollars, except for share data)
       
Income Statement Data:
                             
Sales by Company-operated restaurants
  $ 3,634,371     $ 3,504,128     $ 2,894,466     $ 2,536,655     $ 2,480,897  
Revenues from franchised restaurants
    163,023       153,521       123,652       128,821       125,945  
Total revenues
    3,797,394       3,657,649       3,018,118       2,665,476       2,606,842  
Company-operated restaurant expenses:
                                       
Food and paper
    (1,269,146 )     (1,216,141 )     (1,023,464 )     (929,718 )     (902,305 )
Payroll and employee benefits
    (753,120 )     (701,278 )     (569,084 )     (491,214 )     (461,602 )
Occupancy and other operating expenses
    (984,004 )     (918,102 )     (765,777 )     (667,438 )     (647,152 )
Royalty fees
    (180,547 )     (170,400 )     (140,973 )     (121,901 )     (118,980 )
Franchised restaurants—occupancy expenses
    (56,057 )     (51,396 )     (37,634 )     (42,327 )     (42,416 )
General and administrative expenses
    (314,619 )     (334,914 )     (254,165 )     (189,507 )     (186,098 )
Other operating expenses, net
    (3,261 )     (14,665 )     (22,464 )     (16,562 )     (26,095 )
Total operating costs and expenses
    (3,560,754 )     (3,406,896 )     (2,813,561 )     (2,458,667 )     (2,384,648 )
Operating income
    236,640       250,753       204,557       206,809       222,194  
Net interest expense
    (54,247 )     (60,749 )     (41,613 )     (52,473 )     (26,272 )
Loss from derivative instruments
    (891 )     (9,237 )     (32,809 )     (39,935 )     (2,620 )
Foreign currency exchange results
    (18,420 )     (23,926 )     3,237       (14,098 )     (74,884 )
Other non-operating (expenses) income, net
    (2,119 )     3,562       (23,630 )     (1,240 )     (1,934 )
Income before income taxes
    160,963       160,403       109,742       99,063       116,484  
Income tax expense
    (46,375 )     (44,603 )     (3,450 )     (18,709 )     (12,067 )
Net income
    114,588       115,800       106,292       80,354       104,417  
Less: Net income attributable to non-controlling interests
    (256 )     (271 )     (271 )     (332 )     (1,375 )
Net income attributable to Arcos Dorados Holdings Inc.
    114,332       115,529       106,021       80,022       103,042  
Earnings per share:
                                       
Basic net income per common share attributable to Arcos Dorados Holdings Inc.
  $ 0.55     $ 0.54     $ 0.44     $ 0.33     $ 0.43  
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.
  $ 0.55     $ 0.54     $ 0.44     $ 0.33     $ 0.43  


     
       
2011
   
2010
   
2009
   
2008
 
   
(in thousands of U.S. dollars, except for share data)
 
Balance Sheet Data(1):
                             
Cash and cash equivalents
  $ 184,851     $ 176,301     $ 208,099     $ 167,975     $ 105,982  
Total current assets
    601,498       588,614       552,355       394,011       380,275  
Property and equipment, net
    1,176,350       1,023,180       911,730       785,862       709,667  
Total non-current assets
    1,447,665       1,286,792       1,231,911       1,088,937       923,488  
Total assets
    2,049,163       1,875,406       1,784,266       1,482,948       1,303,763  
Accounts payable
    244,365       220,941       217,326       151,175       148,884  
Short-term debt and current portion of long-term debt
    2,202       3,811       17,947       11,046       15,306  
Total current liabilities
    578,274       589,292       605,148       396,810       388,357  
Long-term debt, excluding current portion
    649,968       525,951       451,423       454,461       351,870  
Total non-current liabilities
    724,579       606,485       629,923       632,092       474,654  
Total liabilities
    1,302,853       1,195,777       1,235,071       1,028,902       863,011  
Total common stock
    484,569       484,569       377,546       377,546       377,546  
Total equity
    746,310       679,629       549,195       454,046       440,752  
Total liabilities and equity
    2,049,163       1,875,406       1,784,266       1,482,948       1,303,763  
Shares outstanding(2)
    209,529,412       209,529,412       241,882,966       241,882,966       241,882,966  


 
 
2

 
 

 
   
For the Years Ended December 31,
 
       
2011
   
2010
   
2009
   
2008
 
   
(in thousands of U.S. dollars, except percentages)
 
                               
Other Data:
                             
Total Revenues
                             
Brazil
  $ 1,797,556     $ 1,890,824     $ 1,595,571     $ 1,200,742     $ 1,237,208  
Caribbean division
    273,467       267,701       260,617       244,774       231,734  
NOLAD
    384,041       355,265       305,017       240,333       232,083  
SLAD(3)
    1,342,330       1,143,859       856,913       979,627       905,817  
Total
    3,797,394       3,657,649       3,018,118       2,665,476       2,606,842  
                                         
Operating Income
                                       
Brazil
  $ 193,339     $ 246,926     $ 208,102     $ 127,291     $ 102,819  
Caribbean division
    (5,020 )     (5,244 )     11,189       10,448       12,454  
NOLAD
    (5,557 )     (8,709 )     (16,718 )     (17,252 )     (4,863 )
SLAD(3)
    120,536       99,813       66,288       108,261       119,716  
Corporate and others and purchase price allocation
    (66,658 )     (82,033 )     (64,304 )     (21,939 )     (7,932 )
Total
    236,640       250,753       204,557       206,809       222,194  
                                         
Operating Margin(4)
                                       
Brazil
    10.8 %     13.1 %     13.0 %     10.6 %     8.3 %
Caribbean division
    (1.8 )     (2.0 )     4.3       4.3       5.4  
NOLAD
    (1.4 )     (2.5 )     (5.5 )     (7.2 )     (2.1 )
SLAD(3)
    9.0       8.7       7.7       11.1       13.2  
Total
    6.2       6.9       6.8       7.8       8.5  
                                         
Adjusted EBITDA(5)
                                       
Brazil
  $ 240,954     $ 289,462     $ 250,606     $ 160,037     $ 144,965  
Caribbean division
    12,345       9,493       23,556       21,167       22,013  
NOLAD
    26,738       19,551       15,400       3,918       15,961  
SLAD(3)
    150,520       121,475       83,998       129,889       138,683  
Corporate and others
    (89,996 )     (100,193 )     (74,446 )     (48,628 )     (33,648 )
Total
    340,561       339,788       299,114       266,383       287,974  
                                         
Adjusted EBITDA Margin(6)
                                       
Brazil
    13.4 %     15.3 %     15.7 %     13.3 %     11.7 %
Caribbean division
    4.5       3.5       9.0       8.6       9.5  
NOLAD
    7.0       5.5       5.0       1.6       6.9  
SLAD(3)
    11.2       10.6       9.8       13.3       15.3  
Total
    9.0       9.3       9.9       10.0       11.0  
                                         
Other Financial Data:
                                       
Working capital(7)
  $ 23,224     $ (678 )   $ (52,793 )   $ (2,799 )   $ (8,082 )
Capital expenditures(8)
    300,482       325,852       176,173       101,166       167,893  
Dividends declared per common share
  $ 0.24     $ 0.24     $ 0.17     $     $  
                                         
Other Operating Data:
                                       
Systemwide comparable sales growth(9)(10)
    9.2 %     13.7 %     14.9 %     5.5 %      
Brazil
    5.2       9.3       17.5       2.7        
Caribbean division
    2.6       (0.6 )     4.7       4.2        
NOLAD
    4.4       8.5       9.1       (1.7 )      
SLAD
    19.9       29.6       16.1       12.2        
Systemwide average restaurant sales(10)(11)
  $ 2,603     $ 2,648     $ 2,288     $ 2,147     $ 2,186  
Systemwide sales growth(10)(12)
    3.6 %     21.1 %     10.2 %     0.9 %      
Brazil
    (4.6 )     19.2       34.3       (2.4 )      
Caribbean division
          1.4       3.8       4.6        
NOLAD
    5.9       14.9       19.2       (12.3 )      
SLAD
    18.6       34.5       (20.2 )     9.2        

 
 
 
3

 

 
     
       
2011
   
2010
   
2009
   
2008
 
Number of systemwide restaurants
    1,948       1,840       1,755       1,680       1,640  
Brazil
    731       662       616       578       564  
Caribbean division
    139       147       142       145       145  
NOLAD
    503       484       476       456       448  
SLAD
    575       547       521       501       483  
Number of Company-operated restaurants
    1,453       1,358       1,292       1,226       1,155  
Brazil
    533       488       453       432       426  
Caribbean division
    96       96       91       93       89  
NOLAD
    335       314       310       289       242  
SLAD
    489       460       438       412       398  
Number of franchised restaurants
    495       482       463       454       485  
Brazil
    198       174       163       146       138  
Caribbean division
    43       51       51       52       56  
NOLAD
    168       170       166       167       206  
SLAD
    86       87       83       89       85  

 (1)
The balance sheet data as of December 31, 2010, 2009 and 2008 does not reflect the split-off of the Axionlog business, formerly known as Axis. See “Item 4. Information on the Company—B. Business Overview—Our Operations—Supply and Distribution.”
 
(2)
Data as of December 2010, 2009 and 2008 was adjusted to reflect the stock split approved on March 14, 2011. See Note 22 to our consolidated financial statements for details.
 
(3)
Currency controls in Venezuela and related accounting changes have had a significant effect on our results of operations and impact the comparability of our results of operations in 2010 compared to 2009.
 
(4)
Operating margin is operating income divided by total revenues, expressed as a percentage.
 
(5)
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.”
 
 
 
4

 
 
 
Presented below is the reconciliation between net income and Adjusted EBITDA on a consolidated basis:
 
   
For the Years Ended December 31,
 
Consolidated Adjusted EBITDA Reconciliation
 
2012
   
2011
   
2010
   
2009
   
2008
 
   
(in thousands of U.S. dollars)
 
Net income attributable to Arcos Dorados Holdings Inc.
  $ 114,332     $ 115,529     $ 106,021     $ 80,022     $ 103,042  
Plus (Less):
                                       
Net interest expense
    54,247       60,749       41,613       52,473       26,272  
Loss from derivative instruments
    891       9,237       32,809       39,935       2,620  
Foreign currency exchange results
    18,420       23,926       (3,237 )     14,098       74,884  
Other non-operating expenses (income), net
    2,119       (3,562 )     23,630       1,240       1,934  
Income tax expense
    46,375       44,603       3,450       18,709       12,067  
Net income attributable to non-controlling interests
    256       271       271       332       1,375  
Operating income
    236,640       250,753       204,557       206,809       222,194  
Plus (Less):
                                       
Items excluded from computation that affect operating income:
                                       
Depreciation and amortization
    92,328       68,971       60,585       54,169       49,496  
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
    (3,328 )     (7,123 )     (5,299 )     (8,465 )     (4,592 )
Write-offs of property and equipment
    4,259       3,570       2,635       9,434       5,144  
Impairment of long-lived assets
    1,982       1,715       4,668              
Stock-based compensation related to the special awards in connection with the initial public offering under the 2011 Plan
    7,997       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
    683       2,077             102       1,066  
Adjusted EBITDA
    340,561       339,788       299,114       266,383       287,974  

(6)
Adjusted EBITDA margin is Adjusted EBITDA divided by total revenues, expressed as a percentage.
 
(7)
Working capital equals current assets minus current liabilities.
 
(8)
Includes property and equipment expenditures and purchase of restaurant businesses.
 
(9)
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.
 
(10)
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.
 
(11)
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.
 
(12)
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.
 

 
 
5

 
 
Exchange Rates and Exchange Controls
 
In 2012, 81.8% 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 9.6% against the U.S. dollar in 2008, 9.9% in 2009, 4.7% in 2010, 8.2% in 2011 and 14.3% in 2012.
 
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. 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 the Central Bank of Argentina’s 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 24, 2013 the exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Argentina was ARS$5.175 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:
                       
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  
2012
    4.917       4.551       4.305       4.917  
Quarter Ended:
                               
    5.147       5.028       4.923       5.147  
 

 
 
6

 
 
 
   
Period-End
   
Average for Period
   
Low
   
High
 
   
(Argentine pesos per U.S. dollar)
 
   
ARS$
   
ARS$
   
ARS$
   
ARS$
 
Month Ended:
                               
    4.694       4.670       4.642       4.694  
    4.766       4.730       4.699       4.766  
    4.834       4.797       4.770       4.834  
    4.917       4.880       4.840       4.917  
    4.977       4.949       4.923       4.977  
    5.045       5.011       4.983       5.045  
    5.122       5.084       5.122       5.048  
    5.175       5.150       5.130       5.145  
 
 
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.
 
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
 
 
 
7

 
 
 
 
·
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.  Furthermore, foreign exchange regulations currently in place provide that previous authorization by the Central Bank of Argentina is required for access to the local foreign exchange market for the payment of certain services, including (i) information and computer services; (ii) technical or professional business services; (iii) royalties, patents and trademarks; (iv) professional athlete services; (v) copyrights; (vi) cultural, personal or recreational services; (vii) payment of commercial warranties for the export of goods and services; (viii) commercial commissions; (ix) rights of exploitation of movies, videos and foreign audio recordings; and (x) services for technology transfer pursuant to Law No. 22,426; provided, however, the contracts related to such services generate payments or new debt (in the calendar year, at the foreign exchange local market concept code level and regarding the debtor) over U.S.$100,000, and either (i) the beneficiary is a person (natural or legal entity) related to the local debtor, whether directly or indirectly; or (ii) the beneficiary is a person (natural or legal entity) located in a tax haven jurisdiction; or (iii) when the payment abroad is performed in a tax haven jurisdiction. Additionally, depending on the nature of the service rendered, an affidavit may need to be filed with the Argentine tax authority (Administración Federal de Ingresos Públicos, or AFIP) pursuant to the terms of AFIP General Resolution No. 3276 (as amended by AFIP General Resolution No. 3307, AFIP General Resolution No. 3376 and AFIP General Resolution No. 3395).
 
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;
 
 
(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, Communication “A” 5318, Communication “A” 5330, Communication “A” 5339, Communication “A” 5377 and Communication “A” 5397, “Communication “A” 5264”).
 
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.
 
Principal Repayments. Foreign currency necessary to pay principal on foreign indebtedness owed by the private non-financial sector may be acquired:
 
 
(a)
within 10 business 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
 
 
 
8

 
 
 
 
(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 10 business days prior to the stated maturity of the relevant obligation, provided that (i) the funds disbursed under the debt facility have remained in Argentina for at least 365 days; and either (y) the prepayment is financed totally with the disbursement of funds from outside Argentina with the purpose of carrying out capital contributions in a local company, or (z) the amount in foreign currency to be prepaid does not exceed the current value of the portion of the debt being prepaid, the prepayment is financed totally with a new cross-border loan granted by a foreign financial creditor and the terms and conditions of the new financing explicitly provide such prepayment as a condition to grant the new loan.
 
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 shall 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 transfers of funds abroad by local residents are subject to prior approval by the Argentine tax authority, and the local residents’ ability to carry out such transfers (previously limited to U.S.$2,000,000 per calendar month) has been suspended indefinitely.
 
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). Moreover, pursuant to AFIP General Resolution No. 3210, AFIP General Resolution No. 3212 and AFIP General Resolution No. 3356, 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 (suspended indefinitely) 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.
 
Notwithstanding the above, although the purchase of foreign currency to pay dividends abroad is legally permitted, in practice, the payment of dividends abroad is being delayed or denied as a result of factual restrictions by the Central Bank of Argentina. This limitation is part of several informal foreign exchange measures implemented by the Argentine government with the purpose of restricting the outflow of foreign currency in order to obtain a favorable balance between the inflows and outflows of foreign currency.
 
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.
 
 
 
9

 
 
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 2008, the Brazilian real depreciated 31.9% in relation to the U.S. dollar; in 2009 and 2010, the Brazilian real appreciated 25.5% and 4.3%, respectively, in relation to the U.S. dollar; and in 2011 and 2012, the Brazilian real depreciated 12.6% and 9.0%, 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 24, 2013, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank of Brazil was R$2.024 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:
                       
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  
2012
    2.044       1.959       1.702       2.112  
Quarter Ended:
                               
    1.976       1.998       1.953       2.047  
Month Ended:
                               
    2.031       2.028       2.014       2.039  
    2.031       2.030       2.022       2.038  
    2.107       2.068       2.031       2.107  
    2.044       2.078       2.044       2.112  
    1.988       2.031       1.988       2.047  
    1.975       1.973       1.957       1.989  
    2.019       1.981       1.953       2.019  
    2.024       2.002       1.974       2.024  
 
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 24, 2013, 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.12.32 per U.S. dollar.
 
 
 
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Period-End
   
Average for Period
   
Low
   
High
 
   
(Mexican pesos per U.S. dollar)
 
   
Ps.
   
Ps.
   
Ps.
   
Ps.
 
Year Ended December 31:
                       
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  
2012
    13.01       13.17       14.39       12.63  
Quarter Ended:
                               
    12.11       12.61       12.11       12.99  
Month Ended:
                               
    12.85       13.00       12.75       13.42  
    13.09       12.87       12.70       13.09  
    13.04       13.10       12.98       13.25  
    13.01       12.87       12.72       13.01  
    12.71       12.71       12.59       12.99  
    12.87       12.72       12.63       12.87  
    12.83       12.55       12.35       12.83  
    12.32       12.23       12.07       12.36  
 
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 had 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 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 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.
 
These approvals became more difficult to obtain over time, which led to the development of a bond-based exchange process during 2009 and the first five months of 2010 under which bolívar fuerte-denominated bonds were purchased in Venezuela and then were 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 had not been able to access the official exchange rate for royalty payments and had instead entered into bond-based exchange transactions to make our royalty payments, honor other foreign debts and pay 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 May 14, 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
 
 
 
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market for exchanging bonds 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.
 
On June 9, 2010, the Venezuelan government, through the Central Bank of Venezuela, implemented a regulated market for trading with foreign currency, known as the System for Transactions with Securities in Foreign Currency, which we refer to as SITME. Pursuant to this 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, 2012, this exchange rate was 5.3000 bolívares fuertes per U.S. dollar.
 
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.
 
On February 8, 2013, the Venezuelan government, through Foreign Exchange Agreement No. 14, established the devaluation of the official exchange rate from 4.30 to 6.30 bolívares fuertes per U.S. dollar, effective as of February 9, 2013. This exchange rate will also apply to the purchase of foreign currency: (i) for the payment of principal, interest, guarantees and other types of collateral related to private debt assumed with foreign creditors, (ii) to settle obligations derived from the use of patents, trademarks, licenses and franchising, and (iii) for the payment of technology imports and technical assistance agreements.
 
In addition, on February 8, 2013, the Venezuelan government, through Decree No. 9381, created a committee called the Superior Office for the Optimization of the Exchange Rate System (Organo Superior para la Optimización del Sistema Cambiario), or the Committee, which will have the authority to design, plan and execute foreign exchange policies for the purpose of balancing foreign currency flow in the Venezuelan economy. The Committee’s decisions will be taken in consensus with the Central Bank of Venezuela and the Venezuelan Ministry of Planning and Finance.
 
Following the change in the official exchange rate, on February 13, 2013, the Central Bank of Venezuela, through an official announcement published in the Venezuelan Official Gazette number 40.109, provided notice that as of February 9, 2013, no sales would be processed and no purchase orders would be granted through SITME. Venezuelan authorized institutions must continue with the operative process required for the payment of negotiated foreign currency balances already assigned through SITME until February 8, 2013.
 
On March 18, 2013, the Venezuelan government announced a new complementary foreign exchange system called the Complementary System for the Acquisition of Foreign Currency (Sistema Complementario de Adquisición de Divisas), or SICAD. Pursuant to this new system, which is complementary to CADIVI, companies in the productive sector of the economy would have access to U.S. dollars through a controlled auction mechanism (a modified Vickrey auction mechanism). The first auction process, which took place on March 26, 2013, resulted in the trading of $200 million among 383 companies, with no official information about the related average exchange rate. Each company could place orders with a maximum amount of $2 million, 1% of the total amount available, with a base exchange rate of 6.30. Applications had to be included in the Registry of Users of the Foreign Currency Administation System (Registro de Usuarios del Sistema de Administración de Divisas), or RUSAD, and present a letter of credit from their bank. With this mechanism, all submitted bids are sorted by price in descending order to allocate the foreign currency to each of the bidders in the same order at the prices of each bid until availability runs out. However, the new foreign exchange oversight committee run by the Ministry of Finance has the discretional power to authorize the request. The foreign currency is not transferred until the imported merchandise has been cleared by the Venezuelan customs authority and inspected by the Central Bank of Venezuela. As of the date of this annual report, there is no information regarding how often the Venezuelan government will conduct these auctions, the average exchange rate quoted and the amounts available to be included in this system, among other important details.
 
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.
 
 
 
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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)
 
   
Bs.F
   
Bs.F
   
Bs.F
 
    2.1446       2.1500       2.1500  
 
   
Essential Goods
   
Non-essential Goods
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
   
Bs.F
   
Bs.F
 
    2.60       4.30  

   
Purchase
   
Sale
   
Payment of External Public Debt
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
   
Bs.F
   
Bs.F
   
Bs.F
 
    4.2893       4.3000       4.3000  
 
   
Purchase
   
Sale
   
Payment of External Public Debt
 
   
(Venezuelan bolívares fuertes
per U.S. dollar)
 
   
Bs.F
   
Bs.F
   
Bs.F
 
    6.2842       6.3000       6.3000  

 
B.   Capitalization and Indebtedness
 
Not applicable.
 
C.   Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D.   Risk Factors
 
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.
 
 
 
13

 
 
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, including through 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.
 
 
 
14

 
 
 
In addition, we estimate that the cost to comply with our restaurant opening commitments under the MFAs from 2011 through 2013 will be between $175 million and $385 million depending on, among other factors, the type and location of the restaurants we open. 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, McDonald’s would become our controlling shareholder.
 
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 1,948 as of December 31, 2012.
 
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
 
 
 
15

 
 
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, financial distress or shortages, 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 appropriate or compliant replacement 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 25.4% of our restaurants were franchised as of December 31, 2012. 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
 
 
 
16

 
 
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, 2012, we owned the land for 513 of our 1,948 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, 2012, we had $659.8 million in total outstanding indebtedness, consisting of $0.6 million in short-term debt, $651.6 million in long-term debt and $7.6 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:
 
 
 
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·
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
 
 
 
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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, 2012, we had 94,282 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 these tax laws and multinational tax conventions, as well as 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 the Territories, 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.”
 
 
 
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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 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.
 
Information technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased operating costs and expose us to litigation.
 
We rely heavily on our computer systems and network infrastructure across our operations including, but not limited to, point-of-sale processing at our restaurants. As of the date of this annual report, we have not experienced any information security problems. However, despite our implementation of security measures and controls that provide reasonable assurance regarding our security posture, there remains the risk that our technology systems are vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. If our technology systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in our operations which could have a material adverse effect on our financial condition and results of operations.
 
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, 2012 operated 1,390 restaurants throughout Latin America, Yum! Brands, which as of December 31, 2012 operated 930 KFC restaurants and 755 Pizza Hut and Pizza Hut Express restaurants in Latin America and the Caribbean, and Subway, which as of December 31, 2012, operated 2,603 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, 2012 operated 407 restaurants, and Bob’s, a primarily Brazilian QSR chain that focuses on hamburger product offerings, which as of December 31, 2012 operated 471 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 9.1% of the value of the Latin American and Caribbean total eating out segment in 2013. 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 33.4% of our total revenues in 2012, and we import approximately 30% of our food and paper raw materials (excluding toys) and 100% of our Happy Meal toys. 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
 
 
 
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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, 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 H1N1 influenza virus 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, Peru, 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. Although Chile passed a law in June 2012 banning the inclusion of toys in children’s meals, the Chilean regulatory authorities have not yet issued regulations or determined the scope of the law. The ban in Chile also restricts advertisements. While it is difficult to predict how the Chilean authorities will enforce or interpret these laws, we currently do not expect that these Chilean laws will have a material impact on our consolidated results. 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, the number of proposed laws seeking to restrict the sale of toys with meals
 
 
 
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increased significantly in Brazil at the federal, state and municipal levels. Certain jurisdictions in the United States are also considering curtailing or have curtailed food retailers’ ability to sell meals to children including free 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 2012, 81.8% 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;
 
 
·
expropriation and nationalization of our assets in a particular jurisdiction; and
 
 
·
restrictions on repatriation of dividends or profits.
 
 
 
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Some of the Territories have been subject to social and political instability in the past, and interruptions in operations could occur in the future. Our revenues could be adversely affected by any of the foregoing factors.
 
Changes in governmental policies in the Territories could adversely affect our business, results of operations, financial condition and prospects.
 
Governments throughout Latin America and the Caribbean have exercised, and continue to exercise, significant influence over the economies of their respective countries. Accordingly, the governmental actions, political developments, regulatory and legal changes or administrative practices in the Territories concerning the economy in general and the food services industry in particular could have a significant impact on us. We cannot assure you that changes in the governmental policies of the Territories will not adversely affect our business, results of operations, financial condition and prospects.
 
An economic downturn in Latin America and the Caribbean could have a significant impact on our operating results.
 
The success of our business is dependent on discretionary consumer spending, which is influenced by general economic conditions, consumer confidence and the availability of discretionary income. Any prolonged economic downturn could result in a decline in discretionary consumer spending. This may reduce the number of consumers who are willing and able to dine in our restaurants, or consumers may make more value-driven and price-sensitive purchasing choices, eschewing our core menu items for our entry level food options. We may also be unable to increase prices of our menu items, which may negatively affect our financial condition.
 
In addition, a prolonged economic downturn may lead to higher interest rates, significant changes in the rate of inflation or an inability to access capital on acceptable terms. Our suppliers could experience cash flow problems, credit defaults or other financial hardships. If our franchisees cannot adequately access the financial resources required to open new restaurants, this could have a material effect on our growth strategy.
 
Inflation and government measures to curb inflation may adversely affect the economies in the countries where we operate, our business and results of operations.
 
Many of the countries in which we operate have experienced, or are currently experiencing, high rates of inflation. Although inflation rates in many of these countries have been relatively low in the recent past, we cannot assure you that this trend will continue. The measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in many of these countries and to heightened volatility in their securities markets. Periods of higher inflation may also slow the growth rate of local economies, that could lead to reduced demand for our core products and decreased sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to fully pass on to our customers, which could adversely affect our operating margins and operating income.
 
Exchange rate fluctuations against the U.S. dollar in the countries in which we operate could negatively affect our results of operations.
 
We are exposed to exchange rate risk in relation to the United States dollar. While substantially all of our income is denominated in the local currencies of the countries in which we operate, our supply chain management involves the importation of various products, and some of our imports, as well as some of our capital expenditures, are denominated in U.S. dollars. As a result, any decrease in the value of the local currencies of the countries in which we operate as compared to the U.S. dollar will increase our costs. In addition, 47.2% of our outstanding long-term debt was denominated in U.S. dollars as of December 31, 2012.
 
As such, any fluctuation in the value of the U.S. dollar with respect to the various currencies of the countries in which we operate or in U.S. dollar interest rates could adversely impact on our net income, results of operations and financial condition.
 
Price controls in certain countries have affected and may continue to affect our results of operations.
 
 
 
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Certain countries in which we conduct operations have imposed price controls that restrict our ability, and the ability of our franchisees, to adjust the prices of our products. This places downward pressure on the prices at which our products are sold and may limit the growth of our revenue. We cannot assure you that the negative effects of the previously imposed price controls will not continue into the future, or that new controls will not be imposed. Our inability to control the prices of our products could have an adverse effect on our results of operations.
 
We could be subject to expropriation or nationalization of our assets and government interference with our business in certain countries in which we operate.
 
We face a risk of expropriation or nationalization of our assets and government interference with our business in several of the countries in which we do business. These risks are particularly acute in Venezuela. The current Venezuelan government has promoted a model of increased state participation in the economy through welfare programs, exchange and price controls and the promotion of state-owned companies. We can provide no assurance that Company-operated or franchised restaurants will not be threatened with expropriation and that our operations will not be transformed into state-owned enterprises. In addition, the Venezuelan government may pass laws, rules or regulations which may directly or indirectly interfere with our ability to operate our business in Venezuela which could result in a material breach of the MFAs, in particular if we are unable to comply with McDonalds’ operations system and standards. A material breach of the MFAs would trigger McDonald’s option to acquire our non-public shares or our interests in Venezuela. See “—Certain Factors Relating to Our Business—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.”
 
We are subject to significant foreign currency exchange controls in certain countries in which we operate.
 
Certain Latin American economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into U.S. dollars. This may increase our costs and limit our ability to convert local currency into U.S. dollars and transfer funds out of certain countries, including for the purchase of dollar-denominated inputs, the payment of dividends or the payment of interest or principal on our outstanding debt. In the event that any of our subsidiaries are unable to transfer funds to us due to currency restrictions, we are responsible for any resulting shortfall. In addition, in some countries like Argentina and Venezuela exchange controls could negatively affect the sourcing of our products and eventually could cause a disruption in the supply.
 
There are currency restrictions in place in Venezuela that limit our ability to repatriate bolívares fuertes held in Venezuela at the government’s official exchange rate. In Venezuela, the official bolívar fuerte-U.S. dollar exchange rate is established by the Central Bank of Venezuela and the Venezuelan Ministry of Finance, and the acquisition of foreign currency at the official exchange rate by Venezuelan companies to pay foreign debt or dividends is subject to registration with and approval by the relevant Venezuelan authorities.
 
These approvals became more difficult to obtain over time, which led to the development of a bond-based exchange process during 2009 and the first five months of 2010, under which bolívar fuerte-denominated bonds were purchased in Venezuela and then were 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 had not been able to access the official exchange rate for royalty payments and had instead entered into bond-based exchange transactions to make our royalty payments, honor other foreign debts and pay intercompany loans.
 
Since January 2010, a two-tiered official exchange rate system has established an exchange rate of 2.60 bolívares fuertes per U.S. dollar for essential goods and an exchange rate of 4.30 bolívares fuertes per U.S. dollar for non-essential goods, subject to registration with, application to and approval by the Comisión de Administración de Divisas, or CADIVI.
 
In May 2010, the Central Bank of Venezuela increased its control of this bond-based exchange process and, as a result, bond-based exchanges may solely be conducted by the Central Bank of Venezuela. Consequently, the market for exchanging bonds 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.
 
 
 
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On June 9, 2010, the Venezuelan government through the Central Bank of Venezuela implemented a regulated market for trading with foreign currency, known 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, 2012, this exchange rate was 5.3000 bolívares fuertes per U.S. dollar.
 
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.
 
On February 8, 2013, the Venezuelan government, through Foreign Exchange Agreement No. 14, established the devaluation of the official exchange rate from 4.30 to 6.30 bolívares fuertes per U.S. dollar, effective as of February 9, 2013. This exchange rate will also apply to the purchase of foreign currency: (i) for the payment of principal, interest, guarantees and other types of collateral related to private debt assumed with foreign creditors, (ii) to settle obligations derived from the use of patents, trademarks, licenses and franchising, and (iii) for the payment of technology imports and technical assistance agreements.
 
In addition, on February 8, 2013, the Venezuelan government, through Decree No. 9381, created a committee called the Superior Office for the Optimization of the Exchange Rate System (Organo Superior para la Optimización del Sistema Cambiario), or the Committee, which will have the authority to design, plan and execute foreign exchange policies for the purpose of balancing foreign currency flow in the Venezuelan economy. The Committee’s decisions will be taken in consensus with the Central Bank of Venezuela and the Venezuelan Ministry of Planning and Finance.
 
Following the change in the official exchange rate, on February 13, 2013, the Central Bank of Venezuela, through an official announcement published in the Venezuelan Official Gazette number 40.109, provided notice that as of February 9, 2013, no sales would be processed and no purchase orders would be granted through SITME. Venezuelan authorized institutions must continue with the operative process required for the payment of negotiated foreign currency balances already assigned through SITME until February 8, 2013.
 
On March 18, 2013, the Venezuelan government announced a new complementary foreign exchange system called the Complementary System for the Acquisition of Foreign Currency (Sistema Complementario de Adquisición de Divisas), or SICAD. Pursuant to this new system, which is complementary to CADIVI, companies in the productive sector of the economy would have access to U.S. dollars through a controlled auction mechanism (a modified Vickrey auction mechanism). The first auction process, which took place on March 26, 2013, resulted in the trading of $200 million among 383 companies, with no official information about the related average exchange rate. Each company could place orders with a maximum amount of $2 million, 1% of the total amount available, with a base exchange rate of 6.30. Applications had to be included in the Registry of Users of the Foreign Currency Administation System (Registro de Usuarios del Sistema de Administración de Divisas), or RUSAD, and present a letter of credit from their bank. With this mechanism, all submitted bids are sorted by price in descending order to allocate the foreign currency to each of the bidders in the same order at the prices of each bid until availability runs out. However, the new foreign exchange oversight committee run by the Ministry of Finance has the discretional power to authorize the request. The foreign currency is not transferred until the imported merchandise has been cleared by the Venezuelan customs authority and inspected by the Central Bank of Venezuela. As of the date of this annual report, there is no information regarding how often the Venezuelan government will conduct these auctions, the average exchange rate quoted and the amounts available to be included in this system, among other important details.
 
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 Venezuelan National Executive Power for the allocation of foreign currency.
 
There are uncertainties regarding the impact that the elimination of SITME and the creation of SICAD could have on the Venezuelan economy and the complementary regulations the Venezuelan government could issue in the near future. As a result, there are significant uncertainties regarding the potential impact on our Venezuelan
 
 
 
25

 
 
operations. There can be no assurance that such measures will not impair the ability of our Venezuelan operating subsidiaries to convert local currency into U.S. dollars, which could result in foreign currency exchange losses that could have a material adverse effect on our results of operations.
 
In addition, in 2001 and 2002, Argentina imposed exchange controls and transfer restrictions substantially limiting the ability of companies to accumulate or maintain foreign currency in Argentina or make payments abroad. Although certain exchange controls and transfer restrictions were subsequently eased, in June 2005 the Argentine government issued a decree that established new controls on capital flows. Exchange control restrictions impact our ability to transfer funds abroad and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina.
 
In July 2012, the Central Bank of Argentina indefinitely suspended local residents’ ability to access the local foreign exchange market to purchase funds without specific allocation (atesoramiento).
 
Communication “A” 5237 issued by the Central Bank of Argentina set forth new rules regarding the repatriation of foreign direct investments. Communication “A” 5245 and AFIP General Resolution No. 3210 require all banks and foreign exchange houses to register every purchase of foreign currency, whether by individual or a legal entity, through an online system administered by AFIP. Purchases of foreign currency by local residents for the formation of off-shore assets require prior authorization from AFIP. If such a transaction fails to clear, the purchaser will not be able to complete the transaction and may make a claim at the AFIP’s offices to obtain authorization to complete the transaction. Purchases of foreign currency for formation of off-shore assets that are exempt from this clearance process include, among others, those made by international organizations and official export credit agencies, diplomatic and consular representatives and local governments. The Argentine government may tighten exchange controls or transfer restrictions in the future to prevent capital flight, counter a significant depreciation of the Argentine peso or address other unforeseen circumstances.
 
In particular, regulations issued by the Central Bank of Argentina currently in place do not grant non-debtors, such as any Argentine subsidiary guarantor, access to the foreign exchange market for the purpose of transferring currency outside Argentina in order to make payments under any subsidiary guarantee granted by it.
 
In 2012, our subsidiaries in Venezuela and Argentina represented 19.1% and 26.1% of our operating income, respectively. If we are further prohibited from transferring funds out of Venezuela and/or Argentina, or if we become subject to similar restrictions in other countries in which we operate, our results of operations and financial condition could be adversely affected.
 
If we fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.
 
We are subject to various federal, state and municipal laws and regulations in the countries in which we operate, including those related to the food services industry, health and safety standards, importation of goods and services, marketing and promotional activities, nutritional labeling, zoning and land use, environmental standards and consumer protection. We strive to abide by and maintain compliance with these laws and regulations. The imposition of new laws or regulations, including potential trade barriers, may increase our operating costs or impose restrictions on our operations, which could have an adverse impact on our financial condition.
 
For example, Argentine regulations require us to seek permission from the Argentine authorities in order to import goods and to file a statement with the Argentine authorities prior to rendering services to, or receiving services from, foreign residents if the services are valued above a threshold amount. These regulations may prevent or delay the receipt of goods or services that we require for our operations, or increase the costs associated with obtaining those goods and services, and therefore have an adverse impact on our business, results of operations or financial condition.
 
Regulations governing the food services industry have become more restrictive. We cannot assure you that new and stricter standards will not be adopted or become applicable to us, or that stricter interpretations of existing laws and regulations will not occur. Any of these events may require us to spend additional funds to gain compliance with the new rules, if possible, and therefore increase our cost of operation.
 
 
 
26

 
 
Certain Factors Relating to Our Class A Shares
 
Mr. Staton, our Chairman and CEO, controls all matters submitted to a shareholder vote, which will limit your ability to influence corporate activities and may adversely affect the market price of our class A shares.
 
Mr. Staton, our Chairman and CEO, owns or controls common stock representing 40.0% and 76.2%, respectively, of our economic and voting interests. As a result, Mr. Staton is and will be able to strongly influence or effectively control the election of our directors, determine the outcome of substantially all actions requiring shareholder approval and shape our corporate and management policies. The MFAs’ requirement that Mr. Staton at all times hold at least 51% of our voting interests likely will have the effect of preventing a change in control of us and discouraging others from making tender offers for our shares, which could prevent shareholders from receiving a premium for their shares. Moreover, this concentration of share ownership may make it difficult for shareholders to replace management and may adversely affect the trading price for our class A shares because investors often perceive disadvantages in owning shares in companies with controlling shareholders. This concentration of control could be disadvantageous to other shareholders with interests different from those of Mr. Staton and the trading price of our class A shares could be adversely affected. See “Item 7. Major Shareholders and Related Party Transactions―A. Major Shareholders” for a more detailed description of our share ownership.
 
Furthermore, the MFAs contemplate instances where McDonald’s could be entitled to purchase the shares of Arcos Dorados Holdings Inc. held by Mr. Staton. However, our publicly-held class A shares will not be similarly subject to acquisition by McDonald’s.
 
Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our class A shares to decline.
 
Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our class A shares to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Under our articles of association, we are authorized to issue up to 420,000,000 class A shares, of which 129,529,412 class A shares were outstanding as of December 31, 2012. We cannot predict the size of future issuances of our shares or the effect, if any, that future sales and issuances of shares would have on the market price of our class A shares.
 
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our Class A shares.
 
Section 303A of the NYSE Listed Company Manual requires listed companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. British Virgin Islands law, the law of our country of incorporation, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee, and our board may thus not include, or include fewer, independent directors than would be required if we were subject to these NYSE requirements. Since a majority of our board of directors may not consist of independent directors as long as we rely on the foreign private issuer exemption to these NYSE requirements, our board’s approach may, therefore, be different from that of a board with a majority of independent directors, and as a result, the management oversight of our Company may be more limited than if we were subject to these NYSE requirements.
 
Certain Risks Relating to Investing in a British Virgin Islands Company
 
We are a British Virgin Islands company and it may be difficult for you to obtain or enforce judgments against us or our executive officers and directors in the United States.
 
We are incorporated under the laws of the British Virgin Islands. Most of our assets are located outside the United States. Furthermore, most of our directors and officers reside outside the United States, and most of their assets are located outside the United States. As a result, you may find it difficult to effect service of process within the United States upon these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for you to enforce in U.S. courts judgments obtained
 
 
 
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against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an action in a British Virgin Islands court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons.
 
As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States and the British Virgin Islands, courts in the British Virgin Islands will not automatically recognize and enforce a final judgment rendered by a U.S. court.
 
Any final and conclusive monetary judgment obtained against us in U.S. courts, for a definite sum, may be treated by the courts of the British Virgin Islands as a cause of action in itself so that no retrial of the issued would be necessary, provided that in respect of the U.S. judgment:
 
 
·
the U.S. court issuing the judgment had jurisdiction in the matter and we either submitted to such jurisdiction or were resident or carrying on business within such jurisdiction and were duly served with process;
 
 
·
the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of ours;
 
 
·
in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court;
 
 
·
recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and
 
 
·
the proceedings pursuant to which judgment were obtained were not contrary to public policy.
 
Under our articles of association, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions.
 
You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.
 
Our affairs are governed by the provisions of our memorandum of association and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law. The rights of our shareholders and the responsibilities of our directors and officers under the British Virgin Islands law are different from those applicable to a corporation incorporated in the United States. There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the British Virgin Islands regulations governing the securities of British Virgin Islands companies may not be as extensive as those in effect in the United States, and the British Virgin Islands law and regulations in respect of corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.
 
You may not be able to participate in future equity offerings, and you may not receive any value for rights that we may grant.
 
Under our memorandum and articles of association, existing shareholders are entitled to preemptive subscription rights in the event of capital increases. However, our articles of association also provide that such preemptive subscription rights do not apply to certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC.
 
 
 
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ITEM 4.  INFORMATION ON THE COMPANY
 
A.    History and Development of the Company
 
Overview
 
We were incorporated as Arcos Dorados Holdings Inc. on December 9, 2010 under the laws of the British Virgin Islands 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. Following the merger, we replaced Arcos Dorados Limited in the corporate structure and replicated its governance structure.
 
We are a British Virgin Islands company incorporated with limited liability and our affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law, including the BVI Business Companies Act, 2004, or the BVI Act. Our company number in the British Virgin Island is 1619553. As provided in sub-regulation 4.1 of our memorandum of association, subject to British Virgin Islands law, we have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction and, for such purposes, full rights, powers and privileges.
 
Our principal executive offices are located at Roque Saenz Peña 432, Olivos, Buenos Aires, Argentina (B1636 FFB). Our telephone number at this address is +54(11) 4711-2000. Our registered office in the British Virgin Islands is Maples Corporate Services (BVI) Limited, Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands.
 
Important Events
 
The Acquisition
 
McDonald’s Corporation has a longstanding history in Latin America and the Caribbean, dating to the opening of its first restaurant in Puerto Rico in 1967. Since then, McDonald’s expanded its presence across the region as consumer markets and opportunities arose, opening its first stores in Brazil in 1979, in Mexico and Venezuela in 1985 and in Argentina in 1986.
 
We commenced operations on August 3, 2007, as a result of the Acquisition of McDonald’s LatAm business. Woods Staton, our Chairman, CEO and controlling shareholder, was the joint venture partner of McDonald’s Corporation in Argentina for over 20 years prior to the Acquisition and also served as President of McDonald’s South Latin America division from 2004 until the Acquisition. Our senior management team is comprised mostly of executives who had previously worked in McDonald’s LatAm business or with Mr. Staton.
 
We hold our McDonald’s franchise rights pursuant to the MFA for all of the Territories except Brazil, executed on August 3, 2007, as amended and restated on November 10, 2008 and as further amended on August 31, 2010 and June 3, 2011, entered into by us, our wholly owned subsidiary Arcos Dorados Coöperatieve U.A., Arcos Dorados B.V. (or these two entities together with us collectively, the Owner Entities), LatAm, LLC, or the Master Franchisee, certain subsidiaries of the Master Franchisee, Los Laureles, Ltd. and McDonald’s. On August 3, 2007, our subsidiary Arcos Dourados Comercio de Alimentos Ltda., or the Brazilian Master Franchisee, and McDonald’s entered into the separate, but substantially identical, Brazilian MFA, which was amended and restated on November 10, 2008. See “Item 10. Additional Information―C. Material Contracts―The MFAs.
 
The Axionlog Split-off
 
We used to own and operate some of the distribution centers in the Territories, which operations and related properties we refer to as Axionlog (formerly known as Axis). Axionlog operated in Argentina, Chile, Colombia, Mexico and Venezuela, and its main third-party customers were Sodexho, Eurest, Sadia, WalMart, Carrefour, Subway and Dairy Queen. We effected a split-off of Axionlog to our existing shareholders in March 2011. The split-off was effected through the redemption of 41,882,966 shares (25,129,780 class A shares and 16,753,186 class B shares). As consideration for the redemption, the Company transferred to its shareholders its equity interests in the operating subsidiaries of the Axionlog business totaling a net book value of $15.4 million and an equity contribution that was made to the Axionlog holding company amounting to $29.8 million. The split-off of Axionlog did not have
 
 
 
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a material effect on our results of operations or financial condition. Following the split-off, Los Laureles Ltd. acquired the Axionlog shares held by Gavea Investment AD, L.P. and investment funds controlled by Capital International, Inc and DLJ South American Partners L.L.C. (through its affiliates).
 
In 2011, we entered into a master commercial agreement with Axionlog on arm’s-length terms pursuant to which Axionlog continues to provide us with distribution services in Argentina, Chile, Colombia, Mexico and Venezuela. On November 9, 2011, we entered into a revolving loan agreement with Axionlog B.V. (formerly known as Axis Distribution B.V.), a holding company of the Axionlog business, pursuant to which we agreed to lend Axionlog the total sum of $12.0 million at an interest rate of LIBOR plus 6%. This revolving loan facility will mature on November 7, 2016. During 2012, Axionlog B.V. borrowed $7.0 million from us in connection with this revolving loan facility.  In addition, we maintain guarantee deposits for the benefit of certain of Axionlog’s suppliers consisting of payments made to them as collateral for the outstanding obligations of Axionlog to these suppliers. In the event that Axionlog does not pay a supplier by the date set forth in the relevant agreement, the guarantee deposit will be released to the supplier and we will have the right to seek reimbursement from Axionlog of the amount released. Neither fees nor interest are charged under this agreement with Axionlog. As of December 31, 2012, the outstanding amount of these guarantee deposits was $2.3 million. See Note 25 to our consolidated financial statements for details of the outstanding balances and transactions as of and for the fiscal year ended December 31, 2012.
 
On March 19, 2013 Axionlog B.V. borrowed $1.0 million from us in connection with the revolving credit facility discussed above.
 
Capital Expenditures and Divestitures
 
Under the MFAs, we are required to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period during the term of the MFAs. The restaurant opening plan specifies the number and type of new restaurants to be opened in the Territories during the applicable three-year period, while the reinvestment plan specifies the amount we must spend reimaging or upgrading restaurants during the applicable three-year period. Prior to the expiration of the then-applicable three-year period we must agree with McDonald’s on a subsequent restaurant opening plan and reinvestment plan. In the event we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan.
 
As part of the reinvestment plan with respect to the three-year period that commenced on January 1, 2011, we must reinvest an aggregate of at least $60 million per year in the Territories. In addition, we have committed to open no less than 250 new restaurants during the current three-year restaurant opening plan. We estimate that the cost to comply with our restaurant opening commitments under the MFAs from 2011 through 2013 will be between $175 million and $385 million, depending on, among other factors, the type and location of restaurants we open.
 
As a result of the foregoing, property and equipment expenditures were $294.5 million, $319.9 million and $175.7 million in 2012, 2011 and 2010, respectively. In 2012, we opened 130 restaurants, reimaged 57 existing restaurants and opened 33 McCafé locations and 245 Dessert Centers (see “—B. Business Overview—Our Operations—McCafé Locations and Dessert Centers”). In 2011, we opened 101 restaurants, reimaged 122 existing restaurants and opened 40 McCafé locations and 132 Dessert Centers. In 2010, we opened 85 restaurants, reimaged 83 existing restaurants and opened 37 McCafé locations and 132 Dessert Centers. In 2012, 2011 and 2010, we closed 22, 16 and 10 restaurants, respectively.
 
In addition, purchases of restaurants totaled $6.0 million, $6.0 million and $0.5 million in 2012, 2011 and 2010, respectively.
 
Proceeds from the sale of property and equipment totaled $6.6 million, $10.7 million and $6.2 million in 2012, 2011 and 2010, respectively.
 
Capital expenditures for 2013 are expected to be approximately U.S.$280 million, considering approximately 140 gross restaurant openings.
 
 
 
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B.    Business Overview
 
Overview
 
We are the world’s largest McDonald’s franchisee in terms of systemwide sales and number of restaurants, according to McDonald’s, representing 5.6% of McDonald’s global sales in 2012, and we are the largest fast food chain in Latin America and the Caribbean in terms of systemwide sales, according to Euromonitor, with a regional market share in terms of sales of 9.9% in 2011, according to Euromonitor. We have the exclusive right to own, operate and grant franchises of McDonald’s restaurants in the Territories. As of December 31, 2012, we operated or franchised 1,948 McDonald’s-branded restaurants, which represented 7.0% of McDonald’s total franchised restaurants worldwide. In 2012 and 2011, we paid $180.5 million and $170.4 million, respectively, in royalties to McDonald’s (not including royalties paid on behalf of our franchisees).
 
We commenced operations on August 3, 2007, as a result of the Acquisition. We operate McDonald’s-branded restaurants under two different operating formats, Company-operated restaurants and franchised restaurants. As of December 31, 2012, of our 1,948 McDonald’s-branded restaurants in the Territories, 1,453 (or 74.6%) were Company-operated restaurants and 495 (or 25.4%) were franchised restaurants. We generate revenues primarily from two sources: sales by Company-operated restaurants and revenues from franchised restaurants that primarily consist of rental income, which is generally based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. We own the land for 513 of our restaurants (totaling approximately 1.1 million square meters) and the buildings for all but 12 of our restaurants.
 
Our business has grown significantly since the Acquisition: we have increased our presence in existing and new markets in the Territories by opening 463 restaurants (346 Company-operated and 117 franchised), 198 McCafé locations and 939 Dessert Centers (see “—Our Operations—McCafé Locations and Dessert Centers”) since the Acquisition. The McDonald’s brand’s market share of the fast food industry in Latin America and the Caribbean in terms of sales has increased from 9.7% in 2007 to 9.9% in 2011 according to Euromonitor.
 
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. As of December 31, 2012, 37.5% of our restaurants were located in Brazil, 29.5% in SLAD, 25.8% in NOLAD and 7.1% in the Caribbean division. We believe our diversified market presence reduces our dependence on any one market and helps stabilize the impact of individual countries’ economic cycles on our revenues. We focus on our customers by managing operations at the local level, including marketing campaigns and special offers, menu management and monitoring customer satisfaction, while leveraging our size by conducting administrative and strategic functions at the divisional or corporate level, as appropriate.
 
See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Segment Presentation” for a description of changes we have made in the structure of our geographical divisions effective January 1, 2013. The discussion in this annual report does not reflect this change and is based on the structure prevailing as of December 31, 2012.
 
 
 
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The following table presents certain operating results and data by operating segment:
 
   
As of and for the Years Ended December 31,
 
       
2011
   
2010
   
2009
   
2008
 
   
(in thousands of U.S. dollars, except percentages)
 
                               
Total Revenues
                             
Brazil
  $ 1,797,556     $ 1,890,824     $ 1,595,571     $ 1,200,742     $ 1,237,208  
Caribbean division
    273,467       267,701       260,617       244,774       231,734  
NOLAD
    384,041       355,265       305,017       240,333       232,083  
SLAD(1) 
    1,342,330       1,143,859       856,913       979,627       905,817  
Total
    3,797,394       3,657,649       3,018,118       2,665,476       2,606,842  
                                         
Adjusted EBITDA(2)
                                       
Brazil
  $ 240,954     $ 289,462     $ 250,606     $ 160,037     $ 144,965  
Caribbean division
    12,345       9,493       23,556       21,167       22,013  
NOLAD
    26,738       19,551       15,400       3,918       15,961  
SLAD(1) 
    150,520       121,475       83,998       129,889       138,683  
Corporate and others
    (89,996 )     (100,193 )     (74,446 )     (48,628 )     (33,648 )
Total
    340,561       339,788       299,114       266,383       287,974  
                                         
Adjusted EBITDA Margin(3)
                                       
Brazil
    13.4 %     15.3 %     15.7 %     13.3 %     11.7 %
Caribbean division
    4.5       3.5       9.0       8.6       9.5  
NOLAD
    7.0       5.5       5.0       1.6       6.9  
SLAD(1) 
    11.2       10.6       9.8       13.3       15.3  
Total
    9.0       9.3       9.9       10.0       11.0  
                                         
Systemwide comparable sales growth(4)(5)
    9.2 %     13.7 %     14.9 %     5.5 %      
Brazil
    5.2       9.3       17.5       2.7        
Caribbean division
    2.6       (0.6 )     4.7       4.2        
NOLAD
    4.4       8.5       9.1       (1.7 )      
SLAD
    19.9       29.6       16.1       12.2        

(1)
Currency controls in Venezuela and related accounting changes have had a significant effect on our results of operations and impact the comparability of our results of operations in 2010 compared to 2009.
 
(2)
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 and a reconciliation thereof, see “Presentation of Financial and Other Information—Other Financial Measures” and “Item 3. Key Information—A. Selected Financial Data.”
 
(3)
Adjusted EBITDA margin is Adjusted EBITDA divided by total revenues, expressed as a percentage.
 
(4)
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.
 
(5)
Systemwide comparable sales growth is presented on a systemwide basis, which means it includes 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.
 
Our Industry
 
We operate in the QSR sub-segment of the fast food segment of the Latin American and Caribbean food service industry. In Latin America and the Caribbean, the fast food segment has benefited from the region’s increasing modernization, as people in more densely populated areas adopt lifestyles that increasingly seek convenience, speed and value. Euromonitor forecasts that fast food segment sales in Latin America and the Caribbean will total an estimated $55.7 billion (nominal value) in 2013. In addition, Euromonitor forecasts that the fast food segment in Latin America and the Caribbean will have grown 62% in the period from 2008 to 2013, which is 44 percentage points higher than the growth that Euromonitor forecasts for the Latin American and Caribbean food service industry as a whole in the same period, representing an estimated compound annual growth rate of 10.2%, which in turn is significantly higher than the estimated 2.9% compound annual growth rate of the U.S. fast food segment.
 
 
 
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Euromonitor estimates that QSRs captured 61% of market share within the fast food segment in Latin America and the Caribbean in 2011, due to the popularity of standardized menus, the consistency of products and services, cost efficient operating systems, the development of products targeted to meet consumer demands, economies of scale, convenience, speed and value. Euromonitor estimates that the growth of QSRs in Latin America and the Caribbean will outpace the growth of the fast food segment generally in the near future, as QSRs tend to be better capitalized and are therefore able to expand through additional restaurant openings and innovation, and as consumers increasingly prefer the convenience and reliability associated with a well-established brand. Euromonitor estimates that the QSR sub-segment in Latin America and the Caribbean will have grown 61% during the period from 2008 to 2013.
 
McDonald’s, Burger King, Subway and KFC have positioned themselves as market leaders within the QSR segment. According to Euromonitor, the McDonald’s brand is the largest in Latin America and the Caribbean with more than three times the sales of Burger King, our closest competitor, in Latin America and the Caribbean and with more sales than our next five competitors combined. In addition to these international brands, strong local brands, such as Habib’s, Bob’s, Servicompras and Giraffa’s, exist in certain key markets.
 
The chart below indicates the percentage market share held by certain major brands in the fast food segment in Latin America and the Caribbean for 2011:
 


Source: Euromonitor
 
 
 
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We believe we have significant opportunities to increase our presence and market share in those countries that we believe offer the best growth prospects and those that are most economically and financially stable, such as Brazil, Chile, Colombia, Mexico and Peru. For example, in many of the Territories, including Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru, we believe there are opportunities for growth as the ratio of gross domestic product purchase power parity, or GDP PPP, per McDonald’s-branded restaurant, a measure we use to determine penetration, is at least 2.5 times greater than in the United States. As the macroeconomic conditions of the countries in the Territories continue to improve, we believe we will have significant opportunities to expand our business as consumers benefit from expanding purchasing power and higher levels of disposable income, which in turn increase consumer demand for our safe, fresh and good-tasting food, comfortable settings and affordable prices as aspects of food convenience.
 
Our Operations
 
Company-Operated and Franchised Restaurants
 
We operate our McDonald’s-branded restaurants under two basic structures: (i) Company-operated restaurants operated by us and (ii) franchised restaurants operated by franchisees. Under both operating alternatives the real estate location may either be owned or leased by us.
 
We own, fully manage and operate Company-operated restaurants and retain any operating profits generated by such restaurants, after paying operating expenses and the franchise and other fees owed to McDonald’s under the MFAs. In Company-operated restaurants, we assume the capital expenditures for the building and equipment of the restaurant and, if we own the real estate location, for the land as well.
 
In contrast to Company-operated restaurants, franchised restaurants are operated and managed by the franchisee with technical and operational support from us as master franchisee, including training programs, operations manuals, access to our supply and distribution network and marketing assistance. Under our conventional franchise arrangements, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurants, and by reinvesting in the business over time. We are required by the MFAs to own the real estate or to secure long-term leases for franchised restaurant sites. We subsequently lease or sublease the property to franchisees. This arrangement allows for long-term occupancy of the property and assists in the alignment of our franchisees’ interests with our own.
 
In exchange for the lease and services, franchisees pay a monthly rent to us, generally based on the greater of a fixed rent or a certain percentage of gross sales. In addition to this monthly rent, we collect the monthly continuing franchise fee, which generally is 5% of the U.S. dollar equivalent of the restaurant’s gross sales, and pay these fees to McDonald’s pursuant to the MFAs. However, if a franchisee fails to pay its monthly continuing franchise fee, we remain liable for payment in full of these fees to McDonald’s. Pursuant to the MFAs, franchisees pay an initial franchise fee in connection with the opening of a new franchised restaurant and a transfer fee upon transfer of a franchised restaurant, both of which are subsequently shared by McDonald’s and us. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Franchise Fees.”
 
 
 
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The chart below illustrates the economics for Company-operated restaurants and franchised restaurants in the case of owned and leased real estate:
 


Source:  Arcos Dorados
 
In addition, we are the majority stakeholder in several joint ventures that collectively own 27 restaurants, in Argentina, Chile and Colombia. We have also granted developmental licenses to 12 restaurants. Pursuant to the developmental licenses, the developmental licensees own or lease the land and building on which the restaurants are located and pay a franchise fee to us in addition to the continuing franchise fee due to McDonald’s. All of our joint ventures and developmental licenses were in existence at the time of the Acquisition.
 
Restaurant Categories
 
We classify our restaurants into one of four categories: (i) freestanding, (ii) food court, (iii) in-store and (iv) mall stores. Freestanding restaurants are the largest type of restaurant, have ample indoor seating and include a drive-thru area and parking lot. Food court restaurants are located in malls and consist primarily of a front counter and kitchen and do not have their own seating area. In-store restaurants are part of a larger building, but they do not have a drive –thru area or a parking lot. Mall stores are located in malls like food court restaurants, but have their own seating areas. As of December 31, 2012, 892 (or 45.8%) of our restaurants were freestanding, 432 (or 22.2%) were food courts, 293 (or 15.1%) were in-stores and 329 (or 16.9%) were mall stores. In addition, we have two non-traditional stores, such as food carts. These percentages vary by country, and may shift as opportunities in malls and more densely populated areas become available in some of the Territories.
 
 
 
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Below are examples of each type of our restaurant categories:
 
 

Source: Arcos Dorados
 
Returns on investment in each type of restaurant vary significantly due to the different capital expenditures required and their different sales potential; mall stores generally provide the highest return on investment while freestanding restaurants generally provide the lowest. Moreover, returns vary significantly on a country by country basis.
 
Reimaging
 
An important component of our development plan is the reimaging of existing restaurants. As of December 31, 2012, we had completed the reimaging of 475 of the 1,569 restaurants we purchased in the Acquisition, an increase of 55 restaurants as compared to December 31, 2011. Our restaurants that have undergone reimaging during the past three years have experienced an additional increase in sales per restaurant over the comparable sales growth experienced by restaurants which have not been reimaged in the same period. Both we and McDonald’s are committed to maintaining an image for our restaurants that creates a contemporary dining experience. Over the last few years, we have invested substantially in the reimaging of our restaurants, and we, pursuant to the MFAs, have committed to a significant reimaging plan. See “Item 10. Additional Information—C. Material Contracts.” Many of the reimaging projects include the addition of McCafé locations to the restaurant.
 
Objectives of the reimaging include elevating the customer’s perception of McDonald’s and creating a more sophisticated and highly aspirational environment. We have developed systemwide guidelines for the interior and exterior design of reimaged restaurants. When carrying out a reimaging project, we minimize the impact on the operations and sales of the restaurants by keeping the restaurants open and operating during the renovations and working in specific areas of the location at particular times.
 
 
 
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Below are images of the exterior of a few of our restaurants that have benefited from reimaging:
 
 

Source: Arcos Dorados
 
McCafé Locations and Dessert Centers
 
Our brand extension efforts focus on the development of additional McCafé locations and Dessert Centers. McCafé locations are stylish, separate areas within restaurants where customers can purchase a variety of customizable beverages, including lattes, cappuccinos, mochas, hot and iced premium coffees and hot chocolate. McCafé locations have been very successful in creating a different customer experience, optimizing the use of our restaurants at all hours of operation and providing a higher profit margin than our regular restaurant operations. We believe the primary benefit of McCafé locations is that they attract new customers by increasing the variety of our product offerings and improving our image.
 
With an average return on investment from McCafé locations of 33.6% in 2012, the McCafé concept is well-suited for restaurants in large-scale shopping centers and commercial areas. McCafé locations have been a key factor in adding value to our customers’ experience and represented 2.1% of the total transactions and 1.3% of total sales of the restaurants in which they were located in 2012. As of December 31, 2012, there were 334 McCafé locations in the Territories, of which 11% were operated by franchisees. Argentina and Brazil, with 84 locations each, have the greatest number of McCafé locations. The first McCafé in Latin America was opened in Argentina in 1999. Pursuant to the MFAs we have the right to add McCafé locations to the premises of our restaurants.
 
 
 
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Below are images of the interior of two of our McCafé locations:
 


Source: Arcos Dorados
 
In addition to McCafé locations, Dessert Centers have been a very successful brand extension. Dessert Centers operate separately from existing restaurants, but depend on them for supplies and operational support. For example, a mall store restaurant can provide support for several Dessert Centers located in different locations throughout the same mall. Our Dessert Centers are conveniently located to attract customers, thereby serving as important transaction generators and providing an effective method of extending our band presence to non-traditional areas. At Dessert Centers, customers can purchase a variety of dessert items, including the McFlurry and soft-serve ice cream. Dessert Centers require low capital expenditures and provide returns on investment and operating margins that are significantly higher than our regular restaurant operations. As such, we believe they are an important driver in increasing our market penetration.
 
Dessert Centers represented 27.3% of our transactions and 8.7% of our total sales in 2012 and, with a return on investment of 154.2% in 2012, provide a low-risk investment alternative. As of December 31, 2012 there were 1,952 Dessert Centers in the Territories. Dessert Centers are highly successful in Brazil, where we have 1,162 locations. The first Dessert Center was created in Costa Rica in 1986 and was launched in Brazil in 1990. Due to a change in methodology in 2011, Dessert Center figures for 2012 and 2011 are not directly comparable to figures for 2009 and 2010.
 
 
 
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The following maps sets forth our McCafé locations and Dessert Centers in each of the Territories as of December 31, 2012:
 
 

Source: Arcos Dorados
 
The McDonald’s Brand
 
Interbrand, a brand consulting firm, ranked McDonald’s among the top ten global brands in 2012. The McDonald’s brand is also one of the most widely recognized consumer brands in Latin America and the Caribbean, according to Euromonitor. In addition, we believe that in Latin America and the Caribbean, the McDonald’s brand benefits from an aspirational cachet as a “destination” restaurant with a reputation for safe, fresh and good-tasting food in an attractive setting. McDonald’s strong brand equity stems from the dedicated execution of its brand promise and its ability to associate with the local community where it operates. McDonald’s sets the standard in the restaurant industry worldwide for brand stewardship and marketing leadership.
 
Product Offerings
 
A crucial part of delivering the brand to clients depends on our product offerings, or more specifically, our menu strategy and management. The key objective of our menu strategy is the development and offering of quality food choices that attract customers to our restaurants on a regular basis. The elements we utilize to achieve this goal include offering McDonald’s core menu, our product innovation initiatives and our focus on food safety.
 
Our menus feature three tiers of products: affordable entry-level options, such as our Big Pleasures, Small Prices or “Combo del Día” (“Daily Extra Value Meal”) offerings, core menu options, such as the Big Mac, Happy Meal and Quarter Pounder, and premium options, such as Big Tasty or Angus premium hamburgers and chicken sandwiches and low-calorie or low-sodium products that are marketed through common platforms rather than as individual items. These platforms can be based on the type of products, such as beef, chicken, salads or desserts, or on the type of customer targeted, such as the children’s menu. We have offered a new menu with fewer calories and less sugar and sodium in the majority of our Territories since 2011.
 
 
 
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Our core menu is the most important element of our menu strategy and includes well-recognized food choices that have global customer acceptance and are what customers repeatedly order at McDonald’s-branded restaurants worldwide.
 
Product Development
 
We have been very innovative in our product development in Latin America and the Caribbean. In key countries, our understanding of the local market has enabled us to successfully introduce new items to appeal to local tastes and to provide our customers with additional food options. Our Big Pleasures, Small Prices and bone-in-chicken offerings are examples of our product development efforts, through which we introduce affordable new products every few months. Also, we carefully monitor the sales of our products and are able to quickly modify them if necessary. For instance, although we always offer the McFlurry dessert product, we include in this product platform a promotional topping that is offered for a limited period of time, followed by a new promotional topping to maintain the sales momentum.
 
In 2006, McDonald’s global innovation team introduced a new food preparation platform called the Bridge Operating Platform, or BOP, which combines product innovation with operational efficiency throughout our restaurants. This platform is a significant system enhancement, and it allows for customization of products without compromising the restaurants’ ability to handle a large influx of customers at peak periods. The BOP has now been implemented in all large Latin American and Caribbean markets. In 2011 we began the roll out of Made For You, or MFY, a new kitchen operating platform that we believe will allow for improved product quality, higher labor productivity and reduced food waste. As of December 31, 2012, we had implemented MFY in almost all of our Company-operated restaurants in Brazil, Mexico and Argentina.
 
We work closely with McDonald’s to develop new product offerings and McDonald’s considers our recommendations regarding regional tastes and preferences and works with us to accommodate such tastes and preferences. We continue to benefit from McDonald’s product development efforts following the Acquisition and have access to a library of products developed globally for the McDonald’s system. In addition, we continue to benefit from the Hamburger Universities in the United States and Brazil and the food studio located in Brazil that aims to develop locally relevant products for the region. The Hamburger Universities and the food studio models have been McDonald’s main global source of people and product development. The Hamburger Universities provide restaurant managers, mid-managers and owner/operators with training on best practices in different aspects of the business, like restaurant and people management, sales and accounting, while emphasizing consistent restaurant operations procedures, service, quality and cleanliness. The food studios across the globe have been responsible for some of McDonald’s most innovative food concepts and play a crucial role in developing new menu options that cater to the local tastes.
 
Product and Pricing Strategy
 
Value perceptions change significantly between markets and even between areas within a single market. In order to adjust pricing to meet customers’ expectations in each market, we have developed local expertise aimed at understanding the dynamics of the local marketplace and the characteristics of their customers. We also examine trends in the pricing of raw materials, packaging, product related operating costs as well as individual item sales volumes to fully understand profitability by item. These insights feed into the local markets’ menu and pricing strategy as well as the marketing plan that is disseminated to both Company-operated and franchised restaurants. Restaurants may then adjust pricing and/or item offerings as they choose in an attempt to optimize sales, profitability and local preferences. This cycle is part of an overall revenue management philosophy and is part of our business management practices utilized throughout the region.
 
Advertisement & Promotion
 
We believe that sales in the QSR sub-segment can be significantly affected by the frequency and quality of our advertising and promotional programs. In particular, we benefit from the strength of McDonald’s global resources, including its global alliances with some of the largest multinational conglomerates and sponsorship of sporting events such as the Olympic Games and the World Cup and participation in various movie promotions, which provides us with important advertising and promotion opportunities.
 
 
 
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We promote the McDonald’s brand and our products by advertising in all of the Territories. We create, develop and coordinate marketing plans and promotional activities throughout the Territories; however, pursuant to the MFAs, McDonald’s reserves the right to review and approve any advertising materials and related promotional activities 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 are required under the MFAs to spend at least 5% of our gross sales, and our franchisees generally are required to pay us 5% of their gross sales for the portion of advertising expenditures related to their restaurants, on advertisement and promotion activities. The only exception to this policy is in Mexico, where both we and our franchisees contribute funds to a cooperative that is responsible for advertisement and promotion activities for Mexico.
 
Our advertisement and promotion activities are guided by our overall marketing plan, which identifies the key strategic platforms that we aim to leverage to drive sales. The advertisement and promotion program is formulated based on the amount of advertisement and promotion support needed for each strategic platform for the year. During 2012, our key strategic platforms included menu relevance, convenience, strengthening the kids and family experience and price segmentation for margin optimization. In terms of menu relevance, we continue to support the breakfast menu that we introduced during 2008 in many of our key markets, such as Brazil, and introduced our premium Angus burger and bone-in-chicken premium products. In terms of convenience, we increased the efficiency of some of our restaurants by including more McCafé locations, combined beverage systems that serve fruit-based smoothies, coffee-based frappés and specialty coffees, and Dessert Centers and developing locally relevant menu items, such as breakfast choices and bone-in-chicken product offerings in Peru. In terms of pricing, we understand that our customers seek great-tasting food at affordable prices and that their perception of value while at the restaurant is a significant factor in determining overall satisfaction and frequency of visits. Our Big Pleasures, Small Prices and our Combo del Día programs in Latin America and the Caribbean, which are based on best practices and experience in the United States and Europe, have been successful in addressing a broad range of value expectations in our restaurants. We continue leveraging these platforms to increase penetration and grow market share.
 
To support our product offerings, we sponsor regionally popular sporting events, such as the preliminary round for the FIFA World Cup 2014 in South America, and leverage global marketing initiatives led by McDonald’s, such as sponsorship of major sporting events and participation in various movie promotions. We believe these branding events provide a cost-effective manner to increase our market recognition.
 
Through the execution of these initiatives, we work to enhance the McDonald’s experience for customers throughout the Territories, increase our sales and customer counts. We aim to position ourselves as a “forever young” brand by delivering a youthfully energetic, distinctly casual, personally engaging and delightful dining/brand experience.
 
Regional Operations
 
The Company is divided into four geographical divisions: Brazil, the Caribbean division, NOLAD and SLAD. Except for Brazil, the divisions are subsequently divided into sub-groups comprised of individual Territories. The presidents of the divisions report directly to our chief operating officer.
 
 
 
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The following map sets forth the number of our restaurants in each of our operating divisions as of December 31, 2012:
 
 

Source: Arcos Dorados
 
We remain close to customers by managing operations at the local level, including implementing recruiting centers, conducting marketing campaigns and promotions, monitoring consumer perception and managing menu offerings. We conduct administrative and strategic activities at either the divisional level or at our headquarters, as appropriate. We provide services such as accounts payable, accounts receivable and payroll through our centralized shared service center located in Buenos Aires, Argentina. In addition, we have designed standardized crew recruiting manuals and have implemented an online communication platform for crew and managers. These centralized operations help us maintain consistent procedures, quality control and brand management across all of our markets.
 
 
 
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Set forth below is a summary of our restaurant portfolio as of December 31, 2012:
 
   
Ownership
   
Store Type(1)
   
Building/ Land(2)
 
 
Portfolio by Division
 
Company-Operated
   
Joint Venture
   
Franchised
   
Developmental License
   
Total
   
Freestanding
   
Food Court
   
In-Store
   
Mall Store
   
Dessert Centers
   
McCafé Locations
   
Owned
   
Leased
 
Brazil
    533             198             731       290       214       85       142       1,162       84       118       613  
Caribbean Division
    96             42       1       139       120       1       6       12       6       18       52       86  
NOLAD
    335             157       11       503       261       130       56       55       315       57       167       325  
SLAD
    462       27       86             575       221       87       146       120       469       175       176       399  
Total
    1,426       27       483       12       1,948       892       432       293       329       1,952       334       513       1,423  

(1)
In addition, we have two non-traditional stores, such as food carts.
 
(2)
Developmental licenses and mobile stores are not included in these figures.
 
Brazil
 
Brazil is our largest division in terms of restaurants, with 731 restaurants as of December 31, 2012 and $1,797.6 million in revenues in 2012, representing 37.5% and 47.3% of our total restaurants and revenues, respectively. Our operations in Brazil are based in Sao Paulo and McDonald’s has been present in Brazil since opening its first restaurant in Rio de Janeiro in 1979.
 
Caribbean Division
 
The Caribbean division includes nine territories with 139 restaurants as of December 31, 2012 and $273.5 million in revenues in 2012, representing 7.1% and 7.2% of our total restaurants and revenues, respectively. Its primary market is Puerto Rico, where the division’s management is based. McDonald’s has been present in Puerto Rico since opening its first restaurant in San Juan in 1967. Puerto Rico represents 75.5% of the Caribbean division’s restaurants and 55.2% of the Caribbean division’s revenues. Puerto Rico is our fifth-largest market in terms of restaurants.
 
NOLAD
 
NOLAD includes three countries with 503 restaurants as of December 31, 2012 and $384.0 million in revenues in 2012, representing 25.8% and 10.1% of our total restaurants and revenues, respectively. Its primary market is Mexico, where the division’s management is based. McDonald’s has been present in Mexico since opening its first restaurant in Mexico City in 1985. Mexico represents 79.7% of NOLAD’s restaurants and 55.4% of NOLAD’s revenues, and Mexico is our second-largest market in terms of restaurants.
 
Our operations in Mexico differ from those in our other Territories (with the exception of Venezuela) in that the percentage of franchised restaurants is significantly higher than our systemwide average because some of McDonald’s previous joint venture partners were converted into franchisees immediately prior to the Acquisition. Since the Acquisition, we have been adjusting our business model in Mexico as several factors had significantly eroded that market’s profitability and, as a result, we have acquired 85 franchised restaurants. As of December 31, 2012, 37.2% of our restaurants in Mexico were franchised, while 25.4% of our restaurants overall were franchised.
 
 
 
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SLAD
 
SLAD includes seven countries with 575 restaurants as of December 31, 2012 and $1,342.3 million in revenues in 2012, representing 29.5% and 35.3% of our total restaurants and revenues, respectively. Its primary markets are Argentina, where the division’s management is based, and Venezuela. McDonald’s has been present in Argentina since opening its first restaurant in Buenos Aires in 1986 and in Venezuela since opening its first restaurant in Caracas in 1985. As of December 31, 2012, Argentina and Venezuela, respectively, represented 36.5% and 24.2% of SLAD’s restaurants and 44.3% and 26.0% of SLAD’s revenues in 2012. Argentina and Venezuela, respectively, are our third- and fourth-largest markets in terms of restaurants.
 
Seasonality
 
Our sales and revenues are generally greater in the second half of the year than in the first half. Although the impact on our results of operations is relatively small, this impact is due to increased consumption of our products during the winter and summer holiday seasons, affecting July and December, respectively.
 
Supply and Distribution
 
Supply chain management is an important element of our success and a crucial factor in optimizing our profitability. Currently, we have an integrated and centralized supply chain management system that focuses on (i) the highest possible quality and food safety, (ii) competitive market pricing that is predictable and sustainable over time, and (iii) leveraging of local, regional and global sourcing strategies to obtain a competitive advantage. This system consists of the selection and development of suppliers that are able to comply with McDonald’s high quality standards and the establishment of the appropriate type of relationships with these suppliers. These standards, which are based on the highest industry standards like International Organization for Standardization, or ISO, standards, British Retail Consortium, or BRC, standards and others, include cleanliness, product consistency and timeliness, meeting or exceeding all local food regulations and compliance with our Hazard Analysis Critical Control Plan, or HACCP, a systematic approach to food safety that emphasizes protection within the processing facility, rather than detection, through analysis, inspection and follow-up. Due to our supply chain management and high quality standards, we believe our products have a competitive advantage because they have many attributes that make them appealing to our customers. For instance, our McNuggets are made of 100% white meat; our frying oil is 100% free of trans fatty acids; the dairy mix for our sundaes and the McFlurry undergo aseptic processes to rid them of bacteria; our vegetables are washed and sanitized; and our hamburger patties are made with 100% beef and do not contain additives.
 
Pursuant to the MFAs, we purchase core products and services, such as beef, chicken, buns, produce, cheese, dairy mixes and toppings, from approved suppliers and distributors who satisfy the above requirements. If McDonald’s determines that any product or service offered by an approved supplier is not in compliance with its standards, it may terminate the supplier’s approved status. Beyond the purchase of core products and services, we have no restrictions on which suppliers or distributors we may use. We have largely continued the supply relationships that McDonald’s had established prior to the Acquisition, and we develop relationships with new suppliers in accordance with McDonald’s Supplier Quality Management System, or SQMS.
 
Since the process to become an approved supplier is lengthy, expensive and requires proof of compliance with McDonald’s high quality standards, we have found that oral agreements with our approved suppliers generally are sufficient to ensure a reliable supply of quality food products, and we have developed long-term relationships with many of our suppliers. In addition, we enter into written agreements with most of our suppliers regarding the cost of such goods, which can be based on pricing protocols, formula costing, benchmarking or open bidding, as appropriate. Our 25 largest suppliers account for approximately 80% of our supplies, and no single supplier or group of related suppliers account for more than 10% of our total food and paper costs. Among our main suppliers are Marfrig Alimentos S.A., McCain Foods Limited, Coca-Cola Company and Fresh Start Bakeries, Inc.
 
Our integrated supply chain management optimizes value as we work with suppliers to develop pricing protocols, inventory, planning and product quality. As of December 31, 2012, approximately 30% of the food and paper products used in our restaurants were imported, primarily from countries within Latin America, while the remaining amount were locally sourced. This percentage varies among the Territories; for example, 18% of the products consumed in Mexico are imported, while 20% and 90% of the products consumed in Brazil and the Caribbean division, respectively, are imported. This includes the toys distributed in our restaurants, which are
 
 
 
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imported from China. Certain supplies, such as beef, must often be locally sourced due to restrictions on their importation. Combined with the MFAs’ requirement to purchase certain core supplies from approved suppliers, although we maintain contingency plans to back up restaurant supplies, we may not be able to quickly find alternate or additional supplies in the event a supplier is unable to meet our orders. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.” The suppliers send all of their products to distribution centers that are in charge of transportation, warehousing, financial administration, demand and inventory planning and customer service. The distribution centers interact directly with our Company-operated and franchised restaurants.
 
Until March 16, 2011 we owned and operated some of the distribution centers in the Territories, which operations and related properties we refer to as Axionlog (formerly known as Axis). See “Item 4. Information on the Company—A. History and Development of the Company—Important Events—The Axionlog Split-off.” In 2011, we entered into a master commercial agreement with Axionlog on arm’s-length terms pursuant to which Axionlog continues to provide us with distribution services in Argentina, Chile, Colombia, Mexico and Venezuela. For additional information about our transactions with Axionlog, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Axionlog Split-off.”
 
Supply Chain Management and Quality Assurance
 
All products that we sell meet McDonald’s specifications, including new products and promotions. We work with our supplies to implement key standards testing at each stage of our supply chain, including raw materials, processing and distribution. With respect to raw materials, we verify that produce suppliers undergo verification audits. All protein suppliers also undergo Animal Welfare Policy, “mad cow” disease and HACCP audits. At the processing stage, we implement a supplier quality management system that encourages continuous improvement in each key product category. We conduct seminars annually with all key suppliers on topics such as standards calibration, product sensory evaluation and best practices and all suppliers are audited annually by a third party for compliance with McDonalds’s SQMS. We measure compliance through visits to processing plants, supplier summits, regularly scheduled audits and sensory testing that is achieved through a combination of product, equipment and operational procedures. At the distribution stage, we have implemented the Distribution Quality Management Program, which includes a shelf-life management system, strict temperature controls for receiving and storage of food products, a sophisticated stock recovery program and a quality inspection program.
 
Our quality testing extends to restaurant operations, where we conduct restaurant improvement and food safety verification processes that allow us to track the implementation of changes in restaurant operations, new products, procedures and equipment. We participate in the restaurant operations improvement process designed by McDonald’s, under which Company-operated and franchised restaurants are visited at least three times in any 21-month cycle to identify system opportunities to continuously improve our operations. Visits are conducted by our operations consultants, who assess restaurants based on food quality, service and cleanliness. We also participate in the worldwide mystery shopper program designed by McDonald’s, where all restaurants are visited twice a month by a third-party vendor who provides us with feedback from a customer perspective. This feedback, called customer satisfaction opportunity reports, is sent to a centralized monitoring system that evaluates key operations indicators. Our multidisciplinary teams, which include members of our Supply Chain and Marketing and Operations teams, work to improve quality and efficiency at the restaurant level throughout the Territories.
 
Our Competition
 
We compete with international, national, regional and local retailers of food products. We compete on the basis of price, convenience, service, menu variety and product quality. Our competition in the broadest perspective includes restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, convenience food stores, delicatessens and supermarkets. For more information about our competition, see “Item 4. Information on the Company—B. Business Overview—Our Industry.”
 
Our Customers
 
We aim to provide our customers with safe, fresh and good-tasting food at a good value and a favorable dining experience in the family friendly environment demanded by our target demographic of young adults and families with children. Based on data from the United Nations Economic Commission for Latin America and the Caribbean,
 
 
 
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the Territories represented a market of approximately 575.9 million people in 2010—equivalent to the combined population of the United States, Germany, France, the United Kingdom and Italy—of which approximately 28% are under 14 years old and 46% are under 25 years old. As a business focused on young adults in the 14 to 35 age range and families with children, our operations have benefited, and we expect to continue to benefit, from our Territories’ population size, age profile when compared to more developed markets and improving socio-economic conditions. In addition, our McCafé brand extension has successfully targeted a more adult customer base.
 
Despite variations in economic development throughout the Territories, Latin America and the Caribbean in general have presented very compelling growth prospects given their improving macroeconomic conditions, expanding buying power of the consumer sector in general and the rapidly growing QSR markets in particular. In addition, improvements in macroeconomic conditions in the Territories have led to a modernization of consumption patterns and increased affordability of our products across socio-economic segments, and we believe we are well-placed to capitalize on these trends. In Brazil alone, 29 million Brazilians joined the middle class between 2003 and 2009, and the percentage of the Brazilian population living in poverty decreased by 45.6% during the same period, according to the Brazilian Ministry of Finance. Moreover, according to Euromonitor, the percentage of households in Brazil with annual disposable incomes of $5,000 or more was greater than that in China and India in 2011.
 
In addition, the demand for QSR options has risen, and Euromonitor forecasts that the QSR sector in Latin America will grow at a 21% annual growth rate between 2012 and 2016. The confluence of favorable factors throughout the region, including growth in our target demographic markets, offer an opportunity of profitable growth and the ability to serve an ever-increasing number of customers.
 
Regulation
 
We are subject to various multi-jurisdictional federal, regional and local laws in the countries in which we operate affecting the operation of our business, as are our franchisees and suppliers. Each restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, tax, operating, building and fire agencies in the jurisdiction in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals can delay or prevent the opening of a new restaurant in a particular area. Restaurant operations are also subject to federal and local laws governing matters such as wages, working conditions and overtime. We are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.
 
Substantive laws that regulate the franchisor/franchisee relationship presently exist in several of the countries in which we operate, including Brazil. These laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply and regulate franchise sales communications.
 
We are also subject to the labor laws applicable in the countries in which we operate. The adoption of new or more stringent labor laws or regulations could result in a material liability to us. 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. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—Labor shortages or increased labor costs could harm our results of operations.” New interpretations or unexpected applications of existing labor laws or regulations may also affect our business practices or results of operations. In August 2012, the Public Labor Ministry of the State of Pernambuco (Ministério Público do Trabalho do Estado de Pernambuco) in Brazil filed a civil complaint against us in the Labor Court of Pernambuco (Justiça do Trabalho de Pernambuco) regarding alleged noncompliance with certain labor laws. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Brazilian Labor Litigation.”
 
In addition, we may become subject to legislation or regulation seeking to regulate high-fat and/or high-sodium foods, particularly in Argentina, Brazil, Chile, Puerto Rico and Venezuela. Moreover, restrictions on advertising by food retailers and QSRs have been proposed or adopted in Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela, including proposals to restrict our ability to sell toys in conjunction with food. Certain jurisdictions in the United States are considering curtailing or have curtailed McDonald’s ability to sell children’s meals including free toys if these meals do not meet certain nutritional criteria. Similar restrictions, if imposed in the Latin American countries where we do business, may have a negative impact on our results of operations. We will comply with any laws or regulations that may be enacted, and we can provide no assurance of the effect that any
 
 
 
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possible future laws and regulations will have on our operating results. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Industry—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.”
 
Environmental Issues
 
To the best of our knowledge, there are currently no international, federal, state or local environmental laws, rules or regulations that we expect will materially affect our results of operations or our position with respect to our competitors. However, we can provide no assurance of the effect that any possible future environmental laws will have on our operating results.
 
Insurance
 
We maintain insurance policies in accordance with the requirements of the MFAs and as appropriate beyond those requirements, to the extent we believe additional coverage is necessary. Our insurance policies include commercial general liability, workers compensation, “all risk” property and business interruption insurance, among others. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Insurance.”
 
Charitable Activities and Social Initiatives
 
The McDonald’s brand is enhanced through McDonald’s and our social responsibility initiatives, which include a wide range of programs focused on positively impacting our employees, customers and the communities in which we operate. The following discussion summarizes some of our principal programs and contributions:
 
Employment Experience
 
We are an important employer in Latin America and the Caribbean and are creating new economic opportunities for Latin America’s next generation. With more than 94,000 employees as of December 31, 2012, we are one of the largest employers in Latin America. For many of our employees, we are their first employer. We provide a strong foundation and teach them valuable customer service and leadership skills that can be applied to a wide range of career paths in the future.
 
 We have been recognized by many independent organizations for being a “great place to work.” In 2012, the Great Place to Work Institute ranked us fourth among the top 25 best multinational employers in Latin America, and we led the “Súper Empresas” (Super Companies) ranking by the Expansión/CNN magazine.  The table below shows the good employer recognitions that we received in 2012:
 
Country
 
 
Award
 
 
Ranking
Argentina
 
“Best Companies to Work for” in Argentina
 
8th
Brazil
 
“Best Companies to Work for” in Brazil
 
22nd
Colombia
 
“Best Companies to Work for” in Colombia
 
4th
Costa Rica
 
“Best Companies to Work for” in Costa Rica
 
11th
Costa Rica and Panama
 
“Work and Life Balance” Certification
 
Chile
 
“Best Companies to Work for” in Chile
 
25th
Ecuador
 
“Best Companies to Work for” in Ecuador
 
2nd
Mexico
 
“Best Companies to Work for” in Mexico
 
3rd
Panama
 
“Best Companies to Work for” in Panama
 
2nd
Peru
 
“Best Companies to Work for” in Peru
 
9th
Uruguay
 
“Best Companies to Work for” in Uruguay
 
4th
Venezuela
 
“Best Companies to Work for” in Venezuela
 
4th

We pride ourselves on principles such as integrity, trust, honesty, hospitality and the importance of team work. To that end, we offer extensive training and continuing education opportunities for crew and corporate employees, and provide a collegial work environment that fosters teamwork and advancement. Each year, we dedicate resources to training and development in our restaurants, Regional Training Centers and McDonald’s University in order to provide our employees with the tools necessary to advance within our Company and help positively impact business results.
 
 
 
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In April 2012, we became one of the first companies to join the New Employment Opportunities (NEO) Program. Developed by the Inter-American Development Bank and the International Youth Foundation, the program helps to increase the employability of the region’s youth.
 
Community
 
The wellbeing of the communities where we operate is of considerable importance to us. One of our major charitable causes is the Ronald McDonald House Charities, which is dedicated to creating, finding and supporting programs that directly improve the health and well-being of children, including by combating pediatric cancer, one of the leading causes of death for children in Latin America.
 
As of December 31, 2012, there were 35 Ronald McDonald House Charities programs in 10 countries in Latin America and the Caribbean, including 16 Ronald McDonald Houses, 18 Ronald McDonald Family Rooms, which provide “a home away from home” to children undergoing serious medical treatment in hospitals and their families, and one Ronald McDonald Care Mobile, which was built to deliver pediatric care services to remote locations.
 
One of our biggest charitable events is McHappy Day, when McDonald’s restaurants across Latin America raise money for various children’s causes, including the Ronald McDonald House Charities foundation, by donating the proceeds generated from the sales of Big Macs on that day. McHappy Day has grown from being a “social marketing” campaign to becoming a community-wide effort. In 2012, McHappy Day was celebrated in all of the Territories, involving more than 35,000 community volunteers and our franchisees and suppliers. In 2012, our McHappy Day activities raised over $13.6 million.  McHappy Day has become one of the most important campaigns that supports children in Latin America and is the biggest source of revenue for the Ronald McDonald House Charities foundation.
 
Nutrition and Well-being
 
As part of our commitment to offering nutritious and quality products to our customers, we are dedicated to actively promoting a balanced lifestyle. This includes teaching healthy eating habits and providing reliable, accessible information to guide educated nutritional decisions. We recently launched a website exclusively dedicated to helping parents and adults make healthy choices and lead balanced lifestyles. We provide nutritious meal options to our crew workers on a daily basis as well.
 
We participate in several educational, sports and well-being programs throughout Latin America and the Caribbean, promoting our brand and encouraging our employees and customers to participate. This includes sponsoring walks and races to raise funds and awareness of various health conditions. One such event is the McDonald’s 5K Women Run (Las Mujeres Corremos), a regional event that brings together more than 60,000 women in 22 cities and 19 countries in Latin America.
 
From a safety and quality perspective, we only use products that have passed strict quality and hygiene controls throughout the production chain, inside our restaurants and up to the moment they are served to our customers. These products are sourced from our approved supplier network for all McDonald’s restaurants.
 
In October 2011, we launched our new Happy Meal, with reduced sodium, calorie and fat totals. For example, the amount of sodium in buns, McNuggets, cheese and ketchup was reduced by an average of 10%. In addition, the amount of sugar added to the fruit juices was reduced by almost 40%, reaching no more than 5 grams of added sugar per 100 milliliters. Today, all of the standard Happy Meal combinations in Latin America contain less than 600 calories and automatically include fruit, such as sliced apples, as a fourth item. Additionally, we expect that in 2013 the majority of our restaurants in the region will begin providing customers with calorie information on its menu board for each of its products, building upon existing nutritional information available on McDonald’s website in each country and via  in-store tray liners, brochures and/or signage.
 
Environmental Responsibility
 
We are committed  to the continuous improvement of our environmental sustainability efforts, including frequently assessing our strengths and areas of improvement. While we have made many positive strides,  we are in the process of setting direct and measurable goals that we will be working toward in the years ahead.
 
 
 
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We strive to be an environmental steward dedicated to conserving natural resources and minimizing waste. We monitor and implement operational measures focused on reducing water consumption, energy utilization and waste production at our restaurants. We execute paper and waste recycling campaigns at our restaurants, whenever possible, and urge consumers to adopt responsible waste sorting and recycling behaviors. We also employ cutting-edge technology that minimizes our environmental footprint, favoring the use of clean-energy sources such as solar panels and wind generators, and recycling cooking oil from our restaurants to make biodiesel that fuels some of our supply trucks.
 
We survey our key suppliers in Latin America and the Caribbean to ensure their operations meet the highest standards possible and partner with them on reducing our impact on the environment. This includes implementing and sharing best practices throughout the supply chain around sustainable sourcing, transportation, resource use, residue disposal and energy consumption, among other matters.
 
Protecting the Amazon—one of Latin America’s greatest environmental treasures—is a top priority. One hundred percent of our suppliers have committed to ending procurement of any goods from the Amazon. In October 2011, McDonald’s signed a global moratorium against harvesting soy from the Amazon and has maintained this commitment during 2012.
 
As of December 31, 2012, we had four ecological restaurants and one LEED-certified corporate university, which are more environmentally responsible and resource-efficient buildings throughout their life-cycle. In December 2008, we opened the first ecological restaurant in Latin America in Bertioga on the coast of São Paulo, Brazil. This restaurant received Leadership in Energy & Environmental Design, or LEED, certification, in September 2009, becoming the first McDonald’s restaurant in Latin America to be so certified. In August 2009, we opened our second ecological restaurant in Lindora, Costa Rica, which was the first of its kind in Central America. In August 2010, we opened our third ecological restaurant in Pilar, Argentina. In July 2011, we re-inaugurated the McDonald’s at Parque Hundido, in Mexico DF as our fourth ecological restaurant. This restaurant was recently awarded LEED certification by the US Green Building Council.
 
The McDonald’s University in São Paulo, Brazil was remodeled and reopened in April 2011 as an ecological, LEED-certified building. This McDonald’s University, one of seven such units in the world, is the corporate training center for employees from all over Latin America and the Caribbean.
 
The know-how accumulated in the construction of these ecological buildings is being used for the development of new McDonald’s restaurants and the reimaging of certain existing ones in the Territories.
 
Sustainable Supply Chain
 
Our deep relationship with our suppliers is an important strategic asset. We work with more than 500 suppliers across Latin America who serve as strategic partners. Many of our suppliers have worked with McDonald’s since it first entered the Latin American market in the 1970’s. All suppliers are evaluated for and must comply with global McDonald’s standards on core products such as beef, chicken, cheese, bread, beverages and others. This ensures a consistent customer experience throughout Latin America.
 
We hope to further strengthen our supply chain by developing local initiatives that meet our demand for goods while promoting the well-being and success of the farmers and suppliers we rely on. For example, our Qori Chacra Project offers local farmers in Cuzco, Peru the opportunity to improve their crops by providing training on various methods to improve yield and distribution options. Through this project, we hope to develop a sustainable supply chain program for the production of lettuce, which could ultimately be replicated in other countries with similar needs. As another example, in Brazil we work with suppliers to educate local farmers about sustainable agriculture. To date, 15 farms have been created and/or expanded to produce lettuce, tomatoes and other produce for McDonald’s restaurants in the region. This enables us to source produce from sustainable farms, while also contributing to the local economy through the creation of jobs.
 
C.    Organizational Structure
 
We conduct substantially all our business through our indirect, wholly-owned Dutch subsidiary Arcos Dorados B.V. Our controlling shareholder is Los Laureles Ltd., a British Virgin Islands company, which is beneficially owned by Mr. Staton, our Chairman and CEO. Under the MFAs, Los Laureles Ltd. is required to hold at all times at least 51% of our voting interests, which is accomplished through its ownership of 100% of the class B shares of
 
 
 
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Arcos Dorados Holdings Inc., each having five votes per share. Los Laureles Ltd. has established a voting trust with respect to the voting interests in us held by Los Laureles Ltd.  Los Laureles Ltd. is the beneficiary of the voting trust. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.” Arcos Dorados B.V. owns all the equity interests of LatAm, LLC, the master franchisee, and owns, directly or indirectly, all the equity interests of the subsidiaries operating our restaurants in the Territories. 
 
The following chart shows our corporate structure as of March 31, 2013.
 
 

(1)
Includes class A shares and class B shares beneficially owned by Mr. Staton, our Chairman and CEO. Los Laureles Ltd. is beneficially owned by Mr. Staton. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.” Mr. Staton directly owns 0.001% of the shares of Arcos Dorados Cöoperatieve U.S.
 
(2)
Includes operating subsidiaries held directly and, in some cases, indirectly through certain intermediate subsidiaries.
 
Other than as described above, all of our significant subsidiaries are wholly owned by us, except Arcos Dorados Argentina S.A., of which Mr. Staton owns 0.003%.
 
D.    Property, Plants and Equipment
 
Property Operations
 
Our long-standing presence in Latin America and the Caribbean has allowed us to build a significant property portfolio with hard-to-replicate locations in key markets across the region that enhance our customers’ experience and ultimately support our brand and market position. As of December 31, 2012, we owned the land for 513 of our 1,948 restaurants (totaling approximately 1.1 million square meters). We owned the buildings for all but 12 of our stand-alone restaurants, all of which are under developmental licenses, whereby the licensees own or lease the land and buildings on which the restaurants are located. We lease the remaining real estate property where we operate. Accordingly, we are able to charge rent on the real estate that we own and lease to our franchisees. The rental payments generally are based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. When we lease land, we match the term of our sublease to the term of the franchise. We may charge a higher rent to franchisees than that which we pay on our leases, therefore deriving additional rental income.
 
The selection, construction and maintenance of restaurant locations and other related real estate assets, which is a key element of our performance, is determined based on an evaluation of expected returns on investment and the most efficient allocation of our capital expenditures. In addition to our restaurant property, we own our corporate
 
 
 
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headquarters in Buenos Aires, Argentina, corporate offices, a manufacturing and logistics center in Sao Paulo, Brazil, and training centers in Sao Paulo, Brazil and Buenos Aires, Argentina.
 
ITEM 4A.  UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
A.    Operating Results
 
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010, and the notes thereto, included elsewhere in this annual report, as well as the information presented under “Presentation of Financial and Other Information” and “Item 3. Key Information—A. Selected Financial Data.”
 
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”
 
Segment Presentation
 
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; the North Latin America division, or NOLAD, consisting of Costa Rica, Mexico and Panama; and the South Latin America division, or SLAD, consisting of Argentina, Chile, Colombia, Ecuador, Peru, Uruguay and Venezuela. As of December 31, 2012, 37.5% of our restaurants were located in Brazil, 29.5% in SLAD, 25.8% in NOLAD and 7.1% in the Caribbean division. We focus on our customers by managing operations at the local level, including marketing campaigns and special offers, menu management and monitoring customer satisfaction, while leveraging our size by conducting administrative and strategic functions at the divisional or corporate level, as appropriate.
 
We are required to report information about operating segments in our financial statements in accordance with ASC Topic 280. Operating segments are components of a company about which separate financial information is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess performance. We have determined that our reportable segments are those that are based on our method of internal reporting, and we manage our business and operations through our four geographical divisions (Brazil, the Caribbean division, NOLAD and SLAD). The accounting policies of the segments are the same as those for the Company on a consolidated basis.
 
In January 2013, we made certain organizational changes in the structure of our geographical divisions in order to balance their relative weight. As a result of the reorganization effective January 1, 2013, Colombia and Venezuela become part of the Caribbean division with headquarters located in Colombia. Therefore, as of the beginning of 2013, SLAD is comprised of Argentina, Chile, Ecuador, Peru and Uruguay, and the Caribbean division is comprised of Aruba, Curaçao, French Guyana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas, Colombia and Venezuela. In accordance with ASC 280 Segment Reporting, we will report the results of the revised structure of our geographical divisions on our segment financial reporting beginning in the first quarter of fiscal year 2013. The discussion of our financial condition and results of operations in this annual report does not reflect this change and is based on the structure prevailing as of December 31, 2012.
 
Principal Income Statement Line Items
 
Revenues
 
We generate revenues primarily from two sources: sales by Company-operated restaurants and revenue from franchised restaurants, which primarily consists of rental income, typically based on the greater of a flat fee or a percentage of sales reported by our franchised restaurants. This rent, along with occupancy and operating rights, is stipulated in our franchise agreements. These agreements typically have a 20-year term but may be shorter if
 
 
 
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necessary to mirror the term of the real estate lease. In 2012, sales by Company-operated restaurants and revenues from franchised restaurants represented 95.7% and 4.3% of our total revenues, respectively. In 2011, sales by Company-operated restaurants and revenues from franchised restaurants represented 95.8% and 4.2% of our total revenues, respectively. In 2010, sales by Company-operated restaurants and revenues from franchised restaurants represented 95.9% and 4.1% of our total revenues, respectively.
 
Operating Costs & Expenses
 
Our sales are heavily influenced by brand advertising, menu selection and initiatives to improve restaurant operations. Sales are also affected by the timing of restaurant openings and closures. We do not record sales from our franchised restaurants as revenues.
 
Company-operated restaurants incur four types of operating costs and expenses:
 
 
·
food and paper costs, which represent the costs of the products that we sell to customers in Company-operated restaurants;
 
 
·
payroll and employee benefit costs, which represent the wages paid to Company-operated restaurant managers and crew, as well as the costs of benefits and training, and which tend to increase as we increase sales;
 
 
·
occupancy and other operating expenses, which represent all other direct costs of our Company-operated restaurants, including advertising and promotional expenses, the costs of outside rent, which are generally tied to sales and therefore increase as we increase our sales, outside services, such as security and cash collection, building and leasehold improvement depreciation, depreciation on equipment, repairs and maintenance, insurance, restaurant operating supplies and utilities; and
 
 
·
royalty fees, representing the continuing franchise fees we pay to McDonald’s pursuant to the MFAs, which are determined as a percentage of gross product sales.
 
Franchised restaurant occupancy expenses include, as applicable, the costs of depreciating and maintaining the land and buildings upon which franchised restaurants are situated or the cost of leasing that property. A significant portion of our leases establish that rent payments are based on the greater of a flat fee or a specified percentage of the restaurant’s sales.
 
We promote the McDonald’s brand and our products by advertising in all of the Territories. Pursuant to the MFAs, we are required to spend at least 5% of our sales on advertisement and promotion activities annually. These activities are guided by our overall marketing plan, which identifies the key strategic platforms that we leverage to drive sales. Our franchisees are generally required to pay us 5% of their sales to cover advertising expenditures related to their restaurants. We account for these payments as a deduction to our advertising expenses. As a result, our advertising expenses only reflect the expenditures related to Company-operated restaurants. Advertising expenses are recorded within the “Occupancy and other operating expenses” line item in our consolidated income statement. The only exception to this policy is in Mexico, where both we and our franchisees contribute funds to a cooperative that is responsible for advertisement and promotion activities for Mexico.
 
General and administrative expenses include the costs of overhead, including salaries and facilities, travel expenses, depreciation of office equipment, situated buildings and vehicles, amortization of intangible assets, occupancy costs, professional services and the cost of field management for Company-operated and franchised restaurants, among others.
 
Other operating expenses, net, include gains and losses on asset dispositions, impairment charges, rental income and depreciation expenses of excess properties, results from distribution centers (until March 16, 2011), the equity awards granted to our CEO until 2011, accrual for contingencies, write-off of inventory, recovery of taxes and other miscellaneous items.
 
Other Line Items
 
Net interest expense primarily includes interest expense on our short-term and long-term debt as well as the amortization of deferred financing costs. Loss from derivative instruments relates to the negative change in the fair
 
 
 
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market value of certain of our derivatives not designated as hedging instruments, which are used to help mitigate some of our foreign currency exchange rate risk.
 
Foreign currency exchange results relate to the impact of remeasuring monetary assets and liabilities denominated in currencies other than our functional currencies. See “—Foreign Currency Translation.”
 
Other non-operating income (expenses), net primarily include monetary actualization adjustments related to tax credits, charitable donations not related to our operations, asset taxes we are required to pay in certain countries and other non-operating charges.
 
Income tax expense includes both current and deferred income taxes. Current income taxes represents the amount accrued during the period to be paid to the tax authorities while deferred income taxes represent the earnings impact of the change in deferred tax assets and liabilities that are recognized in our balance sheet for future income tax consequences.
 
Net income attributable to non-controlling interests relate to the participation of non-controlling interests in the net income of certain subsidiaries that collectively owned 27 restaurants at December 31, 2012 (24 restaurants at December 31, 2011).
 
Key Business Measures
 
We track our results of operations and manage our business by using three key business measures: comparable sales growth, average restaurant sales and sales growth. In addition, we use Adjusted EBITDA to facilitate operating performance comparisons from period to period. See “Presentation of Financial and Other Information—Other Financial Measures” and “Item 3. Key Information—A. Selected Financial Data.” Systemwide results are driven primarily by our Company-operated restaurants, as 74.6% of our systemwide restaurants are Company-operated as of December 31, 2012. Systemwide data represents measures for both Company-operated and franchised restaurants. While sales by franchisees are not recorded as revenues by us, management believes the information is important in understanding our financial performance because these sales are the basis on which we calculate and record franchised restaurant revenues and are indicative of the financial health of our franchisee base. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a systemwide basis.
 
Comparable Sales
 
Comparable sales is a key performance indicator used within the retail industry and is indicative of the success of our initiatives as well as local economic, competitive and consumer trends. Comparable sales are driven by changes in traffic and average check, which is affected by changes in pricing and product mix. Increases or decreases in comparable sales represent the percent change in sales from the prior year for all restaurants in operation for at least thirteen months, including those temporarily closed. Some of the reasons restaurants may close temporarily include reimaging or remodeling, rebuilding, road construction and natural disasters. With respect to restaurants where there are changes in ownership, primarily changes from being franchised restaurants to becoming Company-operated restaurants, all previous months’ sales are reclassified according to the new ownership category when reporting comparable sales. As a result, there will be discrepancies between the sales figures used to calculate comparable sales and our results of operations. We report on a calendar basis, and therefore the comparability of the same month, quarter and year with the corresponding period of the prior year is impacted by the mix of days. The number of weekdays, weekend days and timing of holidays in a period can impact comparable sales positively or negatively. We refer to these impacts as calendar shift/trading day adjustments. These impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales while annual impacts are typically minimal.
 
We calculate and analyze comparable sales and average check in our divisions and systemwide on a constant currency basis, which means they are calculated using the same exchange rate in the applicable division or systemwide, as applicable, over the periods under comparison to remove the effects of currency fluctuations from the analysis. We believe these constant currency measures provide a more meaningful analysis of our business by identifying the underlying business trend, without distortion from the effect of foreign currency fluctuations.
 
Company-operated comparable sales growth refers to comparable sales growth for Company-operated restaurants and franchised comparable sales growth refers to comparable sales growth for franchised restaurants. We
 
 
 
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believe comparable sales growth is a key indicator of our performance, as influenced by our strategic initiatives and those of our competitors.
 
Average Restaurant Sales
 
Average restaurant sales, or ARS, is an important measure of the financial performance of our systemwide restaurants and changes in the overall direction and trends of sales. ARS is calculated by dividing the sales for the relevant period by the arithmetic mean of the number of restaurants at the beginning and end of such period. ARS is influenced mostly by comparable sales performance and restaurant openings and closures. As ARS is provided in nominal terms, it is affected by movements in foreign currency exchange rates.
 
Sales Growth
 
Sales growth refers to the change in sales by all restaurants, whether operated by us or by franchisees, from one period to another. We present sales growth both in nominal terms and on a constant currency basis, which means the latter is calculated using the same exchange rate over the periods under comparison to remove the effects of currency fluctuations from the analysis.
 
Foreign Currency Translation
 
The financial statements of our foreign operating subsidiaries are translated in accordance with guidance in ASC Topic 830, Foreign Currency Matters. See Note 3 to our consolidated financial statements. Except for our Venezuelan operations, the functional currencies of our foreign operating subsidiaries are the local currencies of the countries in which we conduct our operations. Therefore, the assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rates as of the balance sheet date, and revenues and expenses are translated at the average exchange rates prevailing during the period. Translation adjustments are included in the “Accumulated other comprehensive loss” component of shareholders’ equity. We record foreign currency exchange results related to monetary assets and liabilities denominated in currencies other than our functional currencies in our consolidated income statement.
 
Effective January 1, 2010, Venezuela is considered to be highly inflationary. Under U.S. GAAP, an economy is considered to be highly inflationary when its three-year cumulative rate of inflation meets or exceeds 100%. Under the highly inflationary basis of accounting, the financial statements of our Venezuelan subsidiaries are remeasured as if their functional currency were our reporting currency (U.S. dollars), with remeasurement gains and losses recognized in earnings, rather than in the cumulative translation adjustment component of other comprehensive loss within shareholders’ equity.
 
See Notes 21 and 27 to our consolidated financial statements for details about our operations in Venezuela and about the devaluation announced by the Venezuelan government subsequent to December 31, 2012, respectively.
 
Factors Affecting Comparability of Results
 
Seasonality
 
Our sales and revenues are generally greater in the second half of the year than in the first half. Although the impact on our results of operations is relatively small, this impact is due to increased consumption of our products during the winter and summer holiday seasons, affecting July and December, respectively.
 
Critical Accounting Policies and Estimates
 
This management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.
 
We consider an accounting estimate to be critical if:
 
 
 
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·
the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
 
 
·
the impact of the estimates and assumptions on our financial condition or operating performance is material.
 
We believe that of our significant accounting policies, the following encompass a higher degree of judgment and/or complexity:
 
Depreciation of Property and Equipment
 
Accounting for property and equipment involves the use of estimates for determining the useful lives of the assets over which they are to be depreciated. We believe that the estimates we make to determine an asset’s useful life are critical accounting estimates because they require our management to make estimates about technological evolution and competitive uses of assets. We depreciate property and equipment on a straight-line basis over their useful lives based on management’s estimates of the period over which these assets will generate revenue (not to exceed the lease term plus renewal options for leased property). The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. We periodically review these lives relative to physical factors, economic considerations and industry trends. If there are changes in the planned use of property and equipment, or if technological changes occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense or write-offs in future periods. No significant changes to useful lives have been recorded in the past. A significant change in the facts and circumstances that we relied upon in making our estimates may have a material impact on our operating results and financial condition.
 
Impairment of Long-Lived Assets and Goodwill
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We review goodwill for impairment annually in the fourth quarter. In assessing the recoverability of our long-lived assets and goodwill, we consider changes in economic conditions and make assumptions regarding, among other factors, estimated future cash flows by market and by restaurant, discount rates by country and the fair value of the assets. Estimates of future cash flows are highly subjective judgments based on our experience and knowledge of our operations. These estimates can be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. A key assumption impacting estimated future cash flows is the estimated change in comparable sales.
 
In the fourth quarter of 2012, 2011 and 2010, we assessed all markets for impairment indicators. As a result of these assessments, we performed impairment testing of our long-lived assets in Mexico, Puerto Rico and Peru in each fiscal year, as well as in Aruba, Curaçao and the U.S. Virgin Islands of St. Croix and St. Thomas in fiscal year 2012 considering the recent operating losses we incurred in these markets (indicator of potential impairment). As a result of these analyses, no impairments were recorded for our operations in Peru in fiscal years 2011 and 2010 nor in Aruba, Curaçao or the U.S. Virgin Islands of St. Croix and St. Thomas in fiscal year 2012 since the estimates of undiscounted future cash flows for each restaurant in these markets or the fair market value exceeded its carrying value. However, we did record impairment charges associated with certain restaurants in Mexico, Puerto Rico and Peru (the latter only in 2012) with undiscounted future cash flows insufficient to recover their carrying value. The impairment charges were measured by the excess of the carrying amount of each restaurant over its fair value. The impairment charges amounted to $2.0 million, $1.7 million and $4.7 million in 2012, 2011 and 2010, respectively.
 
In the fourth quarter of each year, we also performed impairment testing of our goodwill. As a result of these analyses, in 2012 and 2011 we recorded impairment charges of the full amount of goodwill that had been generated in the acquisition of restaurants in Puerto Rico and St. Croix, respectively, amounting to $0.7 million in 2012 and $2.1 million in 2011. No impairments of goodwill were recognized in 2010.
 
If our estimates or underlying assumptions change in the future, we may be required to record additional impairment charges.
 
 
 
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Share-Based Compensation
 
We have share-based compensation plans outstanding pursuant to which we granted liability awards to certain employees under a long-term incentive plan. The accrued liability is remeasured at the end of each reporting period until settlement. Effective December 31, 2010, we changed the method of measuring our liability awards from the intrinsic value method to a fair value method using the Black-Scholes model. At December 31, 2010, we considered the estimated initial public offering price per class A share ($16.50) in determining the fair value of the awards because in 2011 our Board of Directors decided that on a going forward basis the fair value would be based on that price instead of the formulas that had previously been used to value such awards. Beginning on April 14, 2011, the date of our initial public offering, we have considered the quoted market price per class A share in determining the fair value of the awards.
 
Accounting for our share-based compensation plans involves the use of estimates for determining: (a) the number of units that will vest based on the estimated completion of the requisite service period, and (b) the assumptions required by the closed-form pricing model (expected volatility, dividend yield, risk-free interest rate and expected term). All of these assumptions significantly impact the estimated fair value of the awards. We use historical data and estimates to determine these assumptions, and if these assumptions and/or the stock price change significantly in the future, our operating results and financial condition could be significantly impacted. See Note 16 to our consolidated financial statements.
 
In March 2011, we adopted our Equity Incentive Plan, or 2011 Plan, to attract and retain the most highly qualified and capable professionals and to promote the success of our business through an annual award program. The 2011 Plan permits grants of awards relating to our class A shares, including awards in the form of share (also referred to as stock) options, restricted shares, restricted share units, share appreciation rights, performance awards and other share-based awards as will be determined by our Board of Directors. The maximum number of shares that may be issued under the 2011 Plan is 5,238,235 class A shares, equal to 2.5% of our total outstanding class A and class B shares immediately following our initial public offering on April 14, 2011.
 
We made the annual grants for 2011 to certain of our executive officers and other employees on April 14, 2011, the first trading day of our class A shares on the NYSE. The grants included 231,455 restricted share units and 833,388 stock options that will vest as follows: 40% on the second anniversary of the date of grant and 20% on each of the following three anniversaries. In addition, on April 14, 2011, we granted special awards to certain of our executive officers and other employees in connection with our initial public offering. The special grant included 782,137 restricted share units and 1,046,459 stock options that will vest one-third on each of the second, third and fourth anniversaries of the grant date. With respect to all of the grants made on April 14, 2011, each stock option represents the right to acquire one class A share at a strike price of $21.20 (the closing price on the date of grant), while each restricted share unit represents the right to receive one class A share, when vested.
 
On May 10, 2012, we made the grant of awards corresponding to fiscal year 2012 under the 2011 Plan. We granted to certain of our executive officers and other employees 211,169 restricted share units and 584,587 stock options. Both types of awards vest as follows: 40% on the second anniversary of the date of grant and 20% on each of the following three anniversaries. Each stock option granted represents the right to acquire one class A share at a strike price of $14.35 (the closing price on the date of grant), while each restricted share unit represents the right to receive one class A share when vested.

Restricted share units are measured at the grant-date fair value of our class A shares as if these shares were vested and issued on the grant date. Stock options are accounted for at their grant-date fair value. Fair value of stock options is calculated using the Black-Scholes option pricing model. This calculation is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables (expected volatility, dividend yield, risk-free interest rate and expected term). See Note 16 to our consolidated financial statements.
 
Accounting for Income Taxes
 
We record a valuation allowance to reduce the carrying value of deferred tax assets if it is more likely than not that some portion or all of our deferred assets will not be realized. Our valuation allowance as of December 31,  2012, 2011 and 2010 amounted to $236.6 million, $223.8 million and $220.2 million, respectively. We have considered future taxable income and ongoing prudent and feasible tax strategies in assessing the need for the valuation allowance. This assessment is carried out on the basis of internal projections, which are updated to reflect
 
 
 
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our most recent operating trends, such as expiration date for tax losses carryforward. Because of the imprecision inherent in any forward-looking data, the further into the future our estimates cover, the less objectively verifiable they become. Therefore, we apply judgment to define the period of time to include projected future income to support the future realization of the tax benefit of an existing deductible temporary difference or carryforward and whether there is sufficient evidence to support the projections at a more-likely-than-not level for this period of time. Determining whether a valuation allowance for deferred tax assets is necessary often requires an extensive analysis of positive (e.g., a history of accurately projecting income) and negative evidence (e.g., historic operating losses) regarding realization of the deferred tax assets and inherent in that, an assessment of the likelihood of sufficient future taxable income. During 2012, 2011 and 2010, we recognized a gain for the change in the valuation allowance amounting to $7.7 million, $21.0 million and $91.4 million, respectively, due to improvements in projected taxable income and a relative increase of positive evidence as compared to negative evidence due to the reversal of trends of historic operating losses in some markets. If these estimates and assumptions change in the future, we may be required to adjust the valuation allowance. This could result in a charge to, or an increase in, income in the period this determination is made.
 
Provision for Contingencies
 
We have certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. Accounting for contingencies involves the use of estimates for determining the probability of each contingency and the estimated amount to settle the obligation, including related costs. We accrue liabilities when it is probable that future costs will be incurred and the costs can be reasonably estimated. The accruals are based on all the information available at the issuance date of the financial statements, including our estimates of the outcomes of these matters and our lawyers’ experience in contesting, litigating and settling familiar matters. If we are unable to reliably measure the obligation, no provision is recorded and information is then presented in the notes to our consolidated financial statements. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs. Because of the inherent uncertainties in this estimation, actual expenditures may be different from the originally estimated amount recognized.
 
Results of Operations
 
We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.
 
In a number of places in this annual report, in order to analyze changes in our business from period to period, we present our results of operations and financial condition on a constant currency basis, which isolates the effects of foreign exchange rates on our results of operations and financial condition. In particular, we have isolated the effects of appreciation and depreciation of local currencies in the Territories against the U.S. dollar because we believe that doing so is useful in understanding the development of our business. For these purposes, we eliminate the effect of movements in the exchange rates by converting the balances for both periods being compared from their local currencies to the U.S. dollar using the same exchange rate.
 
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
 
Set forth below are our results of operations for the years ended December 31, 2012 and 2011.

   
For the Years Ended December 31,
       
       
2011
   
%
Increase (Decrease)
 
   
(in thousands of U.S. dollars)
       
Sales by Company-operated restaurants
  $ 3,634,371     $ 3,504,128       3.7 %
Revenues from franchised restaurants
    163,023       153,521       6.2  
Total revenues
    3,797,394       3,657,649       3.8  
 
 
 
 
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For the Years Ended December 31,
       
       
2011
   
%
Increase (Decrease)
 
   
(in thousands of U.S. dollars)
       
Company-operated restaurant expenses:
                       
Food and paper
    (1,269,146 )     (1,216,141 )     4.4  
Payroll and employee benefits
    (753,120 )     (701,278 )     7.4  
Occupancy and other operating expenses
    (984,004 )     (918,102 )     7.2  
Royalty fees
    (180,547 )     (170,400 )     6.0  
Franchised restaurants – occupancy expenses
    (56,057 )     (51,396 )     9.1  
General and administrative expenses
    (314,619 )     (334,914 )     (6.1 )
Other operating expenses, net
    (3,261 )     (14,665 )     (77.8 )
Total operating costs and expenses
    (3,560,754 )     (3,406,896 )     4.5  
Operating income
    236,640       250,753       (5.6 )
Net interest expense
    (54,247 )     (60,749 )     (10.7 )
Loss from derivative instruments
    (891 )     (9,237 )     (90.4 )
Foreign currency exchange results
    (18,420 )     (23,926 )     (23.0 )
Other non-operating (expenses) income, net
    (2,119 )     3,562       (159.5 )
Income before income taxes
    160,963       160,403       0.3  
Income tax expense
    (46,375 )     (44,603 )     4.0  
Net income
    114,588       115,800       (1.0 )
Less: Net income attributable to non-controlling interests
    (256 )     (271 )     (5.5 )
Net income attributable to Arcos Dorados Holdings Inc.
    114,332       115,529       (1.0 )
 
Set forth below is a summary of changes to our systemwide, Company-operated and franchised restaurant portfolios in 2012 and 2011.

Systemwide Restaurants
 
For the Years Ended December 31,
 
       
2011
 
Systemwide restaurants at beginning of period
    1,840       1,755  
Restaurant openings
    130       101  
Restaurant closings
    (22 )     (16 )
Systemwide restaurants at end of period
    1,948       1,840  

Company-operated Restaurants
 
For the Years Ended December 31,
 
       
2011
 
Company-operated restaurants at beginning of period
    1,358       1,292  
Restaurant openings
    99       79  
Restaurant closings
    (16 )     (15 )
Net conversions of franchised restaurants to Company-operated restaurants
    12       2  
Company-operated restaurants at end of period
    1,453       1,358  

Franchised Restaurants
 
For the Years Ended December 31,
 
       
2011
 
Franchised restaurants at beginning of period
    482       463  
Restaurant openings
    31       22  
Restaurant closings
    (6 )     (1 )
Net conversions of franchised restaurants to Company-operated restaurants
    (12 )     (2 )
Franchised restaurants at end of period
    495       482  

 
 
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Key Business Measures

We track our results of operations and manage our business by using three key business measures: comparable sales growth, average restaurant sales and sales growth. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a systemwide basis.

Comparable Sales
 
   
For the Year Ended December 31, 2012
 
Arcos Dorados
     
Systemwide comparable sales growth
    9.2 %
Company-operated comparable sales growth
    9.0  
Franchised comparable sales growth
    9.5  
         
Systemwide Comparable Sales Growth by Division
       
Brazil
    5.2 %
Caribbean division
    2.6  
NOLAD
    4.4  
SLAD
    19.9  
         
Company-operated Comparable Sales Growth by Division
       
Brazil
    4.8 %
Caribbean division
    4.3  
NOLAD
    4.5  
SLAD
    18.4  
         
Franchised Comparable Sales Growth by Division
       
Brazil
    6.1 %
Caribbean division
    (2.1 )
NOLAD
    4.1  
SLAD
    26.1  

Our comparable sales growth on a systemwide basis in 2012 was mainly driven by the increase in average check, which represented 89.8% of the increase in comparable sales. Average check growth resulted primarily from price increases. An increase in traffic caused 10.2% of the increase in comparable sales and was mainly driven by our value menu program.
 
Average Restaurant Sales
 
   
For the Years Ended
 
       
2011
 
   
(in thousands of U.S. dollars)
 
Systemwide average restaurant sales
  $ 2,603     $ 2,648  
Company-operated average restaurant sales
    2,586       2,645  
Franchised average restaurant sales
    2,654       2,658  
 
Our ARS decreased in 2012 because of the depreciation of most currencies in the Territories against the U.S. dollar, which was partially offset by comparable sales growth of 9.2%.
 
 
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Sales Growth
 
   
For the Year Ended
 
   
(in nominal terms)
   
(in constant currency)
 
Brazil
    (4.6 )%     11.4 %
Caribbean division
          2.0  
NOLAD
    5.9       9.9  
SLAD
    18.6       23.5  
Total Systemwide Sales Growth
    3.6       14.0  

In nominal terms, sales growth increased during 2012 due to comparable sales growth of 9.2% and the net addition of 193 restaurants systemwide since January 1, 2011. We had 1,453 Company-operated restaurants and 495 franchised restaurants as of December 31, 2012, compared to 1,358 Company-operated restaurants and 482 franchised restaurants as of December 31, 2011. This was partially offset by the negative impact of the depreciation of most currencies in the Territories against the U.S. dollar.
 
Revenues
 
   
For the Years Ended
       
       
2011
   
% Increase (Decrease)
 
   
(in thousands of U.S. dollars)
       
Sales by Company-operated Restaurants
                 
Brazil
  $ 1,717,761     $ 1,811,390       (5.2 )%
Caribbean division
    262,449       254,251       3.2  
NOLAD
    364,588       336,004       8.5  
SLAD
    1,289,573       1,102,483       17.0  
Total
    3,634,371       3,504,128       3.7  
Revenues from Franchised Restaurants
                       
Brazil
  $ 79,795     $ 79,434       0.5 %
Caribbean division
    11,018       13,450       (18.1 )
NOLAD.
    19,453       19,261       1.0  
SLAD
    52,757       41,376       27.5  
Total
    163,023       153,521       6.2  
Total Revenues
                       
Brazil
  $ 1,797,556     $ 1,890,824       (4.9 )%
Caribbean division
    273,467       267,701       2.2  
NOLAD
    384,041       355,265       8.1  
SLAD
    1,342,330       1,143,859       17.4  
Total
    3,797,394       3,657,649       3.8  
 
Sales by Company-operated Restaurants
 
Total sales by Company-operated restaurants increased by $130.2 million, or 3.7%, from $3,504.1 million in 2011 to $3,634.4 million in 2012. The 9.0% growth in comparable sales, 87.5% of which resulted from a higher average check and the rest of which resulted from increased traffic, caused sales to increase by $314.9 million. In addition, sales by Company-operated restaurants increased by $182.1 million as a result of 147 net restaurant openings and the conversion of 14 franchised restaurants into Company-operated restaurants since January 1, 2011.  This was offset by $366.8 million as a result of the depreciation of most currencies in the Territories against the U.S. dollar.
 
In Brazil, sales by Company-operated restaurants decreased by $93.6 million, or 5.2%, to $1,717.8 million. The driver of the decrease was the depreciation of the real against the U.S. dollar, which caused sales to decrease by $290.1 million. In constant currency, sales increased by 10.8% mainly as a result of 79 net restaurant openings and the conversion of 1 franchised restaurant into a Company-operated restaurant since January 1, 2011, which contributed $110.1 million to the increase in sales in Brazil. In addition, 4.8% growth in comparable sales
 
 
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contributed $86.3 million to the increase. Average check growth represented 84.9% of comparable sales growth and the rest resulted from increased traffic. Average check growth resulted primarily from price increases, while the increase in traffic was primarily driven by our Big Pleasures, Small Prices value menu program.
 
In the Caribbean division, sales by Company-operated restaurants increased by $8.2 million, or 3.2%, to $262.4 million. The main driver of this increase was 4.3% growth in comparable sales, which represented $10.6 million. Average check was the driver of comparable sales growth and it resulted from price increases and the positive effect of changes in product mix. In addition, the net opening of 2 restaurants and the conversion of 3 franchised restaurants into Company-operated restaurants since January 1, 2011 contributed $4.5 million to the increase in sales. This was partially offset by the depreciation of the European euro, which is the local currency in several of our Territories in the Caribbean, against the U.S. dollar, which caused sales to decrease by $6.9 million.

In NOLAD, sales by Company-operated restaurants increased by $28.6 million, or 8.5%, to $364.6 million. This growth was mainly explained by 18 net restaurant openings and the conversion of 7 franchised restaurants into Company-operated restaurants since January 1, 2011, which resulted in a sales increase of $24.9 million. In addition, comparable sales growth of 4.5% caused sales to increase by $15.2 million. Increase in traffic, which represented 98.8% of comparable sales increase, resulted primarily from higher volumes in the dessert category in Mexico. This was partially offset by the depreciation of local currencies in 2012, which caused sales to decrease by $11.5 million.
 
In SLAD, sales by Company-operated restaurants increased by $187.1 million, or 17.0%, to $1,289.6 million. The 18.4% growth in comparable sales, which resulted primarily from a higher average check, caused sales to increase by $202.8 million due to price increases in line with or above inflation, mainly in Venezuela and Argentina. In addition, the net opening of 48 Company-operated restaurants and the conversion of 3 franchised restaurants into Company-operated restaurants since January 1, 2011 resulted in a sales increase of $42.6 million.  This was partially offset by the depreciation of some currencies in the region against the U.S. dollar, which offset the increase in sales by $58.3 million.
 
Revenues from Franchised Restaurants
 
Our total revenues from franchised restaurants increased by $9.5 million, or 6.2%, from $153.5 million in 2011 to $163.0 million in 2012. The main contributors to this increase were comparable sales growth of 9.5%, which resulted in an increase in revenues of $15.8 million, and the net opening of 46 franchised restaurants since January 1, 2011, which was partially offset by the conversion of 14 franchised restaurants into Company-operated restaurants during the same period, which caused revenues from franchised restaurants to increase by $6.5 million. Increased rental income, as most of our franchise agreements provide for rent increases when sales increase, resulted in higher revenues from franchised restaurants of $2.9 million. In 2012, 71% and 29% of revenues from franchised restaurants were earned on the basis of a percentage of sales and on a flat fee basis, respectively. In 2011, 73% and 27% of revenues from franchised restaurants were earned on the basis of a percentage of sales and on a flat fee basis, respectively. The depreciation of most currencies in the Territories against the U.S. dollar offset the increase in revenues by $15.7 million.
 
In Brazil, revenues from franchised restaurants increased by $0.4 million, or 0.5%, to $79.8 million primarily as a result of 36 net franchised restaurant openings, which were partly offset by the conversion of 1 franchised restaurant into a Company-operated restaurant, since January 1, 2011, and comparable sales growth of 6.1%, which explained $5.8 million and $4.8 million of the increase, respectively. In addition, increased rental income resulted in increased revenues from franchised restaurants of $3.2 million. This was partially offset by the depreciation of the real against the U.S. dollar by $13.5 million.
 
In the Caribbean division, revenues from franchised restaurants decreased by $2.4 million, or 18.1%, to $11.0 million. This decrease is mainly explained by  lower rent amounting to $1.3 million and the impact of the closing of 5 restaurants as well as the conversion of 3 franchised restaurants into Company-operated restaurants since January 1, 2011 of $0.8 million.
 
In NOLAD, revenues from franchised restaurants increased by $0.2 million, or 1.0%, to $19.5 million. This growth was a result of the 4.1% increase in comparable sales and 9 net franchised restaurant openings, partially offset by the conversion of 7 franchised restaurants into Company-operated restaurants, since January 1, 2011, which caused revenues from franchised restaurants to increase $0.7 million and $0.3 million, respectively. The depreciation of the Mexican peso against the U.S. dollar contributed to the decrease in revenues by $0.9 million.
 
 
 
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In SLAD, revenues from franchised restaurants increased by $11.4 million, or 27.5%, to $52.8 million. This growth mainly resulted from a comparable sales growth of 26.1% ($10.5 million). In addition, the net openings of 6 restaurants partially offset by the conversion of 3 franchised restaurants into Company-operated restaurants since January 1, 2011 and higher rental income caused revenues to increase by $1.2 million and $1.0 million, respectively. The depreciation of some currencies in the region against the U.S. dollar represented a decrease in revenues of $1.3 million.
 
Operating Costs and Expenses
 
Food and Paper
 
Our total food and paper costs increased by $53.0 million, or 4.4%, to $1,269.1 million in 2012, as compared to 2011. As a percentage of our total sales by Company-operated restaurants, food and paper costs increased 0.2 percentage points to 34.9% primarily due to the depreciation of most currencies in the Territories against the U.S. dollar, as approximately 30% of our food and paper raw materials (excluding toys) and 100% of our Happy Meal toys are imported and paid for in U.S. dollars while our revenues are generated in local currencies.
 
In Brazil, food and paper costs decreased by $24.1 million, or 4.2%, to $551.4 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs increased 0.3 percentage points to 32.1%, primarily as a result of the depreciation of the Brazilian real against the U.S. dollar, as approximately 19% of food and paper costs are imported.
 
In the Caribbean division, food and paper costs increased by $2.9 million, or 3.4%, to $89.3 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs remained unchanged at 34 percentage points.
 
In NOLAD, food and paper costs increased by $10.2 million, or 7.2%, to $151.8 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs decreased 0.5 percentage points to 41.6%, resulting primarily from average check increases higher than the increase in costs in Costa Rica and Panama coupled with efficiencies.
 
In SLAD, food and paper costs increased by $64.1 million, or 15.5%, to $476.6 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs decreased 0.5 percentage points to 37.0%, mostly as a result of cost increases lower than the increase in the average check in Argentina and Venezuela.
 
Payroll and Employee Benefits
 
Our total payroll and employee benefits costs increased by $51.8 million, or 7.4%, to $753.1 million in 2012, as compared to 2011. As a percentage of our total sales by Company-operated restaurants, payroll and employee benefits costs increased 0.7 percentage points to 20.7%. This increase in payroll and employee benefits costs as a percentage of our total sales by Company-operated restaurants is mostly attributable to wage increases that outpaced our sales growth in several markets, which offset an increase in operational efficiency.  Operational efficiency is defined as the number of transactions (receipts issued by cashiers) per crew hour.  Wages increased mostly due to government-mandated minimum wage increases in our major Territories.
 
In Brazil, payroll and employee benefits costs remained unchanged at $355.4 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs increased 1.1 percentage points to 20.7% as a result of the government-mandated minimum wage increases above average check growth. This was partially offset by an increase in operational efficiency.
 
In the Caribbean division, payroll and employee benefits costs decreased by $1.6 million, or 2.2%, to $70.2 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs decreased 1.5 percentage points to 26.7% as a result of a reduction in overtime costs and the closing of 7 non-performing restaurants with higher than average payroll costs.
 
In NOLAD, payroll and employee benefits costs increased by $5.7 million, or 10.6%, to $59.1 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs increased 0.3 percentage points to 16.2% resulting from the average check increasing at a lower rate than wages in Panama
 
 
 
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and Costa Rica. This was partially offset by an increase in operational efficiency and the depreciation of the Mexican peso against the U.S. dollar, which contributed to a decrease in payroll costs of $2.0 million.
 
In SLAD, payroll and employee benefits costs increased by $47.8 million, or 21.7%, to $268.3 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits increased 0.8 percentage points to 20.8% as a result of salary increases higher than increases in our average check. This was partially offset by an increase in operational efficiency.
 
Occupancy and Other Operating Expenses
 
Our total occupancy and other operating expenses increased by $65.9 million, or 7.2%, to $984.0 million in 2012, as compared to 2011. As a percentage of our total sales by Company-operated restaurants, occupancy and other operating expenses increased 0.9 percentage points to 27.1% mainly due to an increase in depreciation and amortization as a result of the net openings in 2012 and higher outside services in some of the Territories.
 
In Brazil, occupancy and other operating expenses decreased by $9.6 million, or 1.9%, to $483.4 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased 0.9 percentage points to 28.1% mainly due to an increase in outside services.
 
In the Caribbean division, occupancy and other operating expenses increased by $3.0 million, or 4.2%, to $74.9 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased 0.3 percentage points to 28.5% as a result of an increase in depreciation expenses.
 
In NOLAD, occupancy and other operating expenses increased by $9.5 million, or 8.5%, to $120.7 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses remained unchanged at 33.1 percentage points.
 
In SLAD, occupancy and other operating expenses increased by $54.6 million, or 19.6%, to $332.7 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased 0.6 percentage points to 25.8% mainly due to higher outside services, maintenance and repair expenses and depreciation and amortization as a result of the net openings in 2012.
 
Royalty Fees
 
Our total royalty fees increased by $10.1 million, or 6.0%, to $180.5 million in 2012, as compared to 2011. As a percentage of sales, royalty fees increased 0.1 percentage points due to CIDE tax charges on royalty payments, as discussed below.  This was partially offset by a partial relief granted by McDonald’s Corporation in Venezuela due to the economic environment prevailing in that country.
 
In Brazil, royalty fees increased by $3.9 million, or 4.4%, to $92.1 million in 2012, as compared to 2011, due to CIDE tax charges on royalty payments that we started to pay in 2012. In 2011, CIDE tax charges on royalty payments were recorded within “Other operating expenses, net” as part of the accrual of the provision for contingencies. CIDE is a Brazilian social contribution tax that applies to Brazilian entities that pay royalties to non-residents. Prior to 2011, we were not required to pay CIDE under the then-existing interpretations of the Brazilian fiscal authorities. In 2011, there was a change in the interpretation of the Brazilian fiscal authorities, pursuant to which we decided to commence recognition of these charges.
 
In the Caribbean division, royalty fees increased by $0.6 million, or 4.6%, to $13.1 million in 2012, as compared to 2011, in line with the increase in sales by Company-operated restaurants.
 
In NOLAD, royalty fees increased by $1.3 million, or 8.3%, to $17.6 million in 2012, as compared to 2011, in line with the increase in sales by Company-operated restaurants.
 
In SLAD, royalty fees increased by $4.3 million, or 8.1%, to $57.8 million in 2012, as compared to 2011. As a percentage of sales by Company-operated restaurants, royalty fees decreased 0.4 percentage points to 4.5% due to the relief granted by McDonald’s Corporation in Venezuela.
 
 
 
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Franchised Restaurants—Occupancy Expenses
 
Occupancy expenses from franchised restaurants increased by $4.7 million, or 9.1%, to $56.1 million in 2012, as compared to 2011, primarily due to higher depreciation expense as well as higher rent expenses for leased properties as a consequence of the increase in sales generated by franchised restaurants. This was partially offset by lower allowance for doubtful accounts in Puerto Rico in 2012  as compared to 2011 and the reversal of allowances in Chile and Mexico.
 
In Brazil, occupancy expenses from franchised restaurants increased by $4.3 million, or 15.1%, to $32.8 million in 2012, as compared to 2011, primarily due to CIDE tax charges on royalty payments, depreciation expense and increased rent expenses for leased properties as a consequence of the increase in sales from franchised restaurants.
 
In the Caribbean division, occupancy expenses from franchised restaurants decreased by $1.5 million, or 29.0%, to $3.7 million in 2012, as compared to 2011. This is mainly explained by the abovementioned lower allowance for doubtful accounts in Puerto Rico.
 
In NOLAD, occupancy expenses from franchised restaurants decreased by $0.3 million, or 2.7%, to $10.4 million in 2012, as compared to 2011, primarily from a partial reversal of allowances for doubtful accounts in Mexico.
 
In SLAD, occupancy expenses from franchised restaurants increased by $1.2 million, or 12.0%, to $11.7 million in 2012, as compared to 2011. This resulted from increased rent expenses for leased properties as a consequence of the increase in sales from franchised restaurants  and higher depreciation expense, partially offset by the reversal of allowances for doubtful accounts in Chile.
 
Set forth below are the margins for our franchised restaurants in 2012, as compared to 2011. The margin for our franchised restaurants is expressed as a percentage and is equal to the difference between revenues from franchised restaurants and occupancy expenses from franchised restaurants, divided by revenues from franchised restaurants.
 
   
For the Years Ended December 31,
 
       
2011
 
Brazil
    58.9 %     64.2 %
Caribbean Division
    66.8       61.7  
NOLAD
    46.4       44.3  
SLAD
    77.9       74.8  
Total
    65.6       66.5  

General and Administrative Expenses
 
General and administrative expenses decreased by $20.3 million, or 6.1%, to $314.6 million in 2012, as compared to 2011. This decrease was mostly due to a decrease in the stock-based compensation expense as a consequence of the impact of the variation in our stock price from period to period, which decrease amounted to $30.9 million, and from the depreciation of most currencies in the Territories against the U.S. dollar, amounting to $28.3 million. This was partially offset by an increase in expenses resulting primarily from higher payroll costs amounting to $25.5 million, mainly due to salary increases linked to Argentina’s inflation and new hirings in Brazil due to the market expansion plan, higher professional services expenses amounting to $14.9 million, due to our ongoing systems integration and shared service center implementation throughout the region, and higher occupancy expenses amounting to $4.6 million.
 
In Brazil, general and administrative expenses decreased by $4.6 million, or 4.7%, to $92.9 million in 2012, as compared to 2011. The decrease resulted primarily from the depreciation of the real against the U.S. dollar amounting to $15.2 million. The increase in local currency is a consequence of higher payroll costs as a result of salary increases and the hiring of employees to fill new positions, most of which are related to our expansion plan and higher professional services, which totaled $6.9 million and $3.3 million, respectively.
 
In the Caribbean division, general and administrative expenses increased by $0.5 million, or 2.2%, to $23.0 million in 2012, as compared to 2011. This increase was mostly due to higher payroll cost, which explained $1.7 million. In addition, the depreciation of the European euro against the U.S. dollar and lower travel expenses contributed $0.5 million and $0.5 million to the decrease in expenses, respectively.
 
 
 
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In NOLAD, general and administrative expenses decreased by $3.5 million, or 12.6%, to $24.5 million in 2012, as compared to 2011. This decrease was mostly due to lower payroll costs, which explained $1.5 million. In addition, the depreciation of the local currency in Mexico against the U.S. dollar contributed to a decrease in general and administrative expenses of $1.3 million.
 
In SLAD, general and administrative expenses increased by $1.7 million, or 2.5%, to $70.0 million in 2012, as compared to 2011, primarily as a result of higher payroll costs, mainly in Argentina and Venezuela, countries that have inflation levels above the rest of the countries in the region, which explained $5.2 million. This was partially offset mainly by lower professional services and the depreciation of some local currencies in the region against the U.S. dollar, which caused general and administrative expenses to decrease by $1.5 million and $1.9 million, respectively.
 
General and administrative expenses for Corporate and others decreased by $14.4 million, or 12.1%, to $104.2 million in 2012, as compared to 2011. This decrease was mostly due to a decrease in stock-based compensation expense of $30.9 million as a consequence of the variation in our stock price from period to period and the depreciation of most local currencies in the Territories against the U.S. dollar, which explained $9.3 million. This was partially offset by higher payroll costs due to salary increases linked to Argentina’s inflation, as our corporate headquarters are located in Argentina, amounting to $13.1 million and higher professional services expenses related to our ongoing systems integration and shared service center implementation throughout the region,which increased by $12.9 million.
 
Other Operating Expenses, Net
 
Other operating expenses, net decreased by $11.4 million, to $3.3 million in 2012, as compared to 2011. This decrease was primarily attributable to the recovery of Brazilian tax credits in 2012 totaling $12.0 million.

Operating Income
 
   
For the Years Ended December 31,
       
       
2011
   
% Increase (Decrease)
 
   
(in thousands of U.S. dollars)
       
Brazil
  $ 193,339     $ 246,926       (21.7 )%
Caribbean division
    (5,020 )     (5,244 )     4.3  
NOLAD
    (5,557 )     (8,709 )     36.2  
SLAD
    120,536       99,813       20.8  
Corporate and others and purchase price allocation
    (66,658 )     (82,033 )     18.7  
Total
    236,640       250,753       (5.6 )

Operating income decreased by $14.1 million, or 5.6%, to $236.6 million in 2012, as compared to 2011.
 
Net Interest Expense
 
Net interest expense decreased by $6.5 million, or 10.7%, to $54.2 million in 2012, as compared to 2011, mainly due to the losses incurred in 2011 in connection with the partial redemption of the 2019 notes totaling $13.9 million, lower accrued interest in 2012 for $5.8 million as a consequence of this redemption, and lower other net interest charges in 2012 for $5.7 million. This was partially offset by an increase in interest expense of $18.9 million as a result of the issuances of the 2016 notes in April 2012 and July 2011.
 
Loss from Derivative Instruments
 
Loss from derivative instruments decreased by $8.3 million, or 90.4%, to $0.9 million in 2012, as compared to 2011, primarily due to the unwinding of our cross-currency interest rate swaps and mirror swaps in July 2011 ($9.7 million).
 
Foreign Currency Exchange Results
 
Foreign currency exchange results improved by $5.5 million, to a $18.4 million loss in 2012, as compared to 2011. This was mainly a consequence of the decreased depreciation of the Brazilian real against the U.S. dollar as
 
 
 
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well as to decreased exposure to foreign currency exchange risk in 2012 when compared to 2011, partially offset by higher losses incurred in the acquisition of U.S. dollars in Venezuela.
 
Other Non-Operating Income (Expenses), Net
 
Other non-operating income (expenses), net worsened by $5.7 million to a $2.1 million loss in 2012, as compared to 2011, primarily because in 2011 we recorded a gain as a result of the monetary actualization of certain tax credits in Brazil.
 
Income Tax Expense
 
Income tax expense increased by $1.8 million, from $44.6 million in 2011 to $46.4 million in 2012. Our consolidated effective tax rate increased by 1 percentage point to 28.8% in 2012, as compared to 2011, mainly as a result of a higher weighted-average statutory income tax rate ($4.8 million), a lower recovery of valuation allowances over deferred tax assets ($13.3 million) and a lower goodwill tax deduction in Brazil ($2.9 million) in 2012 when compared to 2011, partially offset by lower withholding income taxes on intercompany transactions ($5.6 million), lower non-deductible expenses ($6.5 million) and higher deductions related to permanent tax inflation adjustments ($7.5 million) in 2012 when compared to 2011.
 
Net Income Attributable to Non-controlling Interests
 
Net income attributable to non-controlling interests for 2012 remained unchanged at $0.3 million when compared to 2011.
 
Net Income Attributable to Arcos Dorados Holdings Inc.
 
As a result of the foregoing, net income attributable to Arcos Dorados Holdings Inc. decreased by $1.2 million, or 1.0%, to $114.3 million in 2012, as compared to 2011.
 
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
 
Set forth below are our results of operations for the years ended December 31, 2011 and 2010.
 
   
For the Years Ended December 31,
       
       
2010
   
%
Increase (Decrease)
 
   
(in thousands of U.S. dollars)
       
Sales by Company-operated restaurants
  $ 3,504,128     $ 2,894,466       21.1 %
Revenues from franchised restaurants
    153,521       123,652       24.2  
Total revenues
    3,657,649       3,018,118       21.2  
Company-operated restaurant expenses:
                       
Food and paper
    (1,216,141 )     (1,023,464 )     18.8  
Payroll and employee benefits
    (701,278 )     (569,084 )     23.2  
Occupancy and other operating expenses
    (918,102 )     (765,777 )     19.9  
Royalty fees
    (170,400 )     (140,973 )     20.9  
Franchised restaurants – occupancy expenses
    (51,396 )     (37,634 )     36.6  
General and administrative expenses
    (334,914 )     (254,165 )     31.8  
Other operating expenses, net
    (14,665 )     (22,464 )     (34.7 )
Total operating costs and expenses
    (3,406,896 )     (2,813,561 )     21.1  
Operating income
    250,753       204,557       22.6  
Net interest expense
    (60,749 )     (41,613 )     46.0  
Loss from derivative instruments
    (9,237 )     (32,809 )     (71.8 )
Foreign currency exchange results
    (23,926 )     3,237       (839.1 )
Other non-operating income (expenses), net
    3,562       (23,630 )     115.1  
Income before income taxes
    160,403       109,742       46.2  
Income tax expense
    (44,603 )     (3,450 )     1,192.8  
Net income
    115,800       106,292       8.9  
Less: Net income attributable to non-controlling interests
    (271 )     (271 )      
Net income attributable to Arcos Dorados Holdings Inc.
    115,529       106,021       9.0  
 
 
 
 
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Set forth below is a summary of changes to our systemwide, Company-operated and franchised restaurant portfolios in 2011 and 2010.

Systemwide Restaurants
 
For the Years Ended December 31,
 
       
2010
 
Systemwide restaurants at beginning of period
    1,755       1,680  
Restaurant openings
    101       85  
Restaurant closings
    (16 )     (10 )
Systemwide restaurants at end of period
    1,840       1,755  

Company-operated Restaurants
 
For the Years Ended December 31,
 
       
2010
 
Company-operated restaurants at beginning of period
    1,292       1,226  
Restaurant openings
    79       63  
Restaurant closings
    (15 )     (9 )
Net conversions of franchised restaurants to Company-operated restaurants
    2       12  
Company-operated restaurants at end of period
    1,358       1,292  

Franchised Restaurants
 
For the Years Ended December 31,
 
       
2010
 
Franchised restaurants at beginning of period
    463       454  
Restaurant openings
    22       22  
Restaurant closings
    (1 )     (1