e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
June 30,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32875
BURGER KING HOLDINGS,
INC.
(Exact name of Registrant as
Specified in Its Charter)
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Delaware
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75-3095469
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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5505 Blue Lagoon Drive, Miami, Florida
(Address of Principal
Executive Offices)
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33126
(Zip Code)
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Registrants
telephone number, including area code
(305) 378-3000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of December 31, 2008
was $2.1 billion.
The number of shares outstanding of the Registrants Common
Stock as of August 20, 2009 was 134,802,257.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from
Registrants definitive proxy statement for the 2009 annual
meeting of stockholders, which proxy will be filed no later than
120 days after the close of the Registrants fiscal
year ended June 30, 2009.
BURGER
KING HOLDINGS, INC.
2009
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
Burger
King®,
Whopper®,
Whopper
Jr.®,
Have It Your
Way®,
Burger King Bun Halves and Crescent
Logo®,
BK Burger
Shots®,
BK®
Value Menu,
BK®
Breakfast Value Menu,
BK®
Fresh Apple Fries,
BK®
Stacker, BK
Wrapper®,
Hungry
Jacks®,
Spicy ChickN
Crisp®,
Tendercrisp®,
Angry
Whoppertm,
BK Breakfast
Shotstm,
BK
Fusiontm,
BKtm
Positive Steps, Come Como
Reytm,
King
Dealstm,
Long
Chickentm,
SteakhouseXTtm
and
Whoppertm
Bar are trademarks of Burger King Corporation. References to
fiscal 2009, fiscal 2008 and fiscal 2007 in this
Form 10-K
are to the fiscal years ended June 30, 2009, 2008 and 2007,
respectively, and references to fiscal 2010 are to the fiscal
year ending June 30, 2010. Unless the context otherwise
requires, all references to we, us,
our and Company refer to Burger King
Holdings, Inc. and its subsidiaries.
In this document, we rely on and refer to information
regarding the restaurant industry, the quick service restaurant
segment and the fast food hamburger restaurant category that has
been prepared by the industry research firm The NPD Group, Inc.
(which prepares and disseminates Consumer Reported Eating Share
Trends, or CREST data) or compiled from market research reports,
analyst reports and other publicly available information. All
industry and market data that are not cited as being from a
specified source are from internal analyses based upon data
available from known sources or other proprietary research and
analysis.
All financial information within this document has been
rounded to one place past the decimal point.
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Part I
Overview
Burger King Holdings, Inc. (we or the
Company) is a Delaware corporation formed on
July 23, 2002. Our restaurant system includes restaurants
owned by the Company and by franchisees. We are the worlds
second largest fast food hamburger restaurant, or FFHR, chain as
measured by the total number of restaurants and system-wide
sales. As of June 30, 2009, we owned or franchised a total
of 11,925 restaurants in 73 countries and U.S. territories,
of which 1,429 restaurants were Company restaurants and 10,496
were owned by our franchisees. Of these restaurants, 7,233 or
61% were located in the United States and 4,692 or 39% were
located in our international markets. Our restaurants feature
flame-broiled hamburgers, chicken and other specialty
sandwiches, french fries, soft drinks and other
affordably-priced food items. During our more than 50 years
of operating history, we have developed a scalable and
cost-efficient quick service hamburger restaurant model that
offers customers fast food at affordable prices.
We generate revenues from three sources: retail sales at Company
restaurants; franchise revenues, consisting of royalties based
on a percentage of sales reported by franchise restaurants and
franchise fees paid to us by our franchisees; and property
income from restaurants that we lease or sublease to
franchisees. Approximately 90% of our restaurants are franchised
and we have a higher percentage of franchise restaurants to
Company restaurants than our major competitors in the FFHR
category. We believe that this restaurant ownership mix provides
us with a strategic advantage because the capital required to
grow and maintain the Burger
King®
system is funded primarily by franchisees, while still giving us
a sizeable base of Company restaurants to demonstrate
credibility with franchisees in launching new initiatives. As a
result of the high percentage of franchise restaurants in our
system, we have lower capital requirements compared to our major
competitors.
Our
History
Burger King Corporation, which we refer to as BKC, was founded
in 1954 when James McLamore and David Edgerton opened the
first Burger King restaurant in Miami, Florida. The
Whopper®
sandwich was introduced in 1957. BKC opened its first
international restaurant in the Bahamas in 1966. BKC also
established its brand identity with the introduction of the
bun halves logo in 1969 and the launch of the first
Have It Your
Way®
campaign in 1974. BKC introduced drive-thru service, designed to
satisfy customers
on-the-go
in 1975.
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to
Minneapolis-based The Pillsbury Company, taking it from a small
privately-held franchised chain to a subsidiary of a large food
conglomerate. The Pillsbury Company was purchased by Grand
Metropolitan plc which, in turn, merged with Guinness plc to
form Diageo plc, a British spirits company. In December
2002, BKC was acquired by private equity funds controlled by TPG
Capital, Bain Capital Partners and the Goldman Sachs Funds,
which we refer to as our Sponsors. In May 2006, we
consummated our initial public offering. The private equity
funds controlled by the Sponsors currently own approximately 32%
of our outstanding common stock.
Our
Industry
We operate in the FFHR category of the quick service restaurant,
or QSR, segment of the restaurant industry. In the United
States, the QSR segment is the largest segment of the restaurant
industry and has demonstrated steady growth over a long period
of time. According to The NPD Group, Inc., which prepares and
disseminates CREST data, QSR sales have grown at an annual rate
of 3% over the past 10 years, totaling approximately
$231.4 billion for the
12-month
period ended June 2009. According to The NPD Group, Inc., QSR
sales are projected to increase at an annual rate of 3% between
2009 and 2014. However, we have recently experienced negative
comparable sales growth and significant traffic declines in many
of our major markets, primarily caused by adverse economic
conditions, including higher unemployment, fewer customers
eating out, and heavy discounting by other restaurant chains,
and QSR sales and we may continue to be adversely impacted by
the current recessionary environment or sharp increases in
commodity or energy prices.
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We believe the QSR segment is generally less vulnerable to
economic downturns than the casual dining segment, due to the
value that QSRs deliver to consumers, as well as some
trading to value by customers from other restaurant
industry segments during adverse economic conditions, as they
seek to preserve the away from home dining
experience on tighter budgets. During the current recession,
however, QSR traffic in the United States decreased 2% for the
quarter ended in June 2009, while visits to casual dining chains
decreased 3% and family dining chains decreased 6% for the same
period, according to The NPD Group, Inc. Overall
U.S. restaurant traffic decreased 3% for the quarter ended
in May 2009, its steepest drop in 28 years, as diners with
children ate out less, according to The NPD Group, Inc.
According to The NPD Group, Inc., the FFHR category is the
largest category in the QSR segment, generating sales of over
$62.8 billion in the United States for the
12-month
period ended June 30, 2009, representing 27% of total QSR
sales. The FFHR category grew at an annual rate of 3% in terms
of sales during the same period and, according to The NPD Group,
Inc., is expected to increase at an average rate of 4% per year
over the next five years. For the
12-month
period ended June 30, 2009, Burger King accounted
for approximately 14% of total FFHR sales in the United States.
Our
Competitive Strengths
We believe that we are well-positioned to capitalize on the
following competitive strengths to achieve future growth:
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Distinctive brand with global
platform. We believe that our Burger King
and Whopper brands are two of the most
widely-recognized consumer brands in the world. We have one of
the largest restaurant networks in the world, with 11,925
restaurants operating in 73 countries and U.S. territories,
of which 4,692 are located in our international markets. During
fiscal 2009, our franchisees opened restaurants in two new
international markets, the Czech Republic and Suriname, and
re-entered Uruguay, a market in which we had no presence since
August 2007. We believe that the demand for new international
franchise restaurants is growing and that our global platform
will allow us to leverage our established infrastructure to
significantly increase our international restaurant count with
limited incremental investment or expense.
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Attractive business
model. Approximately 90% of our restaurants
are franchised, which is a higher percentage than that of our
major competitors in the FFHR category. We believe that our
franchise restaurants will generate a consistent, profitable
royalty stream to us, with minimal ongoing capital expenditures
or incremental expense by us. We also believe this will provide
us with significant cash flow to reinvest in growing our brand
and enhancing shareholder value. Although we believe that this
restaurant ownership mix is beneficial to us, it also presents a
number of drawbacks, such as our limited influence over
franchisees and limited ability to facilitate changes in
restaurant ownership.
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Innovative marketing campaigns, creative advertising and
strategic sponsorships. We utilize our
successful marketing, advertising and sponsorships to drive
sales and generate restaurant traffic. We were named
Advertiser of the Decade by AdWeek in late
2008. During fiscal 2009, we launched innovative, creative and
edgy advertising campaigns, such as our Whopper Sacrifice
campaign in which we built an application in the social network
Facebook to test if people love the Whopper sandwich more
than their friends by offering a free Whopper sandwich to
anyone who deleted ten of their Facebook friends. The campaign
commanded the attention of consumers and media with
85 million media impressions and continues to be referenced
as an example of a successful Facebook application from a brand
perspective. We are also reaching out to a broad spectrum of
restaurant guests with entertainment events, such as Star
Trektm
and SpongeBob
SquarePantstm
and sports initiatives, such as our partnership with Tony
Stewart and NASCAR. Additionally, we reinforced our commitment
to the nutrition portion of our
BKtm
Positive Steps program by launching
BK®
Fresh Apple Fries, which was named one of 2008s Most
Memorable New Product Launches by Launch PR.
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Experienced management team. We have a
seasoned management team with significant experience.
John Chidsey, our Chairman and Chief Executive Officer, has
extensive experience in managing franchised and branded
businesses, including the Avis
Rent-A-Car
and Budget
Rent-A-Car
systems, Jackson Hewitt Tax Services and PepsiCo. Russell Klein,
our President, Global Marketing, Strategy and Innovation, has
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more than 30 years of retail and consumer marketing
experience, including at 7-Eleven Inc. Ben Wells, our Chief
Financial Officer, has over 30 years of finance experience,
including at Compaq Computer Corporation and British Petroleum.
In addition, other members of our management team have worked at
Frito Lay, McDonalds,
Jack-in-the
Box, PepsiCo, Pillsbury and Wendys. The core of our
management team has been working together since 2004.
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Our
Business Strategy
We intend to grow and strengthen our competitive position
through the continued focus on our strategic global growth
pillars marketing, products, operations and
development and the implementation of the following
key elements of our business strategy:
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Drive further sales growth: We remain
focused on achieving our comparable sales and average restaurant
sales potential. Essential components of this strategy are:
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Enhancing the guest experience our key guest
satisfaction and operations metrics showed continued improvement
in fiscal 2009 and we intend to further improve these metrics.
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Expanding competitive hours of operation we have
implemented initiatives to reduce the gap between our hours of
operation and those of our competitors, which we believe will
increase comparable sales and average restaurant sales in
U.S. restaurants. As of June 30, 2009, 200 Company
restaurants in the United States were open 24 hours
daily.
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Increasing emphasis on our restaurant reimaging
program we believe that dedicating capital
expenditures to our restaurant reimaging program in the United
States and Canada will result in higher sales and traffic in
these restaurants and yield strong cash on cash returns. We have
reimaged a total of 71 restaurants to date and plan to
reimage 53 restaurants during fiscal 2010.
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Enhance restaurant profitability: We
believe that opportunities exist to enhance restaurant
profitability by better utilizing our fixed cost base and
exploring ways to mitigate labor, commodity and energy costs. We
are focused on leveraging our fixed cost structure by
introducing higher margin products and creating efficiencies
through improved speed of service and equipment, such as
headsets which we believe will further improve speed of service.
In the United States and Canada, the installation of the
flexible batch broiler has reduced energy consumption in Company
restaurants, and we expect to further enhance restaurant margins
by utilizing our market based pricing model to achieve optimal
pricing in our markets.
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Employ innovative marketing strategies and offer superior
value and quality: We intend to continue to
employ innovative and creative marketing strategies to increase
our restaurant traffic and comparable sales. We expect to
utilize our barbell menu strategy of innovative indulgent
products and value menu items to offer more choices to our
guests and enhance the price/value proposition of our products.
As part of this strategy, in fiscal 2009, we expanded our
indulgent menu and launched limited time offers, including the
Angry
Whoppertm
sandwich. At the other end of the barbell menu, we launched the
value-priced two-pack BK Burger
Shots®
and BK Breakfast
Shotstm
in the U.S., the King
Dealstm
in Germany, the U.K. and Spain and the Come Como
Reytm
(Eat Like a King) every day value menu in Mexico. As a result of
the continuing recessionary environment and negative traffic and
sales trends we have experienced since March 2009, we plan to
focus our efforts in fiscal 2010 on our brand equities of
flame-broiled taste, quality and size at affordable prices to
differentiate Burger King restaurants from our
competitors. Finally, we continue to introduce new products to
fill gaps in our breakfast, dessert and snack menu offerings. We
intend to roll-out several new and limited time offer products
during the remainder of fiscal 2010, including value focused
products to promote our affordability message.
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Expand our large international
platform: We intend to leverage our
substantial international infrastructure to expand our franchise
network and restaurant base. Internationally, we are much
smaller than our largest competitor, and, therefore, we believe
we have significant growth opportunities. We have developed a
detailed global development plan to accelerate growth over the
next five years. We expect to focus our expansion plans on
(1) markets where we already have an established presence
but which have significant growth potential, such as Spain,
Brazil and Turkey; (2) markets in which we have a small
presence, but
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which we believe offer significant opportunities for
development, such as Argentina, Colombia, China, Japan,
Indonesia and Italy; and (3) financially attractive new
markets in the Middle East, Eastern Europe and the Mediterranean
region.
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Accelerate our new restaurant development and
expansion: The expansion of our restaurant
network and an increase in the number of new restaurants are key
components in our growth plan. We expect that most of our new
restaurant growth will come from franchisees. Consequently, our
development strategy focuses on ensuring that franchisees in
each of our markets have the resources and incentives to grow.
First, we have focused on providing our franchisees with a
development process that we believe is streamlined, financially
flexible and capital-efficient. As part of this strategy, we
developed new, smaller restaurant designs that reduce the level
of capital investment required, while also addressing a change
in consumer preference from dine-in to drive-thru (62% of
U.S. Company restaurant sales are currently made in the
drive-thru). These smaller restaurant models reduce average
building costs by approximately 20%. We have also developed the
Whoppertm
Bar, a small-scale, trendy version of our restaurant where
guests can customize our signature burger with the choice of up
to 22 different toppings. To date, the Whopper Bar has
opened in Orlando, Florida and in Munich, Germany. We are also
actively pursuing co-branding and site sharing programs to
reduce initial investment expense and have begun testing a
turn-key program that reduces the time and uncertainty
associated with new builds. In addition, we have invested in
joint ventures with franchisees to drive development in Taiwan
and Northern China, and we expect to continue to use this
strategy in the future to increase our presence globally.
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Use proactive portfolio management to drive
growth: We intend to use proactive portfolio
management to drive growth and optimize our Company restaurant
portfolio and franchisee participation in new and existing
markets, while maintaining our 90/10 franchise to Company
restaurant ownership mix. As part of this ongoing strategy, we
will focus on (1) attracting new franchisees to acquire
restaurants from existing franchisees; (2) leveraging our
existing infrastructure through the acquisition of franchise
restaurants in our current or targeted Company markets; and
(3) selectively refranchising Company restaurants to
provide new opportunities for existing and new franchisees,
while maintaining our approximately 90/10 franchise to Company
restaurant ownership mix. In April 2008, we completed a 56
restaurant acquisition in the Carolinas with Heartland Southeast
and, in July 2008, we acquired 72 restaurants in Iowa and
Nebraska from Simmonds Restaurant Management. In March 2009, we
sold 19 Company restaurants in Iowa to a new franchisee, and in
May 2009, we sold 20 Company restaurants in Canada to an
existing franchisee. In addition, we closed under-performing
restaurants in the United Kingdom (U.K.) and sold
certain Company restaurants in Germany and Canada to our local
franchisees.
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Global
Operations
We operate in three reportable segments: (i) the United
States and Canada; (ii) Europe, the Middle East, Africa and
Asia Pacific, or EMEA/APAC; and (iii) Latin America.
Additional financial information about geographic segments is
incorporated herein by reference to Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 and Segment
Reporting in Part II, Item 8 in Note 22 of this
Form 10-K.
United
States and Canada
Restaurant
Operations
Our restaurants are limited-service restaurants of distinctive
design and are generally located in high-traffic areas
throughout the United States and Canada. As of June 30,
2009, 1,043 Company restaurants and 6,491 franchise
restaurants were operating in the United States and Canada. We
believe our restaurants appeal to a broad spectrum of consumers,
with multiple day parts appealing to different customer groups.
Operating Procedures and Hours of
Operation. All of our restaurants must adhere to
strict standardized operating procedures and requirements which
we believe are critical to the image and success of the
Burger King brand. Each restaurant is required to follow
the Manual of Operating Data, an extensive operations manual
containing mandatory restaurant operating standards,
specifications and procedures prescribed from time to time to
assure uniformity of operations and consistent high quality of
products at Burger King restaurants. Among the
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requirements contained in the Manual of Operating Data are
standard design, equipment system, color scheme and signage,
operating procedures, hours of operation and standards of
quality for products and services.
Restaurants in the United States are required to be open until
at least 2 a.m., Friday through Saturday, subject to
certain exceptions, and to be open by at least 6 a.m.,
Monday through Saturday. Restaurants in the United States and
Canada are required to be open until at least midnight on the
remaining days of the week. We believe that reducing the gap
between our operating hours and those of our competitors will be
a key component in capturing a greater share of FFHR sales in
the United States and Canada.
Management. Substantially all of our executive
management, finance, marketing, legal and operations support
functions are conducted from our global restaurant support
center in Miami, Florida. There is also a field staff consisting
of operations, training, real estate and marketing personnel who
support Company restaurant and franchise operations in the
United States and Canada. Our franchise operations are organized
into eight divisions, each of which is headed by a division vice
president supported by field personnel who interact directly
with the franchisees. Each Company restaurant is managed by one
restaurant manager and one to three assistant managers,
depending upon the restaurants sales volume. Management of
a franchise restaurant is the responsibility of the franchisee,
who is trained in our techniques and is responsible for ensuring
that the
day-to-day
operations of the restaurant are in compliance with the Manual
of Operating Data.
Restaurant Menu. Our barbell menu strategy of
expanding our high-margin indulgent products and our value
products and our goal of expanding the dayparts that we serve
are the core drivers of our product offerings. As a result of
the continuing recessionary environment and negative traffic and
sales trends we have experienced since March 2009, we plan to
focus our efforts in fiscal 2010 on our brand equities of
flame-broiled taste, quality and size at affordable prices to
differentiate Burger King restaurants from our
competitors. The basic menu of all of our restaurants consists
of hamburgers, cheeseburgers, chicken and fish sandwiches,
breakfast items, french fries, onion rings, salads, desserts,
soft drinks, shakes, milk and coffee. However, as we expand our
hours of operation we have introduced, and expect to continue to
introduce new breakfast, dessert and snack menu offerings which
will complement our core products. We will also continue to use
limited time offers, such as the Angry Whopper sandwich
we offered in fiscal 2009, to provide guests with innovative
taste experiences.
Restaurant Design and Image. Our restaurants
consist of several different building types with various seating
capacities. The traditional Burger King restaurant is
free-standing, ranging in size from approximately 1,900 to
4,300 square feet, with seating capacity of 40 to 120
guests, drive-thru facilities and adjacent parking areas. Some
restaurants are located in airports, shopping malls, toll road
rest areas and educational and sports facilities. In fiscal
2005, we developed new, smaller restaurant designs that reduce
the average building costs by approximately 20%. The seating
capacity for these smaller restaurant designs is between 40 and
80 guests. We believe this seating capacity is adequate since
approximately 62% of our U.S. Company restaurant sales are
made at the drive-thru. We and our franchisees have opened 251
new smaller design restaurants in the United States and Canada
through June 30, 2009. We have also developed the
Whopper Bar, a small-scale, trendy version of our
restaurant where guests can customize our signature burger with
the choice of up to 22 different toppings. Our first Whopper
Bar in the United States opened in March 2009 at
Universal Citywalk
Orlando®
in Orlando, Florida.
In fiscal 2008, we began our reimaging initiative for our
Company restaurants in the United States and Canada. This
initiative includes the remodeling or scraping and rebuilding of
Company restaurants where we believe a new modernized exterior
and interior image can drive additional sales. During fiscal
2009, we reimaged a total of 39 Company restaurants, with 71
reimaged restaurants since the inception of the initiative.
New Restaurant Development. We employ a
sophisticated and disciplined market planning and site selection
process through which we identify trade areas and approve
restaurant sites throughout the United States and Canada that
will provide for quality expansion. We have established a
development committee to oversee all new restaurant development
within the United States and Canada. Our development
committees objective is to ensure that every proposed new
restaurant location is carefully reviewed and that each location
meets the stringent requirements established by the committee,
which include factors such as site accessibility and visibility,
traffic patterns, signage, parking, site size in relation to
building type and certain demographic factors. Our model for
evaluating sites accounts for potential changes to the site,
such as road reconfiguration and traffic pattern alterations.
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Each franchisee wishing to develop a new restaurant is
responsible for selecting a new site location and bears the risk
if the new site does not meet the franchisees investment
expectations. However, we work closely with our franchisees to
assist them in selecting sites. Each restaurant site selected is
required to be within an identified trade area and our
development committee reviews all selections, provides input
based on the same factors that it uses to select Company
restaurants, and grants final approval.
We increased our restaurant count in the United States and
Canada by 22 restaurants during fiscal 2009. We have instituted
several initiatives to accelerate restaurant development in the
United States, including reduced upfront franchise fees, process
simplifications and turnkey development assistance programs,
which reduce the time and uncertainty associated with opening
new restaurants.
Company
Restaurants
As of June 30, 2009, we owned and operated 1,043 Company
restaurants in the United States and Canada, representing 14% of
total United States and Canada system-wide restaurants. We own
the properties for 357 of our Company restaurants and we lease
the remaining 686 properties from third-party landlords. Our
Company restaurants in the United States and Canada generated
$1.3 billion in revenues in fiscal 2009, or 76% of our
total United States and Canada revenues and 53% of our total
worldwide revenues. We use our Company restaurants to test new
products and initiatives before rolling them out to the wider
Burger King system.
The following table details the top ten locations of our Company
restaurants in the United States and Canada as of June 30,
2009:
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% of Total U.S. and
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Company Restaurant
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Canada Company
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Rank
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State/Province
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Count
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Restaurants
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1
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Florida
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251
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24
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%
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2
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North Carolina
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111
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11
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%
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3
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|
Indiana
|
|
|
70
|
|
|
|
7
|
%
|
4
|
|
Ontario
|
|
|
57
|
|
|
|
5
|
%
|
5
|
|
Georgia
|
|
|
55
|
|
|
|
5
|
%
|
6
|
|
Virginia
|
|
|
50
|
|
|
|
5
|
%
|
7
|
|
South Carolina
|
|
|
49
|
|
|
|
5
|
%
|
8
|
|
Massachusetts
|
|
|
44
|
|
|
|
4
|
%
|
9
|
|
Nebraska
|
|
|
42
|
|
|
|
4
|
%
|
10
|
|
Ohio
|
|
|
40
|
|
|
|
4
|
%
|
Franchise
Operations
General. We grant franchises to operate
restaurants using Burger King trademarks, trade dress and
other intellectual property, uniform operating procedures,
consistent quality of products and services and standard
procedures for inventory control and management.
Our growth and success have been built, in significant part,
upon our substantial franchise operations. We franchised our
first restaurant in 1961, and as of June 30, 2009, there
were 6,491 franchise restaurants, owned by 767 franchise
operators, in the United States and Canada. Franchisees report
gross sales on a monthly basis and pay royalties based on
reported sales. Franchise restaurants in the United States and
Canada generated revenues of $323.1 million in fiscal 2009,
or 60% of our total worldwide franchise revenues. The five
largest franchisees in the United States and Canada in terms of
restaurant count represented in the aggregate approximately 17%
of our franchise restaurants in this segment as of June 30,
2009.
8
The following table details the top ten locations of our
franchisees restaurants in the United States and Canada as
of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total U.S. and
|
|
|
|
|
|
Franchise
|
|
|
Canada Franchise
|
|
Rank
|
|
State/Province
|
|
Restaurant Count
|
|
|
Restaurants
|
|
|
1
|
|
California
|
|
|
669
|
|
|
|
10
|
%
|
2
|
|
Texas
|
|
|
430
|
|
|
|
7
|
%
|
3
|
|
Michigan
|
|
|
333
|
|
|
|
5
|
%
|
4
|
|
New York
|
|
|
316
|
|
|
|
5
|
%
|
5
|
|
Ohio
|
|
|
310
|
|
|
|
5
|
%
|
6
|
|
Illinois
|
|
|
304
|
|
|
|
5
|
%
|
7
|
|
Florida
|
|
|
295
|
|
|
|
5
|
%
|
8
|
|
Pennsylvania
|
|
|
236
|
|
|
|
4
|
%
|
9
|
|
Georgia
|
|
|
204
|
|
|
|
3
|
%
|
10
|
|
New Jersey
|
|
|
186
|
|
|
|
3
|
%
|
The following is a list of the five largest franchisees in terms
of restaurant count in the United States and Canada as of
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
|
|
Rank
|
|
Name
|
|
Count
|
|
|
Location
|
|
1
|
|
Carrols Corporation
|
|
|
314
|
|
|
Northeast and Midwest
|
2
|
|
Strategic Restaurants Acquisition Company, LLC
|
|
|
267
|
|
|
California, Midwest and Southeast
|
3
|
|
Heartland Food Corp.
|
|
|
258
|
|
|
Midwest and Canada
|
4
|
|
Army Air Force Exchange Services
|
|
|
128
|
|
|
Across the United States
|
5
|
|
Bravokilo, Inc./Bravo Grande, Inc.
|
|
|
118
|
|
|
Midwest
|
Franchise Agreement Terms. For each franchise
restaurant, we enter into a franchise agreement covering a
standard set of terms and conditions. The typical franchise
agreement in the United States and Canada has a
20-year term
(for both initial grants and renewals of franchises) and
contemplates a one-time franchise fee of $50,000, which must be
paid in full before the restaurant opens for business, or in the
case of renewal, before expiration of the current franchise
term. In recent years, however, we have offered franchisees
reduced upfront franchise fees to encourage
U.S. franchisees to open new restaurants.
Recurring fees consist of monthly royalty and advertising
payments. Franchisees in the United States and Canada are
generally required to pay us an advertising contribution equal
to a percentage of gross sales, typically 4.0%, on a monthly
basis. In addition, most existing franchise restaurants in the
United States and Canada pay a royalty of 3.5% and 4.0% of gross
sales, respectively, on a monthly basis. As of July 1,
2000, a new royalty rate structure became effective in the
United States for most new franchise agreements, including both
new restaurants and renewals of franchises, but limited
exceptions were made for agreements that were grandfathered
under the old fee structure or entered into pursuant to certain
early renewal incentive programs. In general, new franchise
restaurants opened and franchise agreements renewed in the
United States after June 30, 2003 will generate royalties
at the rate of 4.5% of gross sales for the full franchise term.
As a result, the average royalty rate in the United States was
3.9% as of June 30, 2009.
Franchise agreements are not assignable without our consent, and
we have a right of first refusal if a franchisee proposes to
sell a restaurant. Defaults (including non-payment of royalties
or advertising contributions, or failure to operate in
compliance with the terms of the Manual of Operating Data) can
lead to termination of the franchise agreement. We can control
the growth of our franchisees because we have the right to
approve any restaurant acquisition or new restaurant opening.
These transactions must meet our minimum approval criteria to
ensure that franchisees are adequately capitalized and that they
satisfy certain other requirements.
9
Property
Operations
Our property operations consist of restaurants where we lease
the land and often the building to the franchisee. Our real
estate operations in the United States and Canada generated
$88.1 million of our property revenues in fiscal 2009, or
78% of our total worldwide property revenues.
For properties that we lease from third-party landlords and
sublease to franchisees, leases generally provide for fixed
rental payments and may provide for contingent rental payments
based on a restaurants annual gross sales. Franchisees who
lease land only or land and building from us do so on a
triple net basis. Under these triple net leases, the
franchisee is obligated to pay all costs and expenses, including
all real property taxes and assessments, repairs and maintenance
and insurance. As of June 30, 2009, we leased or subleased
to franchisees in the United States and Canada 941
properties, of which we own 441 properties and lease either the
land or the land and building from third-party landlords on the
remaining 500 properties.
Europe,
the Middle East and Africa/Asia Pacific
(EMEA/APAC)
Restaurant
Operations
EMEA. EMEA is the second largest geographic
area in the Burger King system behind the United States,
as measured by number of restaurants. As of June 30, 2009,
EMEA had 2,580 restaurants in 31 countries and territories,
including 278 Company restaurants located in Germany, the U.K.,
Spain, The Netherlands and Italy. Germany is the largest market
in EMEA with 668 restaurants as of June 30, 2009.
APAC. As of June 30, 2009, APAC had 733
restaurants in 13 countries and territories, including China,
Malaysia, Thailand, Australia, Philippines, Singapore, New
Zealand, South Korea, Indonesia, and Japan. All of the
restaurants in the region are franchised other than our 16
Company restaurants in China and one Company restaurant in
Singapore. Australia is the largest market in APAC, with 327
restaurants as of June 30, 2009, all of which are
franchised and operated under Hungry
Jacks®,
a brand that we own in Australia and New Zealand. Australia
is the only market in which we operate under a brand other than
Burger King. We believe there is significant potential
for growth in APAC, particularly in our existing markets of
China, Japan, Taiwan, Hong Kong and Malaysia and in new markets
such as Indonesia.
Our restaurants located in EMEA/APAC generally adhere to the
standardized operating procedures and requirements followed by
U.S. restaurants. However, regional and country-specific
market conditions often require some variation in our standards
and procedures. Some of the major differences between our United
States and Canada and EMEA/APAC operations are discussed below.
Management Structure. Our EMEA headquarters
are located in Zug, Switzerland and our APAC headquarters are
located in Singapore. In addition, we operate restaurant support
centers located in Madrid, London, Munich, Istanbul, Rotterdam
and Gothenburg (for EMEA), Singapore and Shanghai (for APAC).
These centers are staffed by teams who support both franchised
operations and Company restaurants.
Menu and Restaurant Design. Restaurants must
offer certain global Burger King menu items. In many
countries, special products developed to satisfy local tastes
and respond to competitive conditions are also offered. Many
restaurants are located in smaller, attached buildings without a
drive-thru or in food courts, rather than free-standing
buildings. In addition, the design, facility size and color
scheme of the restaurant building may vary from country to
country due to local requirements and preferences. We and our
franchisees have opened 125 new restaurants with the smaller
building designs in EMEA/APAC through June 30, 2009. In
addition, during fiscal 2009 we opened our first Whopper
Bar in EMEA in Munich, Germany.
New Restaurant Development. Unlike the United
States and Canada, where all new development must be approved by
the development committee, our market planning and site
selection process in EMEA/APAC is managed by our regional teams,
who are knowledgeable about the local market. In several of our
markets, there is typically a single franchisee that owns and
operates all of the restaurants within a country. We have
identified opportunities for extending the reach of the
Burger King brand in most of our existing markets in EMEA
and APAC. Over the past two years our franchisees opened
restaurants in three new markets in EMEA/APAC: Romania, Bulgaria
and the Czech Republic. We are also considering the possibility
of entering into additional EMEA/APAC
10
markets, including countries in Eastern Europe, the
Mediterranean and the Middle East, and we are in the process of
identifying prospective new franchisees for these markets.
Company
Restaurants
As of June 30, 2009, 278 (or 11%) of the restaurants in
EMEA were Company restaurants. As of June 30, 2009, there
were 16 Company restaurants in APAC, all of which were located
in China. In July 2009, we opened our first Company restaurant
in Singapore.
The following table details Company restaurant locations in EMEA
as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
|
% of Total EMEA
|
|
Rank
|
|
|
Country
|
|
Count
|
|
|
Company Restaurants
|
|
|
|
1
|
|
|
Germany
|
|
|
145
|
|
|
|
52
|
%
|
|
2
|
|
|
United Kingdom
|
|
|
64
|
|
|
|
23
|
%
|
|
3
|
|
|
Spain
|
|
|
45
|
|
|
|
16
|
%
|
|
4
|
|
|
Netherlands
|
|
|
22
|
|
|
|
8
|
%
|
|
5
|
|
|
Italy
|
|
|
2
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
278
|
|
|
|
100
|
%
|
Franchise
Operations
As of June 30, 2009, 3,019 or 91% of our restaurants in
EMEA/APAC were franchised. Some of our international markets,
including Hungary, Portugal, South Korea and the Philippines,
are operated by a single franchisee. Other markets, such as the
U.K., Germany and Spain, have multiple franchisees. In general,
we enter into a franchise agreement for each restaurant.
International franchise agreements generally contemplate a
one-time franchise fee of $50,000 per restaurant, with monthly
royalties and advertising contributions each of up to 5% of
gross sales.
We have granted master franchises in Australia and Turkey, where
the franchisees are allowed to
sub-franchise
restaurants within their particular territory. Additionally, in
New Zealand and certain Middle East and Persian Gulf countries,
we have entered into arrangements with franchisees under which
they have agreed to nominate third party franchisees to develop
and operate restaurants within their respective territories
under franchise agreements with us. As part of these
arrangements, the franchisees have agreed to provide certain
support services to third party franchisees on our behalf, and
we have agreed to share the franchise fees and, in some cases,
royalties paid by such third party franchisees. We have also
entered into exclusive development agreements with franchisees
in a number of countries throughout EMEA/APAC, including, most
recently, certain provinces of China. These exclusive
development agreements generally grant the franchisee exclusive
rights to develop restaurants in a particular geographic area
and contain growth clauses requiring franchisees to open a
minimum number of restaurants within a specified period.
The following is a list of the five largest franchisees in terms
of restaurant count in EMEA/APAC as of June 30, 2009:
|
|
|
|
|
|
|
|
|
Rank
|
|
Name
|
|
Restaurant Count
|
|
|
Location
|
|
1
|
|
Hungry Jacks Pty Ltd.
|
|
|
284
|
|
|
Australia
|
2
|
|
Tab Gida
|
|
|
247
|
|
|
Turkey
|
3
|
|
Olayan Food Service Company
|
|
|
109
|
|
|
Saudi Arabia /UAE/Egypt
|
4
|
|
System Restaurant Service
|
|
|
99
|
|
|
Korea
|
5
|
|
Al-Homaizi Foodstuff Company
|
|
|
89
|
|
|
United Kingdom/Middle East
|
Property
Operations
Our property operations in EMEA primarily consist of franchise
restaurant sites located in the U.K., Germany and Spain, which
we lease or sublease to franchisees. We have no
franchisee-operated properties in APAC. Of the 97
11
properties in EMEA that we lease or sublease to franchisees, we
own three properties and lease the land and building from third
party landlords on the remaining 94 properties. Our EMEA
property operations generated $25.4 million of our revenues
in fiscal 2009, or 22% of our total worldwide property revenues.
Lease terms on properties that we lease or sublease to our EMEA
franchisees vary from country to country. These leases generally
provide for
25-year
terms, depending on the term of the related franchise agreement.
We lease most of our properties from third party landlords and
sublease them to franchisees. These leases generally provide for
fixed rental payments based on our underlying rent plus a small
markup. In general, franchisees are obligated to pay for all
costs and expenses associated with the restaurant property,
including property taxes, repairs and maintenance and insurance.
In the U.K., many of our leases for our restaurant properties
are subject to rent reviews every five years, which may result
in rent adjustments to reflect current market rents.
Latin
America
As of June 30, 2009, we had 1,078 restaurants in 27
countries and territories in Latin America. There were 92
Company restaurants in Latin America, all located in Mexico, and
986 franchise restaurants in the segment as of June 30,
2009. We are the leader in 14 of the 27 countries and
territories in which the Burger King system operates in
Latin America, including Mexico and Puerto Rico, in terms of
number of restaurants. Mexico is the largest market in this
segment, with a total of 413 restaurants as of June 30,
2009, or 38% of the region. Our restaurants in Mexico have
consistently been among the Company restaurants with the highest
margins worldwide due to a favorable real estate and labor
environment. In fiscal 2009, we opened 28 new restaurants in
Mexico, of which nine were Company restaurants and 19 were
franchise restaurants. Additionally, we entered the country of
Suriname and re-opened restaurants in Uruguay during the same
period.
The following is a list of the five largest franchisees in terms
of restaurant count in Latin America as of June 30, 2009:
|
|
|
|
|
|
|
|
|
Rank
|
|
Name
|
|
Restaurant Count
|
|
|
Location
|
|
1
|
|
Alsea and Affiliates
|
|
|
188
|
|
|
Mexico/Argentina/Chile/Colombia
|
2
|
|
Caribbean Restaurants, Inc.
|
|
|
175
|
|
|
Puerto Rico
|
3
|
|
Geboy de Tijuana, S.A. de C.V.
|
|
|
64
|
|
|
Mexico
|
4
|
|
Operadora Exe S.A. de C.V.
|
|
|
47
|
|
|
Mexico
|
5
|
|
B & A S.A.
|
|
|
41
|
|
|
Guatemala
|
Advertising
and Promotion
We believe sales in the QSR segment can be significantly
affected by the frequency and quality of advertising and
promotional programs. We believe that three of our major
competitive advantages are our strong brand equity, market
position and our global franchise network which allow us to
drive sales through extensive advertising and promotional
programs.
Franchisees must make monthly contributions, generally 4% to 5%
of gross sales, to our advertising funds, and we contribute on
the same basis for Company restaurants. Advertising
contributions are used to pay for all expenses relating to
marketing, advertising and promotion, including market research,
production, advertising costs, sales promotions and other
support functions. In international markets where there is no
Company restaurant presence, franchisees typically manage their
own advertising expenditures, and these amounts are not included
in the advertising fund. However, as part of our global
marketing strategy, we provide these franchisees with support
and guidance in order to deliver a consistent global brand
message.
In the United States and in those other countries where we have
Company restaurants, we coordinate the development, budgeting
and expenditures for all marketing programs, as well as the
allocation of advertising and media contributions, among
national, regional and local markets, subject in the United
States to minimum expenditure requirements for media costs and
certain restrictions as to new media channels. We are required,
however, under our U.S. franchise agreements to discuss the
types of media in our advertising campaigns and the percentage
of the advertising fund to be spent on media with the recognized
franchisee association, currently the National Franchisee
Association, Inc. In addition, U.S. franchisees may elect
to participate in certain local
12
advertising campaigns at the Designated Market Area (DMA) level
by making contributions beyond those required for participation
in the national advertising fund. Approximately 72% of DMAs in
the United States participated in local advertising campaigns
during fiscal 2009. This allows local markets to execute
customized advertising and promotions to deliver market specific
tactics. We believe that increasing the level of local
advertising makes us more competitive in the FFHR category.
Our current global marketing strategy is based upon marketing
campaigns and menu options that focus on the brand equities that
we believe give us a distinct competitive advantage
flame-broiled taste, quality and size at affordable prices. We
believe that the current competitive landscape and global
recession have made customers more value-conscious, and we must
respond to new market conditions and our customers demand
for superior value for the money and quality. Our global
strategy is focused on our core consumer, the SuperFan, our
Have It Your Way brand promise, our core menu items, such
as flame-broiled hamburgers, french fries and soft drinks, the
delivery of value in conjunction with the development of
innovative products and the consistent communication of our
brand. We concentrate our marketing on television advertising,
which we believe is the most effective way to reach our target
customer, the SuperFan. SuperFans are consumers who reported
eating at a fast food hamburger outlet nine or more times in the
past month. We also use radio and Internet advertising and other
marketing tools on a more limited basis.
Supply
and Distribution
We establish the standards and specifications for most of the
goods used in the development and operation of our restaurants
and for the direct and indirect sources of supply of most of
those items. These requirements help us assure the quality and
consistency of the food products sold at our restaurants and
protect and enhance the image of the Burger King system
and the Burger King brand.
In general, we approve the manufacturers of the food, packaging
and equipment products and other products used in Burger King
restaurants, as well as the distributors of these products
to Burger King restaurants. Franchisees are generally
required to purchase these products from approved suppliers. We
consider a range of criteria in evaluating existing and
potential suppliers and distributors, including product and
service consistency, delivery timeliness and financial
condition. Approved suppliers and distributors must maintain
standards and satisfy other criteria on a continuing basis and
are subject to continuing review. Approved suppliers may be
required to bear development, testing and other costs associated
with our evaluation and review.
Restaurant Services, Inc., or RSI, is a
not-for-profit,
independent purchasing cooperative formed in 1992 to leverage
the purchasing power of the Burger King system in the
United States. RSI is the purchasing agent for the Burger
King system in the United States and negotiates the purchase
terms for most equipment, food, beverages (other than branded
soft drinks) and other products such as promotional toys and
paper products used in our restaurants. RSI is also authorized
to purchase and manage distribution services on behalf of the
Company restaurants and franchisees who appoint RSI as their
agent for these purposes. As of June 30, 2009, RSI was
appointed the distribution manager for approximately 94% of the
restaurants in the United States. A subsidiary of RSI also
purchases food and paper products for our Company and franchise
restaurants in Canada under a contract with us. As of
June 30, 2009, four distributors service approximately 85%
of the U.S. system restaurants and the loss of any one of
these distributors would likely adversely affect our business.
There is currently no designated purchasing agent that
represents franchisees in our international regions. However, we
are working closely with our franchisees to implement programs
that leverage our global purchasing power and to negotiate lower
product costs and savings for our restaurants outside of the
United States and Canada. We approve suppliers and use similar
standards and criteria to evaluate international suppliers that
we use for U.S. suppliers. Franchisees may propose
additional suppliers, subject to our approval and established
business criteria.
In fiscal 2000, we entered into long-term exclusive contracts
with The
Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply Company
restaurants and franchise restaurants with their products, which
obligate Burger King restaurants in the United States to
purchase a specified number of gallons of soft drink syrup.
These volume commitments are not subject to any time limit. As
of June 30, 2009, we estimate that it will take
approximately 13 years to complete the
Coca-Cola
and Dr Pepper purchase commitments. If these agreements were
13
terminated, we would be obligated to pay significant termination
fees and certain other costs, including in the case of the
contract with Coca-Cola, the unamortized portion of the cost of
installation and the entire cost of refurbishing and removing
the equipment owned by
Coca-Cola
and installed in Company restaurants in the three years prior to
the termination.
Research
and Development
Company restaurants play a key role in the development of new
products and initiatives because we can use them to test and
perfect new products, equipment and programs before introducing
them to franchisees, which we believe gives us credibility with
our franchisees in launching new initiatives. This strategy also
allows us to keep research and development costs down and
simultaneously facilitates the ability to sell new products and
to launch initiatives both internally to franchisees and
externally to guests.
We operate research and development facilities or test
kitchens at our headquarters in Miami and at certain other
regional locations. In addition, certain vendors have granted us
access to their facilities in the U.K. and China to test new
products. Independent suppliers also conduct research and
development activities for the benefit of the Burger King
system. We believe new product development is critical to
our long-term success and is a significant factor behind our
comparable sales growth. Product innovation begins with an
intensive research and development process that analyzes each
potential new menu item, including market tests to gauge
consumer taste preferences, and includes an ongoing analysis of
the economics of food cost, margin and final price point.
We have developed a flexible batch broiler that is significantly
smaller, less expensive and easier to maintain than the previous
broiler used in our restaurants. We have installed the flexible
batch broiler in all of our Company restaurants in the United
States and Canada. Franchisees in the United States and Canada
are required to install the new broilers in their restaurants by
January 2010 and, as of June 30, 2009, new broilers were
ordered or installed in 79% of the restaurants in the
U.S. and Canada and in 55% of the system worldwide. We
intend to launch the Steakhouse
XTtm
or the extra thick burger prepared on the flexible broiler in
the U.S. on a national basis in February 2010. We have
filed patent applications to protect our worldwide rights with
respect to the flexible batch broiler technology. We have
licensed one of our equipment vendors on an exclusive basis to
manufacture and supply the flexible batch broiler to the
Burger King system throughout the world.
Management
Information Systems
Franchisees typically use a point of sale, or POS, cash register
system to record all sales transactions at the restaurant. We
have not historically required franchisees to use a particular
brand or model of hardware or software components for their
restaurant system. However, we have established specifications
to reduce costs, improve service and allow better data analysis
and starting in January 2006 have approved three global POS
vendors and one regional vendor for each of our three segments
to sell these systems to our franchisees. Currently, franchisees
report summary sales data manually, and we do not have the
ability to verify sales data electronically by accessing their
POS cash register systems. We have the right under our franchise
agreement to audit franchisees to verify sales information
provided to us. The new POS system will make it possible for
franchisees to submit their sales and transaction level details
to us in near-real-time in a common format, allowing us to
maintain one common database of sales information and to make
better marketing and pricing decisions. Franchisees are required
to replace legacy POS systems with the approved POS system over
the next few years, depending on the age of the legacy system.
All U.S. franchisees must have the new POS systems in their
restaurants by no later than January 1, 2014.
Quality
Assurance
We are focused on achieving a high level of guest satisfaction
through the close monitoring of restaurants for compliance with
our key operations platforms: Clean & Safe,
Hot & Fresh and Friendly & Fast. We have
uniform operating standards and specifications relating to the
quality, preparation and selection of menu items, maintenance
and cleanliness of the premises and employee conduct.
The Clean & Safe certification is administered by the
Company and an independent outside vendor. The purpose of the
certification is to bring heightened awareness of food safety,
and includes immediate
follow-up
procedures to take any action needed to protect the safety of
our customers. We measure our Hot & Fresh and
14
Friendly & Fast operations platforms principally
through Guest
TracSM, a
rating system based on survey data submitted by our customers.
We review the overall performance of our operations platforms
through an Operations Excellence Review, or OER, which focuses
on evaluating and improving restaurant operations and guest
satisfaction.
All Burger King restaurants are required to be operated
in accordance with quality assurance and health standards which
we establish, as well as standards set by federal, state and
local governmental laws and regulations. These standards include
food preparation rules regarding, among other things, minimum
cooking times and temperatures, sanitation and cleanliness.
We closely supervise the operation of all of our Company
restaurants to help ensure that standards and policies are
followed and that product quality, guest service and cleanliness
of the restaurants are maintained. Detailed reports from
management information systems are tabulated and distributed to
management on a regular basis to help maintain compliance. In
addition, we conduct scheduled and unscheduled inspections of
Company and franchise restaurants throughout the Burger King
system.
Intellectual
Property
As of June 30, 2009, we owned approximately 2,980 trademark
and service mark registrations and applications and
approximately 1,040 domain name registrations around the world,
some of which are of material importance to our business.
Depending on the jurisdiction, trademarks and service marks
generally are valid as long as they are used
and/or
registered. We also have established the standards and
specifications for most of the goods and services used in the
development, improvement and operation of Burger King
restaurants. These proprietary standards, specifications and
restaurant operating procedures are trade secrets owned by us.
Additionally, we own certain patents relating to equipment used
in our restaurants and provide proprietary product and labor
management software to our franchisees. Patents are of varying
duration.
Competition
We operate in the FFHR category of the QSR segment within the
broader restaurant industry. Our two main domestic competitors
in the FFHR category are McDonalds Corporation, or
McDonalds, and Wendys/Arbys Group, Inc., or
Wendys. To a lesser degree, we compete against national
food service businesses offering alternative menus, such as
Subway, Yum! Brands, Inc.s Taco Bell, Pizza Hut and
Kentucky Fried Chicken, casual restaurant chains, such as
Applebees, Chilis, Ruby Tuesdays and
fast casual restaurant chains, such as Panera Bread,
as well as convenience stores and grocery stores that offer menu
items comparable to that of Burger King restaurants. We
compete on the basis of product choice, quality, affordability,
service and location.
Our largest U.S. competitor, McDonalds, has
significant international operations. Non-FFHR based chains,
such as KFC and Pizza Hut, have many outlets in international
markets that compete with Burger King and other FFHR
chains. In addition, Burger King restaurants compete
internationally against local FFHR chains, sandwich shops,
bakeries and single-store locations.
Government
Regulation
We are subject to various federal, state and local laws
affecting the operation of our business, as are our franchisees.
Each Burger King restaurant is subject to licensing and
regulation by a number of governmental authorities, which
include zoning, health, safety, sanitation, building and fire
agencies in the jurisdiction in which the restaurant is located.
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.
In the United States, we are subject to the rules and
regulations of the Federal Trade Commission, or the FTC, and
various state laws regulating the offer and sale of franchises.
The FTC and various state laws require that we furnish to
certain prospective franchisees a franchise disclosure document
containing prescribed information. A number of states, in which
we are currently franchising, regulate the sale of franchises
and require registration of the franchise disclosure document
with state authorities and the delivery of a franchise
disclosure document to prospective franchisees. We are currently
operating under exemptions from registration in several of these
states
15
based upon our net worth and experience. Substantive state laws
that regulate the franchisor/franchisee relationship presently
exist in a substantial number of states. These state 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.
Company restaurant operations and our relationships with
franchisees are subject to federal and state antitrust laws.
Company restaurant operations are also subject to federal and
state laws governing such matters as consumer protection,
privacy, wages, union organizing, working conditions, work
authorization requirements, health insurance and overtime. Some
states have set minimum wage requirements higher than the
federal level. Congress is considering the enactment of the
Employee Free Choice Act, which would eliminate secret ballots
for union elections, require shorter union campaigns and faster
elections as well as binding arbitration if the parties are
unable to agree upon the terms of the collective bargaining
contract. Congress is also considering health care legislation
that would require employers to provide and contribute to health
care coverage for their workers or pay a new tax equal to 8% of
payroll. If these bills are enacted into law, our operating
results and the operating results of our franchisees could be
impacted significantly.
In addition, we may become subject to legislation or regulation
seeking to tax
and/or
regulate high-fat, high-calorie and high-sodium foods,
particularly in the United States, the U.K. and Spain. Certain
counties, states and municipalities, such as California, New
York City, and King County, Washington, have approved menu
labeling legislation that requires restaurant chains to provide
caloric information on menu boards. Additional cities or states
may propose to adopt menu labeling regulations.
In addition, public interest groups have focused attention on
the marketing of high-fat and high-sodium foods to children in a
stated effort to combat childhood obesity, and legislators in
the United States have proposed legislation to restore the
FTCs authority to regulate childrens advertising. We
have signed an advertising pledge in the United States, which is
a voluntary commitment to change the way we advertise to
children under the age of 12 in the United States.
Internationally, our Company and franchise restaurants are
subject to national and local laws and regulations, which are
generally similar to those affecting our U.S. restaurants,
including laws and regulations concerning franchises, labor,
health, privacy, sanitation and safety. For example, regulators
in the U.K. have adopted restrictions on television advertising
of foods high in fat, salt or sugar targeted at children. In
addition, the Spanish government and certain industry
organizations have focused on reducing advertisements that
promote large portion sizes. The federal public attorney in Sao
Paulo, Brazil has filed a civil lawsuit against Burger King and
other fast food restaurant companies to prohibit promotional
sales of toys in our restaurants in Brazil. We have signed the
EU Pledge, which is a voluntary commitment to the European
Commission to change our advertising to children under the age
of 12 in the European Union. Our international restaurants are
also subject to tariffs and regulations on imported commodities
and equipment and laws regulating foreign investment.
Working
Capital
Information about the Companys working capital (changes in
current assets and liabilities) is included in
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II,
Item 7 and in the Consolidated Statements of Cash Flows in
Financial Statements and Supplementary Data in
Part II, Item 8.
Environmental
Matters
We are not aware of any federal, state or local environmental
laws or regulations that will materially affect our earnings or
competitive position or result in material capital expenditures.
However, we cannot predict the effect on our operations of
possible future environmental legislation or regulations.
Customers
Our business is not dependent upon a single customer or a small
group of customers, including franchisees. No franchisees or
customers accounted for more than 10% of total consolidated
revenues in fiscal 2009.
16
Government
Contracts
No material portion of our business is subject to renegotiation
of profits or termination of contracts or subcontracts at the
election of the U.S. government.
Seasonal
Operations
Our business is moderately seasonal. Restaurant sales are
typically higher in the spring and summer months (our fourth and
first fiscal quarters) when weather is warmer than in the fall
and winter months (our second and third fiscal quarters).
Restaurant sales during the winter are typically highest in
December, during the holiday shopping season. Our restaurant
sales and Company restaurant margins are typically lowest during
our third fiscal quarter, which occurs during the winter months
and includes February, the shortest month of the year. Because
our business is moderately seasonal, results for any one quarter
are not necessarily indicative of the results that may be
achieved for any other quarter or for the full fiscal year.
Our
Employees
As of June 30, 2009, we had approximately
41,320 employees in our Company restaurants, our field
management offices and our global headquarters. As franchisees
are independent business owners, they and their employees are
not included in our employee count. We consider our relationship
with our employees to be good.
Financial
Information about Business Segments and Geographic
Areas
Financial information about our significant geographic areas
(United States & Canada, EMEA/APAC and Latin America)
is incorporated herein by reference from Selected Financial
Data in Part II, Item 6; Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7; and in Financial
Statements and Supplementary Data in Part II,
Item 8 of this
Form 10-K.
Available
Information
The Company makes available free of charge on or through the
Investor Relations section of its internet website at
www.bk.com, this annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
annual proxy statements and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), as soon as reasonably practicable after
electronically filing such material with the Securities and
Exchange Commission (SEC). This information is also
available at www.sec.gov, an internet site maintained by
the SEC that contains reports, proxy and information statements,
and other information regarding issuers that file electronically
with the SEC. The material may also be read and copied by
visiting the Public Reference Room of the SEC at
100 F Street, NE, Washington, DC 20549 or by calling
the SEC at
1-800-SEC-0330.
The references to our website address and the SECs website
address do not constitute incorporation by reference of the
information contained in these websites and should not be
considered part of this document.
Our Corporate Governance Guidelines, our Code of Business Ethics
and Conduct, our Code of Ethics for Executive Officers, our Code
of Conduct for Directors and our Code of Business Ethics and
Conduct for Vendors are also located within the Investor
Relations section of our website. Amendments to these documents
or waivers related to our codes of conduct will be made
available on our website as soon as reasonably practicable after
the effective date of the changes. These documents, as well as
our SEC filings and copies of financial and other information,
are available in print free of charge to any shareholder who
requests a copy from our Investor Relations Department. Requests
to Investor Relations may also be made by calling
(305) 378-7696,
or by sending the request to Investor Relations, Burger King
Holdings, Inc., 5505 Blue Lagoon Drive, Miami, FL 33126.
The Companys Chairman and Chief Executive Officer, John W.
Chidsey, certified to the New York Stock Exchange (NYSE) on
December 27, 2008, pursuant to Section 303A.12 of the
NYSEs listing standards, that he was not aware of any
violation by the Company of the NYSEs corporate governance
listing standards as of that date.
17
Executive
Officers of the Registrant
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John W. Chidsey
|
|
|
47
|
|
|
Chairman and Chief Executive Officer
|
Russell B. Klein
|
|
|
52
|
|
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President, Global Marketing, Strategy and Innovation
|
Ben K. Wells
|
|
|
56
|
|
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Chief Financial Officer
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Julio A. Ramirez
|
|
|
55
|
|
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EVP, Global Operations
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Peter C. Smith
|
|
|
53
|
|
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Chief Human Resources Officer
|
Anne Chwat
|
|
|
50
|
|
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General Counsel, Chief Ethics and Compliance Officer and
Secretary
|
Charles M. Fallon, Jr.
|
|
|
46
|
|
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President, North America
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Peter Robinson
|
|
|
61
|
|
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President, EMEA (through October 1, 2009)
|
Kevin Higgins
|
|
|
46
|
|
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President, EMEA (beginning August 17, 2009)
|
John W. Chidsey has served as our Chief Executive Officer
and a member of our board since April 2006 and as Chairman of
the Board since July 1, 2009. From September 2005 until
April 2006, he was our President and Chief Financial Officer and
from June 2004 until September 2005, he was our President, North
America. Mr. Chidsey joined us as Executive Vice President,
Chief Administrative and Financial Officer in March 2004 and
held that position until June 2004. From January 1996 to March
2003, Mr. Chidsey served in numerous positions at Cendant
Corporation, most recently as Chief Executive Officer of the
Vehicle Services Division and the Financial Services Division.
Russell B. Klein has served as our President, Global
Marketing, Strategy and Innovation since June 2006. Previously,
he served as Chief Marketing Officer from June 2003 to June
2006. From August 2002 to May 2003, Mr. Klein served as
Chief Marketing Officer at 7-Eleven Inc. From January 1999 to
July 2002, Mr. Klein served as a Principal at Whisper
Capital.
Ben K. Wells has served as our Chief Financial Officer
since April 2006. From May 2005 to April 2006, Mr. Wells
served as our Senior Vice President and Treasurer. From June
2002 to May 2005 he was a Principal and Managing Director at BK
Wells & Co., a corporate treasury advisory firm in
Houston, Texas. From June 1987 to June 2002, he was at Compaq
Computer Corporation, most recently as Vice President, Corporate
Treasurer. Before joining Compaq, Mr. Wells held various
finance and treasury responsibilities over a
10-year
period at British Petroleum.
Julio A. Ramirez has served as our Executive Vice
President, Global Operations since September 2008.
Mr. Ramirez has worked for Burger King Corporation for
25 years. From January 2002 to September 2008,
Mr. Ramirez served as our President, Latin America. During
his tenure, Mr. Ramirez has held several positions,
including Senior Vice President of U.S. Franchise
Operations and Development from February 2000 to December 2001
and President, Latin America from 1997 to 2000.
Peter C. Smith has served as our Chief Human Resources
Officer since December 2003. From September 1998 to November
2003, Mr. Smith served as Senior Vice President of Human
Resources at AutoNation.
Anne Chwat has served as our General Counsel, Chief
Ethics and Compliance Officer and Secretary since September
2004. In June 2008, Ms. Chwat also began serving as a board
member and President of the Have It your
Way®
Foundation, the charitable arm of the Burger King system.
From September 2000 to September 2004, Ms. Chwat served in
various positions at BMG Music (now SonyBMG Music
Entertainment), including as Senior Vice President, General
Counsel and Chief Ethics and Compliance Officer.
Charles M. Fallon, Jr. has served as our President,
North America since June 2006. From November 2002 to June 2006,
Mr. Fallon served as Executive Vice President of Revenue
Generation for Cendant Car Rental Group, Inc. Mr. Fallon
served in various positions with Cendant Corporation, including
Executive Vice President of Sales for Avis
Rent-A-Car,
from August 2001 to October 2002.
18
Peter Robinson has served as our President, EMEA since
October 2006. From 2003 through 2006, Mr. Robinson served
as Senior Vice President and President, Pillsbury USA Division.
Mr. Robinson will be leaving the Company on October 1,
2009.
Kevin Higgins has served as our President, EMEA since
August 2009. From April 2004 through February 2009, he served as
General Manager, Yum! Brands Europe and Russia Franchise
Business Unit. From November 1, 2001 through April 2004,
Mr. Higgins served as Director of Development and Franchise
Recruitment for Yum! Brands Europe.
Special
Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect
managements expectations regarding future events and
economic performance are forward-looking in nature and,
accordingly, are subject to risks and uncertainties. These
forward-looking statements include statements regarding our
intent to focus on sales growth and profitability; our ability
to drive sales growth by enhancing the guest experience and
expanding competitive hours of operation; our intent to expand
our international platform and accelerate new restaurant
development; our beliefs and expectations regarding system-wide
average restaurant sales; our beliefs and expectations regarding
franchise restaurants, including their growth potential and our
expectations regarding franchisee distress; our expectations
regarding opportunities to enhance restaurant profitability and
effectively manage margin pressures; our intention to continue
to employ innovative and creative marketing strategies and offer
superior value and quality, including the launching of new and
limited time offer products; our intention to focus on our
restaurant reimaging program; our ability to use proactive
portfolio management to drive financial performance and
development; our exploration of initiatives to reduce the
initial investment expense, time and uncertainty of new builds;
our ability to manage fluctuations in foreign currency exchange
and interest rates; our estimates regarding our liquidity,
capital expenditures and sources of both, and our ability to
fund future operations and obligations; our expectations
regarding increasing net restaurant count; our estimates
regarding the fulfillment of certain volume purchase
commitments; our beliefs regarding the effects of the
realignment of our European and Asian businesses; our
expectations regarding the impact of accounting pronouncements;
our intention to renew hedging contracts; our expectations
regarding unrecognized tax benefits; and our continued efforts
to leverage our global purchasing power. These forward-looking
statements are only predictions based on our current
expectations and projections about future events. Important
factors could cause our actual results, level of activity,
performance or achievements to differ materially from those
expressed or implied by these forward-looking statements,
including, but not limited to, the risks and uncertainties
discussed below.
Our
success depends on our ability to compete with our major
competitors.
The restaurant industry is intensely competitive and we compete
in the United States and internationally with many
well-established food service companies on the basis of product
choice, quality, affordability, service and location. Our
competitors include a large and diverse group of restaurant
chains and individual restaurants that range from independent
local operators to well-capitalized national and international
restaurant companies. McDonalds and Wendys are our
principal competitors. As our competitors expand their
operations, including through acquisitions or otherwise, we
expect competition to intensify. We also compete against
regional hamburger restaurant chains, such as Carls Jr.,
Jack in the Box and Sonic. Some of our competitors have
substantially greater financial and other resources than we do,
which may allow them to react to changes in pricing, marketing
and the quick service restaurant segment in general better than
we can. We have recently experienced negative sales and traffic
trends due in part to heavy discounting by other restaurant
chains in the United States and other major markets. The failure
to reverse these trends or intensification of these trends will
continue to negatively impact our operating results and the
operating results of our franchisees.
To a lesser degree, we compete against national food service
businesses offering alternative menus, such as Subway and Yum!
Brands, Inc.s Taco Bell, Pizza Hut and Kentucky Fried
Chicken, casual restaurant chains, such as Applebees,
Chilis, Ruby Tuesdays and fast casual
restaurant chains, such as Panera Bread, as well as convenience
stores and grocery stores that offer menu items comparable to
that of Burger King restaurants.
19
Finally, the restaurant industry has few barriers to entry, and
therefore new competitors may emerge at any time. Our ability to
compete will depend on the success of our plans to improve
existing products and to roll-out new products and product line
extensions, our ability to manage the complexity of our
restaurant operations as well as the impact of our
competitors actions. To the extent that one of our
existing or future competitors offers items that are better
priced or more appealing to consumer tastes or a competitor
increases the number of restaurants it operates in one of our
key markets or offers financial incentives to personnel,
franchisees or prospective sellers of real estate in excess of
what we offer, or a competitor has more effective advertising
and marketing programs than we do, it could have a material
adverse effect on our financial condition and results of
operations. We also compete with other restaurant chains and
other retail businesses for quality site locations and hourly
employees.
Economic
conditions are adversely affecting consumer discretionary
spending and may continue to negatively impact our business and
operating results.
The restaurant industry is dependent upon consumer discretionary
spending, which is influenced by general economic conditions,
consumer confidence and the availability of discretionary
income. A protracted economic slowdown, increased unemployment,
decreased salaries and wage rates, increased energy prices,
inflation, rising interest rates or other industry-wide cost
pressures adversely affect consumer behavior and decrease
consumer spending for restaurant dining occasions. The current
recession has reduced consumer confidence and impacted the
publics ability and desire to spend discretionary dollars,
resulting in lower levels of guest traffic in our restaurants
and a reduction in the average amount guests spend in our
restaurants, resulting in a decline in our sales and
profitability. Unemployment levels in the United States are at a
25-year high
and the unemployment rate for our SuperFan customers was 12% in
July 2009. These factors have also reduced gross sales at
franchise restaurants, resulting in lower royalty payments from
franchisees, and could reduce profitability of franchise
restaurants, potentially impacting the ability of franchisees to
make royalty payments as they become due. Unfavorable changes in
the factors described above could increase our costs, further
reduce traffic in some or all of our restaurants and the average
amount guests spend in our restaurants or impose practical
limits on pricing, any of which would result in spreading our
fixed costs across a lower level of sales, which would, in turn,
lower our profit margins and have a material adverse effect on
our financial condition and results of operations.
If this difficult economic situation continues for a prolonged
period of time or deepens in magnitude, our business and results
of operations could be materially affected, including by
constraining our flexibility in managing and operating our
business, leading us to implement promotional or other price
discounting actions, requiring us to incur non-cash impairment
or other charges, causing us to reduce the number
and/or
frequency of new restaurant openings, causing us to close or
sell Company restaurants, and slowing our Company restaurant
reimaging program. Future recessionary effects on the Company
are unknown at this time and could have a material adverse
effect on our financial position and results of operations,
including adversely affecting our ability to comply with
covenants under our senior secured credit facility, the ability
of lenders to honor our senior secured credit facility under
certain circumstances and our ability to raise additional
capital, if needed. There can be no assurance that the
U.S. governments plan to stimulate the economy will
restore consumer confidence, stabilize the financial markets,
increase liquidity and the availability of credit or result in
lower unemployment.
Our
business is affected by changes in consumer preferences and
perceptions.
The restaurant industry is affected by consumer preferences and
perceptions. If prevailing health or dietary preferences and
perceptions cause consumers to avoid our products in favor of
alternative food options, our business could suffer. In
addition, negative publicity about our products could materially
harm our business, results of operations and financial
condition. In recent years, numerous companies in the fast food
industry have introduced products positioned to capitalize on
the growing consumer preference for food products that are
and/or are
perceived to be healthful, nutritious, and low in calories,
sodium and fat content. Our success will depend in part on our
ability to anticipate and respond to changing consumer
preferences, tastes and eating and purchasing habits.
Our
business is subject to fluctuations in foreign currency exchange
and interest rates.
Our international operations are impacted by fluctuations in
currency exchange rates. In countries outside of the United
States where we operate Company restaurants, we generally
generate revenues and incur operating
20
expenses and selling, general and administrative expenses
denominated in local currencies. These revenues and expenses are
translated using the average rates during the period in which
they are recognized and are impacted by changes in currency
exchange rates. In many countries where we do not have Company
restaurants, our franchisees pay royalties to us in currencies
other than the local currency in which they operate. However, as
the royalties are calculated based on local currency sales, our
revenues are still impacted by fluctuations in currency exchange
rates. In fiscal 2009, income from operations would have
decreased or increased $12.3 million if all foreign
currencies uniformly weakened or strengthened by 10% relative to
the U.S. dollar.
Fluctuations in interest rates may also affect our business. We
attempt to minimize this risk and lower our overall borrowing
costs through the utilization of derivative financial
instruments, primarily interest rate swaps. These swaps are
entered into with financial institutions and have reset dates
and critical terms that match those of our forecasted interest
payments. Accordingly, any change in market value associated
with interest rate swaps is offset by the opposite market impact
on the related debt. We do not attempt to hedge all of our debt
and, as a result, may incur higher interest costs for portions
of our debt which are not hedged. In addition, we enter into
forward contracts to reduce our exposure to volatility from
foreign currency fluctuations associated with certain foreign
currency-denominated assets. We are also exposed to losses in
the event of nonperformance by counterparties on these
instruments.
Increases
in commodity or other operating costs could harm our
profitability and operating results.
We and our franchisees purchase large quantities of food and
supplies which may be subject to substantial price fluctuations.
The cost of the food and supplies we use depends on a variety of
factors, many of which are not predictable or within our
control. Fluctuations in weather, global supply and demand and
the value of the U.S. dollar, commodity market conditions,
government tax incentives, the imposition of trade barriers,
such as tariffs, export subsidies and import taxes, and other
factors could adversely affect the cost, availability and
quality of some of our critical products and raw ingredients,
including beef and chicken. In addition, in Canada, Mexico and
the U.K., our suppliers purchase goods in currencies other than
the local currency in which they operate and pass all or a
portion of the currency exchange impact on to us. Increases in
commodity prices could result in higher restaurant operating
costs, and the highly competitive nature of our industry may
limit our ability to pass increased costs on to our guests. Our
profitability depends in part on our ability to anticipate and
react to changes in food and supply costs. Moreover, to the
extent that we increase the prices for our products, our guests
may reduce the number of visits to our restaurants or purchase
less expensive menu items, which would have a material adverse
effect on our business, results of operations and financial
condition.
We purchase large quantities of beef and chicken in the United
States, which represent approximately 20% and 11% of our food
costs, respectively. The market for beef and chicken is
particularly volatile and is subject to significant price
fluctuations due to seasonal shifts, climate conditions, demand
for corn (a key ingredient of cattle and chicken feed), industry
demand, international commodity markets and other factors.
Demand for corn for use in ethanol, the primary alternative fuel
in the United States, can significantly reduce the supply of
corn for cattle and chicken feed, and in the past this has
resulted in higher beef and chicken prices and could do so again
in the future. We do not utilize commodity option or future
contracts to hedge commodity prices for beef and do not have
long-term pricing arrangements. As a result, we purchase beef
and many other commodities at market prices, which fluctuate on
a daily basis. We are currently under fixed price contracts with
most of our chicken suppliers which expire in December 2009. If
the price of beef, chicken or other food products that we use in
our restaurants increases in the future and we choose not to
pass, or cannot pass, these increases on to our guests, our
operating margins would decrease.
Increases in energy costs for our Company restaurants,
principally electricity for lighting restaurants and natural gas
for our broilers, could adversely affect our operating margins
and our financial results if we choose not to pass, or cannot
pass, these increased costs on to our guests. Although we have
locked in natural gas prices for our U.S. Company
restaurants, we will not achieve any cost savings if the price
of natural gas falls below the contract price. In addition, our
distributors purchase gasoline needed to transport food and
other supplies to us. Any significant increases in energy costs
could result in the imposition of fuel surcharges by our
distributors that could adversely affect our operating margins
and financial results if we chose not to pass, or cannot pass,
these increased costs on to our guests.
21
Labor
shortages or increases in labor costs could slow our growth or
harm our business.
Our success depends in part upon our ability to continue to
attract, motivate and retain regional operational and restaurant
general managers with the qualifications to succeed in our
industry and the motivation to apply our core service
philosophy. If we are unable to continue to recruit and retain
sufficiently qualified managers or to motivate our employees to
sustain high service levels, our business and our growth could
be adversely affected. Competition for these employees could
require us to pay higher wages which could result in higher
labor costs. In addition, increases in the minimum wage or labor
regulations could increase our labor costs. For example, the
European markets have seen increased minimum wages due to a
higher level of regulation and the U.S. Congress increased
the national minimum wage to $7.25. In addition, many states
have adopted, and others are considering adopting, minimum wage
statutes that exceed the federal minimum wage. We may be unable
to increase our prices in order to pass these increased labor
costs on to our guests, in which case our and our
franchisees margins would be negatively affected.
Our
operating results depend on the effectiveness of our marketing
and advertising programs and franchisee support of these
programs.
Our revenues are heavily influenced by brand marketing and
advertising. Our marketing and advertising programs may not be
successful, which may lead us to fail to attract new guests and
retain existing guests. If our marketing and advertising
programs are unsuccessful, our results of operations could be
materially adversely affected. Moreover, because franchisees and
Company restaurants contribute to our advertising fund based on
a percentage of their gross sales, our advertising fund
expenditures are dependent upon sales volumes at system-wide
restaurants. If system-wide sales decline, there will be a
reduced amount available for our marketing and advertising
programs.
We believe that the current competitive landscape and global
recession have made our customers more value-conscious, and that
we must respond to new market conditions and consumers
demand for superior value for the money and quality. We plan to
focus our efforts in fiscal 2010 on our brand equities of
flame-broiled taste, quality and size at affordable prices to
differentiate Burger King from our competitors. Our
challenge is to achieve an overall product mix that balances
consumer value with margin expansion, including in markets where
cost or pricing pressures may be significant. If we are unable
to successfully execute this strategy, our operating margins and
financial results could be adversely affected.
The support of our franchisees is critical for the success of
our marketing programs and any new capital intensive or other
strategic initiatives we seek to undertake, and the successful
execution of these initiatives will depend on our ability to
maintain alignment with our franchisees. In the United States,
we typically poll our franchisees before introducing any
nationally- or locally-advertised price or discount promotion to
gauge the level of support for the campaign. We may decide not
to move forward with certain promotions if we fail to receive
the desired level of support from our U.S. franchisees. In
addition, franchisees may elect to participate in certain local
advertising campaigns at the Designated Market Area level, and
their failure to contribute to local advertising may adversely
impact sales in their markets. While we can mandate certain
strategic initiatives through enforcement of our franchise
agreements, we need the active support of our franchisees if the
implementation of these initiatives is to be successful.
Although we believe that our current relationships with our
franchisees are generally good, there can be no assurance that
our franchisees will continue to support our marketing programs
and strategic initiatives. We were recently sued by the National
Franchisee Association, Inc., an organization that represents
over 50% of our franchisees in the United States, over the use
of restaurant operating funds paid by our soft drink vendors. We
were also sued by four franchisees in Florida over extended
hours of operation, which is one of our important initiatives to
drive higher sales. The failure of our franchisees to support
our marketing programs and strategic initiatives could adversely
affect our ability to implement our business strategy and could
materially harm our business, results of operations and
financial condition.
Approximately
90% of our restaurants are franchised and this restaurant
ownership mix presents a number of disadvantages and
risks.
Approximately 90% of our restaurants are franchised and we do
not expect the percentage of franchise restaurants to change
significantly as we implement our growth strategy. Although we
believe that this restaurant
22
ownership mix is beneficial to us because the capital required
to grow and maintain our system is funded primarily by
franchisees, it also presents a number of drawbacks, such as our
limited influence over franchisees and limited ability to
facilitate changes in restaurant ownership. In addition, we are
dependent on franchisees to open new restaurants and to remodel
their existing restaurants. Franchisees may not have access to
the financial resources they need in order to open new
restaurants or remodel their existing restaurants due to the
unavailability of credit or other factors beyond their control.
The current global recession may adversely impact the
availability and cost of credit to our franchisees. Any
significant inability to obtain necessary financing on
acceptable terms, or at all, could slow our planned growth. Our
success will depend in part on our ability to maintain alignment
with our franchisees on capital intensive and other operating
and promotional initiatives.
Our principal competitors may have greater influence over their
respective restaurant systems than we do. McDonalds
exercises control through its significantly higher percentage of
company restaurants and ownership of franchisee real estate.
Wendys also has a higher percentage of company restaurants
than we do. As a result of the greater number of company
restaurants, McDonalds and Wendys may have a greater
ability to implement operational initiatives and business
strategies, including their marketing and advertising programs.
Our
franchisees are independent operators, and we have limited
influence over their restaurant operations or their decision to
invest in other businesses.
Franchisees are independent operators and have a significant
amount of flexibility in running their operations. Their
employees are not our employees. Although we can influence our
franchisees and their restaurant operations to a limited extent
through our ability, pursuant to the franchise agreements and
our Manual of Operating Data, to mandate menu items, signage,
equipment, hours of operation, value menu, and standardized
operating procedures and approve suppliers, distributors and
products, the quality of franchise restaurant operations may be
diminished by any number of factors beyond our control.
Consequently, franchisees may not successfully operate
restaurants in a manner consistent with our standards and
requirements, such as our cleanliness standards, or may not hire
and train qualified managers and other restaurant personnel.
While we ultimately can take action to terminate franchisees
that do not comply with the standards contained in our franchise
agreements and our Manual of Operating Data, we may not be able
to identify problems and take action quickly enough and, as a
result, our image and reputation may suffer, and our franchise
and property revenues could decline.
Some of our franchisees have invested in other businesses,
including other restaurant concepts. In some cases, these
franchisees have used the cash generated by their Burger
King restaurants to expand their non Burger King
businesses or to subsidize losses incurred by such
businesses. We have limited influence over the ability of
franchisees to invest in other businesses. To the extent that
franchisees use the cash from their Burger King
restaurants to subsidize their other businesses rather than
to pay amounts owed to us for royalties, advertising fund
contributions or rents or to expand their Burger King
business, our financial results could be adversely affected.
Our
operating results are closely tied to the success of our
franchisees.
We receive revenues in the form of royalties and fees from our
franchisees. As a result, our operating results substantially
depend upon our franchisees sales volumes, restaurant
profitability, and financial viability. However, our franchisees
are independent operators, and their decision to incur
indebtedness is generally outside of our control and could
result in financial distress in the future due to over-leverage.
In 2003, many of our franchisees in the United States and Canada
were in financial distress primarily due to over-leverage. In
response to this situation, we established the Franchisee
Financial Restructuring Program, or FFRP program, in February
2003 to address these financial problems. At its peak in August
2003, over 2,540 restaurants were in the FFRP program. As of
December 31, 2006, the FFRP program in the United States
and Canada was completed. However, there will always be a
percentage of franchisees in our system in financial distress
and we will continue to provide assistance to these franchisees
as needed. As of June 30, 2009, we have an aggregate
remaining potential commitment of up to $9.9 million to
fund certain loans to renovate franchise restaurants, make
renovations to certain restaurants that we lease or sublease to
franchisees, and to provide rent relief
and/or
contingent cash flow subsidies to certain franchisees.
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In connection with sales of Company restaurants to franchisees,
we have guaranteed certain lease payments of franchisees arising
from leases assigned to the franchisees as part of the sale, by
remaining secondarily liable for base and contingent rents under
the assigned leases of varying terms. The aggregate contingent
obligation arising from these assigned lease guarantees,
excluding contingent rent, was $74.0 million as of
June 30, 2009, including $47.6 million in the U.K.,
expiring over an average period of seven years.
To the extent that our franchisees experience financial
distress, due to over-leverage or otherwise, it could negatively
affect (1) our operating results as a result of delayed or
reduced payments of royalties, advertising fund contributions
and rents for properties we lease to them or claims under our
lease guarantees, (2) our future revenue, earnings and cash
flow growth and (3) our financial condition. In addition,
lenders to our franchisees were adversely affected by
franchisees who defaulted on their indebtedness and there can be
no assurance that current or prospective franchisees can obtain
necessary financing on favorable terms or at all in light of the
history of financial distress among franchisees and prevailing
market conditions.
If we
fail to successfully implement our international growth
strategy, our ability to increase our revenues and operating
profits could be adversely affected and our overall business
could be adversely affected.
A significant component of our growth strategy involves
increasing our net restaurant count in our international
markets. We can increase our net restaurant count by opening new
international restaurants in both existing and new markets and
by minimizing the number of closures in our existing markets. We
and our franchisees face many challenges in opening new
international restaurants, including, among others:
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the selection and availability of suitable restaurant locations;
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the negotiation of acceptable lease terms;
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the availability of bank credit and the ability of franchisees
to obtain acceptable financing terms;
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securing required foreign governmental permits and approvals;
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securing acceptable suppliers;
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employing and training qualified personnel; and
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consumer preferences and local market conditions.
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We expect that most of our international growth will be
accomplished through the opening of additional franchise
restaurants. However, our franchisees may be unwilling or unable
to increase their investment in our system by opening new
restaurants, particularly if their existing restaurants are not
generating positive financial results. Moreover, opening new
franchise restaurants depends, in part, upon the availability of
prospective franchisees with the experience and financial
resources to be effective operators of Burger King
restaurants. In the past, we have approved franchisees that
were unsuccessful in implementing their expansion plans,
particularly in new markets. There can be no assurance that we
will be able to identify franchisees who meet our criteria, or
if we identify such franchisees, that they will successfully
implement their expansion plans.
Our
international operations subject us to additional risks and
costs and may cause our profitability to decline.
As of June 30, 2009, our restaurants were operated,
directly by us or by franchisees, in 73 foreign countries and
U.S. territories (Guam and Puerto Rico, which are
considered part of our international business). During fiscal
2008 and 2009, our revenues from international operations were
approximately $1,043.3 million and $944.7 million, or
42% and 37% of total revenues for both years, respectively. The
decrease in revenues from international operations during fiscal
year 2009 is primarily attributable to $110.6 million, or
4% of total revenues, of unfavorable impact from the significant
movement of currency exchange rates, primarily in EMEA/APAC. Our
results of operations are substantially affected not only by
global economic conditions, but also by local operating and
economic conditions, which can vary substantially by market.
Unfavorable conditions can depress sales in a given market and
may prompt promotional or other actions that adversely affect
our margins, constrain our operating flexibility or result in
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charges, restaurant closures or sales of Company restaurants.
Whether we can manage this risk effectively depends mainly on
the following:
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our ability to manage risks arising from the significant and
rapid fluctuations in currency exchange markets and the
decisions and positions that we take to hedge such volatility;
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our ability to manage upward pressure on commodity prices, as
well as fluctuations in interest rates, and local governmental
actions to manage national economic conditions, such as consumer
spending, inflation rates and unemployment levels;
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our ability to manage changing labor conditions and difficulties
in staffing our international operations;
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the impact of labor costs on our margins given our
labor-intensive business model and the long-term trend toward
higher wages in both mature and developing markets and the
potential impact of union organizing efforts on
day-to-day
operations of our restaurants;
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our ability to manage consumer preferences and respond to
changes in consumer preferences;
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the effects of legal and regulatory changes and the burdens and
costs of our compliance with a variety of foreign laws;
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the effects of any changes to U.S. laws and regulations
relating to foreign trade and investments;
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the effects of increases in the taxes we pay and other changes
in applicable tax laws;
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our ability to manage political and economic instability and
anti-American
sentiment;
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the risks of operating in markets such as Brazil and China, in
which there are significant uncertainties regarding the
interpretation, application and enforceability of laws and
regulations and the enforceability of contract rights and
intellectual property rights;
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whether we can develop effective initiatives in underperforming
markets that may be experiencing challenges such as low consumer
confidence levels, negative consumer perceptions about our
foods, slow economic growth or a highly competitive operating
environment;
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the nature and timing of decisions about underperforming markets
or assets, including decisions that result in significant
impairment charges that reduce our earnings; and
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our ability to identify and secure appropriate real estate sites
and to manage the costs and profitability of our growth in light
of competitive pressures and other operating conditions that may
limit pricing flexibility.
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These factors may increase in importance as we expect to open
new Company and franchise restaurants in international markets
as part of our growth strategy.
There
can be no assurance that the franchisees can or will renew their
franchise agreements with us.
Our franchise agreements typically have a
20-year
term, and our franchisees may not be willing or able to renew
their franchise agreements with us. For example, franchisees may
decide not to renew due to low sales volumes, high real estate
costs, or may be unable to renew due to the failure to secure
lease renewals. In order for a franchisee to renew its franchise
agreement with us, it typically must pay a $50,000 franchise
fee, remodel its restaurant to conform to our current standards
and, in many cases, renew its property lease with its landlord.
The average cost to remodel a stand-alone restaurant in the
United States ranges from $200,000 to $450,000 and the average
cost to replace the existing building with a new building is
approximately $1.0 million. Franchisees generally require
additional capital to undertake the required remodeling, which
may not be available to the franchisee on acceptable terms or at
all. If a substantial number of our franchisees cannot or decide
not to, renew their franchise agreements with us, then our
results of operations and financial condition would suffer.
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Incidents
of food-borne illnesses or food tampering could materially
damage our reputation and reduce our restaurant
sales.
Our business is susceptible to the risk of food-borne illnesses
(such as
e-coli,
bovine spongiform encephalopathy or mad cows
disease, hepatitis A, trichinosis or salmonella). We
cannot guarantee that our internal controls and training will be
fully effective in preventing all food-borne illnesses.
Furthermore, our reliance on third-party food suppliers and
distributors increases the risk that food-borne illness
incidents could be caused by third-party food suppliers and
distributors outside of our control and multiple locations being
affected rather than a single restaurant. New illnesses
resistant to any precautions may develop in the future, or
diseases with long incubation periods could arise, such as
bovine spongiform encephalopathy, which could give rise to
claims or allegations on a retroactive basis. Reports in the
media of one or more instances of food-borne illnesses in one of
our restaurants or in one of our competitors restaurants
could negatively affect our restaurant sales, force the closure
of some of our restaurants and conceivably have a national or
international impact if highly publicized. This risk exists even
if it were later determined that the illness had been wrongly
attributed to the restaurant or if our restaurants were not
implicated but the cause of the illness was traced to an
ingredient used in our products.
In addition, other illnesses, such as foot and mouth disease or
avian influenza, could adversely affect the supply of some of
our food products and significantly increase our costs. In 2007,
there was an outbreak of foot and mouth disease in England,
which prompted a European-wide ban on live animals, fresh meat
and milk products from the U.K. Although this disease is
extremely rare in humans, the negative publicity about beef and
beef products could adversely affect our sales.
Our industry has long been subject to the threat of food
tampering by suppliers, employees or guests, such as the
addition of foreign objects in the food that we sell. Reports,
whether or not true, of injuries caused by food tampering have
in the past severely injured the reputations of restaurant
chains in the quick service restaurant segment and could affect
us in the future as well. Instances of food tampering, even
those occurring solely at restaurants of our competitors could,
by resulting in negative publicity about the restaurant
industry, adversely affect our sales on a local, regional,
national or worldwide basis. A decrease in guest traffic as a
result of these health concerns or negative publicity could
materially harm our business, results of operations and
financial condition.
Our
results can be adversely affected by disruptions or catastrophic
events.
Unforeseen events, including war, terrorism and other
international conflicts, public health issues, such as the H1N1
flu pandemic, and natural disasters such as earthquakes,
hurricanes and other adverse weather and climate conditions,
whether occurring in the United States or abroad, could disrupt
our operations, disrupt the operations of franchisees, suppliers
or customers, have an adverse impact on consumer spending and
confidence levels or result in political or economic
instability. Moreover, in the event of a natural disaster or act
of terrorism, or the threat of either, we may be required to
suspend operations in some or all of our restaurants, which
could have a material adverse effect on our business, financial
condition and results of operations. For example, the outbreak
of the H1N1 flu pandemic in Mexico during fiscal 2009 resulted
in the temporary closure of many of our restaurants in and
around Mexico City and adversely affected our revenues and
financial results. These events could also reduce demand for our
products or make it difficult or impossible to receive products
from distributors.
We
rely on distributors of food, beverages and other products that
are necessary for our and our franchisees operations. If
these distributors fail to provide the necessary products in a
timely fashion, our business would face supply shortages and our
results of operations might be adversely affected.
We and our franchisees are dependent on frequent deliveries of
perishable food products that meet our specifications. Four
distributors service approximately 85% of our U.S. system
restaurants and the loss of any one of these distributors would
likely adversely affect our business. Moreover, in many of our
international markets, including the U.K., we have a sole
distributor that delivers products to all of our restaurants.
Our distributors operate in a competitive and low-margin
business environment and, as a result, they often extend
favorable credit terms to our franchisees. If certain of our
franchisees experience financial distress and do not pay
distributors for products bought from them, those
distributors operations would likely be adversely affected
which could jeopardize their ability to continue to supply us
and our other franchisees with needed products. Finally,
unanticipated demand,
26
problems in production or distribution, disease or food-borne
illnesses, inclement weather, terrorist attacks or other
conditions could result in shortages or interruptions in the
supply of perishable food products. As a result of the financial
distress of our franchisees or otherwise, we may need to take
steps to ensure the continued supply of products to restaurants
in the affected markets, which could result in increased costs
to distribute needed products. A disruption in our supply and
distribution network could have a severe impact on our and our
franchisees ability to continue to offer menu items to our
guests and could adversely affect our and our franchisees
business, results of operations and financial condition.
The
loss of key management personnel or our inability to attract and
retain new qualified personnel could hurt our business and
inhibit our ability to operate and grow
successfully.
The success of our business to date has been, and our continuing
success will be, dependent to a large degree on the continued
services of our executive officers, including John Chidsey, our
Chairman and Chief Executive Officer; Russell Klein, our
President, Global Marketing, Strategy and Innovation; Ben Wells,
our Chief Financial Officer; Julio Ramirez, our Executive Vice
President, Global Operations; and other key personnel who have
extensive experience in the franchising and food industries. If
we lose the services of any of these key personnel and fail to
manage a smooth transition to new personnel, our business could
suffer.
Changes
in tax laws and unanticipated tax liabilities could adversely
affect our effective income tax rate and
profitability.
We are subject to income taxes in the United States and numerous
foreign jurisdictions. Our effective income tax rate in the
future could be adversely affected by a number of factors,
including: changes in the mix of earnings in countries with
different statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, continued losses in certain
international Company restaurant markets that could trigger a
valuation allowance or negatively impact our ability to utilize
foreign tax credits to offset our U.S. income taxes;
changes in tax laws, the outcome of income tax audits in various
jurisdictions around the world, and any repatriation of
non-U.S. earnings
for which we have not previously provided for U.S. taxes.
We regularly assess all of these matters to determine the
adequacy of our tax provision, which is subject to significant
discretion. Recently, the Obama administration proposed
legislation that would change how U.S. multinational
corporations are taxed on their foreign income. If such
legislation is enacted, it may have a material adverse impact to
our tax rate and, in turn, our profitability.
Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be
materially different from our historical income tax provisions
and accruals. The results of a tax audit or related litigation
could have a material effect on our income tax provision, net
income or cash flows in the period or periods for which that
determination is made.
The
realignment of our European and Asian businesses may result in
increased income tax expense to us if these businesses are less
profitable than expected.
Effective July 1, 2006, we realigned the activities
associated with managing our European and Asian businesses,
including the transfer of rights of existing franchise
agreements, the ability to grant future franchise agreements and
utilization of our intellectual property assets, in new European
and Asian holding companies. Previously, all cash flows relating
to intellectual property and franchise rights in those regions
returned to the United States and were subsequently transferred
back to those regions to fund their growing capital
requirements. We believe this realignment more closely aligns
the intellectual property with the respective regions, provides
funding in the proper region and lowers our effective tax rate.
However, if certain of our European and Asian businesses are
less profitable than expected, there could be an adverse impact
on our overall effective tax rate, which would result in
increased income tax expense to us.
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Leasing
and ownership of a significant portfolio of real estate exposes
us and our franchisees to potential losses and liabilities and
we or our franchisees may not be able to renew leases, control
rent increases and control real estate expenses at existing
restaurant locations or obtain leases or purchase real estate
for new restaurants.
Many of our Company restaurants are presently located on leased
premises. In addition, our franchisees generally lease their
restaurant locations. At the end of the term of the lease, we or
our franchisees might be forced to find a new location to lease
or close the restaurant. If we are able to negotiate a new lease
at the existing location or an extension of the existing lease,
the rent may increase significantly. With respect to the land
and buildings that are owned by us or our franchisees, the value
of these assets could decrease or costs could increase because
of changes in the investment climate for real estate,
demographic trends, increases in insurance and taxes and
liability for environmental conditions. Any of these events
could adversely affect our profitability or our
franchisees profitability. Some leases are subject to
renewal at fair market value, which could involve substantial
rent increases, or are subject to renewal with scheduled rent
increases, which could result in rents being above fair market
value. We compete with numerous other retailers and restaurants
for sites in the highly competitive market for retail real
estate and some landlords and developers may exclusively grant
locations to our competitors. As a result, we may not be able to
obtain new leases or renew existing ones on acceptable terms,
which could adversely affect our sales and brand-building
initiatives. In the U.K., we have approximately 45 leases for
properties that we sublease to franchisees in which the lease
term with our landlords is longer than the sublease. As a
result, we may be liable for lease obligations if such
franchisees do not renew their subleases or if we cannot find
substitute tenants.
We may
not be able to adequately protect our intellectual property,
which could harm the value of our brand and branded products and
adversely affect our business.
We depend in large part on our brand, which represents 33% of
the total assets on our balance sheet as of June 30, 2009,
and we believe that our brand is very important to our success
and our competitive position. We rely on a combination of
trademarks, copyrights, service marks, trade secrets and similar
intellectual property rights to protect our brand and branded
products. The success of our business depends on our continued
ability to use our existing trademarks and service marks in
order to increase brand awareness and further develop our
branded products in both domestic and international markets. We
have registered certain trademarks and have other trademark
registrations pending in the United States and foreign
jurisdictions. Not all of the trademarks that we currently use
have been registered in all of the countries in which we do
business, and they may never be registered in all of these
countries. We may not be able to adequately protect our
trademarks, and our use of these trademarks may result in
liability for trademark infringement, trademark dilution or
unfair competition. The steps we have taken to protect our
intellectual property in the United States and in foreign
countries may not be adequate. In addition, the laws of some
foreign countries do not protect intellectual property rights to
the same extent as the laws of the United States.
We may, from time to time, be required to institute litigation
to enforce our trademarks or other intellectual property rights,
or to protect our trade secrets. Such litigation could result in
substantial costs and diversion of resources and could
negatively affect our sales, profitability and prospects
regardless of whether we are able to successfully enforce our
rights.
We may
experience significant fluctuations in our operating results due
to a variety of factors, many of which are outside of our
control.
We may experience significant fluctuations in our operating
results due to a variety of factors, many of which are outside
of our control. Our operating results for any one quarter are
not necessarily indicative of results to be expected for any
other quarter or for any year and sales, comparable sales, and
average restaurant sales for any future period may decrease. Our
results of operations may fluctuate significantly because of a
number of factors, including but not limited to, our ability to
retain existing guests, attract new guests at a steady rate and
maintain guest satisfaction; the announcement or introduction of
new or enhanced products by us or our competitors; significant
marketing promotions that increase traffic to our stores; the
amount and timing of operating costs and capital expenditures
relating to expansion of our business; operations and
infrastructure; governmental regulation; and the risk factors
discussed in this section. Moreover, we may not be able to
successfully implement the business
28
strategy described in this
Form 10-K
and implementing our business strategy may not sustain or
improve our results of operations or increase our market share.
You should not place undue reliance on our financial guidance,
nor should you rely on
quarter-to-quarter
comparisons of our operating results as indicators of likely
future performance.
Our
indebtedness under our senior secured credit facility is
substantial and could limit our ability to grow our business. In
the event we are unable to refinance or repay such indebtedness
prior to their maturities, we may need to take certain actions
which could negatively impact our business or dilute our
existing stockholders.
As of June 30, 2009, we had total indebtedness under our
senior secured credit facility of $816.2 million, of which
$150.0 million is under Term Loan A and $666.2 million
is under Term Loan B-1. The maturity dates of Term Loan A, Term
Loan B-1 and any future amounts borrowed under the revolving
credit facility are June 30, 2011, June 30, 2012, and
June 30, 2011, respectively. Our indebtedness could have
important consequences to you.
For example, it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness if we do not
maintain specified financial ratios, thereby reducing the
availability of our cash flow for other purposes;
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limit our ability to implement our growth strategy and strategic
initiatives; or
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate, thereby
placing us at a disadvantage compared to competitors that may
have less indebtedness.
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In addition, our senior secured credit facility permits us to
incur substantial additional indebtedness in the future. As of
June 30, 2009, we had $119.4 million, net of
outstanding letters of credit of $30.6 million, available
to us for additional borrowing under our $150.0 million
revolving credit facility portion of our senior secured credit
facility. If we increase our indebtedness by borrowing under the
revolving credit facility or incur other new indebtedness, the
risks described above would increase.
We anticipate refinancing the indebtedness under our senior
secured credit facility within the next three years in light of
the maturity dates of Term Loan A, Term Loan B-1 and the
revolving credit facility. The subprime mortgage crisis and
current recessionary conditions have adversely impacted the
availability, cost and terms of debt financing. There can be no
assurance that we will be able to refinance our senior secured
credit facility on terms as favorable as our current senior
secured credit facility, on commercially acceptable terms, or at
all.
If we are unable to refinance our indebtedness under our senior
secured credit facility, we cannot guarantee that we will
generate enough cash flow from operations or be able to obtain
enough capital to repay our indebtedness and fund our planned
capital expenditures. In such event, we may need to close or
sell restaurants, reduce the number
and/or
frequency of restaurant openings, slow our reimaging of company
restaurants, issue common stock or securities convertible into
common stock or issue debt securities to repay our indebtedness.
If implemented, these actions could negatively impact our
business or dilute our existing stockholders.
Our
senior secured credit facility has restrictive terms and our
failure to comply with any of these terms could put us in
default, which would have an adverse effect on our business and
prospects.
Our senior secured credit facility contains a number of
significant covenants. These covenants limit our ability and the
ability of our subsidiaries to, among other things:
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incur additional indebtedness;
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make capital expenditures and other investments above a certain
level;
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merge, consolidate or dispose of our assets or the capital stock
or assets of any subsidiary;
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pay dividends, make distributions or redeem capital stock in
certain circumstances;
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enter into transactions with our affiliates;
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grant liens on our assets or the assets of our subsidiaries;
|
|
|
|
enter into the sale and subsequent lease-back of real
property; and
|
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|
|
make or repay intercompany loans.
|
Our senior secured credit facility requires us to maintain
specified financial ratios. Our ability to meet these financial
ratios and tests can be affected by events beyond our control,
and we may not meet those ratios. A breach of any of these
restrictive covenants or our inability to comply with the
required financial ratios would result in a default under our
senior secured credit facility or require us to dedicate a
substantial portion of our cash flow from operations to payments
on our indebtedness. If the banks accelerate amounts owing under
our senior secured credit facility because of a default and we
are unable to pay such amounts, the banks have the right to
foreclose on the stock of BKC and certain of its subsidiaries.
A
change in control, as defined in our senior secured
credit facility, would be an event of default under the
facility.
Under our senior secured credit facility, a change in
control occurs if any person or group, other than the
private equity funds controlled by the Sponsors, acquires more
than (1) 25% of our equity value and (2) the equity
value controlled by the Sponsors. A change in control is an
event of default under our senior secured credit facility. The
Sponsors currently control, in the aggregate, approximately 32%
of our equity value, and it would be possible for another person
or group to effect a change in control without our
consent. If a change in control were to occur, the banks would
have the ability to terminate any commitments under the facility
and/or
accelerate all amounts outstanding. We may not be able to
refinance such outstanding commitments on commercially
reasonable terms, or at all. If we were not able to pay such
accelerated amounts, the banks under the senior secured credit
facility would have the right to foreclose on the stock of BKC
and certain of its subsidiaries.
We
face risks of litigation and pressure tactics, such as strikes,
boycotts and negative publicity from restaurant customers,
franchisees, suppliers, employees and others, which could divert
our financial and management resources and which may negatively
impact our financial condition and results of
operations.
Class action lawsuits have been filed, and may continue to be
filed, against various quick service restaurants alleging, among
other things, that quick service restaurants have failed to
disclose the health risks associated with high-fat or
high-sodium foods and that quick service restaurant marketing
practices have targeted children and encouraged obesity. Adverse
publicity about these allegations may negatively affect us and
our franchisees, regardless of whether the allegations are true,
by discouraging customers from buying our products. In addition,
we face the risk of lawsuits and negative publicity resulting
from illnesses and injuries, including injuries to infants and
children, allegedly caused by our products, toys and other
promotional items available in our restaurants or our playground
equipment.
In addition to decreasing our sales and profitability and
diverting our management resources, adverse publicity or a
substantial judgment against us could negatively impact our
business, results of operations, financial condition and brand
reputation, hindering our ability to attract and retain
franchisees and grow our business in the United States and
internationally.
In addition, activist groups, including animal rights activists
and groups acting on behalf of franchisees, the workers who work
for our suppliers and others, have in the past, and may in the
future, use pressure tactics to generate adverse publicity about
us by alleging, for example, inhumane treatment of animals by
our suppliers, poor working conditions or unfair purchasing
policies. These groups may be able to coordinate their actions
with other groups, threaten strikes or boycotts or enlist the
support of well-known persons or organizations in order to
increase the pressure on us to achieve their stated aims. In the
future, these actions or the threat of these actions may force
us to change our business practices or pricing policies, which
may have a material adverse effect on our business, results of
operations and financial condition.
30
Further, we may be subject to employee, franchisee, customer and
other claims in the future based on, among other things,
mismanagement of the system, unfair or unequal treatment,
discrimination, harassment, violations of privacy and consumer
credit laws, wrongful termination, and wage, rest break and meal
break issues, including those relating to overtime compensation.
If one or more of these claims were to be successful or if there
is a significant increase in the number of these claims, our
business, results of operations and financial condition could be
harmed.
Our
products are subject to numerous and changing government
regulations, and failure to comply with such existing or future
government regulations could negatively affect our sales,
revenues and earnings.
Our products are subject to numerous and changing government
regulations, and failure to comply with such existing or future
government regulations could negatively affect our sales,
revenues and earnings. In many of our markets, including the
United States and Europe, we are subject to increasing
regulation regarding our products, which may significantly
increase our cost of doing business.
Many governmental bodies, particularly those in the United
States, the U.K. and Spain, have considered or begun to enact
legislation to regulate high-fat, high-calorie and high-sodium
foods as a way of combating concerns about obesity and health.
Public interest groups have also focused attention on the
marketing of high-fat, high-calorie and high-sodium foods to
children in a stated effort to combat childhood obesity and
legislators in the United States have proposed legislation to
restore the FTCs authority to regulate childrens
advertising. Further, regulators in the U.K. have adopted
restrictions on television advertising of foods high in fat,
salt or sugar targeted at children. In addition, the Spanish
government and certain industry organizations have focused on
reducing advertisements that promote large portion sizes. We
have made voluntary commitments to change our advertising to
children under the age of 12 in the United States and European
Union. Regulators in Canada are proposing to take steps to
reduce the level of exposure to acrylamide, a potential
carcinogen that naturally occurs in the preparation of foods
such as french fries. In the State of California, we are
required to warn about the presence of acrylamide and other
potential carcinogens in our foods. The cost of complying with
these regulations could increase our expenses and the negative
publicity arising from such legislative initiatives could reduce
our future sales.
Our food products are also subject to significant complex, and
sometimes contradictory, health and safety regulatory risks
including:
|
|
|
|
|
inconsistent standards imposed by state and federal authorities
regarding the nutritional content of our products, which can
adversely affect the cost of our food, consumer perceptions and
increase our exposure to litigation;
|
|
|
|
the impact of nutritional, health and other scientific inquiries
and conclusions, which constantly evolve and often have
contradictory implications, but nonetheless drive consumer
perceptions, litigation and regulation in ways that are material
to our business;
|
|
|
|
the risks and costs of our nutritional labeling and other
disclosure practices, particularly given differences in
practices within the restaurant industry with respect to testing
and disclosure, ordinary variations in food preparation among
our own restaurants, and reliance on the accuracy and
appropriateness of information obtained from third-party
suppliers;
|
|
|
|
the impact and costs of menu labeling legislation, currently
adopted in several cities and states and under consideration in
various other jurisdictions, which generally requires QSR
restaurant chains to provide caloric information on menu boards;
|
|
|
|
the impact of licensing and regulation by state and local
departments relating to health, food preparation, sanitation and
safety standards; and
|
|
|
|
the impact of laws that ban or limit the development of new
quick service restaurants in an attempt to address the high
rates of obesity in certain areas.
|
Additional U.S. or foreign jurisdictions may propose to
adopt similar regulations. The cost of complying with these
regulations could increase our expenses. Additionally, menu
labeling legislation may cause some of our guests to avoid
certain of our products
and/or alter
the frequency of their visits.
31
If we fail to comply with existing or future laws and
regulations governing our products, we may be subject to
governmental or judicial fines or sanctions. In addition, our
and our franchisees capital expenditures could increase
due to remediation measures that may be required if we are found
to be noncompliant with any of these laws or regulations.
Increasing
regulatory complexity surrounding our operations will continue
to affect our operations and results of operations in material
ways.
Our legal and regulatory environment worldwide exposes us to
complex compliance regimes and similar risks that affect our
operations and results of operations in material ways. In many
of our markets, including the United States and Europe, we are
subject to increasing regulation regarding our operations, which
may significantly increase our cost of doing business. In
developing markets, we face the risks associated with new and
untested laws and judicial systems. Among the more important
regulatory risks regarding our operations we face are the
following:
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|
|
|
|
the impact of employer mandated health care, minimum wage,
overtime, occupational health and safety, immigration, privacy
and other local and foreign laws and regulations on our business;
|
|
|
|
the impact of the Employee Free Choice Act, which would remove
the secret ballot election and replace it with a card
check system, require shorter union campaigns and faster
elections as well as binding arbitration, on our business;
|
|
|
|
the impact of municipal zoning laws that restrict or ban the
development of new quick service restaurants;
|
|
|
|
disruptions in our operations or price volatility in a market
that can result from governmental actions, including price
controls, currency and repatriation controls, limitations on the
import or export of commodities we use or government-mandated
closure of our or our vendors operations;
|
|
|
|
the risks of operating in foreign markets in which there are
significant uncertainties, including with respect to the
application of legal requirements and the enforceability of laws
and contractual obligations; and
|
|
|
|
the risks associated with information security, and the use of
cashless payments, such as increased investment in technology,
the costs of compliance with privacy, consumer protection and
other laws, costs resulting from consumer fraud and the impact
on our margins as the use of cashless payments increases.
|
We are also subject to a Federal Trade Commission rule and to
various state and foreign laws that govern the offer and sale of
franchises. These laws regulate various aspects of the franchise
relationship, including terminations and the refusal to renew
franchises. The failure to comply with these laws and
regulations in any jurisdiction or to obtain required government
approvals could result in a ban or temporary suspension on
future franchise sales, fines, other penalties or require us to
make offers of rescission or restitution, any of which could
adversely affect our business and operating results. We could
also face lawsuits by our franchisees based upon alleged
violations of these laws.
The Americans with Disabilities Act, or ADA, prohibits
discrimination on the basis of disability in public
accommodations and employment. We have, in the past, been
required to make certain modifications to our restaurants
pursuant to the ADA. Although our obligations under those
requirements are substantially complete, future mandated
modifications to our facilities to make different accommodations
for disabled persons and modifications required under the
Department of Justices proposal to ADA could result in
material unanticipated expense to us and our franchisees.
If we fail to comply with existing or future laws and
regulations, we may be subject to governmental or judicial fines
or sanctions. In addition, our and our franchisees capital
expenditures could increase due to remediation measures that may
be required if we are found to be noncompliant with any of these
laws or regulations.
32
The
personal information that we collect may be vulnerable to
breach, theft or loss that could adversely affect our reputation
and operations.
Possession and use of employee, franchisee, vendor and consumer
personal information in the ordinary course of our business
subjects us to risks and costs that could harm our business. We
collect, process, transmit and retain personal information
regarding our employees and their families, such as social
security numbers, banking and tax ID information, and health
care information. We also collect, process, transmit and retain
personal information of our franchisees and vendors. In
connection with credit card sales, we transmit confidential
credit card information securely over public networks. Some of
this personal information is held and managed by certain of our
vendors. Although we use security and business controls to limit
access and use of personal information, a third party may be
able to circumvent those security and business controls, which
could result in a breach of employee, consumer or franchisee
privacy. Furthermore, any such breach could result in
substantial fines, penalties and potential litigation which
could negatively impact our results of operations and financial
condition. In addition, errors in the storage, use or
transmission of personal information could result in a breach of
privacy. Possession and use of personal information in our
operations also subjects us to legislative and regulatory
burdens that could require notification of data breaches and
restrict our use of personal information. We cannot assure you
that a breach, loss or theft of personal information will not
occur. A major breach, theft or loss of personal information
regarding our employees and their families or our franchisees,
vendors and consumers that is held by us or our vendors could
have a material adverse effect on our reputation and results of
operations and result in further regulation and oversight by
federal and state authorities and increased costs of compliance.
We
rely on computer systems and information technology to run our
business. Any material failure, interruption or security breach
of our computer systems or information technology may adversely
affect our business and our results of operations.
Computer viruses or terrorism may disrupt our operations and
harm our operating results. Despite our implementation of
security measures, all of our technology systems are vulnerable
to disability or failures due to hacking, viruses, acts of war
or terrorism and other causes. In addition, some of our systems
and processes are not fully integrated worldwide and, as a
result, require us to manually estimate and consolidate certain
information that we use to manage our business and prepare our
financial statements which could increase the risk of breach. If
our technology systems were to fail, and we were unable to
recover in a timely way, or if we do not adequately manage our
financial reporting and information systems, our results of
operations and financial condition could be adversely affected.
Compliance
with or cleanup activities required by environmental laws may
hurt our business.
We are subject to various federal, state, local and foreign
environmental laws and regulations. These laws and regulations
govern, among other things, discharges of pollutants into the
air and water as well as the presence, handling, release and
disposal of and exposure to, hazardous substances. These laws
and regulations provide for significant fines and penalties for
noncompliance. If we fail to comply with these laws or
regulations, we could be fined or otherwise sanctioned by
regulators. Third parties may also make personal injury,
property damage or other claims against owners or operators of
properties associated with releases of, or actual or alleged
exposure to, hazardous substances at, on or from our properties.
Environmental conditions relating to prior, existing or future
restaurants or restaurant sites, including franchised sites, may
have a material adverse effect on us. Moreover, the adoption of
new or more stringent environmental laws or regulations could
result in a material environmental liability to us and the
current environmental condition of the properties could be
harmed by tenants or other third parties or by the condition of
land or operations in the vicinity of our properties.
Our
current principal stockholders own a significant amount of our
common stock and have certain contractual rights to appoint
directors, which will allow them to significantly influence all
matters requiring shareholder approval.
The private equity funds controlled by the Sponsors beneficially
own approximately 32% of our outstanding common stock. In
addition, three of our 10 directors are representatives of
the private equity funds controlled by the
33
Sponsors. Although each Sponsor has currently elected to
nominate only one director, each Sponsor retains the right to
nominate two directors, subject to reduction and elimination as
the stock ownership percentage of the private equity funds
controlled by the applicable Sponsor declines. In addition, with
respect to each committee of our board other than the audit
committee, each Sponsor has the right to appoint at least one
director to each committee, for Sponsor directors to constitute
a majority of the membership of each committee (subject to NYSE
requirements) and for the chairman of each committee to be a
Sponsor director until the private equity funds controlled by
the Sponsors collectively own less than 30% of our outstanding
common stock. As a result of these contractual rights, the
Sponsors will continue to have significant influence over our
decision to enter into any corporate transaction and may have
the ability to prevent any transaction that requires the
approval of stockholders, regardless of whether or not other
stockholders believe that such transaction is in their own best
interests. Such concentration of voting power could have the
effect of delaying, deterring or preventing a change of control
or other business combination that might otherwise be beneficial
to our stockholders.
Your
percentage ownership in us may be diluted by future issuances of
capital stock, which could reduce your influence over matters on
which stockholders vote.
Our board of directors has the authority, without action or vote
of our stockholders, to issue all or any part of our authorized
but unissued shares of common stock, including shares issuable
upon the exercise of options, or shares of our authorized but
unissued preferred stock. Our board also has the authority to
issue debt convertible into shares of common stock. Issuances of
common stock, voting preferred stock or convertible debt could
reduce your influence over matters on which our stockholders
vote, and, in the case of issuances of preferred stock, would
likely result in your interest in us being subject to the prior
rights of holders of that preferred stock.
The
sale of a substantial number of shares of our common stock may
cause the market price of shares of our common stock to
decline.
Future sales of a substantial number of shares of our common
stock, or the perception that such sales might occur, could
cause the market price of our common stock to decline. The
private equity funds controlled by the Sponsors have
approximately 42.6 million shares, which represents
approximately 32% of our common stock issued and outstanding at
June 30, 2009 and all of which are subject to registration
rights.
Provisions
in our certificate of incorporation could make it more difficult
for a third party to acquire us and could discourage a takeover
and adversely affect existing stockholders.
Our certificate of incorporation authorizes our board of
directors to issue up to 10,000,000 preferred shares and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions on
those shares, without any further vote or action by our
stockholders. The rights of the holders of our common stock will
be subject to, and may be adversely affected by, the rights of
the holders of any preferred shares that may be issued in the
future. The issuance of preferred shares could have the effect
of delaying, deterring or preventing a change in control and
could adversely affect the voting power or economic value of
your shares.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our global restaurant support center and U.S. headquarters
is located in Miami, Florida and consists of approximately
213,000 square feet which we lease. We extended the Miami
lease for our global restaurant support center in May 2008
through September 2018 with an option to renew for one five-year
period. We lease properties for our EMEA headquarters in Zug,
Switzerland and our APAC headquarters in Singapore. We believe
that our existing headquarters and other leased and owned
facilities are adequate to meet our current requirements.
34
The following table presents information regarding our
restaurant properties as of June 30, 2009:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
|
|
|
|
|
|
|
|
|
|
Building/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land &
|
|
|
Total
|
|
|
|
|
|
|
Owned(1)
|
|
|
Land
|
|
|
Building
|
|
|
Leases
|
|
|
Total
|
|
|
United States and Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
357
|
|
|
|
219
|
|
|
|
467
|
|
|
|
686
|
|
|
|
1,043
|
|
Franchisee-operated properties
|
|
|
441
|
|
|
|
300
|
|
|
|
200
|
|
|
|
500
|
|
|
|
941
|
|
Non-operating restaurant locations
|
|
|
18
|
|
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
32
|
|
Offices
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
816
|
|
|
|
526
|
|
|
|
680
|
|
|
|
1,206
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
20
|
|
|
|
44
|
|
|
|
322
|
|
|
|
366
|
|
|
|
386
|
|
Franchisee-operated properties
|
|
|
3
|
|
|
|
1
|
|
|
|
93
|
|
|
|
94
|
|
|
|
97
|
|
Non-operating restaurant locations
|
|
|
1
|
|
|
|
7
|
|
|
|
30
|
|
|
|
37
|
|
|
|
38
|
|
Offices
|
|
|
1
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25
|
|
|
|
52
|
|
|
|
455
|
|
|
|
507
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Owned refers to properties where we own the land and the
building. |
|
|
Item 3.
|
Legal
Proceedings
|
Ramalco Corp. et al. v. Burger King Corporation,
Case
No. 09-43704CA05
(Circuit Court of the Eleventh Judicial Circuit, Dade County,
Florida). On July 30, 2008, we were sued by four Florida
franchisees over our decision to mandate extended operating
hours in the United States. The plaintiffs seek damages,
declaratory relief and injunctive relief. We have a motion to
dismiss before the court. The judge in the case has asked to
hear live testimony from witnesses on both sides before he makes
his decision on the motion. While we believe we have the right
under our franchise agreement to mandate extended operating
hours, we are unable to predict the ultimate outcome of this
litigation.
Castaneda v. Burger King Corp. and Burger King Holdings,
Inc.,
No. CV08-4262
(U.S. District Court for the Northern District of
California). On September 10, 2008, a purported class
action lawsuit was filed against us in the United States
District Court for the Northern District of California. The
complaint alleged that all Burger King restaurants in
California leased by BKC and operated by franchisees violate
accessibility requirements under federal and state law. The
plaintiffs seek injunction relief, statutory damages,
attorneys fees and costs. The hearing on the
plaintiffs motion for class certification is set for
September 17, 2009. We intend to vigorously defend against
all claims in this lawsuit, but we are unable to predict the
ultimate outcome of this litigation.
National Franchisee Association v. Burger King Corporation
and The
Coca-Cola
Company, No. 09 CV 939 W NLS and National Franchisee
Association v. Burger King Corporation and Dr Pepper
Snapple Group f/k/a Dr Pepper/Seven Up, Inc., Case
No. 09 939 W NLS (U.S. District Court for the Southern
District of California). We are a party to written agreements
with The
Coca-Cola
Company and Dr Pepper/Seven Up, Inc. pursuant to which these
companies supply soft drinks to Burger King restaurants
in the United States. Under these agreements, the soft drink
companies are required to pay certain amounts, known as
Restaurant Operating Funds, based on the volume of
syrup purchased by the restaurants. Historically, the soft drink
companies have paid the entire amount of the Restaurant
Operating Funds to the restaurants. However, in April 2009, we
announced that beginning January 1, 2010, a portion of
these funds would be paid directly to us for use as specified in
the soft drink agreements. The National Franchisee Association,
Inc. filed these two class action lawsuits on May 4, 2009,
claiming to represent Burger King franchisees and seeking
third party beneficiary status and declaratory relief. The
complaints allege that BKC and the soft drink companies did not
have the right to amend our agreements to reduce the portion of
Restaurant Operating Funds paid directly to the restaurants
without the franchisees consent. We intend to
35
vigorously defend against all claims in this lawsuit, but we are
unable to predict the ultimate outcome of this litigation.
From time to time, we are involved in other legal proceedings
arising in the ordinary course of business relating to matters
including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over our
intellectual property.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
for Our Common Stock
Our common stock trades on the New York Stock Exchange under the
symbol BKC. Trading of our common stock commenced on
May 18, 2006, following the completion of our initial
public offering. Prior to that date, no public market existed
for our common stock. As of August 20, 2009, there were
approximately 387 holders of record of our common stock. The
following table sets forth the high and low sales prices of our
common stock as reported on the New York Stock Exchange and
dividends declared per share of common stock for each of the
quarters in fiscal 2009 and fiscal 2008:
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|
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2009
|
|
|
2008
|
|
Dollars per Share:
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
First Quarter
|
|
$
|
30.95
|
|
|
$
|
22.77
|
|
|
$
|
0.0625
|
|
|
$
|
27.00
|
|
|
$
|
22.21
|
|
|
$
|
0.0625
|
|
Second Quarter
|
|
$
|
24.93
|
|
|
$
|
16.56
|
|
|
$
|
0.0625
|
|
|
$
|
29.19
|
|
|
$
|
24.41
|
|
|
$
|
0.0625
|
|
Third Quarter
|
|
$
|
24.48
|
|
|
$
|
19.21
|
|
|
$
|
0.0625
|
|
|
$
|
28.90
|
|
|
$
|
21.60
|
|
|
$
|
0.0625
|
|
Fourth Quarter
|
|
$
|
24.10
|
|
|
$
|
15.85
|
|
|
$
|
0.0625
|
|
|
$
|
30.75
|
|
|
$
|
26.41
|
|
|
$
|
0.0625
|
|
Issuer
Purchases of Equity Securities
The following table presents information related to the
repurchase of our common stock during the three months ended
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Approximate Dollar Value) of
|
|
|
|
Total Number
|
|
|
|
|
|
Purchased as Part of
|
|
|
Shares That May Yet be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased(1)
|
|
|
Paid per Share
|
|
|
Plans or Programs(2)
|
|
|
the Plans or Programs(2)
|
|
|
April 1-30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000,000
|
|
May 1-31, 2009
|
|
|
11,150
|
|
|
$
|
17.37
|
|
|
|
|
|
|
$
|
200,000,000
|
|
June 1-30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,150
|
|
|
$
|
17.37
|
|
|
|
|
|
|
$
|
200,000,000
|
|
|
|
|
(1)
|
|
All shares purchased were in
connection with the Companys obligation to withhold from
restricted stock and option awards the amount of federal
withholding taxes due in respect of such awards.
|
|
(2)
|
|
On March 4, 2009, the
Companys Board of Directors authorized a
$200.0 million share repurchase program pursuant to which
the Company would repurchase shares directly in the open market
consistent with the Companys insider trading policy and
also repurchase shares under plans complying with
Rule 10b5-1
under the Exchange Act during periods when the Company may be
prohibited from making direct share repurchases under such
policy. The program expires on December 31, 2010. To date,
we have not repurchased any shares under the new program.
|
36
Dividend
Policy
During each quarter of fiscal 2008 and 2009, we paid a quarterly
cash dividend of $0.0625 per share. Although we do not have a
dividend policy, we elected to pay a cash dividend in each of
these quarters because we generated strong cash flow during
these periods, and we expect our cash flow to continue to
strengthen.
The terms of our credit facility limit our ability to pay cash
dividends in certain circumstances. In addition, because we are
a holding company, our ability to pay cash dividends on shares
of our common stock may be limited by restrictions on our
ability to obtain sufficient funds through dividends from our
subsidiaries, including the restrictions under our credit
facility. Subject to the foregoing, the payment of cash
dividends in the future, if any, will be at the discretion of
our board of directors and will depend upon such factors as
earnings levels, capital requirements, our overall financial
condition and any other factors deemed relevant by our board of
directors.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table presents information regarding options
outstanding under our compensation plans as of June 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
(c)
|
|
|
|
(a)
|
|
|
Average Exercise
|
|
|
Number of
|
|
|
|
Number of
|
|
|
Price of
|
|
|
Securities Remaining Available for
|
|
|
|
Securities to be Issued Upon
|
|
|
Outstanding
|
|
|
Future Issuance under Equity
|
|
|
|
Exercise of Outstanding
|
|
|
Options, Warrants
|
|
|
Compensation Plans (Excluding
|
|
Plan Category
|
|
Options, Warrants and Rights
|
|
|
and Rights
|
|
|
Securities Reflected in Column (a))
|
|
|
Equity Compensation Plans
Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc. 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Omnibus Incentive Plan
|
|
|
2,357,487
|
|
|
$
|
14.05
|
|
|
|
4,568,599
|
|
Burger King Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plan
|
|
|
5,336,846
|
|
|
$
|
16.33
|
|
|
|
521,597
|
|
Equity Compensation Plans Not
Approved by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
7,694,333
|
|
|
|
|
|
|
|
5,090,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the 7.7 million total number of securities in
column (a) above are approximately 1.8 million
restricted stock units, performance-based restricted stock
awards and deferred stock awards. The weighted average exercise
price in column (b) is based only on stock options as
restricted stock units, performance-based restricted stock
awards and deferred stock awards have no exercise price. The
Company does not currently have warrants or rights outstanding.
37
Stock
Performance Graph
This graph compares the cumulative total return of the
Companys common stock to the cumulative total return of
the S&P 500 Stock Index and the S&P Restaurant Index
for the period from May 18, 2006 through June 30,
2009, the last trading day of the Companys fiscal year.
The graph assumes an investment in the Companys common
stock and the indices of $100 at May 18, 2006 and that all
dividends were reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/18/2006
|
|
|
|
6/30/2006
|
|
|
|
6/29/2007
|
|
|
|
6/30/2008
|
|
|
|
6/30/2009
|
|
BKC
|
|
|
$
|
100
|
|
|
|
$
|
90
|
|
|
|
$
|
151
|
|
|
|
$
|
155
|
|
|
|
$
|
101
|
|
S&P 500 Index
|
|
|
$
|
100
|
|
|
|
$
|
101
|
|
|
|
$
|
122
|
|
|
|
$
|
106
|
|
|
|
$
|
78
|
|
S&P Restaurant Index
|
|
|
$
|
100
|
|
|
|
$
|
100
|
|
|
|
$
|
122
|
|
|
|
$
|
122
|
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All amounts rounded to nearest dollar.
|
|
Item 6.
|
Selected
Financial Data
|
The following tables present selected consolidated financial and
other data for each of the periods indicated. The selected
historical financial data as of June 30, 2009 and 2008 and
for the fiscal years ended June 30, 2009, 2008 and 2007
have been derived from our audited consolidated financial
statements and the notes thereto included in this report. The
selected historical financial data for fiscal years ended
June 30, 2006 and 2005 have been derived from our audited
consolidated financial statements and the notes thereto, which
are not included in this report.
38
The selected historical consolidated financial and other
operating data included below and elsewhere in this report are
not necessarily indicative of future results. The information
presented below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II,
Item 7 and Financial Statements and Supplementary
Data in Part II, Item 8 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
|
$
|
1,658.0
|
|
|
$
|
1,515.6
|
|
|
$
|
1,407.4
|
|
Franchise revenues
|
|
|
543.4
|
|
|
|
537.2
|
|
|
|
459.5
|
|
|
|
419.8
|
|
|
|
412.5
|
|
Property revenues
|
|
|
113.5
|
|
|
|
121.6
|
|
|
|
116.2
|
|
|
|
112.4
|
|
|
|
120.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,537.4
|
|
|
|
2,454.7
|
|
|
|
2,233.7
|
|
|
|
2,047.8
|
|
|
|
1,940.3
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
603.7
|
|
|
|
564.3
|
|
|
|
499.3
|
|
|
|
469.5
|
|
|
|
436.7
|
|
Payroll and employee benefits
|
|
|
582.2
|
|
|
|
534.7
|
|
|
|
492.1
|
|
|
|
446.3
|
|
|
|
415.4
|
|
Occupancy and other operating costs
|
|
|
457.8
|
|
|
|
439.0
|
|
|
|
418.0
|
|
|
|
380.1
|
|
|
|
343.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
1,643.7
|
|
|
|
1,538.0
|
|
|
|
1,409.4
|
|
|
|
1,295.9
|
|
|
|
1,195.2
|
|
Selling, general and administrative expenses(1)
|
|
|
490.4
|
|
|
|
499.5
|
|
|
|
473.5
|
|
|
|
487.9
|
|
|
|
486.6
|
|
Property expenses
|
|
|
58.1
|
|
|
|
62.1
|
|
|
|
60.6
|
|
|
|
57.4
|
|
|
|
64.2
|
|
Fees paid to affiliates(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.9
|
|
|
|
8.8
|
|
Other operating (income) expenses, net*
|
|
|
5.8
|
|
|
|
0.9
|
|
|
|
(4.4
|
)
|
|
|
(3.6
|
)
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,198.0
|
|
|
|
2,100.5
|
|
|
|
1,939.1
|
|
|
|
1,876.5
|
|
|
|
1,792.9
|
|
Income from operations
|
|
|
339.4
|
|
|
|
354.2
|
|
|
|
294.6
|
|
|
|
171.3
|
|
|
|
147.4
|
|
Interest expense, net
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
67.0
|
|
|
|
72.0
|
|
|
|
73.1
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.8
|
|
|
|
293.0
|
|
|
|
226.8
|
|
|
|
81.5
|
|
|
|
74.3
|
|
Income tax expense*
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
78.7
|
|
|
|
54.4
|
|
|
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
$
|
27.1
|
|
|
$
|
47.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
1.48
|
|
|
$
|
1.40
|
|
|
$
|
1.11
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
Earnings per share diluted
|
|
$
|
1.46
|
|
|
$
|
1.38
|
|
|
$
|
1.08
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
Weighted average shares outstanding-basic
|
|
|
134.8
|
|
|
|
135.1
|
|
|
|
133.9
|
|
|
|
110.3
|
|
|
|
106.5
|
|
Weighted average shares outstanding-diluted
|
|
|
136.8
|
|
|
|
137.6
|
|
|
|
136.8
|
|
|
|
114.7
|
|
|
|
106.9
|
|
Cash dividends per common share(3)
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.13
|
|
|
$
|
3.42
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
310.8
|
|
|
$
|
243.4
|
|
|
$
|
110.4
|
|
|
$
|
67.0
|
|
|
$
|
209.7
|
|
Net cash (used for) provided by investing activities
|
|
|
(242.0
|
)
|
|
|
(199.3
|
)
|
|
|
(77.4
|
)
|
|
|
(66.7
|
)
|
|
|
3.4
|
|
Net cash used for financing activities
|
|
|
(105.5
|
)
|
|
|
(62.0
|
)
|
|
|
(126.9
|
)
|
|
|
(172.6
|
)
|
|
|
(2.2
|
)
|
Capital expenditures
|
|
|
204.0
|
|
|
|
178.2
|
|
|
|
87.3
|
|
|
|
85.1
|
|
|
|
92.5
|
|
EBITDA(4)
|
|
$
|
437.5
|
|
|
$
|
449.8
|
|
|
$
|
383.4
|
|
|
$
|
259.2
|
|
|
$
|
220.9
|
|
39
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
121.7
|
|
|
$
|
166.0
|
|
Total assets
|
|
|
2,707.1
|
|
|
|
2,686.5
|
|
Total debt and capital lease obligations
|
|
|
888.9
|
|
|
|
947.4
|
|
Total liabilities
|
|
|
1,732.3
|
|
|
|
1,842.0
|
|
Total stockholders equity
|
|
$
|
974.8
|
|
|
$
|
844.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(5)(6)(7)
|
|
|
1.2
|
%
|
|
|
5.4
|
%
|
|
|
3.4
|
%
|
|
|
1.9
|
%
|
|
|
5.6
|
%
|
Sales growth(5)(6)
|
|
|
4.2
|
%
|
|
|
8.3
|
%
|
|
|
4.9
|
%
|
|
|
2.1
|
%
|
|
|
6.1
|
%
|
Average restaurant sales (in thousands)(6)
|
|
$
|
1,259
|
|
|
$
|
1,301
|
|
|
$
|
1,193
|
|
|
$
|
1,126
|
|
|
$
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,331.8
|
|
|
$
|
1,171.9
|
|
|
$
|
1,082.1
|
|
EMEA/APAC(8)
|
|
|
488.6
|
|
|
|
554.9
|
|
|
|
515.2
|
|
Latin America(9)
|
|
|
60.1
|
|
|
|
69.1
|
|
|
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant revenues
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
|
$
|
1,658.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
33.0
|
%
|
|
|
32.5
|
%
|
|
|
30.8
|
%
|
Payroll and employee benefits
|
|
|
31.1
|
%
|
|
|
30.5
|
%
|
|
|
30.4
|
%
|
Occupancy and other operating costs
|
|
|
23.1
|
%
|
|
|
23.1
|
%
|
|
|
23.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
87.2
|
%
|
|
|
86.1
|
%
|
|
|
84.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA/APAC(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
28.8
|
%
|
|
|
28.5
|
%
|
|
|
27.9
|
%
|
Payroll and employee benefits
|
|
|
32.7
|
%
|
|
|
30.5
|
%
|
|
|
30.3
|
%
|
Occupancy and other operating costs
|
|
|
27.3
|
%
|
|
|
27.1
|
%
|
|
|
28.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
88.8
|
%
|
|
|
86.1
|
%
|
|
|
87.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
38.4
|
%
|
|
|
36.7
|
%
|
|
|
36.6
|
%
|
Payroll and employee benefits
|
|
|
12.3
|
%
|
|
|
11.8
|
%
|
|
|
11.7
|
%
|
Occupancy and other operating costs
|
|
|
29.7
|
%
|
|
|
26.1
|
%
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
80.4
|
%
|
|
|
74.6
|
%
|
|
|
74.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
32.1
|
%
|
|
|
31.4
|
%
|
|
|
30.1
|
%
|
Payroll and employee benefits
|
|
|
31.0
|
%
|
|
|
29.8
|
%
|
|
|
29.7
|
%
|
Occupancy and other operating costs
|
|
|
24.3
|
%
|
|
|
24.5
|
%
|
|
|
25.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
87.4
|
%
|
|
|
85.7
|
%
|
|
|
85.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues (in millions) (10):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
323.1
|
|
|
$
|
317.9
|
|
|
$
|
283.6
|
|
EMEA/APAC(8)
|
|
|
173.4
|
|
|
|
173.0
|
|
|
|
135.1
|
|
Latin America(9)
|
|
|
46.9
|
|
|
|
46.3
|
|
|
|
40.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise revenues
|
|
$
|
543.4
|
|
|
$
|
537.2
|
|
|
$
|
459.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
341.8
|
|
|
$
|
348.2
|
|
|
$
|
339.4
|
|
EMEA/APAC(8)
|
|
|
83.6
|
|
|
|
91.8
|
|
|
|
53.9
|
|
Latin America(9)
|
|
|
37.8
|
|
|
|
41.4
|
|
|
|
35.2
|
|
Unallocated(11)
|
|
|
(123.8
|
)
|
|
|
(127.2
|
)
|
|
|
(133.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
339.4
|
|
|
$
|
354.2
|
|
|
$
|
294.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
See Note 2 to the Consolidated
Financial Statements in Part II, Item 8 of this
Form 10-K
for information about income tax expense and other operating
(income) expenses, net related to the reclassification of
transaction gains and losses resulting from the remeasurement of
foreign denominated tax assets for the fiscal years ended
June 30, 2009, 2008 and 2007. For the fiscal years ended
June 30, 2006 and 2005, we reclassified $1.5 million
of income and $3.8 million of expense, respectively from
income tax expense to other operating (income) expense, net
related to the reclassification.
|
|
(1)
|
|
Selling, general and administrative
expenses for fiscal 2006 include compensation expense and taxes
related to a $34.4 million compensatory make-whole payment
made on February 21, 2006 to holders of options and
restricted stock unit awards, primarily members of senior
management.
|
|
(2)
|
|
Fees paid to affiliates consist of
management fees we paid to the Sponsors under a management
agreement. Fees paid to affiliates in fiscal 2006 also include a
$30.0 million fee that we paid to terminate the management
agreement with the Sponsors.
|
|
(3)
|
|
The cash dividend paid in fiscal
2006 represents a special dividend paid prior to our initial
public offering.
|
|
(4)
|
|
EBITDA is defined as earnings (net
income) before interest, taxes, depreciation and amortization,
and is used by management to measure operating performance of
the business. Management believes that EBITDA is a useful
measure as it incorporates certain operating drivers of our
business such as sales growth, operating costs, selling, general
and administrative expenses and other income and expense. EBITDA
is also one of the measures used by us to calculate incentive
compensation for management and corporate-level employees.
|
|
|
|
While EBITDA is not a recognized
measure under generally accepted accounting principles
(GAAP), management uses this financial measure to
evaluate and forecast our business performance. The non-GAAP
measure has certain material limitations, including:
|
|
|
|
|
|
it does not include interest expense, net. Because we have
borrowed money for general corporate purposes, interest expense
is a necessary element of our costs and ability to generate
profits and cash flows;
|
|
|
|
it does not include depreciation and amortization expenses.
Because we use capital assets, depreciation and amortization are
necessary elements of our costs and ability to generate
profits; and
|
|
|
|
it does not include provision for taxes. The payment of taxes is
a necessary element of our operations.
|
|
|
|
|
|
Management compensates for these
limitations by using EBITDA as only one of its measures for
evaluating the Companys business performance. In addition,
capital expenditures, which impact depreciation and
amortization, interest expense and income tax expense, are
reviewed separately by management. Management believes that
EBITDA provides both management and investors with a more
complete understanding of the underlying operating results and
trends and an enhanced overall understanding of our financial
performance and prospects for the future. EBITDA is not intended
to be a measure of liquidity or cash flows from operations nor a
measure comparable to net income, as it does not take into
account certain requirements such as capital expenditures and
related depreciation, principal and interest payments and tax
payments.
|
41
The following table is a reconciliation of our net income to
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
$
|
27.1
|
|
|
$
|
47.3
|
|
Interest expense, net
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
67.0
|
|
|
|
72.0
|
|
|
|
73.1
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
17.8
|
|
|
|
|
|
Income tax expense
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
78.7
|
|
|
|
54.4
|
|
|
|
27.0
|
|
Depreciation and amortization
|
|
|
98.1
|
|
|
|
95.6
|
|
|
|
88.8
|
|
|
|
87.9
|
|
|
|
73.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
437.5
|
|
|
$
|
449.8
|
|
|
$
|
383.4
|
|
|
$
|
259.2
|
|
|
$
|
220.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
Comparable sales growth and sales
growth are analyzed on a constant currency basis, which means
they are calculated using the same exchange rate over the
periods under comparison, to remove the effects of currency
fluctuations from these trend analyses. We believe these
constant currency measures provide a more meaningful analysis of
our business by identifying the underlying business trends,
without distortion from the effect of foreign currency movements.
|
|
(6)
|
|
Unless otherwise stated, comparable
sales growth, sales growth and average restaurant sales are
presented on a system-wide basis, which means they include
Company restaurants and franchise restaurants. Franchise sales
represent sales at all franchise restaurants and are revenues to
our franchisees. We do not record franchise sales as revenues.
However, our royalty revenues are calculated based on a
percentage of franchise sales. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Key Business Measures.
|
|
(7)
|
|
Comparable sales growth refers to
the change in restaurant sales in one period from a comparable
period for restaurants that have been open for thirteen months
or longer.
|
|
(8)
|
|
Refers to our operations in Europe,
the Middle East, Africa and Asia Pacific.
|
|
(9)
|
|
Refers to our operations in Mexico,
Central and South America, the Caribbean and Puerto Rico.
|
|
(10)
|
|
Franchise revenues consist
primarily of royalties paid by franchisees. Royalties earned are
based on a percentage of franchise sales, which were
$12.8 billion, $12.9 billion and $11.6 billion
for fiscal 2009, 2008, and 2007, respectively. Franchise sales
are sales at all franchise restaurants and are revenues to our
franchisees. We do not record franchise sales as revenues.
|
|
(11)
|
|
Unallocated includes corporate
support costs in areas such as facilities, finance, human
resources, information technology, legal, marketing, and supply
chain management, which benefit all of the Companys
geographic segments and system wide restaurants and are not
allocated specifically to any of the geographic segments.
|
42
Burger
King Holdings, Inc. and Subsidiaries Restaurant Count
The following table presents information relating to the
analysis of our restaurant count for the geographic areas and
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
(Unaudited)
|
|
|
Number of Company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
1,043
|
|
|
|
984
|
|
|
|
59
|
|
EMEA/APAC
|
|
|
294
|
|
|
|
292
|
|
|
|
2
|
|
Latin America
|
|
|
92
|
|
|
|
84
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurants
|
|
|
1,429
|
|
|
|
1,360
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
6,491
|
|
|
|
6,528
|
|
|
|
(37
|
)
|
EMEA/APAC
|
|
|
3,019
|
|
|
|
2,759
|
|
|
|
260
|
|
Latin America
|
|
|
986
|
|
|
|
918
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise restaurants
|
|
|
10,496
|
|
|
|
10,205
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of system-wide restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
7,534
|
|
|
|
7,512
|
|
|
|
22
|
|
EMEA/APAC
|
|
|
3,313
|
|
|
|
3,051
|
|
|
|
262
|
|
Latin America
|
|
|
1,078
|
|
|
|
1,002
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total system-wide restaurants
|
|
|
11,925
|
|
|
|
11,565
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion together with
Part II, Item 6 Selected Financial Data
and our audited consolidated financial statements and the
related notes thereto included in Item 8 Financial
Statements and Supplementary Data. In addition to
historical consolidated financial information, this discussion
contains forward-looking statements that reflect our plans,
estimates and beliefs. Actual results could differ from these
expectations as a result of factors including those described
under Item 1A, Risk Factors, Special Note
Regarding Forward-Looking Statements and elsewhere in this
Form 10-K.
References to fiscal 2010, fiscal 2009, fiscal 2008 and
fiscal 2007 in this section are to our fiscal year ending
June 30, 2010 and our fiscal years ended June 30,
2009, 2008 and 2007, respectively. Unless otherwise stated,
comparable sales growth, average restaurant sales and sales
growth are presented on a system-wide basis, which means that
these measures include sales at both Company restaurants and
franchise restaurants. Franchise sales represent sales at all
franchise restaurants and are revenues to our franchisees. We do
not record franchise sales as revenues; however, our franchise
revenues include royalties based on sales. System-wide results
are driven primarily by our franchise restaurants, as
approximately 90% of our system-wide restaurants are
franchised.
Overview
We operate in the fast food hamburger restaurant, or FFHR,
category of the quick service restaurant, or QSR, segment of the
restaurant industry. We are the second largest FFHR chain in the
world as measured by number of restaurants and system-wide
sales. Our system of restaurants includes restaurants owned by
us, as well as our franchisees. Our business operates in three
reportable segments: the United States and Canada; Europe, the
Middle East, Africa and Asia Pacific, or EMEA/APAC; and Latin
America.
Approximately 90% of our restaurants are franchised, and we do
not expect the percentage of franchise restaurants to change
significantly as we implement our growth strategy. We believe
that this restaurant ownership
43
mix is beneficial to us because the capital required to grow and
maintain our system is funded primarily by franchisees while
giving us a sizable base of company restaurants to demonstrate
credibility with franchisees in launching new initiatives.
However, our franchise dominated business model also presents a
number of drawbacks and risks, such as our limited influence
over franchisees and limited ability to facilitate changes in
restaurant ownership. In addition, our operating results are
closely tied to the success of our franchisees, and we are
dependent on franchisees to open new restaurants and remodel
their existing restaurants as part of our growth strategy.
Our international operations are impacted by fluctuations in
currency exchange rates. In Company markets located outside of
the U.S., we generate revenues and incur expenses denominated in
local currencies. These revenues and expenses are translated
using the average rates during the period in which they are
recognized, and are impacted by changes in currency exchange
rates. In many of our franchise markets, our franchisees pay
royalties to us in currencies other than the local currency in
which they operate; however, as the royalties are calculated
based on local currency sales, our revenues are still impacted
by fluctuations in currency exchange rates.
Revenues
In fiscal 2009, segment revenues and income from operations,
excluding unallocated corporate general and administrative
expenses, were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Income from Operations
|
|
|
Segment:
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
69
|
%
|
|
|
74
|
%
|
EMEA/APAC
|
|
|
27
|
%
|
|
|
18
|
%
|
Latin America
|
|
|
4
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We generate revenues from three sources: retail sales at Company
restaurants; franchise revenues, consisting of royalties based
on a percentage of sales reported by franchise restaurants and
franchise fees paid to us by our franchisees; and property
income from restaurants that we lease or sublease to
franchisees. In fiscal 2009, Company restaurant revenues and
franchise revenues represented 74% and 21% of total revenues,
respectively. The remaining 5% of total revenues was derived
from property income.
Restaurant sales are typically higher in the spring and summer
months (our fourth and first fiscal quarters) when the weather
is warmer than in the fall and winter months (our second and
third fiscal quarters). Restaurant sales during the winter are
typically highest in December, during the holiday shopping
season. Our restaurant sales and Company restaurant margin are
typically lowest during our third fiscal quarter, which occurs
during the winter months and includes February, the shortest
month of the year.
Our sales are heavily influenced by brand advertising, menu
selection and initiatives to improve restaurant operations.
Company restaurant revenues are affected by comparable sales,
timing of Company restaurant openings and closures, acquisitions
by us of franchise restaurants and sales of Company restaurants
to franchisees, or refranchisings. In fiscal 2009,
franchise restaurants generated 87% of system-wide sales. We do
not record franchise sales as revenues. However, royalties paid
by franchisees are based on a percentage of franchise sales and
are recorded as franchise revenues.
Expenses
Company restaurants incur three types of operating expenses:
(i) food, paper and other product costs, which represent
the costs of the products that we sell to customers in Company
restaurants; (ii) payroll and employee benefits costs,
which represent the wages paid to Company restaurant managers
and staff, as well as the cost of their health insurance, other
benefits and training; and (iii) occupancy and other
operating costs, which represent all other direct costs of
operating our Company restaurants, including the cost of rent or
real estate depreciation (for restaurant properties owned by
us), depreciation on equipment, repairs and maintenance,
insurance, restaurant supplies and utilities. As average
restaurant sales increase, we can leverage payroll and employee
benefits costs and occupancy and other costs, resulting in a
direct improvement in restaurant profitability. As a result, we
believe our
44
continued focus on increasing average restaurant sales will
result in long-term improved profitability to our restaurants
system-wide.
We promote our brand and products by advertising in all the
countries and territories in which we operate. In countries
where we have Company restaurants, such as the United States,
Canada, the U.K. and Germany, we manage an advertising fund for
that country by collecting required advertising contributions
from Company and franchise restaurants and purchasing
advertising and other marketing initiatives on behalf of all
Burger King restaurants in that country. These
advertising contributions are based on a percentage of sales at
Company and franchise restaurants. We do not record advertising
contributions collected from franchisees as revenues, or
expenditures of these contributions as expenses. Amounts which
are contributed to the advertising funds by Company restaurants
are recorded as selling expenses. In countries where we manage
an advertising fund, we plan the marketing calendar in advance
based on expected contributions into the fund for that year. To
the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are recorded
as accrued advertising liability on our consolidated balance
sheets. We may also make discretionary contributions into these
funds, which are also recorded as selling expenses. In the past,
we have made discretionary contributions to fund deficit
balances of the advertising funds.
Our selling, general and administrative expenses include the
costs of field management for Company and franchise restaurants;
costs of our operational excellence programs (including program
staffing, training and Clean & Safe certifications);
corporate overhead, including corporate salaries and facilities;
advertising and bad debt expenses, net of recoveries; and
amortization of intangible assets. We believe that our current
staffing and structure will allow us to expand our business
globally without increasing general and administrative expenses
significantly.
Property expenses include costs of depreciation and rent on
properties we lease and sublease to franchisees.
Other operating (income) expenses, net include income and
expenses that are not directly derived from the Companys
primary business such as gains and losses on asset and business
disposals, write-offs associated with Company restaurant
closures, impairment charges, settlement losses recorded in
connection with acquisitions of franchise operations, gains and
losses on foreign currency transactions, gains and losses on
foreign currency forward contracts and other miscellaneous items.
Fiscal
2009 Highlights
Highlights of our fiscal 2009 performance include:
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|
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|
|
continued acceleration of system-wide restaurant growth with
360 net new openings during fiscal 2009, the highest in
almost a decade; over 90% of the increase came from markets
outside the United States and Canada, the best international
development year in our history;
|
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|
|
all-time high annual worldwide revenues of $2.5 billion for
fiscal 2009, a 3% increase from the prior year;
|
|
|
|
worldwide average restaurant sales for fiscal 2009 of
$1.3 million system-wide, which includes the unfavorable
impact of currency exchange rates of $55,000;
|
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|
|
net growth of 22 restaurants in the United States and Canada,
the second year in a row that we have increased our restaurant
count in this segment;
|
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|
|
worldwide system restaurant count of 11,925 at June 30,
2009, our highest restaurant count in the history of the brand;
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|
|
the opening of the first restaurant in the Czech Republic and
Suriname and our re-entry into Uruguay, which brings the number
of countries and U.S. territories in which we operate to 73;
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|
|
successful execution of our portfolio management strategy,
including strategic acquisitions of 87 restaurants and 51
refranchisings;
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|
named by Ad Week magazine in December 2008 as one of the
top three industry-changing advertisers in the last three
decades along with
NIKE®
and Budweiser;
|
45
|
|
|
|
|
new product offerings such as BK Fresh Apple Fries, which
received the Kid Friendly Product of the Year award
from the Glycemic Research Institute (GRI) in
Washington, D.C., and
Kraft®
Macaroni and Cheese;
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continued high guest satisfaction scores, as well as high speed
of service and cleanliness scores; and
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net income up 6% to $200.1 million and diluted earnings per
share up 6% to $1.46 per share for fiscal 2009 compared to
fiscal 2008.
|
Key
Business Measures
We use three key business measures as indicators of the
Companys operational performance: comparable sales growth,
average restaurant sales and sales growth. These measures are
important indicators of the overall direction, trends of sales
and the effectiveness of the Companys advertising,
marketing and operating initiatives and the impact of these on
the entire Burger King system. Comparable sales growth
and sales growth are provided by reportable segments and are
analyzed on a constant currency basis, which means they are
calculated using the same exchange rate over the periods under
comparison to remove the effects of currency fluctuations from
these trend analyses. We believe these constant currency
measures provide a more meaningful analysis of our business by
identifying the underlying business trend, without distortion
from the effect of currency movements.
Comparable
Sales Growth
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period in the prior year for
restaurants that have been open for 13 months or longer as
of the end of the most recent period. Company comparable sales
growth refers to comparable sales growth for Company restaurants
and franchise comparable sales growth refers to comparable sales
growth for franchise restaurants, in each case by reportable
segment. We believe comparable sales growth is a key indicator
of our performance, as influenced by our strategic initiatives
and those of our competitors.
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|
|
For the
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In constant currencies)
|
|
|
Company Comparable Sales Growth:
|
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|
|
|
|
|
|
|
|
|
|
|
United States & Canada
|
|
|
0.5
|
%
|
|
|
2.6
|
%
|
|
|
2.1
|
%
|
EMEA/APAC
|
|
|
0.1
|
%
|
|
|
3.8
|
%
|
|
|
2.2
|
%
|
Latin America
|
|
|
(3.2
|
)%
|
|
|
1.8
|
%
|
|
|
1.1
|
%
|
Total Company Comparable Sales Growth
|
|
|
0.3
|
%
|
|
|
2.9
|
%
|
|
|
2.1
|
%
|
Franchise Comparable Sales Growth:
|
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|
|
|
|
|
|
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|
United States & Canada
|
|
|
0.4
|
%
|
|
|
5.8
|
%
|
|
|
3.8
|
%
|
EMEA/APAC
|
|
|
3.3
|
%
|
|
|
5.6
|
%
|
|
|
3.1
|
%
|
Latin America
|
|
|
2.3
|
%
|
|
|
4.5
|
%
|
|
|
3.7
|
%
|
Total Franchise Comparable Sales Growth
|
|
|
1.4
|
%
|
|
|
5.7
|
%
|
|
|
3.6
|
%
|
System-wide Comparable Sales Growth:
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|
|
|
|
|
|
|
|
|
|
|
|
United States & Canada
|
|
|
0.4
|
%
|
|
|
5.4
|
%
|
|
|
3.6
|
%
|
EMEA/APAC
|
|
|
2.9
|
%
|
|
|
5.4
|
%
|
|
|
3.0
|
%
|
Latin America
|
|
|
1.9
|
%
|
|
|
4.3
|
%
|
|
|
3.5
|
%
|
Total System-wide Comparable Sales Growth
|
|
|
1.2
|
%
|
|
|
5.4
|
%
|
|
|
3.4
|
%
|
Our comparable sales growth in fiscal 2009 and fiscal 2008 was
driven by our strategic initiatives related to our global growth
pillars marketing, products, operations and
development including our barbell menu strategy of
innovative indulgent products and value menu items and continued
development of our breakfast and late night dayparts. Despite
positive comparable sales growth across all reportable segments
during fiscal 2009, comparable sales for the period were
negatively impacted by significant traffic declines during the
third and forth quarters across many of the markets in which we
operate, driven by continued adverse macroeconomic conditions,
including higher
46
unemployment, more customers eating at home, heavy discounting
by other restaurant chains and the H1N1 flu pandemic.
Comparable sales growth in the United States and Canada for
fiscal 2009 was driven primarily by our strategic pricing
initiatives and barbell menu strategy focusing on indulgent
products and value offerings. However, comparable sales for the
period were negatively impacted by significant traffic declines
during the third and fourth quarters, driven by continued
adverse macroeconomic conditions, including higher unemployment,
more customers eating at home and heavy discounting by other
restaurant chains. Products and promotions featured during
fiscal 2009 include BK Burger Shots and BK Breakfast
Shots, Whopper sandwich limited time offers, such as
Transform your Whopper, the introduction of
the new
BK®
Kids Meal (including
Kraft®
Macaroni and Cheese and BK Fresh Apple Fries), the
Angry Whopper sandwich, the Steakhouse Burger, the Spicy
Chicken BK
Wrapper®
and the Whopper Virgins and Whopper Sacrifice
marketing campaigns. SuperFamily promotions, such as Star
Trektm,
Transformerstm2,
Pokémontm,
Sponge Bob
SquarePantstm,
The
Simpsonstm,
iDogtm
and a
Nintendotm
giveaway promotional tie-in with the
BK®
Crown Card, also contributed to positive comparable sales.
Comparable sales growth in EMEA/APAC in fiscal 2009 reflected
positive sales performance in most major countries in this
segment, with the exception of Germany, which experienced
negative comparable sales growth during the period due to
significant traffic declines in the third and fourth quarters
caused by adverse economic conditions and heavy discounting by
our major competitor in Germany. Positive comparable sales were
driven primarily by our strategic pricing initiatives,
operational improvements, value-driven promotions such as the
King Deals in Germany, the U.K. and Spain and the
Whopper sandwich and Whopper Jr. sandwich value
meal promotions in Australia, as well as high quality indulgent
products such as Whopper sandwich limited time offers
throughout the segment, BK
Fusiontm
Real Ice Cream and the Long
Chickentm
sandwich limited time offer in Spain. SuperFamily promotions,
such as The
Simpsonstm,
iDogtm,
Crayolatm
and Secret
Palazztm,
positively impacted comparable sales for the fiscal year.
Comparable sales in EMEA/APAC for fiscal 2009 were negatively
impacted by traffic declines during the third and fourth
quarters, particularly in Germany.
Although comparable sales increased in Latin America in fiscal
2009, our sales performance was negatively impacted by
significant traffic declines in the third and fourth quarters,
particularly in Mexico, due to continued adverse socioeconomic
conditions and the resulting slowdown in tourism, the H1N1 flu
pandemic in Mexico and South America, the devaluation of local
currencies and lower influx of remittances from the
U.S. Comparable sales in fiscal 2009 were also adversely
affected by softer performance in Puerto Rico due to the
introduction of a VAT tax, which has negatively affected
disposable income. Products and promotions featured during the
fiscal year include the introduction of the Angry Whopper
sandwich throughout the region, the Chipotle Whopper
in Mexico, the
BK®
Stacker promotion in Argentina and Chile, the Crown
Whopper Jr. and Whopper Jackpot sweepstakes in
Puerto Rico, the Steakhouse Burger platform, including the
Mushroom & Swiss Steakhouse Burger in Central America,
Puerto Rico and the Caribbean and the new
BK®
Fish Wrap for the Lenten season. We continued to focus on value
with the Come Como Rey (Eat Like a King) everyday value
menu in Mexico, Central America and the Caribbean, the XL double
burger value promotion in Argentina, Chile and the Dominican
Republic and the double and triple Crown Whopper Jr.
sandwich promotion in Puerto Rico. In addition, our regional
Latin Billboard music promotion in selected markets in the
region, the successful breakfast relaunch in Puerto Rico and
strong kids properties such as Star
Trektm,
Pokémontm,
Cabbage Patch
Kidstm,
Monster
Jamtm
and The Pink
Panthertm
positively impacted comparable sales.
In the United States and Canada, our comparable sales growth
performance increased in fiscal 2008 compared to fiscal 2007, as
a result of our innovative advertising, our barbell menu
strategy, which featured new indulgent products such as the
A-1
Steakhouse Burger, BBQ Bacon
Tendercrisp®
chicken sandwich and Homestyle Melts, as well as new
offerings on our BK Value Menu and BK Breakfast
Value Menu, such as the Spicy ChickN
Crisp®
sandwich and the Cheesy Bacon BK Wrapper. Our results
were also fueled by successful product promotions, such as the
Whopper
50th
anniversary promotion featuring the Whopper Freakout
media campaign in the United States and the Whopper
Superiority promotion, late-night hours and successful movie
tie-ins, such as The
Simpsonstm
Movie,
Transformerstm,
SpongeBob
SquarePantstm,
Snoopy®,
Indiana
Jonestm
and the Kingdom of the Crystal
Skulltm,
Iron
Mantm
and The Incredible
Hulktm.
47
Comparable sales growth in EMEA/APAC reflected positive sales
performance in all major countries in this segment for fiscal
2008. Strong comparable sales were driven primarily by continued
growth in EMEA due to our continued focus on operational
improvements, marketing and advertising, and on high quality
indulgent offerings, such as the limited time offer Angry
Whopper sandwich and Aberdeen Angus Burger, the continued
success of the King Ahorro value menu in Spain and the
BK Fusion Real Dairy Ice Cream offerings in the U.K.
Latin America demonstrated strong results in comparable sales
for fiscal 2008 compared to fiscal 2007. The improvement in
comparable sales reflects continued strength in Central America
and South America, driven by sales of higher margin indulgent
products, such as the Steakhouse Burger, Extreme Whopper
sandwich and BK Stacker sandwich and Whopper
sandwich limited time offers. In addition, promotional
tie-ins with global marketing properties, such as The
Simpsonstm
Movie,
Transformerstm,
Scooby
Dootm,
Snoopy®,
Indiana
Jonestm
and the Kingdom of the Crystal
Skulltm
and Iron
Mantm
as well as combo meal offerings also drove sales. This increase
was partially offset by softer performance in Puerto Rico due to
current economic conditions in that U.S. territory as well
as the introduction of a VAT tax which has negatively affected
disposable income.
Average
Restaurant Sales
Average restaurant sales, or ARS, is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. ARS is influenced mostly
by comparable sales performance and restaurant openings and
closures and also includes the impact of movement in currency
exchange rates.
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|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Average Restaurant Sales
|
|
$
|
1,259
|
|
|
$
|
1,301
|
|
|
$
|
1,193
|
|
Our ARS decreased during fiscal 2009, primarily a result of a
$55,000 unfavorable impact from the movement of currency
exchange rates, partially offset by worldwide comparable sales
growth of 1.2% (in constant currencies).
Our ARS improvement during fiscal 2008 was primarily due to
improved worldwide comparable sales growth of 5.4% (in constant
currencies) for the period as discussed above, the opening of
new restaurants with higher than average sales volumes, a
$32,000 favorable impact from the movement of foreign currency
exchange rates, primarily in EMEA, and, to a lesser extent, the
closure of under-performing restaurants.
Sales
Growth
Sales growth refers to the change in sales at all Company and
franchise restaurants from one period to another. Sales growth
is an important indicator of the overall direction and trends of
sales and income from operations on a system-wide basis. Sales
growth is influenced by restaurant openings and closures and
comparable sales growth, as well as the effectiveness of our
advertising and marketing initiatives and featured products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In constant currencies)
|
|
|
Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
1.2
|
%
|
|
|
6.0
|
%
|
|
|
3.0
|
%
|
EMEA/APAC
|
|
|
9.7
|
%
|
|
|
12.6
|
%
|
|
|
7.9
|
%
|
Latin America
|
|
|
8.5
|
%
|
|
|
13.1
|
%
|
|
|
13.3
|
%
|
Total System-wide Sales Growth
|
|
|
4.2
|
%
|
|
|
8.3
|
%
|
|
|
4.9
|
%
|
Sales growth continued on a positive trend during fiscal 2009
and 2008, as comparable sales and restaurant count continued to
increase on a system-wide basis.
Our sales growth in the United States and Canada during fiscal
2009 reflects comparable sales growth and the net increase in
the number of restaurants. We had 7,534 restaurants in the
United States and Canada as of June 30,
48
2009, compared to 7,512 restaurants as of June 30, 2008,
reflecting a less than 1% increase in the number of restaurants.
Our sales growth in the United States and Canada during fiscal
2008, reflects positive comparable sales growth and an increase
in the amount of revenues earned by new restaurants. We had
7,512 restaurants in the United States and Canada as of
June 30, 2008, compared to 7,488 restaurants as of
June 30, 2007.
EMEA/APAC demonstrated sales growth during fiscal 2009,
reflecting net openings of new restaurants and comparable sales
growth in most major markets with the exception of Germany,
where adverse macroeconomic conditions have resulted in negative
comparable sales growth. We had 3,313 restaurants in EMEA/APAC
as of June 30, 2009, compared to 3,051 restaurants as of
June 30, 2008, a 9% increase in the number of restaurants.
EMEA/APAC demonstrated strong sales growth during fiscal 2008
reflecting net openings of new restaurants and comparable sales
growth in most major markets. We had 3,051 restaurants in
EMEA/APAC as of June 30, 2008, compared to 2,892
restaurants as of June 30, 2007, a 5% increase in the
number of restaurants.
Latin Americas sales growth was driven by new restaurant
openings and positive comparable sales in fiscal 2009. We had
1,078 restaurants in Latin America as of June 30, 2009,
compared to 1,002 restaurants as of June 30, 2008, an 8%
increase in the number of restaurants.
Latin Americas sales growth was driven by new restaurant
openings and strong comparable sales growth in fiscal 2008.
Factors
Affecting Comparability of Results
Termination
of Global Headquarters Lease
In May 2007, BKC terminated the lease for its proposed new
global headquarters facility, which was to be constructed in
Coral Gables, Florida (the Coral Gables Lease). We
determined that remaining at our current headquarters location
would avoid the cost and disruption of moving to a new facility
and that the current headquarters facility would continue to
meet our needs for a global headquarters more effectively and
cost efficiently. The Coral Gables Lease provided for the lease
of approximately 225,000 square feet for a term of
15 years at an estimated initial annual rent of
approximately $5.6 million per year, subject to
escalations. By terminating the Coral Gables Lease, we estimated
at the time of the transaction savings of approximately
$24.0 million in future rent payments between October 2008
and September 2018 and approximately $23.0 million of
tenant improvements and moving costs, which were expected to be
paid over an
18-month
period. Total costs associated with the termination of the Coral
Gables Lease were $6.7 million, including a termination fee
of $5.0 million we paid to the landlord, which includes a
reimbursement of the landlords expenses. See
Note 20 to the Consolidated Financial Statements in
Part II, Item 8 of this
Form 10-K.
These costs are reflected in other operating (income)
expense, net in our consolidated statements of income for fiscal
2007.
49
Results
of Operations
The following table presents our results of operations for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
Increase/
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(Decrease)
|
|
|
Amount
|
|
|
(Decrease)
|
|
|
|
(In millions, except percentages and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
|
|
5
|
%
|
|
$
|
1,658.0
|
|
|
|
8
|
%
|
Franchise revenues
|
|
|
543.4
|
|
|
|
537.2
|
|
|
|
1
|
%
|
|
|
459.5
|
|
|
|
17
|
%
|
Property revenues
|
|
|
113.5
|
|
|
|
121.6
|
|
|
|
(7
|
)%
|
|
|
116.2
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,537.4
|
|
|
|
2,454.7
|
|
|
|
3
|
%
|
|
|
2,233.7
|
|
|
|
10
|
%
|
Company restaurant expenses
|
|
|
1,643.7
|
|
|
|
1,538.0
|
|
|
|
7
|
%
|
|
|
1,409.4
|
|
|
|
9
|
%
|
Selling, general and administrative expenses
|
|
|
490.4
|
|
|
|
499.5
|
|
|
|
(2
|
)%
|
|
|
473.5
|
|
|
|
5
|
%
|
Property expenses
|
|
|
58.1
|
|
|
|
62.1
|
|
|
|
(6
|
)%
|
|
|
60.6
|
|
|
|
2
|
%
|
Other operating (income) expenses, net
|
|
|
5.8
|
|
|
|
0.9
|
|
|
|
NM
|
|
|
|
(4.4
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,198.0
|
|
|
|
2,100.5
|
|
|
|
5
|
%
|
|
|
1,939.1
|
|
|
|
8
|
%
|
Income from operations
|
|
|
339.4
|
|
|
|
354.2
|
|
|
|
(4
|
)%
|
|
|
294.6
|
|
|
|
20
|
%
|
Interest expense, net
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
(11
|
)%
|
|
|
67.0
|
|
|
|
(9
|
)%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
NM
|
|
|
|
0.8
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.8
|
|
|
|
293.0
|
|
|
|
(3
|
)%
|
|
|
226.8
|
|
|
|
29
|
%
|
Income tax expense
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
(18
|
)%
|
|
|
78.7
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
|
6
|
%
|
|
$
|
148.1
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended June 30, 2009 Compared to Fiscal Year Ended
June 30, 2008
Revenues
Company
restaurant revenues
Company restaurant revenues increased by $84.6 million, or
5%, to $1,880.5 million in fiscal 2009, compared to the
prior fiscal year. This increase was primarily due to a net
increase of 69 Company restaurants (net of closures and sales of
Company restaurants to franchisees, or
refranchisings), including the net acquisition of 36
franchise restaurants during fiscal 2009, partially offset by
$80.5 million of unfavorable impact from the significant
movement of currency exchange rates.
In the United States and Canada, Company restaurant revenues
increased by $159.9 million, or 14%, to
$1,331.8 million in fiscal 2009, compared to the prior
fiscal year. This increase was primarily a result of a net
increase of 59 Company restaurants during fiscal 2009, including
the net acquisition of 42 franchise restaurants, partially
offset by $20.6 million of unfavorable impact from the
movement of currency exchange rates in Canada.
In EMEA/APAC, Company restaurant revenues decreased by
$66.3 million, or 12%, to $488.6 million in fiscal
2009 compared to the prior fiscal year. This decrease was
primarily due to a $50.0 million unfavorable impact from
the movement of currency exchange rates and lost Company
restaurant revenues due to the refranchising of restaurants in
the prior year, primarily in Germany and the U.K. as part of our
ongoing portfolio management initiative.
In Latin America, Company restaurant revenues decreased by
$9.0 million, or 13%, to $60.1 million in fiscal 2009,
compared to the prior fiscal year, primarily due to
$10.0 million of unfavorable impact from the movement of
50
currency exchange rates and negative Company comparable sales
growth of 3.2% (in constant currencies). However, this decrease
was largely offset by a net increase of eight Company
restaurants during fiscal 2009.
Franchise
revenues
Total franchise revenues increased by $6.2 million, or 1%,
to $543.4 million in fiscal 2009, compared to the prior
fiscal year, primarily due to the net increase of 291 franchise
restaurants during fiscal 2009, worldwide franchise comparable
sales growth of 1.4% (in constant currencies) and a higher
effective royalty rate in the U.S. These factors were
partially offset by a $24.2 million unfavorable impact from
the movement of currency exchange rates.
In the United States and Canada, franchise revenues increased by
$5.2 million, or 2%, to $323.1 million in fiscal 2009,
compared to the prior fiscal year. This increase was the result
of a higher effective royalty rate in the U.S., partially offset
by the loss of royalties from 37 fewer franchise restaurants
compared to the same period in the prior year, primarily due to
the net acquisition of 42 franchise restaurants by the Company,
and a $1.0 million unfavorable impact from the movement of
currency exchange rates in Canada.
In EMEA/APAC, franchise revenues increased by $0.4 million,
or 0.2%, to $173.4 million in fiscal 2009, compared the
prior fiscal year. This increase was primarily driven by a net
increase of 260 franchise restaurants during fiscal 2009 and
franchise comparable sales growth of 3.3% (in constant
currencies). These factors were largely offset by a
$20.4 million unfavorable impact from the movement of
currency exchange rates.
Latin America franchise revenues increased by $0.6 million,
or 1%, to $46.9 million in fiscal 2009, compared to the
prior fiscal year. This increase was primarily a result of the
net addition of 68 franchise restaurants during fiscal 2009 and
franchise comparable sales growth of 2.3% (in constant
currencies). However, these factors were largely offset by a
$2.8 million unfavorable impact from the movement of
currency exchange rates.
Property
Revenues
Total property revenues decreased by $8.1 million, or 7%,
to $113.5 million for fiscal 2009, compared to the prior
fiscal year, primarily due to a $5.9 million unfavorable
impact from the movement of currency exchange rates and the
reduction in the number of properties in our portfolio, which
includes the impact of the closure or acquisition of restaurants
leased to franchisees. These factors were partially offset by
positive worldwide franchise comparable sales growth, which
resulted in increased revenues from percentage rents.
In the United States and Canada, property revenues decreased by
$0.6 million, or 1%, to $88.1 million for fiscal 2009,
compared to the prior fiscal year, primarily as a result of the
reduction in the number of properties in our portfolio and a
$0.7 million unfavorable impact from the movement of
currency exchange rates. This decrease was partially offset by
increased revenues from percentage rents as a result of positive
franchise comparable sales growth.
In EMEA/APAC, property revenues decreased by $7.5 million,
or 23%, to $25.4 million for fiscal 2009, compared to the
prior year, primarily due to a $5.2 million unfavorable
impact from the movement of currency exchange rates and the
reduction in the number of properties in our portfolio. These
factors were partially offset by increased revenues from
percentage rents as a result of positive franchise comparable
sales growth.
Operating
Costs and Expenses
Food,
paper and product costs
Total food, paper and product costs increased by
$39.4 million, or 7%, to $603.7 million in fiscal
2009, primarily as a result of the net addition of 69 Company
restaurants during the twelve months ended June 30, 2009,
and significant increases in commodity costs, including the
negative currency exchange impact of cross border purchases
which occurs in Canada, Mexico and the U.K. when our suppliers
purchase goods in currency other than the local currency in
which they operate and pass on all, or a portion of the currency
exchange impact to us. These factors were partially offset by a
$26.1 million favorable impact from the movement of
currency exchange rates. As
51
a percentage of Company restaurant revenues, food, paper and
product costs increased by 0.7% to 32.1%, primarily due to the
increase in commodity costs noted above, partially offset by the
impact of strategic pricing initiatives.
In the United States and Canada, food, paper and product costs
increased by $58.8 million, or 15%, to $440.0 million
in fiscal 2009, primarily as a result of the net addition of 59
Company restaurants during fiscal 2009, as well as significant
increases in commodity costs, including the negative currency
exchange impact of cross border purchases in Canada, partially
offset by a $7.4 million favorable impact from the movement
of currency exchange rates. Food, paper and product costs as a
percentage of Company restaurant revenues increased 0.5% to
33.0%, primarily due to an increase in the cost of beef, cheese,
chicken and other food costs, including the currency exchange
impact of cross border purchases in Canada, partially offset by
the impact of strategic pricing initiatives.
The cost of many of our core commodities reached historical
highs in the United States and Canada during the first quarter
of fiscal 2009; however, commodity and other food costs
moderated throughout the remainder of fiscal 2009.
In EMEA/APAC, food, paper and product costs decreased by
$17.6 million, or 11%, to $140.6 million for fiscal
2009, primarily as a result of the favorable impact from the
movement of currency exchange rates of $14.7 million and
the refranchising of Company restaurants in the prior year,
primarily in Germany and the U.K., partially offset by an
increase in commodity costs, including the negative currency
exchange impact of cross border purchases. Food, paper and
product costs as a percentage of Company restaurant revenues
increased 0.3% to 28.8%, primarily due to a significant increase
in commodity costs, partially offset by the impact of strategic
pricing initiatives.
In Latin America, food, paper and product costs decreased by
$1.8 million, or 7%, to $23.1 million for fiscal 2009,
compared to the same period in the prior year, as a result of
the benefits derived from the favorable impact from the movement
of currency exchange rates of $4.0 million, offset by the
net addition of eight Company restaurants during fiscal 2009 and
an increase in commodity costs, including the negative currency
exchange impact of cross border purchases in Mexico and the
indexing of local purchases to the U.S. dollar. Food, paper
and product costs as a percentage of Company restaurant revenues
increased by 1.7% to 38.4% primarily due to the increase in
commodity costs as noted above, partially offset by the impact
of strategic pricing initiatives.
Payroll
and employee benefits costs
Total payroll and employee benefits costs increased by
$47.5 million, or 9%, to $582.2 million in fiscal
2009, primarily due to the net addition of 69 Company
restaurants during fiscal 2009, as well as increased labor costs
in the United States and Canada and EMEA, partially offset by a
$24.0 million favorable impact from the movement of
currency exchange rates. As a percentage of Company restaurant
revenues, payroll and employee benefits costs increased by 1.2%
to 31.0%, primarily as a result of increased labor costs in EMEA
and the United States and Canada, partially offset by positive
worldwide Company comparable sales growth of 0.3% (in constant
currencies).
In the United States and Canada, payroll and employee benefits
costs increased by $58.2 million, or 16%, to
$414.9 million in fiscal 2009, primarily as a result of the
net addition of 59 Company restaurants during fiscal 2009 and
increased labor costs resulting from the negative impact from
decreased traffic and increased staffing and training on
acquired restaurants, partially offset by a $6.8 million
favorable impact from the movement of currency exchange rates in
Canada. As a percentage of Company restaurant revenues, payroll
and employee benefits costs increased by 0.6% to 31.1%,
primarily due to labor inefficiencies noted above, partially
offset by benefits derived from positive Company comparable
sales growth of 0.5% (in constant currencies).
In EMEA/APAC, payroll and employee benefits costs decreased by
$9.8 million, or 6% to $159.9 million in fiscal 2009,
primarily as a result of a $16.0 million favorable impact
from the movement of currency exchange rates and the
refranchising of Company restaurants in the prior year,
primarily in Germany and the U.K., partially offset by
government mandated and contractual wage and benefits increases
in Germany. As a percentage of Company restaurant revenues,
payroll and employee benefits costs increased by 2.2% to 32.7%,
primarily as a result of increases in labor costs in Germany.
In Latin America, payroll and employee benefits costs decreased
by $0.9 million, or 11% to $7.4 million in fiscal
2009, compared to the same period in the prior fiscal year as a
result of a $1.2 million favorable impact from
52
the movement of currency exchange rates, partially offset by the
net addition of eight Company restaurants during fiscal 2009.
Payroll and employee benefits costs as a percentage of Company
restaurant revenues increased by 0.5% to 12.3%, primarily as a
result of negative Company comparable sales growth of (3.2%) (in
constant currencies).
Occupancy
and other operating costs
Occupancy and other operating costs increased by
$18.8 million, or 4%, to $457.8 million in fiscal
2009, primarily as a result of the net addition of 69 Company
restaurants during fiscal 2009, increased rents and utility
costs,
start-up
costs related to new and acquired Company restaurants in the
U.S. and the write-off of unfavorable leases in the prior
year, primarily in Mexico, partially offset by a reduction in
the amount of accelerated depreciation related to the reimaging
of Company restaurants in the United States and Canada and a
$22.4 million favorable impact from the movement of
currency exchange rates. As a percentage of Company restaurant
revenues, occupancy and other operating costs remained
relatively unchanged at 24.3%, primarily as a result of the
benefits derived from positive worldwide Company comparable
sales growth of 0.3% (in constant currencies) and the prior year
accelerated depreciation expense noted above, offset by
increased rents and the write-off of unfavorable leases in the
prior year, as noted above.
In the United States and Canada, occupancy and other operating
costs increased by $35.7 million, or 13%, to
$306.8 million in fiscal 2009, primarily as a result of the
net addition of 59 Company restaurants during fiscal 2009, which
represents a 6% increase in the number of Company restaurants in
this segment year over year, increased rents and utility costs,
increased repairs and maintenance costs, increased casualty
insurance and
start-up
costs related to new and acquired Company restaurants, partially
offset by a reduction in the amount of accelerated depreciation
as noted above and a $5.2 million favorable impact from the
movement of currency exchange rates in Canada. As a percentage
of Company restaurant revenues, occupancy and other operating
costs remained unchanged at 23.1% with the benefits derived from
positive Company comparable sales growth of 0.5% (in constant
currencies) and the prior year accelerated depreciation expense
noted above, offset by increased rents and
start-up
costs related to new and acquired Company restaurants.
In EMEA/APAC, occupancy and other operating costs decreased by
$16.7 million, or 11%, to $133.2 million in fiscal
2009, primarily due to a $14.4 million favorable impact
from the movement in currency exchange rates, a reduction in
payments made to third parties for services currently performed
by our employees, decreased repairs and maintenance costs and
the refranchising of Company restaurants in the prior year,
primarily in Germany and the U.K., partially offset by increased
rents. As a percentage of Company restaurant revenues, occupancy
and other operating costs remained relatively unchanged at
27.3%, with the benefits from reduced payments for services
performed by third parties in the prior year as noted above,
decreased repairs and maintenance costs and the closure of
under-performing restaurants and the refranchising of Company
restaurants in the U.K. (including benefits from the release of
unfavorable lease obligations), offset by increased rents.
In Latin America, occupancy and other operating costs decreased
by $0.2 million, or 1%, to $17.8 million in fiscal
2009, primarily as a result of a $2.8 million favorable
impact from the movement in currency exchange rates, partially
offset by the net addition of eight Company restaurants during
fiscal 2009, increased rents and utility costs and the write-off
of unfavorable leases in the prior year. As a percentage of
Company restaurant revenues, occupancy and other operating costs
increased by 3.6% to 29.7% as a result of increased utility
costs, the write-off of unfavorable leases as noted above, and
negative Company comparable sales growth of 3.2% (in constant
currencies).
Selling,
general and administrative expenses
Selling expenses increased by $1.8 million, or 2%, to
$93.3 million for fiscal 2009, compared to the prior fiscal
year. The increase, which was primarily driven by an increase in
sales and promotional expenses of $8.2 million as a result
of increased sales at our Company restaurants, was partially
offset by a $4.0 million favorable impact from the movement
of currency exchange rates and $2.5 million due to lower
local marketing expenditures primarily in EMEA.
General and administrative expenses decreased by
$10.9 million, or 3%, to $397.1 million for fiscal
2009, compared to the prior fiscal year. The decrease was
primarily a result of a $14.9 million favorable impact from
the
53
movement of currency exchange rates, a $2.4 million
decrease in deferred compensation expense, which was fully
offset by net losses on investments held in the rabbi trust
recorded in other operating (income) expense, net, a
$1.8 million decrease in travel and meeting expenses and
$2.5 million of other miscellaneous benefits. These factors
were partially offset by an increase in stock compensation of
$5.0 million, an incremental increase of $3.1 million
in amortization of intangible assets associated with the
acquisition of restaurants, and a decrease in the amount of bad
debt recoveries, net of $2.6 million.
Property
Expenses
Total property expenses decreased by $4.0 million, or 6.4%,
to $58.1 million for fiscal 2009 compared to the same
period in the prior fiscal year, primarily as a result of a
$5.2 million favorable impact from the movement of currency
exchange rates and the net effect of changes to our property
portfolio, which includes the impact of the closure or
acquisition of restaurants leased to franchisees, partially
offset by an increase in percentage rent expense generated by
worldwide comparable franchise sales growth of 1.4% (in constant
currencies).
Other
operating (income) expense, net
Other operating expense, net, for fiscal 2009 of
$5.8 million includes $6.8 million of net expense
related to the remeasurement of foreign denominated assets and
the expense related to the use of forward contracts used to
hedge the currency exchange impact on such assets,
$3.9 million of net losses on investments held in the rabbi
trust, which were fully offset by a corresponding decrease in
deferred compensation expense reflected in general and
administrative expenses, $1.8 million of charges associated
with the acquisition of franchise restaurants primarily from a
large franchisee in the U.S. and $1.8 million of
miscellaneous expenses. These expenses were partially offset by
an $8.5 million gain from the disposal of assets and
restaurant closures, which includes the refranchising of Company
restaurants in the United States and Canada and EMEA.
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
341.8
|
|
|
$
|
348.2
|
|
EMEA/APAC
|
|
|
83.6
|
|
|
|
91.8
|
|
Latin America
|
|
|
37.8
|
|
|
|
41.4
|
|
Unallocated
|
|
|
(123.8
|
)
|
|
|
(127.2
|
)
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
339.4
|
|
|
$
|
354.2
|
|
|
|
|
|
|
|
|
|
|
Income from operations decreased by $14.8 million, or 4%,
to $339.4 million in fiscal 2009, primarily as a result of
an increase in other operating expense, net of
$4.9 million, a decrease in Company restaurant margin of
$21.1 million and a decrease in net property income of
$4.1 million. The decrease in income from operations was
partially offset by a $6.2 million increase in franchise
revenues, reflecting franchise comparable sales growth of 1.4%
(in constant currencies) and an increase in the effective
royalty rate in the U.S and a $9.1 million decrease in
selling, general and administrative expenses. (See Note 22
to our audited condensed consolidated financial statements for
segment information disclosed in accordance with
SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information).
For fiscal 2009, the unfavorable impact on revenues from the
movement of currency exchange rates was offset by the favorable
impact of currency exchange rates on Company restaurant expenses
and selling, general and administrative expenses, resulting in a
net unfavorable impact on income from operations of
$14.9 million.
In the United States and Canada, income from operations
decreased by $6.4 million, or 2%, to $341.8 million in
fiscal 2009, compared to the same period in the prior fiscal
year, primarily as a result of an increase in other
54
operating expense, net of $9.3 million, an increase in
selling, general and administrative expenses of
$7.3 million and a decrease in net property income of
$0.4 million, partially offset by an increase in Company
restaurant margin of $7.2 million and $5.2 million
increase in franchise revenues, reflecting franchise comparable
sales growth of 0.4% (in constant currencies) and an increase in
the effective royalty rate in the U.S.
In EMEA/APAC, income from operations decreased by
$8.2 million, or 9%, to $83.6 million in fiscal 2009,
primarily as a result of a decrease in Company restaurant margin
of $22.2 million, and a decrease in net property income of
$2.0 million, partially offset by an increase in other
operating income, net of $3.5 million, a $12.2 million
decrease in selling, general and administrative expenses and a
$0.4 million increase in franchise revenues, reflecting
franchise comparable sales growth of 3.3% (in constant
currencies). These factors reflect an $11.9 million
unfavorable impact from the movement of currency exchange rates.
In Latin America, income from operations decreased by
$3.6 million, or 9%, to $37.8 million in fiscal 2009,
primarily as a result of a decrease in Company restaurant margin
of $6.1 million, partially offset by a $0.9 million
decrease in selling, general and administrative expenses, a
decrease in other operating expense, net of $0.9 million
and a $0.6 million increase in franchise revenues, which
reflects franchise comparable sales growth of 2.3% (in constant
currencies). These factors reflect a $2.9 million
unfavorable impact from the movement of currency exchange rates.
Our unallocated corporate expenses decreased by
$3.4 million in fiscal 2009, compared to the same period in
the prior fiscal year, primarily as a result of a decrease in
general and administrative expenses attributable to savings from
cost containment initiatives.
Interest
Expense, net
Interest expense, net decreased by $6.6 million during
fiscal 2009, compared to the prior fiscal year, primarily
reflecting a decrease in rates paid on borrowings during the
period. The weighted average interest rates for the fiscal years
ended June 30, 2009 and 2008 were 5.1% and 6.02%,
respectively, which included the impact of interest rate swaps
on 70.6% and 56.0% of our term debt, respectively.
Income
Tax Expense
Income tax expense was $84.7 million in fiscal 2009,
resulting in an effective tax rate of 29.7% primarily due to the
resolution of federal and state audits and tax benefits realized
from the dissolution of dormant foreign entities.
See Note 15 to our consolidated financial statements for
further information regarding our effective tax rate. See
Item 1A Risk Factors in Part I of this
report for a discussion regarding our ability to utilize foreign
tax credits and estimate deferred tax assets.
Net
Income
Our net income increased by $10.5 million, or 6%, to
$200.1 million in fiscal 2009 compared to the same period
in the prior fiscal year, primarily as a result of an
$18.7 million decrease in income tax expense, increased
franchise revenues of $6.2 million, driven by a net
increase in restaurants and positive franchise comparable sales
growth, a $9.1 million decrease in selling, general and
administrative expenses and the benefit from a $6.6 million
decrease in interest expense, net. These factors were partially
offset by a net change of $4.9 million in other operating
expense, net, a decrease in Company restaurant margin of
$21.1 million and a decrease in net property income of
$4.1 million.
Fiscal
Year Ended June 30, 2008 Compared to Fiscal Year Ended
June 30, 2007
Revenues
Company
Restaurant Revenues
Total Company restaurant revenues increased by
$137.9 million, or 8%, to $1.8 billion in fiscal 2008,
primarily as a result of the addition of 57 Company restaurants
(net of closures and refranchisings) during fiscal 2008 and
worldwide Company comparable sales growth of 2.9% (in constant
currencies). Approximately $70.2 million, or
55
51%, of the increase in Company restaurant revenues was
generated by the favorable impact from the movement of foreign
currency exchange rates, primarily in EMEA.
In the United States and Canada, Company restaurant revenues
increased by $89.8 million, or 8%, to $1.2 billion in
fiscal 2008, primarily as a result of a net increase of 87
Company restaurants during fiscal 2008, including the
acquisition of 56 franchise restaurants in April 2008, and
Company comparable sales growth of 2.6% (in constant currencies)
for the period in this segment. Approximately
$16.4 million, or 18%, of the increase in Company
restaurant revenues was generated by the favorable impact from
the movement of foreign currency exchange rates in Canada.
In EMEA/APAC, Company restaurant revenues increased by
$39.7 million, or 8%, to $554.9 million in fiscal
2008, primarily as a result of Company comparable sales growth
of 3.8% (in constant currencies) for the period in this segment
and a $52.6 million favorable impact from the movement of
foreign currency exchange rates. Partially offsetting these
factors was a decrease in revenues from a net decrease of 37
Company restaurants during fiscal 2008, which was primarily
attributable to 15 closures and 16 refranchisings in the U.K.
In Latin America, Company restaurant revenues increased by
$8.4 million, or 14%, to $69.1 million in fiscal 2008,
primarily as a result of a net increase of seven Company
restaurants during fiscal 2008, Company comparable sales growth
of 1.8% (in constant currencies) for the period in this segment
and a $1.2 million favorable impact from the movement of
foreign currency exchange rates.
Franchise
Revenues
Total franchise revenues increased by $77.7 million, or
17%, to $537.2 million in fiscal 2008, driven by a net
increase of 225 franchise restaurants during fiscal 2008,
worldwide franchise comparable sales growth of 5.7% (in constant
currencies) for the period and a $16.2 million favorable
impact from the movement of foreign currency exchange rates.
In the United States and Canada, franchise revenues increased by
$34.3 million, or 12%, to $317.9 million in fiscal
2008, primarily as a result of franchise comparable sales growth
of 5.8% (in constant currencies) for the period in this segment
and higher effective royalty rates, partially offset by the
elimination of royalties from 63 fewer franchise
restaurants driven by acquisitions by the Company and closures
during fiscal 2008, including the acquisition of 56 franchise
restaurants in April 2008.
In EMEA/APAC, franchise revenues increased by
$37.9 million, or 28%, to $173.0 million in fiscal
2008, driven by a net increase of 196 franchise restaurants
during fiscal 2008, franchise comparable sales growth of 5.6%
(in constant currencies) for the period in this segment and a
$16.2 million favorable impact from the movement of foreign
currency exchange rates.
Latin America franchise revenues increased by $5.5 million,
or 13%, to $46.3 million in fiscal 2008, as a result of the
net addition of 92 franchise restaurants during fiscal 2008 and
franchise comparable sales growth of 4.5% (in constant
currencies) for the period in this segment.
Property
Revenues
Total property revenues increased by $5.4 million, or 5%,
to $121.6 million in fiscal 2008, primarily as a result of
worldwide franchise comparable sales growth of 5.7% (in constant
currencies) resulting in increased contingent rents and a
$2.0 million favorable impact from the movement of foreign
currency exchange rates, partially offset by the net effect of
changes to our property portfolio, which includes the impact of
the closure or acquisition of restaurants leased to franchisees.
In the United States and Canada, property revenues increased by
$3.5 million, or 4%, to $88.7 million in fiscal 2008.
This increase was driven by increased contingent rent payments
from increased franchise sales.
Our EMEA/APAC property revenues increased by $1.9 million,
or 6%, to $32.9 million, primarily from increased
contingent rents as a result of an increase in franchise sales
and a $1.6 million favorable impact from the movement of
foreign currency exchange rates, partially offset by the effect
of a net reduction in the number of properties we lease or
sublease to franchisees in EMEA.
56
Operating
Costs and Expenses
Food,
Paper and Product Costs
Total food, paper and product costs increased by
$65.1 million, or 13%, to $564.3 million in fiscal
2008, as a result of an 8% increase in Company restaurant
revenues, a significant increase in commodity costs and a
$21.0 million unfavorable impact from the movement of
foreign currency exchange rates, primarily in EMEA. As a
percentage of Company restaurant revenues, food, paper and
product costs increased 1.3% to 31.4%, primarily due to the
increase in commodity and other food costs in the United States
and Canada.
In the United States and Canada, food, paper and product costs
increased by $48.1 million, or 14%, to $381.2 million
in fiscal 2008, as a result of an 8% increase in Company
restaurant revenues in this segment, a significant increase in
commodity costs and a $5.7 million unfavorable impact from
the movement of foreign currency exchange rates. Food, paper and
product costs as a percentage of Company restaurant revenues
increased 1.7% to 32.5%, primarily due to an increase in beef,
cheese, chicken and other food costs, partially offset by sales
of higher margin products.
In EMEA/APAC, food, paper and product costs increased by
$14.3 million, or 10%, to $158.2 million in fiscal
2008, primarily as a result of an 8% increase in Company
restaurant revenues in this segment, an increase in commodity
costs and a $14.9 million unfavorable impact from the
movement of foreign currency exchange rates. Food, paper and
product costs as a percentage of Company restaurant revenues
increased 0.6% to 28.5%, reflecting the unfavorable impact from
product mix and commodity pressures during fiscal 2008.
In Latin America, food, paper and product costs increased by
$2.7 million, or 12%, to $24.9 million in fiscal 2008,
as a result of a 14% increase in Company restaurant revenues in
this segment. As a percentage of revenues, food, paper and
product costs remained relatively unchanged at 36.7% for fiscal
2008 compared to 36.6% for fiscal 2007.
Payroll
and Employee Benefits
Payroll and employee benefits costs increased by
$42.6 million, or 9%, to $534.7 million in fiscal
2008. This increase was primarily due to the net addition of 57
Company restaurants in fiscal 2008, additional labor needed to
service increased traffic, inflationary increases in salaries
and wages, increases in fringe benefit costs and a
$21.3 million unfavorable impact from the movement of
foreign currency exchange rates, primarily in EMEA. As a
percentage of Company restaurant revenues, payroll and employee
benefits costs remained relatively unchanged at 29.8% in fiscal
2008 compared to 29.7% in fiscal 2007, reflecting inflationary
increases in salaries and wages, partially offset by worldwide
Company comparable sales growth of 2.9% (in constant currencies)
for the period.
In the United States and Canada, payroll and employee benefits
costs increased by $27.6 million, or 8%, to
$356.7 million in fiscal 2008. This increase was primarily
due to the net addition of 87 Company restaurants in fiscal
2008, additional labor needed to service increased traffic,
inflationary increases in salaries and wages and a
$5.2 million unfavorable impact from the movement of
foreign currency exchange rates in Canada. As a percentage of
Company restaurant revenues, payroll and employee benefits costs
remained relatively unchanged at 30.5% in fiscal 2008 compared
to 30.4% in fiscal 2007, reflecting inflationary increases in
salaries and wages, partially offset by Company comparable sales
growth of 2.6% (in constant currencies) for the period in this
segment.
In EMEA/APAC, payroll and employee benefits costs increased by
$13.8 million, or 9%, to $169.7 million in fiscal
2008. This increase was primarily due to an increase in
temporary staffing, inflationary increases in salaries and
wages, increases in fringe benefit costs and a
$16.1 million unfavorable impact from the movement of
foreign currency exchange rates, partially offset by the net
reduction of 37 Company restaurants in fiscal 2008. As a
percentage of Company restaurant revenues, payroll and employee
benefits costs increased 0.2% to 30.5% as a result of
inflationary increases in salaries and wages and increases in
fringe benefit costs, partially offset by Company comparable
sales growth of 3.8% (in constant currencies) for the period in
this segment.
In Latin America, payroll and employee benefits increased by
$1.2 million, or 17%, to $8.3 million in fiscal 2008.
This increase was primarily due to a net increase of seven
Company restaurants during fiscal 2008. As a
57
percentage of Company restaurant revenues, payroll and employee
benefits remained relatively unchanged at 11.8% compared to
11.7% in fiscal 2007.
Occupancy
and Other Operating Costs
Occupancy and other operating costs increased by
$20.9 million, or 5%, to $439.0 million in fiscal
2008. This increase was primarily attributable to the net
addition of 57 Company restaurants in fiscal 2008 and a
$17.8 million unfavorable impact from the movement of
foreign currency exchange rates, primarily in EMEA. As a
percentage of Company restaurant revenues, occupancy and other
operating costs decreased by 0.7% to 24.5% as a result of the
benefits realized from the new flexible batch broilers in the
United States and Canada, which includes accelerated
depreciation expense on the old broilers recorded in fiscal
2007, the closure of under-performing restaurants and the
refranchising of Company restaurants in the U.K. (including
benefits from the write-off of unfavorable leases) and worldwide
Company comparable sales growth of 2.9% (in constant currencies)
for the period. These benefits were partially offset by the
unfavorable impact of accelerated depreciation expense related
to our restaurant reimaging program in the United States and
Canada.
In the United States and Canada, occupancy and other operating
costs increased by $17.3 million, or 7%, to
$271.1 million in fiscal 2008. This increase was primarily
driven by the net addition of 87 Company restaurants in fiscal
2008, accelerated depreciation expense related to our restaurant
reimaging program and a $4.0 million unfavorable impact
from the movement in foreign currency exchange rates in Canada.
As a percentage of Company restaurant revenues, occupancy and
other operating costs decreased by 0.4% to 23.1% primarily as a
result of the benefits realized from the accelerated
depreciation expense on the old broilers recorded in fiscal 2007
and not recurring this year, and Company comparable sales growth
of 2.6% (in constant currencies) for the period in this segment,
partially offset by the unfavorable impact of accelerated
depreciation expense related to our restaurant reimaging program.
In EMEA/APAC, occupancy and other operating costs increased by
$1.3 million, or 1%, to $149.9 million in fiscal 2008.
This increase was primarily due to a $13.5 million
unfavorable impact from the movement in foreign currency
exchange rates, partially offset by the net reduction of 37
Company restaurants in fiscal 2008. As a percentage of Company
restaurant revenues, occupancy and other operating costs
decreased by 1.7% to 27.1%, reflecting the benefits realized
from the closure of under-performing restaurants and the
refranchising of Company restaurants in the U.K. (including
benefits from the write-off of unfavorable leases) as well as
Company comparable sales growth of 3.8% (in constant currencies)
for the period in this segment.
In Latin America, occupancy and other operating costs increased
by $2.3 million, or 15%, to $18.0 million in fiscal
2008 primarily due to the net addition of seven new Company
restaurants in fiscal 2008. As a percentage of Company
restaurant revenues, occupancy and other operating costs
increased by 0.3% to 26.1% primarily as a result of an increase
in utilities, property taxes and the cost of information
technology upgrades, including POS systems associated with the
additional restaurants.
Selling,
General and Administrative Expenses
Selling expenses increased by $8.0 million, or 10%, to
$91.0 million in fiscal 2008. The increase was primarily
attributable to $4.1 million of additional sales promotions
and advertising expenses generated by higher Company restaurant
revenues, a $4.1 million reduction in the amount of bad
debt recoveries compared to the prior year and a
$4.1 million unfavorable impact from the movement of
foreign currency exchange rates, primarily in EMEA, partially
offset by a $4.0 million reduction in the amount of
discretionary contributions to advertising funds in EMEA.
General and administrative expenses increased by
$18.0 million, or 5%, to $408.5 million in fiscal
2008. The increase was primarily attributable to a
$6.2 million increase in stock-based compensation expense,
as an additional year of grants is included in the expense
amount. In addition, general and administrative expenses
increased as a result of a $4.5 million increase in
corporate salary, fringe benefits and other employee-related
costs, a $4.8 million increase in general corporate travel
and meeting costs and a $15.2 million unfavorable impact
from the movement of foreign currency exchange rates, primarily
in EMEA. These increases were partially offset by a
$1.8 million decrease in operating costs, which includes a
decrease in rent expense, utility expense and repairs and
maintenance
58
and $8.0 million in miscellaneous cost savings and other
items, including decreased insurance costs and an increase in
the amount of capitalized indirect labor costs on capital
projects. Annual stock-based compensation expense is expected to
increase through fiscal year 2010, as a result of our adoption
of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-based Payment in fiscal
2007, which has resulted in stock-based compensation expense
only for awards granted subsequent to our initial public
offering. See Note 3 to our Consolidated Financial
Statements in Part II, Item 8 of this
Form 10-K
for further information regarding our stock-based
compensation.
Property
Expenses
Property expenses increased by $1.5 million, or 2%, to
$62.1 million in fiscal 2008, primarily as a result of an
increase in contingent rent expense generated by comparable
sales growth in the United States and Canada, as well as a
$1.6 million unfavorable impact from the movement of
foreign currency exchange rates in EMEA. These increases were
partially offset by a net reduction in the number of properties
we lease or sublease to franchisees in EMEA. Property expenses
were 37% of property revenues in the United States and Canada in
both fiscal 2008 and fiscal 2007. Our property expenses in
EMEA/APAC approximate our property revenues because most of the
EMEA/APAC property operations consist of properties that are
subleased to franchisees on a pass-through basis.
Other
Operating (Income) Expense, Net
Other operating (income) expense, net was $0.9 million of
expense in fiscal 2008, compared to $4.4 million of income
in fiscal 2007. Other operating expense, net in fiscal 2008
includes $4.2 million of franchise system distress costs in
the U.K., $1.6 million of foreign currency transaction
losses, $1.9 million of charges associated with the
acquisition of franchise restaurants, $1.0 million in
charges for litigation reserves and a loss of $0.7 million
from forward currency contracts used to hedge intercompany loans
denominated in foreign currencies. These costs were partially
offset by net gains of $9.8 million from the disposal of
assets and restaurant closures, primarily in Germany and the
United States, which includes the refranchising of Company
restaurants in Germany.
Other operating income, net in fiscal 2007 included a net gain
of $4.7 million from the disposal of assets and a gain of
$6.8 million from forward currency contracts used to hedge
intercompany loans denominated in foreign currencies, partially
offset by $6.6 million in costs associated with the
termination of the Coral Gables Lease, $1.7 million in
charges for litigation reserves and $2.9 million in
franchise workout costs.
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
348.2
|
|
|
$
|
339.4
|
|
EMEA/APAC
|
|
|
91.8
|
|
|
|
53.9
|
|
Latin America
|
|
|
41.4
|
|
|
|
35.2
|
|
Unallocated
|
|
|
(127.2
|
)
|
|
|
(133.9
|
)
|
|
|
|
|
|
|
|
|
|
Total Income from Operations
|
|
$
|
354.2
|
|
|
$
|
294.6
|
|
|
|
|
|
|
|
|
|
|
Income from operations increased by $59.6 million, or 20%,
to $354.2 million in fiscal 2008, primarily due to a
$77.7 million increase in franchise revenues driven by
worldwide franchise comparable sales growth of 5.7% (in constant
currencies) for the period and an increase in the effective
royalty rate. See Note 22 to our audited consolidated
financial statements for segment information disclosed in
accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.
The favorable impact that the movement in foreign currency
exchange rates had on revenues was partially offset by the
unfavorable impact on operating costs and expenses, resulting in
a $7.6 million net favorable impact on income from
operations during fiscal 2008.
59
In the United States and Canada, income from operations
increased by $8.8 million, or 3%, to $348.2 million in
fiscal 2008, primarily as a result of a $34.3 million
increase in franchise revenues, reflecting franchise comparable
sales growth of 5.8% (in constant currencies) for the period in
this segment and an increase in the effective royalty rate. This
increase was partially offset by higher selling, general and
administrative expenses of $316.3 million, driven primarily
by increased salaries and wages, fringe benefit costs and
increased stock-based compensation expense.
Income from operations in EMEA/APAC increased by
$37.9 million, or 70%, to $91.8 million in fiscal
2008, primarily as a result of a $37.9 million increase in
franchise revenues, reflecting franchise comparable sales growth
of 5.6% (in constant currencies) for the period in this segment
and the net increase of 196 franchise restaurants during fiscal
2008. The favorable impact that the movement in foreign currency
exchange rates had on revenues was partially offset by the
unfavorable impact on operating costs and expenses, resulting in
a $7.7 million net favorable impact on income from
operations.
Income from operations in Latin America increased by
$6.2 million, or 18%, to $41.4 million in fiscal 2008,
primarily as a result of an increase in franchise revenues,
reflecting comparable sales growth of 4.5% (in constant
currencies) for the period in this segment, and a net increase
of 92 franchise restaurants during fiscal 2008.
Our unallocated corporate expenses decreased by
$6.7 million during fiscal 2008, primarily as a result of
non-recurring professional services fees incurred associated
with the realignment of our European and Asian businesses during
fiscal 2007.
Interest
Expense, Net
Interest expense, net decreased by $5.8 million during
fiscal 2008, reflecting a reduction in the amount of borrowings
outstanding due to early prepayments of our debt and a decrease
in rates paid on borrowings during the period. The weighted
average interest rates for fiscal 2008 and fiscal 2007 were
6.02% and 6.91%, respectively, which included the impact of
interest rate swaps on 56.0% and 57.0% of our term debt,
respectively.
Income
Tax Expense
Income tax expense was $103.4 million in fiscal 2008.
Compared to the same period in the prior fiscal year, our
effective tax rate increased slightly by 0.6 percentage
points to 35.3%.
See Note 15 to our consolidated financial statements for
further information regarding our effective tax rate. See
Item 1A Risk Factors in Part I of this
report for a discussion regarding our ability to utilize foreign
tax credits and estimate deferred tax assets.
Net
Income
Net income increased by $41.5 million, or 28%, to
$189.6 million in fiscal 2008, primarily as a result of a
net increase in restaurants and strong comparable sales growth,
which increased franchise revenues by $77.7 million,
Company restaurant margin by $9.3 million and net property
revenues by $5.4 million. We also benefited from a
$5.8 million decrease in interest expense. These
improvements were partially offset by a $26.0 million
increase in selling, general and administrative expenses and a
$28.1 million increase in income tax expense.
Liquidity
and Capital Resources
Overview
Cash provided by operations was $310.8 million in fiscal
2009, compared to $243.4 million in fiscal 2008.
Our leverage ratio, as defined by our credit agreement, was 1.8x
as of June 30, 2009 and 2008. The weighted average interest
rate on our term debt for fiscal 2009 was 5.1%, which included
the benefit of interest rates swaps on 70.6% of our debt.
For each of the years ended June 30, 2009 and 2008, we paid
four quarterly dividends of $0.0625 per share of common stock,
resulting in $34.1 million and $34.2 million,
respectively, of cash payments to shareholders of
60
record. We paid quarterly dividends of $0.0625 per share of
common stock for the third and fourth quarter of the year ended
June 30, 2007, resulting in $16.9 million of cash
payments to shareholders of record. During the first quarter of
fiscal 2010, we declared a quarterly dividend of $0.0625 per
share of common stock that is payable on September 30, 2009
to shareholders of record on September 14, 2009.
During fiscal 2009, we repurchased 834,882 shares of common
stock under our previously announced share repurchase program at
an aggregate cost of $20.0 million, which we will retain in
treasury for future use. All of the shares were purchased under
the former share repurchase program, which expired on
December 31, 2008. During the third quarter of fiscal 2009,
our board of directors approved, and we adopted a new share
repurchase program to repurchase up to $200 million of our
common stock in the open market from time to time prior to
December 31, 2010. We intend to use a portion of our excess
cash to repurchase shares under our share repurchase program
depending on market conditions. No shares have been purchased
under the new share repurchase program to date.
We had cash and cash equivalents of $121.7 million and
$166.0 million as of June 30, 2009 and 2008,
respectively. In addition, as of June 30, 2009, we had a
borrowing capacity of $119.4 million under our
$150.0 million revolving credit facility.
We expect that cash on hand, cash flow from operations and our
borrowing capacity under our revolving credit facility will
allow us to meet cash requirements, including capital
expenditures, tax payments, dividends, debt service payments and
share repurchases, if any, over the next twelve months and for
the foreseeable future. If additional funds are needed for
strategic initiatives or other corporate purposes, we believe we
could incur additional debt or raise funds through the issuance
of our equity securities.
Comparative
Cash Flows
Operating
Activities
Cash provided by operating activities was $310.8 million in
fiscal 2009, compared to $243.4 million in fiscal 2008. The
$310.8 million provided in fiscal 2009 includes net income
of $200.1 million, non-cash items of $165.4 million,
which include depreciation and amortization of
$98.1 million and a $50.1 million loss on the
remeasurement of foreign denominated assets and a
$3.8 million change in other long term assets and
liabilities, partially offset by a $58.5 million change in
working capital. The $58.5 million of cash used from the
change in working capital is primarily due to the timing of tax
payments, including benefits derived from the dissolution of
dormant foreign entities.
The $243.4 million provided in fiscal 2008 includes net
income of $189.6 million, non-cash items of
$50.2 million, which include depreciation and amortization
of $95.6 million, a $55.6 million gain on the
remeasurement of foreign denominated assets, and
$32.0 million from a change in working capital, partially
offset by a change in other long term assets and liabilities of
$28.4 million. The $32.0 million of cash generated
from the change in working capital is primarily driven by a
$20.8 million increase in accounts payable and capital
accruals, a decrease of $11.7 million in prepaid
advertising and insurance expense and an $11.1 million
increase in accrued advertising, partially offset by an increase
in accounts receivable of $8.6 million, which is primarily
driven by higher sales recognized in fiscal 2008, as compared to
the prior fiscal year.
Investing
Activities
Cash used for investing activities was $242.0 million in
fiscal 2009, compared to $199.3 million in fiscal 2008. The
$242.0 million of cash used in fiscal 2009 includes
$204.0 million of payments for property and equipment,
$67.9 million used for the acquisition of franchised
restaurants and $4.4 million used for other investing
activities, partially offset by proceeds received from
refranchisings, dispositions of assets and restaurant closures
of $26.4 million and $7.9 million of principal
payments received on direct financing leases.
The $199.3 million of cash used in fiscal 2008 includes
$178.2 million of payments for property and equipment,
$54.2 million used for the acquisition of franchised
restaurants and $1.3 million used for other investing
activities, partially offset by proceeds received from
refranchisings, dispositions of assets and restaurant closures
of $27.0 million and $7.4 million of principal
payments received on direct financing leases.
61
Capital expenditures for new restaurants include the costs to
build new Company restaurants as well as properties for new
restaurants that we lease to franchisees. Capital expenditures
for existing restaurants consist of the purchase of real estate
related to existing restaurants, as well as renovations to
Company restaurants, including restaurants acquired from
franchisees, investments in new equipment and normal annual
capital investments for each Company restaurant to maintain its
appearance in accordance with our standards. Capital
expenditures for existing restaurants also include investments
in improvements to properties we lease and sublease to
franchisees, including contributions we make toward leasehold
improvements completed by franchisees on properties we own.
Other capital expenditures include investments in information
technology systems and corporate furniture and fixtures. The
following table presents capital expenditures by type of
expenditure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
New restaurants
|
|
$
|
65.4
|
|
|
$
|
55.4
|
|
|
$
|
22.9
|
|
Existing restaurants
|
|
|
110.1
|
|
|
|
102.0
|
|
|
|
47.4
|
|
Other, including corporate
|
|
|
28.5
|
|
|
|
20.8
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
204.0
|
|
|
$
|
178.2
|
|
|
$
|
87.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our capital expenditures increased in fiscal 2009 primarily as a
result of a $10.0 million increase in the construction of
new Company restaurants and properties leased to franchisees,
increased capital spending at our existing restaurants of
$8.1 million, including costs associated with our reimaging
program, and an increase in other expenditures of
$7.8 million, including costs associated with our
restaurant support centers in the U.K. and Turkey.
For fiscal 2010, we expect capital expenditures of approximately
$175.0 million to $200.0 million to develop new
restaurants and properties, to fund our restaurant reimaging
program and to make improvements to restaurants we acquire, for
operational initiatives in our restaurants and for other
corporate expenditures.
Financing
Activities
Cash used by financing activities was $105.5 million in
fiscal 2009, compared to $62.0 million in fiscal 2008. The
$105.5 million of cash used includes $144.3 million of
payments on our revolving credit facility, payment of four
quarterly cash dividends totaling $34.1 million, stock
repurchases of $20.3 million and $7.4 million of
payments on capital leases, term debt and other debt. These cash
uses were partially offset by $94.3 million of proceeds
received from our revolving credit facility, $3.3 million
in tax benefits from stock-based compensation and
$3.0 million of proceeds from stock option exercises.
The $62.0 million of cash used in fiscal 2008 includes the
repayment of term debt of $50.0 million, stock repurchases
of $35.4 million, payment of four quarterly cash dividends
totaling $34.2 million, and $5.5 million of payments
on capital leases and other debt. These cash uses were partially
offset by $50.0 million in proceeds received from our
revolving credit facility, $9.3 million in tax benefits
from stock-based compensation and $3.8 million of proceeds
from stock option exercises.
62
Contractual
Obligations and Commitments
The following table presents information relating to our
contractual obligations as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In millions)
|
|
|
Capital lease obligations
|
|
$
|
138.1
|
|
|
$
|
14.4
|
|
|
$
|
28.6
|
|
|
$
|
28.0
|
|
|
$
|
67.1
|
|
Operating lease obligations
|
|
|
1,628.0
|
|
|
|
167.1
|
|
|
|
304.1
|
|
|
|
323.3
|
|
|
|
833.5
|
|
Unrecognized tax benefits
|
|
|
19.5
|
|
|
|
3.4
|
|
|
|
7.2
|
|
|
|
4.2
|
|
|
|
4.7
|
|
Long-term debt, including current portion and interest(1)
|
|
|
917.0
|
|
|
|
101.7
|
|
|
|
813.8
|
|
|
|
0.4
|
|
|
|
1.1
|
|
Purchase commitments(2)
|
|
|
81.2
|
|
|
|
80.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,783.8
|
|
|
$
|
367.2
|
|
|
$
|
1,154.3
|
|
|
$
|
355.9
|
|
|
$
|
906.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We have estimated our interest
payments based on (i) current LIBOR rates, (ii) the
portion of our debt we converted to fixed rates through interest
rate swaps and (iii) the amortization schedule in our
credit agreement.
|
|
(2)
|
|
Includes open purchase orders, as
well as commitments to purchase advertising and other marketing
services from third parties in advance on behalf of the
Burger King system and obligations related to information
technology and service agreements.
|
See Notes 15 and 17 to our audited consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for information about unrecognized tax benefits and our leasing
arrangements, respectively.
As of June 30, 2009, the projected benefit obligation of
our U.S. and international defined benefit pension plans
exceeded pension assets by $77.2 million. The discount rate
used in the calculation of the benefit obligation at
June 30, 2009 for the U.S. Plans is derived from a
yield curve comprised of the yields of an index of 250
equally-weighted corporate bonds, rated AA or better by
Moodys, which approximates the duration of the
U.S. Plans. We made contributions totaling
$25.7 million into our pension plans and estimated benefit
payments of $6.4 million out of these plans during fiscal
2009. Estimates of reasonably likely future pension
contributions are dependent on pension asset performance, future
interest rates, future tax law changes, and future changes in
regulatory funding requirements.
Other
Commercial Commitments and Off-Balance Sheet
Arrangements
We have commitments outstanding and contingent obligations
relating to our FFRP Program, guarantees and letters of credit
issued in our normal course of business, vendor relationships,
litigation and our insurance programs. For information on
these commitments and contingent obligations, see Note 21
to the Consolidated Financial Statements in Part II,
Item 8 of this
Form 10-K.
Impact of
Inflation
We believe that our results of operations are not materially
impacted by moderate changes in the inflation rate. Inflation
did not have a material impact on our operations in fiscal 2009,
fiscal 2008 or fiscal 2007. Severe increases in inflation,
however, could affect the global and U.S. economies and
could have an adverse impact on our business, financial
condition and results of operations.
Critical
Accounting Policies and Estimates
This discussion and analysis of financial condition and results
of operations is based on our consolidated financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these
financial statements requires our management to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, as well as related
disclosures of contingent assets and liabilities. We evaluate
our estimates on an ongoing basis and we base our estimates on
historical experience and various other assumptions we deem
reasonable to the situation. These estimates and assumptions
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
63
sources. Volatile credit, equity, foreign currency and energy
markets, and declines in consumer spending have increased and
may continue to create uncertainty inherent in such estimates
and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ
significantly from these estimates. Changes in our estimates
could materially impact our results of operations and financial
condition in any particular period.
We consider our critical accounting policies and estimates to be
as follows based on the high degree of judgment or complexity in
their application:
Long-lived
Assets
Long-lived assets (including definite-lived intangible assets)
are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. We regularly review long-lived assets for
indications of impairment. Some of the events or changes in
circumstances that would trigger an impairment test include, but
are not limited to:
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significant under-performance relative to expected
and/or
historical results (negative comparable sales or cash flows for
two consecutive years);
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significant negative industry or economic trends; or
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knowledge of transactions involving the sale of similar property
at amounts below our carrying value.
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The impairment test for long-lived assets requires us to assess
the recoverability of our long-lived assets by comparing their
net carrying value to the sum of undiscounted estimated future
cash flows directly associated with and arising from our use and
eventual disposition of the assets. If the net carrying value of
a group of long-lived assets exceeds the sum of related
undiscounted estimated future cash flows, we would be required
to record an impairment charge equal to the excess, if any, of
net carrying value over fair value.
Long-lived assets are grouped for recognition and measurement of
impairment at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets.
Definite-lived intangible assets, consisting primarily of
franchise agreements and reacquired franchise rights, are
grouped for impairment reviews at the country level. Other
long-lived assets and related liabilities are grouped together
for impairment reviews at the operating market level (based on
geographic areas) in the case of the United States, Canada, the
U.K. and Germany. The operating market groupings within the
United States and Canada are predominantly based on major
metropolitan areas within the United States and Canada.
Similarly, operating markets within the other foreign countries
with larger long-lived asset concentrations (the U.K. and
Germany) are made up of geographic regions within those
countries (three in the U.K. and four in Germany). These
operating market definitions are based upon the following
primary factors:
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management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants
and area managers receive incentives on this basis; and
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management does not evaluate individual restaurants to build,
acquire or close independent of any analysis of other
restaurants in these operating markets.
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In countries in which we have a smaller number of restaurants
most operating functions and advertising are performed at the
country level, and shared by all restaurants in the country. As
a result, we have defined operating markets as the entire
country in the case of The Netherlands, Spain, Italy, Mexico and
China.
When assessing the recoverability of our long-lived assets, we
make assumptions regarding estimated future cash flows and other
factors. Some of these assumptions involve a high degree of
judgment and also bear a significant impact on the assessment
conclusions. Included among these assumptions are estimating
undiscounted future cash flows, including the projection of
comparable sales, restaurant operating expenses, and capital
requirements for property and equipment. We formulate estimates
from historical experience and assumptions of future
performance, based on business plans and forecasts, recent
economic and business trends, and competitive
64
conditions. In the event that our estimates or related
assumptions change in the future, we may be required to record
an impairment charge.
Goodwill
and Indefinite-lived Intangible Assets
Goodwill represents the excess of the purchase price over the
fair value of assets acquired and liabilities assumed in our
acquisitions of franchise restaurants, predominately in the
United States, which are accounted for as business combinations.
Our indefinite-lived intangible asset consists of the Burger
King brand (the Brand).
We test goodwill and the Brand for impairment on an annual basis
and more often if an event occurs or circumstances change that
indicates impairment might exist.
Our impairment test for goodwill requires us to compare the
carrying value of a reporting unit with assigned goodwill to its
fair value. Our reporting units are defined as our operating
segments. If the carrying value of the reporting unit exceeds
its fair value, we may be required to record an impairment
charge to goodwill. Our impairment test for the Brand consists
of a comparison of the carrying value of the Brand to its fair
value on a consolidated basis, with impairment equal to the
amount by which the carrying value of the Brand exceeds its fair
value.
When testing goodwill and the Brand for impairment, we make
assumptions regarding the amount and the timing of estimated
future cash flows similar to those when testing long-lived
assets for impairment, as described above. In the event that our
estimates or related assumptions change in the future, we may be
required to record an impairment charge.
Accounting
for Income Taxes
We record income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or
liability is recognized whenever there are future tax effects
from existing temporary differences and operating loss and tax
credit carry-forwards. When considered necessary, we record a
valuation allowance to reduce deferred tax assets to the balance
that is more likely than not to be realized. We must make
estimates and judgments on future taxable income, considering
feasible tax planning strategies and taking into account
existing facts and circumstances, to determine the proper
valuation allowance. When we determine that deferred tax assets
could be realized in greater or lesser amounts than recorded,
the asset balance and income statement reflect the change in the
period such determination is made. Due to changes in facts and
circumstances and the estimates and judgments that are involved
in determining the proper valuation allowance, differences
between actual future events and prior estimates and judgments
could result in adjustments to this valuation allowance.
We file income tax returns, including returns for our
subsidiaries, with federal, state, local and foreign
jurisdictions. We are subject to routine examination by taxing
authorities in these jurisdictions. We apply a two-step approach
to recognizing and measuring uncertain tax positions. The first
step is to evaluate available evidence to determine if it
appears more likely than not that an uncertain tax position will
be sustained on an audit by a taxing authority, based solely on
the technical merits of the tax position. The second step is to
measure the tax benefit as the largest amount that is more than
50% likely of being realized upon settling the uncertain tax
position.
Although we believe we have adequately accounted for our
uncertain tax positions, from time to time, audits result in
proposed assessments where the ultimate resolution may result in
us owing additional taxes. We adjust our uncertain tax positions
in light of changing facts and circumstances, such as the
completion of a tax audit, expiration of a statute of
limitations, the refinement of an estimate, and interest
accruals associated with uncertain tax positions until they are
resolved. We believe that our tax positions comply with
applicable tax law and that we have adequately provided for
these matters. However, to the extent that the final tax outcome
of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the
period in which such determination is made.
We use an estimate of the annual effective tax rate at each
interim period based on the facts and circumstances available at
that time, while the actual effective tax rate is calculated at
fiscal year-end.
65
Insurance
Reserves
We carry insurance to cover claims such as workers
compensation, general liability, automotive liability, executive
risk and property, and we are self-insured for healthcare claims
for eligible participating employees. Through the use of
insurance program deductibles (ranging from $0.5 million to
$1.0 million) and self insurance, we retain a significant
portion of the expected losses under these programs. Insurance
reserves have been recorded based on our estimates of the
anticipated ultimate costs to settle all claims, both reported
and incurred-but-not-reported (IBNR).
Our accounting policies regarding these insurance programs
include judgments and independent actuarial assumptions about
economic conditions, the frequency or severity of claims and
claim development patterns and claim reserve, management and
settlement practices. Since there are many estimates and
assumptions involved in recording insurance reserves,
differences between actual future events and prior estimates and
assumptions could result in adjustments to these reserves.
Stock-based
Compensation
Stock-based compensation expense for stock options is estimated
on the grant date using a Black-Scholes option pricing model. We
only grant non-qualified stock options and do not grant
incentive stock options. Our specific weighted average
assumptions for the risk-free interest rate, expected term,
expected volatility and expected dividend yield are documented
in Note 3 to our audited consolidated financial statements
included in Part II, Item 8 of this
Form 10-K.
Additionally, we are required to estimate pre-vesting
forfeitures for purposes of determining compensation expense to
be recognized. Future expense amounts for any quarterly or
annual period could be affected by changes in our assumptions or
changes in market conditions.
New
Accounting Pronouncements Issued But Not Yet
Adopted
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R).
SFAS No. 141R replaces SFAS No. 141 but
retains the fundamental requirements in SFAS No. 141
that the acquisition method of accounting be used for all
business combinations and for an acquirer to be identified for
each business combination. SFAS No. 141R defines the
acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control.
SFAS No. 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at their fair values at the acquisition
date. Costs incurred by the acquirer to effect the acquisition
are not allocated to the assets acquired or liabilities assumed,
but are recognized separately in earnings.
SFAS No. 141R is effective prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008, which for us will be business
combinations with an acquisition date beginning on or after
July 1, 2009. The impact that SFAS No. 141R will
have on the Company depends in part upon the volume of business
acquisitions.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary and clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
that should be reported as equity in the consolidated financial
statements. SFAS No. 160 establishes a single method
of accounting for changes in a parents ownership interest
in a subsidiary that do not result in deconsolidation and
requires a parent to recognize a gain or loss in net income when
a subsidiary is deconsolidated. SFAS No. 160 also
requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the
noncontrolling interest and to disclose, on the face of the
consolidated statement of income, the amounts of consolidated
net income attributable to the parent and to the noncontrolling
interest. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008, which for us will
be our fiscal year beginning on July 1, 2009. We do not
anticipate that the adoption of SFAS No. 160 will have
a significant impact on the Company.
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial
Assets an amendment of FASB Statement
No. 140 (SFAS No. 166).
This statement removes the concept of a qualifying
special-purpose entity (QSPE) from
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and
66
Extinguishments of Liabilities a replacement of
FASB Statement No. 125, and eliminates the
exception from applying FASB Interpretation No. 46 (revised
December 2003) (FIN 46(R)), Consolidation of
Variable Interest Entities, to qualifying special-purpose
entities. Furthermore, SFAS No. 166 establishes
specific conditions to account for a transfer of financial
assets as a sale, changes the requirements for derecognizing
financial assets and requires additional disclosure.
SFAS No. 166 will be effective as of the beginning of
the first annual reporting period that begins after
November 15, 2009, which for us will be our fiscal year
beginning on July 1, 2010. We do not anticipate that the
adoption of SFAS No. 166 will have a significant impact on
the Company.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS No. 167). SFAS No. 167
amends FIN 46 (R) to require an enterprise to perform an
analysis to identify the primary beneficiary of a Variable
Interest Entity (VIE), a qualitatively on-going
re-assessment on whether the enterprise is the primary
beneficiary of the VIE and additional disclosures that will
provide users of financial statements with more transparent
information about an enterprises involvement in a VIE. In
addition, this statement revises the methods utilized for
determining whether an entity is a VIE and the events that
trigger a reassessment of whether an entity is a VIE.
SFAS No. 167 will be effective as of the beginning of
the first annual reporting period that begins after
November 15, 2009, which for us will be our fiscal year
beginning on July 1, 2010. We have not yet determined the
impact, if any, that SFAS No. 167 will have on our
consolidated balance sheet and income statement.
In June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting Principles
a replacement of FASB Statement
No. 162 (SFAS No. 168).
SFAS No. 168 has revised the GAAP hierarchy to include
only two levels of GAAP: Authoritative and Non-Authoritative.
All of the content included in the FASB Accounting Standards
Codificationtm
(the Codification) will be considered authoritative.
SFAS No. 168 is not intended to amend GAAP but
codifies previous accounting literature. SFAS No. 168
is effective for interim and annual reporting periods ending
after September 15, 2009, which for us will be our first
quarter ending September 30, 2009. This statement will have
no impact on our consolidated balance sheet and income
statement, but it will change the referencing of authoritative
accounting literature to conform to the Codification.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Market
Risk
We are exposed to financial market risks associated with
currency exchange rates, interest rates and commodity prices. In
the normal course of business and in accordance with our
policies, we manage these risks through a variety of strategies,
which may include the use of derivative financial instruments to
hedge our underlying exposures. Our policies prohibit the use of
derivative instruments for speculative purposes, and we have
procedures in place to monitor and control their use.
Currency
Exchange Risk
Movements in currency exchange rates may affect the translated
value of our earnings and cash flow associated with our foreign
operations, as well as the translation of net asset or liability
positions that are denominated in foreign currencies. In
countries outside of the United States where we operate Company
restaurants, we generally generate revenues and incur operating
expenses and selling, general and administrative expenses
denominated in local currencies. These revenues and expenses are
translated using the average rates during the period in which
they are recognized and are impacted by changes in currency
exchange rates. In many countries where we do not have Company
restaurants our franchisees pay royalties to us in currencies
other than the local currency in which they operate. However, as
the royalties are calculated based on local currency sales, our
revenues are still impacted by fluctuations in exchange rates.
In fiscal 2009, income from operations would have decreased or
increased $12.3 million if all foreign currencies uniformly
weakened or strengthened 10% relative to the U.S. dollar.
We have entered into forward contracts intended to hedge our
exposure to fluctuations in currency exchange rates associated
with our intercompany loans denominated in foreign currencies
and certain foreign currency-denominated assets. These forward
contracts are primarily denominated in Euros but are also
denominated in British Pounds and Canadian Dollars. Fluctuations
in the value of these forward contracts are recognized in our
condensed consolidated statements of income as incurred. The
fluctuations in the value of these forward contracts
67
do, however, largely offset the impact of changes in the value
of the underlying risk that they are intended to economically
hedge, which is also reflected in our condensed consolidated
statements of income (See Note 13 to the Consolidated
Financial Statements). As of June 30, 2009, we had forward
contracts to hedge the net U.S. dollar equivalent of
$397.0 million of foreign currency-denominated assets. This
U.S. dollar equivalent by currency is as follows:
$302.6 million in Euros; $72.3 million in British
Pounds, $17.4 million in Canadian Dollars and
$4.7 million in Australian Dollars. All foreign currency
forward contracts expire prior to June 2010.
We are exposed to losses in the event of nonperformance by
counterparties on these forward contracts. We attempt to
minimize this risk by selecting counterparties with investment
grade credit ratings, limiting our exposure to any single
counterparty and regularly monitoring our market position with
each counterparty.
Interest
Rate Risk
We have a market risk exposure to changes in interest rates,
principally in the United States. We attempt to minimize this
risk and lower our overall borrowing costs through the
utilization of interest rate swaps. These swaps are entered into
with financial institutions and have reset dates and key terms
that match those of the underlying debt. Accordingly, any change
in market value associated with interest rate swaps is offset by
the opposite market impact on the related debt.
As of June 30, 2009, we had interest rate swaps with a
notional value of $595.0 million that qualify as cash flow
hedges. These interest rate swaps help us manage exposure to
changes in forecasted LIBOR-based interest payments made on
variable-rate debt. A 1% change in interest rates on our
existing debt of $816.2 million would have resulted in an
increase or decrease in interest expense of approximately
$2.2 million for fiscal year 2009.
Commodity
Price Risk
We purchase certain products, including beef, chicken, cheese,
french fries, tomatoes and other commodities which are subject
to price volatility that is caused by weather, market conditions
and other factors that are not considered predictable or within
our control. Additionally, our ability to recover increased
costs is typically limited by the competitive environment in
which we operate. We do not utilize commodity option or future
contracts to hedge commodity prices and do not have long-term
pricing arrangements other than for chicken, which expires in
December 2009 and natural gas contracts which expire at various
dates during fiscal 2010. As a result, we purchase beef and
other commodities at market prices, which fluctuate on a daily
basis.
The estimated change in Company restaurant food, paper and
product costs from a hypothetical 10% change in average prices
of our commodities would have been approximately
$58.4 million for fiscal 2009. The hypothetical change in
food, paper and product costs could be positively or negatively
affected by changes in prices or product sales mix.
68
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Item 8.
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Financial
Statements and Supplementary Data
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BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
69
Managements
Report on Internal Control Over Financial
Reporting
Management is responsible for the preparation, integrity and
fair presentation of the consolidated financial statements,
related notes and other information included in this annual
report. The financial statements were prepared in accordance
with accounting principles generally accepted in the United
States of America and include certain amounts based on
managements estimates and assumptions. Other financial
information presented is consistent with the financial
statements.
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal
control over financial reporting as of June 30, 2009.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. The Companys system of internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Management performed an assessment of the effectiveness of the
Companys internal control over financial reporting as of
June 30, 2009 based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment and those criteria, management
determined that the Companys internal control over
financial reporting was effective as of June 30, 2009.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The effectiveness of the Companys internal control over
financial reporting as of June 30, 2009 has been audited by
KPMG LLP, the Companys independent registered public
accounting firm, as stated in its attestation report which is
included herein.
70
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Burger King Holdings, Inc. and subsidiaries (the Company) as of
June 30, 2009 and 2008, and the related consolidated
statements of income, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended June 30, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Burger King Holdings, Inc. and subsidiaries as of
June 30, 2009 and 2008, and the results of their operations
and their cash flows for each of the years in the three-year
period ended June 30, 2009, in conformity with
U.S. generally accepted accounting principles.
As discussed in notes 2 and 15 to the consolidated
financial statements, the Company changed its method of
accounting for uncertain tax positions by adopting Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, effective
July 1, 2007. As discussed in notes 2 and 19 to the
consolidated financial statements, the Company adopted Statement
of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R), as of
June 30, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
June 30, 2009, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated August 27, 2009 expressed an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ KPMG LLP
Miami, Florida
August 27, 2009
Certified Public Accountants
71
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
We have audited the internal control over financial reporting of
Burger King Holdings, Inc. and subsidiaries (the Company) as of
June 30, 2009, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements
Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of June 30, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of June 30,
2009 and 2008, and the related consolidated statements of
income, stockholders equity and comprehensive income, and
cash flows for each of the years in the three-year period ended
June 30, 2009, and our report dated August 27, 2009
expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Miami, Florida
August 27, 2009
Certified Public Accountants
72
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As of June 30,
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2009
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2008
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(In millions, except
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share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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121.7
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$
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166.0
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Trade and notes receivable, net
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130.0
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|
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139.3
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Prepaids and other current assets, net
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86.4
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|
|
53.5
|
|
Deferred income taxes, net
|
|
|
32.5
|
|
|
|
45.2
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
370.6
|
|
|
|
404.0
|
|
Property and equipment, net
|
|
|
1,013.2
|
|
|
|
960.7
|
|
Intangible assets, net
|
|
|
1,062.7
|
|
|
|
1,054.6
|
|
Goodwill
|
|
|
26.4
|
|
|
|
26.6
|
|
Net investment in property leased to franchisees
|
|
|
135.3
|
|
|
|
135.4
|
|
Other assets, net
|
|
|
98.9
|
|
|
|
105.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,707.1
|
|
|
$
|
2,686.5
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$
|
127.0
|
|
|
$
|
129.5
|
|
Accrued advertising
|
|
|
67.8
|
|
|
|
77.2
|
|
Other accrued liabilities
|
|
|
220.0
|
|
|
|
241.9
|
|
Current portion of long term debt and capital leases
|
|
|
67.5
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
482.3
|
|
|
|
456.0
|
|
Term debt, net of current portion
|
|
|
755.6
|
|
|
|
868.8
|
|
Capital leases, net of current portion
|
|
|
65.8
|
|
|
|
71.2
|
|
Other liabilities, net
|
|
|
354.5
|
|
|
|
360.4
|
|
Deferred income taxes, net
|
|
|
74.1
|
|
|
|
85.6
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,732.3
|
|
|
|
1,842.0
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 21)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 300,000,000 shares
authorized; 134,792,121 and 135,022,753 shares issued and
outstanding at June 30, 2009 and 2008, respectively
|
|
|
1.4
|
|
|
|
1.4
|
|
Restricted stock units
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
623.4
|
|
|
|
600.9
|
|
Retained earnings
|
|
|
455.4
|
|
|
|
289.8
|
|
Accumulated other comprehensive loss
|
|
|
(45.9
|
)
|
|
|
(8.4
|
)
|
Treasury stock, at cost; 2,884,223 and 2,042,887 shares at
June 30, 2009 and 2008, respectively
|
|
|
(59.5
|
)
|
|
|
(39.2
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
974.8
|
|
|
|
844.5
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,707.1
|
|
|
$
|
2,686.5
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
73
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions, except
|
|
|
|
per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
|
$
|
1,658.0
|
|
Franchise revenues
|
|
|
543.4
|
|
|
|
537.2
|
|
|
|
459.5
|
|
Property revenues
|
|
|
113.5
|
|
|
|
121.6
|
|
|
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,537.4
|
|
|
|
2,454.7
|
|
|
|
2,233.7
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
603.7
|
|
|
|
564.3
|
|
|
|
499.3
|
|
Payroll and employee benefits
|
|
|
582.2
|
|
|
|
534.7
|
|
|
|
492.1
|
|
Occupancy and other operating costs
|
|
|
457.8
|
|
|
|
439.0
|
|
|
|
418.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
1,643.7
|
|
|
|
1,538.0
|
|
|
|
1,409.4
|
|
Selling, general and administrative expenses
|
|
|
490.4
|
|
|
|
499.5
|
|
|
|
473.5
|
|
Property expenses
|
|
|
58.1
|
|
|
|
62.1
|
|
|
|
60.6
|
|
Other operating (income) expenses, net (See Note 2)
|
|
|
5.8
|
|
|
|
0.9
|
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,198.0
|
|
|
|
2,100.5
|
|
|
|
1,939.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
339.4
|
|
|
|
354.2
|
|
|
|
294.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
57.3
|
|
|
|
67.1
|
|
|
|
73.1
|
|
Interest income
|
|
|
(2.7
|
)
|
|
|
(5.9
|
)
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
67.0
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.8
|
|
|
|
293.0
|
|
|
|
226.8
|
|
Income tax expense (See Note 2)
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.48
|
|
|
$
|
1.40
|
|
|
$
|
1.11
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
1.38
|
|
|
$
|
1.08
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
134.8
|
|
|
|
135.1
|
|
|
|
133.9
|
|
Diluted
|
|
|
136.8
|
|
|
|
137.6
|
|
|
|
136.8
|
|
Dividends per common share
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.13
|
|
See accompanying notes to consolidated financial statements.
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
Common
|
|
|
Restricted
|
|
|
Additional
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock Shares
|
|
|
Amount
|
|
|
Units
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In millions, except per share information)
|
|
|
Balances at June 30, 2006
|
|
|
133.0
|
|
|
$
|
1.4
|
|
|
$
|
4.6
|
|
|
$
|
545.2
|
|
|
$
|
3.2
|
|
|
$
|
14.6
|
|
|
$
|
(2.2
|
)
|
|
$
|
566.8
|
|
Stock option exercises
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.2
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.5
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(1.6
|
)
|
Issuance of shares upon settlement of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid on common shares ($0.13 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148.1
|
|
|
|
|
|
|
|
|
|
|
|
148.1
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
(5.4
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of
$3.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
(5.4
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax of $1.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134.8
|
|
Adjustment to initially apply SFAS No 158, net of tax of
$3.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007
|
|
|
135.2
|
|
|
$
|
1.4
|
|
|
$
|
2.8
|
|
|
$
|
573.6
|
|
|
$
|
134.4
|
|
|
$
|
7.5
|
|
|
$
|
(3.8
|
)
|
|
$
|
715.9
|
|
Stock option exercises
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.4
|
|
Treasury stock purchases
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.4
|
)
|
|
|
(35.4
|
)
|
Issuance of shares upon settlement of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
(2.8
|
)
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid on common shares ($0.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(34.2
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189.6
|
|
|
|
|
|
|
|
|
|
|
|
189.6
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
(1.7
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of
$3.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
(6.4
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax of $1.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
(1.3
|
)
|
Pension and post-retirement benefit plans, net of tax of
$4.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
135.0
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
600.9
|
|
|
$
|
289.8
|
|
|
$
|
(8.4
|
)
|
|
$
|
(39.2
|
)
|
|
$
|
844.5
|
|
Stock option exercises
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.2
|
|
Treasury stock purchases
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.3
|
)
|
|
|
(20.3
|
)
|
Dividend paid on common shares ($0.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(34.1
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200.1
|
|
|
|
|
|
|
|
|
|
|
|
200.1
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
(6.0
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of
$10.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
(16.8
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax of $0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
Pension and post-retirement benefit plans, net of tax of
$9.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162.6
|
|
Adjustment to adopt measurement provision under SFAS No
158, net of tax of $0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009
|
|
|
134.8
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
623.4
|
|
|
$
|
455.4
|
|
|
$
|
(45.9
|
)
|
|
$
|
(59.5
|
)
|
|
$
|
974.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
98.1
|
|
|
|
95.6
|
|
|
|
88.8
|
|
Impairment of long-lived assets
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Gain on hedging activities
|
|
|
(1.3
|
)
|
|
|
(2.0
|
)
|
|
|
(3.9
|
)
|
Loss (gain) on remeasurement of foreign denominated transactions
|
|
|
50.1
|
|
|
|
(55.6
|
)
|
|
|
(26.2
|
)
|
Gain on refranchisings and dispositions of assets
|
|
|
(11.0
|
)
|
|
|
(16.8
|
)
|
|
|
(11.4
|
)
|
Bad debt expense net of recoveries
|
|
|
0.7
|
|
|
|
(2.7
|
)
|
|
|
(4.4
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Stock-based compensation
|
|
|
16.2
|
|
|
|
11.4
|
|
|
|
4.9
|
|
Deferred income taxes
|
|
|
12.1
|
|
|
|
20.3
|
|
|
|
13.6
|
|
Changes in current assets and liabilities, excluding
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivable
|
|
|
2.1
|
|
|
|
(8.6
|
)
|
|
|
(13.2
|
)
|
Prepaids and other current assets
|
|
|
(35.4
|
)
|
|
|
14.9
|
|
|
|
(16.7
|
)
|
Accounts and drafts payable
|
|
|
3.3
|
|
|
|
20.8
|
|
|
|
5.0
|
|
Accrued advertising
|
|
|
(7.7
|
)
|
|
|
11.1
|
|
|
|
14.4
|
|
Other accrued liabilities
|
|
|
(20.8
|
)
|
|
|
(6.2
|
)
|
|
|
(101.4
|
)
|
Other long-term assets and liabilities, net
|
|
|
3.8
|
|
|
|
(28.4
|
)
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
310.8
|
|
|
|
243.4
|
|
|
|
110.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
(349.9
|
)
|
Proceeds from sale of
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
349.9
|
|
Payments for property and equipment
|
|
|
(204.0
|
)
|
|
|
(178.2
|
)
|
|
|
(87.3
|
)
|
Proceeds from refranchisings, disposition of assets and
restaurant closures
|
|
|
26.4
|
|
|
|
27.0
|
|
|
|
22.0
|
|
Payments for acquired franchisee operations, net of cash acquired
|
|
|
(67.9
|
)
|
|
|
(54.2
|
)
|
|
|
(16.9
|
)
|
Return of investment on direct financing leases
|
|
|
7.9
|
|
|
|
7.4
|
|
|
|
6.7
|
|
Other investing activities
|
|
|
(4.4
|
)
|
|
|
(1.3
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(242.0
|
)
|
|
|
(199.3
|
)
|
|
|
(77.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of term debt and capital leases
|
|
|
(7.4
|
)
|
|
|
(55.5
|
)
|
|
|
(130.8
|
)
|
Borrowings under revolving credit facility and other
|
|
|
94.3
|
|
|
|
50.0
|
|
|
|
0.7
|
|
Repayments of revolving credit facility
|
|
|
(144.3
|
)
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
3.0
|
|
|
|
3.8
|
|
|
|
8.2
|
|
Dividends paid on common stock
|
|
|
(34.1
|
)
|
|
|
(34.2
|
)
|
|
|
(16.9
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
3.3
|
|
|
|
9.3
|
|
|
|
13.5
|
|
Repurchases of common stock
|
|
|
(20.3
|
)
|
|
|
(35.4
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(105.5
|
)
|
|
|
(62.0
|
)
|
|
|
(126.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(7.6
|
)
|
|
|
14.4
|
|
|
|
4.6
|
|
Decrease in cash and cash equivalents
|
|
|
(44.3
|
)
|
|
|
(3.5
|
)
|
|
|
(89.3
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
166.0
|
|
|
|
169.5
|
|
|
|
258.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
121.7
|
|
|
$
|
166.0
|
|
|
$
|
169.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cashflow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid(1)
|
|
$
|
56.0
|
|
|
$
|
64.6
|
|
|
$
|
61.0
|
|
Income taxes paid(2)
|
|
$
|
112.3
|
|
|
$
|
73.5
|
|
|
$
|
150.6
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property with capital lease obligations
|
|
$
|
2.2
|
|
|
$
|
9.3
|
|
|
$
|
8.0
|
|
Net investment in direct financing leases
|
|
$
|
12.2
|
|
|
$
|
2.3
|
|
|
$
|
2.5
|
|
|
|
|
(1)
|
|
Amount for the year ended
June 30, 2007 is net of $13.0 million received upon
termination of interest rate swaps.
|
|
(2)
|
|
Amount for the year ended
June 30, 2007 includes $82.0 million in income taxes
incurred, resulting from the realignment of the Companys
European and Asian businesses.
|
See accompanying notes to consolidated financial statements.
76
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
|
|
Note 1.
|
Description
of Business and Organization
|
Description
of Business
Burger King Holdings, Inc. (BKH or the
Company) is a Delaware corporation formed on
July 23, 2002. The Company is the parent of Burger King
Corporation (BKC), a Florida corporation that
franchises and operates fast food hamburger restaurants,
principally under the Burger King brand.
The Company generates revenues from three sources:
(i) retail sales at Company restaurants;
(ii) franchise revenues, consisting of royalties based on a
percentage of sales reported by franchise restaurants and
franchise fees paid by franchisees; and (iii) property
income from restaurants that the Company leases or subleases to
franchisees.
Restaurant sales are affected by the timing and effectiveness of
the Companys advertising, new products and promotional
programs. The Companys results of operations also
fluctuate from quarter to quarter as a result of seasonal trends
and other factors, such as the timing of restaurant openings and
closings and the acquisition of franchise restaurants, as well
as variability of the weather. Restaurant sales are typically
higher in the Companys fourth and first fiscal quarters,
which are the spring and summer months when weather is warmer,
than in the Companys second and third fiscal quarters,
which are the fall and winter months. Restaurant sales during
the winter are typically highest in December, during the holiday
shopping season. The Companys restaurant sales and Company
restaurant margins are typically lowest during the
Companys third fiscal quarter, which occurs during the
winter months and includes February, the shortest month of the
year.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. The Company had consolidated, in accordance with
the provisions of Financial Accounting Standard Board
(FASB) Interpretation No. 46R,
Consolidation of Variable Interest Entities
an interpretation of ARB No. 51, one joint
venture that operated restaurants where the Company was a 49%
partner, but was deemed to be the primary beneficiary, as the
joint venture agreement provided protection to the joint venture
partner from absorbing expected losses. This joint venture was
dissolved on June 30, 2008 and, effective July 1,
2008, these restaurants have been operated as Company
restaurants. The results of operations of this joint venture are
not material to the Companys results of operations and
financial position.
Certain prior year amounts in the accompanying Financial
Statements and Notes to the Financial Statements have been
reclassified in order to be comparable with the current year
classifications. These reclassifications had no effect on
previously reported Net Income. (See significant accounting
policies for Income Taxes.)
Concentrations
of Risk
The Companys operations include Company and franchise
restaurants located in 73 countries and U.S. territories.
Of the 11,925 restaurants in operation as of June 30, 2009,
1,429 were Company restaurants and 10,496 were franchise
restaurants.
Four distributors service approximately 85% of our
U.S. system restaurants and the loss of any one of these
distributors would likely adversely affect our business.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the Companys consolidated
financial statements and accompanying notes. Management adjusts
such estimates and assumptions when facts and circumstances
dictate. Volatile
77
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
credit, equity, foreign currency, and energy markets, and
declines in consumer spending have increased and may continue to
affect the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be
determined with precision, actual results could differ
significantly from these estimates.
Foreign
Currency Translation
The functional currency of each foreign subsidiary is generally
the local currency. Foreign currency balance sheets are
translated using the end of period exchange rates, and
statements of income are translated at the average exchange
rates for each period. The resulting translation adjustments to
the balance sheets are recorded in accumulated other
comprehensive income (loss) within stockholders equity.
Foreign
Currency Transaction Gain or Losses
Foreign currency transaction gains or losses resulting from the
re-measurement of foreign-denominated assets and liabilities of
the Company or its subsidiaries are reflected in earnings in the
period when the exchange rates change and are included within
other operating (income) expenses, net in the Consolidated
Statements of Income.
Cash
and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments with original maturities of three months or less and
credit card receivables.
Auction
Rate Securities Available for Sale
Auction rate securities represent long-term variable rate bonds
tied to short-term interest rates that are reset through a
dutch auction process, which occurs every seven to
35 days, and are classified as available for sale
securities. Since the auction rate securities have long-term
maturity dates and there is no guarantee the holder will be able
to liquidate its holding, they do not meet the definition of
cash equivalents and, accordingly, are recorded as investments.
There were no auction rate securities outstanding as of
June 30, 2009 and 2008 and the Company did not purchase or
sell auction rate securities during the years ended
June 30, 2009 and 2008. The Company purchased and sold
auction rate securities in the amount of $349.9 million
during the year ended June 30, 2007.
Allowance
for Doubtful Accounts
The Company evaluates the collectibility of its trade accounts
receivable from franchisees based on a combination of factors,
including the length of time the receivables are past due and
the probability of collection from litigation or default
proceedings, where applicable. The Company records a specific
allowance for doubtful accounts in an amount required to adjust
the carrying values of such balances to the amount that the
Company estimates to be net realizable value. The Company writes
off a specific account when (a) the Company enters into an
agreement with a franchisee that releases the franchisee from
outstanding obligations, (b) franchise agreements are
terminated and the projected costs of collections exceed the
benefits expected to be received from pursuing the balance owed
through legal action, or (c) franchisees do not have the
financial wherewithal or unprotected assets from which
collection is reasonably assured.
Notes receivable represent loans made to franchisees arising
from re-franchisings of Company restaurants, sales of property,
and in certain cases when past due trade receivables from
franchisees are restructured into an interest-bearing note.
Trade receivables which are restructured to interest-bearing
notes are generally already fully reserved, and as a result, are
transferred to notes receivable at a net carrying value of zero.
Notes receivable with a carrying value greater than zero are
written down to net realizable value when it is probable or
likely that the Company is unable to collect all amounts due
under the contractual terms of the loan agreement.
78
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or net realizable value, and consist primarily of
restaurant food items and paper supplies. Inventories are
included in prepaids and other current assets in the
accompanying consolidated balance sheets.
Property
and Equipment, net
Property and equipment, net, owned by the Company are recorded
at historical cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using
the straight-line method based on the estimated useful lives of
the assets. Leasehold improvements to properties where the
Company is the lessee are amortized over the lesser of the
remaining term of the lease or the estimated useful life of the
improvement.
Leases
The Company defines lease term as the initial term of the lease,
plus any renewals covered by bargain renewal options or that are
reasonably assured of exercise because non-renewal would create
an economic penalty. Once determined, lease term is used
consistently by the Company for lease classification, rent
expense recognition, amortization of leasehold improvements and
minimum rent commitment purposes.
Assets acquired by the Company as lessee under capital leases
are stated at the lower of the present value of future minimum
lease payments or fair market value at the date of inception of
the lease. Capital lease assets are depreciated using the
straight-line method over the shorter of the useful life of the
asset or the underlying lease term.
The Company also enters into capital leases as lessor. Capital
leases meeting the criteria of direct financing leases are
recorded on a net basis, consisting of the gross investment and
residual value in the lease less the unearned income. Unearned
income is recognized over the lease term yielding a constant
periodic rate of return on the net investment in the lease.
Direct financing leases are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an
asset may not be recoverable based on the payment history under
the lease.
The Company records rent expense and income for operating leases
that contain rent holidays or scheduled rent increases on a
straight-line basis over the lease term. Contingent rentals are
generally based on sales levels in excess of stipulated amounts,
and thus are not considered minimum lease payments.
Favorable and unfavorable operating leases were recorded in 2002
as part of the acquisition of BKC by private equity funds
controlled by TPG Capital, Bain Capital Partners and the Goldman
Sachs Funds (the Sponsors) and subsequent
acquisitions of franchise restaurants. The Company amortizes
these favorable and unfavorable leases on a straight-line basis
over the remaining term of the leases. Upon early termination of
a lease, the write-off of the favorable or unfavorable lease
carrying value associated with the lease is recognized as a loss
or gain in the consolidated statements of income.
Goodwill
and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the
fair value of assets acquired and liabilities assumed in the
Companys acquisitions of franchise restaurants, which are
accounted for as business combinations. The Companys
indefinite-lived intangible asset consists of the Burger King
brand (the Brand), which was recorded as part of
the acquisitions of BKC by the Sponsors.
Goodwill and the Brand are not amortized, but are tested for
impairment on an annual basis and more often if an event occurs
or circumstances change that indicates impairment might exist.
The impairment test for goodwill requires the Company to compare
the carrying value of a reporting unit (with assigned goodwill)
to its fair value. The Companys reporting units are its
operating segments, as defined under FASB Statement of Financial
Accounting Standards (SFAS) No. 131
Disclosures About Segments of an Enterprise and Related
Information. If the carrying value of the reporting
unit exceeds its estimated fair value, the Company may be
required to record an impairment charge to goodwill.
79
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The impairment test for the Brand consists of a comparison of
the carrying value of the Brand to its fair value as a global
unit of accounting, with impairment, if any, equal to the amount
by which the carrying value exceeds its fair value.
The Company performs its impairment testing of goodwill and the
Brand as of the beginning of its fourth fiscal quarter. No
impairment charges resulted from these impairment tests for the
years ended June 30, 2009, 2008 and 2007.
Long-Lived
Assets
Long-lived assets, such as property and equipment and acquired
intangibles subject to amortization, are tested for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company
regularly reviews long-lived assets for indicators of
impairment. Some of the events or changes in circumstances that
would trigger an impairment review include, but are not limited
to, a significant under-performance relative to expected
and/or
historical results (two consecutive years of comparable
restaurant sales decreases or two consecutive years of negative
operating cash flows), significant negative industry or economic
trends, or knowledge of transactions involving the sale of
similar property at amounts below the carrying value. The
impairment test for long-lived assets requires the Company to
assess the recoverability of long-lived assets by comparing
their net carrying value to the sum of undiscounted estimated
future cash flows directly associated with and arising from use
and eventual disposition of the assets. If the net carrying
value of a group of long-lived assets exceeds the sum of related
undiscounted estimated future cash flows, the Company must
record an impairment charge equal to the excess, if any, of net
carrying value over fair value.
Long-lived assets are grouped for recognition and measurement of
impairment at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets.
Definite-lived intangible assets, consisting primarily of
franchise agreements and reacquired franchise rights, are
grouped for impairment reviews at the country level. Other
long-lived assets and related liabilities are grouped together
for impairment testing at the operating market level (based on
geographic areas) in the case of the United States, Canada, the
U.K. and Germany. The operating market groupings within the
United States and Canada are predominantly based on major
metropolitan areas within the United States and Canada.
Similarly, operating markets within the other foreign countries
with large asset concentrations (the U.K. and Germany) are
comprised of geographic regions within those countries (three in
the U.K. and four in Germany). These operating market
definitions are based upon the following primary factors:
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management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants,
and area managers receive incentives on this basis; and
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the Company does not evaluate individual restaurants to build,
acquire or close independent of an analysis of other restaurants
in these operating markets.
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In countries in which the Company has a smaller number of
restaurants, most operating functions and advertising are
performed at the country level, and shared by all restaurants in
the country. As a result, the Company has defined operating
markets as the entire country in the case of The Netherlands,
Spain, Italy, Mexico and China.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses,
gains, and losses that are included in comprehensive income
(loss), but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders equity,
net of tax. The Companys other comprehensive income (loss)
is comprised of unrealized gains and losses on foreign currency
translation adjustments, unrealized gains and losses on hedging
activity, net of tax, and minimum pension liability adjustments,
net of tax.
80
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Derivative
Financial Instruments
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended,
establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at
fair value. Gains or losses resulting from changes in the fair
value of derivatives are recognized in earnings or recorded in
other comprehensive income (loss) and recognized in the
statement of income when the hedged item affects earnings,
depending on the purpose of the derivatives and whether they
qualify for, and the Company has applied hedge accounting
treatment.
When applying hedge accounting, the Companys policy is to
designate, at a derivatives inception, the specific
assets, liabilities or future commitments being hedged, and to
assess the hedges effectiveness at inception and on an
ongoing basis. The Company may elect not to designate the
derivative as a hedging instrument where the same financial
impact is achieved in the financial statements. The Company does
not enter into or hold derivatives for trading or speculative
purposes.
Disclosures
About Fair Value of Financial Instruments
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair
value, establishes a framework for measuring fair value and
enhances disclosures about fair value measurements required
under other accounting pronouncements, but does not change
existing guidance as to whether or not an instrument is carried
at fair value. On July 1, 2008, the Company adopted the
provisions of SFAS No. 157 related to its financial
assets and financial liabilities. Also, in October 2008, the
FASB issued Financial Statement of Position (FSP)
FAS 157-3,
as amended, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
(FSP
FAS 157-3),
which clarified the application of SFAS No. 157 in a
market that is not active and also provided an example to
illustrate key considerations in determining the fair value of a
financial asset when the market for the financial asset is not
active. FSP
FAS 157-3
did not have an effect upon the Companys adoption of
SFAS No. 157.
In February 2008, the FASB issued FSP
FAS 157-2,
Effective Date of FASB No. 157, which
permits a one-year deferral for the implementation of
SFAS No. 157 with regard to non-financial assets and
liabilities that are not recognized or disclosed at fair value
in the financial statements on a recurring basis (at least
annually). The Company elected to defer the adoption of
SFAS No. 157 for such items under this provision until
its quarter ending September 30, 2009. For the Company
these items primarily include long-lived assets, goodwill and
intangibles for which fair value would be determined as part of
the related impairment tests, intangible assets measured at fair
value in conjunction with the Companys acquisition of BKC
on December 12, 2002, but not measured at fair value in
subsequent periods, and asset retirement obligations initially
measured at fair value under SFAS No. 143,
Asset Retirement Obligations. The Company
does not currently anticipate that full adoption of
SFAS No. 157 in fiscal 2010 will materially impact the
Companys results of operations or financial condition.
SFAS No. 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the principal market, or if none exists, the most
advantageous market, for the specific asset or liability at the
measurement date (the exit price). The fair value should be
based on assumptions that market participants would use when
pricing the asset or liability. SFAS No. 157
establishes a fair value hierarchy that prioritizes the
information used in measuring fair value as follows:
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Level 1
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Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets
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Level 2
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Inputs other than quoted prices included in Level 1 that
are observable for the asset or liability either directly or
indirectly
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Level 3
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Unobservable inputs reflecting managements own assumptions
about the inputs used in pricing the asset or liability
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81
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Certain of the Companys derivatives are valued using
various pricing models or discounted cash flow analyses that
incorporate observable market parameters, such as interest rate
yield curves, option volatilities and currency rates, classified
as Level 2 within the valuation hierarchy. In accordance
with the requirements of SFAS No. 157, derivative
valuations incorporate credit risk adjustments that are
necessary to reflect the probability of default by the
counterparty or the Company.
The carrying amounts for cash and equivalents, trade accounts
and notes receivable and accounts and drafts receivable
approximate fair value based on the short-term nature of these
accounts.
Restricted investments, consisting of investment securities held
in a rabbi trust to invest compensation deferred under the
Companys Executive Retirement Plan and fund future
deferred compensation obligations, are carried at fair value,
with net unrealized gains and losses recorded in the
Companys consolidated statements of income. The fair value
of these investment securities are determined using quoted
market prices in active markets.
At June 30, 2009, the fair value of the Companys
variable rate term debt was estimated at $791.9 million,
compared to a carrying amount of $816.4 million. This fair
value was estimated using quoted market prices and are similar
to Level 2 inputs within the SFAS No. 157
valuation hierarchy.
Revenue
Recognition
Revenues include retail sales at Company restaurants and
franchise and property revenues. Franchise revenues include
royalties and initial and renewal franchise fees. Property
revenues include rental income from operating lease rentals and
earned income on direct financing leases on property leased or
subleased to franchisees. Retail sales at Company restaurants
are recognized at the point of sale and royalties from
franchisees are based on a percentage of retail sales reported
by franchisees. The Company presents sales net of sales tax and
other sales-related taxes. Royalties are recognized when
collectibility is reasonably assured. Initial franchise fees are
recognized as revenue when the related restaurant begins
operations. A franchisee may pay a renewal franchise fee and
renew its franchise for an additional term. Renewal franchise
fees are recognized as revenue upon receipt of the
non-refundable fee and execution of a new franchise agreement.
The cost recovery accounting method is used to recognize
revenues for franchisees for whom collectibility is not
reasonably assured. Rental income on operating lease rentals and
earned income on direct financing leases are recognized when
collectibility is reasonably assured.
Advertising
and Promotional Costs
The Company expenses the production costs of advertising when
the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period
incurred.
Franchise restaurants and Company restaurants contribute to
advertising funds managed by the Company in the United States
and certain international markets where Company restaurants
operate. Under the Companys franchise agreements,
contributions received from franchisees must be spent on
advertising, marketing and related activities, and result in no
gross profit recognized by the Company. Advertising expense, net
of franchisee contributions, totaled $93.3 million for the
year ended June 30, 2009, $91.5 million for the year
ended June 30, 2008, and $87.5 million for the
year ended June 30, 2007, and is included in selling,
general and administrative expenses in the accompanying
consolidated statements of income.
To the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are accounted
for as a deferred liability and are recorded in accrued
advertising in the accompanying consolidated balance sheets.
Franchisees in markets where no Company restaurants operate
contribute to advertising funds not managed by the Company. Such
contributions and related fund expenditures are not reflected in
the Companys results of operations or financial position.
82
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Income
Taxes
Amounts in the financial statements related to income taxes are
calculated using the principles of SFAS No. 109,
Accounting for Income Taxes. Under
SFAS No. 109, deferred tax assets and liabilities
reflect the impact of temporary differences between the amounts
of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for tax purposes, as well as
tax credit carryforwards and loss carryforwards. These deferred
taxes are measured by applying currently enacted tax rates. A
deferred tax asset is recognized when it is considered more
likely than not to be realized. The effects of changes in tax
rates on deferred tax assets and liabilities are recognized in
income in the year in which the law is enacted. A valuation
allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred
tax assets will not be recognized.
Income tax benefits credited to stockholders equity relate
to tax benefits associated with amounts that are deductible for
income tax purposes but do not affect earnings. These benefits
are principally generated from employee exercises of
nonqualified stock options and settlement of restricted stock
awards.
Effective July 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
requires that a position taken or expected to be taken in a tax
return be recognized in the financial statements when it is more
likely than not (i.e., a likelihood of more than fifty percent)
that the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. Upon
adoption, the Company had no material change to its unrecognized
tax benefits.
During fiscal year 2009, the Company changed its classification
of transaction gains and losses resulting from the remeasurement
of foreign deferred tax assets, reflected in its consolidated
statements of income. In accordance with SFAS No. 109,
Accounting for Income Taxes
(SFAS No. 109), transaction gains and
losses resulting from the remeasurement of foreign deferred tax
assets or liabilities may be reported separately or included in
deferred tax expense or benefit, if that presentation is
considered more useful. In that regard, in order to
(i) reduce complexity in financial reporting by mitigating
the impact that fluctuations in exchange rates have on the
calculation of the Companys effective tax rate,
(ii) provide clarity by reducing the impact attributable to
fluctuations in exchange rates on the Companys effective
tax rate, leaving remaining differences between expected and
actual tax expense primarily related to trends in earnings, and
(iii) provide transparency to its financial statements by
isolating foreign exchange transaction gains and losses within
the same line in the consolidated statements of income, the
Company believes it to be preferable to reclassify the foreign
exchange transaction gains and losses attributable to the
remeasurement of foreign deferred tax assets, previously
included within income tax expense, to other operating (income)
expense, net. For the year ended June 30, 2007, this change
in accounting policy resulted in an increase to income tax
expense of $3.4 million, with a corresponding increase in
net gains from foreign exchange transactions, included in other
operating (income) expense, net. For the year ended
June 30, 2008, the impact of this change in accounting
policy was not significant. This accounting policy change had no
effect on net income for the periods presented.
Earnings
per Share
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. The computation of diluted earnings per share is
consistent with that of basic earnings per share, while giving
effect to all dilutive potential common shares that were
outstanding during the period.
Stock-based
Compensation
On July 1, 2006, the Company adopted SFAS No. 123
(Revised 2004) Share-Based Payment
(SFAS No. 123R), which replaced SFAS
No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123)
83
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
superseded Accounting Standards Board (APB)
No. 25, Accounting for Stock Issued to
Employees, and related interpretations and amended
SFAS No. 95. Prior to the adoption of
SFAS No. 123R, all stock option grants were accounted
for under the recognition and measurement principles of APB
No. 25. Accordingly, no stock-based compensation expense
was recorded in the consolidated statements of income for stock
options, as all stock options granted had an exercise price
equal to the market value of the Companys common stock on
the date of grant. Under the pro-forma disclosure required by
SFAS No. 123, compensation expense for stock options
was measured using the minimum value method, as permitted under
SFAS No. 123.
Stock options granted by the Company typically contain only a
service condition for vesting. For performance-based restricted
stock and restricted stock units (PBRS) and
restricted stock units (RSU) awards, vesting is
based both on a performance condition and a service condition.
For awards granted subsequent to the Companys adoption of
SFAS No. 123R that have a cliff-vesting schedule,
stock-based compensation cost is recognized ratably over the
requisite service period. For awards with a graded vesting
schedule, where the award vests in increments during the
requisite service period, the Company has elected to record
stock-based compensation cost over the requisite service period
for the entire award, in accordance with the
SFAS No. 123R.
Retirement
Plans
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of
FASB Statement No. 87, 88, 106, 132 ( R),
(SFAS No. 158). In the fourth quarter of
fiscal year 2007, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. Additionally,
SFAS No. 158 requires measurement of the funded status
of pension and postretirement plans as of the date of the
Companys fiscal year end effective for the fiscal year
ending June 30, 2009. The Companys plans had
measurement dates that did not coincide with its fiscal year end
and thus the Company was required to change their measurement
dates in fiscal 2009.
SFAS No. 158 required the Company to recognize the
funded status of its pension and postretirement plans in the
June 30, 2007 consolidated balance sheet, with a
corresponding adjustment to Accumulated other comprehensive
income (loss), net of tax. The impact of adopting these
provisions of SFAS No. 158 was an after tax reduction
of shareholders equity of $6.2 million in fiscal year
2007. Subsequent to the adoption of SFAS No. 158,
gains or losses and prior service costs or credits are being
recognized as they arise as a component of other comprehensive
income (loss) to the extent they have not been recognized as a
component of net periodic benefit cost pursuant to
SFAS No. 87, Employers Accounting for
Pensions, or SFAS No. 106 Employers
Accounting for Post retirement benefits Other than
Pensions. In the fourth quarter of fiscal year 2009, the
Company adopted the measurement date provisions of
SFAS No. 158 and recorded a decrease to retained
earnings of $0.4 million after tax related to its pension
plans and postretirement medical plan.
The Company sponsors the Burger King Savings Plan (the
Savings Plan), a defined contribution plan under the
provisions of section 401(k) of the Internal Revenue Code.
The Savings Plan is voluntary and is provided to all employees
who meet the eligibility requirements. A participant can elect
to contribute up to 50% of their compensation subject to IRS
limits and the Company matches 100% of the first 6% of employee
compensation. Effective July 1, 2007, the Company added the
Burger King Holdings, Inc. Stock Fund (the BK Stock
Fund) to the Savings Plan as an investment option.
Participants in the Savings Plan may direct no more than 10% of
their investment elections to the BK Stock Fund and no more than
10% of their total account balance.
The Company also maintains an Executive Retirement Plan
(ERP) for all officers and senior management.
Officers and senior management may elect to defer up to 50% of
base pay once 401(k) limits are reached and up to 100% of
incentive pay on a before-tax basis under the ERP. BKC provides
a
dollar-for-dollar
match up to the first 6% of base pay. Additionally, the Company
may make a discretionary contribution ranging from 0% to 6%
based on the Companys performance. The total deferred
compensation liability related to the ERP was $17.9 million
and $20.2 million at June 30, 2009 and 2008,
respectively.
84
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Effective July 1, 2007, the Company funded
$21.7 million into a rabbi trust established to invest
compensation deferred under the ERP and fund future deferred
compensation obligations. The rabbi trust is subject to creditor
claims in the event of insolvency, but the assets held in the
rabbi trust are not available for general corporate purposes and
are classified as restricted investments within other assets,
net in the Companys consolidated balance sheets. The rabbi
trust is required to be consolidated into the Companys
consolidated financial statements in accordance with the
provisions of Emerging Issues Task Force (EITF)
Issue
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested.
Prior to July 1, 2007, participants received a fixed return
from the Company on amounts they deferred under the deferred
compensation plan. Subsequent to July 1, 2007, participants
receive returns on amounts they deferred under the deferred
compensation plan based on investment elections they make.
The investment securities in the rabbi trust have been
designated by the Company as trading securities and are carried
at fair value as restricted investments within other assets, net
in the Companys consolidated balance sheets, with
unrealized trading gains and losses recorded in earnings. The
fair value of the investment securities held in the rabbi trust
was $17.9 million and $20.2 million as of
June 30, 2009 and 2008, respectively. Net unrealized
trading gains and losses, which totaled $2.3 million and
$1.3 million for the years ended June 30, 2009 and
2008, respectively, are recorded in other operating (income)
expense, net, in the Companys consolidated statements of
income. The financial impact on the Companys consolidated
statements of income from unrealized trading gains and losses on
investments in the rabbi trust is completely offset by a
corresponding change in compensation expense, which is reflected
in selling, general and administrative expenses in the
Companys consolidated statements of income.
Amounts recorded in the consolidated statements of income
representing the Companys matching contributions to the
Savings Plan and the ERP for the years ended June 30, 2009,
2008 and 2007 totaled $3.5 million, $4.3 million and
$3.8 million, respectively.
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Note 3.
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Stock-based
Compensation
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Prior to February 16, 2006, the date the Company filed a
registration statement on
Form S-1
with the Securities and Exchange Commission, or SEC (for its
initial public offering, which occurred on May 18, 2006)
(the Registration Statement), the Company accounted
for stock-based compensation in accordance with the
intrinsic-value method of APB No. 25. Under the intrinsic
value method of APB No. 25, stock options were granted at
fair value, with no compensation cost being recognized in the
financial statements over the vesting period. In addition, the
Company issued restricted stock units under APB No. 25 and
recognized compensation cost over the vesting period of the
awards. Under the pro forma disclosure required by
SFAS No. 123, compensation expense for stock options
was measured by the Company using the minimum value method,
which assumed no volatility in the Black-Scholes model used to
calculate the options fair value.
As a result of filing the Registration Statement, the Company
transitioned from a non-public entity to a public entity under
SFAS No. 123R. Since the Company applied
SFAS No. 123 pro forma disclosure for stock options
using the minimum value method prior to becoming a public
entity, SFAS No. 123R required that the Company adopt
SFAS 123R using a combination of the prospective and
modified prospective methods. The Company was required to apply
the prospective method for those stock options granted prior to
the Company filing the Registration Statement, as the Company
used the minimum value method for these awards for disclosure
under SFAS No. 123. Under the prospective method, any
unrecognized compensation cost relating to these stock options
was required to be recognized in the financial statements
subsequent to the adoption of SFAS No. 123R, using the
same method of recognition and measurement originally applied to
these options. Since no compensation cost was recognized by the
Company in the financial statements for these stock options
under APB No. 25, no compensation cost has been or will be
recognized for these stock options after the Companys
adoption of SFAS No. 123R on July 1, 2006, unless
such options are modified. For stock options granted subsequent
to the filing of the Registration Statement, but prior to the
SFAS No. 123R adoption date, the Company was required
to apply the modified
85
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
prospective method, in which compensation expense was recognized
for any unvested portion of the awards granted between the
filing of the Registration Statement and the adoption date of
SFAS No. 123R over the remaining vesting period of the
awards.
On July 1, 2006, the Company adopted
SFAS No. 123R, which requires share-based compensation
cost to be recognized based on the grant date estimated fair
value of each award, net of estimated cancellations, over the
employees requisite service period, which is generally the
vesting period of the equity grant.
Non-qualified stock option awards (stock options)
granted by the Company expire 10 years from the grant date
and generally vest ratably over a four to five-year service
period commencing on the grant date. In August 2008, the Company
granted stock options covering approximately 1.2 million
shares to eligible employees. Nonvested shares granted by the
Company consist of restricted stock and RSU, PBRS awards and
deferred shares issued to non-employee members of the
Companys Board of Directors. RSUs generally vest
ratably over a two to five year service period commencing on the
grant date. In August 2008, the Company granted PBRS awards
covering approximately 0.4 million shares of common stock
to eligible employees. The number of PBRS awards that actually
vest are determined based on achievement of a Company
performance target for the year ended June 30, 2009. The
PBRS primarily have a three or four-year vesting period, which
includes the one-year performance period.
The Company recorded $16.2 million, $11.4 million and
$4.9 million of stock-based compensation expense in the
years ended June 30, 2009, 2008 and 2007, respectively. In
accordance with SFAS No. 123R, tax benefits realized
for tax deduction from stock options exercised of
$3.3 million, $9.3 million and $13.5 million in
the years ended June 30, 2009, 2008 and 2007, respectively,
are reported as financing cash flows.
Equity
Incentive Plan and 2006 Omnibus Incentive Plan
The Companys Equity Incentive Plan and 2006 Omnibus
Incentive Plan (collectively, the Plans) permit the
grant of stock-based compensation awards including stock
options, RSUs, deferred shares and PBRS to participants
for up to 20.8 million shares of the Companys common
stock. Awards are granted with an exercise price or market value
equal to the closing price of the Companys common stock on
the date of grant. The number of shares available to be granted
under the Plans totaled approximately 5.1 million, as of
June 30, 2009. The Company satisfies share-based exercises
and vesting through the issuance of authorized but previously
unissued shares of the Companys stock or treasury shares.
Nonvested shares are generally net-settled with new Company
shares withheld, and not issued, to meet the employees
minimum statutory withholding tax requirements.
Under the Companys compensation program for the Board of
Directors, non-employee directors receive an annual grant of
deferred shares of the Companys common stock and may also
elect to receive their quarterly retainer and Committee fees in
deferred shares in lieu of cash. The annual grant vests in
quarterly installments over a one-year period on the first day
of each calendar quarter following the grant date, and the
deferred shares granted in lieu of cash are fully vested on the
grant date. The deferred shares will settle and shares of common
stock will be issued at the time the non-employee director no
longer serves on the Board of Directors.
Stock-based compensation expense for stock options is estimated
on the grant date using a Black-Scholes option pricing model.
The Companys specific weighted-average assumptions for the
risk-free interest rate, expected term, expected volatility and
expected dividend yield are discussed below. Additionally, under
SFAS No. 123R the Company is required to estimate
pre-vesting forfeitures for purposes of determining compensation
expense to be recognized. Future expense amounts for any
quarterly or annual period could be affected by changes in the
Companys assumptions or changes in market conditions.
In connection with the adoption of SFAS No. 123R, the
Company has determined the expected term of stock options
granted using the simplified method as discussed in
Section D, Certain Assumptions Used in Valuation
Methods, of SEC Staff Accounting Bulletin (SAB)
No. 107. Based on the results of applying the simplified
86
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
method, the Company has determined that 6.25 years is an
appropriate expected term for awards with four-year graded
vesting and 6.50 years for awards with five-year grading
vesting.
Upon the adoption of SFAS No. 123R, the Company
utilized a volatility assumption in the option pricing model to
calculate the grant date fair value of stock options. However,
as a newly public company, the Company had previously elected,
for stock options granted subsequent to the adoption of
SFAS No. 123R, to base the estimate of the expected
volatility of its common stock for the Black-Scholes model
solely on the historical volatility of a group of its peers, as
permitted under SFAS No. 123R and
SAB No. 107. Beginning in 2008, the Company determined
it had sufficient information regarding the historical
volatility of its common stock price and implied volatility of
its exchange-traded options to incorporate a portion of these
volatilities into the calculation of expected volatility used in
the Black-Scholes model, in addition to the historical
volatility of a group of its peers.
The fair value of each stock option granted under the Plans
during the years ended June 30, 2009, 2008, and 2007 was
estimated on the date of grant using the Black-Scholes option
pricing model based on the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
3.33%
|
|
4.40%
|
|
5.34%
|
Expected term (in years)
|
|
6.25
|
|
6.25
|
|
6.25
|
Expected volatility
|
|
31.80%
|
|
29.35%
|
|
33.01%
|
Expected dividend yield
|
|
0.96%
|
|
1.07%
|
|
0.00%
|
A summary of stock option activity under the Plans as of and for
the year ended June 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Total
|
|
|
Weighted
|
|
|
Total
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Contractual Term
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
(Yrs)
|
|
|
|
(In 000s)
|
|
|
|
|
|
(In 000s)
|
|
|
|
|
|
Options outstanding as of July 1, 2008
|
|
|
5,425.2
|
|
|
$
|
12.89
|
|
|
$
|
75,446.0
|
|
|
|
7.15
|
|
Granted
|
|
|
1,234.1
|
|
|
$
|
25.99
|
|
|
|
|
|
|
|
|
|
Pre-vest cancels
|
|
|
(166.5
|
)
|
|
$
|
19.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(564.0
|
)
|
|
$
|
5.62
|
|
|
|
|
|
|
|
|
|
Post-vest cancels
|
|
|
(2.8
|
)
|
|
$
|
22.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2009
|
|
|
5,926.0
|
|
|
$
|
16.10
|
|
|
$
|
26,861.4
|
|
|
|
6.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of June 30, 2009
|
|
|
2,866.7
|
|
|
$
|
10.37
|
|
|
$
|
22,749.0
|
|
|
|
5.62
|
|
The weighted average grant date fair value of stock options
granted was $8.54, $7.99 and $6.71 in the years ended
June 30, 2009, 2008 and 2007, respectively. The total
intrinsic value of stock options exercised was
$11.4 million, $14.4 million and $30.5 million in
the years ended June 30, 2009 and 2008, respectively.
For the years ended June 30, 2009, 2008 and 2007, proceeds
from stock options exercised were $3.1 million,
$3.8 million and $9.0 million, respectively, and
actual tax benefits realized for tax deductions from stock
options exercised were $3.3 million, $9.3 million and
$14.0 million, respectively.
87
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
A summary of nonvested share activity under the Plans, which
includes RSUs, Deferred Stock Awards, and PBRS awards, as
of and for the year ended June 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Total
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Nonvested Shares
|
|
|
Value
|
|
|
|
(In 000s)
|
|
|
|
|
|
Nonvested shares outstanding as of July 1, 2008
|
|
|
1,305.5
|
|
|
$
|
18.74
|
|
Granted
|
|
|
606.9
|
|
|
$
|
25.10
|
|
Vested & settled
|
|
|
(55.9
|
)
|
|
$
|
19.61
|
|
Pre-vest cancels
|
|
|
(88.1
|
)
|
|
$
|
20.69
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares outstanding as of June 30, 2009
|
|
|
1,768.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares unvested as of June 30, 2009
|
|
|
1,642.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of nonvested shares
granted during the years ended June 30, 2009, 2008 and 2007
were $25.10, $23.95, and $14.36, respectively. The total
intrinsic value of grants which have vested and settled was
$1.1 million, $14.3 million and $6.5 million in
the years ended June 30, 2009, 2008,and 2007, respectively.
As of June 30, 2009, there was $31.3 million of total
unrecognized compensation cost related to stock options and
nonvested shares granted under the Plans. That cost is expected
to be recognized in the Companys financial statements over
a weighted-average period of 1.74 years.
For the years ended June 30, 2009, 2008, and 2007, the fair
value of shares withheld by the Company to meet employees
minimum statutory withholding tax requirements on the settlement
of RSUs was $0.3 million, $4.1 million and
$2.0 million, respectively.
|
|
Note 4.
|
Acquisitions,
Closures and Dispositions
|
Acquisitions
All acquisitions of franchise restaurants are accounted for
using the purchase method of accounting under
SFAS No. 141 and guidance under EITF Issue
No. 04-1,
Accounting for Pre-existing Relationships between
parties to a Business Combination. These acquisitions
are summarized as follows (in millions, except for number of
restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Number of restaurants acquired
|
|
|
87
|
|
|
|
83
|
|
|
|
64
|
|
Prepaids and other current assets
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
Property and equipment, net
|
|
|
14.6
|
|
|
|
13.3
|
|
|
|
10.2
|
|
Goodwill and other intangible assets
|
|
|
55.7
|
|
|
|
47.5
|
|
|
|
11.7
|
|
Assumed liabilities
|
|
|
(3.4
|
)
|
|
|
(7.6
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
67.9
|
|
|
$
|
54.2
|
|
|
$
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closures
and Dispositions
Gains and losses on closures and dispositions represent sales of
Company properties and other costs related to restaurant
closures and sales of Company restaurants to franchisees,
referred to as refranchisings, and are recorded in
other operating (income) expenses, net in the accompanying
consolidated statements of income (See
88
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Note 20). Gains and losses recognized in the current period
may reflect closures and refranchisings that occurred in
previous periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Number of restaurant closures
|
|
|
19
|
|
|
|
29
|
|
|
|
24
|
|
Number of refranchisings
|
|
|
51
|
|
|
|
38
|
|
|
|
15
|
|
Net gain on restaurant closures, refranchisings and dispositions
of assets
|
|
$
|
(8.5
|
)
|
|
$
|
(9.8
|
)
|
|
$
|
(4.7
|
)
|
Included in the net gain on restaurant closures, refranchisings
and dispositions of assets for the year ended June 30, 2009
is a $5.4 million gain from the refranchising of Company
restaurants in the U.S. and Germany. Included in the net
gain on restaurant closures, refranchisings and dispositions of
assets for the year ended June 30, 2008 is a
$9.0 million gain from the refranchising of Company
restaurants, primarily in Germany.
|
|
Note 5.
|
Franchise
Revenues
|
Franchise revenues consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Franchise royalties
|
|
$
|
518.2
|
|
|
$
|
512.6
|
|
|
$
|
438.3
|
|
Initial franchise fees
|
|
|
13.8
|
|
|
|
13.2
|
|
|
|
11.5
|
|
Renewal franchise fees and other related fees
|
|
|
11.4
|
|
|
|
11.4
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
543.4
|
|
|
$
|
537.2
|
|
|
$
|
459.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Trade and
Notes Receivable, Net
|
Trade and notes receivable, net, consists of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Trade accounts receivable
|
|
$
|
146.3
|
|
|
$
|
157.4
|
|
Notes receivable, current portion
|
|
|
5.5
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151.8
|
|
|
|
162.3
|
|
Allowance for doubtful accounts
|
|
|
(21.8
|
)
|
|
|
(23.0
|
)
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
130.0
|
|
|
$
|
139.3
|
|
|
|
|
|
|
|
|
|
|
The change in allowances for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
23.0
|
|
|
$
|
28.6
|
|
|
$
|
32.3
|
|
Provision (recoveries) for doubtful accounts, net
|
|
|
0.7
|
|
|
|
(2.7
|
)
|
|
|
(4.4
|
)
|
Write-offs
|
|
|
(1.9
|
)
|
|
|
(2.9
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
21.8
|
|
|
$
|
23.0
|
|
|
$
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Prepaids
and Other Current Assets, net
|
Included in prepaids and other current assets, net were
refundable income taxes of $39.3 million and zero as of
June 30, 2009 and 2008, respectively, inventories totaling
$15.8 million for each of the year ended June 30,
2009,
89
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
and 2008 and prepaids of $31.3 million and
$37.7 million as of June 30, 2009 and 2008,
respectively. Refundable income taxes for fiscal 2009 were
primarily generated as a result of tax benefits realized from
the dissolution of dormant foreign entities.
|
|
Note 8.
|
Property
and Equipment, Net
|
Property and equipment, net, along with their estimated useful
lives, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
|
|
$
|
390.3
|
|
|
$
|
388.5
|
|
Buildings and improvements(1)
|
|
(up to 40 years)
|
|
|
697.1
|
|
|
|
634.2
|
|
Machinery and equipment(2)
|
|
(up to 18 years)
|
|
|
293.8
|
|
|
|
279.4
|
|
Furniture, fixtures, and other
|
|
(up to 10 years)
|
|
|
132.8
|
|
|
|
122.1
|
|
Construction in progress
|
|
|
|
|
106.6
|
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,620.6
|
|
|
$
|
1,509.9
|
|
Accumulated depreciation and amortization(3)
|
|
|
|
|
(607.4
|
)
|
|
|
(549.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
1,013.2
|
|
|
$
|
960.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Buildings and improvements include assets under capital leases
of $75.6 million and $79.4 million as of June 30,
2009 and 2008, respectively. |
|
(2) |
|
Machinery and equipment include assets under capital leases of
$1.8 million and $3.6 million as of June 30, 2009
and 2008, respectively. |
|
(3) |
|
Accumulated depreciation related to capital leases totaled
$34.1 million and $33.4 million as of June 30,
2009 and 2008, respectively. |
Depreciation and amortization expense on property and equipment
totaled $110.1 million, $116.6 million and
$110.6 million for the years ended June 30, 2009, 2008
and 2007, respectively.
Construction in progress represents new restaurant construction,
reimaging (demolish and rebuild) and remodeling of existing and
acquired restaurants.
|
|
Note 9.
|
Intangible
Assets, Net and Goodwill
|
The Burger King Brand, which had a carrying value of
$905.1 million and $934.8 million as of June 30,
2009 and 2008, respectively, is the Companys only
intangible asset with an indefinite life. The decrease in the
net carrying value of the Brand is primarily attributable to a
$29.7 million impact from foreign currency translation on
the value of the Brand recorded in the Companys EMEA/APAC
reporting segment. Goodwill had a carrying value of
$26.4 million and $26.6 million as of June 30,
2009 and 2008, respectively.
90
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The table below presents intangible assets subject to
amortization, along with their useful lives (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Franchise agreements
|
|
up to 26 years
|
|
$
|
140.6
|
|
|
$
|
109.8
|
|
Favorable leases
|
|
up to 20 years
|
|
|
48.8
|
|
|
|
35.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
189.4
|
|
|
$
|
145.6
|
|
Accumulated amortization
|
|
|
|
|
(31.8
|
)
|
|
|
(25.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total, Net
|
|
|
|
$
|
157.6
|
|
|
$
|
119.8
|
|
|
|
|
|
|
|
|
|
|
|
|
The $30.8 million and $13.0 million increase in the
value of franchise agreements and favorable leases,
respectively, is attributable to the acquisition of franchise
restaurants in the year ended June 30, 2009.
As of June 30, 2009, estimated future amortization expense
of intangible assets subject to amortization for each of the
years ended June 30, is $8.4 million in 2010 and 2011,
$8.3 million in 2012 and 2013, $8.2 million in 2014
and $116.0 million thereafter.
|
|
Note 10.
|
Earnings
Per Share
|
Basic and diluted earnings per share were calculated as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
134.8
|
|
|
|
135.1
|
|
|
|
133.9
|
|
Effect of dilutive securities
|
|
|
2.0
|
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
136.8
|
|
|
|
137.6
|
|
|
|
136.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.48
|
|
|
$
|
1.40
|
|
|
$
|
1.11
|
|
Diluted earnings per share
|
|
$
|
1.46
|
|
|
$
|
1.38
|
|
|
$
|
1.08
|
|
For the years ended June 30, 2009, 2008 and 2007 there were
2.4 million, 0.8 million and 1.4 million
anti-dilutive stock options outstanding, respectively.
|
|
Note 11.
|
Other
Accrued Liabilities and Other Liabilities
|
Included in other accrued liabilities (current) as of
June 30, 2009 and 2008, were accrued payroll and
employee-related benefit costs totaling $69.4 million and
$84.2 million, respectively. The decrease in payroll and
employee-related benefit costs of $14.8 million is
primarily due to the timing of payroll periods during fiscal
2009, as compared to prior fiscal year.
Included in other liabilities (non-current) as of June 30,
2009 and 2008, were accrued pension liabilities of
$54.0 million and $53.8 million, respectively;
interest rate swap liabilities of $32.4 million and
$10.1 million, respectively; casualty insurance reserves of
$27.7 million and $27.6 million, respectively; retiree
health benefits of $21.1 million and $21.4 million,
respectively; and liabilities for unfavorable leases of
$155.5 million and $189.6 million, respectively. The
$34.1 million decrease in liabilities for unfavorable
leases is primarily attributable to amortization taken during
fiscal year 2009 and an $11.6 million impact from foreign
currency translation.
91
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Long-term debt is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Term Loan A
|
|
$
|
150.0
|
|
|
$
|
152.5
|
|
Term Loan B-1
|
|
|
666.2
|
|
|
|
666.2
|
|
Revolving Credit Facility
|
|
|
|
|
|
|
50.0
|
|
Other
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
818.3
|
|
|
|
871.1
|
|
Less: current maturities of debt
|
|
|
(62.7
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
755.6
|
|
|
$
|
868.8
|
|
|
|
|
|
|
|
|
|
|
The Companys credit facility consists of term loans A and
B-1 and a revolving credit facility (credit
facility).
The interest rate under Term Loan A and the revolving credit
facility is, at the Companys option, either (a) the
greater of the federal funds effective rate plus 0.50% or the
prime rate (ABR), plus a rate not to exceed 0.75%,
which varies according to the Companys leverage ratio or
(b) LIBOR plus a rate not to exceed 1.75%, which varies
according to Companys leverage ratio. The interest rate
for Term Loan B-1 is, at the Companys option, either
(a) ABR, plus a rate of 0.50% or (b) LIBOR plus 1.50%,
in each case so long as the Companys leverage ratio
remains at or below certain levels (but in any event not to
exceed 0.75% in the case of ABR loans and 1.75% in the case of
LIBOR loans). The weighted average interest rates related to the
Companys term debt was 5.1% and 6.3% for the years ended
June 30, 2009 and June 30, 2008, respectively, which
included the impact of interest rate swaps on 70.6% and 55.6% of
the Companys term debt, respectively, (See Note 13).
The credit facility contains certain customary financial and
non-financial covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees and mergers and acquisitions. These covenants also
place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between the Company and its
subsidiaries and certain transactions with affiliates.
The financial covenants limit the maximum amount of capital
expenditures to an amount ranging from $180.0 million to
$250.0 million per fiscal year over the term of the
facility, subject to certain financial ratios. Following the end
of each fiscal year, the Company is required to prepay the term
debt in an amount equal to 50% of excess cash flow (as defined
in the credit facility agreement) for such fiscal year. This
prepayment requirement is not applicable if the Companys
leverage ratio is less than a predetermined amount. There are
other events and transactions, such as certain asset sales, sale
and leaseback transactions resulting in aggregate net proceeds
over $2.5 million in any fiscal year, proceeds from
casualty events and incurrence of debt that will trigger
additional mandatory prepayment. The Company has not been
required to make any prepayments in connection with these
covenants.
The facility also allows the Company to make dividend payments,
subject to certain covenant restrictions. As of June 30,
2009, the Company believes it was in compliance with the
financial covenants of the credit facility.
Provided that the Company is in compliance with certain
financial covenants, the facility allows the Company to request
one or more tranches of incremental term loans up to a maximum
amount of $150.0 million, although no lender is obligated
to provide any incremental term loans unless it so agrees. As of
June 30, 2009, the amount available under the revolving
credit facility was $119.4 million net of
$30.6 million of irrevocable standby letters of credit
outstanding. BKC incurs a commitment fee on the unused revolving
credit facility at the rate of 0.50% multiplied by the unused
portion.
92
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
BKC is the borrower under the facility and the Company and
certain subsidiaries have jointly and severally unconditionally
guaranteed the payment of the amounts under the facility. The
Company, BKC and certain subsidiaries have pledged, as
collateral, a 100% equity interest in the domestic subsidiaries
of the Company and BKC with certain exceptions. Furthermore, BKC
has pledged as collateral a 65% equity interest in certain
foreign subsidiaries.
During the year ended June 30, 2009, the Company paid
$146.8 million of term debt, of which $2.5 million
related to the Term Loan A and $144.3 million related to
the revolving credit facility and borrowed $94.3 million
under the revolving credit facility. As of June 30, 2009,
the next scheduled principal payment on term debt is the
September 30, 2009 principal payment of $15.6 million
on Term Loan A. The level of required principal repayments
increases over time thereafter. The maturity dates of Term Loan
A, Term Loan B-1, and any amounts drawn under the revolving
credit facility are June 2011, June 2012 and June 2011,
respectively.
The aggregate maturities of long-term debt, including the Term
Loan A, Term Loan B-1 and other debt as of June 30, 2009,
are as follows (in millions):
|
|
|
|
|
|
|
Principal
|
|
Year Ended June 30,
|
|
Amount
|
|
|
2010
|
|
$
|
62.7
|
|
2011
|
|
|
87.7
|
|
2012
|
|
|
666.4
|
|
2013
|
|
|
0.2
|
|
2014
|
|
|
0.2
|
|
Thereafter
|
|
|
1.1
|
|
|
|
|
|
|
Total
|
|
$
|
818.3
|
|
|
|
|
|
|
The Company also has lines of credit with foreign banks, which
can also be used to provide guarantees, in the amounts of
$3.5 million and $4.4 million as of June 30, 2009
and 2008, respectively. There are no guarantees issued against
these lines of credit as of June 30, 2009 and 2008,
respectively.
|
|
Note 13.
|
Fair
Value Measurements and Derivative Instruments
|
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157. This
statement provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures
concerning fair value. SFAS No. 157 applies to
instruments accounted for under previously issued pronouncements
that prescribe fair value as the relevant measure of value. (See
Note 2)
Disclosures
about Derivative Instruments and Hedging
Activities
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161), which
provides companies with requirements for enhanced disclosures
about derivative instruments and hedging activities to enable
investors to better understand their effects on a companys
financial position, financial performance and cash flows. The
Company adopted the disclosure provisions of
SFAS No. 161 during the quarter ended March 31,
2009.
The Company enters into derivative instruments for risk
management purposes, including derivatives designated as hedging
instruments under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS No. 133) and those utilized as
economic hedges. The Company uses derivatives to manage exposure
to fluctuations in interest rates and currency exchange rates.
93
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The fair value of the Companys foreign currency forward
contracts and interest rate swaps was determined based on the
present value of expected future cash flows considering the
risks involved, including nonperformance risk, and using
discount rates appropriate for the duration.
Interest
Rate Swaps
The Company enters into receive-variable, pay-fixed interest
rate swap contracts to hedge a portion of the Companys
forecasted variable-rate interest payments on its underlying
Term Loan A and Term Loan B debt (the Term Debt).
Interest payments on the Term Debt are made quarterly and the
variable rate on the Term Debt is reset at the end of each
fiscal quarter. The interest rate swap contracts are designated
as cash flow hedges and to the extent they are effective in
offsetting the variability of the variable-rate interest
payments, changes in the derivatives fair value are not
included in current earnings but are included in accumulated
other comprehensive income (AOCI) in the accompanying
consolidated balance sheets. These changes in fair value are
subsequently reclassified into earnings as a component of
interest expense each quarter as interest payments are made on
the Term Debt. At June 30, 2009, interest rate swap
contracts with a notional amount of $595.0 million were
outstanding.
In September 2006, the Company settled interest rate swaps
designated as cash flow hedges, which had a fair value of
$11.5 million, and terminated the hedge relationship. In
accordance with SFAS No. 133, this fair value is
recorded in AOCI and is being recognized as a reduction to
interest expense each quarter over the remaining term of the
Term Debt. At June 30, 2009, $2.0 million remained in
AOCI.
Foreign
Currency Forward Contracts
The Company enters into foreign currency forward contracts,
which typically have maturities between three and fifteen
months, to economically hedge the remeasurement of foreign
currency-denominated intercompany loan receivables and other
foreign-currency denominated assets recorded in the
Companys consolidated balance sheets. The Company also
enters into foreign currency forward contracts in order to
manage the foreign exchange variability in forecasted royalty
cash flows due to fluctuations in exchange rates. Remeasurement
represents changes in the expected amount of cash flows to be
received or paid upon settlement of the intercompany loan
receivables and other foreign-currency denominated assets and
liabilities resulting from a change in foreign currency exchange
rates. At June 30, 2009, foreign currency forward contracts
with a notional amount of $397.0 million were outstanding.
Credit
Risk
By entering into derivative instrument contracts, the Company
exposes itself, from time to time, to counterparty credit risk.
Counterparty credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the
fair value of a derivative contract is in an asset position, the
counterparty has a liability to the Company, which creates
credit risk for the Company. The Company attempts to minimize
this risk by selecting counterparties with investment grade
credit ratings, limiting its exposure to any single counterparty
and regularly monitoring its market position with each
counterparty.
The Companys derivative valuations consider credit risk
adjustments that are necessary to reflect the probability of
default by the counterparty or itself.
Credit-Risk
Related Contingent Features
The Companys derivative instruments do not contain any
credit-risk related contingent features.
The following tables present the required quantitative
disclosures (in millions) under SFAS No. 157 and
SFAS No. 161, on a combined basis, for the
Companys financial instruments, which include derivatives
designated as cash flow hedging instruments, derivatives not
designated as hedging instruments, and other investments, which
consists of money market accounts and mutual funds held in a
Rabbi trust established by the Company to invest
94
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
compensation deferred by participants in the Companys
Executive Retirement Plan and to fund future deferred
compensation obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
Fair Value Measurements at June 30, 2009
|
|
|
|
Carrying Value and Balance Sheet Location
|
|
|
Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
Prepaid and
|
|
|
|
|
|
|
|
|
Other
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
Deferrals
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Current
|
|
|
Other
|
|
|
Accrued
|
|
|
and
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (asset)
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.3
|
|
|
$
|
|
|
Foreign currency forward contracts (liability)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20.3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20.3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
(20.3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20.0
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009
|
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Forward Contracts
|
|
|
Total
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (effective
portion)
|
|
$
|
(39.2
|
)
|
|
$
|
|
|
|
$
|
(39.2
|
)
|
Gain (loss) reclassified from AOCI into interest expense, net(a)
|
|
$
|
10.5
|
|
|
$
|
|
|
|
$
|
10.5
|
|
Gain (loss) recognized in interest expense, net (ineffective
portion)(b)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other (income) expense, net
|
|
$
|
|
|
|
$
|
43.2
|
|
|
$
|
43.2
|
|
|
|
|
(a) |
|
Includes $1.3 million of gain for the year ended
June 30, 2009 related to the terminated hedges. |
|
(b) |
|
For the year ended June 30, 2009, the Company determined
that the amount of ineffectiveness from cash flow hedges was not
material. |
95
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 14.
|
Interest
Expense
|
Interest expense consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Term loans
|
|
$
|
47.2
|
|
|
$
|
56.4
|
|
|
$
|
63.3
|
|
Capital lease obligations
|
|
|
10.1
|
|
|
|
10.7
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57.3
|
|
|
$
|
67.1
|
|
|
$
|
73.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had $4.9 million and $6.7 million of
unamortized deferred financing costs at June 30, 2009 and
2008, respectively. These fees are classified in other assets,
net and are amortized over the term of the debt into interest
expense on term debt using the effective interest method.
Income before income taxes, classified by source of income, is
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Domestic
|
|
$
|
241.4
|
|
|
$
|
245.1
|
|
|
$
|
220.4
|
|
Foreign
|
|
|
43.4
|
|
|
|
47.9
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
284.8
|
|
|
$
|
293.0
|
|
|
$
|
226.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
57.0
|
|
|
$
|
64.5
|
|
|
$
|
52.4
|
|
State, net of federal income tax benefit
|
|
|
6.1
|
|
|
|
8.3
|
|
|
|
4.8
|
|
Foreign
|
|
|
9.5
|
|
|
|
10.3
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72.6
|
|
|
$
|
83.1
|
|
|
$
|
65.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9.1
|
|
|
$
|
9.8
|
|
|
$
|
11.5
|
|
State, net of federal income tax benefit
|
|
|
6.2
|
|
|
|
1.3
|
|
|
|
0.6
|
|
Foreign
|
|
|
(3.2
|
)
|
|
|
9.2
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.1
|
|
|
$
|
20.3
|
|
|
$
|
13.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84.7
|
|
|
$
|
103.4
|
|
|
$
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The U.S. Federal tax statutory rate reconciles to the
effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S. Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
|
|
2.8
|
|
|
|
2.6
|
|
|
|
2.1
|
|
Costs/(Benefits) and taxes related to foreign operations
|
|
|
(4.7
|
)
|
|
|
7.4
|
|
|
|
(1.5
|
)
|
Foreign tax rate differential
|
|
|
(4.9
|
)
|
|
|
(5.3
|
)
|
|
|
(2.0
|
)
|
Foreign exchange differential on tax benefits
|
|
|
0.7
|
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
Change in valuation allowance
|
|
|
1.1
|
|
|
|
(3.1
|
)
|
|
|
3.1
|
|
Change in accrual for tax uncertainties
|
|
|
(1.3
|
)
|
|
|
(0.1
|
)
|
|
|
(2.0
|
)
|
Other
|
|
|
1.0
|
|
|
|
(0.6
|
)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
29.7
|
%
|
|
|
35.3
|
%
|
|
|
34.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate was 29.7% for the fiscal
year ended June 30, 2009, primarily as a result of the
resolution of federal and state audits and tax benefits realized
from the dissolution of dormant foreign entities.
Income tax expense includes an increase in valuation allowance
related to deferred tax assets in foreign countries of
$3.0 million for the year ended June 30, 2009, a
decrease of $7.1 million for the year ended June 30,
2008 and an increase of $5.0 million for the year ended
June 30, 2007. The increase in valuation allowance for the
year ended June 30, 2009 is a result of operating losses in
certain foreign jurisdictions.
The following table provides the amount of income tax expense
(benefit) allocated to continuing operations and amounts
separately allocated to other items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income tax expense from continuing operations
|
|
$
|
84.7
|
|
|
$
|
103.4
|
|
|
$
|
78.7
|
|
Interest rate swaps in accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive income (loss)
|
|
|
(11.0
|
)
|
|
|
(5.0
|
)
|
|
|
(4.9
|
)
|
Pension liability in accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive income (loss)
|
|
|
(9.4
|
)
|
|
|
(4.5
|
)
|
|
|
3.7
|
|
Adjustments to deferred income taxes related to Brand
|
|
|
(0.2
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
Adjustments to the valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
related to Brand
|
|
|
(0.3
|
)
|
|
|
(6.5
|
)
|
|
|
(2.5
|
)
|
Stock option tax benefit in additional paid-in capital
|
|
|
(3.3
|
)
|
|
|
(9.3
|
)
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60.5
|
|
|
$
|
75.7
|
|
|
$
|
61.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The significant components of deferred income tax expense
(benefit) attributable to income from continuing operations are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Deferred income tax expense (exclusive of the effects of
components listed below)
|
|
$
|
3.2
|
|
|
$
|
20.3
|
|
|
$
|
8.4
|
|
Change in valuation allowance, net of amounts allocated as
adjustments to purchase accounting
|
|
|
3.0
|
|
|
|
(7.1
|
)
|
|
|
5.0
|
|
Change in effective state income tax rate
|
|
|
4.5
|
|
|
|
|
|
|
|
(1.9
|
)
|
Change in effective foreign income tax rate
|
|
|
1.4
|
|
|
|
7.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12.1
|
|
|
$
|
20.3
|
|
|
$
|
13.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Trade and notes receivable, principally due to allowance for
doubtful accounts
|
|
$
|
12.7
|
|
|
$
|
16.0
|
|
Accrued employee benefits
|
|
|
49.6
|
|
|
|
44.4
|
|
Unfavorable leases
|
|
|
71.9
|
|
|
|
81.5
|
|
Liabilities not currently deductible for tax
|
|
|
52.7
|
|
|
|
51.8
|
|
Tax loss and credit carryforwards
|
|
|
111.3
|
|
|
|
88.3
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
61.6
|
|
|
|
72.2
|
|
Other
|
|
|
3.4
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
363.2
|
|
|
|
355.1
|
|
Valuation allowance
|
|
|
(78.7
|
)
|
|
|
(87.9
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
284.5
|
|
|
|
267.2
|
|
Less deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
237.3
|
|
|
|
226.4
|
|
Leases
|
|
|
55.1
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
292.4
|
|
|
|
273.4
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
7.9
|
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2009, the valuation allowance
decreased by $9.2 million. The decrease in valuation
allowance is primarily the result of changes in currency
exchange rates.
98
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Changes in valuation allowance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
87.9
|
|
|
$
|
97.8
|
|
|
$
|
88.7
|
|
Change in estimates recorded to deferred income tax expense
|
|
|
3.0
|
|
|
|
(7.1
|
)
|
|
|
5.0
|
|
Change in estimates in valuation allowance recorded to
intangible assets
|
|
|
(0.3
|
)
|
|
|
(6.5
|
)
|
|
|
(2.5
|
)
|
Changes from foreign currency exchange rates
|
|
|
(11.9
|
)
|
|
|
4.6
|
|
|
|
6.6
|
|
Other
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
78.7
|
|
|
$
|
87.9
|
|
|
$
|
97.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no Federal loss carryforwards in the United
States and has State loss carryforwards of $1.8 million,
expiring between 2022 and 2023. In addition, the Company has
foreign loss carryforwards of $261.3 million expiring
between 2010 and 2029, and foreign loss carryforwards of
$151.9 million that do not expire. As of June 30,
2009, the Company has a foreign tax credit carryforward balance
of $43.5 million.
Deferred taxes have not been provided on basis differences
related to investments in foreign subsidiaries. These
differences consist primarily of $117.5 million of
undistributed earnings, which are considered to be permanently
reinvested in the operations of such subsidiaries outside the
United States. Determination of the deferred income tax
liability on these unremitted earnings is not practicable. Such
liability, if any, depends on circumstances existing if and when
remittance occurs.
As discussed in Note 2, the Company adopted FIN 48
effective July 1, 2007. Upon adoption, the Company had no
material changes to its unrecognized tax benefits as of
July 1, 2007. The amount of unrecognized tax benefits at
July 1, 2007 was approximately $22.0 million which, if
recognized, would affect the effective income tax rate.
The Company had $19.5 million and $22.6 million of
unrecognized tax benefits at June 30, 2009 and 2008,
respectively, which if recognized, would affect the effective
income tax rate. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Beginning balance
|
|
$
|
22.6
|
|
|
$
|
22.0
|
|
Additions on tax position related to the current year
|
|
|
6.3
|
|
|
|
3.7
|
|
Additions for tax positions of prior years
|
|
|
2.0
|
|
|
|
2.1
|
|
Reductions for tax positions of prior years
|
|
|
(9.1
|
)
|
|
|
(4.1
|
)
|
Reductions for settlements
|
|
|
(0.3
|
)
|
|
|
|
|
Reductions due to statute expiration
|
|
|
(2.0
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
19.5
|
|
|
$
|
22.6
|
|
|
|
|
|
|
|
|
|
|
During the twelve months beginning July 1, 2009, it is
reasonably possible the Company will reduce unrecognized tax
benefits by a range of approximately $1.5 million to
$3.0 million primarily as a result of the expiration of
certain statutes of limitations and the completion of certain
tax audits.
The Company recognizes potential accrued interest and penalties
related to unrecognized tax benefits in income tax expense. The
total amount of accrued interest and penalties at June 30,
2009 and 2008 was $3.7 million and $4.2 million,
respectively, which was included as a component of the
unrecognized tax benefits noted above. Potential interest and
penalties associated with uncertain tax positions recognized
during the years ended June 30, 2009 and 2008 were
$0.6 million and $1.5 million, respectively. To the
extent interest and penalties are not assessed
99
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
with respect to uncertain tax positions, amounts accrued will be
reduced and reflected as a reduction of the overall income tax
provision.
The Company files income tax returns, including returns for its
subsidiaries, with federal, state, local and foreign
jurisdictions. Generally the Company is subject to routine
examination by taxing authorities in these jurisdictions,
including significant international tax jurisdictions, such as
the United Kingdom, Germany, Spain, Switzerland, Singapore and
Mexico. None of the foreign jurisdictions are individually
material. The Company is currently under audit by the
U.S. Internal Revenue Service for the years ended
June 30, 2008 and June 30, 2007. The Company also has
various state and foreign income tax returns in the process of
examination. From time to time, these audits result in proposed
assessments where the ultimate resolution may result in the
Company owing additional taxes. The Company believes that its
tax positions comply with applicable tax law and that it has
adequately provided for these matters.
|
|
Note 16.
|
Related
Party Transactions
|
A former member of the Board of Directors of the Company, who
resigned from the Board effective April 1, 2007, has a
direct financial interest in a company which is the landlord
under a lease for a new corporate headquarters facility that the
Company had proposed to build in Coral Gables, Florida. In May
2007, the Company terminated the lease and incurred costs of
$6.7 million, including a termination fee of
$5.0 million paid by the Company to the landlord, which
includes a reimbursement of the landlords expenses.
The Company paid $1.1 million in registration expenses
relating to the secondary offerings during the year ended
June 30, 2008. This amount included registration and filing
fees, printing fees, external accounting fees, all reasonable
fees and disbursements of one law firm selected by the Sponsors
and all expenses related to the road show for the secondary
offerings.
As of June 30, 2009, the Company leased or subleased 1,108
restaurant properties to franchisees and non-restaurant
properties to third parties under capital and operating leases.
The building and leasehold improvements of the leases with
franchisees are usually accounted for as direct financing leases
and recorded as a net investment in property leased to
franchisees, while the land is recorded as operating leases.
Most leases to franchisees provide for fixed payments with
contingent rent when sales exceed certain levels. Lease terms
generally range from 10 to 20 years. The franchisees bear
the cost of maintenance, insurance and property taxes.
Property and equipment, net leased to franchisees and other
third parties under operating leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
195.8
|
|
|
$
|
200.9
|
|
Buildings and improvements
|
|
|
114.0
|
|
|
|
95.4
|
|
Restaurant equipment
|
|
|
5.1
|
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
314.9
|
|
|
$
|
308.0
|
|
Accumulated depreciation
|
|
|
(40.9
|
)
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
274.0
|
|
|
$
|
273.1
|
|
|
|
|
|
|
|
|
|
|
100
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Net investment in property leased to franchisees and other third
parties under direct financing leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Future minimum rents to be received
|
|
$
|
306.4
|
|
|
$
|
306.3
|
|
Estimated unguaranteed residual value
|
|
|
4.0
|
|
|
|
3.9
|
|
Unearned income
|
|
|
(166.2
|
)
|
|
|
(166.1
|
)
|
Allowance on direct financing leases
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144.0
|
|
|
$
|
143.6
|
|
Current portion included within trade receivables
|
|
|
(8.7
|
)
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in property leased to franchisees
|
|
$
|
135.3
|
|
|
$
|
135.4
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company is the lessee on land, building,
equipment, office space and warehouse leases, including 250
restaurant buildings under capital leases. Initial lease terms
are generally 10 to 20 years. Most leases provide for fixed
monthly payments. Many of these leases provide for future rent
escalations and renewal options. Certain leases require
contingent rent, determined as a percentage of sales, generally
when annual sales exceed specific levels. Most leases also
obligate the Company to pay the cost of maintenance, insurance
and property taxes.
As of June 30, 2009, future minimum lease receipts and
commitments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
Lease Commitments
|
|
|
|
Financing
|
|
|
Operating
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
2010
|
|
$
|
29.2
|
|
|
$
|
69.9
|
|
|
$
|
(14.4
|
)
|
|
$
|
(167.1
|
)
|
2011
|
|
|
28.7
|
|
|
|
65.4
|
|
|
|
(14.5
|
)
|
|
|
(156.6
|
)
|
2012
|
|
|
27.5
|
|
|
|
60.4
|
|
|
|
(14.1
|
)
|
|
|
(147.5
|
)
|
2013
|
|
|
26.9
|
|
|
|
57.1
|
|
|
|
(14.0
|
)
|
|
|
(140.8
|
)
|
2014
|
|
|
25.9
|
|
|
|
52.3
|
|
|
|
(14.0
|
)
|
|
|
(182.5
|
)
|
Thereafter
|
|
|
168.2
|
|
|
|
346.0
|
|
|
|
(67.1
|
)
|
|
|
(833.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
306.4
|
|
|
$
|
651.1
|
|
|
$
|
(138.1
|
)
|
|
$
|
(1,628.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total minimum obligations under capital
leases are $138.1 million and $154.4 million as of
June 30, 2009 and 2008, respectively. Of these amounts,
$67.5 million and $78.1 million represents interest as
of June 30, 2009 and 2008, respectively. The remaining
balance of $70.6 million and $76.3 million is
reflected as capital lease obligations recorded in the
Companys consolidated balance sheet, of which
$4.8 million and $5.1 million is classified as current
portion of long-term debt and capital leases as of June 30,
2009 and 2008, respectively.
101
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Property revenues are comprised primarily of rental income from
operating leases and earned income on direct financing leases
with franchisees as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
69.9
|
|
|
$
|
78.9
|
|
|
$
|
76.1
|
|
Contingent
|
|
|
20.6
|
|
|
|
20.7
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental income
|
|
|
90.5
|
|
|
|
99.6
|
|
|
|
92.3
|
|
Earned income on direct financing leases
|
|
|
23.0
|
|
|
|
22.0
|
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property revenues
|
|
$
|
113.5
|
|
|
$
|
121.6
|
|
|
$
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense associated with the lease commitments is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Rental expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
166.5
|
|
|
$
|
150.2
|
|
|
$
|
154.7
|
|
Contingent
|
|
|
7.7
|
|
|
|
7.4
|
|
|
|
7.3
|
|
Amortization of favorable and unfavorable leases contracts, net
|
|
|
(18.2
|
)
|
|
|
(24.2
|
)
|
|
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expense
|
|
$
|
156.0
|
|
|
$
|
133.4
|
|
|
$
|
137.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable leases are amortized on a straight line basis over the
remaining lease term for a period of up to 20 years, with
amortization expense included in occupancy and other operating
costs and property expenses in the consolidated statements of
income. Unfavorable leases are amortized over a period of up to
20 years as a reduction in occupancy and other operating
costs and property expenses in the consolidated statements of
income.
Amortization of favorable leases totaled $2.6 million,
$1.8 million and $2.1 million for the years ended
June 30, 2009, 2008 and 2007, respectively. Amortization of
unfavorable leases totaled $20.8 million,
$26.0 million and $26.7 million for the years ended
June 30, 2009, 2008 and 2007, respectively.
Favorable leases, net of accumulated amortization totaled
$36.5 million and $25.1 million as of June 30,
2009 and June 30, 2008, respectively, and are classified as
intangible assets in the accompanying consolidated balance
sheets (See Note 9). Unfavorable leases, net of accumulated
amortization totaled $155.5 million and $189.6 million
as of June 30, 2009 and June 30, 2008, respectively,
and are classified within other deferrals and liabilities in the
accompanying consolidated balance sheets.
As of June 30, 2009, estimated future amortization expense
of favorable lease contracts subject to amortization for each of
the years ended June 30 is $2.5 million in 2010 and 2011,
$2.4 million in 2012, $2.3 million in 2013 and 2014
and $24.5 million thereafter. As of June 30, 2009,
estimated future amortization expense of unfavorable lease
contracts subject to amortization for each of the years ended
June 30 is $17.9 million in 2010, $16.4 million in
2011, $15.2 million in 2012, $14.4 million in 2013,
$13.4 million in 2014 and $78.2 million thereafter.
102
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 18.
|
Stockholders
Equity
|
Dividends
Paid
During each of the years ended June 30, 2009 and 2008, the
Company declared four quarterly cash dividends of $0.0625 per
share on its common stock and two quarterly cash dividends of
$0.0625 per share on its common stock during the year ended
June 30, 2007. We paid quarterly dividends of $0.0625 per
share of common stock for the third and fourth quarter of the
year ended June 30, 2007, resulting in $16.9 million
of cash payments to shareholders of record. Total dividends paid
by the Company during each of the years ended June 30,
2009, 2008, and 2007 was $34.1 million, $34.2 million,
and $16.9 million, respectively.
Accumulated
Other Comprehensive Income (Loss)
The following table displays the change in the components of
accumulated other comprehensive income (loss) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
Comprehensive
|
|
|
|
Derivatives
|
|
|
Pensions
|
|
|
Translation
|
|
|
Income (loss)
|
|
|
Balance at June 30, 2006
|
|
$
|
(15.5
|
)
|
|
$
|
1.7
|
|
|
$
|
(0.8
|
)
|
|
$
|
(14.6
|
)
|
Translation Adjustments
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
5.4
|
|
Net change in fair value of derivatives, net of tax of
$3.4 million
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
Amounts reclassified into earnings from terminated swaps, net of
tax of $1.5 million
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
Adjustment to initially apply SFAS 158, net of tax of
$3.7 million
|
|
|
|
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
|
|
|
(7.6
|
)
|
|
|
(4.5
|
)
|
|
|
4.6
|
|
|
|
(7.5
|
)
|
Translation Adjustments
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
1.7
|
|
Net change in fair value of derivatives, net of tax of
$3.9 million
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
Amounts reclassified into earnings from terminated swaps, net of
tax of $1.1 million
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Pension and post-retirement benefit plans, net of tax of
$4.5 million
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
0.1
|
|
|
|
2.0
|
|
|
|
6.3
|
|
|
|
8.4
|
|
Translation Adjustments
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Net change in fair value of derivatives, net of tax of
$10.6 million
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
16.8
|
|
Amounts reclassified into earnings from terminated swaps, net of
tax of $0.4 million
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
Pension and post-retirement benefit plans, net of tax of
$9.2 million
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
17.8
|
|
|
$
|
15.8
|
|
|
$
|
12.3
|
|
|
$
|
45.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 19.
|
Pension
and Post Retirement Medical Benefits
|
Pension
Benefits
The Company sponsors noncontributory defined benefit pension
plans for its salaried employees in the United States (the
U.S. Pension Plans) and certain employees in
the United Kingdom, Germany and Switzerland (the
International Pension Plans). Effective
December 31, 2005, all benefits accrued under the
U.S. Pension Plans were frozen at the benefit level
attained as of that date.
103
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Postretirement
Medical Benefits
The Companys postretirement medical plan (the
U.S. Medical Plan) provides medical, dental and
life insurance benefits to U.S. salaried retirees hired
prior to June 30, 2001 and who were age 40 or older as
of June 30, 2001, and their eligible dependents. The amount
of retirement health care coverage an employee will receive
depends upon the length of credited service with the Company,
multiplied by an annual factor to determine the value of the
post-retirement health care coverage.
The U.S Medical Plan also provides prescription drug coverage to
retirees as a primary provider in lieu of Medicare Part D.
Recent legislation enacted will result in the federal government
paying a special direct subsidy to employers (the
Part D subsidy) as an incentive to encourage
employers to continue providing prescription drug coverage to
Medicare-eligible employees. Under the subsidy, an employer may
receive an annual amount equal to 28 percent of the
allowable retiree drug costs between $295 and $6,000. The annual
effect of the Part D subsidy is reflected in the
Companys estimated future cash flows for the
U.S. Medical Plan and is not significant.
Obligations
and Funded Status
The following table sets forth the change in benefit
obligations, fair value of plan assets and amounts recognized in
the balance sheets for the U.S. Pension Plans,
International Pension Plans and U.S. Medical Plan (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
147.8
|
|
|
$
|
145.9
|
|
|
$
|
27.0
|
|
|
$
|
20.4
|
|
|
$
|
22.3
|
|
|
$
|
21.9
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
1.6
|
|
|
|
0.6
|
|
|
|
0.5
|
|
Interest cost
|
|
|
11.0
|
|
|
|
8.7
|
|
|
|
1.6
|
|
|
|
1.2
|
|
|
|
1.7
|
|
|
|
1.3
|
|
Actuarial (gains) losses
|
|
|
(6.4
|
)
|
|
|
(2.2
|
)
|
|
|
(3.3
|
)
|
|
|
0.9
|
|
|
|
(1.8
|
)
|
|
|
(0.9
|
)
|
Employee Contributions
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Part D Rx Subsidy Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(4.1
|
)
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(6.4
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
146.0
|
|
|
$
|
147.8
|
|
|
$
|
23.6
|
|
|
$
|
25.7
|
|
|
$
|
22.1
|
|
|
$
|
22.3
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
99.0
|
|
|
$
|
101.3
|
|
|
$
|
20.8
|
|
|
$
|
18.5
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
(19.5
|
)
|
|
|
(2.9
|
)
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
24.8
|
|
|
|
5.2
|
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Employee Contributions
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Actuarial gain/loss
|
|
|
|
|
|
|
|
|
|
|
(3.5
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(6.4
|
)
|
|
|
(4.6
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
97.9
|
|
|
$
|
99.0
|
|
|
$
|
16.6
|
|
|
$
|
19.7
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(48.1
|
)
|
|
$
|
(48.8
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(22.1
|
)
|
|
$
|
(22.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Amounts recognized in the consolidated balance sheet as of
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(1.0
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
|
|
|
$
|
(1.0
|
)
|
|
$
|
(0.9
|
)
|
Noncurrent liabilities
|
|
|
(47.1
|
)
|
|
|
(47.8
|
)
|
|
|
(6.9
|
)
|
|
|
(6.0
|
)
|
|
|
(21.1
|
)
|
|
|
(21.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension liability, end of fiscal year
|
|
$
|
(48.1
|
)
|
|
$
|
(48.8
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(22.1
|
)
|
|
$
|
(22.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income
(AOCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial loss (gain)
|
|
$
|
31.2
|
|
|
$
|
7.1
|
|
|
$
|
(1.3
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AOCI (before tax)
|
|
$
|
31.2
|
|
|
$
|
7.1
|
|
|
$
|
(1.3
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net gain for the International Pension Plans and
the U.S. Medical Plans that will be amortized from
accumulated other comprehensive gain into net periodic benefit
costs in the year ending June 30, 2010 is not significant.
Additional
year-end information for the U.S. Pension Plans, International
Pension Plans and U.S. Medical Plan with accumulated benefit
obligations in excess of plan assets
The following sets forth the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
the U.S. Pension Plans, International Pension Plans and
U.S. Medical Plan with accumulated benefit obligations in
excess of plan assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Projected benefit obligation
|
|
$
|
146.0
|
|
|
$
|
147.8
|
|
|
$
|
7.3
|
|
|
$
|
5.8
|
|
|
$
|
22.1
|
|
|
$
|
22.3
|
|
Accumulated benefit obligation
|
|
$
|
146.0
|
|
|
$
|
147.8
|
|
|
$
|
6.4
|
|
|
$
|
5.1
|
|
|
$
|
22.1
|
|
|
$
|
22.3
|
|
Fair value of plan assets
|
|
$
|
97.9
|
|
|
$
|
99.0
|
|
|
$
|
1.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
As of June 30, 2009, for International Pension Plans,
accumulated benefit obligations in excess of plan assets relates
to the Germany pension plan, which had no assets in this plan.
Components
of Net Periodic Benefit Cost
A summary of the components of net periodic benefit cost for the
U.S. Pension Plans and International Pension Plans and
U.S. Medical Plan is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
U.S. Medical
|
|
|
|
U.S. Pension Plans
|
|
|
Pension Plans
|
|
|
Plans
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.3
|
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
Interest cost
|
|
|
8.8
|
|
|
|
8.7
|
|
|
|
7.6
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Expected return on plan assets
|
|
|
(8.8
|
)
|
|
|
(8.2
|
)
|
|
|
(7.7
|
)
|
|
|
(0.5
|
)
|
|
|
(1.3
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial (gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
1.6
|
|
|
$
|
1.2
|
|
|
$
|
1.7
|
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Other
Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
U.S. Medical
|
|
|
|
U.S. Pension Plans
|
|
|
Pension Plans
|
|
|
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Unrecognized actuarial (gain) loss
|
|
$
|
24.1
|
|
|
$
|
8.4
|
|
|
$
|
0.4
|
|
|
$
|
4.0
|
|
|
$
|
(1.5
|
)
|
|
$
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in OCI
|
|
$
|
24.1
|
|
|
$
|
8.4
|
|
|
$
|
0.4
|
|
|
$
|
4.0
|
|
|
$
|
(1.5
|
)
|
|
$
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
The weighted-average assumptions used in computing the benefit
obligations of the U.S. Pension Plans and U.S. Medical
Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
U.S. Medical
|
|
|
|
U.S. Pension Plans
|
|
|
Pension Plans
|
|
|
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Discount rate as of year-end
|
|
|
6.37
|
%
|
|
|
6.10
|
%
|
|
|
6.07
|
%
|
|
|
6.00
|
%
|
|
|
6.10
|
%
|
|
|
5.64
|
%
|
|
|
6.37
|
%
|
|
|
6.10
|
%
|
|
|
6.07
|
%
|
Range of compensation rate increase
|
|
|
N/A
|
*
|
|
|
N/A
|
*
|
|
|
N/A
|
*
|
|
|
3.53
|
%
|
|
|
4.15
|
%
|
|
|
3.60
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
* |
|
The Company curtailed the U.S Pension Plans during the year
ended June 30, 2006. |
The discount rate used in the calculation of the benefit
obligation at June 30, 2009 for the U.S. Plans is
derived from a yield curve comprised of the yields of an index
of 250 equally-weighted corporate bonds, rated AA or better by
Moodys, which approximates the duration of the
U.S. Plans.
The weighted-average assumptions used in computing the net
periodic benefit cost of the U.S. Pension Plans and the
U.S. Medical Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
U.S. Medical
|
|
|
|
U.S. Pension Plans
|
|
|
Pension Plans
|
|
|
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
6.07
|
%
|
|
|
6.09
|
%
|
|
|
5.82
|
%
|
|
|
5.39
|
%
|
|
|
5.08
|
%
|
|
|
6.10
|
%
|
|
|
6.07
|
%
|
|
|
6.09
|
%
|
Range of compensation rate increase
|
|
|
N/A
|
*
|
|
|
N/A
|
*
|
|
|
N/A
|
*
|
|
|
3.88
|
%
|
|
|
3.61
|
%
|
|
|
4.18
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
6.51
|
%
|
|
|
7.00
|
%
|
|
|
6.70
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
* |
|
The Company curtailed the U.S Pension Plans during the year
ended June 30, 2006. |
The expected long-term rate of return on plan assets is
determined by expected future returns on the asset categories in
target investment allocation. These expected returns are based
on historical returns for each assets category adjusted
for an assessment of current market conditions.
The assumed healthcare cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2016
|
|
|
|
2016
|
|
|
|
2016
|
|
Assumed healthcare cost trend rates do not have a significant
effect on the amounts reported for the postretirement healthcare
plans, since a one-percentage point increase or decrease in the
assumed healthcare cost trend rate would have a minimal effect
on service and interest cost and the postretirement obligation.
106
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Plan
Assets
The fair value of plan assets for U.S. Pension Plan as of
June 30, 2009 and 2008 was $97.9 million and
$99.0 million, respectively. The fair value of plan assets
for the International Pension Plans as of June 30, 2009 and
2008 was $16.6 million and $19.7 million, respectively.
The following table sets forth the asset allocation for
U.S. and International Pension Plans assets at the
measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Equity securities
|
|
|
48
|
%
|
|
|
70
|
%
|
|
|
65
|
%
|
|
|
71
|
%
|
Debt securities
|
|
|
52
|
%
|
|
|
30
|
%
|
|
|
35
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment objective for the U.S. Pension Plans and
International Pension Plans is to secure the benefit obligations
to participants while minimizing costs to the Company. The goal
is to optimize the long-term return on plan assets at an average
level of risk. The portfolio of equity securities includes
primarily large-capitalization companies with a mix of
small-capitalization international companies.
Estimated
Future Cash Flows
Total contributions to the U.S. Pension Plans and
International Pension Plans were $25.7 million,
$6.1 million and $3.5 million for the years ended
June 30, 2009, 2008 and 2007, respectively.
The U.S. and International Pension Plans and
U.S. Medical Plans expected contributions to be paid
in the next fiscal year, the projected benefit payments for each
of the next five fiscal years and the total aggregate amount for
the subsequent five fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Medical Plan*
|
|
|
Estimated Net Contributions During Fiscal 2010:
|
|
$
|
4.9
|
|
|
$
|
0.4
|
|
|
$
|
1.0
|
|
Estimated Future Year Benefit Payments During Years Ended
June 30,:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
5.8
|
|
|
$
|
0.2
|
|
|
$
|
1.0
|
|
2011
|
|
$
|
5.9
|
|
|
$
|
0.2
|
|
|
$
|
1.2
|
|
2012
|
|
$
|
6.2
|
|
|
$
|
0.2
|
|
|
$
|
1.3
|
|
2013
|
|
$
|
6.5
|
|
|
$
|
0.2
|
|
|
$
|
1.5
|
|
2014
|
|
$
|
6.9
|
|
|
$
|
0.3
|
|
|
$
|
1.6
|
|
2015 - 2019
|
|
$
|
44.3
|
|
|
$
|
2.2
|
|
|
$
|
9.7
|
|
107
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 20.
|
Other
Operating (Income) Expenses, Net
|
Other operating (income) expenses, net, consist of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net gains on refranchisings, dispositions of assets and
restaurant closures
|
|
$
|
(8.5
|
)
|
|
$
|
(9.8
|
)
|
|
$
|
(4.7
|
)
|
Impairment of fixed assets
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Litigation settlements and accruals
|
|
|
3.2
|
|
|
|
1.1
|
|
|
|
1.7
|
|
Other, net
|
|
|
10.6
|
|
|
|
9.6
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expenses, net
|
|
$
|
5.8
|
|
|
$
|
0.9
|
|
|
$
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $10.6 million of other, net within other operating
(income) expenses, net for the year ended June 30, 2009
includes a $6.8 million of net expense related to the
remeasurement of foreign denominated assets and the expense
related to the use of foreign currency forward contracts used to
hedge the currency exchange impact on such assets, and
$3.9 million of net losses on investments held in the rabbi
trust, which were fully offset by a corresponding decrease in
deferred compensation expense reflected in general and
administrative expenses.
The $9.6 million of other, net within other operating
(income) expenses, net for the year ended June 30, 2008
includes $4.2 million of franchise system distress costs in
the U.K., $1.6 million of foreign currency transaction
losses, $1.9 million of settlement losses associated with
the acquisition of franchise restaurants and a loss of
$0.7 million from forward currency contracts used to hedge
intercompany loans denominated in foreign currencies.
The $1.4 million of other, net within other operating
(income) expenses, net for the year ended June 30, 2007
included a realized gain of $6.8 million from forward
currency contracts used to hedge intercompany loans denominated
in foreign currencies and a $3.4 million gain resulting
from the reclassification of the foreign exchange gain on
foreign denominated deferred tax assets (See Note 2),
offset by $6.6 million in costs associated with the lease
termination of the Companys proposed new headquarters, and
$2.9 million in franchise workout costs.
|
|
Note 21.
|
Commitments
and Contingencies
|
Franchisee
Restructuring Program
During the year ended June 30, 2003, the Company initiated
a program designed to provide financial assistance to
franchisees in the United States and Canada experiencing
financial difficulties. Under this program, the Company worked
with franchisees meeting certain operational criteria, their
lenders, and other creditors to attempt to strengthen the
franchisees financial condition.
In order to assist certain franchisees in making capital
improvements to their restaurants, the Company has provided
loans to such franchisees to fund capital expenditures
(Capex Loans). Capex Loans are typically unsecured,
bear interest, and have
10-year
terms. In addition, the Company has made capital improvements
related to restaurant properties that the Company leases to
franchisees. During the years ended June 30, 2009, 2008,
and 2007, the Company funded $1.1 million,
$0.9 million and $3.5 million of Capex loans,
respectively. During the years ended June 30, 2009, 2008
and 2007, the Company made $2.3 million, $2.5 million
and $2.7 million in improvements to restaurant properties
that the Company leases to franchisees, respectively. As of
June 30, 2009, the Company had commitments to fund future
Capex loans of less than $1.0 million and to make up to
$4.3 million of improvements to restaurant properties that
the Company leases to franchisees. These commitments extend over
a period of up to two years.
During the year ended June 30, 2009, temporary reductions
in rent (rent relief) for certain franchisees that
leased restaurant properties from the Company were
$1.5 million. The Company provided approximately
$1.8 million and $2.1 million in rent relief for the
years ended June 30, 2008 and 2007, respectively. As of
108
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
June 30, 2009, the Company had potential commitments
remaining to provide future rent relief of up to an aggregate of
$4.9 million extending over a period of up to 16 years.
Guarantees
The Company guarantees certain lease payments of franchisees
arising from leases assigned in connection with sales of Company
restaurants to franchisees, by remaining secondarily liable for
base and contingent rents under the assigned leases of varying
terms. The maximum contingent rent amount is not determinable as
the amount is based on future revenues. In the event of default
by the franchisees, the Company has typically retained the right
to acquire possession of the related restaurants, subject to
landlord consent. The aggregate contingent obligation arising
from these assigned lease guarantees, excluding contingent
rents, was $74.0 million as of June 30, 2009, expiring
over an average period of seven years.
Other commitments arising out of normal business operations were
$13.3 million as of June 30, 2009, of which
$8.1 million was guaranteed under bank guarantee
arrangements.
Letters
of Credit
As of June 30, 2009, the Company had $30.6 million in
irrevocable standby letters of credit outstanding, which were
issued primarily to certain insurance carriers to guarantee
payments of deductibles for various insurance programs, such as
health and commercial liability insurance. Such letters of
credit are secured by the collateral under the Companys
senior secured credit facility. As of June 30, 2009, no
amounts had been drawn on any of these irrevocable standby
letters of credit.
As of June 30, 2009, the Company had posted bonds totaling
$3.3 million, which related to certain utility deposits and
capital projects.
Vendor
Relationships
During the year ended June 30, 2000, the Company entered
into long-term, exclusive contracts with The
Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply the Company
and its franchise restaurants with their products and obligating
Burger
King®
restaurants in the United States to purchase a specified number
of gallons of soft drink syrup. These volume commitments are not
subject to any time limit. As of June 30, 2009, the Company
estimates that it will take approximately 13 years to
complete the
Coca-Cola
and Dr Pepper/Seven Up, Inc. purchase commitments. In the event
of early termination of these arrangements, the Company may be
required to make termination payments that could be material to
the Companys results of operations and financial position.
Additionally, in connection with these contracts, the Company
received upfront fees, which are being amortized over the term
of the contracts. As of June 30, 2009 and 2008, the
deferred amounts totaled $16.1 million and
$17.2 million, respectively. These deferred amounts are
amortized as a reduction to food, paper and product costs in the
accompanying consolidated statements of income.
As of June 30, 2009, the Company had $12.7 million in
aggregate contractual obligations for the year ended
June 30, 2009 with vendors providing information technology
and telecommunication services under multiple arrangements.
These contracts extend up to three years with a termination fee
ranging from $0.8 million to $1.7 million during those
years. The Company also has separate arrangements for
telecommunication services with an aggregate contractual
obligation of $4.6 million over two years with no early
termination fee.
The Company also enters into commitments to purchase
advertising. As of June 30, 2009, commitments to purchase
advertising totaled $51.7 million and run through October
2011.
Litigation
On July 30, 2008, we were sued by four Florida franchisees
over our decision to mandate extended operating hours in the
United States. The plaintiffs seek damages, declaratory relief
and injunctive relief. While we believe we have the right under
our franchise agreement to mandate extended operating hours, we
are unable to predict the ultimate outcome of this litigation.
109
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
On September 10, 2008, a purported class action lawsuit was
filed against the Company in the United States District Court
for the Northern District of California. The complaint alleged
that all Burger King restaurants in California leased by
BKC and operated by franchisees violate accessibility
requirements under federal and state law. The plaintiffs seek
injunctive relief, statutory damages, attorneys fees and
costs. The hearing on the plaintiffs motion for class
certification is set for September 17, 2009. The Company
intends to vigorously defend against all claims in this lawsuit;
however, at this moment the Company is unable to predict the
ultimate outcome of the litigation.
The Company is a party to written agreements with The
Coca-Cola
Company and Dr Pepper/Seven Up, Inc. pursuant to which these
soft drink companies provide soft drinks to Burger King
restaurants in the United States. Under these agreements, the
soft drink companies are required to pay certain amounts, known
as Restaurant Operating Funds, based on the volume
of syrup purchased by the restaurants. Historically, the soft
drink companies have paid the entire amount of the Restaurant
Operating Funds to the restaurants. However, in April 2009, the
Company announced that beginning January 1, 2010, a portion
of these funds would be paid directly to the Company for use as
specified in the soft drink agreements. The National Franchisee
Association filed these two class action lawsuits on May 4,
2009, claiming to represent Burger King franchisees and
seeking third party beneficiary status. The complaints allege
that BKC and the soft drink companies did not have the right to
amend the Companys agreements to reduce the portion of
Restaurant Operating Funds paid directly to the restaurants
without the franchisees consent. The Company intends to
vigorously defend against all claims in this lawsuit; however,
the Company is unable to predict the ultimate outcome of the
litigation.
From time to time, the Company is involved in other legal
proceedings arising in the ordinary course of business relating
to matters including, but not limited to, disputes with
franchisees, suppliers, employees and customers, as well as
disputes over the Companys intellectual property. In the
opinion of management, disposition of the matters will not
materially affect the Companys financial condition or
results of operations.
Other
The Company carries insurance programs to cover claims such as
workers compensation, general liability, automotive
liability, executive risk and property, and is self-insured for
healthcare claims for eligible participating employees. Through
the use of insurance program deductibles (ranging from
$0.5 million to $1.0 million) and self insurance, the
Company retains a significant portion of the expected losses
under these programs. Insurance reserves have been recorded
based on the Companys estimate of the anticipated ultimate
costs to settle all claims, both reported and
incurred-but-not-reported (IBNR), and such reserves include
judgments and independent actuarial assumptions about economic
conditions, the frequency or severity of claims and claim
development patterns, and claim reserve, management and
settlement practices. As of June 30, 2009 and 2008, the
Company had $36.5 million and $34.4 million,
respectively, in accrued liabilities for such claims.
|
|
Note 22.
|
Segment
Reporting
|
The Company operates in the fast food hamburger category of the
quick service segment of the restaurant industry. Revenues
include retail sales at Company restaurants, franchise revenues,
consisting of royalties based on a percentage of sales reported
by franchise restaurants and franchise fees paid by franchisees,
and property revenues. The business is managed in three distinct
geographic segments: (1) United States and Canada;
(2) Europe, the Middle East and Africa and Asia Pacific
(EMEA/APAC); and (3) Latin America.
The unallocated amounts reflected in certain tables below
include corporate support costs in areas such as facilities,
finance, human resources, information technology, legal,
marketing and supply chain management, which benefit all of the
Companys geographic segments and system-wide restaurants
and are not allocated specifically to any of the geographic
segments.
110
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following tables present revenues, income from operations,
depreciation and amortization, total assets, long-lived assets
and capital expenditures by geographic segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,743.0
|
|
|
$
|
1,578.5
|
|
|
$
|
1,450.9
|
|
EMEA/APAC
|
|
|
687.4
|
|
|
|
760.8
|
|
|
|
681.3
|
|
Latin America
|
|
|
107.0
|
|
|
|
115.4
|
|
|
|
101.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,537.4
|
|
|
$
|
2,454.7
|
|
|
$
|
2,233.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Companys total
revenues. Revenues in the United States totaled
$1.6 billion, $1.4 billion and $1.3 billion for
the years ended June 30, 2009, 2008 and 2007, respectively.
Revenues in Germany totaled $307.2 million,
$349.5 million and $308.1 million for the years ended
June 30, 2009, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
341.8
|
|
|
$
|
348.2
|
|
|
$
|
339.4
|
|
EMEA/APAC
|
|
|
83.6
|
|
|
|
91.8
|
|
|
|
53.9
|
|
Latin America
|
|
|
37.8
|
|
|
|
41.4
|
|
|
|
35.2
|
|
Unallocated
|
|
|
(123.8
|
)
|
|
|
(127.2
|
)
|
|
|
(133.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
|
339.4
|
|
|
|
354.2
|
|
|
|
294.6
|
|
Interest expense, net
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
67.0
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.8
|
|
|
|
293.0
|
|
|
|
226.8
|
|
Income tax expense
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
63.4
|
|
|
$
|
64.0
|
|
|
$
|
61.0
|
|
EMEA/APAC
|
|
|
15.7
|
|
|
|
14.1
|
|
|
|
12.5
|
|
Latin America
|
|
|
5.6
|
|
|
|
4.5
|
|
|
|
4.2
|
|
Unallocated
|
|
|
13.4
|
|
|
|
13.0
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
98.1
|
|
|
$
|
95.6
|
|
|
$
|
88.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
2,004.3
|
|
|
$
|
1,925.6
|
|
EMEA/APAC
|
|
|
598.2
|
|
|
|
660.1
|
|
Latin America
|
|
|
59.5
|
|
|
|
67.1
|
|
Unallocated
|
|
|
45.1
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,707.1
|
|
|
$
|
2,686.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
945.0
|
|
|
$
|
886.3
|
|
EMEA/APAC
|
|
|
121.3
|
|
|
|
131.3
|
|
Latin America
|
|
|
37.1
|
|
|
|
44.8
|
|
Unallocated
|
|
|
45.1
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
1,148.5
|
|
|
$
|
1,096.1
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets include property and equipment, net, and net
investment in property leased to franchisees. Only the United
States represented 10% or more of the Companys total
long-lived assets as of June 30, 2009 and 2008. Long-lived
assets in the United States, including the unallocated portion,
totaled $917.1 million and $841.8 million as of
June 30, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
146.9
|
|
|
$
|
121.9
|
|
|
$
|
41.4
|
|
EMEA/APAC
|
|
|
30.7
|
|
|
|
28.6
|
|
|
|
24.8
|
|
Latin America
|
|
|
7.6
|
|
|
|
9.4
|
|
|
|
7.7
|
|
Unallocated
|
|
|
18.8
|
|
|
|
18.3
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
204.0
|
|
|
$
|
178.2
|
|
|
$
|
87.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The goodwill reflected in the Companys consolidated
balance sheets of $26.4 million and $26.6 million as
of June 30, 2009 and 2008, respectively, was primarily
attributable to the Companys United States and Canada
geographic segment.
|
|
Note 23.
|
Quarterly
Financial Data (Unaudited)
|
Summarized unaudited quarterly financial data (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
September 30, 2008
|
|
|
December 31, 2008
|
|
|
March 31, 2009
|
|
|
June 30, 2009
|
|
|
Revenue
|
|
$
|
673.5
|
|
|
$
|
634.1
|
|
|
$
|
599.9
|
|
|
$
|
629.9
|
|
Operating income
|
|
$
|
89.9
|
|
|
$
|
86.2
|
|
|
$
|
75.6
|
|
|
$
|
87.7
|
|
Net income
|
|
$
|
49.8
|
|
|
$
|
44.3
|
|
|
$
|
47.1
|
|
|
$
|
58.9
|
|
Basic earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.33
|
|
|
$
|
0.35
|
|
|
$
|
0.44
|
|
Diluted earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
|
$
|
0.34
|
|
|
$
|
0.43
|
|
112
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
September 30, 2007
|
|
|
December 31, 2007
|
|
|
March 31, 2008
|
|
|
June 30, 2008
|
|
|
Revenue
|
|
$
|
602.0
|
|
|
$
|
612.6
|
|
|
$
|
594.4
|
|
|
$
|
645.7
|
|
Operating income
|
|
$
|
95.9
|
|
|
$
|
95.1
|
|
|
$
|
81.0
|
|
|
$
|
82.2
|
|
Net income
|
|
$
|
48.5
|
|
|
$
|
49.1
|
|
|
$
|
41.4
|
|
|
$
|
50.6
|
|
Basic earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
|
$
|
0.38
|
|
Diluted earnings per share
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
|
$
|
0.37
|
|
Quarterly results are impacted by the timing of expenses and
charges which affect comparability of results.
|
|
Note 24.
|
Subsequent
Event
|
On August 20, 2009, the Company declared a quarterly
dividend of $0.0625 per share of common stock that is payable on
September 30, 2009 to shareholders of record on
September 14, 2009. The Company evaluated events and
transactions for potential recognition or disclosure through
August 27, 2009, the date the consolidated financial
statements were issued.
113
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of
June 30, 2009. Based on that evaluation, the CEO and CFO
concluded that the Companys disclosure controls and
procedures were effective as of such date to ensure that
information required to be disclosed in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.
Internal
Control Over Financial Reporting
The Companys management, including the CEO and CFO,
confirm that there were no changes in the Companys
internal control over financial reporting during the fiscal
quarter ended June 30, 2009 that have materially affected,
or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Managements Report on Internal Control Over Financial
Reporting and the report of Independent Registered Public
Accounting Firm on internal control over financial reporting are
set forth in Part II, Item 8 of this
Form 10-K.
114
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item, other than the
information regarding our executive officers which is set forth
in Part I, Item I above under the caption
Executive Officers of the Registrant, is
incorporated herein by reference from the Companys
definitive proxy statement to be filed no later than
120 days after June 30, 2009. We refer to this proxy
statement as the 2009 Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
Incorporated herein by reference from the Companys 2009
Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Incorporated herein by reference from the Companys 2009
Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Incorporated herein by reference from the Companys 2009
Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Incorporated herein by reference from the Companys 2009
Proxy Statement.
Part IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(1)
|
All
Financial Statements
|
Consolidated financial statements filed as part of this report
are listed under Part II, Item 8 of this
Form 10-K.
|
|
(2)
|
Financial
Statement Schedules
|
No schedules are required because either the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements or the notes thereto.
The exhibits listed in the accompanying index are filed as part
of this report.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Burger King
Holdings, Inc.
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K dated August 31, 2006
|
|
3
|
.2
|
|
Amended and Restated Bylaws, effective as of the date of the
Companys 2009 Annual Meeting of Stockholders
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated June 3, 2009.
|
|
4
|
.1
|
|
Form of Common Stock Certificate
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.1
|
|
Amended and Restated Credit Agreement, dated February 15,
2006, among Burger King Corporation, Burger King Holdings, Inc.,
the lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent, Citicorp North America, Inc., as
syndication agent, and Bank of America, N.A., RBC Capital
Markets and Wachovia Bank, National Association, as
documentation agents
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
115
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.2
|
|
Form of Amended and Restated Shareholders Agreement by and
among Burger King Holdings, Inc., Burger King Corporation, TPG
BK Holdco LLC, GS Capital Partners 2000, L.P., GS Capital
Partners 2000 Offshore, L.P., GS Capital Partners 2000
GmbH & Co. Beteiligungs KG, GS Capital Partners 2000
Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., Stone Street Fund 2000, L.P., Goldman
Sachs Direct Investment Fund 2000, L.P., GS Private Equity
Partners 2000, L.P., GS Private Equity Partners 2000 Offshore
Holdings, L.P., GS Private Equity Partners
2000-Direct
Investment Fund, L.P., Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC and BCIP TCV, LLC
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.3
|
|
Form of Management Subscription and Shareholders Agreement
among Burger King Holdings, Inc., Burger King Corporation and
its officers
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.4
|
|
Form of Board Member Subscription and Shareholders
Agreement among Burger King Holdings, Inc., Burger King
Corporation and its directors
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.5
|
|
Amendment to the Management Subscription and Shareholders
Agreement among Burger King Holdings, Inc., Burger King
Corporation and John W. Chidsey
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.6
|
|
Management Subscription and Shareholders Agreement among
Burger King Holdings, Inc., Burger King Corporation and Gregory
D. Brenneman
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.7
|
|
Management Agreement, dated December 13, 2002, among Burger
King Corporation, Bain Capital Partners, LLC, Bain Capital
Integral Investors, LLC, Bain Capital VII Coinvestment Fund,
LLC, BCIP TCV, LLC, Goldman, Sachs & Co., Goldman
Sachs Capital Partners 2000, L.P., GS Capital Partners 2000
Offshore, L.P., GS Capital Partners 2000 GmbH & Co.
Beteiligungs KG, GS Capital Partners 2000 Employee Fund, L.P.,
Bridge Street Special Opportunities Fund 2000, L.P., Stone
Street Fund 2000, L.P., Goldman Sachs Direct Investment
Fund 2000, L.P., GS Private Equity Partners 2000, L.P., GS
Private Equity Partners 2000 Offshore Holdings, L.P., GS Private
Equity Partners 2000 Direct Investment Fund, L.P.,
TPG GenPar III, L.P. and TPG BK Holdco LLC
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
116
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.8
|
|
Letter Agreement Terminating the Management Agreement, dated as
of February 3, 2006, among Burger King Corporation, Bain
Capital Partners, LLC, Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC, BCIP TCV, LLC, Goldman,
Sachs & Co., Goldman Sachs Capital Partners 2000,
L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital
Partners 2000 GmbH & Co. Beteiligungs KG, GS Capital
Partners 2000 Employee Fund, L.P., Bridge Street Special
Opportunities Fund 2000, L.P., GS Private Equity Partners
2000, L.P., GS Private Equity Partners 2000 Offshore Holdings,
L.P., GS Private Equity Partners 2000 Direct
Investment Fund, L.P., TPG GenPar III, L.P. and TPG BK Holdco LLC
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.9
|
|
Lease Agreement, dated as of May 10, 2005, between CM
Lejeune, Inc. and Burger King Corporation
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.10
|
|
Burger King Holdings, Inc. Equity Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.11
|
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.12
|
|
Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.13
|
|
Form of Management Restricted Unit Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.14
|
|
Form of Amendment to Management Restricted Unit Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.15
|
|
Management Restricted Unit Agreement among John W. Chidsey,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of October 8, 2004
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.16
|
|
Special Management Restricted Unit Agreement among Peter C.
Smith, Burger King Holdings, Inc. and Burger King Corporation,
dated as of December 1, 2003
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.17
|
|
Form of 2003 Management Stock Option Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.18
|
|
Form of 2005 Management Stock Option Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.19
|
|
Form of Board Member Stock Option Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
117
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.20
|
|
Form of Special Management Stock Option Agreement among John W.
Chidsey, Burger King Holdings, Inc. and Burger King Corporation
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.21
|
|
Management Stock Option Agreement among Gregory D. Brenneman,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of August 1, 2004
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.22
|
|
Stock Option Agreement among Armando Codina, Burger King
Holdings, Inc. and Burger King Corporation, dated as of
February 14, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.23
|
|
Employment Agreement between John W. Chidsey and Burger King
Corporation, dated as of April 7, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.24
|
|
Employment Agreement between Russell B. Klein and Burger King
Corporation, dated as of April 20, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.25
|
|
Employment Agreement between Ben K. Wells, and Burger King
Corporation, dated as of April 7, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.26
|
|
Employment Agreement between James F. Hyatt and Burger King
Corporation, dated as of April 20, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.27
|
|
Employment Agreement between Peter C. Smith and Burger King
Corporation, dated as of April 20, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.28
|
|
Separation and Consulting Services Agreement between Gregory D.
Brenneman and Burger King Corporation, dated as of April 6,
2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.29
|
|
Separation Agreement between Bradley Blum and Burger King
Corporation, dated as of July 30, 2004
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.30
|
|
Restricted Stock Unit Award Agreement between Burger King
Holdings, Inc. and John W. Chidsey, dated as of May 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.31
|
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.32
|
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Equity Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.33
|
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.34
|
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. Equity Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.35
|
|
Form of Performance Award Agreement under the Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated August 14, 2006
|
118
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.36
|
|
Form of Retainer Stock Award Agreement for Directors under the
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated August 14, 2006
|
|
10
|
.37
|
|
Form of Annual Deferred Stock Award Agreement for Directors
under the Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated August 14, 2006
|
|
10
|
.38
|
|
Employment Agreement between Anne Chwat and Burger King
Corporation dated as of April 20, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q dated February 2, 2007
|
|
10
|
.39
|
|
Agreement of Termination and Cancellation of Lease
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated May 9, 2007
|
|
10
|
.40
|
|
Burger King Savings Plan, including all amendments thereto
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-8 (File No. 333-144592)
|
|
10
|
.41
|
|
Letter Agreement between Ben K. Wells and Burger King
Corporation dated July 12, 2007 amending the Employment
Agreement between Ben K. Wells and Burger King Corporation dated
April 7, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K dated September 7, 2007
|
|
10
|
.42
|
|
Employment Agreement between Charles M. Fallon, Jr. and Burger
King Corporation dated June 6, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated October 26, 2007
|
|
10
|
.43
|
|
Employment Agreement between Peter Tan and Burger King Asia
Pacific, Inc. dated November 14, 2005
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated October 26, 2007
|
|
10
|
.44
|
|
Form of Performance Award Agreement for Restricted Stock Units
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated October 26, 2007
|
|
10
|
.45
|
|
Option Award Agreement between Burger King Holdings, Inc. and
Charles M. Fallon, Jr. dated June 6, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q dated February 5, 2008
|
|
10
|
.46
|
|
Option Award Agreement between Burger King Holdings, Inc. and
Charles M. Fallon, Jr. dated June 6, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q dated February 5, 2008
|
|
10
|
.47
|
|
Form of Restricted Stock Unit Agreement under Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q dated May 5, 2008
|
|
10
|
.48
|
|
Employment Agreement between BK AsiaPac, Pte.Ltd. and Peter Tan
dated March 5, 2008
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q dated May 5, 2008
|
|
10
|
.49
|
|
Employment Agreement dated August 22, 2006 between Peter
Robinson and Burger King Corporation
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated November 5, 2008
|
|
10
|
.50
|
|
Assignment Letter dated August 22, 2006 among Peter
Robinson, Burger King Corporation and Burger King Europe GmbH
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated November 5, 2008
|
|
10
|
.51
|
|
Amended and Restated Employment Agreement between John W.
Chidsey and Burger King Corporation dated December 16, 2008
|
|
Attached
|
119
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.52
|
|
Amended and Restated Employment Agreement between Charles M.
Fallon and Burger King Corporation dated December 8, 2008
|
|
Attached
|
|
10
|
.53
|
|
Amended and Restated Employment Agreement between Russell B.
Klein and Burger King Corporation dated December 8, 2008
|
|
Attached
|
|
10
|
.54
|
|
Amended and Restated Employment Agreement between Ben K. Wells
and Burger King Corporation dated December 8, 2008
|
|
Attached
|
|
10
|
.55
|
|
Form of Performance Award Agreement for Restricted Stock Units
under the Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Attached
|
|
10
|
.56
|
|
Form of Performance Award Agreement for Performance Based
Restricted Stock under the Burger King Holdings, Inc. 2006
Omnibus Incentive Plan
|
|
Attached
|
|
14
|
.2
|
|
Code of Ethics for Executive Officers
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K dated September 7, 2008
|
|
14
|
.3
|
|
Code of Conduct for Directors
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K dated September 7, 2008
|
|
21
|
.1
|
|
List of Subsidiaries of the Registrant
|
|
Attached
|
|
23
|
.1
|
|
Consent of KPMG LLP
|
|
Attached
|
|
31
|
.1
|
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
32
|
.1
|
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
|
|
|
Management contract or compensatory plan or arrangement |
120
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BURGER KING HOLDINGS, INC.
Name: John W. Chidsey
Title: Chairman and Chief Executive Officer
Date: August 27, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/ John
W. Chidsey
John
W. Chidsey
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Chairman and Chief Executive Officer (principal executive
officer)
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August 27, 2009
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/s/ Ben
K. Wells
Ben
K. Wells
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Chief Financial Officer
(principal financial and accounting officer)
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August 27, 2009
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/s/ Richard
W. Boyce
Richard
W. Boyce
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Director
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August 27, 2009
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/s/ David
A. Brandon
David
A. Brandon
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Director
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August 27, 2009
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/s/ Ronald
M. Dykes
Ronald
M. Dykes
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Director
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August 27, 2009
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/s/ Peter
R. Formanek
Peter
R. Formanek
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Director
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August 27, 2009
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/s/ Manuel
A. Garcia
Manuel
A. Garcia
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Director
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August 27, 2009
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Sanjeev
K. Mehra
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Director
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August 27, 2009
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/s/ Stephen
G. Pagliuca
Stephen
G. Pagliuca
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Director
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August 27, 2009
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/s/ Brian
T. Swette
Brian
T. Swette
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Director
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August 27, 2009
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/s/ Kneeland
C. Youngblood
Kneeland
C. Youngblood
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Director
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August 27, 2009
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