Burger King Holdings Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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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, 2006 |
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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
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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 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number) |
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5505 Blue Lagoon Drive, Miami, Florida |
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33126 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code
(305) 378-3000
Securities registered pursuant to Section 12(b) of the
Act:
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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 |
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 o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act (check one);
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
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 initial public offering of Burger King Holdings, Inc.’s
common stock, par value of $0.01 per share, commenced on
May 18, 2006. Prior to that date, there was no public
market for the registrant’s common stock.
As of August 23, 2006, there were 133,058,771 shares
of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from
the registrant’s definitive proxy statement for the 2006
annual meeting of stockholders, which proxy will be filed no
later than 120 days after the close of the
registrant’s fiscal year ended June 30, 2006.
BURGER KING HOLDINGS, INC.
2006 FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
Burger
King®,
Whopper®,
Have It Your
Way®
and the Burger King Bun Halves and Crescent Logo are registered
trademarks of Burger King Brands, Inc., a wholly-owned
subsidiary of Burger King Holdings, Inc. References to fiscal
2006, fiscal 2005 and fiscal 2004 in this section and elsewhere
in this Form 10-K
are to the fiscal years ended June 30, 2006, 2005 and 2004,
respectively.
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 industry research firms, including NPD Group,
Inc. (which prepares and disseminates Consumer Reported Eating
Share Trends, or CREST data) and Research International (which
provides us with proprietary National Adult Tracking data) or
compiled from market research reports, research 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.
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Part I
Overview
Burger King Holdings, Inc. (“we” or the
“Company”) is a Delaware corporation formed on
July 23, 2002. We are the world’s second largest fast
food hamburger restaurant, or FFHR, chain as measured by the
number of restaurants and system-wide sales. As of June 30,
2006, we owned or franchised a total of 11,129 restaurants in 65
countries and U.S. territories, of which 1,240 restaurants
were company-owned and 9,889 were owned by our franchisees. Of
these restaurants, 7,207 or 65% were located in the United
States and 3,922 or 35% were located in our international
markets. Our restaurants feature flame-broiled hamburgers,
chicken and other specialty sandwiches, french fries, soft
drinks and other reasonably-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 modest prices.
We generate revenues from three sources: sales at company
restaurants; royalties and franchise fees paid to us by our
franchisees; and property income from certain franchise
restaurants that lease or sublease property from us.
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 fast food
hamburger 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 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.
Moreover, due to the steps that we have taken to improve the
health of our franchise system in the United States and Canada,
we expect that this mix will produce more stable earnings and
cash flow in the future. Although we believe that this
restaurant ownership mix is beneficial to us, it also presents a
number of drawbacks, such as our limited control over
franchisees and limited ability to facilitate changes in
restaurant ownership.
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 opened the
first Burger King restaurant in Canada in 1969, in Australia in
1971 and in Europe in Madrid, Spain in 1975. 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 1985, BKC rounded out its menu offerings by adding
breakfast on a national basis.
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to
Minneapolis-based The Pillsbury Company. BKC became a subsidiary
of Grand Metropolitan plc in 1989 when it acquired Pillsbury.
Grand Metropolitan plc merged with Guinness plc to
form Diageo plc in 1997. These conglomerates were focused
more on their core operations than on BKC. On December 13,
2002, Diageo plc sold BKC to private equity funds controlled by
Texas Pacific Group, Bain Capital Partners and the Goldman Sachs
Funds, which we refer to as our “Sponsors”, and for
the first time since 1967 BKC became an independent company. We
are a holding company formed in connection with the December
2002 acquisition in order to own 100% of BKC.
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 NPD Group, Inc., which prepares and
disseminates CREST data, QSR sales have grown at an average
annual rate of 4.8% over the past 10 years,
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totaling approximately $213 billion for the year ended
June 30, 2006. According to NPD Group, Inc., QSR sales are
projected to increase at an annual rate of 4% between 2006 and
2011.
According to NPD Group, Inc., the FFHR category is the largest
category in the QSR segment, generating sales of over
$56 billion in the United States for the year ended
June 30, 2006 representing 27% of total QSR sales. The FFHR
category grew 3.0% in terms of sales during the same period and,
according to NPD Group, Inc., is expected to increase at an
average rate of 4.2% per year over the next five years. For
the year ended June 30, 2006, the top three FFHR chains
(McDonald’s, Burger King and Wendy’s) accounted for
73% of the category’s total sales, with approximately 15%
attributable to Burger King.
We believe the QSR segment is generally less vulnerable to
economic downturns and increases in energy prices than the
casual dining segment, due to the value that QSRs deliver to
consumers, as well as some “trading down” 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. However,
significant economic downturns or sharp increases in energy
prices may adversely impact FFHR chains, including us.
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. In
2005, Brandweek magazine ranked Burger King number
15 among the top 2,000 brands in the United States. We also
believe that consumers associate our brands with our signature
flame-broiled products and Have It Your Way brand
promise. According to National Adult Tracking data, our
flame-broiled preparation method is preferred over frying, and
our flagship product, the Whopper sandwich, is the number
one large branded burger in the United States. We believe the
ability of our major competitors to duplicate our flame-broiled
method is limited by the substantial cost necessary to convert
their existing systems and retrain their staff. |
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Attractive business model. Approximately 90% of
our restaurants are franchised, which is a higher percentage
than our major competitors in the fast food hamburger restaurant
category. We believe that our franchise restaurants will
generate a consistent, profitable royalty stream to us, with
minimal associated capital expenditures or incremental expense
by us. We also believe this will provide us with significant
cash flow to reinvest in strengthening our brand and enhancing
shareholder value. |
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Established and scalable international business.
We have one of the largest restaurant networks in the
world, with more than 3,900 franchise and company-owned
restaurants located in our international markets. We believe
that the demand for new international franchise restaurants is
growing and our established infrastructure is capable of
supporting substantial restaurant expansion in the years ahead. |
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Experienced management team with significant ownership.
We have assembled a seasoned management team with
significant experience. John Chidsey, our Chief Executive
Officer, has extensive experience in managing franchised and
branded businesses, including Avis Rent-A-Car and Budget
Rent-A-Car systems, Jackson Hewitt Tax Services and PepsiCo.
Russ Klein, our President, Global Marketing Strategy and
Innovation, has 26 years of retail and consumer marketing
experience, including at 7-Eleven Inc. Ben Wells, our Chief
Financial Officer and Treasurer, has 25 years of finance
experience, including at Compaq Computer Corporation and British
Petroleum. Jim Hyatt, our Chief Operations Officer, has more
than 30 years of brand experience as both a franchisee and
senior executive of the Company. In addition, other members of
our management team have worked at McDonald’s, Taco Bell,
The Coca-Cola Company and KFC. |
Global Operations
We operate in three reportable business segments: United States
and Canada; Europe, Middle East and Africa and Asia Pacific, or
EMEA/ APAC; and Latin America. Additional financial information
about
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geographic segments is incorporated herein by reference to
Management’s 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 20 of this
Form 10-K.
Our restaurants are limited-service restaurants of distinctive
design and are generally located in high-traffic areas
throughout the United States and Canada. At June 30, 2006,
878 company restaurants and 6,656 franchise restaurants
were operating in the United States and Canada. We believe our
restaurants appeal to a broad spectrum of consumers, with
multiple meal segments appealing to different customer groups.
Operating Procedures. 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.
Management. Substantially all of our executive
management, finance, marketing, legal and operations support
functions are conducted from our global headquarters 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 restaurant’s 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. 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. In addition,
promotional menu items are introduced periodically for limited
periods. We continually seek to develop new products as we
endeavor to enhance the menu and service of all of our
restaurants. Franchisees must offer all mandatory menu items.
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
customers, drive-thru facilities and adjacent parking areas.
Some restaurants are located in institutional locations, such as
airports, shopping malls, toll road rest areas and educational
and sports facilities. In fiscal 2005, we developed a new,
smaller restaurant model that reduces the current average
non-real estate costs associated with building a new restaurant
from approximately $1.2 million using the prior design to
approximately $900,000 using the new design, a savings of
approximately 25%. The seating capacity for this smaller
restaurant model is between 40 and 80 customers. We believe this
seating capacity is adequate since approximately 60% of our
U.S. system-wide sales are made at the drive-thru. We have
opened 11 new restaurants in this format to date, with more than
10 scheduled to open in fiscal 2007.
New Restaurant Development and Renewals. 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. The development
committee’s 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. We work closely
with our franchisees to assist them in selecting sites. They
must agree to search for a potential site within an identified
trade area and to have the final site location approved by the
development committee.
Our franchisees closed 1,196 restaurants in the United States
between July 1, 2002 and June 30, 2006. Many of these
closures involved franchisees in bankruptcy and our franchisee
financial restructuring program. See Part II, Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Factors
Affecting Comparability of Results — Historical
Franchisee Financial Distress”. The franchise
restaurants that closed had average restaurant sales of
approximately $625,000 in the 12 months prior to closure.
We and our franchisees opened 146 new restaurants in the United
States between fiscal 2004 and fiscal 2006, of which 81 were
opened for at least 12 months as of June 30, 2006. The
average restaurant sales of these new restaurants was
approximately $1.3 million for the 12 months after
opening. We and our franchisees opened 53 restaurants and closed
225 restaurants in the United States in fiscal 2006. We believe
that the number of closures will significantly decline in fiscal
2007 and beyond. We have instituted a program in the United
States and Canada to encourage franchisees to open new
restaurants by offering them reduced upfront franchise fees.
In recent years, we have experienced lower levels of franchisees
in the United States renewing their expiring franchise
agreements for a standard additional
20-year term than we
have historically experienced. In many cases, however, we agreed
to extend the existing agreements to avoid the closure of the
restaurants by giving franchisees additional time to comply with
our renewal requirements. To encourage franchisees to renew, we
instituted a program in the United States to allow them to pay
the $50,000 franchise fee in installments and to delay the
required restaurant remodel for up to two years, while providing
an incentive to accelerate the completion of the remodel by
offering reduced royalties for a limited period. We believe that
this program was important to maintaining our base of
restaurants. As a result of this program and our other
initiatives, we have seen an increase in the number of
restaurants with renewed franchise agreements.
As of June 30, 2006, we owned and operated 878 restaurants
in the United States and Canada, representing 12% of total U.S.
and Canada system restaurants. Included in this number are 29
restaurants that we operate but are owned by a joint venture
between us and an independent third party. We also use our
company restaurants to test new products and initiatives before
rolling them out to the wider Burger King system.
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, 2006, there were
approximately 6,656 franchise restaurants in the United States
and Canada. Franchisees report gross sales on a monthly basis
and pay royalties based on reported sales. The five largest
franchisees in the United States and Canada in terms of
restaurant count represented in the aggregate approximately 16%
of U.S. and Canadian Burger King franchise restaurants at
June 30, 2006.
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.
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,
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typically 4%, on a monthly basis. In addition, most existing
franchise restaurants in the United States and Canada pay a
royalty of 3.5% and 4% 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 agreement renewals after June 30, 2003 will
generate royalties at the rate of 4.5% of gross sales for the
full franchise term.
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.
Our property operations consist of restaurants where we lease
the land and often the building to the franchisee.
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 restaurant’s annual gross sales. Leases with
franchisees, which include land only or land and building, are
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. Of the 927 properties
that we lease or sublease to franchisees in the United States
and Canada, we own 466 properties and lease either the land or
the land and building from third-party landlords on the
remaining 461 properties.
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Europe, Middle East and Africa/ Asia Pacific (EMEA/ APAC)
Regions |
These regions, and the markets within these regions, differ
substantially in many respects, including customer taste
preferences, consumer disposable income, occupancy costs, food
costs, operating margins and the level of competitive activity.
The following discussion is intended as a summary of our EMEA/
APAC business as a whole. However, some of the information
discussed below may not be applicable to individual countries
within our EMEA/ APAC operations.
EMEA. EMEA is the second largest geographic area in the
Burger King system behind the United States as measured
by the number of restaurants. At June 30, 2006, EMEA had
2,168 restaurants in 26 countries and territories, including
291 company restaurants located in the United Kingdom,
Germany, Spain and The Netherlands. The United Kingdom is the
largest market in EMEA with 630 restaurants at June 30,
2006.
APAC. At June 30, 2006, APAC had 619 restaurants in
11 countries and territories, including China, Malaysia,
Thailand, Australia, Philippines, Taiwan, Singapore, New
Zealand, and South Korea. All of the restaurants in the region
other than our two restaurants in China are franchised.
Australia is the largest market in APAC, with 294 restaurants at
June 30, 2006, all of which are franchised and operated
under Hungry Jack’s, a trademark that we own in
Australia and New Zealand. Australia is the only market in which
we operate under a brand other than Burger King.
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 U.S. and
EMEA/ APAC operations are discussed below.
Management Structure. Our EMEA/ APAC operations are
managed from restaurant support centers located in Zug,
Switzerland, Madrid, London and Munich (for EMEA) and Singapore
and Shanghai (for APAC). These centers are staffed by teams who
support both franchised operations and company restaurants.
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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
in-line facilities 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.
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.
At June 30, 2006, 2,494 or 89% of our restaurants in EMEA/
APAC were franchised. Some of our international markets are
operated by a single franchisee. Other markets, such as the
United Kingdom, Germany, Spain and Australia, 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, 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 parties 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 royalties paid by such third party
franchisees. Our largest franchisee in the Middle East and
Persian Gulf is also allowed to grant development rights to a
single franchisee with respect to each country within its
territory. We have also entered into exclusive development
agreements with franchisees in a number of countries throughout
EMEA and APAC. 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.
Our property operations in EMEA primarily consist of franchise
restaurants located in the United Kingdom, Germany and
Spain, which we lease or sublease to franchisees. We have no
property operations in APAC. Of the 139 properties that we lease
or sublease to franchisees, we own 4 properties and lease the
land and building from third party landlords on the remaining
135 properties.
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.
At June 30, 2006, we had 808 restaurants in 26 countries
and territories in Latin America of which 69 were company
restaurants, all located in Mexico, and 739 were franchise
restaurants. We are the market leader in 13 of our 26 markets in
Latin America, including Puerto Rico, in terms of number of
restaurants.
The Mexican market is the largest in the region, with a total of
304 restaurants at June 30, 2006, or 38% of the region. In
fiscal 2006, we opened 49 new restaurants in Mexico, of which
nine were company restaurants and 40 were franchise restaurants.
We are also aggressively pursuing development in Brazil. At
June 30, 2006,
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there were 12 restaurants in Brazil, and we have entered into
agreements with franchisees for the development of over 100 new
restaurants during the next five years.
Advertising and Promotion
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, public relations and sales
promotions. 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 intend to provide these franchisees with assistance
in developing advertising and promotional programs in order to
deliver a consistent global brand message.
In the United States and in those other countries where we have
company restaurants, we have full discretion as to 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 Franchise Association, Inc.
Our current global marketing strategy is based upon customer
choice. We believe that quality, innovation and differentiation
drive profitable customer traffic and pricing power over the
long term. Our global strategy is focused on our core customer,
the SuperFan (who are consumers who reported eating at a fast
food hamburger outlet nine or more times in the past month), our
Have It Your Way brand promise, our core menu items, such
as burgers, fries and soft drinks, 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 the SuperFan. We also
use radio and Internet advertising and other marketing tools on
a more limited basis.
Supply and Distribution
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 1991 to leverage
the purchasing power of the Burger King system. 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 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.
At June 30, 2006, RSI has been appointed the distribution
manager for approximately 91% of the restaurants in the United
States. A subsidiary of RSI is also purchasing food and paper
products for our Canadian restaurants under a contract with us.
Five distributors service approximately 88% of the
U.S. system and the loss of any one of these distributors
would likely adversely affect our business.
There is currently no purchasing agent that represents
franchisees in our international regions. However, we are
considering an initiative to leverage our global purchasing
power and negotiate lower product costs and savings for our
restaurants outside of the United States and Canada. We approve
suppliers and use similar
9
standards and criteria to evaluate international suppliers that
we use for U.S. suppliers. Franchisees may propose
additional suppliers, subject to our approval. In countries
where we operate company restaurants, we negotiate the purchase
terms with suppliers, and those terms are made available to
company restaurants and franchise restaurants. In non-company
restaurant markets, franchisees typically negotiate the purchase
terms directly with Burger King approved suppliers for
food and packaging products used in their restaurants.
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 and franchise restaurants with their
products and obligating Burger King restaurants in the
United States to purchase a specified number of gallons of soft
drink syrup. These volume commitments are not subject to any
time limit. As of June 30, 2006, we estimate that it will
take approximately 16 years and 17 years to complete
the Coca-Cola and Dr Pepper purchase commitments,
respectively. If these agreements were terminated, we would be
obligated to pay significant termination fees and certain other
costs, including in the case of the contract with The Coca-Cola
Company, the unamortized portion of the cost of installation and
the entire cost of refurbishing and removing the equipment owned
by The Coca-Cola Company and installed in company restaurants in
the three years prior to termination.
Research and Development
We operate a research and development facility or “test
kitchen” at our headquarters in Miami and certain other
regional locations. In addition, certain vendors have granted us
access to their facilities in the United Kingdom and China to
test new products. While research and development activities are
important to our business, these expenditures are not material.
Independent suppliers also conduct research and development
activities for the benefit of the Burger King system.
We have developed a new flexible batch broiler that is
significantly smaller, less expensive and easier to maintain
than the current broiler used in our restaurants. We expect that
the new broiler will reduce operating costs (principally through
reduced utility costs), without sacrificing speed, quality or
efficiency, although we have not yet verified how the broiler
will perform under restaurant conditions. We currently are
testing the new broiler in certain company restaurants and hope
to make it available for widespread use in our restaurants
during fiscal 2007. We have filed a patent application with
respect to the broiler technology and design. We have licensed
one of our equipment vendors on an exclusive basis to
manufacture and supply the new broiler to the Burger King
system throughout the world.
Management Information Systems
Franchisees typically use a point of sale (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 recently
established specifications to reduce cost, improve service and
allow better data analysis and have approved three global POS
vendors and one regional vendor for each of our three key
regions to sell these systems to our franchisees. Currently,
franchisees report sales manually, and we do not have the
ability to verify sales data electronically by accessing their
POS cash register systems. 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. We expect that it will be three to five years
before the majority of franchisees have the new POS systems. We
provide proprietary software to our U.S. franchisees for
labor and product management.
Quality Assurance
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, customer service and
cleanliness of the restaurants are
10
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
We and our wholly-owned subsidiary, Burger King Brands, Inc.,
own approximately 2,480 trademark and service mark registrations
and applications and approximately 354 domain name registrations
around the world. 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.
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 McDonald’s Corporation or
McDonald’s and Wendy’s International, Inc. or
Wendy’s. 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
Applebee’s, Chili’s, Ruby Tuesday’s 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.
During the past year, the FFHR category has experienced flat or
declining traffic which we believe is due in part to competition
from these competitors.
Our largest U.S. competitor, McDonald’s, has
international operations that are significantly larger than
ours. 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, and single-store locations. In one of our major European
markets, the United Kingdom, much of the growth in the quick
service restaurant segment is expected to come from sandwich
shops, bakeries and new entrants that are diversifying into
healthier options to respond to nutritional concerns. We believe
that the large hamburger chains in the United Kingdom have
experienced declining sales as they face increased competition
not only from the sandwich shops and bakeries, but also from
pubs that are repositioning themselves as family venues and
offering inexpensive food.
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
prospective franchisees a franchise offering circular containing
proscribed information. A number of states, in which we are
currently franchising, regulate the sale of franchises and
require registration of the franchise offering circular with
state authorities and the delivery of a franchise offering
circular to prospective franchisees. We are currently operating
under exemptions from registration in several of these states
based upon our net worth and experience. Substantive state laws
that regulate the franchisor/franchisee relationship presently
exist in a substantial number of states, and bills have been
introduced in Congress from time to time that would provide for
federal regulation of the franchisor/franchisee relationship in
certain respects. The 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.
11
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 as to wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage
requirements higher than the federal level.
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, sanitation and safety. 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 Company’s working capital (changes in
current assets and current liabilities) is included in the
Consolidated Statements of Cash Flows in Part II,
Item 8.
Tax Matters
As a matter of course, we are regularly audited by various tax
authorities. From time to time, these audits result in proposed
assessments where the ultimate resolution may result in owing
additional taxes. We believe that our tax positions comply with
applicable law and that we have adequately provided for these
matters. We are in the process of being audited by the
U.S. Internal Revenue Service. The audit relates to both
executive compensation and income taxes for our 2003 and 2004
fiscal years. At this time, we do not know when this audit will
be completed or what its impact, if any, will be.
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. During
fiscal 2006, there were no material capital expenditures for
environmental control facilities and no such material
expenditures are anticipated.
Customers
Our business in 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 2006.
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 United States government.
Seasonal Operations
Our business is moderately seasonal. Restaurant sales are
typically higher in our fourth and first fiscal quarters, which
are the spring and summer months when weather is warmer, than in
our 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. 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, 2006, we had approximately 37,000 employees
in our company restaurants, field management offices and global
headquarters. As franchisees are independent business owners,
they and their
12
employees are not included in our employee count. We consider
our relationship with our employees and franchisees to be good.
Financial Information about Business Segments and Geographic
Areas
Financial information about our significant geographic areas
(U.S. & Canada, EMEA/ APAC, and Latin America) is
incorporated herein by reference from “Selected
Financial Data” in Part II, Item 6;
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7; and in the “Financial Statements and
Supplementary Data” in Part II, Item 8.
Available Information
The Company makes available 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. The references to our website address
and the SEC’s 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 and our Code of Business
Ethics and Conduct are also located within the Investor
Relations section of our website. These documents, as well as
our SEC filings, are available in print to any shareholder who
requests a copy from our Investor Relations Department.
Special Note Regarding Forward-Looking Statements
This Annual Report on
Form 10-K includes
forward-looking statements under the captions
“Business”, “Risk Factors”,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in other sections
of this Form 10-K.
In some cases, you can identify these statements by
forward-looking words such as “may,”,
“might,” “will,”, “should,”
“expect,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,”
“potential” or “continue,” the negative of
these terms and other comparable terminology. These
forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include projections
of our future financial performance, based on our growth
strategies and anticipated trends in our business. These
statements are only predictions based on our current
expectations and projections about future events. There are
important factors that could cause our actual results, level of
activity, performance or achievements to differ materially from
the results, level of activity, performance or achievements
expressed or implied by the forward-looking statements,
including, but not limited to, the risks and uncertainties
discussed below.
Our operating results may fluctuate significantly and
could fall below expectations of securities analysts and
investors due to various factors.
Our operating results may fluctuate significantly because of a
number of factors, including the risk factors discussed in this
section. Moreover, we may not be able to successfully implement
the business strategy described in Part II, Item 7 of
this Form 10-K,
and implementing our business strategy may not sustain or
improve our results of operations or increase our market share.
As a result of the factors described in this section, operating
results for any one quarter are not necessarily indicative of
results to be expected for any other quarter or for any year and
system-wide sales, comparable sales and average restaurant sales
for any future period may decrease. In the future, our operating
results may fall below the expectations of securities analysts
and investors. In that event, the price of our common stock
would likely decrease.
13
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 price,
service, location and food quality. 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. McDonald’s and Wendy’s 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 Carl’s 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.
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 Applebee’s,
Chili’s, Ruby Tuesday’s 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. During the past year,
the fast food hamburger restaurant, or FFHR, category has
experienced flat or declining traffic which we believe is due in
part to competition from these competitors. In one of our major
European markets, the United Kingdom, much of the growth in the
quick service restaurant segment is expected to come from
bakeries, sandwich shops and new entrants that are diversifying
into healthier options to respond to nutritional concerns. We
believe that the large hamburger chains in the United Kingdom
have experienced declining sales as they face increased
competition from not only the bakeries and sandwich shops, but
also from pubs that are re-positioning themselves as family
venues and offering inexpensive food.
Finally, the restaurant industry has few non-economic barriers
to entry, and therefore new competitors may emerge at any time.
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, 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.
Our operating results are closely tied to the success of
our franchisees. Over the last several years, many franchisees
in the United States, Canada and the United Kingdom have
experienced severe financial distress, and our franchisees may
experience financial distress in the future.
We receive revenues in the form of royalties and fees from our
franchisees. As a result, our operating results substantially
depend upon our franchisees’ restaurant profitability,
sales volumes and financial viability. In December 2002, over
one-third of our franchisees in the United States and Canada
were facing financial distress primarily due to over-leverage.
Many of these franchisees became over-leveraged because they
took advantage of the lending environment in the late 1990s to
incur additional indebtedness without having to offer
significant collateral. Others became over-leveraged because
they financed the acquisition of restaurants from other
franchisees at premium prices on the assumption that sales would
continue to grow. When sales began to decline, many of these
franchisees were unable to service their indebtedness. Our
largest franchisee, with over 300 restaurants, declared
bankruptcy in December 2002 and a number of our other large
franchisees defaulted on their indebtedness. This distress
affected our results of operations as the franchisees did not
pay, or delayed or reduced payments of royalties, national
advertising fund contributions and rents for properties we
leased to them.
In response to this situation, we established the Franchisee
Financial Restructuring Program, or FFRP program, in February
2003 to address our franchisees’ financial problems in the
United States and Canada. At the FFRP program’s peak in
August 2003, over 2,540 restaurants were in the FFRP program.
From December 2002 through June 30, 2006, we wrote off over
$106 million in the United States in uncollectible accounts
receivable (principally royalties, advertising fund
contributions and rents). We have introduced a similar program
on a smaller scale in the United Kingdom to respond to negative
trends in that market. For more information on the FFRP program
and its financial impact on us, see Part II, Item 7,
“Management’s
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Discussion and Analysis of Financial Condition and Results of
Operations — Factors Affecting Comparability of
Results — Historical Franchisee Financial
Distress.”
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 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 was
$112 million at June 30, 2006, expiring over an
average period of five years. In addition, franchisees that have
completed the FFRP program in the United States, Canada or the
United Kingdom, and franchisees that have not experienced
financial distress in the past may experience financial distress
in the future. The resolution of future franchisee financial
difficulties, if possible, could be difficult and would likely
result in additional costs to us, including potentially under
our lease guarantees, and might result in a decrease in our
revenues and earnings. In addition, lenders to our franchisees
were affected by the financial distress and there can be no
assurance that current or prospective franchisees can obtain
necessary financing in light of the history of financial
distress.
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 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 control over franchisees and
limited ability to facilitate changes in restaurant ownership.
Franchisees are independent operators and have a significant
amount of flexibility in running their operations, including the
ability to set prices of our products in their restaurants.
Their employees are not our employees. Although we can exercise
control over our franchisees and their restaurant operations to
a limited extent through our ability under the franchise
agreements to mandate signage, equipment 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, or may not hire and train qualified managers and
other restaurant personnel. In addition, we set minimum
restaurant opening hours, but we have no right to mandate longer
hours. While we ultimately can take action to terminate
franchisees that do not comply with the standards contained in
our franchise agreements, 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.
Our principal competitors may have greater control over their
respective restaurant systems than we do. McDonald’s
exercises control through its significantly higher percentage of
company restaurants and ownership of franchisee real estate.
Wendy’s also has a higher percentage of company restaurants
than we do. As a result of the greater number of company
restaurants, McDonald’s and Wendy’s may have a greater
ability to implement operational initiatives and business
strategies, including their marketing and advertising programs.
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 opening
new international restaurants in both existing and new 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 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; and |
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employing and training qualified personnel. |
We are planning to expand our international operations in
markets where we currently operate and in selected new markets.
Operations in foreign markets may be affected by consumer
preferences and local market conditions. For example, we have
experienced declining sales and operating profits in certain
foreign markets, such as the United Kingdom, due in part to
franchisee financial distress and concerns about obesity as well
as high operating expenses. We may not be successful in
developing effective initiatives to reverse these trends.
Therefore, to the extent that we open new company restaurants in
existing foreign markets, we may not experience the operating
margins we expect, and our expected growth in our results of
operations may be negatively impacted.
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 who meet our criteria, including
extensive knowledge of the local market. 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 find franchisees who meet
our criteria, or if we find such franchisees, that they will
successfully implement their expansion plans.
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 customers
and retain existing customers. 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 marketing fund based on a
percentage of their gross sales, our marketing fund expenditures
are dependent upon sales volumes at system-wide restaurants. If
system sales decline, there will be a reduced amount available
for our marketing and advertising programs.
The support of our franchisees is critical for the success of
our marketing programs and any new strategic initiatives we seek
to undertake. In the United States, we poll our franchisees
before introducing any nationally-or locally-advertised price or
discount promotion to gauge the level of support for the
campaign. 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. At the time of the December
2002 acquisition, our relationships with franchisees were
strained. 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. The failure of our
franchisees to support our marketing programs and strategic
initiatives would adversely affect our ability to implement our
business strategy and could materially harm our business,
results of operations and financial condition.
We recently promoted members of our existing senior
management team as a result of the departure of our Chairman and
Chief Executive Officer; failure to manage a smooth transition
of those senior management into their new positions, 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.
On April 7, 2006, we announced the promotion of John
Chidsey, who had been our President and Chief Financial Officer,
to Chief Executive Officer as a result of the departure of Greg
Brenneman, who had been our Chief Executive Officer since August
2004 and our Chairman since February 2005. On the same date, we
announced the promotion of Ben Wells, who had been our Senior
Vice President and Treasurer, to Chief Financial Officer and
Treasurer. Changes in senior management, even changes involving
the promotion of
16
existing senior management, involve inherent disruptions. If we
fail to manage a smooth transition of Messrs. Chidsey and
Wells into their new positions, our ability to operate and grow
successfully and our business generally could be harmed.
In addition, 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
Messrs. Chidsey and Wells; President, Global Marketing
Strategy and Innovation, Russell Klein; Chief Operations
Officer, Jim Hyatt; 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 would suffer.
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 cow’s 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/or 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,
that could give rise to claims or allegations on a retroactive
basis. Reports in the media of one or more instances of
food-borne illness in one of our restaurants or in one of our
competitor’s 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. The risk exists even if it were later
determined that the illness had been wrongly attributed to the
restaurant. Furthermore, 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 addition, our industry has long been subject to the threat of
food tampering by suppliers, employees or customers, such as the
addition of foreign objects 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 system-wide basis. A decrease in customer traffic as
a result of these health concerns or negative publicity could
materially harm our business, results of operations and
financial condition.
Our business is affected by changes in consumer
preferences and consumer discretionary spending.
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 or healthier foods, our business could be hurt. In
addition, negative publicity about our products could materially
harm our business, results of operations and financial condition.
Our success depends to a significant extent on discretionary
consumer spending, which is influenced by general economic
conditions, consumer confidence and the availability of
discretionary income. Changes in economic conditions affecting
our customers could reduce traffic in some or all of our
restaurants or limit our ability to raise prices, either of
which could have a material adverse effect on our financial
condition and results of operations. Accordingly, we may
experience declines in sales during economic downturns or
periods of prolonged elevated energy prices or due to possible
terrorist attacks. Any material decline in consumer confidence
or in the amount of discretionary spending either in the United
States or, as we continue to expand internationally, in other
countries in which we operate, could have a material adverse
effect on our business, results of operations and financial
condition.
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A substantial number of franchise agreements will expire
in the next five years and 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
franchise agreements covering approximately 2,000 restaurants,
or approximately 20% of the total number of franchise
restaurants, will expire in the next five years. These
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 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 is approximately
$230,000 and franchisees generally require additional capital to
undertake the required remodeling and pay the franchise fee,
which may not be available to the franchisee on acceptable terms
or at all.
Over the past three fiscal years, we have experienced lower
levels of franchisees in the United States renewing their
franchise agreements for a standard additional
20-year term than we
have historically experienced. In many cases, however, we agreed
to extend the existing franchise agreements to avoid the closure
of restaurants by giving franchisees additional time to comply
with our renewal requirements. In addition, during fiscal 2000
and 2001, we offered an incentive program to franchisees in the
United States in which franchisees could renew their franchise
agreements prior to expiration and pay reduced royalties for a
limited period. Approximately 1,100 restaurants participated in
this incentive program. Many of these participants had franchise
agreements that would have otherwise expired over the next
several years. We believe that this program had a significant
impact on our renewal rates in fiscal 2004, 2005 and 2006
because franchisees that would otherwise have renewed during
those fiscal years had already signed new franchise agreements
for a standard additional
20-year term.
During fiscal 2004, 2005 and 2006, a total of 333, 435 and 409
franchise agreements, respectively, expired in the United
States, including, for each year, an estimated 150 that had
expired during previous years but were extended. Of the 333
agreements that expired in fiscal 2004, 53, or 16%, were renewed
and 103, or 31%, were extended for periods that ranged from nine
months to two years. Of the 435 agreements that expired in
fiscal 2005, 168, or 39%, were renewed and 130, or 30%, were
extended for periods that also ranged from nine months to two
years. Of the 409 agreements that expired in fiscal 2006, 191,
or 47%, were renewed and 113, or 28%, were extended for similar
periods. Additionally, 87, 89 and 98 restaurants with expiring
franchise agreements closed during fiscal 2004, 2005 and 2006,
respectively, or 26%, 20% and 24% of the total number of
expiring franchise agreements for such periods, respectively.
The balance of the restaurants with expiring franchise
agreements had no agreement in place by the end of the relevant
fiscal period, in many cases because franchisees had not
completed the renewal documentation, but continued to operate
and pay royalty and advertising fund contributions in compliance
with the terms of their expired franchise agreements.
If a substantial number of our franchisees cannot or decide not
to renew their franchise agreements with us, then our business,
results of operations and financial condition would suffer.
Increases in the cost of food, paper products and energy
could harm our profitability and operating results.
The cost of the food and paper products we use depends on a
variety of factors, many of which are beyond our control. Food
and paper products typically represent approximately 31% of our
company restaurant revenues. Fluctuations in weather, supply and
demand and economic conditions could adversely affect the cost,
availability and quality of some of our critical products,
including beef. Our inability to obtain requisite quantities of
high-quality ingredients would adversely affect our ability to
provide the menu items that are central to our business. The
highly competitive nature of our industry may limit our ability
to pass through these increased costs to our customers, causing
our operating margins to decrease.
We purchase large quantities of beef and our beef costs in the
United States represent approximately 20% of our food, paper and
product costs. The market for beef is particularly volatile and
is subject to significant price fluctuations due to seasonal
shifts, climate conditions, industry demand and other factors.
If the price of
18
beef or other food products that we use in our restaurants
increase in the future and we choose not to pass, or cannot
pass, these increases on to our customers, our operating margins
would decrease.
The recent increase in energy costs in the United States has
also adversely affected our business and may continue to have
this effect. Energy costs for our company restaurants in the
United States, principally electricity for lighting restaurants
and natural gas for our broilers, increased by $3.6 million
in fiscal 2006. We have generally not been able to pass these
increased costs on to our customers and continued high energy
costs could adversely affect our and our franchisees’
business, results of operation and financial condition.
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. Five
distributors service approximately 88% of our U.S. system
and the loss of any one of these distributors would likely
adversely affect our business. Moreover, 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, problems in
production or distribution, disease or food-borne illnesses,
inclement weather, such as hurricanes, further terrorist attacks
or other conditions could result in shortages or interruptions
in the supply of perishable food products. A disruption in our
supply and distribution network as a result of the financial
distress of our franchisees or otherwise could result in
increased costs to source needed products and could have a
severe impact on our and our franchisees’ ability to
continue to offer menu items to our customers. Such a disruption
could adversely affect our and our franchisees’ business,
results of operation and financial condition.
Labor shortages or increases in labor costs could slow our
growth or harm our business.
The success of our business 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 achieve sustained 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 regulation could increase our labor costs.
For example, there has been increased legislative activity at
the state and federal level to increase the minimum wage in the
United States, and our European markets have seen increased
minimum wages due to a higher level of regulation. We may be
unable to increase our prices in order to pass these increased
labor costs on to our customers, in which case our and our
franchisees’ margins would be negatively affected.
Our international operations subject us to additional
risks and costs and may cause our profitability to
decline.
Our restaurants are currently operated, directly by us or by
franchisees, in 64 foreign countries and U.S. territories
(Guam and Puerto Rico, which are considered part of our
international business). During fiscal 2006 and fiscal 2005, our
revenues from international operations were approximately
$809 million and $794 million, or 40% and 41% of total
revenues, respectively. Our financial condition and results of
operations may be adversely affected if international markets in
which our company and franchise restaurants compete are affected
by changes in political, economic or other factors. These
factors, over which neither we nor our franchisees have control,
may include:
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economic recessions; |
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changing labor conditions and difficulties in staffing and
managing our foreign operations; |
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increases in the taxes we pay and other changes in applicable
tax laws; |
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legal and regulatory changes and the burdens and costs of our
compliance with a variety of foreign laws; |
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changes in inflation rates; |
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changes in exchange rates; |
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difficulty in collecting our royalties and longer payment cycles; |
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expropriation of private enterprises; |
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political and economic instability and anti-American
sentiment; and |
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other external factors. |
These factors may increase in importance as we expect to open
additional company and franchise restaurants in international
markets as part of our growth strategy.
Our business is subject to fluctuations in foreign
currency exchange and interest rates.
Exchange rate fluctuations 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 generate revenues and incur operating expenses
and selling, general and administrative expenses denominated in
local currencies. In many foreign countries where we do not have
company restaurants our franchisees pay royalties in
U.S. dollars. However, as the royalties are calculated
based on local currency sales, our revenues are still impacted
from fluctuations in exchange rates. In fiscal 2006, operating
income would have decreased or increased $9.5 million if
all foreign currencies uniformly weakened or strengthened 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 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. 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.
We or our franchisees may not be able to renew leases or
control rent increases at existing restaurant locations or
obtain leases 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. 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 United Kingdom,
we have approximately 70 leases for properties that we sublease
to franchisees in which the lease term with our landlords are
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.
Current restaurant locations may become unattractive, and
attractive new locations may not be available for a reasonable
price, if at all.
The success of any restaurant depends in substantial part on its
location. There can be no assurance that current locations will
continue to be attractive as demographic patterns change.
Neighborhood or economic
20
conditions where restaurants are located could decline in the
future, thus resulting in potentially reduced sales in these
locations. If we cannot obtain desirable locations at reasonable
prices, our ability to effect our growth strategy will be
adversely affected.
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 35% of
the total assets on our balance sheet, and we believe that it is
very important to our success and our competitive position to
increase brand awareness and further develop our branded
products in both domestic and international markets. 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. 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.
Our indebtedness under our senior secured credit facility
is substantial and could limit our ability to grow our
business.
As of June 30, 2006, we had total indebtedness under our
senior secured credit facility of $994 million. An
additional $50 million prepayment was made on July 31,
2006 reducing the balance to $944 million. Our indebtedness
could have important consequences to our shareholders.
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; 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 competitive disadvantage compared to our
competitors that may have less indebtedness. |
In addition, our senior secured credit facility permits us to
incur additional indebtedness in the future. As of June 30,
2006, we had $109 million available to us for additional
borrowing under our $150 million revolving facility portion
of our senior secured credit facility (net of $41 million
in letters of credit issued under the revolving 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.
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; |
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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 those
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 payment
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 a 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 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 foods and
that quick service restaurant marketing practices have targeted
children and encouraged obesity. We have also been sued in
California under Proposition 65 to force disclosure of warnings
that certain of our products, such as french fries and
flame-broiled hamburgers, may expose customers to potentially
cancer-causing chemicals. In addition, we face the risk of
lawsuits and negative publicity resulting from 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.
Further, we may be subject to employee, franchisee and other
claims in the future based on, among other things, mismanagement
of the system, unfair or unequal treatment, discrimination,
harassment, wrongful termination and wage, rest break and meal
break issues, including those relating to overtime compensation.
We have been subject to these types of claims in the past, and
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 failure to comply with existing or increased
government regulations or becoming subject to future regulation
relating to the products that we sell could adversely affect our
business and operating results.
We are currently subject to numerous federal, state, local and
foreign laws and regulations, including those relating to: the
preparation and sale of food; building and zoning requirements;
environmental protection
22
and litter removal; minimum wage, overtime, immigration and
other labor requirements; the taxation of our business;
compliance with the Americans with Disabilities Act (ADA); and
working and safety conditions.
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.
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. Additionally, 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 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 could result in material unanticipated
expense to us and our franchisees.
In addition, we may become subject to legislation or regulation
seeking to tax and/or regulate high-fat and high-sodium foods,
particularly in the United States and the United Kingdom. For
example, a bill was introduced in the United States Congress
that would compel the listing of all nutritional information on
fast food menu boards and the Center for Science in the Public
Interest, a non-profit advocacy organization, has sued the
U.S. Food and Drug Administration to reduce the permitted
sodium levels in processed foods. The Attorney General of the
State of California is currently suing us and our major
competitors under Proposition 65 to force the disclosure of
warnings that carbohydrate-rich foods cooked at high
temperatures, such as french fries, contain the potentially
cancer-causing chemical acrylamide. In addition, public interest
groups have also focused attention on the marketing of these
foods to children in a stated effort to combat childhood
obesity. We cannot predict whether we will become subject in the
future to these or other regulatory or tax regimes or how
burdensome they could be to our business. Any future regulation
or taxation of our products or payments from our franchisees
could materially adversely affect our business, results of
operations and financial condition.
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.
Regulation of genetically modified food products may force
us to find alternative sources of supply.
As is the case with many other companies in the restaurant
industry, some of our products contain genetically engineered
food ingredients. Our U.S. suppliers are not required to
label their products as such.
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Environmental groups, some scientists and consumers,
particularly in Europe, are raising questions regarding the
potential adverse side effects, long-term risks and
uncertainties associated with genetically modified foods.
Regulatory agencies in Europe and elsewhere have imposed
labeling requirements on genetically modified food products.
Increased regulation of and opposition to genetically engineered
food products have in the past forced us and may in the future
force us to use alternative non-genetically engineered sources
at increased costs.
Our current principal stockholders have significant
influence over us, and they could delay, deter or prevent a
change of control or other business combination or otherwise
cause us to take action with which you may disagree.
The private equity funds controlled by the Sponsors together
beneficially own approximately 75.9% of our outstanding common
stock. In addition, six of our 13 directors are representatives
of the private equity funds controlled by the Sponsors. 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. As a result, these private equity funds have
significant influence over our decision to enter into any
corporate transaction and 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.
We are a “controlled company” within the meaning
of the New York Stock Exchange rules, and, as a result, qualify
for, and intend to rely on, exemptions from certain corporate
governance requirements that provide protection to stockholders
of other companies.
The private equity funds controlled by the Sponsors collectively
own more than 50% of the total voting power of our common shares
and thus we are a “controlled company” under the New
York Stock Exchange, or NYSE, corporate governance standards. As
a controlled company, we utilize certain exemptions under the
NYSE standards that free us from the obligation to comply with
certain NYSE corporate governance requirements, including the
requirements:
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that a majority of our board of directors consists of
independent directors; |
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that we have a nominating and governance committee that is
composed entirely of independent directors with a written
charter addressing the committee’s purpose and
responsibilities; |
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that we have a compensation committee that is composed entirely
of independent directors with a written charter addressing the
committee’s purpose and responsibilities; and |
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for an annual performance evaluation of the nominating and
governance committee and compensation committee. |
While our executive and corporate governance committee and our
compensation committee have charters that comply with the NYSE
requirements, we are not required to maintain those charters. As
a result of our use of these exemptions, our stockholders will
not have the same protection afforded to stockholders of
companies that are subject to all of the NYSE corporate
governance requirements.
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. Issuances of common stock or voting
preferred stock would reduce a stockholder’s influence over
matters on which our stockholders vote, and, in the case of
issuances of preferred stock, would likely result in a
stockholder’s interest in the Company being subject to the
prior rights of holders of that preferred stock.
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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 in the public market, or the perception that these sales
could occur, could cause the market price of our common stock to
decline. The shares of our common stock outstanding prior to our
initial public offering will be eligible for sale in the public
market at various times in the future. We, all of our executive
officers, directors and the private equity funds controlled by
the Sponsors and certain of our other officers have agreed,
subject to certain exceptions, not to sell any shares of our
common stock until after November 13, 2006 without the
prior written consent of J.P. Morgan Securities Inc. Upon
expiration of the
lock-up period
described above, up to approximately 4,840,944 additional shares
of common stock may be eligible for sale in the public market
without restriction, and up to approximately
107,239,245 shares of common stock held by affiliates may
become eligible for sale, subject to the restrictions under
Rule 144 under the Securities Act of 1933. In addition, the
private equity funds controlled by the Sponsors have the right
to require us to register their shares.
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 shares
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 the
holders of common stock.
We currently do not intend to pay dividends on our common
stock and consequently, your only opportunity to achieve a
return on your investment is if the price of our common stock
appreciates.
We currently do not plan to pay dividends on shares of our
common stock in the near future. The terms of our senior secured
credit facility limit our ability to pay cash dividends.
Furthermore, if we are in default under this credit facility,
our ability to pay cash dividends will be limited in certain
circumstances in the absence of a waiver of that default or an
amendment to that facility. 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. Consequently, a stockholder’s only
opportunity to achieve a return on his or her investment in our
company will be if the market price of our common stock
appreciates.
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| Item 1B. |
Unresolved Staff Comments |
None.
Our global headquarters is located in Miami, Florida and
consists of approximately 213,000 square feet which we
lease as well as another 42,950 square foot building which
we also lease. We have recently signed a
15-year lease to move
our global headquarters into a building to be constructed in
Coral Gables, Florida. We currently plan to occupy a space of
224,638 square feet in the new building beginning in 2008.
Our regional headquarters are located in Zug, Switzerland for
EMEA and Singapore for APAC. We also lease properties for our
regional offices in the United Kingdom, Germany and Spain. The
lease for our London office has expired, and we are currently
negotiating renewal terms with the landlord. We lease an office
space of 46,864 square feet in Munich, Germany under a
lease that expires in August 2015. In Madrid, Spain, we lease an
office space of 16,210 square feet under a lease that
expires in March 2009. We believe that our existing headquarters
and other leased and owned facilities are adequate to meet our
current requirements.
In the United Kingdom, 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
for the next five years.
25
The following table presents information regarding our
properties as of June 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Leased | |
|
|
| |
|
|
|
| |
|
|
| |
|
|
|
|
|
Building/ | |
|
|
|
|
| |
|
|
|
|
|
Land & | |
|
Total | |
|
|
| |
|
Owned(1) | |
|
Land | |
|
Building | |
|
Leases | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
United States and Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company restaurants
|
|
|
337 |
|
|
|
187 |
|
|
|
354 |
|
|
|
541 |
|
|
|
878 |
|
| |
Franchisee-operated properties
|
|
|
466 |
|
|
|
263 |
|
|
|
198 |
|
|
|
461 |
|
|
|
927 |
|
| |
Non-operating restaurant locations
|
|
|
35 |
|
|
|
31 |
|
|
|
12 |
|
|
|
43 |
|
|
|
78 |
|
| |
Offices
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
838 |
|
|
|
481 |
|
|
|
571 |
|
|
|
1,052 |
|
|
|
1,890 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company restaurants
|
|
|
20 |
|
|
|
35 |
|
|
|
310 |
|
|
|
345 |
|
|
|
365 |
|
| |
Franchisee-operated properties
|
|
|
4 |
|
|
|
— |
|
|
|
135 |
|
|
|
135 |
|
|
|
139 |
|
| |
Non-operating restaurant locations
|
|
|
1 |
|
|
|
— |
|
|
|
28 |
|
|
|
28 |
|
|
|
29 |
|
| |
Offices
|
|
|
— |
|
|
|
3 |
|
|
|
7 |
|
|
|
10 |
|
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
25 |
|
|
|
38 |
|
|
|
480 |
|
|
|
518 |
|
|
|
543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Owned refers to properties where we own the land and the
building. |
|
|
| Item 3. |
Legal Proceedings |
Litigation
On September 5, 2002, a lawsuit was filed against
McDonald’s and us in the Superior Court of California in
Los Angeles County (Case No. BC280980) (Council for Education
and Research on Toxics v. McDonald’s Corporation, Burger
King Corporation, et al,) alleging that the defendants violated
Proposition 65 and the California Unfair Competition Act by
failing to warn about the presence of acrylamide, a Proposition
65 regulated chemical, in french fries. The case was stayed for
three years pending the outcome of a proposed regulatory action
by California’s Office of Environmental Health Hazard
Assessment (“OEHHA”), the lead agency with primary
jurisdiction for implementing Proposition 65. The court agreed
to stay the case until the agency proposed updated regulations
for acrylamide in foods. In April 2005, the agency proposed new
regulations, including safe harbor warning language and a format
for warnings to be provided on signs at retail grocery stores or
restaurants. On March 30, 2006, OEHHA withdrew its proposed
regulations promising to issue a new proposal in 60 days.
No new proposals have been issued.
On August 26, 2005, the Attorney General for California
filed a lawsuit against us and eight others in the food
industry, in the Superior Court of California in Los Angeles
County (Case No. BC338956) (People of the State of California,
ex rel Bill Lockyer, Attorney General of the State of California
v. Frito-Lay, Inc., et al.), seeking an order providing for an
unspecified warning to be provided to consumers regarding the
presence of acrylamide in french fries and an unspecified
monetary payment. The Attorney General’s case, the CERT
case and a number of other cases filed against other companies
by three different private plaintiffs’ groups alleging
similar violations were deemed related in January 2006 and
assigned to a single judge in the Complex Litigation Division of
the Los Angeles Superior Court. On March 31, 2006, the
court lifted the stay in the related cases, allowing the matters
to proceed. Discovery and motions practice has commenced in the
related cases.
On July 24, 2006, we were served with a lawsuit against us
and CKE Restaurants in the Superior Court of California in
Sacramento County (Case No. 06AS02168) (Leeman v. Burger King
Corporation, et al.). The complaint alleges that we violated
Proposition 65 by failing to warn consumers about the presence
of chemicals known as polycyclic aromatic hydrocarbons (commonly
known as PAHs) found in flame-broiled meats, including our large
flame-broiled burgers such as the Triple Whopper. The
chemicals at issue are listed in Proposition 65 as possible
human carcinogens or reproductive toxicants.
26
In the event that there is a finding of liability in these
cases, we would be exposed to a potential obligation for payment
of plaintiff’s attorneys’ fees, penalties (in an
amount to be set by the court) and injunctive relief. It is not
possible to ascertain with any degree of confidence the amount
of our financial exposure, if any.
Proposition 65 Notices
On April 28, 2006, Physicians Committee for Responsible
Medicine served us and others in our industry with a notice
under Proposition 65 alleging a violation of Proposition 65 for
not warning about the chemical compound PhIP in grilled chicken
sandwiches served at restaurants in California. PhIP is listed
in Proposition 65. The notice is a pre-condition to filing a
lawsuit similar to the CERT lawsuit filed against us with
respect to acrylamide in french fries. The
60-day period expired
July 2, 2006, meaning that the plaintiff may now file suit
against us.
On July 26, 2006, we were served with a
60-day notice of intent
to sue under Proposition 65 asserting that the french fries
served at Burger King restaurants in California violate
Proposition 65 because there are no warnings to customers that
the product contains naphthalene, a Proposition 65 listed
chemical. The 60-day
notice period will expire on October 4, 2006, after which
the plaintiff may file a lawsuit in California.
It is not possible to ascertain with any degree of confidence
the amount of our financial exposure, if any, if we are sued in
connection with these matters.
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 |
The following matters were submitted to a vote of security
holders during the fourth quarter of fiscal 2006:
|
|
| |
By written consent dated April 7, 2006, the holders of
approximately 97% of the common stock of the Company elected
John W. Chidsey to serve on the Board of Directors of the
Company, effective as of April 7, 2006. The Company did not
solicit proxies. |
| |
| |
By written consent dated May 1, 2006, the holders of
approximately 97% of the common stock of the Company approved
the amended and restated certificate of incorporation and
bylaws, elected all of the nominees to the Board, approved a
26.34608 for 1 stock split of the Company’s common stock
and approved and adopted the Burger King Holdings, Inc. 2006
Omnibus Incentive Plan and reservation of shares to be issued
under the plan. The Company did not solicit proxies and the
board of directors as previously reported to the SEC was
re-elected in its entirety. |
| |
| |
By written consent dated May 15, 2006, the holders of
approximately 97% of the common stock of the Company approved
and adopted the Burger King Holdings, Inc. Amended and Restated
Equity Incentive Plan. The Company did not solicit proxies. |
| |
| |
Information regarding executive officers is contained in
Part III, Item 10 of this
Form 10-K under
the heading “Executive Officers of the
Registrant.” |
Part II
|
|
| Item 5. |
Market for Registrant’s 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 23, 2006 there were approximately
27
150 holders of record of our common stock. From May 18,
2006 through June 30, 2006, our common stock had a high
trading price of $19.45 and a low trading price of $15.48. There
were no repurchases of our common stock by or on behalf of us
during the fourth quarter of fiscal 2006 and we do not have a
formal or publicly announced stock repurchase program. The Bank
of New York is the transfer agent and registrar of our common
stock.
Recent Sales of Unregistered Securities
In January 2006, the Company issued 46,212 shares of its
common stock to a director of the Company for an aggregate of
$1,000,000 in a private placement. In addition, during the 2006
fiscal year the Company issued an aggregate of
29,746 shares of common stock to certain employees in
settlement of restricted stock unit awards in consideration of
services rendered. During the same period, the Company issued an
aggregate of 1,247,789 shares of its common stock to
employees pursuant to the exercise of outstanding options for an
aggregate of $6,089,377 in consideration of services rendered.
These issuances were deemed exempt from registration under the
Securities Act of 1933, as amended, pursuant to
Section 4(2) of the Securities Act or Rule 701
thereunder. In accordance with Rule 701, the shares were
issued pursuant to a written compensatory benefit plan and the
issuances did not, during the fiscal year, exceed 15% of the
outstanding shares of the Company’s common stock,
calculated in accordance with the provisions of Rule 701.
Dividend Policy
On February 21, 2006, we paid an aggregate cash dividend of
$367 million to holders of record of our common stock on
February 9, 2006. We currently do not plan to declare
further dividends on shares of our common stock in the near
future. We intend to retain our future earnings for use in the
operation and expansion of our business.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table presents information regarding options
outstanding under our compensation plans as of June 30,
2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Securities | |
|
|
|
|
| |
|
to be Issued Upon | |
|
Weighted-Average | |
|
|
| |
|
Exercise of | |
|
Exercise Price of | |
|
Number of Securities | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Remaining Available | |
| |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
for Future Issuance | |
| |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
| |
|
| |
|
| |
|
Plan Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
|
226,634 |
|
|
$ |
17.13 |
|
|
|
6,886,808 |
|
|
Burger King Holdings, Inc. Amended and Restated Equity Incentive
Plan
|
|
|
8,138,991 |
|
|
$ |
7.62 |
|
|
|
5,545,427 |
|
|
Equity Compensation Plans Not Approved by Security Holders
|
|
|
— |
|
|
|
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
TOTAL
|
|
|
8,365,625 |
|
|
$ |
7.88 |
|
|
|
12,432,235 |
|
| |
|
|
|
|
|
|
|
|
|
Use of Proceeds from Sale of Registered Securities
On May 18, 2006, we commenced our initial public offering
of our common stock, par value of $0.01, pursuant to our
Registration Statement on
Form S-1, as
amended (Reg.
No. 333-131897)
that was declared effective on May 17, 2006. We registered
28,750,000 shares of Common Stock at a maximum offering
price of $488.8 million pursuant to the registration
statement, all of which were sold in the offering at a per share
price of $17.00 for an aggregate offering price of
$488.8 million. The selling shareholders sold
3,750,000 shares and
28
we sold 25,000,000 shares in the offering. The managing
underwriters in the offering were J.P. Morgan Securities
Inc., Citigroup Global Markets Inc., Goldman, Sachs &
Co. and Morgan Stanley & Co.
The net proceeds received by us in the offering were
$392 million, determined as follows (in millions):
| |
|
|
|
|
|
Aggregate offering proceeds to the Company
|
|
$ |
425 |
|
|
Underwriting discounts and commissions
|
|
|
28 |
|
|
Other fees and expenses
|
|
|
5 |
|
| |
|
|
|
|
Total Expenses
|
|
|
33 |
|
| |
|
|
|
|
Net Proceeds to the Company
|
|
$ |
392 |
|
| |
|
|
|
On May 26, 2006, we used $350 million of the net
proceeds to repay the loan under our senior secured credit
facility that was incurred to finance, in large part, the
February 2006 dividend, described above under the heading
“Dividend Policy”, and a one-time compensatory
make whole payment in the amount of $33 million to certain
holders of options and restricted stock units. In February 2006,
we entered into an agreement with the Sponsors to pay a
termination fee of $30 million to terminate our management
agreement with the Sponsors upon completion of the initial
public offering. The $30 million management agreement
termination fee was paid in May 2006. The remainder of the net
proceeds which totaled $12 million, will be used for
general corporate purposes. The Goldman Sachs Funds, affiliates
of Goldman, Sachs & Co., one of the managing
underwriters in our initial public offering, own in excess of
10% of the issued and outstanding shares of our common stock.
Except for amounts paid to Goldman, Sachs & Co., none
of the underwriting discounts and commissions or offering
expenses was incurred or paid to associates of our directors or
to persons holding 10% or more of our common stock or to our
affiliates.
|
|
| Item 6. |
Selected Financial Data |
On December 13, 2002, we acquired BKC through private
equity funds controlled by the Sponsors. In this report, unless
the context otherwise requires, all references to
“we”, “us” and “our” refer to
Burger King Holdings, Inc. and its subsidiaries, including BKC,
for all periods subsequent to our December 13, 2002
acquisition of BKC. All references to our
“predecessor” refer to BKC and its subsidiaries for
all periods prior to the acquisition, which operated under a
different ownership and capital structure. In addition, the
acquisition was accounted for under the purchase method of
accounting and resulted in purchase accounting allocations that
affect the comparability of results of operations between
periods before and after the acquisition.
The following tables present selected consolidated financial and
other data for us and our predecessor for each of the periods
indicated. The selected historical financial data as of
June 30, 2006 and 2005 and for the fiscal years ended
June 30, 2006, 2005 and 2004 have been derived from our
audited consolidated financial statements and the notes thereto
included in this report. The selected historical financial data
as of June 30, 2004 and 2003 and for the period
December 13, 2002 to June 30, 2003 have been derived
from our audited consolidated financial statements and the notes
thereto, which are not included in this report.
The selected historical financial data for our predecessor as of
June 30, 2002 and for the period July 1, 2002 to
December 12, 2002 and the fiscal year ended June 30,
2002 have been derived from the audited consolidated financial
statements and notes thereto of our predecessor, which are not
included in this report. The combined financial data for the
combined fiscal year ended June 30, 2003 have been derived
from the audited consolidated financial statements and notes
thereto of our predecessor and us, but have not been audited on
a combined basis, do not comply with generally accepted
accounting principles and are not intended to represent what our
operating results would have been if the acquisition of BKC had
occurred at the beginning of the period. The other operating
data for the fiscal years ended June 30, 2006, 2005 and
2004 have been derived from our internal records.
The selected historical consolidated financial and other
operating data included below and elsewhere in this report are
not necessarily indicative of future results. The information
presented below should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 and our audited consolidated financial statements
and related notes and other financial information appearing
elsewhere in this report.
29
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Burger King | |
|
|
|
|
| |
|
Burger King Holdings, Inc. | |
|
|
|
Holdings, Inc. and | |
|
|
| |
|
and Subsidiaries | |
|
|
|
Subsidiaries | |
|
Predecessor | |
| |
|
| |
|
|
|
| |
|
| |
| |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
| |
|
Fiscal Years | |
|
Twelve | |
|
Period from | |
|
Period from | |
|
For the | |
| |
|
Ended June 30, | |
|
Months | |
|
December 13, | |
|
July 1, 2002 | |
|
Fiscal Year | |
| |
|
| |
|
Ended June 30, | |
|
2002 to June 30, | |
|
to December 12, | |
|
Ended June 30, | |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2002 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company restaurant revenues
|
|
$ |
1,516 |
|
|
$ |
1,407 |
|
|
$ |
1,276 |
|
|
$ |
1,174 |
|
|
$ |
648 |
|
|
$ |
526 |
|
|
$ |
1,130 |
|
| |
Franchise revenues
|
|
|
420 |
|
|
|
413 |
|
|
|
361 |
|
|
|
368 |
|
|
|
198 |
|
|
|
170 |
|
|
|
392 |
|
| |
Property revenues
|
|
|
112 |
|
|
|
120 |
|
|
|
117 |
|
|
|
115 |
|
|
|
60 |
|
|
|
55 |
|
|
|
124 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
2,048 |
|
|
|
1,940 |
|
|
|
1,754 |
|
|
|
1,657 |
|
|
|
906 |
|
|
|
751 |
|
|
|
1,646 |
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Food, paper and product costs
|
|
|
470 |
|
|
|
437 |
|
|
|
391 |
|
|
|
359 |
|
|
|
197 |
|
|
|
162 |
|
|
|
354 |
|
| |
Payroll and employee benefits
|
|
|
446 |
|
|
|
415 |
|
|
|
382 |
|
|
|
349 |
|
|
|
192 |
|
|
|
157 |
|
|
|
335 |
|
| |
Occupancy and other operating costs
|
|
|
380 |
|
|
|
343 |
|
|
|
314 |
|
|
|
314 |
|
|
|
168 |
|
|
|
146 |
|
|
|
298 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total company restaurant expenses
|
|
|
1,296 |
|
|
|
1,195 |
|
|
|
1,087 |
|
|
|
1,022 |
|
|
|
557 |
|
|
|
465 |
|
|
|
987 |
|
|
Selling, general and administrative expenses(1)
|
|
|
488 |
|
|
|
487 |
|
|
|
474 |
|
|
|
472 |
|
|
|
248 |
|
|
|
224 |
|
|
|
422 |
|
|
Property expenses
|
|
|
57 |
|
|
|
64 |
|
|
|
58 |
|
|
|
55 |
|
|
|
28 |
|
|
|
27 |
|
|
|
58 |
|
|
Fees paid to affiliates(2)
|
|
|
39 |
|
|
|
9 |
|
|
|
8 |
|
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
7 |
|
|
Impairment of goodwill(3)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
875 |
|
|
|
— |
|
|
|
875 |
|
|
|
5 |
|
|
Other operating (income) expenses, net(3)
|
|
|
(2 |
) |
|
|
34 |
|
|
|
54 |
|
|
|
32 |
|
|
|
(7 |
) |
|
|
39 |
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating costs and expenses
|
|
|
1,878 |
|
|
|
1,789 |
|
|
|
1,681 |
|
|
|
2,462 |
|
|
|
831 |
|
|
|
1,631 |
|
|
|
1,524 |
|
|
Income (loss) from operations
|
|
|
170 |
|
|
|
151 |
|
|
|
73 |
|
|
|
(805 |
) |
|
|
75 |
|
|
|
(880 |
) |
|
|
122 |
|
| |
Interest expense, net
|
|
|
72 |
|
|
|
73 |
|
|
|
64 |
|
|
|
81 |
|
|
|
35 |
|
|
|
46 |
|
|
|
105 |
|
| |
Loss on early extinguishment of debt
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
80 |
|
|
|
78 |
|
|
|
9 |
|
|
|
(886 |
) |
|
|
40 |
|
|
|
(926 |
) |
|
|
17 |
|
| |
Income tax expense (benefit)
|
|
|
53 |
|
|
|
31 |
|
|
|
4 |
|
|
|
(18 |
) |
|
|
16 |
|
|
|
(34 |
) |
|
|
54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
$ |
(868 |
) |
|
$ |
24 |
|
|
$ |
(892 |
) |
|
$ |
(37 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings per share — basic
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
|
* |
|
|
$ |
0.23 |
|
|
|
* |
|
|
|
* |
|
| |
|
Earnings per share — diluted
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
|
* |
|
|
$ |
0.23 |
|
|
|
* |
|
|
|
* |
|
| |
Weighted average shares outstanding, basic
|
|
|
110.3 |
|
|
|
106.5 |
|
|
|
106.1 |
|
|
|
* |
|
|
|
104.7 |
|
|
|
* |
|
|
|
* |
|
| |
Weighted average shares outstanding, diluted
|
|
|
114.7 |
|
|
|
106.9 |
|
|
|
106.1 |
|
|
|
* |
|
|
|
104.7 |
|
|
|
* |
|
|
|
* |
|
30
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Burger King | |
|
|
|
|
| |
|
Burger King Holdings, Inc. | |
|
|
|
Holdings, Inc. and | |
|
|
| |
|
and Subsidiaries | |
|
|
|
Subsidiaries | |
|
Predecessor | |
| |
|
| |
|
|
|
| |
|
| |
| |
|
|
|
Combined | |
|
For the | |
|
For the | |
|
|
| |
|
For the Fiscal Year Ended | |
|
Twelve | |
|
Period from | |
|
Period from | |
|
For the | |
| |
|
June 30, | |
|
Months | |
|
December 13, | |
|
July 1, 2002 | |
|
Fiscal Year | |
| |
|
| |
|
Ended June 30, | |
|
2002 to June 30, | |
|
to December 12, | |
|
Ended June 30, | |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2002 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
74 |
|
|
$ |
218 |
|
|
$ |
199 |
|
|
$ |
82 |
|
|
$ |
81 |
|
|
$ |
1 |
|
|
$ |
212 |
|
|
Net cash used for investing activities
|
|
|
(74 |
) |
|
|
(5 |
) |
|
|
(184 |
) |
|
|
(587 |
) |
|
|
(485 |
) |
|
|
(102 |
) |
|
|
(349 |
) |
|
Net cash (used for) provided by financing activities
|
|
|
(173 |
) |
|
|
(2 |
) |
|
|
3 |
|
|
|
719 |
|
|
|
607 |
|
|
|
112 |
|
|
|
155 |
|
|
Capital expenditures
|
|
|
85 |
|
|
|
93 |
|
|
|
81 |
|
|
|
142 |
|
|
|
47 |
|
|
|
95 |
|
|
|
325 |
|
|
EBITDA(3)(4)
|
|
$ |
258 |
|
|
$ |
225 |
|
|
$ |
136 |
|
|
$ |
(719 |
) |
|
$ |
118 |
|
|
$ |
(837 |
) |
|
$ |
283 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Burger King Holdings, Inc. and Subsidiaries | |
|
Predecessor | |
| |
|
| |
|
| |
| |
|
As of June 30, | |
|
|
| |
|
| |
|
As of June 30, | |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
259 |
|
|
$ |
432 |
|
|
$ |
221 |
|
|
$ |
203 |
|
|
$ |
54 |
|
| |
Total assets
|
|
|
2,552 |
|
|
|
2,723 |
|
|
|
2,665 |
|
|
|
2,458 |
|
|
|
3,329 |
|
| |
Total debt and capital lease obligations
|
|
|
1,065 |
|
|
|
1,339 |
|
|
|
1,294 |
|
|
|
1,251 |
|
|
|
1,323 |
|
| |
Total liabilities
|
|
|
1,985 |
|
|
|
2,246 |
|
|
|
2,241 |
|
|
|
2,026 |
|
|
|
2,186 |
|
| |
Total stockholders’ equity
|
|
$ |
567 |
|
|
$ |
477 |
|
|
$ |
424 |
|
|
$ |
432 |
|
|
$ |
1,143 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Burger King Holdings, Inc. and | |
| |
|
Subsidiaries | |
| |
|
| |
| |
|
For the Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Other System-Wide Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(5)(6)
|
|
|
1.9 |
% |
|
|
5.6 |
% |
|
|
1.0 |
% |
|
System-wide sales growth(5)
|
|
|
2.1 |
% |
|
|
6.1 |
% |
|
|
1.2 |
% |
|
Average restaurant sales (in millions)(5)
|
|
$ |
1.126 |
|
|
$ |
1.104 |
|
|
$ |
1.014 |
|
|
Number of company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
|
878 |
|
|
|
844 |
|
|
|
759 |
|
| |
EMEA/ APAC(7)
|
|
|
293 |
|
|
|
283 |
|
|
|
277 |
|
| |
Latin America(8)
|
|
|
69 |
|
|
|
60 |
|
|
|
51 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total company restaurants
|
|
|
1,240 |
|
|
|
1,187 |
|
|
|
1,087 |
|
|
Number of franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
|
6,656 |
|
|
|
6,876 |
|
|
|
7,217 |
|
| |
EMEA/ APAC(7)
|
|
|
2,494 |
|
|
|
2,373 |
|
|
|
2,308 |
|
| |
Latin America(8)
|
|
|
739 |
|
|
|
668 |
|
|
|
615 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total franchise restaurants
|
|
|
9,889 |
|
|
|
9,917 |
|
|
|
10,140 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total system-wide restaurants
|
|
|
11,129 |
|
|
|
11,104 |
|
|
|
11,227 |
|
| |
|
|
|
|
|
|
|
|
|
31
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Burger King Holdings, Inc. and | |
| |
|
Subsidiaries | |
| |
|
| |
| |
|
For the Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
$ |
295 |
|
|
$ |
255 |
|
|
$ |
115 |
|
| |
EMEA/ APAC(7)
|
|
|
62 |
|
|
|
36 |
|
|
|
95 |
|
| |
Latin America(8)
|
|
|
29 |
|
|
|
25 |
|
|
|
26 |
|
| |
Unallocated(9)
|
|
|
(216 |
) |
|
|
(165 |
) |
|
|
(163 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating income
|
|
$ |
170 |
|
|
$ |
151 |
|
|
$ |
73 |
|
| |
|
|
|
|
|
|
|
|
|
|
Company Restaurant Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
$ |
1,032 |
|
|
$ |
923 |
|
|
$ |
802 |
|
| |
EMEA/ APAC(7)
|
|
|
428 |
|
|
|
435 |
|
|
|
429 |
|
| |
Latin America(8)
|
|
|
56 |
|
|
|
49 |
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total company restaurant revenues
|
|
$ |
1,516 |
|
|
$ |
1,407 |
|
|
$ |
1,276 |
|
| |
|
|
|
|
|
|
|
|
|
|
Company Restaurant Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
|
14.1 |
% |
|
|
14.2 |
% |
|
|
11.3 |
% |
| |
EMEA/ APAC(7)
|
|
|
13.8 |
% |
|
|
15.2 |
% |
|
|
18.9 |
% |
| |
Latin America(8)
|
|
|
26.8 |
% |
|
|
30.6 |
% |
|
|
37.8 |
% |
| |
Total company restaurant margin
|
|
|
14.5 |
% |
|
|
15.1 |
% |
|
|
14.8 |
% |
|
Franchise Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
$ |
267 |
|
|
$ |
269 |
|
|
$ |
234 |
|
| |
EMEA/ APAC(7)
|
|
|
119 |
|
|
|
114 |
|
|
|
102 |
|
| |
Latin America(8)
|
|
|
34 |
|
|
|
30 |
|
|
|
25 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total franchise revenues
|
|
$ |
420 |
|
|
$ |
413 |
|
|
$ |
361 |
|
| |
|
|
|
|
|
|
|
|
|
|
Franchise sales (in millions)(10)
|
|
$ |
10,903 |
|
|
$ |
10,817 |
|
|
$ |
10,055 |
|
|
|
| (1) |
Selling, general and administrative expenses included
$72 million of intangible asset amortization in the fiscal
year ended June 30, 2002. |
| |
| (2) |
Fees paid to affiliates are comprised primarily of management
fees we paid to the Sponsors and fees paid by our predecessor to
Diageo plc under management agreements. Fees paid to affiliates
in fiscal 2006 also include a $30 million fee that we paid
to terminate the management agreement with the Sponsors. |
| |
| (3) |
In connection with our acquisition of BKC, our predecessor
recorded $35 million of intangible asset impairment charges
within other operating (income) expenses, net and goodwill
impairment charges of $875 million during the period from
July 1, 2002 to December 12, 2002. |
| |
| (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 incorporates certain operating drivers of
our business such as sales growth, operating costs, general and
administrative expenses and other income and expense. Capital
expenditures, which impact depreciation and amortization,
interest expense and income tax expense, are reviewed separately
by management. EBITDA is also one of the measures used by us to
calculate incentive compensation for management and
corporate-level employees. Further, management believes that
EBITDA is a useful measure as it improves comparability of
predecessor and successor results of operations, as purchase
accounting renders depreciation and amortization non-comparable
between predecessor and successor |
32
|
|
|
periods. See Part II, Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Factors
Affecting Comparability of Results — Purchase
Accounting”. |
|
|
| |
While EBITDA is not a recognized measure under generally
accepted accounting principles, we believe EBITDA is useful to
investors because it is frequently used by security analysts,
investors and other interested parties to evaluate us and other
companies in our industry. 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 consider certain
requirements such as capital expenditures and related
depreciation, principal and interest payments and tax payments. |
The following table is a reconciliation of our net income to
EBITDA:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Burger King | |
|
|
|
|
| |
|
Burger King Holdings, Inc. | |
|
|
|
Holdings, Inc. and | |
|
|
| |
|
and Subsidiaries | |
|
|
|
Subsidiaries | |
|
Predecessor | |
| |
|
| |
|
|
|
| |
|
| |
| |
|
|
|
Combined | |
|
For the | |
|
For the | |
|
|
| |
|
For the Fiscal Year Ended | |
|
Twelve | |
|
Period from | |
|
Period from | |
|
For the | |
| |
|
June 30, | |
|
Months | |
|
December 13, | |
|
July 1, 2002 | |
|
Fiscal Year | |
| |
|
| |
|
Ended June 30, | |
|
2002 to June 30, | |
|
to December 12, | |
|
Ended June 30, | |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2002 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Net income (loss)
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
$ |
(868 |
) |
|
$ |
24 |
|
|
$ |
(892 |
) |
|
$ |
(37 |
) |
|
Interest expense, net
|
|
|
72 |
|
|
|
73 |
|
|
|
64 |
|
|
|
81 |
|
|
|
35 |
|
|
|
46 |
|
|
|
105 |
|
|
Loss on early distinguishment of debt
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Income tax expense (benefit)
|
|
|
53 |
|
|
|
31 |
|
|
|
4 |
|
|
|
(18 |
) |
|
|
16 |
|
|
|
(34 |
) |
|
|
54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
170 |
|
|
|
151 |
|
|
|
73 |
|
|
|
(805 |
) |
|
|
75 |
|
|
|
(880 |
) |
|
|
122 |
|
|
Depreciation and amortization
|
|
|
88 |
|
|
|
74 |
|
|
|
63 |
|
|
|
86 |
|
|
|
43 |
|
|
|
43 |
|
|
|
161 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
258 |
|
|
$ |
225 |
|
|
$ |
136 |
|
|
$ |
(719 |
) |
|
$ |
118 |
|
|
$ |
(837 |
) |
|
$ |
283 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
This presentation of EBITDA may not be directly comparable to
similarly titled measures of other companies, since not all
companies use identical calculations. |
|
|
| (5) |
These are our key business measures. System-wide sales measures
include sales at both company restaurants and franchise
restaurants. We do not record franchise restaurant sales as
revenues. However, our royalty revenues are calculated based on
a percentage of franchise restaurant sales. Comparable sales
growth and system-wide sales growth are analyzed on a constant
currency basis, which means they are calculated using the prior
year average exchange rates, to remove the effects of currency
fluctuations from these trend analyses. We believe these
constant currency measures provide a more meaningful analysis of
our business by identifying the underlying business trend,
without distortion from the effect of foreign currency
movements. See Part II, Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Key Business
Measures”. |
| |
| (6) |
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. Comparable sales growth
includes sales at company restaurants and franchise restaurants.
We do not record franchise restaurant sales as revenues.
However, our royalty revenues are calculated based on a
percentage of franchise restaurant sales. |
| |
| (7) |
Refers to our operations in Europe, the Middle East, Africa,
Asia, Australia, New Zealand and Guam. |
| |
| (8) |
Refers to our operations in Mexico, Central and South America,
the Caribbean and Puerto Rico. |
33
|
|
| (9) |
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing and supply chain management. |
|
|
| (10) |
Franchise sales represent sales at franchise restaurants and
revenue to our franchisees. We do not record franchise
restaurant sales as revenues. However, our royalty revenues are
calculated based on a percentage of franchise restaurant sales. |
Burger King Holdings, Inc. and Subsidiaries Restaurant Count
Analysis
The following tables present information relating to the
analysis of our restaurant count for the geographic areas and
periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Franchise | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Beginning Balance July 1, 2003
|
|
|
1,061 |
|
|
|
10,274 |
|
|
|
11,335 |
|
| |
Openings
|
|
|
29 |
|
|
|
275 |
|
|
|
304 |
|
| |
Closings
|
|
|
(20 |
) |
|
|
(392 |
) |
|
|
(412 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
17 |
|
|
|
(17 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
1,087 |
|
|
|
10,140 |
|
|
|
11,227 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
63 |
|
|
|
251 |
|
|
|
314 |
|
| |
Closings
|
|
|
(23 |
) |
|
|
(414 |
) |
|
|
(437 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
60 |
|
|
|
(60 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
1,187 |
|
|
|
9,917 |
|
|
|
11,104 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
23 |
|
|
|
326 |
|
|
|
349 |
|
| |
Closings
|
|
|
(14 |
) |
|
|
(310 |
) |
|
|
(324 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
44 |
|
|
|
(44 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
1,240 |
|
|
|
9,889 |
|
|
|
11,129 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Franchise | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Beginning Balance July 1, 2003
|
|
|
735 |
|
|
|
7,529 |
|
|
|
8,264 |
|
| |
Openings
|
|
|
3 |
|
|
|
43 |
|
|
|
46 |
|
| |
Closings
|
|
|
(16 |
) |
|
|
(318 |
) |
|
|
(334 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
37 |
|
|
|
(37 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
759 |
|
|
|
7,217 |
|
|
|
7,976 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
33 |
|
|
|
21 |
|
|
|
54 |
|
| |
Closings
|
|
|
(9 |
) |
|
|
(301 |
) |
|
|
(310 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
61 |
|
|
|
(61 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
844 |
|
|
|
6,876 |
|
|
|
7,720 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
4 |
|
|
|
55 |
|
|
|
59 |
|
| |
Closings
|
|
|
(10 |
) |
|
|
(235 |
) |
|
|
(245 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
40 |
|
|
|
(40 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
878 |
|
|
|
6,656 |
|
|
|
7,534 |
|
| |
|
|
|
|
|
|
|
|
|
34
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Franchise | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Beginning Balance July 1, 2003
|
|
|
280 |
|
|
|
2,179 |
|
|
|
2,459 |
|
| |
Openings
|
|
|
21 |
|
|
|
177 |
|
|
|
198 |
|
| |
Closings
|
|
|
(4 |
) |
|
|
(68 |
) |
|
|
(72 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
(20 |
) |
|
|
20 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
277 |
|
|
|
2,308 |
|
|
|
2,585 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
21 |
|
|
|
165 |
|
|
|
186 |
|
| |
Closings
|
|
|
(14 |
) |
|
|
(101 |
) |
|
|
(115 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
283 |
|
|
|
2,373 |
|
|
|
2,656 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
10 |
|
|
|
191 |
|
|
|
201 |
|
| |
Closings
|
|
|
(4 |
) |
|
|
(66 |
) |
|
|
(70 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
4 |
|
|
|
(4 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
293 |
|
|
|
2,494 |
|
|
|
2,787 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Franchise | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Beginning Balance July 1, 2003
|
|
|
46 |
|
|
|
566 |
|
|
|
612 |
|
| |
Openings
|
|
|
5 |
|
|
|
55 |
|
|
|
60 |
|
| |
Closings
|
|
|
— |
|
|
|
(6 |
) |
|
|
(6 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
51 |
|
|
|
615 |
|
|
|
666 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
9 |
|
|
|
65 |
|
|
|
74 |
|
| |
Closings
|
|
|
— |
|
|
|
(12 |
) |
|
|
(12 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
60 |
|
|
|
668 |
|
|
|
728 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Openings
|
|
|
9 |
|
|
|
80 |
|
|
|
89 |
|
| |
Closings
|
|
|
— |
|
|
|
(9 |
) |
|
|
(9 |
) |
| |
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
69 |
|
|
|
739 |
|
|
|
808 |
|
| |
|
|
|
|
|
|
|
|
|
35
|
|
| Item 7. |
Management’s 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 2006, fiscal 2005 and fiscal 2004 in
this section are to the fiscal years ended June 30, 2006,
2005 and 2004, respectively.
Overview
We are the second largest fast food hamburger restaurant, or
FFHR, chain in the world as measured by the number of
restaurants and system-wide sales. As of June 30, 2006, we
owned or franchised a total of 11,129 restaurants in 65
countries and U.S. territories, of which 7,534 were located
in the United States and Canada. At that date, 1,240 restaurants
were company-owned and 9,889 were owned by our franchisees. We
operate in the FFHR category of the quick service restaurant, or
QSR, segment of the restaurant industry. The FFHR category is
highly competitive with respect to price, service, location and
food quality. Our restaurants feature flame-broiled hamburgers,
chicken and other specialty sandwiches, french fries, soft
drinks and other reasonably-priced food items.
Our business operates in three reportable segments: (1) the
United States and Canada; (2) Europe, Middle East, Africa
and Asia Pacific, or EMEA/ APAC; and (3) Latin America.
United States and Canada is our largest segment and comprised
68% of total revenues and 76% of operating income, excluding
unallocated corporate general and administrative expenses, in
fiscal 2006. EMEA/ APAC comprised 28% of total revenues and 16%
of operating income, excluding unallocated corporate general and
administrative expenses, and Latin America comprised the
remaining 4% of revenues and 8% of operating income, excluding
unallocated corporate general and administrative expenses, in
fiscal 2006.
Fiscal 2006 Highlights and Fiscal 2007 Outlook
Our strategic plan (the “Go Forward Plan”) has four
guiding principles: Grow Profitably (a market plan); Fund the
Future (a financial plan);
Fire-up the Guest (a
product plan); and Working Together (a people plan). Guided by
our Go Forward Plan and strong executive leadership, our
accomplishments during fiscal 2006 include:
|
|
|
| |
• |
ten consecutive quarters of positive system-wide comparables
sales growth for the first time in more than a decade; |
| |
| |
• |
nine straight quarters of positive comparable sales growth in
United States and Canada, as compared to negative comparable
sales growth in the previous seven consecutive quarters; |
| |
| |
• |
all-time high annual revenues of $2.05 billion; |
| |
| |
• |
all-time high average restaurant sales of $1.13 million; |
| |
| |
• |
openings of 290 new restaurants in two of our business segments,
EMEA/ APAC and Latin America; |
| |
| |
• |
system-wide net restaurant growth of 25, the first year of
net growth in four years; |
| |
| |
• |
significant improvement in the financial health of our franchise
system in the United States and Canada as demonstrated by
improved royalty and rent collection rates and our substantially
completed Franchisee Financial Restructuring Program or FFRP; |
| |
| |
• |
award-winning advertising and promotional programs focused on
our core customer, the SuperFan; |
| |
| |
• |
robust pipeline of new products; |
36
|
|
|
| |
• |
improved relationships with our franchisees in the United States; |
| |
| |
• |
all-time high restaurant guest satisfaction scores, as well as
record speed of service and cleanliness scores; |
| |
| |
• |
Decrease in total debt by $285 million from
$1.283 billion at June 30, 2005 to $998 million
at June 30, 2006; and |
| |
| |
• |
Increase in EBITDA by 15% from $225 million in fiscal 2005
to $258 million in fiscal 2006. See Part II,
Item 6, Selected Financial Data for a definition of
EBITDA, its calculation and an explanation of its usefulness to
management. |
Our long-term growth targets are: average annual revenue growth
of 6% to 7%; average annual EBITDA growth of 10% to 12%; and net
income growth in excess of 20%.
We intend to achieve these growth targets and strengthen our
competitive position through the continued implementation of the
following key elements of our business strategy:
|
|
|
| |
• |
Drive sales growth and profitability of our
U.S. business. We have achieved nine consecutive
quarters of comparable sales growth and increased average
restaurant sales by 14% since fiscal 2003 in our
U.S. business, but we believe that we have a long way to go
to reach our comparable sales and average restaurant sales
(ARS) growth potential in the United States. We also
believe that our purchasing scale, coupled with our initiatives
to promote restaurant efficiency, including our new batch
broiler, our improved labor scheduling system and our kitchen
minder platform, will further improve restaurant profitability.
We will continue to emphasize extending our hours of operations
with our U.S. franchisees to close the competitive hour gap
both in the breakfast and late night day parts. We have reduced
the capital costs to build a restaurant which, together with the
improved financial health of our franchise system in the United
States, is leading to increased restaurant development in our
U.S. business. During fiscal 2007, we anticipate opening
more than 100 new restaurants in the United States. |
| |
| |
• |
Expand our large international platform. We will
continue to build upon our substantial international
infrastructure, franchise network and restaurant base, focusing
mainly on under-penetrated markets where we already have a
presence. Internationally, we are about one-fourth the size of
our largest competitor, which we believe demonstrates
significant growth opportunities for us. We have developed a
detailed global development plan to seed worldwide growth over
the next five years. We expect that most of this growth will
come from franchisees in our established markets, particularly
in Germany, Spain and Mexico, although we also intend to
aggressively pursue market expansion opportunities in Brazil. In
addition, we will focus on expanding our presence in many of our
under-penetrated European and Asian markets. During fiscal 2007,
we anticipate opening more than 250 new restaurants in EMEA/APAC
and more than 80 new restaurants in Latin America. |
| |
| |
• |
Continue to build relationships with franchisees.
We succeed when our franchisees succeed, and we will continue
building our relationships with our franchisees. In the past
three years, we have held regional conferences with franchisees
to promote our operations and marketing initiatives and share
best practices, and we intend to continue holding these
conferences in the future. We have established quarterly officer
and director visits to franchisees, which have more closely
aligned the people in our company to our franchise base. We have
implemented advisory committees for marketing, operations,
finance and people, which we believe will ensure that franchisee
expertise and best practices are incorporated into all
U.S. system initiatives prior to rollout. We will continue
to dedicate resources toward the creation of a cohesive
organization that is focused on supporting the Burger King
brand globally. |
| |
| |
• |
Become a world-class global company. Since 2004,
we have integrated our domestic and international operations
into one global company. For fiscal 2007, we have developed a
global marketing calendar to create more consistent advertising
and brand positioning strategies across our markets. We have
also established a global product development team to reduce
complexity and increase consistency in our |
37
|
|
|
| |
|
worldwide menu. We expect to leverage our global purchasing
power to negotiate lower product costs and savings for our
restaurants outside of the United States and Canada. We believe
that the organizational realignments that we have implemented
will position us to execute our global growth strategy, while
remaining responsive to national differences in consumer
preferences and local requirements. |
Our Business
We generate revenue from three sources:
|
|
|
| |
• |
sales at our company restaurants; |
| |
| |
• |
royalties and franchise fees paid to us by our
franchisees; and |
| |
| |
• |
property income from restaurants that we lease or sublease to
franchisees. |
We refer to sales generated at our company restaurants and
franchise restaurants as system-wide sales. In fiscal 2006,
franchise restaurants generated approximately 88% of system-wide
sales. Royalties paid by franchisees are based on a percentage
of franchise restaurant sales and are recorded as franchise
revenues. Franchise fees and franchise renewal fees are recorded
as revenues in the year received. In fiscal 2006, company
restaurant and franchise revenues represented 74% and 21% of
total revenues, respectively. The remaining 5% of total revenues
were derived from property income.
We have a higher percentage of franchise restaurants to company
restaurants than our major competitors in the fast food
hamburger restaurant category. We believe that this restaurant
ownership mix provides us with a strategic advantage 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 our
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.
Moreover, due to the steps that we have taken to improve the
health of our franchise system in the United States and Canada,
we expect that this mix will produce more stable earnings and
cash flow in the future. However, our franchise dominated
business model also presents a number of drawbacks, such as our
limited control over franchisees and limited ability to
facilitate changes in restaurant ownership.
Revenues 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 closings, acquisitions
by us of franchise restaurants and sales of company restaurants
to franchisees (“refranchisings”). Royalties are paid
to us based on a percentage of franchise restaurant sales, while
franchise fees are paid upon the opening of a new franchise
restaurant, or the renewal of an existing franchise agreement.
Our property revenues represent income we earn under leasing and
subleasing arrangements with our franchisees. Royalties,
franchise fees and property revenues from franchisees are
affected primarily by sales at franchise restaurants, the timing
of franchise restaurant openings and closings and the financial
strength and stability of the franchise system.
Company restaurants incur three types of operating expenses:
|
|
|
| |
• |
food, paper and product costs, which represent the costs of the
food and beverages that we sell to consumers in company
restaurants; |
| |
| |
• |
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 |
| |
| |
• |
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. |
38
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 continued focus on increasing
average restaurant sales will result in improved profitability
to our system-wide restaurants.
Our 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), and
corporate overhead, including corporate salaries and facilities.
We believe that our current staffing and structure will allow us
to expand our business globally without increasing general and
administrative expenses significantly. Our selling expenses are
comprised of advertising and bad debt expenses. Selling, general
and administrative expenses also include amortization of
intangible assets and management fees paid to the Sponsors under
our management agreement with them. We terminated this
management agreement in connection with our initial public
offering. See “Results of Operations — Fees
Paid to Affiliates”.
Property expenses include costs of depreciation and rent on
properties we lease and sublease to franchisees, respectively.
Fees paid to affiliates are comprised primarily of management
fees paid to the Sponsors under a management agreement that we
entered into in connection with our acquisition of BKC. Under
this agreement, we paid a management fee to the Sponsors equal
to 0.5% of our total current year revenues, which amount was
limited to 0.5% of the prior year’s total revenues.
In February 2006, we entered into an agreement with the Sponsors
to pay a termination fee of $30 million to the Sponsors to
terminate the management agreement upon completion of our
initial public offering of common stock. In May 2006, we paid
the termination fee to the Sponsors.
Items classified as other operating (income) expenses, net
include gains and losses on asset and business disposals,
impairment charges, settlement losses recorded in connection
with acquisitions of franchise operations, gains and losses on
foreign currency transactions and other miscellaneous items.
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 United Kingdom 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, general and administrative expenses. In
countries where we manage an advertising fund, we plan the
marketing calendar in advance based on expected contributions
for that year into the fund. 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. If franchisees
fail to make the expected contributions, we may not be able to
continue with our marketing plan for that year unless we make
additional contributions into the fund. These additional
contributions are also recorded as selling, general and
administrative expenses. We made additional contributions of
$1 million, $15 million and $41 million in fiscal
2006, fiscal 2005 and fiscal 2004, respectively.
Key Business Measures
We track our results of operations and manage our business by
using three key business measures on a systemwide basis:
comparable sales growth, average restaurant sales and
system-wide sales growth. Comparable sales growth and
system-wide sales growth are analyzed on a constant currency
basis, which means they are calculated using prior year average
exchange rates, to remove the effects of currency fluctuations
from these trend analyses. We believe these constant currency
measures provide a more meaningful analysis of our
39
business by identifying the underlying business trend, without
distortion from the effect of foreign currency movements.
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. We believe comparable
sales growth is a key indicator of our performance, as
influenced by our initiatives and those of our competitors.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In constant currencies) | |
|
Comparable Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
|
2.5% |
|
|
|
6.6% |
|
|
|
(0.5 |
)% |
| |
EMEA/ APAC
|
|
|
0.0% |
|
|
|
2.8% |
|
|
|
5.4 |
% |
| |
Latin America
|
|
|
2.5% |
|
|
|
5.5% |
|
|
|
4.0 |
% |
| |
|
Total System-Wide
|
|
|
1.9% |
|
|
|
5.6% |
|
|
|
1.0 |
% |
Our comparable sales growth in fiscal 2006 was driven by new
products and marketing and operational initiatives. Comparable
sales did not increase at the same rate in fiscal 2006 due to
the high growth rate in fiscal 2005 to which fiscal 2006 is
compared. We believe that our system-wide comparable sales
growth for fiscal 2006 is more indicative of our future
performance than the higher comparable sales growth that we
achieved in fiscal 2005.
Comparable sales growth increased significantly in fiscal 2005
as a result of strategic initiatives we initially introduced in
fiscal 2004, including new premium products, our new advertising
campaigns targeting our core customers and our operational
excellence programs. Our early fiscal 2004 results were
negatively affected by competitive discounting in the United
States and Canada, before beginning to improve in the second
half of fiscal 2004 as a result of these strategic initiatives.
In the United States and Canada, our comparable sales
performance improved significantly in fiscal 2005, as we
continued to make improvements to our menu, advertising and
operations. The improved financial health of our franchise
system in fiscal 2005 and lower comparable sales in fiscal 2004
also contributed to our exceptionally strong fiscal 2005
comparable sales performance.
The comparable sales growth performance in EMEA/ APAC reflects
positive sales performance in markets such as Spain and Turkey
offset by poor sales performance in the United Kingdom over the
past three years and Germany during 2005 and 2006. Latin America
demonstrated strong results in the three-year period and
continues to grow, driven by our franchise restaurants.
Average restaurant sales is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. Average restaurant sales
is influenced by comparable sales performance and restaurant
openings and closings.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Average Restaurant Sales
|
|
$ |
1,126 |
|
|
$ |
1,104 |
|
|
$ |
1,014 |
|
Our improvement in average restaurant sales in fiscal 2006 and
fiscal 2005 was primarily due to improved comparable sales, the
opening of new restaurants with high sales volumes and closure
of under-performing restaurants. Our comparable sales increased
by 1.9% and 5.6% in fiscal 2006 and 2005, respectively, driven
40
primarily by our strategic initiatives related to operational
excellence, advertising and our menu. Additionally, we and our
franchisees closed 1,638 restaurants between July 1, 2002
and June 30, 2006. Approximately 73% of these closures were
franchise restaurants in the United States, which had average
restaurant sales of approximately $625,000 in the 12 months
prior to closure. We and our franchisees also opened 146 new
restaurants in the United States between fiscal 2004 and fiscal
2006, of which 81 were opened for at least 12 months as of
June 30, 2006. The average restaurant sales of these new
restaurants was approximately $1.3 million for the first
12 months after opening. We expect that closures of
under-performing restaurants, combined with continued
improvements to average restaurant sales of existing restaurants
and strong sales at new restaurants, to result in financially
stronger operators throughout our franchise base.
System-wide sales refer to sales at all company and franchise
restaurants. System-wide sales and system-wide sales growth are
important indicators of:
|
|
|
| |
• |
the overall direction and trends of sales and operating income
on a system-wide basis; and |
| |
| |
• |
the effectiveness of our advertising and marketing initiatives. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In constant currencies) | |
|
System-Wide Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
|
0.2% |
|
|
|
4.9% |
|
|
|
(2.2 |
)% |
| |
EMEA/ APAC
|
|
|
5.0% |
|
|
|
7.9% |
|
|
|
11.5 |
% |
| |
Latin America
|
|
|
13.0% |
|
|
|
14.5% |
|
|
|
8.4 |
% |
| |
|
Total System-Wide
|
|
|
2.1% |
|
|
|
6.1% |
|
|
|
1.2 |
% |
System-wide sales continued a growth trend during fiscal 2006,
when comparable sales continued to increase on a system-wide
basis although at a slower rate due to the high growth rate in
fiscal 2005, to which fiscal 2006 is compared. Additionally,
there were 349 restaurant openings during the period, partially
offset by 324 restaurant closures in fiscal 2006. We expect
restaurant closures to continue to decline and that restaurant
openings will accelerate, particularly in EMEA/ APAC and Latin
America.
The increases in system-wide sales growth in fiscal 2005 and
fiscal 2004 primarily reflected improved comparable sales in all
regions and sales at 618 new restaurants opened during that
two-year period, which were partially offset by the closure of
849 under-performing restaurants during the same two-year period.
Our system-wide sales in the United States and Canada increased
slightly in fiscal 2006, primarily as a result of positive
comparable sales growth partially offset by restaurant closures.
We had 6,656 franchise restaurants in the United States and
Canada at June 30, 2006, compared to 6,876 franchise
restaurants at June 30, 2005. System-wide sales in the
United States and Canada increased 4.9% in fiscal 2005,
following a pattern of declining sales in the twelve months
ended June 30, 2003 and the first half of fiscal 2004,
primarily due to the implementation of our strategic initiatives
related to advertising, our menu and our operational excellence
programs.
EMEA/ APAC demonstrated strong system-wide sales growth during
the three-year period which reflected growth in several markets,
including Germany, Spain, the Netherlands and smaller markets in
the Mediterranean and Middle East. Partially offsetting this
growth was the United Kingdom, where changes in consumer
preferences away from the FFHR category have adversely affected
sales for us. We opened 131 restaurants (net of closures)
in EMEA/ APAC during fiscal 2006 and 71 restaurants (net of
closures) during fiscal 2005, increasing our total system
restaurant count in this segment to 2,787 at June 30, 2006.
Latin America’s system-wide sales growth was driven by new
restaurant openings and strong comparable sales in fiscal 2004
through fiscal 2006. We opened 80 restaurants (net of closures)
in Latin America during
41
fiscal 2006 and 62 (net of closures) during fiscal 2005,
increasing our total system restaurant count in this segment to
808 at June 30, 2006.
Factors Affecting Comparability of Results
The acquisition of BKC was accounted for using the purchase
method of accounting, or purchase accounting, in accordance with
Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”)
No. 141, Business Combinations. Purchase accounting
required a preliminary allocation of the purchase price to the
assets acquired and liabilities assumed at their estimated fair
market values at the time of our acquisition of BKC. In December
2003, we completed our fair market value calculations and
finalized the adjustments to these preliminary purchase
accounting allocations. As part of finalizing our assessment of
fair market values, we reviewed all of our lease agreements
worldwide. Some of our lease payments were at below-market lease
rates while other lease payments were at above-market lease
rates. In cases where we were making below-market lease
payments, we recorded an asset reflecting this favorable lease.
We amortize this intangible asset over the underlying lease
term, which has the effect of increasing our rent expense on a
non-cash basis to the market rate. Conversely, in cases where we
were making above-market lease payments, we recorded a liability
reflecting this unfavorable lease. We amortize this liability
over the underlying lease term, which has the effect of
decreasing our rent expense on a non-cash basis to the market
rate.
During fiscal 2006, fiscal 2005 and fiscal 2004, we recorded a
net benefit from favorable and unfavorable lease amortization of
$24 million, $29 million and $52 million,
respectively. The fiscal 2004 unfavorable and favorable benefit
was higher than fiscal 2005 primarily as a result of final
adjustments to our purchase price allocation which resulted in a
higher benefit of $19 million associated with favorable and
unfavorable lease amortization. The favorable and unfavorable
lease benefit and other miscellaneous adjustments were partially
offset by $18 million of incremental depreciation expense,
resulting in a net benefit of $2 million in fiscal 2004,
when we finalized our purchase accounting allocations.
In addition to the amortization of these favorable and
unfavorable leases, purchase accounting resulted in certain
other items that affect the comparability of the results of
operations, including changes in asset carrying values (and
related depreciation and amortization), expenses related to
incurring the debt that financed the acquisition that were
capitalized and amortized as interest expense, and the
recognition of intangible assets (and related amortization).
|
|
|
Historical Franchisee Financial Distress |
Subsequent to our acquisition of BKC, we began to experience
delinquencies in payments of royalties, advertising fund
contributions and rents from certain franchisees in the United
States and Canada. In February 2003, we initiated the FFRP
program designed to proactively assist franchisees experiencing
financial difficulties due to over-leverage and other factors
including weak sales, the impact of competitive discounting on
operating margins and poor cost management. Under the FFRP
program, we worked with those franchisees with strong operating
track records, their lenders and other creditors to attempt to
strengthen the franchisees’ financial condition. The FFRP
program also resulted in closing unviable franchise restaurants
and our acquisition of certain under-performing franchise
restaurants in order to improve their performance. In addition,
we entered into agreements to defer certain royalty payments,
which we did not recognize as revenue during fiscal 2004, and
acquired a limited amount of franchisee debt, often as part of
broader agreements to acquire franchise restaurants or real
estate. We also contributed funds to cover shortfalls in
franchisee advertising contributions. See “Other
Commercial Commitments and Off-Balance Sheet Arrangements”
for further information about the support we committed to
provide in connection with the FFRP program, including an
aggregate remaining commitment of $36 million to fund
certain loans to renovate franchise restaurants, to 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. Through this program, we
42
significantly reduced the number of franchise restaurants in
distress from over 2,540 in August 2003 to approximately 60 at
June 30, 2006.
Franchise system distress had a significant impact on our
results of operations during fiscal 2004 and fiscal 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue not recognized(1)
|
|
$ |
— |
|
|
$ |
(3 |
) |
|
$ |
22 |
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Bad debt expense
|
|
|
(1 |
) |
|
|
1 |
|
|
|
11 |
|
| |
Incremental advertising contributions
|
|
|
1 |
|
|
|
15 |
|
|
|
41 |
|
| |
Internal and external costs of FFRP program administration
|
|
|
— |
|
|
|
12 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total effect on selling, general and administrative
|
|
$ |
— |
|
|
$ |
28 |
|
|
$ |
63 |
|
|
Other operating expenses (income), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reserves (recoveries) on acquired debt, net
|
|
|
(2 |
) |
|
|
4 |
|
|
|
19 |
|
| |
Other, net
|
|
|
2 |
|
|
|
4 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total effect on other operating (income) expenses, net
|
|
$ |
— |
|
|
$ |
8 |
|
|
$ |
20 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total effect on income from operations
|
|
$ |
— |
|
|
$ |
33 |
|
|
$ |
105 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Fiscal 2005 reflects the collection and recognition of revenue
that was not recognized in fiscal 2004. |
As a result of the franchisees’ distress, we did not
recognize revenues associated with royalties and rent for
certain franchise restaurants where collection was uncertain in
fiscal 2004, although we retained the legal right pursuant to
the applicable franchise agreement to collect these amounts. In
accordance with SFAS No. 45, Accounting for
Franchise Fee Revenue, we recognize revenue for the
previously unrecognized revenue at the time such amounts are
actually collected. In addition, provisions for bad debt expense
were higher than historical levels during fiscal 2004, as a
result of a substantial increase in past due receivables. As
brand advertising is a significant element of our success, we
contributed an incremental $1 million, $15 million,
and $41 million to the U.S. and Canada advertising fund for
fiscal 2006, fiscal 2005 and fiscal 2004, respectively, to fund
the shortfall in franchisee contributions. We also incurred
significant internal and external costs to manage the FFRP
program in fiscal 2005 and fiscal 2004.
We believe the FFRP program has significantly improved the
financial health and performance of our franchisee base in the
United States and Canada. Franchise restaurant average
restaurant sales in the United States and Canada have improved
from $973,000 in the twelve months ended June 30, 2003 to
$1.1 million in fiscal 2006. Our collection rates, which we
define as collections divided by billings on a one-month
trailing basis, also improved during this period. Collection
rates in the United States and Canada have improved from 91%
during fiscal 2004 to 100% in fiscal 2005 and fiscal 2006, which
reflects the improvement of our franchise system’s
financial health.
Our franchisees are independent operators, and their decision to
incur indebtedness is generally outside of our control. Although
franchisees may experience financial distress in the future due
to over-leverage, we believe that there are certain factors that
may reduce the likelihood of such a recurrence. We have
established a compliance program to monitor the financial
condition of restaurants that were formerly in the FFRP program.
We review our collections on a monthly basis to identify
potentially distressed franchisees. Further, we believe that the
best way to reduce the likelihood of another wave of franchisee
financial distress in our system is for us to focus on driving
sales growth and improving restaurant profitability, and that
the successful implementation of our business strategy will help
us to achieve these objectives.
43
We believe the investments we made historically in the FFRP
program will continue to provide a return to us in the form of a
reinvigorated franchise system in the United States and Canada.
|
|
|
Our Global Reorganization and Realignment |
After our acquisition of BKC, we retained consultants during
fiscal 2004 and fiscal 2005 to assist us in the review of the
management and efficiency of our business, focusing on our
operations, marketing, supply chain and corporate structure. In
connection with these reviews, we reorganized our corporate
structure to allow us to operate as a global brand, including
the elimination of certain corporate and international
functions. Also in connection with those reviews, we implemented
operational initiatives which have helped us improve restaurant
operations. During fiscal 2006, we continued our global
reorganization by regionalizing the activities associated with
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 EMEA/ APAC, in new European and Asian holding
companies. See “Liquidity and Capital
Resources — Realignment of our European and Asian
businesses”.
In connection with our global reorganization and related
realignment of our European and Asian businesses, we incurred
costs of $10 million, $17 million and $22 million
in fiscal 2006, fiscal 2005 and fiscal 2004, respectively,
consisting primarily of consulting and severance-related costs,
which included severance payments, outplacement services and
relocation costs. The following table presents, for the periods
indicated, such costs:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Consulting fees
|
|
$ |
10 |
|
|
$ |
2 |
|
|
$ |
14 |
|
|
Severance-related costs of the global reorganization
|
|
|
— |
|
|
|
15 |
|
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
10 |
|
|
$ |
17 |
|
|
$ |
22 |
|
| |
|
|
|
|
|
|
|
|
|
44
Results of Operations
The following table presents, for the periods indicated, our
results of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Increase/ | |
|
|
|
Increase/ | |
|
|
| |
|
Amount | |
|
(Decrease) | |
|
Amount | |
|
(Decrease) | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except percentages and per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company restaurant revenues
|
|
$ |
1,516 |
|
|
|
8 |
% |
|
$ |
1,407 |
|
|
|
10 |
% |
|
$ |
1,276 |
|
| |
Franchise revenues
|
|
|
420 |
|
|
|
2 |
% |
|
|
413 |
|
|
|
14 |
% |
|
|
361 |
|
| |
Property revenues
|
|
|
112 |
|
|
|
(7 |
)% |
|
|
120 |
|
|
|
3 |
% |
|
|
117 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
2,048 |
|
|
|
6 |
% |
|
|
1,940 |
|
|
|
11 |
% |
|
|
1,754 |
|
|
Company restaurant expenses
|
|
|
1,296 |
|
|
|
8 |
% |
|
|
1,195 |
|
|
|
10 |
% |
|
|
1,087 |
|
|
Selling, general and administrative expenses
|
|
|
488 |
|
|
|
* |
|
|
|
487 |
|
|
|
3 |
% |
|
|
474 |
|
|
Property expenses
|
|
|
57 |
|
|
|
(11 |
)% |
|
|
64 |
|
|
|
10 |
% |
|
|
58 |
|
|
Fees paid to affiliates
|
|
|
39 |
|
|
|
333 |
% |
|
|
9 |
|
|
|
13 |
% |
|
|
8 |
|
|
Other operating (income) expenses, net
|
|
|
(2 |
) |
|
|
(106 |
)% |
|
|
34 |
|
|
|
(37 |
)% |
|
|
54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating costs and expenses
|
|
|
1,878 |
|
|
|
5 |
% |
|
|
1,789 |
|
|
|
6 |
% |
|
|
1,681 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
170 |
|
|
|
13 |
% |
|
|
151 |
|
|
|
107 |
% |
|
|
73 |
|
| |
Interest expense, net
|
|
|
72 |
|
|
|
(1 |
)% |
|
|
73 |
|
|
|
14 |
% |
|
|
64 |
|
| |
Loss on early extinguishment of debt
|
|
|
18 |
|
|
|
* |
|
|
|
— |
|
|
|
* |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
80 |
|
|
|
3 |
% |
|
|
78 |
|
|
|
* |
|
|
|
9 |
|
| |
Income tax expense
|
|
|
53 |
|
|
|
71 |
% |
|
|
31 |
|
|
|
* |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27 |
|
|
|
(43 |
)% |
|
$ |
47 |
|
|
|
* |
|
|
$ |
5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings per common share — diluted
|
|
$ |
0.24 |
|
|
|
(45 |
)% |
|
$ |
0.44 |
|
|
|
780 |
% |
|
$ |
0.05 |
|
Company restaurant revenues increased 8% to $1,516 million
in fiscal 2006, primarily as a result of nine new restaurant
openings (net of closures), the acquisition of 44 franchise
restaurants (net of refranchisings), and positive comparable
sales in the United States and Canada. Partially offsetting
these factors were negative comparable sales in EMEA/ APAC. In
fiscal 2005, company restaurant revenues increased 10% to
$1,407 million, as a result of strong comparable sales in
the United States and Canada and Latin America, where
approximately 76% of our company restaurants were located.
In the United States and Canada, company restaurant revenues
increased 12% to $1,032 million in fiscal 2006, primarily
as a result of positive comparable sales and the acquisition of
40 franchise restaurants (net of refranchisings), most of which
were located in the United States. In fiscal 2005 company
restaurant revenues increased 15% to $923 million,
primarily as a result of strong comparable sales generated from
the implementation of strategic initiatives related to our menu,
advertising and operational excellence programs, as well as the
acquisition of 99 franchise restaurants.
In EMEA/ APAC, company restaurant revenues decreased 2% to
$428 million in fiscal 2006, primarily as a result of
negative comparable sales in the United Kingdom and Germany,
where 77% of our EMEA/ APAC company restaurants were located at
June 30, 2006, and the negative impact of foreign currency
exchange rates, which were partially offset by strong
performance in Spain and the Netherlands. Company restaurant
revenues were negatively impacted $19 million by movement
in foreign currency exchange rates. However, this negative
impact did not have a material impact on operating income as it
was offset by the positive impact to Company restaurant expenses
and selling, general and administrative expenses. In fiscal
2005, company restaurant revenues increased 1% to
$435 million, primarily as a result of new restaurant
openings and positive comparable sales.
45
In Latin America, company restaurant revenues increased 14% to
$56 million in fiscal 2006, as revenues generated by nine
new company restaurants, partially offset by negative comparable
sales. In fiscal 2005, company restaurant revenues increased 8%
to $49 million, primarily as a result of new restaurant
openings and positive comparable sales.
Franchise revenues increased 2% to $420 million in fiscal
2006. Comparable sales increased at franchise restaurants in the
United States and Canada and Latin America segments and
decreased in the EMEA/ APAC segment during fiscal 2006. In
addition, 326 new franchise restaurants were opened since
June 30, 2005, including 277 new international franchise
restaurants. Partially offsetting these factors was the
elimination of royalties from 360 franchise restaurants that
were closed or acquired by us, primarily in the United States
and Canada. In fiscal 2005, franchise revenues increased 14% to
$413 million, primarily as a result of improved sales at
franchise restaurants in all segments.
In the United States and Canada, franchise revenues decreased 1%
to $267 million in fiscal 2006, primarily as a result of
the elimination of royalties from 278 franchise restaurants that
were closed or acquired by us, partially offset by positive
comparable sales. In fiscal 2005, franchise revenues increased
15% to $269 million, primarily as a result of the
implementation of our menu, marketing and operational excellence
initiatives and the improved financial condition of our
franchise system. In addition to increased royalties from
improved franchise restaurant sales, we recognized
$3 million of franchise revenues not previously recognized
in United States and Canada in fiscal 2005, compared to
$17 million of franchise revenues not recognized in fiscal
2004. Partially offsetting these factors was the elimination of
royalties from franchise restaurants that were closed or
acquired by us in fiscal 2005.
Our EMEA/ APAC franchisees opened 125 new franchise restaurants
(net of closures) since June 30, 2005 resulting in a 4%
increase in franchise revenues to $119 million in fiscal
2006. In fiscal 2005, our franchisees opened 64 new franchise
restaurants (net of closures) in EMEA/ APAC which, along with
positive comparable sales, resulted in a 13% increase in
franchise revenues to $114 million.
Latin America franchise revenues increased 13% to
$34 million during fiscal 2006 as a result of 71 new
franchise restaurants (net of closures) since June 30, 2005
and positive comparable sales. In fiscal 2005, franchise
revenues increased 17% to $30 million, as a result of 53
new franchise restaurants (net of closures) and positive
comparable sales.
Property revenues decreased by 7% to $112 million in fiscal
2006, as a result of a decrease in the number of properties that
we lease or sublease to franchisees due to franchise restaurants
that were closed or acquired by us, partially offset by higher
contingent rent payments. In fiscal 2005, property revenues
increased 3% to $120 million.
In the United States and Canada, property revenues were
$83 million in fiscal 2006 and fiscal 2005, primarily as a
result of higher contingent rent payments from increased
franchise restaurant sales, offset by the effect of franchise
restaurants leased to franchisees that were closed or acquired
by us. In fiscal 2005, property revenues increased 1% to
$83 million primarily because fiscal 2004 property revenues
in the United States and Canada excluded $5 million of
property revenues not recognized, partially offset by
$3 million of revenues recognized in connection with
finalizing our purchase accounting allocations.
Our EMEA/ APAC property revenues decreased $8 million to
$29 million, primarily as a result of the closure of
franchise restaurants in the United Kingdom and the
reclassification of property income on certain properties that
were leased or subleased to non-restaurant businesses after
restaurant closures. The property income on these properties is
treated as a reduction in related property expenses rather than
revenue. In fiscal 2005, property revenues increased 5% to
$37 million.
|
|
|
Operating Costs and Expenses |
|
|
|
Company restaurant expenses |
Food, paper and product costs increased 8% to $470 million
in fiscal 2006, primarily as a result of an 8% increase in
company restaurant revenues. As a percentage of company
restaurant revenues, food, paper and
46
product costs decreased 0.1% to 31.0%, primarily due to reduced
beef and cheese prices in the United States, partially offset by
increased beef prices in Europe. In fiscal 2005, food, paper and
product costs increased 12% to $437 million, primarily as a
result of a 10% increase in company restaurant revenues. As a
percentage of company restaurant revenues, food, paper and
product costs increased 0.5% to 31.1% in fiscal 2005, primarily
as a result of increases in the price of beef in the United
States.
In the United States and Canada, food, paper and product costs
increased 9% to $325 million in fiscal 2006, primarily as a
result of a 12% increase in company restaurant revenues. Food,
paper and product costs decreased 0.6% to 31.5% of company
restaurant revenues, primarily due to reduced beef and cheese
prices. In fiscal 2005, food, paper and product costs increased
16% to $297 million, primarily as a result of a 15%
increase in company restaurant revenues. As a percentage of
company restaurant revenues, food, paper and product costs
increased 0.3% to 32.1% in fiscal 2005, primarily as a result of
increases in the price of beef.
In EMEA/ APAC, food, paper and product costs increased 2% to
$125 million in fiscal 2006, primarily as a result of
increased beef prices in Europe, partially offset by a 2%
decrease in company restaurant revenues and favorable foreign
currency exchange rates. Food, paper and product costs increased
1.2% to 29.2% of company restaurant revenues, primarily as a
result of the increased beef prices in Europe. In fiscal 2005,
food, paper and product costs increased 2% to $122 million
in EMEA/ APAC, primarily as a result of a 1% increase in company
restaurant revenues.
In Latin America, food, paper and product costs increased 11% in
fiscal 2006, primarily as a result of a 14% increase in company
restaurant revenues. In fiscal 2005, food, paper and product
costs increased 7% to $18 million, primarily as a result of
an 8% increase in company restaurant revenues.
Payroll and employee benefits costs increased 7% to
$446 million in fiscal 2006. Payroll and employee benefits
costs decreased 0.1% to 29.4% of company restaurant revenues in
fiscal 2006 compared to 29.5% in fiscal 2005. Payroll and
employee benefits costs have continued to increase as a result
of increases in wages and other costs of labor, particularly
health insurance, as well as an increase in the number of
company restaurants. Partially offsetting these increased costs
was a reduction in the labor required to operate our
restaurants, due to our operational excellence programs and
operational efficiency programs implemented in Europe.
In fiscal 2005, payroll and employee benefits costs increased 9%
to $415 million, as a result of increased wages, health
insurance and training expenses, as well as the acquisition of
franchise restaurants in fiscal 2005. Payroll and employee
benefits costs decreased 0.4% to 29.5% of company restaurant
revenues in fiscal 2005 as higher costs of wages and health
insurance benefits were more than offset by increasing
restaurant sales and efficiency gains from our operational
excellence programs to reduce the labor required to operate our
restaurants.
In the United States and Canada, payroll and employee benefits
costs increased 13% to $312 million in fiscal 2006,
primarily as a result of the acquisition of 40 franchise
restaurants (net of refranchisings) and increased wages and
health insurance benefit costs. Payroll and employee benefits
costs increased 0.3% to 30.2% of company restaurant revenues. In
fiscal 2005, payroll and employee benefits costs increased 12%
to $276 million, primarily as a result of the acquisition
of franchise restaurants and increased wages and health
insurance benefit costs. Payroll and employee benefits costs
were 29.9% of company restaurant revenues, compared to 30.8% in
fiscal 2004, primarily as a result of leveraging payroll costs
from increased sales and efficiency gains resulting from our
operational improvement initiatives.
In EMEA/ APAC, payroll and employee benefits costs decreased 5%
to $127 million in fiscal 2006, primarily as a result of
favorable foreign currency exchange rates. Payroll and employee
benefits costs decreased 1.1% to 29.7% of company restaurant
revenues in EMEA/ APAC. In fiscal 2005, payroll and employee
benefits costs increased 3% to $134 million, primarily as a
result of new company restaurants in Germany and increased wages
and benefits costs. Payroll and employee benefits costs were
30.8% of company restaurant revenues in EMEA/ APAC, compared to
30.3% in fiscal 2004.
In Latin America, where labor costs are lower than in the United
States and Canada and EMEA/ APAC segments, payroll and employee
benefits costs increased 17% to $7 million in fiscal 2006,
primarily as a result
47
of nine new company restaurant openings since June 30,
2005. Payroll and employee benefits costs increased 0.9% to
12.5% of company restaurant revenues in Latin America. In fiscal
2005, payroll and employee benefits costs increased 12% to
$6 million, primarily as a result of new company
restaurants. Payroll and employee benefits costs were 11.4% of
company restaurant revenues in Latin America in fiscal 2005,
compared to 11.0% in fiscal 2004.
Occupancy and other operating costs increased 11% to
$380 million in fiscal 2006. Occupancy and other operating
costs were 25.1% of company restaurant revenues in fiscal 2006
compared to 24.4% in fiscal 2005. These increases are primarily
attributable to the acquisition of franchise restaurants and
increased utility costs.
Occupancy and other operating costs increased 9% to
$343 million in fiscal 2005, primarily as a result of the
acquisition of franchise restaurants and increases in costs such
as rents and utilities. Occupancy and other operating costs were
24.4% of company restaurant revenues in fiscal 2005 compared to
24.6% in fiscal 2004, primarily because of sales growth.
In the United States and Canada, occupancy and other operating
costs increased to 24.1% of company restaurant revenues in
fiscal 2006 compared to 23.6% in fiscal 2005, primarily as a
result of increased utility and restaurant supply costs. In
fiscal 2005, occupancy and other operating costs were 23.6% of
company restaurant revenues compared to 26.1% in fiscal 2004,
primarily as a result of leveraging base rents from increased
sales.
In EMEA/ APAC, occupancy and other operating costs increased to
27.3% of company restaurant revenues in fiscal 2006 compared to
26.1% in fiscal 2005, as a result of decreased restaurant sales,
increased utilities in the segment and increased rents in the
United Kingdom, partially offset by the closure of certain
restaurants with higher than average restaurant rents. In fiscal
2005, occupancy and other operating costs were 26.1% of company
restaurant revenues compared to 22.9% in fiscal 2004, primarily
as a result of increased rents and utilities in the United
Kingdom and adjustments we recorded in fiscal 2004 when we
finalized our purchase accounting allocations.
In Latin America, occupancy and other operating costs increased
to 25% of company restaurant revenues in fiscal 2006 from 21.6%
in fiscal 2005, primarily as a result of a decrease in
comparable sales and increased utility costs. In fiscal 2005,
occupancy and other operating costs were 21.6% of company
restaurant revenues compared to 13.7% in fiscal 2004, primarily
as a result of increased utility costs and adjustments we
recorded in fiscal 2004 when we finalized our purchase
accounting allocations.
|
|
|
Worldwide selling, general and administrative expenses |
Selling, general and administrative expenses increased by
$1 million to $488 million during fiscal 2006. General
and administrative expenses increased $17 million to
$416 million, while selling expenses decreased
$16 million to $72 million.
Our fiscal 2006 general and administrative expenses included
$34 million of compensation expense and taxes related to
the compensatory make-whole payment, $10 million in
expenses associated with the realignment of our European and
Asian businesses and $5 million of executive severance
expense. Additionally, our acquisition of 44 franchise
restaurants (net of refranchisings) resulted in increased
general and administrative expenses related to the management of
our company restaurants. Partially offsetting these increased
expenses was a $19 million reduction in general and
administrative expenses related to franchise system distress and
our global reorganization costs in fiscal 2006.
The $16 million decrease in selling expenses in fiscal 2006
is primarily attributable to a $14 million decrease in
incremental advertising expense compared to fiscal 2005
resulting from franchisee non-payment of advertising
contributions. Partially offsetting this reduction were
incremental advertising expenses for company restaurants opened
or acquired in fiscal 2006.
In fiscal 2005, selling, general and administrative expenses
increased $13 million to $487 million. General and
administrative costs increased 10% to $399 million, while
selling expenses decreased 21% to $88 million.
48
General and administrative expenses included $29 million
and $33 million of costs associated with the FFRP
program’s administration and severance and consulting fees
incurred in connection with our global reorganization in fiscal
2005 and fiscal 2004, respectively. Our fiscal 2005 general and
administrative cost increases also included $14 million of
incremental incentive compensation as a result of improved
restaurant operations and our improved financial performance, as
well as $7 million of increased costs associated with
operational excellence initiatives. Our remaining general and
administrative expense increases in fiscal 2005 were
attributable to the acquisition of franchise restaurants and
increases in restaurant operations and business development
teams, particularly in EMEA/ APAC where our general and
administrative expenses increased by $18 million in fiscal
2005.
The decrease in selling expenses is attributable to a decrease
in advertising expense and bad debt expense. Our bad debt
expense decreased to $1 million in fiscal 2005 from
$11 million in fiscal 2004 and our incremental advertising
expense resulting from franchisee non-payment of advertising
contributions was $15 million in fiscal 2005 compared to
$41 million in fiscal 2004. These improvements resulted
from the strengthening of our franchise system during fiscal
2005. Partially offsetting these reductions were incremental
advertising expenses for company restaurants opened or acquired
in fiscal 2005.
Property expenses decreased by $7 million to
$57 million in fiscal 2006, as a result of a decrease in
the number of properties that we lease or sublease to
franchisees, primarily due to restaurant closures and
acquisition of franchise restaurants. Additionally, the revenues
from properties that we lease or sublease to non-restaurant
businesses after restaurant closures is treated as a reduction
in property expenses, resulting in decreased property revenues
and expenses in fiscal 2006. Property expenses were 35% of
property revenues in the United States and Canada in fiscal 2006
compared to 36% in fiscal 2005 and 35% in fiscal 2004. 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.
Fees paid to affiliates increased to $39 million in fiscal
2006, compared to $9 million and $8 million in fiscal
2005 and fiscal 2004, respectively, as a result of the
$30 million management agreement termination fee paid to
the Sponsors.
|
|
|
Worldwide other operating (income) expenses, net |
Other operating income, net, comprised primarily of gains on
property disposals and other miscellaneous items, was
$2 million in fiscal 2006 compared to other operating
expenses, net, of $34 million and $54 million in
fiscal 2005 and fiscal 2004, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
(Gains) losses on closures, asset disposals, and refranchisings,
net
|
|
$ |
(3 |
) |
|
$ |
13 |
|
|
$ |
15 |
|
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
(Recovery) impairment of investments in franchisee debt
|
|
|
(2 |
) |
|
|
4 |
|
|
|
19 |
|
|
Impairment of investments in unconsolidated companies
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
Litigation settlements and reserves
|
|
|
— |
|
|
|
2 |
|
|
|
4 |
|
|
Other, net
|
|
|
3 |
|
|
|
11 |
|
|
|
12 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total other operating (income) expenses, net
|
|
$ |
(2 |
) |
|
$ |
34 |
|
|
$ |
54 |
|
| |
|
|
|
|
|
|
|
|
|
Gains and losses on asset disposals are primarily related to
exit costs associated with restaurant closures and gains and
losses from selling company restaurants to franchisees. In
fiscal 2005, the United States and
49
Canada recorded $7 million in net losses on asset disposals
compared to $6 million in fiscal 2004. EMEA/ APAC recorded
$6 million in net losses on asset disposals in fiscal 2005,
compared to $8 million in fiscal 2004, including a loss of
$3 million recorded in connection with the refranchising of
company restaurants in Sweden.
As a result of our assessments of the net realizable value of
certain third-party debt of franchisees that we acquired,
primarily in connection with the FFRP program in the United
States and Canada, we recorded $4 million and
$12 million of impairment charges related to investments in
franchisee debt in fiscal 2005 and fiscal 2004, respectively.
The remaining fiscal 2004 impairment of debt investments was
recorded in connection with the forgiveness of a note receivable
from an unconsolidated affiliate in Australia.
Other, net included $5 million of settlement losses
recorded in connection with the acquisition of franchise
restaurants and $4 million of costs associated with the
FFRP program in fiscal 2005 in the United States and Canada. In
fiscal 2004, other, net included $3 million of losses from
unconsolidated investments in EMEA/ APAC and $2 million
each of losses from transactions denominated in foreign
currencies, property valuation reserves, and re-branding costs
related to our operations in Asia.
Operating income increased by $19 million to
$170 million in fiscal 2006, primarily as a result of
improved restaurant sales and the improved financial health of
our franchise system, partially offset by the effect of the
compensatory make-whole payment and the management agreement
termination fee. See Note 20 to our audited consolidated
financial statements contained in this report for segment
information disclosed in accordance with Statement of Financial
Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS No 131).
In fiscal 2005, our operating income increased by
$78 million to $151 million, primarily as a result of
increased revenues and the improved financial health of our
franchise system.
In the United States and Canada, operating income increased by
$40 million to $295 million in fiscal 2006, primarily
as a result of increased sales and reductions in the negative
effect of franchise system distress, which decreased by
$33 million. The decrease in the negative effect of
franchise system distress was comprised primarily of a
$14 million reduction in incremental advertising
contributions and a $12 million reduction in costs of FFRP
administration, both of which resulted from the improved
financial health of our franchise system. In fiscal 2005,
operating income increased by $140 million to
$255 million, primarily as a result of increased revenues
and a reduction in the negative effect of franchise system
distress, which decreased by $72 million. This decrease was
comprised primarily of a $25 million increase in franchise
and property revenue recognition, a $26 million reduction
in incremental advertising contributions and a $15 million
reduction in reserves on acquired debt, all of which resulted
from the improved financial health of our franchise system.
Operating income in EMEA/ APAC increased by $26 million to
$62 million in fiscal 2006, as a result of a
$6 million reduction in losses on property disposals, a
$16 million decrease in selling, general and administrative
expenses, primarily attributable to the effects of our global
reorganization and a $5 million increase in franchise
revenues, partially offset by a $7 million decrease in
margins from company restaurants driven primarily by results in
the United Kingdom, due to decreased sales, increased beef
prices and occupancy costs, including rents and utilities. In
fiscal 2005, operating income decreased by $59 million to
$36 million, as a result of a number of factors, including:
(i) a $16 million decrease in margins from company
restaurants, as a result of higher operating costs, (ii) a
$12 million increase in selling, general and administrative
expenses to support growth, (iii) a $6 million
increase in expenses related to our global reorganization,
(iv) $9 million of lease termination and exit costs,
including $8 million in the United Kingdom, and
(v) $2 million of litigation settlement costs in Asia.
Operating income in Latin America increased by $4 million
to $29 million in fiscal 2006, primarily as a result of
increased revenues. In fiscal 2005, operating income decreased
by $1 million to $25 million, primarily as a result of
higher company restaurant expenses.
50
Our unallocated corporate expenses increased $51 million to
$216 million in fiscal 2006, primarily as a result of
(i) the $34 million of compensation expense recorded
in connection with the compensatory make-whole payment and
related taxes, (ii) the management termination fee of
$30 million paid to the Sponsors, and
(iii) $5 million of executive severance, partially
offset by a $7 million decrease in global reorganization
costs. In fiscal 2005, our unallocated corporate expenses
increased 1% to $165 million.
Interest expense, net decreased 1% to $72 million in fiscal
2006. Interest expense decreased 1% to $81 million in
fiscal 2006, as a result of our debt repayments and lower
interest rates attributable to our July 2005 and February 2006
financings. Interest income was approximately $9 million in
fiscal 2006 and fiscal 2005, as increased interest rates offset
a reduction in cash invested. In fiscal 2005, interest expense,
net increased 14% to $73 million due to higher interest
rates related to term debt and debt payable on our
payment-in-kind, or PIK
notes to Diageo plc and the private equity funds controlled by
the Sponsors incurred in connection with our acquisition of BKC.
Interest income was $9 million in fiscal 2005, an increase
of $5 million from fiscal 2004, primarily as a result of an
increase in cash and cash equivalents due to improved cash
provided by operating activities and increased interest rates on
investments.
|
|
|
Loss on early extinguishment of debt |
In connection with the refinancing of our secured debt in July
2005, the incremental $350 million borrowing in February
2006, and the prepayment of $350 million in term debt from
the proceeds of our initial public offering, $18 million of
deferred financing fees were recorded as a loss on early
extinguishment of debt.
Income tax expense increased $22 million to
$53 million in fiscal 2006, primarily due to a 26% increase
in our effective tax rate to 66%. The higher effective tax rate
is primarily attributable to accruals for tax uncertainties of
$15 million and changes in the estimate of tax provisions
of $7 million which resulted in a higher effective tax rate
for fiscal 2006.
In fiscal 2005, income tax expense increased $27 million to
$31 million, primarily due to the $69 million increase
in income before income taxes in fiscal 2005. Our effective tax
rate declined by 4.7% to 39.7% which partially offset the effect
of the increase in income before income taxes. The majority of
the change in our effective tax rate is attributable to
adjustments to our valuation allowances related to deferred tax
assets in foreign countries and certain state income taxes in
fiscal 2005. See Note 13 to our audited consolidated
financial statements for further information regarding our
effective tax rate and valuation allowances.
Our net income decreased $20 million to $27 million in
fiscal 2006, primarily due to unusual items such as
(i) $34 million of compensation expense and related
taxes recorded in connection with the compensatory make-whole
payment, (ii) the $30 million termination fee related
to the termination of our management agreement with the
Sponsors, (iii) the $18 million loss recorded on the
early extinguishment of debt, and (iv) a $22 million
increase in income tax expense. This increase was partially
offset by increased revenues and a $40 million reduction in
costs of franchise system distress and our global reorganization.
In fiscal 2005, our net income increased by $42 million to
$47 million. This improvement resulted primarily from
increased revenues, a decrease in expenses related to franchise
system distress, particularly bad debt expense, incremental
advertising fund contributions and reserves recorded on acquired
franchisee debt, and a decrease in global reorganization costs.
51
Quarterly Financial Data
The following table presents unaudited consolidated income
statement data for each of the eight fiscal quarters in the
period ended June 30, 2006. The operating results for any
quarter are not necessarily indicative of the results for any
future period. These quarterly results were prepared in
accordance with generally accepted accounting principles and
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Quarters Ended | |
| |
|
| |
| |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
| |
|
2006 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Company restaurant revenues
|
|
$ |
394 |
|
|
$ |
368 |
|
|
$ |
379 |
|
|
$ |
375 |
|
|
$ |
364 |
|
|
$ |
339 |
|
|
$ |
354 |
|
|
$ |
350 |
|
|
Franchise revenues
|
|
|
111 |
|
|
|
100 |
|
|
|
104 |
|
|
|
105 |
|
|
|
107 |
|
|
|
100 |
|
|
|
104 |
|
|
|
102 |
|
|
Property revenues
|
|
|
28 |
|
|
|
27 |
|
|
|
29 |
|
|
|
28 |
|
|
|
32 |
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
|
533 |
|
|
|
495 |
|
|
|
512 |
|
|
|
508 |
|
|
|
503 |
|
|
|
468 |
|
|
|
488 |
|
|
|
481 |
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Food, paper and product costs
|
|
|
119 |
|
|
|
114 |
|
|
|
119 |
|
|
|
118 |
|
|
|
115 |
|
|
|
104 |
|
|
|
110 |
|
|
|
108 |
|
| |
Payroll and employee benefits
|
|
|
116 |
|
|
|
111 |
|
|
|
109 |
|
|
|
110 |
|
|
|
107 |
|
|
|
104 |
|
|
|
101 |
|
|
|
103 |
|
| |
Occupancy and other operating costs
|
|
|
100 |
|
|
|
96 |
|
|
|
93 |
|
|
|
91 |
|
|
|
87 |
|
|
|
88 |
|
|
|
81 |
|
|
|
87 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total company restaurant expenses
|
|
|
335 |
|
|
|
321 |
|
|
|
321 |
|
|
|
319 |
|
|
|
309 |
|
|
|
296 |
|
|
|
292 |
|
|
|
298 |
|
|
Selling, general and administrative expenses
|
|
|
135 |
|
|
|
146 |
|
|
|
109 |
|
|
|
98 |
|
|
|
131 |
|
|
|
124 |
|
|
|
123 |
|
|
|
109 |
|
|
Property expenses
|
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
21 |
|
|
|
14 |
|
|
|
15 |
|
|
|
14 |
|
|
Fees paid to affiliates
|
|
|
31 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
Other operating expenses (income), net
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(5 |
) |
|
|
2 |
|
|
|
16 |
|
|
|
15 |
|
|
|
2 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating costs and expenses
|
|
|
519 |
|
|
|
481 |
|
|
|
442 |
|
|
|
436 |
|
|
|
479 |
|
|
|
451 |
|
|
|
434 |
|
|
|
425 |
|
|
Income from operations
|
|
|
14 |
|
|
|
14 |
|
|
|
70 |
|
|
|
72 |
|
|
|
24 |
|
|
|
17 |
|
|
|
54 |
|
|
|
56 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(10 |
) |
|
$ |
(12 |
) |
|
$ |
27 |
|
|
$ |
22 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
23 |
|
|
$ |
21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings per common share — Diluted
|
|
$ |
(0.08 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
Segment Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
76 |
|
|
$ |
67 |
|
|
$ |
74 |
|
|
$ |
78 |
|
|
$ |
63 |
|
|
$ |
55 |
|
|
$ |
65 |
|
|
$ |
72 |
|
|
EMEA/ APAC
|
|
|
11 |
|
|
|
9 |
|
|
|
21 |
|
|
|
21 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
19 |
|
|
|
17 |
|
|
Latin America
|
|
|
7 |
|
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
|
|
6 |
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
|
Unallocated
|
|
|
(80 |
) |
|
|
(69 |
) |
|
|
(33 |
) |
|
|
(34 |
) |
|
|
(46 |
) |
|
|
(43 |
) |
|
|
(37 |
) |
|
|
(39 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Operating Income
|
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
70 |
|
|
$ |
72 |
|
|
$ |
24 |
|
|
$ |
17 |
|
|
$ |
54 |
|
|
$ |
56 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
271 |
|
|
$ |
254 |
|
|
$ |
254 |
|
|
$ |
253 |
|
|
$ |
245 |
|
|
$ |
220 |
|
|
$ |
229 |
|
|
$ |
229 |
|
|
EMEA/ APAC
|
|
|
109 |
|
|
|
100 |
|
|
|
110 |
|
|
|
109 |
|
|
|
106 |
|
|
|
107 |
|
|
|
113 |
|
|
|
109 |
|
|
Latin America
|
|
|
14 |
|
|
|
14 |
|
|
|
15 |
|
|
|
13 |
|
|
|
13 |
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Company Restaurant Revenues
|
|
$ |
394 |
|
|
$ |
368 |
|
|
$ |
379 |
|
|
$ |
375 |
|
|
$ |
364 |
|
|
$ |
339 |
|
|
$ |
354 |
|
|
$ |
350 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
15.1 |
% |
|
|
12.2 |
% |
|
|
14.2 |
% |
|
|
14.2 |
% |
|
|
15.1 |
% |
|
|
11.4 |
% |
|
|
17.0 |
% |
|
|
13.1 |
% |
|
EMEA/ APAC
|
|
|
12.8 |
% |
|
|
12.0 |
% |
|
|
15.5 |
% |
|
|
15.6 |
% |
|
|
13.2 |
% |
|
|
13.1 |
% |
|
|
17.7 |
% |
|
|
16.5 |
% |
|
Latin America
|
|
|
28.6 |
% |
|
|
28.6 |
% |
|
|
33.3 |
% |
|
|
23.1 |
% |
|
|
30.8 |
% |
|
|
33.3 |
% |
|
|
25.0 |
% |
|
|
33.3 |
% |
|
Company Restaurant Margin
|
|
|
15.0 |
% |
|
|
12.8 |
% |
|
|
15.3 |
% |
|
|
14.9 |
% |
|
|
15.1 |
% |
|
|
12.7 |
% |
|
|
17.5 |
% |
|
|
14.9 |
% |
|
Franchise Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
70 |
|
|
$ |
65 |
|
|
$ |
66 |
|
|
$ |
67 |
|
|
$ |
70 |
|
|
$ |
66 |
|
|
$ |
67 |
|
|
$ |
67 |
|
|
EMEA/ APAC
|
|
|
32 |
|
|
|
27 |
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
27 |
|
|
|
29 |
|
|
|
28 |
|
|
Latin America
|
|
|
9 |
|
|
|
8 |
|
|
|
9 |
|
|
|
8 |
|
|
|
8 |
|
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Franchise Revenues
|
|
$ |
111 |
|
|
$ |
100 |
|
|
$ |
104 |
|
|
$ |
105 |
|
|
$ |
107 |
|
|
$ |
100 |
|
|
$ |
104 |
|
|
$ |
102 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Quarters Ended | |
| |
|
| |
| |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
| |
|
2006 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Franchise Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
1,914 |
|
|
$ |
1,795 |
|
|
$ |
1,850 |
|
|
$ |
1,923 |
|
|
$ |
1,956 |
|
|
$ |
1,761 |
|
|
$ |
1,877 |
|
|
$ |
1,961 |
|
|
EMEA/ APAC
|
|
|
695 |
|
|
|
632 |
|
|
|
680 |
|
|
|
708 |
|
|
|
671 |
|
|
|
640 |
|
|
|
667 |
|
|
|
662 |
|
|
Latin America
|
|
|
187 |
|
|
|
172 |
|
|
|
179 |
|
|
|
168 |
|
|
|
163 |
|
|
|
153 |
|
|
|
159 |
|
|
|
147 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Franchise Sales
|
|
$ |
2,796 |
|
|
$ |
2,599 |
|
|
$ |
2,709 |
|
|
$ |
2,799 |
|
|
$ |
2,790 |
|
|
$ |
2,554 |
|
|
$ |
2,703 |
|
|
$ |
2,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales are affected by the timing and effectiveness of
our advertising, new products and promotional programs. Our
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 our acquisition
of franchise restaurants as well as variability of the weather.
Restaurant sales are typically higher in our fourth and first
fiscal quarters, which are the spring and summer months when
weather is warmer, than in our 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. 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.
New restaurants typically have lower operating margins for three
months after opening, as a result of
start-up expenses.
Similarly, many franchise restaurants that we acquire are
under-performing and continue to have lower margins before we
make operational improvements. The timing of new restaurant
openings has not caused a material fluctuation in our quarterly
results of operations. However, we acquired 44 franchise
restaurants (net of refranchisings) in fiscal 2006, which
resulted in increased revenues and operating expenses in fiscal
2006 compared to fiscal 2005.
53
Our quarterly results also fluctuate due to the timing of
expenses and charges associated with franchise system distress,
our global reorganization, gains and losses on asset and
business disposals, impairment charges and settlement losses
recorded in connection with acquisitions of franchise
restaurants. Unusual charges incurred during each quarter for
fiscal 2006 and fiscal 2005 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Quarters Ended | |
| |
|
| |
| |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
| |
|
2006 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Franchise system distress impact(a)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3 |
) |
|
$ |
(1 |
) |
|
$ |
— |
|
|
$ |
1 |
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Franchise system distress impact(b)
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
9 |
|
|
|
9 |
|
|
|
8 |
|
| |
Global reorganization and realignment
|
|
|
7 |
|
|
|
2 |
|
|
|
1 |
|
|
|
— |
|
|
|
7 |
|
|
|
4 |
|
|
|
3 |
|
|
|
3 |
|
| |
Compensatory make-whole payment
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Executive severance
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total effect on SG&A
|
|
|
11 |
|
|
|
36 |
|
|
|
1 |
|
|
|
1 |
|
|
|
9 |
|
|
|
13 |
|
|
|
12 |
|
|
|
11 |
|
|
Fees paid to affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Management fee
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
| |
Management agreement termination fee
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total fees paid to affiliates
|
|
|
31 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
Other operating (income) expenses: (“OIE”), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Franchise system distress impact(c)
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
1 |
|
| |
Loss on asset disposals and asset impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total effect on OIE, net
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
— |
|
|
|
9 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
1 |
|
| |
|
Total effect on income from operations
|
|
|
43 |
|
|
|
36 |
|
|
|
5 |
|
|
|
4 |
|
|
|
17 |
|
|
|
34 |
|
|
|
10 |
|
|
|
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on $350 million loan paid-off at IPO
|
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Loss on early extinguishment of debt
|
|
|
4 |
|
|
|
1 |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total effect on income before income taxes
|
|
$ |
50 |
|
|
$ |
40 |
|
|
$ |
5 |
|
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
34 |
|
|
$ |
10 |
|
|
$ |
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Represents revenues not recognized and
(recoveries) of revenues previously not recognized.
|
|
|
|
(b) |
|
Represents bad debt expense (recoveries), incremental
advertising contributions and the internal and external costs of
FFRP program administration. |
| |
|
(c) |
|
Represents (recoveries) reserves on acquired debt, net
and other items included within operating (income) expenses,
net. |
54
Comparable sales growth for each of the quarters in the fiscal
years ended June 30, 2006 and 2005 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Quarters Ended | |
| |
|
| |
| |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
| |
|
2006 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In constant currencies) | |
|
|
|
Comparable Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States and Canada
|
|
|
2.0% |
|
|
|
4.9 |
% |
|
|
2.3% |
|
|
|
1.1 |
% |
|
|
1.2% |
|
|
|
8.8% |
|
|
|
9.1% |
|
|
|
7.7% |
|
| |
EMEA/ APAC
|
|
|
0.2% |
|
|
|
(0.4 |
)% |
|
|
1.3% |
|
|
|
(0.7 |
)% |
|
|
2.5% |
|
|
|
2.8% |
|
|
|
1.7% |
|
|
|
4.1% |
|
| |
Latin America
|
|
|
5.0% |
|
|
|
1.5 |
% |
|
|
1.6% |
|
|
|
1.5 |
% |
|
|
2.2% |
|
|
|
5.6% |
|
|
|
8.2% |
|
|
|
6.4% |
|
| |
|
Total System-Wide
|
|
|
1.7% |
|
|
|
3.3 |
% |
|
|
2.0% |
|
|
|
0.7 |
% |
|
|
1.6% |
|
|
|
7.1% |
|
|
|
7.2% |
|
|
|
6.8% |
|
Liquidity and Capital Resources
Our cash flow from operations was $74 million in fiscal
2006 and was adversely affected by our payment of the
compensatory make-whole payment of $33 million, the
management agreement termination fee of $30 million and
interest payment of $103 million related to the PIK Notes.
As a result of the realignment of our European and Asian
businesses discussed below, we incurred $126 million in tax
liability, which was partially offset by $40 million
through the utilization of net operating loss carryforwards and
other foreign tax credits resulting in a cash tax obligation of
$86 million to be paid in the first quarter of fiscal 2007
associated with this realignment.
We had cash and cash equivalents of $259 million at
June 30, 2006. In addition, we currently have a borrowing
capacity of $109 million under our $150 million
revolving credit facility (net of $41 million in letters of
credit issued under the 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, and debt service payments, in the
short-term 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 securities.
|
|
|
July 2005 Refinancing, February 2006 Financing and
Dividend and the Compensatory Make-Whole Payment |
On July 13, 2005, BKC entered into a $1.15 billion
senior secured credit facility guaranteed by us, which we refer
to as the July 2005 refinancing and which consisted of a
$150 million revolving credit facility, a $250 million
term loan, which we refer to as term loan A, and a
$750 million term loan, which we refer to as term
loan B. We used $1 billion in proceeds from term loans
A and B, $47 million of the revolving credit facility, and
cash on hand to repay in full the existing senior secured credit
facility and
payment-in-kind notes
payable to Diageo plc, the private equity funds controlled by
the Sponsors and certain directors that we incurred in
connection with our acquisition of BKC and to pay
$16 million in financing costs. In the first quarter 2005,
we repaid the $47 million outstanding balance on the
revolver.
On February 15, 2006, we and BKC amended and restated the
senior secured credit facility. We borrowed $350 million
under our senior secured credit facility, all the proceeds of
which were used to pay, along with $50 million of cash on
hand, the February 2006 dividend, the compensatory make-whole
payment and financing costs and expenses. The amendments
replaced the $746 million then outstanding under term
loan B with a new term loan B, which we refer to as
term loan B-1, in an amount of $1.096 billion.
In May 2006, we utilized a portion of the $392 million in
net proceeds we received from our initial public offering to
prepay $350 million of term debt, resulting in a debt
balance of $994 million outstanding under the term
loan A and B-1 facilities. In July 2006, subsequent to the
end fiscal 2006, we prepaid an additional $50 million of
term debt, reducing the term loan A and B-1 balance to
$944 million. As a result of these
55
prepayments, our next scheduled principal payment on the senior
secured credit facility is December 31, 2008. The level of
required principal repayments increases over time thereafter.
The maturity dates of term loan A, term loan B-1, and
amounts drawn under the revolving credit facility are June 2011,
June 2012, and June 2011, respectively.
The interest rate under the senior secured credit facility for
term loan A and the revolving credit facility is at our
option either (a) the greater of the federal funds
effective rate plus 0.50% and the prime rate, which we refer to
as ABR, plus a rate not to exceed 0.75%, which varies according
to our leverage ratio or (b) LIBOR plus a rate not to
exceed 1.75%, which varies according to our leverage ratio. The
interest rate for term
loan B-1 is at our
option either (a) ABR, plus a rate of 0.50% or
(b) LIBOR plus 1.50%, in each case so long as our 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).
Our senior secured credit facility contains certain customary
financial and other covenants. These covenants impose
restrictions on additional indebtedness, liens, investments,
advances, guarantees, mergers and acquisitions. These covenants
also place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between us and our
subsidiaries and certain transactions with affiliates.
The financial covenants limit the maximum amount of capital
expenditures to an amount ranging from $180 million to
$250 million per fiscal year over the term of our senior
secured credit facility. Following the end of each fiscal year,
we are required to prepay the term debt in an amount equal to
50% of excess cash flow (as defined in our senior secured credit
facility) for such fiscal year. This prepayment requirement is
not applicable if our 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.
While BKC is the only borrower under our senior secured credit
facility, we and certain of our subsidiaries have jointly and
severally unconditionally guaranteed the payment of the amounts
due under our senior secured credit facility. We and certain of
our subsidiaries, including BKC, have pledged as collateral a
100% equity interest in our and BKC’s domestic subsidiaries
with some exceptions. Furthermore, BKC has pledged as collateral
a 65% equity interest in certain of its foreign subsidiaries.
See Part II, Item 8 Term Debt in Note 10
of this Form 10-K
for further information about our senior secured credit facility.
Operating Activities. Cash flows from operating
activities were $74 million in fiscal 2006 compared to
$218 million in fiscal 2005 and $199 million in fiscal
2004. The $144 million decrease in fiscal 2006 was due
primarily to the payment of $103 million of interest on the
PIK notes in connection with our July 2005 refinancing, the
payment of the $34 million compensatory make-whole payment
and related taxes and the payment of the management agreement
termination fee of $30 million.
Investing Activities. Cash used in investing activities
was $74 million in fiscal 2006 compared to $5 million
in fiscal 2005 and $184 million in fiscal 2004. The
$69 million increase in fiscal 2006 and $179 million
decrease in fiscal 2005 were due primarily to $122 million
of securities purchased as short-term investments in fiscal
2004, which were sold for $122 million in fiscal 2005. In
fiscal 2006, our cash used to acquire franchise restaurants and
franchisee debt decreased by $43 million, partially
offsetting the comparative cash flow effect of the
$122 million in proceeds for the investment sale in fiscal
2005.
In fiscal 2005, our cash used to acquire franchise restaurants
and franchisee debt increased by $27 million, partially
offsetting the comparative cash flow effect of the
$122 million for the investment sale in fiscal 2005 and
purchase in fiscal 2004.
56
Historically, the most significant ongoing component of our
investing activities was for capital expenditures to open new
company restaurants, to remodel and maintain restaurant
properties to our standards and to develop our corporate
infrastructure in connection with our acquisition of BKC,
particularly investment in information technology. The following
table presents capital expenditures, by type of expenditure:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the | |
| |
|
Fiscal Year Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
New restaurants
|
|
$ |
25 |
|
|
$ |
26 |
|
|
$ |
22 |
|
|
Real estate purchases
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
|
Maintenance capital
|
|
|
40 |
|
|
|
44 |
|
|
|
43 |
|
|
Other, including corporate
|
|
|
14 |
|
|
|
18 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
85 |
|
|
$ |
93 |
|
|
$ |
81 |
|
| |
|
|
|
|
|
|
|
|
|
Maintenance capital includes 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, which typically range from $10,000 to
$15,000 per restaurant per year. Maintenance capital also
includes investments in improvements to properties we lease and
sublease to franchisees, including contributions we make towards
improvements completed by franchisees. Other capital
expenditures include investments in information technology
systems, as well as investments in technologies for deployment
in restaurants, such as
point-of-sale software.
We expect capital expenditures of approximately $80 to
$100 million in fiscal 2007 for maintenance capital,
acquisitions, new restaurants and other corporate expenditures.
Financing Activities. Financing activities used cash of
$173 million in fiscal 2006 and $2 million in fiscal
2005, and provided cash of $3 million in fiscal 2004. Uses
of cash in financing activities in fiscal 2006 included the
payment of the $367 million dividend and the net repayment
of $186 million in term debt, which were partially offset
by $392 million of proceeds, net of underwriter fees and
other costs, received, from our initial public offering and
$7 million of proceeds from the exercise of stock options.
|
|
|
Realignment of our European and Asian businesses |
During fiscal 2005, we realigned our business to operate as a
global brand by moving to common systems and platforms,
standardizing our marketing efforts, and introducing a uniform
product offering supplemented by offerings targeting local
consumer preferences. We also reorganized our international
management structure by instituting a regional structure for the
United States and Canada, EMEA/ APAC and Latin America.
To further this initiative, we regionalized 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 EMEA/ APAC,
in new European and Asian holding companies. Each of these new
holding companies is responsible in its region for
(a) management, development and expansion of the Burger
King trade names and trademarks, (b) management of
existing and future franchises and licenses for both franchise
and company-owned restaurants, and (c) collections and
redeployment of funds. Previously, the intellectual property
assets related to EMEA/ APAC were owned by a U.S. company,
with the result that all cash flows returned to the
United States and then were subsequently transferred back
to these regions to fund their growing capital requirements. We
believe this realignment more closely aligns the intellectual
property to the respective regions, provides funding in the
proper regions and will lower our effective tax rate going
forward.
The new holding companies acquired the intellectual property
rights from BKC, a U.S. company, in a transaction that
generated a taxable gain for BKC in the United States of
$328 million, resulting in a $126 million tax
liability in the fourth quarter of 2006 recorded in other
accrued liabilities on our consolidated
57
balance sheet. This tax liability was partially offset by
$40 million through the utilization of net operating loss
carryforwards and other foreign tax credits, resulting in a cash
tax obligation of $86 million, which we expect to make in
the first quarter of fiscal 2007.
In accordance with the guidance provided by ARB 51,
Consolidated Financial Statements, the resulting tax
amount of $126 million was recorded as a prepaid tax asset
and offset by the reversal of a $105 million deferred tax
liability, which we had previously recorded associated with the
transferred asset resulting in a net prepaid asset of
$21 million.
We incurred consulting, legal, information technology, finance
and relocation costs of approximately $10 million during
fiscal 2006 to implement this realignment. The relocation costs
were incurred in connection with the relocation of certain key
officers, finance, accounting and legal staff of the EMEA/ APAC
businesses to locations within Europe and Asia.
Contractual Obligations and Commitments
The following table presents information relating to our
contractual obligations as of June 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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
|
|
$ |
134 |
|
|
$ |
13 |
|
|
$ |
25 |
|
|
$ |
22 |
|
|
$ |
74 |
|
|
Operating lease obligations(1)
|
|
|
1,391 |
|
|
|
153 |
|
|
|
275 |
|
|
|
231 |
|
|
|
732 |
|
|
Long-term debt, including current portion and interest(2)
|
|
|
1,354 |
|
|
|
64 |
|
|
|
164 |
|
|
|
273 |
|
|
|
853 |
|
|
Purchase commitments(3)
|
|
|
56 |
|
|
|
56 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,935 |
|
|
$ |
286 |
|
|
$ |
464 |
|
|
$ |
526 |
|
|
$ |
1,659 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Operating lease obligations include lease payments for company
restaurants and franchise restaurants that sublease the property
from us. Rental income from these franchisees was
$88 million and $91 million for fiscal 2006 and fiscal
2005, respectively. |
| |
| (2) |
We have estimated our interest payments based on
(i) projected LIBOR rates, (ii) the portion of our
debt we converted to fixed rates through interest rate swaps and
(iii) the amortization schedule of the debt. |
| |
| (3) |
Includes 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 service agreements. |
As of June 30, 2006, we leased 1,090 properties to
franchisees and other third parties. At June 30, 2006, we
also leased land, buildings, office space and warehousing under
operating leases, and leased or subleased land and buildings
that we own or lease, respectively, to franchisees under
operating leases. In addition to the minimum obligations
included in the table above, contingent rentals may be payable
under certain leases on the basis of a percentage of sales in
excess of stipulated amounts. See Note 15 to our audited
consolidated financial statements for further information about
our leasing arrangements.
As of June 30, 2006, the projected benefit obligation of
our defined benefit pension plans exceeded pension assets by
$67 million. We use the Moody’s long-term corporate
bond yield indices for Aa bonds (“Moody’s Aa
rate”), plus an additional 25 basis points to reflect
the longer duration of our plans, as the discount rate used in
the calculation of the projected benefit obligation as of the
measurement date. We made contributions totaling $2 million
into our pension plans and estimated benefit payments of
$4 million out of these plans during fiscal 2006. 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.
58
In November 2005, we announced the curtailment of our pension
plans in the United States and we froze future pension benefit
accruals, effective December 31, 2005. These plans will
continue to pay benefits and invest plan assets. We recognized a
one-time pension curtailment gain of approximately
$6 million in December 2005. In conjunction with this
curtailment gain, we accrued a contribution totaling
$6 million as of December 31, 2005, on behalf of those
pension participants who were affected by the curtailment. The
curtailment gain and contribution offset each other to result in
no net effect on our results of operations.
Other Commercial Commitments and Off-Balance Sheet
Arrangements
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|
|
Franchisee Restructuring Program |
In connection with the FFRP program we have made commitments to:
fund loans to certain franchisees for the purpose of remodeling
restaurants; remodel certain properties we lease or sublease to
franchisees; provide temporary rent reductions to certain
franchisees; and fund shortfalls in certain franchisee cash flow
beyond specified levels (to annual and aggregate maximums). As
of June 30, 2006, our remaining commitments under the FFRP
program totaled $36 million, which we may incur. These
arrangements expire over the next five years.
We guarantee certain lease payments of franchisees arising from
leases assigned in connection with sales of company restaurants
to franchisees, by remaining secondarily liable under the
assigned leases of varying terms, for base and contingent rents.
The maximum contingent rent amount is not determinable as the
amount is based on future revenues. In the event of default by
the franchisees, we have typically retained the right to acquire
possession of the related restaurants, subject to landlord
consent. The aggregate contingent obligation arising from these
assigned lease guarantees was $112 million at June 30,
2006, expiring over an average period of five years.
Other commitments arising out of normal business operations were
$10 million and $12 million as of June 30, 2006
and 2005, respectively, of which $6 million and
$4 million, respectively were guaranteed under bank
guarantee arrangements.
At June 30, 2006, there were $42 million in
irrevocable standby letters of credit outstanding, which were
issued primarily to certain insurance carriers to guarantee
payment for various insurance programs such as health and
commercial liability insurance. Included in that amount was
$41 million of standby letters of credit issued under the
Company’s $150 million revolving credit facility. As
of June 30, 2006, none of these irrevocable standby letters
of credit had been drawn upon.
As of June 30, 2006, we had posted bonds totaling
$2 million, which related to certain utility deposits.
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 and franchise restaurants with their
products and obligating Burger King restaurants in the
United States to purchase a specified number of gallons of soft
drink syrup. These volume commitments are not subject to any
time limit. As of June 30, 2006, we estimate that it will
take approximately 16 years and 17 years to complete
the Coca-Cola and Dr Pepper/Seven Up, Inc. purchase
commitments, respectively. In the event of early termination of
these arrangements, we may be required to make termination
payments that could be material to our results of operations and
financial position. Additionally, in connection with these
contracts, we have received upfront fees, which are being
amortized over the term of the contracts. At June 30, 2006
and 2005, the deferred amounts totaled $23 million and
$26 million, respectively. These deferred amounts are
amortized as a reduction to food, paper and product costs in the
accompanying consolidated statements of operations.
59
In May 2005, we entered into an agreement to lease a building in
Coral Gables, Florida, to serve as our new global headquarters
beginning in fiscal 2009. The estimated annual rent for the
15 year initial term, which is expected to be approximately
$7 million per year, will be finalized upon the completion
of the building’s construction and will escalate based on
the inflation rate. We also expect to spend approximately
$18 million in tenant improvements, furniture and fixtures,
information technology and moving costs. Of this amount,
approximately $15 million will be capitalized and amortized
over the shorter of the assets useful life or lease. One of our
directors has an ownership interest in this building. See
Part I, Item 2, “Properties” and
Part II, Item 5, Commitments and Contingencies
in Note 19.
We are self-insured for most domestic workers’
compensation, general liability, and automotive liability losses
subject to per occurrence and aggregate annual liability
limitations. We are also self-insured for healthcare claims for
eligible participating employees subject to certain deductibles
and limitations. We determine our liability for claims on a
incurred but not reported based on an actuarial analysis.
We have claims for certain years which are insured by a third
party carrier, which is currently insolvent. We are currently
reviewing our options to replace this carrier with another
insurance carrier. If we are unable to successfully replace the
carrier and the existing carrier goes into receivership, then
there is the possibility for the State in which the claim is
reported to take over the pending and potential claims. This may
result in an increase in premiums for claims related to this
period.
Impact of Inflation
We believe that our results of operations are not materially
impacted by moderate changes in the inflation rate. Inflation
and changing prices did not have a material impact on our
operations in fiscal 2006, fiscal 2005 or in fiscal 2004. 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
sources. Changes in our estimates could materially impact our
results of operations and financial condition in any particular
period.
Based on the high degree of judgment or complexity in their
application, we consider the following to be our critical
accounting policies and estimates.
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|
|
Business Combinations and Intangible Assets |
The December 2002 acquisition of our predecessor and
acquisitions of restaurant operations require the application of
the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations. The
purchase method of accounting involves the allocation of the
purchase price to the estimated fair values of the assets
acquired and liabilities assumed. This allocation process
involves the use of estimates and assumptions to derive fair
values and to complete the allocation. Due to the high degree of
judgment and complexity involved with the valuation process, we
hired a third party valuation firm to assist with the
determination of the fair value of the net assets acquired for
the 2002 acquisition of our predecessor and use such firms from
time to time to value acquisitions of restaurant operations.
60
In the event that actual results vary from any of the estimates
or assumptions used in any valuation or allocation process under
SFAS No. 141, we may be required to record an
impairment charge or an increase in depreciation or amortization
in future periods, or both. See Note 1, Note 3 and
Note 7 to our audited consolidated financial statements
included elsewhere in this report for further information about
purchase accounting allocations, related adjustments and
intangible assets recorded in connection with our acquisition of
BKC and acquisition of restaurant operations.
Long-lived assets (including definite-lived intangible assets)
are reviewed for impairment at least annually or more frequently
if events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. 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. Assets are grouped together
for impairment testing at the operating market level (based on
geographic areas) in the case of the United States, Canada, the
United Kingdom and Germany. The operating market asset 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 asset concentrations (the United Kingdom and
Germany) are comprised of geographic regions within those
countries (three in the United Kingdom and four in Germany).
These operating market definitions are based upon the following
primary factors:
|
|
|
| |
• |
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 |
| |
| |
• |
we do not evaluate individual restaurants to build, acquire or
close independent of an analysis of other restaurants in these
operating markets. |
In countries in which we have a smaller number of restaurants
(The Netherlands, Spain, Mexico and China), most operating
functions and advertising are performed at the country level,
and shared by all restaurants in each country. As a result, we
have defined operating markets as the entire country in the case
of the Netherlands, Spain, Mexico and China.
Some of the events or changes in circumstances that would
trigger an impairment review include, but are not limited to:
|
|
|
| |
• |
significant under-performance relative to expected and/or
historical results (negative comparable sales or cash flows for
two years); |
| |
| |
• |
significant negative industry or economic trends; or |
| |
| |
• |
knowledge of transactions involving the sale of similar property
at amounts below our carrying value. |
When assessing the recoverability of our long-lived assets, we
make assumptions regarding estimated future cash flows and other
factors. Some of these assumptions involve a high degree of
judgment and also bear a significant impact on the assessment
conclusions. Included among these assumptions are estimating
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 conditions. In the event that our
estimates or related assumptions change in the future, we may be
required to record an impairment charge in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
|
|
|
Impairment of Indefinite-Lived Intangible Assets |
Indefinite-lived intangible assets consist of values assigned to
brands which we own and goodwill recorded upon acquisitions. The
most significant indefinite lived asset we have is our brand
asset with a carrying book value of $896 million at
June 30, 2006. We test our indefinite-lived intangible
assets for impairment on an annual basis or more often if an
event occurs or circumstances change that indicates impairment
might exist.
61
Our impairment test for indefinite-lived intangible assets
consists of a comparison of the fair value of the asset with its
carrying amount in each segment, as defined by
SFAS No. 131, which are the United States and Canada,
EMEA/ APAC, and Latin America. When assessing the recoverability
of these assets, we make assumptions regarding estimated future
cash flow similar to those when testing long-lived assets, 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 in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
|
|
|
Reserves for Uncollectible Accounts and Revenue
Recognition |
We collect from franchisees royalties, advertising fund
contributions and, in the case of approximately 5% of our
franchise restaurants, rents. We recognize revenue that is
estimated to be reasonably assured of collection, and also
record reserves for estimated uncollectible revenues and
advertising contributions, based on monthly reviews of
franchisee accounts, average sales trends, and overall economic
conditions. In the event that franchise restaurant sales
declined, or the financial health of franchisees otherwise
deteriorated, we increase our reserves for uncollectible
accounts and/or defer or not recognize revenues, the collection
of which we deem to be less than reasonably assured.
|
|
|
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 carryforwards. 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 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 reflects 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 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.
We are self-insured for most workers’ compensation, health
care claims, and general liability losses. These self-insurance
programs are supported by third-party insurance policies to
cover losses above our self-insured amounts. We record estimates
of insurance liabilities based on independent actuarial studies
and assumptions based on historical and recent claim cost trends
and changes in benefit plans that could affect self-insurance
liabilities. We review all self-insurance reserves at least
quarterly, and review our estimation methodology and assumptions
at least annually. If we determine that the liability exceeds
the recorded obligation, the cost of self-insurance programs
will increase in the future, as insurance reserves are increased
to revised expectations, resulting in an increase in
self-insurance program expenses.
We have claims for certain years which are insured by a third
party carrier, which is currently insolvent. We are currently
reviewing our options to replace this carrier with another
insurance carrier. If we are unable to successfully replace the
carrier and the existing carrier goes into receivership, then
there is the possibility for the State in which the claim is
reported to take over the pending and potential claims. This may
result in an increase in premiums for claims related to this
period.
Newly Issued Accounting Standards
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment
(“SFAS No. 123(R)”), which is a revision
of FASB Statement No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”).
SFAS No. 123(R) supersedes Accounting Principles Board
Opinion
62
No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”). SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative. Under SFAS No. 123(R) the
effective date for a nonpublic entity that becomes a public
entity after June 15, 2005 is the first interim or annual
reporting period beginning after becoming a public company.
Further, SFAS No. 123(R) states that an entity that
makes a filing with a regulatory agency in preparation for the
sale of any class of equity securities in a public market is
considered a public entity for purposes of
SFAS No. 123(R). We implemented
SFAS No. 123(R) effective July 1, 2006.
As permitted by SFAS No. 123, for periods prior to
July 1, 2006 we accounted for share-based payments to
employees using APB No. 25’s intrinsic value method
and, as such, generally recognized no compensation expense for
employee stock options. As we currently apply
SFAS No. 123 pro forma disclosure using the minimum
value method of accounting, we are required to adopt
SFAS No. 123(R) using the prospective transition
method. Under the prospective transition method, non-public
entities that previously applied SFAS No. 123 using
the minimum value method continue to account for non-vested
awards outstanding at the date of adoption of
SFAS No. 123(R) in the same manner as they had been
accounted to prior to adoption. For us, since we accounted for
our equity awards using the minimum value method under APB
No. 25, we will continue to apply APB No. 25 to equity
awards outstanding at the date we adopt
SFAS No. 123(R), and as a result not recognize
compensation expense for awards issued prior to the date we
filed our Registration Statement on
Form S-1 in
February 2006.
From the date of the filing of our initial Registration
Statement in February 2006, we are required to apply the
modified prospective transition method to any share-based
payments issued subsequent to the filing of the registration
statement but prior to the effective date of our adoption of
SFAS No. 123(R). Under the modified prospective
transition method, compensation expense is recognized for any
unvested portion of the awards granted between filing date and
adoption date of SFAS No. 123(R) over the remaining
vesting period of the awards beginning on the adoption date, for
us July 1, 2006.
For any awards granted subsequent to the adoption of
SFAS No. 123(R), compensation expense will be
recognized over the service period of the award, based on the
fair value at the grant date. The impact of the adoption of this
statement on the Company in fiscal 2007 and beyond will depend
on various factors including, but not limited to, our future
stock-based compensation grants. We currently estimate the
adoption of SFAS 123(R) will decrease net income by
approximately $3 million for fiscal 2007.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. The first
step is to determine whether it is more-likely-than-not that a
tax position will be sustained upon examination based on the
technical merits of the position. The second step is measurement
of any tax position that meets the more-likely-than-not
recognition threshold to determine the amount of benefit to
recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate
settlement. An enterprise that presents a classified statement
of financial position should classify a liability for
unrecognized tax benefits as current to the extent that the
enterprise anticipates making a payment within one year or the
operating cycle. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are currently
evaluating the impact that FIN 48 may have on our
statements of operations and statements of financial position
when we adopt FIN 48 on July 1, 2007.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
Market Risk
We are exposed to financial market risks associated with foreign
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
63
underlying exposures. Our policies prohibit the use of
derivative instruments for trading purposes, and we have
procedures in place to monitor and control their use.
Foreign Currency Exchange Risk
Movements in foreign 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
countries. In countries outside of the United States where we
operate company restaurants, we generate revenues and incur
operating expenses and selling, general and administrative
expenses denominated in local currencies. In many foreign
countries where we do not have Company restaurants our
franchisees pay royalties in U.S. dollars. However, as the
royalties are calculated based on local currency sales, our
revenues are still impacted from fluctuations in exchange rates.
In fiscal 2006, operating income would have decreased or
increased $9.5 million if all foreign currencies uniformly
weakened or strengthened 10% relative to the U.S. dollar.
We use derivative instruments to reduce the foreign exchange
impact on earnings from changes in the value of
foreign-denominated assets and liabilities. At June 30,
2006, we had forward currency contracts outstanding to sell
Euros, British Pounds and Canadian dollars totaling
$346 million, $27 million and $5 million,
respectively, to hedge intercompany notes and offset the foreign
exchange risk associated with the remeasurement of these notes.
Changes in the fair value of these forward contracts due to
changes in the spot rate between the U.S. dollar and the Euro,
British Pound and Canadian dollar are offset by the
remeasurement of the intercompany notes resulting in
insignificant impact to the Company’s net income. The
contracts outstanding at June 30, 2006 mature at various
dates through October 2006 and we intend to continue to renew
these contracts to hedge our foreign exchange impact.
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 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 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.
During the year ended June 30, 2006, we entered into
interest rate swaps with a notional value of $750 million
that qualify as cash flow hedges under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. The interest rate swaps help us manage exposure
to interest rate risk by converting the floating interest-rate
component of approximately 75% of our total debt obligations
outstanding at June 30, 2006 to fixed rates. A 1% change in
interest rates on our existing debt of $998 million would
result in an increase or decrease in interest expense of
approximately $2.5 million in a given year, as we have
hedged $750 million of our debt.
Commodity Price Risk
We purchase certain products, particularly beef, 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. 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 beef
prices would have been approximately $9 million and
$8 million in fiscal 2006 and fiscal 2005, respectively.
The hypothetical change in food, paper and product costs could
be positively or negatively affected by changes in prices or
product sales mix.
64
|
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| Item 8. |
Financial Statements and Supplementary Data |
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
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Page | |
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Report of Independent Registered Public Accounting Firm
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66 |
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| |
|
Consolidated Balance Sheets as of June 30, 2006 and 2005
|
|
|
67 |
|
| |
|
Consolidated Statements of Operations for each of the years in
the three-year period ended June 30, 2006
|
|
|
68 |
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| |
|
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss) for each of the years in the
three-year period ended June 30, 2006
|
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69 |
|
| |
|
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended June 30, 2006
|
|
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70 |
|
| |
|
Notes to Consolidated Financial Statements
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71 |
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65
Report of Independent Registered Public Accounting
Firm
The Board of Directors
Burger King Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Burger King Holdings, Inc. and subsidiaries as of June 30,
2006 and 2005, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income
(loss), and cash flows for each of the years in the three-year
period ended June 30, 2006. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Burger King Holdings, Inc. and subsidiaries as of
June 30, 2006 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year
period ended June 30, 2006, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
August 31, 2006
Miami, Florida
Certified Public Accountants
66
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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|
As of June 30, | |
| |
|
| |
| |
|
2006 | |
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2005 | |
| |
|
| |
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| |
| |
|
(In millions, except | |
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|
share data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
259 |
|
|
$ |
432 |
|
| |
Trade and notes receivable, net
|
|
|
109 |
|
|
|
110 |
|
| |
Prepaids and other current assets, net
|
|
|
40 |
|
|
|
35 |
|
| |
Deferred income taxes, net
|
|
|
45 |
|
|
|
57 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
453 |
|
|
|
634 |
|
|
Property and equipment, net
|
|
|
886 |
|
|
|
899 |
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|
Intangible assets, net
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|
|
975 |
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|
|
995 |
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|
Goodwill
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|
20 |
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|
|
17 |
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|
Net investment in property leased to franchisees
|
|
|
148 |
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|
|
149 |
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|
Other assets, net
|
|
|
70 |
|
|
|
29 |
|
| |
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Total assets
|
|
$ |
2,552 |
|
|
$ |
2,723 |
|
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|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
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|
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|
|
| |
Accounts and drafts payable
|
|
$ |
100 |
|
|
$ |
83 |
|
| |
Accrued advertising
|
|
|
49 |
|
|
|
59 |
|
| |
Other accrued liabilities
|
|
|
338 |
|
|
|
248 |
|
| |
Current portion of long term debt and capital leases
|
|
|
5 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
492 |
|
|
|
394 |
|
|
Term debt, net of current portion
|
|
|
997 |
|
|
|
1,282 |
|
|
Capital leases, net of current portion
|
|
|
63 |
|
|
|
53 |
|
|
Other deferrals and liabilities
|
|
|
349 |
|
|
|
375 |
|
|
Deferred income taxes, net
|
|
|
84 |
|
|
|
142 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
1,985 |
|
|
|
2,246 |
|
|
Commitments and Contingencies (Note 19)
|
|
|
|
|
|
|
|
|
|
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; 133,058,640 and 106,734,893 shares issued and
outstanding at June 30, 2006 and June 30, 2005,
respectively
|
|
|
1 |
|
|
|
1 |
|
| |
Restricted stock units
|
|
|
5 |
|
|
|
2 |
|
| |
Additional paid-in capital
|
|
|
545 |
|
|
|
406 |
|
| |
Retained earnings
|
|
|
3 |
|
|
|
76 |
|
| |
Accumulated other comprehensive income (loss)
|
|
|
15 |
|
|
|
(6 |
) |
| |
Treasury stock, at cost; 590,841 shares, at June 30,
2006 and June 30, 2005, respectively
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
567 |
|
|
|
477 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
2,552 |
|
|
$ |
2,723 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
67
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except | |
| |
|
per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Company restaurant revenues
|
|
$ |
1,516 |
|
|
$ |
1,407 |
|
|
$ |
1,276 |
|
| |
Franchise revenues
|
|
|
420 |
|
|
|
413 |
|
|
|
361 |
|
| |
Property revenues
|
|
|
112 |
|
|
|
120 |
|
|
|
117 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
2,048 |
|
|
|
1,940 |
|
|
|
1,754 |
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Food, paper and product costs
|
|
|
470 |
|
|
|
437 |
|
|
|
391 |
|
| |
Payroll and employee benefits
|
|
|
446 |
|
|
|
415 |
|
|
|
382 |
|
| |
Occupancy and other operating costs
|
|
|
380 |
|
|
|
343 |
|
|
|
314 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total company restaurant expenses
|
|
|
1,296 |
|
|
|
1,195 |
|
|
|
1,087 |
|
|
Selling, general and administrative expenses
|
|
|
488 |
|
|
|
487 |
|
|
|
474 |
|
|
Property expenses
|
|
|
57 |
|
|
|
64 |
|
|
|
58 |
|
|
Fees paid to affiliates
|
|
|
39 |
|
|
|
9 |
|
|
|
8 |
|
|
Other operating (income) expenses, net
|
|
|
(2 |
) |
|
|
34 |
|
|
|
54 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total operating costs and expenses
|
|
|
1,878 |
|
|
|
1,789 |
|
|
|
1,681 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
170 |
|
|
|
151 |
|
|
|
73 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Interest expense
|
|
|
81 |
|
|
|
82 |
|
|
|
68 |
|
| |
Interest income
|
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(4 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total interest expense, net
|
|
|
72 |
|
|
|
73 |
|
|
|
64 |
|
| |
Loss on early extinguishment of debt
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
80 |
|
|
|
78 |
|
|
|
9 |
|
| |
Income tax expense
|
|
|
53 |
|
|
|
31 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
| |
Diluted
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
110.3 |
|
|
|
106.5 |
|
|
|
106.1 |
|
| |
Diluted
|
|
|
114.7 |
|
|
|
106.9 |
|
|
|
106.1 |
|
See accompanying notes to consolidated financial statements.
68
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Issued | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issued | |
|
Common | |
|
Restricted | |
|
Additional | |
|
|
|
Accum. Other | |
|
|
|
|
| |
|
Common | |
|
Stock | |
|
Stock | |
|
Paid-In | |
|
Retained | |
|
Comprehensive | |
|
Treasury | |
|
|
| |
|
Stock Shares | |
|
Amount | |
|
Units | |
|
Capital | |
|
Earnings | |
|
Income (Loss) | |
|
Stock | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Balances at June 30, 2003
|
|
|
107 |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
397 |
|
|
$ |
24 |
|
|
$ |
10 |
|
|
$ |
— |
|
|
$ |
432 |
|
| |
Sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
| |
|
Translation adjustment
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
|
|
— |
|
|
|
(19 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2004
|
|
|
107 |
|
|
|
1 |
|
|
|
— |
|
|
|
403 |
|
|
|
29 |
|
|
|
(9 |
) |
|
|
— |
|
|
|
424 |
|
| |
Sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
| |
Treasury stock purchases
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
Issuance of restricted stock units
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
| |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
| |
|
Translation adjustment
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
| |
|
Minimum pension liability adjustment, net of tax of $2
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2005
|
|
|
107 |
|
|
|
1 |
|
|
|
2 |
|
|
|
406 |
|
|
|
76 |
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
477 |
|
| |
Sale of common stock
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
399 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
399 |
|
| |
Stock option tax benefits
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
| |
Issuance of restricted stock units
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
| |
Dividend paid on common shares
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(267 |
) |
|
|
(100 |
) |
|
|
— |
|
|
|
— |
|
|
|
(367 |
) |
| |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
| |
|
Translation adjustment
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
| |
|
Unrealized gain on hedging activity, net of tax of $(10)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
| |
|
Minimum pension liability adjustment, net of tax of $(2)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006
|
|
|
133 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
545 |
|
|
$ |
3 |
|
|
$ |
15 |
|
|
$ |
(2 |
) |
|
$ |
567 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
69
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
88 |
|
|
|
74 |
|
|
|
63 |
|
| |
|
Interest expense payable in kind
|
|
|
— |
|
|
|
45 |
|
|
|
41 |
|
| |
|
(Gain) loss on asset disposals
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
12 |
|
| |
|
(Recoveries) provision for bad debt expense, net
|
|
|
(2 |
) |
|
|
1 |
|
|
|
11 |
|
| |
|
Impairment of debt investments and investments in unconsolidated
companies and joint ventures
|
|
|
— |
|
|
|
4 |
|
|
|
24 |
|
| |
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
| |
|
Pension curtailment gain
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Loss on early extinguishment of debt
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
| |
|
Amortization of unearned compensation
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
| |
|
Deferred income tax (benefit) expense
|
|
|
68 |
|
|
|
9 |
|
|
|
(12 |
) |
| |
Changes in current assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Trade and notes receivables
|
|
|
7 |
|
|
|
(2 |
) |
|
|
(8 |
) |
| |
|
Prepaids and other current assets
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(6 |
) |
| |
|
Accounts and drafts payable
|
|
|
8 |
|
|
|
(21 |
) |
|
|
23 |
|
| |
|
Accrued advertising
|
|
|
(10 |
) |
|
|
7 |
|
|
|
(3 |
) |
| |
|
Other accrued liabilities
|
|
|
(30 |
) |
|
|
48 |
|
|
|
28 |
|
| |
Payment of interest on PIK notes
|
|
|
(103 |
) |
|
|
— |
|
|
|
— |
|
| |
Other long-term assets and liabilities, net
|
|
|
13 |
|
|
|
8 |
|
|
|
21 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by operating activities
|
|
|
74 |
|
|
|
218 |
|
|
|
199 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of available for sale securities
|
|
|
— |
|
|
|
(768 |
) |
|
|
(308 |
) |
| |
Proceeds from available for sale securities
|
|
|
— |
|
|
|
890 |
|
|
|
186 |
|
| |
Payments for property and equipment
|
|
|
(85 |
) |
|
|
(93 |
) |
|
|
(81 |
) |
| |
Proceeds from asset disposals and restaurant closures
|
|
|
18 |
|
|
|
18 |
|
|
|
26 |
|
| |
Payments for acquired franchisee operations
|
|
|
(8 |
) |
|
|
(28 |
) |
|
|
(6 |
) |
| |
Investment in franchisee debt
|
|
|
(4 |
) |
|
|
(27 |
) |
|
|
(22 |
) |
| |
Repayments of franchisee debt
|
|
|
5 |
|
|
|
3 |
|
|
|
3 |
|
| |
Net proceeds for purchase of BKC
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
| |
Release from restricted cash/escrow account
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net cash used for investing activities
|
|
|
(74 |
) |
|
|
(5 |
) |
|
|
(184 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from term debt and credit facility
|
|
|
2,143 |
|
|
|
— |
|
|
|
— |
|
| |
Repayments of term debt, credit facility and capital leases
|
|
|
(2,329 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
| |
Payments for financing costs
|
|
|
(19 |
) |
|
|
— |
|
|
|
— |
|
| |
Proceeds from sale of common stock, net
|
|
|
399 |
|
|
|
3 |
|
|
|
6 |
|
| |
Dividends paid on common stock
|
|
|
(367 |
) |
|
|
— |
|
|
|
— |
|
| |
Treasury stock purchases
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net cash (used for) provided by financing activities
|
|
|
(173 |
) |
|
|
(2 |
) |
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
| |
(Decrease) increase in cash and cash equivalents
|
|
|
(173 |
) |
|
|
211 |
|
|
|
18 |
|
| |
Cash and cash equivalents at beginning of period
|
|
|
432 |
|
|
|
221 |
|
|
|
203 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents at end of period
|
|
$ |
259 |
|
|
$ |
432 |
|
|
$ |
221 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental cash-flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest paid(1)
|
|
$ |
180 |
|
|
$ |
26 |
|
|
$ |
21 |
|
| |
Income taxes paid
|
|
$ |
16 |
|
|
$ |
14 |
|
|
$ |
13 |
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Acquisition of franchisee operations
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
3 |
|
| |
Acquisition of property with capital lease obligations
|
|
$ |
13 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
| (1) |
Amount for the year ended June 30, 2006 includes
$103 million of interest paid on PIK notes which was
included in term debt at June 30, 2005. |
See accompanying notes to consolidated financial statements.
70
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
| Note 1. |
Description of Business and Organization |
Burger King Holdings, Inc. (“BKH” or the
“Company”) is a Delaware corporation formed on
July 23, 2002. It 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. BKH is approximately 75.9% owned by
private equity funds controlled by Texas Pacific Group, the
Goldman Sachs Capital Funds and Bain Capital Partners
(collectively, the “Sponsors”).
The Company generates revenues from three sources:
(i) sales at restaurants owned by the Company;
(ii) royalties and franchise fees paid by franchisees; and
(iii) property income from the franchise restaurants that
the Company leases or subleases to franchisees. The Company
receives monthly royalties and advertising contributions from
franchisees based on a percentage of restaurant sales.
On December 13, 2002 (the “Transaction Date”),
Gramet Holding Corporation (“GHC”), a wholly-owned
subsidiary of Diageo plc and the former parent of BKC, completed
its sale of 100% of the outstanding common stock of BKC to
Burger King Acquisition Corporation (“BKAC”) for
$1.51 billion, subject to adjustments (the
“Transaction”).
BKAC was established as an acquisition vehicle by the Sponsors
for the purpose of acquiring BKC. BKAC was capitalized with an
$822.5 million capital contribution from BKH. Of the
aggregate contribution, $610 million was paid in cash and
$212.5 million was due from the Company.
On the Transaction Date, BKAC paid GHC a total of
$1,404.3 million, calculated as $1,510 million less a
preliminary purchase price adjustment of $105.7 million.
The Company and GHC ultimately settled on a further reduction to
the purchase price of $5 million. Of the total amount, GHC
received $441.8 million in cash from BKAC,
$750 million in loan proceeds from BKAC’s lenders and
$212.5 million in the form of a
payment-in-kind note,
or PIK note, issued by BKH to GHC. Additionally, BKAC paid
$62.5 million in costs associated with the Transaction,
comprised of $28.8 million in deferred financing fees and
$33.7 in professional fees. Of the $33.7 in professional fees,
$22.4 million was paid to the Sponsors.
On the Transaction Date, BKH also issued PIK notes in the
aggregate amount of $212.5 million to the private equity
funds controlled by the Sponsors, and the proceeds were
contributed to BKAC. The terms of these PIK notes were identical
to the PIK note issued to GHC.
BKAC was merged into BKC upon completion of the Transaction. The
merger was accounted for as a combination of entities under
common control.
The Transaction was accounted for using the purchase method of
accounting, or purchase accounting, in accordance with Statement
of Financial Accounting Standard (“SFAS”)
No. 141, Business Combinations
(“SFAS No. 141”). At the time of the
Transaction, the Company made a preliminary allocation of the
purchase price to the assets acquired and liabilities assumed at
their estimated fair market value. After the transaction, the
Company hired a third party valuation firm to assist in
determining the fair market value of the assets. In December
2003, the Company completed its fair market value calculations
and finalized the purchase accounting adjustments to these
preliminary allocations. The sum of the fair value of assets
acquired and liabilities assumed exceeded the acquisition cost,
resulting in negative goodwill of $154 million. The
negative goodwill was allocated on a pro rata basis to reduce
the carrying value of long-lived assets in accordance with
SFAS No. 141.
In connection with the final allocation of the purchase price,
the Company adjusted the valuation of its long-lived assets,
primarily property and equipment, and recorded favorable and
unfavorable leases as
71
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
intangible assets and other liabilities, respectively. In
connection with these adjustments to the preliminary
allocations, the Company recognized a net benefit of
$2 million as a change in accounting estimate in the fiscal
year ended June 30, 2004. This net benefit consisted of
$23 million in additional amortization related to the
adjustment to unfavorable leases and $1 million in other
adjustments, partially offset by $18 million in additional
depreciation expense related to the adjustment to property and
equipment and $4 million of additional amortization expense
related to the adjustment to favorable leases.
In May 2006 the Company completed its initial public offering of
25,000,000 shares of common stock, $0.01 par value, at
a per share price of $17.00 with net proceeds after transaction
costs to the Company of approximately $392 million (the
“initial public offering”). The Sponsors sold an
additional 3,750,000 shares, to settle the
underwriters’ over-allotment option at $17.00 per
share. After the consummation of the initial public offering,
the equity funds controlled by the Sponsors owned approximately
75.9% of the Company’s outstanding common stock. In
connection with the initial public offering, the Board of
Directors of the Company authorized an increase in the number of
shares of the Company’s common stock to 300 million
shares, authorized a 26.34608 to one stock split, and authorized
10 million shares of a new class of preferred stock, with a
par value of $0.01 per share. As of June 30, 2006, no
shares of this new class of preferred stock were issued or
outstanding. All references to the number of shares in these
consolidated financial statements and accompanying notes have
been adjusted to reflect the stock split on a retroactive basis.
|
|
| Note 2. |
Summary of Significant Accounting Policies |
|
|
|
Basis of Presentation and Consolidation |
The consolidated financial statements include the accounts of
BKH and its majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. Investments in affiliates where the Company owns
between 20% and 50% are accounted for under the equity method,
except as discussed below.
In December 2003, the Financial Accounting Standards Board
(“FASB”) issued Interpretation No. 46R,
Consolidation of Variable Interest Entities — an
interpretation of ARB No. 51
(“FIN 46R”). FIN 46R establishes
guidance to identify variable interest entities
(“VIE’s”). FIN 46R requires VIE’s to be
consolidated by the primary beneficiary who is exposed to the
majority of the VIE’s expected losses, expected residual
returns, or both. FIN 46R excludes from its scope operating
businesses unless certain conditions exist.
A majority of franchise entities meet the definition of an
operating business and, therefore, are exempt from the scope of
FIN 46R. Additionally, there are a number of franchise
entities which do not meet the definition of a business as a
result of leasing arrangements and other forms of subordinated
financial support provided by the Company, including certain
franchise entities that participated in the franchise financial
restructuring program (see Note 19) and, therefore,
are considered variable interest entities. However, the Company
is not exposed to the majority of expected losses in any of
these arrangements and, therefore, is not the primary
beneficiary required to consolidate any of these franchisees.
The Company has consolidated one joint venture created in fiscal
2005 that operates restaurants where the Company is a 49%
partner, but is deemed to be the primary beneficiary, as the
joint venture agreement provides protection to the joint venture
partner from absorbing expected losses. The results of
operations of this joint venture are not material to the
Company’s results of operations and financial position.
72
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The Company’s operations include Company-owned and
franchise restaurants located throughout the U.S., its
territories and 64 other countries. Of the 11,129 restaurants in
operation as of June 30, 2006, 1,240 are Company-owned and
operated and 9,889 are franchisee operated.
The Company has an operating agreement with a third party,
Restaurant Services, Inc., or RSI, which acts as the exclusive
purchasing agent for Company-owned and franchised Burger King
restaurants in the United States for the purchase of food,
packaging, and equipment. These restaurants place purchase
orders and receive the respective products from distributors
with whom, in most cases, RSI has service agreements. For the
year ended June 30, 2006, the five largest
U.S. distributors serviced approximately 88% of total
U.S. purchases by Company-owned and franchised restaurants.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the Company’s consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
|
|
|
Foreign Currency Translation |
Foreign currency balance sheets are translated using the end of
period exchange rates, and statements of operations are
translated at the average exchange rates for each period. The
resulting translation adjustments 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.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include short-term, highly liquid
investments with original maturities of three months or less.
|
|
|
Investment in Auction Rate Notes |
Auction rate notes 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
thirty-five days, and are classified as available for sale
securities. Auction rate notes are considered highly liquid by
market participants because of the auction process. However,
because the auction rate notes 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 in
SFAS No. 95, Statement of Cash Flows and,
accordingly, are recorded as investments. There were no
investments in auction rate notes at June 30, 2006 and 2005.
|
|
|
Allowance for Doubtful Accounts |
The Company evaluates the collectibility of its trade receivable
from franchisees based on a combination of factors, including
the length of time the receivables are past due and the
probability of any success 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
73
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
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 owned restaurants, sale of
property, and in certain cases when past due trade receivables
from franchisees are generally 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 receivables at a net
carrying value of zero. Notes receivable with a carrying value
greater than zero are impaired when it is probable or likely
that the Company is unable to collect all amounts in accordance
with the contractual terms of the loan agreement, in accordance
with SFAS No. 114, “Accounting by Creditors
for Impairment of a Loan” and SFAS No. 118,
“Accounting by Creditors for Impairment of a
Loan — Income Recognition and Disclosures.”
Inventories, totaling $14 million and $15 million at
June 30, 2006 and 2005, respectively, 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 life of the improvement.
Improvements and major repairs with a useful life greater than
one year are capitalized, while minor maintenance and repairs
are expensed when incurred.
The Company accounts for leases in accordance with
SFAS No. 13, Accounting for Leases
(“SFAS No. 13”), and other related
authoritative literature. Assets acquired 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 or the
underlying lease term.
The Company records rent expense for operating leases that
contain scheduled rent increases on a straight-line basis over
the lease term, including any renewal option periods considered
in the determination of that lease term. Contingent rentals are
generally based on sales levels in excess of stipulated amounts,
and thus are not considered minimum lease payments.
The Company also enters into capital leases as lessor. Capital
leases meeting the criteria of direct financing leases under
SFAS No. 13 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.
74
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Favorable and unfavorable lease contracts were recorded as part
of the Transaction (see Note 1). The Company amortizes
these favorable and unfavorable lease contracts on a
straight-line basis over the remaining term of the leases. Upon
early termination of a lease, the favorable or unfavorable lease
contract balance associated with the lease contract is
recognized as a loss or gain in the statement of operations.
|
|
|
Goodwill and Intangible Assets |
Goodwill and the intellectual property associated with the
Burger King brand are assessed for impairment by segment
annually or more frequently if events or circumstances indicate
that either asset may be impaired in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets
(“SFAS No. 142”).
In accordance with the requirements of SFAS No. 142,
goodwill is recorded at the reporting unit level for purposes of
impairment testing. The reporting units are the Company’s
operating segments. As of June 30, 2006, all of the
goodwill recorded is included in the United States and Canada
operating segment.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived
assets, such as property and equipment, and acquired intangibles
subject to amortization, are reviewed for impairment annually or
more frequently if events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Some of the events or changes in circumstances that would
trigger an impairment review include, but are not limited to, a
significant under-performance relative to expected and/or
historical results (two years comparable restaurant sales
decrease or two years 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. 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. Assets are grouped together for
impairment testing at the operating market level (based on
geographic areas) in the case of the United States, Canada, the
United Kingdom and Germany. The operating market asset 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 asset concentrations (the United Kingdom and
Germany) are comprised of geographic regions within those
countries (three in the United Kingdom and four in Germany).
These operating market definitions are based upon the following
primary factors:
|
|
|
| |
• |
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 |
| |
| |
• |
the Company does not evaluate individual restaurants to build,
acquire or close independent of an analysis of other restaurants
in these operating markets. |
In countries in which the Company has a smaller number of
restaurants (The Netherlands, Spain, Mexico and China), most
operating functions and advertising are performed at the country
level, and shared by all restaurants in each country. As a
result, the Company has defined operating markets as the entire
country in the case of The Netherlands, Spain, Mexico and China.
If the carrying amount of an asset exceeds the estimated and
undiscounted future cash flows generated by the asset, an
impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
|
|
|
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 Company’s other comprehensive income (loss)
is
75
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
comprised of unrealized gains and losses on foreign currency
translation adjustments, unrealized gain on hedging activity,
net of tax, and minimum pension liability adjustments, net of
tax.
|
|
|
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
operations when the hedged item affects earnings, depending on
the purpose of the derivatives and whether they qualify for
hedge accounting treatment.
When applying hedge accounting, the Company’s policy is to
designate, at a derivative’s inception, the specific
assets, liabilities or future commitments being hedged, and to
assess the hedge’s effectiveness at inception and on an
ongoing basis. The Company may not 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 |
Cash and cash equivalents, trade and notes receivable:
The carrying value equals fair value based on the short-term
nature of these accounts.
Debt, including current maturities: The carrying value of
term debt was $998 million at June 30, 2006 and
$1.28 billion at June 30, 2005 which approximated fair
value as the debt at both of these dates carry a floating
interest rate and reflect the Company’s credit ratings at
each date.
Revenues include retail sales at Company-owned restaurants and
franchise and property revenues. Franchise and property revenues
include royalties, initial and renewal franchise fees, and
property revenues, which include pass-through rental income from
operating lease rentals and earned income on direct financing
leases on property leased to franchisees. Retail sales are
recognized at the point of sale. Royalties are based on a
percentage of sales by franchisees. Royalties are recorded as
earned and when collectibility is reasonably assured. Initial
franchise fees are recognized as income 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 income upon receipt of
the non-refundable fee and execution of a new franchise
agreement. In accordance with SFAS No. 45,
Accounting for Franchise Fee Revenue, the cost recovery
accounting method is used to recognize revenues for franchisees
for whom collectibility is not reasonably assured.
Pass-through rental income on operating lease rentals and earned
income on direct financing leases are recognized as earned and
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, in accordance with Statement of Position
(“SOP”) No. 93-7, Reporting on Advertising
Costs.
Franchised restaurants and Company-owned restaurants contribute
to advertising funds managed by the Company in the United States
and certain international markets where Company-owned
restaurants operate. Under the Company’s franchise
agreements, contributions received from franchisees must be
spent on
76
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
advertising, marketing and related activities, and result in no
gross profit recognized by the Company. Amounts which are
contributed to the advertising funds by company owned
restaurants are recorded as selling, general and administrative
expenses. Advertising expense, net of franchisee contributions,
totaled $74 million for the year ended June 30, 2006,
$87 million for the year ended June 30, 2005, and
$100 million for the year ended June 30, 2004 and is
included in selling, general and administrative expenses.
To the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are accounted
for as deferred credits, in accordance with
SFAS No. 45, and are recorded in accrued advertising
in the accompanying consolidated balance sheets.
Franchisees in markets where no Company-owned restaurants
operate contribute to advertising funds not managed by the
Company. Such contributions and related fund expenditures are
not reflected in the Company’s results of operations or
financial position.
The Company files a consolidated U.S. federal income tax
return. Amounts in the financial statements related to income
taxes are calculated using the principles of
SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). 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. 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.
Basic earnings per share is computed by dividing net income
attributable to common stockholders 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.
The Company accounts for stock-based compensation using the
intrinsic-value method in accordance with Accounting Principles
Board Opinion (“APB”) No. 25, Accounting for
Stock Issued to Employees (“APB No. 25”), and
related interpretations. Pro forma information regarding net
income and earnings per share is required by
SFAS No. 123, Accounting for Stock Based
Compensation (“SFAS No. 123”). In
estimating the fair value of its options under
SFAS No. 123, the Company uses the minimum value
method. In addition, the Company will adopt SFAS 123(R),
Share-Based Payment, (“SFAS 123(R)”) on
July 1, 2006. As such, the Company became a public company,
as the term is defined in SFAS 123(R), on February 16,
2006, the date the Company filed
its S-1
registration statement with the SEC in anticipation of its
initial public offering of common stock, which was completed in
May 2006. In accordance with SFAS 123(R), the Company is
required to apply the modified prospective transition method to
any share-based payments issued subsequent to the filing of the
registration statement; however no stock compensation cost will
begin to be recognized for such awards in the financial
statements until the Company adopts SFAS 123(R) on
July 1, 2006. As a result, the pro-forma information
regarding net income and earnings per share required by
SFAS 123 would also include an estimated volatility factor
for those share-based payment awards issued for the period
February 16, 2006 to June 30, 2006. However, the
amount of stock compensation for these awards was immaterial,
therefore, the following assumptions for the Black-Scholes model
are only those used to calculate compensation cost using the
minimum value method.
77
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Compensation value for the fair value disclosure is estimated
for each option grant using a Black-Scholes option-pricing
model. The following weighted average assumptions were used for
option grants:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Risk-free interest rate
|
|
|
4.78 |
% |
|
|
3.88 |
% |
|
|
3.98 |
% |
|
Expected term (in years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
Expected volatility
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Expected dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The following table illustrates the effect on net income and
earnings per share had the Company applied the minimum value
recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, to stock-based
employee compensation (in millions, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net income, as reported
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
| |
less: Stock-based compensation expense under minimum value
method, net of related tax effects
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income, pro forma
|
|
$ |
25 |
|
|
$ |
46 |
|
|
$ |
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, as reported
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
Basic earnings per share, pro forma
|
|
$ |
0.23 |
|
|
$ |
0.43 |
|
|
$ |
0.04 |
|
|
Diluted earnings per share, as reported
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
Diluted earnings per share, pro forma
|
|
$ |
0.22 |
|
|
$ |
0.43 |
|
|
$ |
0.04 |
|
Certain reclassifications have been made to the prior periods to
conform to the current period’s presentation. The
reclassifications had no effect on previously reported net
income or stockholder’s equity.
|
|
| Note 3. |
Acquisitions, Closures and Dispositions |
All acquisitions of franchised restaurant operations are
accounted for using the purchase method of accounting under
SFAS 141. These acquisitions are summarized as follows (in
millions, except for number of restaurants):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Number of restaurants acquired
|
|
|
50 |
|
|
|
101 |
|
|
|
38 |
|
| |
|
Inventory
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
|
Property and equipment, net
|
|
|
5 |
|
|
|
34 |
|
|
|
4 |
|
|
Goodwill and other intangible assets
|
|
|
7 |
|
|
|
12 |
|
|
|
5 |
|
|
Assumed liabilities
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total purchase price
|
|
$ |
8 |
|
|
$ |
44 |
|
|
$ |
9 |
|
| |
|
|
|
|
|
|
|
|
|
78
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
|
Closures and Dispositions |
(Gains) losses on asset and business disposals are comprised
primarily of lease termination costs relating to restaurant
closures and refranchising of Company-owned restaurants, and are
recorded in other operating expenses (income), net in the
accompanying consolidated statements of operations. The closures
and refranchisings are summarized as follows (in millions,
except for number of restaurants):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Number of restaurant closures
|
|
|
14 |
|
|
|
23 |
|
|
|
20 |
|
|
(Gains) losses on closures and dispositions, net
|
|
$ |
(3 |
) |
|
$ |
6 |
|
|
$ |
12 |
|
| |
|
Number of refranchisings
|
|
|
6 |
|
|
|
11 |
|
|
|
21 |
|
|
Loss on refranchisings
|
|
$ |
— |
|
|
$ |
7 |
|
|
$ |
3 |
|
|
|
| Note 4. |
Franchise Revenues |
Franchise revenues are comprised of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Franchise royalties
|
|
$ |
401 |
|
|
$ |
396 |
|
|
$ |
346 |
|
|
Initial franchise fees
|
|
|
10 |
|
|
|
9 |
|
|
|
7 |
|
|
Other
|
|
|
9 |
|
|
|
8 |
|
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
420 |
|
|
$ |
413 |
|
|
$ |
361 |
|
| |
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 45, the Company deferred
the recognition of revenues totaling $1 million and
$22 million for the years ended June 30, 2005 and
2004, respectively. The Company had recoveries of
$4 million and write-offs of $11 million for the year
ended June 30, 2005. As of June 30, 2005 and 2004, the
Company had deferred revenue balances of $8 million and
$22 million, respectively. The Company did not defer
recognition of revenues for the fiscal year ended June 30,
2006.
|
|
| Note 5. |
Trade and Notes Receivable, Net |
Trade and notes receivable, net, are comprised of the following
(in millions):
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Trade accounts receivable
|
|
$ |
134 |
|
|
$ |
133 |
|
|
Notes receivable, current portion
|
|
|
7 |
|
|
|
6 |
|
| |
|
|
|
|
|
|
| |
|
|
141 |
|
|
|
139 |
|
|
Allowance for doubtful accounts and notes receivable, current
portion
|
|
|
(32 |
) |
|
|
(29 |
) |
| |
|
|
|
|
|
|
| |
Total, net
|
|
$ |
109 |
|
|
$ |
110 |
|
| |
|
|
|
|
|
|
The Company recorded net recoveries of $2 million for the
year ended June 30, 2006, and bad debt expense, net of
recoveries, of $1 million for the year ended June 30,
2005, and $11 million for the year ended
79
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
June 30, 2004. The change in allowances for doubtful
accounts for each of the three years ending June 30, 2006
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Beginning balance
|
|
|
29 |
|
|
|
79 |
|
|
|
106 |
|
|
Bad debt expense, net of recoveries
|
|
|
(2 |
) |
|
|
1 |
|
|
|
11 |
|
|
Write-offs and transfers to/from notes receivable, net
|
|
|
5 |
|
|
|
(51 |
) |
|
|
(38 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
32 |
|
|
|
29 |
|
|
|
79 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 6. |
Property and Equipment, Net |
Property and equipment, net, along with their estimated useful
lives, consist of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Years Ended | |
| |
|
|
|
June 30, | |
| |
|
|
|
| |
| |
|
|
|
2006 | |
|
2005 | |
| |
|
|
|
| |
|
| |
|
Land
|
|
|
|
|
|
$ |
379 |
|
|
$ |
384 |
|
|
Buildings and improvements
|
|
|
(up to 40 years |
) |
|
|
517 |
|
|
|
470 |
|
|
Machinery and equipment
|
|
|
(up to 18 years |
) |
|
|
228 |
|
|
|
234 |
|
|
Furniture, fixtures, and other
|
|
|
(up to 10 years |
) |
|
|
85 |
|
|
|
37 |
|
|
Construction in progress
|
|
|
|
|
|
|
34 |
|
|
|
26 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
1,243 |
|
|
|
1,151 |
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(357 |
) |
|
|
(252 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Property and equipment, net
|
|
|
|
|
|
$ |
886 |
|
|
$ |
899 |
|
| |
|
|
|
|
|
|
|
|
|
Depreciation expense on property and equipment totaled
$109 million for the year ended June 30, 2006,
$100 million for the year ended June 30, 2005, and
$112 million for the year ended June 30, 2004.
Property and equipment, net, includes assets under capital
leases, net of depreciation, of $47 million and
$39 million at June 30, 2006 and 2005, respectively.
|
|
| Note 7. |
Intangible Assets, Net and Goodwill |
The Burger King brand of $896 million and
$909 million at June 30, 2006 and 2005, respectively
and goodwill of $20 million and $17 million at
June 30, 2006 and 2005, respectively, represent the
Company’s indefinite-lived intangible assets. The increase
in goodwill of $3 million is attributable to acquisitions
during 2006. The decrease in the net carrying amount of the
brand is attributable to a $12 million reduction in
pre-acquisition deferred tax valuation allowances and
$6 million deferred tax liability associated with these
reductions, both of which were recorded as part of the
Transaction, and were applied against the brand in accordance
with SFAS No. 109. These amounts were offset by the
foreign currency translation effect of $3 million on the
value of the brand transferred to EMEA operating segment as part
of the realignment of the European and Asian businesses (See
Note 13).
80
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):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Years Ended | |
| |
|
|
|
June 30, | |
| |
|
|
|
| |
| |
|
|
|
2006 | |
|
2005 | |
| |
|
|
|
| |
|
| |
|
Franchise agreements
|
|
|
26 years |
|
|
$ |
68 |
|
|
$ |
65 |
|
|
Favorable lease contracts
|
|
|
Up to 20 years |
|
|
|
32 |
|
|
|
36 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
100 |
|
|
|
101 |
|
|
Accumulated amortization
|
|
|
|
|
|
|
(21 |
) |
|
|
(15 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net carrying amount
|
|
|
|
|
|
$ |
79 |
|
|
$ |
86 |
|
| |
|
|
|
|
|
|
|
|
|
Amortization expense on franchise agreements totaled
$3 million for the years ended June 30, 2006, 2005 and
2004, respectively. The amortization of favorable lease
contracts totaled $4 million for the year ended
June 30, 2006, $3 million for the year ended
June 30, 2005, and $5 million for the year ended
June 30, 2004.
As of June 30, 2006, estimated future amortization expense
of intangible assets subject to amortization for each of the
years ended June 30 is $5 million in 2007;
$4 million in each of 2008, 2009, 2010, and 2011; and
$58 million thereafter.
|
|
| Note 8. |
Earnings Per Share |
Basic and diluted earnings per share were calculated as follows
(in millions, except share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
110,327,949 |
|
|
|
106,499,866 |
|
|
|
106,061,888 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restricted stock units
|
|
|
707,836 |
|
|
|
410,261 |
|
|
|
— |
|
| |
Employee stock options
|
|
|
3,654,800 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
114,690,585 |
|
|
|
106,910,127 |
|
|
|
106,061,888 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
Diluted earnings per share
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
Unexercised employee stock options to
purchase 1.2 million, 9.0 million and
6.8 million shares of the Company’s common stock for
the years ended June 30, 2006, 2005 and 2004, respectively,
were not included in the computation of diluted earnings per
share as their exercise prices were equal to or greater than the
average market price of the Company’s common stock during
those respective periods, which would have resulted in dilution.
81
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
| Note 9. |
Other Accrued Liabilities |
Included in other accrued liabilities as of June 30, 2006
and 2005, were accrued payroll and employee-related benefit
costs totaling $101 million and $93 million,
respectively, and income taxes payable of $96 million and
$5 million, respectively.
Term debt is comprised of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
PIK notes
|
|
$ |
— |
|
|
$ |
528 |
|
|
Term loan
|
|
|
— |
|
|
|
750 |
|
|
Term loan A
|
|
|
185 |
|
|
|
— |
|
|
Term loan B-1
|
|
|
809 |
|
|
|
— |
|
|
Other
|
|
|
4 |
|
|
|
5 |
|
| |
|
|
|
|
|
|
|
Total term debt
|
|
|
998 |
|
|
|
1,283 |
|
| |
Less: current maturities of term debt
|
|
|
(1 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
Long term portion of term debt
|
|
$ |
997 |
|
|
$ |
1,282 |
|
| |
|
|
|
|
|
|
In July 2005, the Company entered into a $1.15 billion
credit agreement, which consists of a $150 million
revolving credit facility, a $250 million term loan
(“Term loan A”), and a $750 million term
loan (“Term loan B”). The Company utilized
$1 billion in proceeds from Term loan A and Term
loan B, $47 million from the revolving credit
facility, and cash on hand to repay in full BKC’s Term
loan, PIK Notes and $16 million in financing costs
associated with the new facility. The unamortized balance of
deferred financing costs, totaling $13 million, related to
the existing Term loan was recorded as a loss on early
extinguishment of debt in the accompanying condensed
consolidated statement of operations for the year ended
June 30, 2006. In the first quarter of 2006, the Company
repaid the $47 million outstanding balance on the revolving
debt facility.
In February 2006, the Company amended and restated its
$1.15 billion secured credit facility (“amended
facility”) to replace the existing $750 million Term
loan B with a new Term loan B-1 (“Term
loan B-1”) in an amount of $1.1 billion. As a
result of this transaction, the Company received net proceeds of
$347 million. The $347 million of net proceeds and
cash on hand was used to make a $367 million dividend
payment to the holders of the Company’s common stock (see
Note 16) and to make a one-time compensatory make-whole
payment in the amount of $33 million to certain option and
restricted stock unit holders in the Company’s common stock
(see Note 16). The Company recorded deferred financing
costs of $3 million in connection with the amended facility
in addition to a $1 million write-off of deferred financing
costs, which is recorded as a loss on early extinguishment of
debt in the consolidated statement of operations for the fiscal
year ended June 30, 2006.
In May 2006, the Company utilized a portion of the
$392 million in net proceeds received from the initial
public offering to prepay $350 million of Term loans. As a
result of this prepayment, the Company recorded a
$4 million write-off of deferred financing fees as a loss
on the early extinguishment of debt in the consolidated
statement of operations for the fiscal year ended June 30,
2006.
The interest rate under Term loan A and the revolving
credit facility is, at the Company’s 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 Company’s
leverage ratio or (b) LIBOR plus a rate not to exceed
1.75%, which varies according to Company’s leverage ratio.
The interest rate for Term loan B-1 is, at
82
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Company’s option, either (a) ABR, plus a rate of 0.50%
or (b) LIBOR plus 1.50%, in each case so long as the
Company’s 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 Company’s term debt was 5.89%
and 5.40% at June 30, 2006 and June 30, 2005,
respectively.
The amended credit facility contains certain customary financial
and other covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees, 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 million to
$250 million per fiscal year over the term of the amended
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 senior secured credit facility) for such fiscal year.
This prepayment requirement is not applicable if the
Company’s 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 amended facility also allows the Company to make dividend
payments, subject to certain covenant restrictions.
BKC is the borrower under the amended facility and the Company
and certain subsidiaries have jointly and severally
unconditionally guaranteed the payment of the amounts under the
amended 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 some exceptions.
Furthermore, BKC has pledged as collateral a 65% equity interest
in certain foreign subsidiaries.
As a result of the May 2006 prepayment of $350 million and
July 2006 prepayment of $50 million (see Note 23), the
next scheduled principal payment on the amended facility is
December 31, 2008. The level of required principal
repayments increases over time thereafter. The maturity dates of
Term loan A, Term loan B-1, and amounts drawn under
the revolving credit facility are June 2011, June 2012, and June
2011, respectively. The aggregate debt maturities, including the
Term loan A, Term loan B-1 and other debt as of
June 30, 2006, are as follows (in millions):
| |
|
|
|
|
|
2007
|
|
$ |
1 |
|
|
2008
|
|
|
1 |
|
|
2009
|
|
|
35 |
|
|
2010
|
|
|
63 |
|
|
2011
|
|
|
88 |
|
|
Thereafter
|
|
|
810 |
|
| |
|
|
|
| |
|
$ |
998 |
|
| |
|
|
|
At June 30, 2006, there were no borrowings outstanding
under the revolving credit facility. At June 30, 2006,
there were $41 million of irrevocable standby letters of
credit outstanding, which are described further in Note 19.
Accordingly, the availability of the revolving credit facility
was $109 million as of June 30, 2006. BKC incurs a
commitment fee on the unused revolving credit facility at the
rate of 0.50%.
The Company also has lines of credits with foreign banks, which
can also be used to provide guarantees, in the amounts of
$5 million and $4 million at June 30, 2006 and
2005, respectively. The Company had issued $2 million of
guarantees against these lines of credit at both June 30,
2006 and 2005, respectively.
83
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
| Note 11. |
Derivative Instruments |
During the year ended June 30, 2006, the Company entered
into interest rate swap contracts with a notional value of
$750 million that qualify as cash flow hedges under
SFAS No. 133, as amended. These interest rate swaps
are used to convert the floating interest-rate component of
certain debt obligations to fixed rates.
The fair value of the interest rate swaps was $26 million
as of June 30, 2006 and is recorded within other assets,
net in the accompanying consolidated balance sheet. At
June 30, 2006, a $16 million, net of tax, unrealized
gain on hedging activity is included in accumulated other
comprehensive income (loss) included in the consolidated
statement of stockholder’s equity and other comprehensive
income (loss), resulting from the increase in fair value of the
interest rate swaps. Unrealized gains and losses in other
comprehensive income related to these hedges are expected to be
recorded to the Company’s statement of operations in the
future and will offset interest expense on certain variable rate
debt. The actual amounts that will be recorded to the
Company’s consolidated statement of operations could vary
from this estimated amount as a result of changes in interest
rates in the future. No ineffectiveness was recognized in fiscal
2006 for those interest rate swaps designated as cash flow
hedges.
The Company enters into foreign currency forward contracts with
the objective of reducing its exposure to foreign currency
fluctuations associated with foreign-denominated assets. As part
of the realignment of the European and Asian businesses, the
Company recorded Euro-denominated intercompany receivables with
a principal amount equivalent to $340 million as
consideration for intellectual property and other assets
transferred to certain foreign subsidiaries. Concurrently, the
Company entered into foreign currency forward contracts that
mature in October 2006 to sell Euros and buy approximately
$346 million U.S. Dollars in order to reduce the
Company’s cash flow and income statement exposure to
changes in the U.S. and Euro exchange rates associated with the
principal and interest amounts of such receivables. The notional
amount of the contracts associated with the principal portion of
the intercompany receivables totaling $342 million is
recorded at fair value on the consolidated balance sheet with
the corresponding amount recorded in other income (expense). The
change in fair value of these contracts through June 30,
2006 resulted in a $5 million loss, and is included in
other income (expense), net in the consolidated statement of
operations, which is offset by a corresponding gain recorded
upon the remeasurement of the principal portion of intercompany
receivables for the same period.
The Company also entered into and designated the notional amount
of the contracts associated with the interest portion of the
receivables totaling $4 million as cash flow hedges. As the
notional amount, maturity date and currency of these contracts
match those of the underlying receivable, these foreign currency
forward contracts are considered to be effective cash flow
hedges according to the criteria specified in
SFAS No. 133. Accordingly, the gains and losses for
these foreign currency forward contracts are reported in
accumulated other comprehensive income and will be reclassified
into earnings when the impact of the hedged transaction (i.e.,
receipt of the interest payment) occurs. For those foreign
currency exchange forward contracts that the Company has
designated as cash flow hedges, the Company measures
ineffectiveness by comparing the cumulative change in the
foreign currency forward contract with the cumulative change in
the hedged item. The Company excludes the difference between the
spot rate and the forward rate of the contracts entered into
from the assessment of hedge ineffectiveness for its cash flow
hedges. No ineffectiveness was recognized in fiscal 2006 for
those foreign currency forward contracts designated as cash flow
hedges.
84
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
| Note 12. |
Interest Expense |
Interest expense is comprised of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Term loans and PIK Notes
|
|
$ |
72 |
|
|
$ |
74 |
|
|
$ |
61 |
|
|
Capital lease obligations
|
|
|
9 |
|
|
|
8 |
|
|
|
7 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
81 |
|
|
$ |
82 |
|
|
$ |
68 |
|
| |
|
|
|
|
|
|
|
|
|
As discussed in Note 10, the Company incurred
$19 million in deferred financing fees in conjunction with
the July 2005 refinancing and the February 2006 amended
facility, of which $5 million have been written off as a
loss on the early extinguishment of debt resulting from
pre-payments and refinancings. 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 (loss) before income taxes, classified by source of
income, is as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Domestic
|
|
$ |
79 |
|
|
$ |
93 |
|
|
$ |
(25 |
) |
|
Foreign
|
|
|
1 |
|
|
|
(15 |
) |
|
|
34 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income before income taxes
|
|
$ |
80 |
|
|
$ |
78 |
|
|
$ |
9 |
|
| |
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
$ |
(16 |
) |
|
$ |
18 |
|
|
$ |
10 |
|
| |
|
State, net of federal income tax benefit
|
|
|
(1 |
) |
|
|
2 |
|
|
|
5 |
|
| |
Foreign
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(15 |
) |
|
|
22 |
|
|
|
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
|
50 |
|
|
|
13 |
|
|
|
(22 |
) |
| |
|
State, net of federal income tax benefit
|
|
|
5 |
|
|
|
(3 |
) |
|
|
— |
|
| |
Foreign
|
|
|
13 |
|
|
|
(1 |
) |
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
68 |
|
|
|
9 |
|
|
|
(12 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
53 |
|
|
$ |
31 |
|
|
$ |
4 |
|
| |
|
|
|
|
|
|
|
|
|
85
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, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
U.S. Federal income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes, net of federal income tax benefit
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
25.2 |
|
|
Benefit and taxes related to foreign operations
|
|
|
11.1 |
|
|
|
(12.2 |
) |
|
|
(28.8 |
) |
|
Foreign exchange differential on tax benefits
|
|
|
(1.9 |
) |
|
|
4.8 |
|
|
|
(87.2 |
) |
|
Change in valuation allowance
|
|
|
0.9 |
|
|
|
10.1 |
|
|
|
80.4 |
|
|
Change in accrual for tax uncertainties
|
|
|
18.4 |
|
|
|
4.4 |
|
|
|
33.7 |
|
|
Other
|
|
|
— |
|
|
|
(5.2 |
) |
|
|
(13.9 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Effective income tax rate
|
|
|
66.3 |
% |
|
|
39.7 |
% |
|
|
44.4 |
% |
| |
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2006, the Company recorded
accruals for tax uncertainties of $15 million and changes
in the estimate of tax provisions of $7 million, which
resulted in a higher effective tax rate for the year.
The income tax expense includes an increase in valuation
allowance related to deferred tax assets in foreign countries of
$1 million, $12 million, and $7 million for the
years ending June 30, 2006, 2005 and 2004, respectively.
For the year ended June 30, 2005, the valuation allowance
decreased by $4 million in certain states. This reduction
was a result of determining that it was more likely than not
that certain state loss carryforwards and other deferred tax
assets would be realized. The valuation allowance increased by
$1 million for certain state loss carryforwards as their
realization was not considered more likely than not for the year
ended June 30, 2004.
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, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Income tax expense from continuing operations
|
|
$ |
53 |
|
|
$ |
31 |
|
|
$ |
4 |
|
|
Interest rate swaps in accumulated other comprehensive income
(loss)
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
Minimum pension liability in accumulated other comprehensive
income (loss)
|
|
|
2 |
|
|
|
(2 |
) |
|
|
— |
|
|
Adjustments to deferred income taxes related to brand
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to the valuation allowance related to brand (See
note 7)
|
|
|
(12 |
) |
|
|
— |
|
|
|
(2 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
47 |
|
|
$ |
29 |
|
|
$ |
2 |
|
| |
|
|
|
|
|
|
|
|
|
86
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, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Deferred income tax expense (benefit) (exclusive of the effects
of components listed below)
|
|
$ |
67 |
|
|
$ |
2 |
|
|
$ |
(20 |
) |
|
Change in valuation allowance, net of amounts allocated as
adjustments to purchase accounting
|
|
|
1 |
|
|
|
8 |
|
|
|
8 |
|
|
Change in effective state income tax rate
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
68 |
|
|
$ |
9 |
|
|
$ |
(12 |
) |
| |
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities at the date of transaction
were recorded based on management’s best estimate of the
ultimate tax basis that will be accepted by the tax authorities.
At the date of a change in management’s best estimate,
deferred tax assets and liabilities are adjusted to reflect the
revised tax basis. Pursuant to SFAS No. 109, certain
adjustments to deferred taxes and reductions of valuation
allowances established in purchase accounting would be applied
as an adjustment to the Company’s intangible assets. During
the year ended June 30, 2004, the Company recognized the
effect of benefits arising from these items by recording a
deferred tax asset of $41 million, which resulted in a
related decrease in the value of the Burger King
brand recorded in connection with the Transaction. During
the year ended June 30, 2006, the Company recorded
reductions in the valuation allowance of $12 million which
were applied to reduce intangible assets. Based on the
provisions of SFAS No. 109, approximately
$64 million of valuation allowance, if realized, will be
applied to reduce intangible assets.
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):
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Trade and notes receivable, principally due to allowance for
doubtful accounts
|
|
$ |
28 |
|
|
$ |
36 |
|
| |
Accrued employee benefits
|
|
|
31 |
|
|
|
29 |
|
| |
Unfavorable leases
|
|
|
101 |
|
|
|
106 |
|
| |
Liabilities not currently deductible for tax
|
|
|
45 |
|
|
|
70 |
|
| |
Tax loss and credit carryforwards
|
|
|
38 |
|
|
|
79 |
|
| |
Property and equipment, principally due to differences in
depreciation
|
|
|
61 |
|
|
|
49 |
|
| |
Other
|
|
|
7 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
| |
|
|
311 |
|
|
|
370 |
|
|
Valuation allowance
|
|
|
(89 |
) |
|
|
(78 |
) |
| |
|
|
|
|
|
|
| |
|
|
222 |
|
|
|
292 |
|
|
Less deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Intangible assets
|
|
|
212 |
|
|
|
328 |
|
| |
Leases
|
|
|
49 |
|
|
|
49 |
|
| |
|
|
|
|
|
|
| |
|
|
261 |
|
|
|
377 |
|
| |
|
|
|
|
|
|
| |
Net deferred tax liability
|
|
$ |
39 |
|
|
$ |
85 |
|
| |
|
|
|
|
|
|
87
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
For the year ended June 30, 2006, the valuation allowance
increased by $11 million. After considering the level of
historical taxable income, projections for future taxable income
over the periods in which the deferred tax assets are
deductible, and the reversal of deferred tax liabilities,
management believes it is more likely than not that the benefits
of certain state and foreign net operating loss carryforwards
and other deferred tax assets will not be realized.
Changes in valuation allowance for the years ended June 30,
2006, 2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Beginning balance
|
|
$ |
78 |
|
|
$ |
65 |
|
|
$ |
22 |
|
| |
Purchase accounting adjustments
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
| |
Change in estimates recorded to deferred income tax expense
|
|
|
1 |
|
|
|
8 |
|
|
|
8 |
|
| |
Change in estimates in valuation allowance recorded to
intangible assets
|
|
|
(12 |
) |
|
|
— |
|
|
|
(2 |
) |
| |
Change due to increase in deferred tax assets that are fully
reserved
|
|
|
20 |
|
|
|
5 |
|
|
|
— |
|
| |
Changes from foreign currency exchange rates
|
|
|
2 |
|
|
|
— |
|
|
|
6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
89 |
|
|
$ |
78 |
|
|
$ |
65 |
|
| |
|
|
|
|
|
|
|
|
|
The Company has no federal loss carryforwards in the United
States and has state loss carryforwards of $37 million,
expiring between 2007 and 2025. In addition, the Company has
foreign loss carryforwards of $83 million expiring between
2007 and 2019, and foreign loss carryforwards of
$131 million that do not expire.
Deferred taxes have not been provided on basis difference
related to investments in foreign subsidiaries. These
differences consist primarily of $19 million of
undistributed earnings, which are considered to be permanently
reinvested in the operations of such subsidiaries.
As a matter of course, the Company is regularly audited by
various tax authorities. 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.
During 2006, the Company regionalized the activities associated
with managing its European and Asian businesses, including the
transfer of rights of existing franchise agreements, the ability
to grant future franchise agreements and utilization of the
Company’s intellectual property assets in EMEA/APAC, in new
European and Asian holding companies. The new holding companies
acquired the intellectual property rights from BKC, a
U.S. company, in a transaction that generated a taxable
gain for BKC in the United States of $328 million resulting
in a $126 million tax liability. This liability is recorded
in other accrued liabilities in the consolidated balance sheet
and is offset by $40 million through the utilization of net
operating loss carryforwards and other foreign tax credits,
resulting in a cash tax payment obligation of $86 million,
which the Company expects to make in the first quarter of fiscal
2007. In accordance with the guidance provided by ARB 51,
Consolidated Financial Statements, the resulting tax
amount of $126 million was recorded as a prepaid tax asset
and offset by the reversal of a $105 million deferred tax
liability, which the Company had previously recorded associated
with the transferred asset resulting in a net prepaid asset of
$21 million, which is included in other assets, net on the
accompanying consolidated balance sheet.
|
|
| Note 14. |
Related Party Transactions |
In connection with the Company’s acquisition of BKC, the
Company entered into a management agreement with the Sponsors
for monitoring the Company’s business through board of
director participation, executive team recruitment, interim
senior management services and other services consistent with
arrangements with private equity funds (“the management
agreement”). Pursuant to the management agreement,
88
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
the Company was charged a quarterly fee not to exceed 0.5% of
the prior quarter’s total revenues. The Company incurred
management fees and reimbursable
out-of-pocket expenses
under the management agreement totaling $9 million per year
for the fiscal years ended June 30, 2006 and 2005, and
$8 million for the fiscal year ended June 30, 2004.
These fees and reimbursable
out-of-pocket expenses
are recorded within fees paid to affiliates in the consolidated
statement of operations. At June 30, 2005, amounts payable
to the Sponsors for management fees and reimbursable
out-of-pocket expenses
totaled $2 million, which are included within other accrued
liabilities in the consolidated balance sheets. In May 2006, the
Company paid a termination fee totaling $30 million to the
Sponsors to terminate the management agreement upon the
completion of the initial public offering. As a result, the
Company recognized an expense of $30 million in the period
and included in fees paid to affiliates.
As of June 30, 2005, the Company had PIK Notes outstanding
to the private equity funds controlled by the Sponsors of
$528 million. The outstanding balance of the PIK Notes,
which included $103 million of
payment-in-kind
interest as of June 30, 2005, and $2 million of
accrued interest for the fiscal year 2006, was repaid in July
2005. Interest expense on the PIK Notes totaled $2 million
and $23 million for the years ended June 30, 2006 and
2005, respectively.
A member of the Board of Directors of the Company has a direct
financial interest in a company with which the Company has
entered into a lease agreement for the Company’s new
corporate headquarters (see Note 19).
An affiliate of one of the Sponsors participated as one of the
joint book-running managers of our initial public offering. This
affiliate was paid $5 million pursuant to a customary
underwriting agreement among the Company and the several
underwriters.
At June 30, 2006, the Company leased 1,090 restaurant
properties to franchisees and other non-restaurant third parties
under capital and operating leases. The building portions of the
capital leases with franchisees are accounted for as direct
financing leases and recorded as a net investment in property
leased to franchisees, while the land and restaurant equipment
components are recorded as operating leases and are included in
the table below.
Property and equipment, net leased to franchisees and other
third parties under operating leases was as follows (in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Land
|
|
$ |
196 |
|
|
$ |
201 |
|
|
Buildings and improvements
|
|
|
78 |
|
|
|
67 |
|
|
Restaurant equipment
|
|
|
2 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
| |
|
|
276 |
|
|
|
270 |
|
|
Accumulated depreciation
|
|
|
(23 |
) |
|
|
(18 |
) |
| |
|
|
|
|
|
|
|
Property and equipment, net leased to franchisees and other
third parties under operating leases
|
|
$ |
253 |
|
|
$ |
252 |
|
| |
|
|
|
|
|
|
89
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):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Future minimum rents to be received
|
|
$ |
353 |
|
|
$ |
373 |
|
|
Estimated unguaranteed residual value
|
|
|
4 |
|
|
|
4 |
|
|
Unearned income
|
|
|
(200 |
) |
|
|
(218 |
) |
|
Allowance on direct financing leases
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
|
|
|
|
|
|
| |
|
|
155 |
|
|
|
157 |
|
|
Current portion included within trade receivables
|
|
|
(7 |
) |
|
|
(8 |
) |
| |
|
|
|
|
|
|
|
Net investment in property leased to franchisees
|
|
$ |
148 |
|
|
$ |
149 |
|
| |
|
|
|
|
|
|
In addition, the Company leases land, buildings, office space,
and warehousing, including 194 restaurant buildings under
capital leases.
At June 30, 2006, future minimum lease receipts and
commitments were as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Lease Receipts | |
|
|
| |
|
| |
|
Lease Commitments | |
| |
|
Direct | |
|
|
|
| |
| |
|
Financing | |
|
Operating | |
|
Capital | |
|
Operating | |
| |
|
Leases | |
|
Leases | |
|
Leases | |
|
Leases | |
| |
|
| |
|
| |
|
| |
|
| |
|
2007
|
|
$ |
30 |
|
|
$ |
73 |
|
|
$ |
13 |
|
|
$ |
153 |
|
|
2008
|
|
|
30 |
|
|
|
68 |
|
|
|
13 |
|
|
|
145 |
|
|
2009
|
|
|
30 |
|
|
|
62 |
|
|
|
12 |
|
|
|
130 |
|
|
2010
|
|
|
30 |
|
|
|
58 |
|
|
|
11 |
|
|
|
121 |
|
|
2011
|
|
|
28 |
|
|
|
54 |
|
|
|
11 |
|
|
|
110 |
|
|
Thereafter
|
|
|
205 |
|
|
|
352 |
|
|
|
74 |
|
|
|
732 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
353 |
|
|
$ |
667 |
|
|
$ |
134 |
|
|
$ |
1,391 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The total minimum obligations of capital leases are
$134 million at June 30, 2006. Of this amount,
$67 million represents interest. The remaining balance of
$67 million is reflected as capital lease obligations
recorded in the Company’s consolidated balance sheet, of
which $4 million is classified as current portion of
long-term debt and capital leases.
Property revenues, which are classified within franchise and
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, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Minimum
|
|
$ |
74 |
|
|
$ |
78 |
|
|
$ |
78 |
|
| |
Contingent
|
|
|
14 |
|
|
|
13 |
|
|
|
10 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total rental income
|
|
|
88 |
|
|
|
91 |
|
|
|
88 |
|
|
Earned income on direct financing leases
|
|
|
24 |
|
|
|
29 |
|
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total property revenues
|
|
$ |
112 |
|
|
$ |
120 |
|
|
$ |
117 |
|
| |
|
|
|
|
|
|
|
|
|
90
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Rent expense associated with the lease commitments is as follows
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Rental expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Minimum
|
|
$ |
151 |
|
|
$ |
145 |
|
|
$ |
137 |
|
| |
Contingent
|
|
|
6 |
|
|
|
6 |
|
|
|
5 |
|
|
Amortization of favorable and unfavorable lease contracts, net
|
|
|
(24 |
) |
|
|
(29 |
) |
|
|
(52 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total rental expense
|
|
$ |
133 |
|
|
$ |
122 |
|
|
$ |
90 |
|
| |
|
|
|
|
|
|
|
|
|
Favorable and unfavorable lease contracts are amortized over a
period of up to 20 years and are included in occupancy and
other operating costs and property expenses, respectively, in
the consolidated statements of operations. Amortization of
unfavorable lease contracts totaled $28 million for the
year ended June 30, 2006, $32 million for the year
ended June 30, 2005, and $57 million for the year
ended June 30, 2004. Amortization of favorable lease
contracts totaled $4 million for the year ended
June 30, 2006, $3 million for the year ended
June 30, 2005, and $5 million for the year ended
June 30, 2004.
Unfavorable leases, net of accumulated amortization totaled
$234 million and $261 million at June 30, 2006
and June 30, 2005, respectively. Unfavorable leases, net of
amortization are classified within other deferrals and
liabilities in the consolidated balance sheets.
As of June 30, 2006, estimated future amortization expense
of unfavorable lease contracts subject to amortization for each
of the years ended June 30 is $26 million in 2007,
$24 million in 2008, $22 million in 2009,
$21 million in 2010, $19 million in 2011, and
$122 million thereafter.
|
|
| Note 16. |
Stockholders’ equity |
The Company was initially capitalized on December 13, 2002
with $398 million in cash, as a limited liability company.
On June 27, 2003, the Company was converted to a
corporation and issued an aggregate 104,692,735 common shares to
the private equity funds controlled by the Sponsors.
As described in Note 1, in connection with the initial
public offering, the Board of Directors of the Company
authorized an increase in the number of shares of the
Company’s $0.01 par value common stock to
300 million shares, authorized a 26.34608 to one stock
split on common stock and authorized 10 million shares of a
new class of preferred stock, with a par value of $0.01 per
share. As of June 30, 2006, no shares of this new class of
preferred stock were issued or outstanding.
|
|
|
Dividends Paid and Return of Capital |
On February 21, 2006, the Company paid a dividend of
$367 million, or $3.42 per issued and outstanding
share, to holders of record of the Company’s common stock
on February 9, 2006, including members of senior
management. The payment of the dividend was financed primarily
from proceeds of the amended facility (see Note 10) and was
recorded as a cash dividend of $100 million ($0.93 per
share) charged to the Company’s historical cumulative
retained earnings through the dividend date, and as a return of
capital of $267 million ($2.49 per share) charged to
additional paid-in capital in the accompanying consolidated
statement of stockholders’ equity and other comprehensive
income (loss) for the year ended June 30, 2006.
91
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan |
Prior to the Company’s initial public offering, the Company
adopted the Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan (the “2006 Omnibus Incentive Plan”). The 2006
Omnibus Incentive Plan provides for the possible issuance of up
to 7,113,442 shares of BKH common stock through grants of
stock options, stock appreciation rights
(“SAR’s”), restricted stock and restricted stock
units, deferred stock and performance-based awards to certain
officers, employees and non-management members of the Board of
Directors.
|
|
|
Burger King Holdings, Inc. Equity Incentive Plan |
In July 2003, the Company implemented the Burger King Holdings,
Inc. Equity Incentive Plan (the “Equity Incentive
Plan”). The Equity Incentive Plan provides for the possible
issuance of up to 13,684,418 shares of BKH common stock
through the sale of common stock to certain officers of the
Company and independent members of the Board of Directors;
grants of stock options to certain officers, employees, and
independent board members of the Company; and grants of
restricted stock units to certain officers of the Company.
Options generally vest over five years and have a
10-year life from the
date of grant. In conjunction with the initial public offering,
the Company granted a one-time grant of 447,886 options to
purchase shares of BKH common stock to certain executive
officers.
The following table summarizes the status and activity of
options granted during fiscal 2005 and 2006:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
| |
|
Number of | |
|
Average | |
| |
|
Options | |
|
Exercise Price | |
| |
|
| |
|
| |
|
Outstanding at June 30, 2003
|
|
|
— |
|
|
$ |
— |
|
| |
Granted
|
|
|
8,787,366 |
|
|
|
4.86 |
|
| |
Forfeited
|
|
|
(1,969,211 |
) |
|
|
5.16 |
|
| |
|
|
|
|
|
|
|
Outstanding at June 30, 2004
|
|
|
6,818,155 |
|
|
|
4.78 |
|
| |
Granted
|
|
|
5,142,728 |
|
|
|
4.28 |
|
| |
Exercised
|
|
|
(21,446 |
) |
|
|
3.80 |
|
| |
Forfeited
|
|
|
(2,930,316 |
) |
|
|
4.62 |
|
| |
|
|
|
|
|
|
|
Outstanding at June 30, 2005
|
|
|
9,009,121 |
|
|
|
4.55 |
|
| |
Granted
|
|
|
2,247,383 |
|
|
|
13.69 |
|
| |
Exercised
|
|
|
(1,247,776 |
) |
|
|
4.78 |
|
| |
Forfeited
|
|
|
(2,600,489 |
) |
|
|
4.50 |
|
| |
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
7,408,239 |
|
|
$ |
7.75 |
|
| |
|
|
|
|
|
|
92
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The following table summarizes information about stock options
outstanding at June 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
|
|
| |
|
|
|
Average | |
|
|
| |
|
|
|
Remaining | |
|
Weighted | |
| |
|
Number of | |
|
Contractual | |
|
Average | |
| Exercise Price |
|
Options | |
|
Life | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
$ 3.80
|
|
|
4,686,502 |
|
|
|
6.29 |
|
|
$ |
3.80 |
|
|
7.59
|
|
|
263,250 |
|
|
|
0.77 |
|
|
|
7.59 |
|
|
10.25
|
|
|
830,709 |
|
|
|
9.16 |
|
|
|
10.25 |
|
|
11.39
|
|
|
384,522 |
|
|
|
7.74 |
|
|
|
11.39 |
|
|
17.00
|
|
|
447,886 |
|
|
|
9.88 |
|
|
|
17.00 |
|
|
18.91
|
|
|
29,007 |
|
|
|
9.92 |
|
|
|
18.91 |
|
|
$21.64
|
|
|
766,363 |
|
|
|
9.54 |
|
|
$ |
21.64 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
7,408,239 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
During the years ended June 30, 2006, 2005 and 2004, the
Company granted 508,379, 482,212 and 109,969 restricted stock
units (“RSU’s”), respectively, at fair value to
certain officers of BKC and its subsidiaries. In addition,
during the years ended June 30, 2006 and 2005, 29,745 and
17,888 shares, respectively, of common stock were issued in
settlement of RSU’s and 3,267 RSU’s were
forfeited during the year ended June 30, 2006. There were
no shares of common stock issued in settlement of RSU’s in
2004 and no RSU’s forfeited in 2005 and 2004.
|
|
|
Compensatory Make-Whole-Payment |
In February 2006, the Company paid $33 million to holders
of vested and unvested stock options and RSU’s of the
Company, primarily members of senior management and the Board of
Directors, in order to compensate such holders for the decrease
in value of their equity interests as a result of the February
2006 dividend payment. The make-whole payment was recorded as
employee compensation cost, and is included in selling, general
and administrative expenses in the accompanying statement of
operations for the year ended June 30, 2006.
|
|
| Note 17. |
Retirement Plan and Other Postretirement Benefits |
The Company has noncontributory defined benefit plans for its
salaried employees in the United States (the “Plans”)
and noncontributory defined benefit plans for certain employees
in the United Kingdom and Germany. In November 2005, the Company
announced that effective December 31, 2005 all benefits
accrued under the Plans would be frozen at the benefit level
attained on that date. As a result, the Company recognized a
one-time pension curtailment gain of $6 million, as a
component of selling, general and administrative expenses in the
accompanying consolidated statement of operations for the fiscal
year ended June 30, 2006, equal to the unamortized balances
as of December 31, 2005 from prior plan amendments and
allowable gains to be realized.
BKC has the Burger King Savings Plan (the “Savings
Plan”), a defined contribution plan that is provided to all
employees who meet the eligibility requirements. Eligible
employees may contribute up to 50% of pay on a pre-tax basis,
subject to IRS limitations.
Effective August 1, 2003, BKC implemented the Executive
Retirement Plan (“ERP”) for all officers and senior
management. Officers and senior management may elect to defer up
to 50% of base pay and up to
93
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
100% of incentive pay on a before-tax basis under the ERP. BKC
provides dollar-for-dollar match on up to the first 6% of base
pay. Additionally, the Company may make a discretionary
contribution ranging from 0% to 6% based on Company’s
performance.
In conjunction with the curtailment gain, the Company approved a
distribution totaling $6 million on behalf of those
participants who were affected by the curtailment of the Plans.
The distribution was recorded as a component of selling, general
and administrative expenses in the accompanying consolidated
statements of operations for the fiscal year ended June 30,
2006 and was paid by the Company to employees in cash or
contributed to the 401(k) plan in which the employee
participates.
Expenses incurred for the savings plan and ERP totaled
$6 million for the year ended June 30, 2006,
$5 million for the year ended June 30, 2005, and
$5 million for the year ended June 30, 2004.
BKC uses a measurement date of March 31 and April 30
for all of its US and Non-US Plans.
|
|
|
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 Pension Plans and Postretirement
Plans (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retirement | |
|
Other | |
| |
|
Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
June 30, | |
|
June 30, | |
| |
|
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at beginning of year
|
|
$ |
181 |
|
|
$ |
167 |
|
|
$ |
22 |
|
|
$ |
21 |
|
| |
Service cost
|
|
|
5 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
| |
Interest cost
|
|
|
10 |
|
|
|
10 |
|
|
|
1 |
|
|
|
1 |
|
| |
Actuarial (gain) loss
|
|
|
(9 |
) |
|
|
3 |
|
|
|
(1 |
) |
|
|
(1 |
) |
| |
Curtailment (gain)
|
|
|
(21 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Benefits paid
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
162 |
|
|
|
181 |
|
|
|
22 |
|
|
|
22 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
|
93 |
|
|
|
86 |
|
|
|
— |
|
|
|
— |
|
| |
Actual return on plan assets
|
|
|
10 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
| |
Company contributions
|
|
|
11 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
| |
Benefits paid
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
110 |
|
|
|
93 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Funded status of plan
|
|
|
(52 |
) |
|
|
(88 |
) |
|
|
(22 |
) |
|
|
(22 |
) |
| |
Unrecognized net actuarial (gain) loss
|
|
|
(2 |
) |
|
|
23 |
|
|
|
(2 |
) |
|
|
(1 |
) |
| |
Minimum pension liability adjustment
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accrued benefit cost
|
|
|
(54 |
) |
|
|
(60 |
) |
|
|
(24 |
) |
|
|
(23 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
94
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retirement | |
|
Other | |
| |
|
Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
June 30, | |
|
June 30, | |
| |
|
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accrued benefit liability
|
|
|
(54 |
) |
|
|
(55 |
) |
|
|
(24 |
) |
|
|
(23 |
) |
| |
Accumulated other comprehensive loss
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accrued benefit cost
|
|
$ |
(54 |
) |
|
$ |
(60 |
) |
|
$ |
(24 |
) |
|
$ |
(23 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional year-end information for Pension Plans 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 Pension Plans with accumulated benefit obligations in
excess of plan assets (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Projected benefit obligation
|
|
$ |
162 |
|
|
$ |
181 |
|
|
Accumulated benefit obligation
|
|
|
155 |
|
|
|
153 |
|
|
Fair value of plan assets
|
|
$ |
110 |
|
|
$ |
93 |
|
|
|
|
Components of Net Periodic Benefit Cost |
A summary of the components of net periodic benefit cost for the
Pension Plans (retirement benefits) and Postretirement Plans
(other benefits) is presented below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retirement Benefits | |
|
Other Benefits | |
| |
|
| |
|
| |
| |
|
Years Ended June 30, | |
|
Years Ended June 30, | |
| |
|
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Service cost-benefits earned during the period
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
Interest costs on projected benefit obligations
|
|
|
10 |
|
|
|
10 |
|
|
|
9 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Expected return on plan assets
|
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Curtailment gain
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Recognized net actuarial loss
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost and total annual pension cost
|
|
$ |
1 |
|
|
$ |
10 |
|
|
$ |
9 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used in computing the benefit
obligations of the U.S. Pension Plans (retirement benefits)
and Postretirement Plans (other benefits) are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retirement Benefits | |
|
Other Benefits | |
| |
|
| |
|
| |
| |
|
Years Ended June 30, | |
|
Years Ended June 30, | |
| |
|
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Discount rate as of year-end
|
|
|
6.09 |
% |
|
|
5.86 |
% |
|
|
6.00 |
% |
|
|
6.09 |
% |
|
|
5.86 |
% |
|
|
6.00 |
% |
|
Range of compensation rate increase
|
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Company uses the Moody’s long-term corporate bond yield
indices for Aa bonds plus an additional 25 basis points to
reflect the longer duration of the plans, as the discount rate
used in the calculation of the benefit obligation.
95
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The weighted-average assumptions used in computing the net
periodic benefit cost of the U.S. Pension Plans (retirement
benefits) and Postretirement Plans (other benefits) are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retirement Benefits | |
|
Other Benefits | |
| |
|
| |
|
| |
| |
|
Years Ended June 30, | |
|
Years Ended June 30, | |
| |
|
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
5.86 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
5.86 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
Range of compensation rate increase
|
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Expected long-term rate of return on plan assets
|
|
|
8.75 |
% |
|
|
8.75 |
% |
|
|
8.75 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The expected long-term rate of return on plan assets is
determined by expected future returns on the asset categories in
target investment allocation. These expected returns are based
on historical returns for each asset’s category adjusted
for an assessment of current market conditions.
The assumed healthcare cost trend rates are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Healthcare cost trend rate assumed for next year
|
|
|
10.00 |
% |
|
|
9.00 |
% |
|
|
9.50 |
% |
|
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 |
|
|
|
2013 |
|
|
|
2013 |
|
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 change in the assumed
healthcare cost trend rate would have very minimal effects on
service and interest cost and the postretirement obligation.
The fair value of plan assets for BKC’s U.S. pension
benefit plans as of March 31, 2006 and 2005 was
$95 million and $82 million, respectively. The fair
value of plan assets for BKC’s pension benefit plans
outside the U.S. was $15 million and $11 million
at April 30, 2006 and 2005, respectively.
The following table sets forth the asset allocation for
BKC’s U.S. pension plans’ assets:
| |
|
|
|
|
|
|
|
|
| |
|
Retirement | |
| |
|
Benefits | |
| |
|
| |
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Equity securities
|
|
|
72 |
% |
|
|
71 |
% |
|
Debt securities
|
|
|
27 |
% |
|
|
28 |
% |
|
Short-term investments
|
|
|
1 |
% |
|
|
1 |
% |
| |
|
|
|
|
|
|
| |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
The investment objective for the U.S. 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 target
investment allocation is 65% equity and 35% fixed income
securities. The portfolio of equity securities includes
primarily large-capitalization U.S. companies with a mix of
some small-capitalization U.S. companies and international
entities.
96
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
|
Estimated Future Cash Flows |
Total contributions to the Pension Plans were $2 million,
$17 million and $1 million for the years ended
June 30, 2006, 2005, and 2004, respectively.
The Pension and Postretirement 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retirement Benefits | |
|
|
| |
|
| |
|
Other | |
| |
|
Qualified | |
|
Excess | |
|
Total | |
|
Benefits | |
| |
|
| |
|
| |
|
| |
|
| |
|
Estimated net employer contributions during fiscal 2007
|
|
$ |
4.2 |
|
|
$ |
0.6 |
|
|
$ |
4.8 |
|
|
$ |
0.8 |
|
|
Estimated future fiscal year benefit payments during fiscal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2007
|
|
$ |
4.1 |
|
|
$ |
0.6 |
|
|
$ |
4.7 |
|
|
$ |
0.8 |
|
| |
2008
|
|
|
4.4 |
|
|
|
0.5 |
|
|
|
4.9 |
|
|
|
1.0 |
|
| |
2009
|
|
|
4.5 |
|
|
|
0.5 |
|
|
|
5.0 |
|
|
|
1.1 |
|
| |
2010
|
|
|
4.7 |
|
|
|
0.5 |
|
|
|
5.2 |
|
|
|
1.2 |
|
| |
2011
|
|
|
4.9 |
|
|
|
0.5 |
|
|
|
5.4 |
|
|
|
1.3 |
|
| |
2012 - 2016
|
|
$ |
32.6 |
|
|
$ |
3.1 |
|
|
$ |
35.7 |
|
|
$ |
8.8 |
|
|
|
| Note 18. |
Other Operating Expenses (Income), Net |
Other operating expenses (income), net, consist of the following
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
(Gains) losses on asset acquisitions, closures and dispositions
|
|
$ |
(3 |
) |
|
$ |
13 |
|
|
$ |
15 |
|
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
(Recovery) impairment of investments in franchisee debt
|
|
|
(2 |
) |
|
|
4 |
|
|
|
19 |
|
|
Impairment of investments in unconsolidated companies
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
Litigation settlements and reserves
|
|
|
— |
|
|
|
2 |
|
|
|
4 |
|
|
Other, net
|
|
|
3 |
|
|
|
11 |
|
|
|
12 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other operating expenses (income), net
|
|
$ |
(2 |
) |
|
$ |
34 |
|
|
$ |
54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) Losses on Asset Acquisitions, Closures and
Dispositions |
Losses on asset acquisitions, closures and business dispositions
are primarily related to restaurant closures and refranchising
of Company-owned restaurants. See Note 3 for further
details.
|
|
|
Litigation Settlements and Reserves |
The Company is a party to legal proceedings arising in the
ordinary course of business, some of which are covered by
insurance. In the opinion of management, disposition of these
matters will not materially affect the Company’s financial
condition and statements of operations.
97
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
For the year ended June 30, 2004, the Company recognized a
charge of $3 million for settlement of a claim in Australia
by BKC’s joint venture partner. Under the terms of a
settlement agreement, BKC paid $3 million to terminate
certain development rights granted to the joint venture in June
2002. BKC’s joint venture partner also had the option to
buy BKC’s interest in the joint venture for approximately
$6 million by giving notice to BKC on or before
June 30, 2006. The joint venture partner exercised its
option and purchased BKC’s interest in the joint venture in
August 2006. In addition, BKC agreed to forgive the note
receivable from the joint venture plus accrued interest and
accordingly, the Company recognized an impairment loss of
$7 million for the year ended June 30, 2004.
|
|
|
(Recovery) Impairment of Investment in Franchisee
Debt |
The Company assesses impairment on franchise debt in accordance
with SFAS No. 114. For the year ended June 30,
2004, the Company assessed the collectibility of certain
acquired franchisee third-party debt, and recorded an impairment
charge of $12 million. As noted above, for the year ended
June 30, 2004, the Company agreed to forgive the note
receivable from the Australia joint venture partner plus accrued
interest and thus the Company recognized an impairment loss of
$7 million. There were no impairments for the year ended
June 30, 2006 and 2005.
Items included within Other, net in fiscal 2005 include
settlement losses in connection with the acquisition of
franchise restaurants of $5 million and $5 million of
costs associated with the FFRP program. Items in Other, net in
fiscal 2004 include losses from unconsolidated investments of
$3 million in EMEA/ APAC and $2 million each of losses
from transactions denominated in foreign currencies, property
valuation reserves and re-branding costs related to our
operations in Asia.
|
|
| Note 19. |
Commitments and Contingencies |
|
|
|
Franchisee Restructuring Program |
During 2003, the Company initiated a program designed to provide
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. As part of
this program, the Company has agreed to provide financial
support to certain franchisees.
In order to assist certain franchisees in making capital
improvements to restaurants in need of remodeling, the Company
provided commitments to fund capital expenditure loans
(“Capex Loans”) and to make capital expenditures
related to restaurant properties that the Company leases to
franchisees. Capex Loans are typically unsecured, bear interest,
and have 10-year terms.
Through June 30, 2006, the Company has funded
$3 million in Capex Loans and has made $7 million of
improvements to restaurant properties that the Company leases to
franchisees in connection with these commitments. As of
June 30, 2006, the Company has commitments remaining to
provide future Capex Loans of $10 million and to make up to
$12 million of improvements to properties that the Company
leases to franchisees.
The Company provided $2 million and $3 million of
temporary reductions in rent (“rent relief”) for
certain franchisees that leased restaurant property from the
Company in the fiscal years ended June 30, 2006 and 2005,
respectively. There was no rent relief provided in the fiscal
year ended 2004. As of June 30, 2006, the Company has
commitments remaining to provide future rent relief of up to
$9 million.
Contingent cash flow subsidies represent commitments by the
Company to provide future cash grants to certain franchisees for
limited periods in the event of failure to achieve their debt
service coverage ratio. No contingent cash flow subsidy has been
provided through June 30, 2006. The maximum contingent cash
flow
98
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
subsidy commitment for future periods as of June 30, 2006
is $5 million. Upon funding, in most instances, the
subsidies will be added to the franchisee’s existing note
balance.
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 was $112 million at
June 30, 2006, expiring over an average period of five
years.
Other commitments arising out of normal business operations were
$10 million and $12 million as of June 30, 2006
and 2005, respectively, of which $6 million and
$4 million, respectively were guaranteed under bank
guarantee arrangements.
At June 30, 2006, there were $42 million in
irrevocable standby letters of credit outstanding, which were
issued primarily to certain insurance carriers to guarantee
payment for various insurance programs such as health and
commercial liability insurance. Included in that amount was
$41 million of standby letters of credit issued under the
Company’s $150 million revolving credit facility. As
of June 30, 2006, none of these irrevocable standby letters
of credit had been drawn upon.
As of June 30, 2006, the Company had posted bonds totaling
$2 million, which related to certain utility deposits.
In fiscal 2000, the Company entered into long-term, exclusive
contracts with the Coca-Cola Company and with Dr Pepper/
Seven Up, Inc. to supply Company and franchise restaurants with
their products and obligating Burger King restaurants in
the United States to purchase a specified number of gallons of
soft drink syrup. These volume commitments are not subject to
any time limit. As of June 30, 2006, the Company estimates
that it will take approximately 16 years and 17 years
to complete the Coca-Cola and Dr Pepper/ Seven Up, Inc.
purchase commitments, respectively. In the event of early
termination of these arrangements, the Company may be required
to make termination payments that could be material to the
Company’s results of operations and financial position.
Additionally, in connection with these contracts, the Company
has received upfront fees, which are being amortized over the
term of the contracts. At June 30, 2006 and 2005, the
deferred amounts totaled $23 million and $26 million,
respectively. These deferred amounts are amortized as a
reduction to food, paper and product costs in the accompanying
consolidated statements of operations.
As of June 30, 2006 the Company had $11 million in
aggregate contractual obligations for the year ended
June 30, 2007 with a vendor providing information
technology services under three separate arrangements. These
contracts extend up to five years with a termination fee ranging
from less than $1 million to $3 million during those
years.
The Company also enters into commitments to purchase advertising
for periods up to twelve months. At June 30, 2006,
commitments to purchase advertising totaled $45 million.
99
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
In May 2005, the Company entered into an agreement to lease a
building in Coral Gables, Florida, to serve as the
Company’s new global headquarters beginning in fiscal 2009.
Under this agreement, the estimated annual rent for the
15 year initial term is expected to be approximately
$7 million a year, which will be finalized upon the
completion of the building’s construction and will escalate
based on the annual inflation rate.
The Company is self-insured for most domestic workers’
compensation, general liability, and automotive liability losses
subject to per occurrence and aggregate annual liability
limitations. The Company is also self-insured for healthcare
claims for eligible participating employees subject to certain
deductibles and limitations. The Company determines its
liability for claims incurred but not reported based on an
actuarial analysis.
The Company has claims for certain years which are insured by a
third party carrier, which is currently insolvent. The Company
is currently reviewing its options to replace this carrier with
another insurance carrier. If the Company is unable to
successfully replace the carrier and the existing carrier goes
into receivership, then there is the possibility for the State,
in which the claim is reported, to take over the pending and
potential claims. This may result in an increase in premiums for
claims related to this period.
|
|
| Note 20. |
Segment Reporting |
The Company operates in the fast food hamburger restaurant
industry. Revenues include retail sales at Company-owned
restaurants and franchise revenues. The business is managed as
distinct geographic segments: United States and Canada, Europe,
Middle East and Africa and Asia Pacific (“EMEA/
APAC”), and Latin America.
Unallocated amounts reflected in certain tables below included
corporate support costs in areas such as facilities, finance,
human resources, information technology, legal, marketing, and
supply chain management.
The following tables present revenues, operating income,
depreciation and amortization, total assets, long-lived assets
and capital expenditures information by geographic segment (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
1,382 |
|
|
$ |
1,275 |
|
|
$ |
1,117 |
|
|
EMEA/ APAC
|
|
|
576 |
|
|
|
586 |
|
|
|
566 |
|
|
Latin America
|
|
|
90 |
|
|
|
79 |
|
|
|
71 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
$ |
2,048 |
|
|
$ |
1,940 |
|
|
$ |
1,754 |
|
| |
|
|
|
|
|
|
|
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Company’s total
revenues. Revenues in the United States totaled
$1,239 million for the year ended June 30, 2006,
$1,146 million for the year ended June 30, 2005 and
$997 million for the year ended June 30, 2004.
Revenues in Germany totaled $269 million for the year ended
June 30, 2006, $262 million for the year ended
June 30, 2005 and $236 million for the year ended
June 30, 2004.
100
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
295 |
|
|
$ |
255 |
|
|
$ |
115 |
|
|
EMEA/ APAC
|
|
|
62 |
|
|
|
36 |
|
|
|
95 |
|
|
Latin America
|
|
|
29 |
|
|
|
25 |
|
|
|
26 |
|
|
Unallocated
|
|
|
(216 |
) |
|
|
(165 |
) |
|
|
(163 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total operating income
|
|
|
170 |
|
|
|
151 |
|
|
|
73 |
|
| |
Interest expense, net
|
|
|
72 |
|
|
|
73 |
|
|
|
64 |
|
| |
Loss on early distinguishment of debt
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income before income taxes
|
|
|
80 |
|
|
|
78 |
|
|
|
9 |
|
| |
Income tax expense
|
|
|
53 |
|
|
|
31 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
60 |
|
|
$ |
52 |
|
|
$ |
56 |
|
|
EMEA/ APAC
|
|
|
9 |
|
|
|
4 |
|
|
|
(13 |
) |
|
Latin America
|
|
|
3 |
|
|
|
2 |
|
|
|
(1 |
) |
|
Unallocated
|
|
|
16 |
|
|
|
16 |
|
|
|
21 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total depreciation and amortization
|
|
$ |
88 |
|
|
$ |
74 |
|
|
$ |
63 |
|
| |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the year ended
June 30, 2004 reflects the initial period of amortization
of unfavorable leases recorded as part of the Transaction.
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Assets:
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
1,978 |
|
|
$ |
2,433 |
|
|
EMEA/ APAC
|
|
|
498 |
|
|
|
220 |
|
|
Latin America
|
|
|
45 |
|
|
|
47 |
|
|
Unallocated
|
|
|
31 |
|
|
|
23 |
|
| |
|
|
|
|
|
|
| |
Total assets
|
|
$ |
2,552 |
|
|
$ |
2,723 |
|
| |
|
|
|
|
|
|
101
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
| |
|
| |
|
| |
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
854 |
|
|
$ |
892 |
|
|
EMEA/ APAC
|
|
|
114 |
|
|
|
102 |
|
|
Latin America
|
|
|
35 |
|
|
|
31 |
|
|
Unallocated
|
|
|
31 |
|
|
|
23 |
|
| |
|
|
|
|
|
|
| |
Total long-lived assets
|
|
$ |
1,034 |
|
|
$ |
1,048 |
|
| |
|
|
|
|
|
|
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 Company’s total
long-lived assets as of June 30, 2006 and 2005. Long-lived
assets in the United States, including the unallocated portion,
totaled $813 million and $845 million at June 30,
2006 and 2005, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
June 30, | |
| |
|
| |
| |
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
43 |
|
|
$ |
40 |
|
|
$ |
36 |
|
|
EMEA/ APAC
|
|
|
17 |
|
|
|
27 |
|
|
|
28 |
|
|
Latin America
|
|
|
10 |
|
|
|
8 |
|
|
|
6 |
|
|
Unallocated
|
|
|
15 |
|
|
|
18 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total capital expenditures
|
|
$ |
85 |
|
|
$ |
93 |
|
|
$ |
81 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 21. |
Quarterly Financial Data (Unaudited) |
Summarized unaudited quarterly financial data (in millions,
except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarters Ended | |
| |
|
| |
| |
|
September 30, 2005 | |
|
December 31, 2005 | |
|
March 31, 2006 | |
|
June 30, 2006 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
$ |
508 |
|
|
$ |
512 |
|
|
$ |
495 |
|
|
$ |
533 |
|
|
Operating income
|
|
|
72 |
|
|
|
70 |
|
|
|
14 |
|
|
|
14 |
|
|
Net income (loss)
|
|
|
22 |
|
|
|
27 |
|
|
|
(12 |
) |
|
|
(10 |
) |
|
Basic earnings (loss) per share
|
|
|
0.21 |
|
|
|
0.25 |
|
|
|
(0.11 |
) |
|
|
(0.08 |
) |
|
Diluted earnings (loss) per share
|
|
$ |
0.20 |
|
|
$ |
0.24 |
|
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarters Ended | |
| |
|
| |
| |
|
September 30, 2004 | |
|
December 31, 2004 | |
|
March 31, 2005 | |
|
June 30, 2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
$ |
481 |
|
|
$ |
488 |
|
|
$ |
468 |
|
|
$ |
503 |
|
|
Operating income
|
|
|
56 |
|
|
|
54 |
|
|
|
17 |
|
|
|
24 |
|
|
Net income
|
|
|
21 |
|
|
|
23 |
|
|
|
1 |
|
|
|
2 |
|
|
Basic earnings per share
|
|
|
0.20 |
|
|
|
0.22 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
Diluted earnings per share
|
|
$ |
0.20 |
|
|
$ |
0.21 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
102
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Quarterly results were impacted by timing of expenses and
charges which affect comparability of results. The impact of
these items during each quarter for fiscal 2006 and 2005 was as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Quarters Ended | |
| |
|
| |
| |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
| |
|
2006 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Franchise system distress impact(a)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3 |
) |
|
$ |
(1 |
) |
|
$ |
— |
|
|
$ |
1 |
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Franchise system distress impact(b)
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
9 |
|
|
|
9 |
|
|
|
8 |
|
| |
Global reorganization and realignment
|
|
|
7 |
|
|
|
2 |
|
|
|
1 |
|
|
|
— |
|
|
|
7 |
|
|
|
4 |
|
|
|
3 |
|
|
|
3 |
|
| |
Compensatory make-whole payment
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Executive severance
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total effect on SG&A
|
|
|
11 |
|
|
|
36 |
|
|
|
1 |
|
|
|
1 |
|
|
|
9 |
|
|
|
13 |
|
|
|
12 |
|
|
|
11 |
|
|
Fees paid to affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Management fee
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
| |
Management agreement termination fee
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total fees paid to affiliates
|
|
|
31 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
Other operating (income) expenses (“OIE”), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Franchise system distress impact(c)
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
1 |
|
| |
Loss on asset disposals and asset impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total effect on OIE, net
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
— |
|
|
|
9 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
1 |
|
| |
Total effect on income from operations
|
|
|
43 |
|
|
|
36 |
|
|
|
5 |
|
|
|
4 |
|
|
|
17 |
|
|
|
34 |
|
|
|
10 |
|
|
|
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on $350 million loan paid-off at IPO
|
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Loss on early extinguishment of debt
|
|
|
4 |
|
|
|
1 |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total effect on income before income taxes
|
|
$ |
50 |
|
|
$ |
40 |
|
|
$ |
5 |
|
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
34 |
|
|
$ |
10 |
|
|
$ |
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents revenues not recognized and (recoveries) of
revenues previously not recognized. |
| |
|
(b) |
|
Represents bad debt expense (recoveries), incremental
advertising contributions and the internal and external costs of
FFRP program administration. |
| |
|
(c) |
|
Represents (recoveries) reserves on acquired debt, net
and other items included within operating (income) expenses,
net. |
|
|
| Note 22. |
New Accounting Pronouncements |
In December 2004, the FASB issued Statement No. 123
(revised 2004), SFAS No. 123(R), which is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”). SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB
No. 25”). SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative. Under SFAS No. 123(R) the effective date
for a nonpublic entity that becomes a public entity after
June 15, 2005 is the first interim or annual reporting
period beginning after becoming a public company. Further,
SFAS No. 123(R) states that an entity that makes a
filing with a regulatory agency in
103
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
preparation for the sale of any class of equity securities in a
public market is considered a public entity for purposes of
SFAS No. 123(R). The Company implemented
SFAS No. 123(R) effective July 1, 2006. As a
result, after the filing date of a registration statement in
connection with the Company’s initial public offering of
its common stock, the Company is required to apply the modified
prospective transition method to any share-based payments issued
subsequent to the filing of the registration statement but prior
to the effective date of the Company’s adoption of
SFAS No. 123(R). Under the modified prospective
transition method, compensation expense is recognized for any
unvested portion of the awards granted between filing date and
adoption date of SFAS No. 123(R) over the remaining
vesting period of the awards beginning on the adoption date for
the Company, July 1, 2006.
As permitted by SFAS No. 123, for periods prior to
July 1, 2006 the Company accounted for share-based payments
to employees using APB No. 25’s intrinsic value method
and, as such, recognized no compensation expense for employee
stock options. As the Company currently applies
SFAS No. 123 pro forma disclosure using the minimum
value method of accounting, the Company is required to adopt
SFAS No. 123(R) using the prospective transition
method. Under the modified prospective transition method,
non-public entities that previously applied SFAS No.S 123
using the minimum value method continue to account for
non-vested awards outstanding at the date of adoption of
SFAS No. 123(R) in the same manner as they had been
accounted to prior to adoption. The Company currently accounts
for equity awards using the minimum value method under APB
No. 25, and will continue to apply APB No. 25 to
equity awards outstanding at the adoption date of
SFAS No. 123(R). The Company will not recognize
compensation expense for awards issued prior to the date of
adoption, unless those awards are modified after the Company
became a public company, as described above.
For any awards granted subsequent to the adoption of
SFAS No. 123(R), compensation expense will be
recognized generally over the vesting period of the award.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. The first
step is to determine whether it is more-likely-than-not that a
tax position will be sustained upon examination based on the
technical merits of the position. The second step is the
measurement of any tax positions that meet the
more-likely-than-not recognition threshold is measured to
determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount
of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. An enterprise that presents a
classified statement of financial position should classify a
liability for unrecognized tax benefits as current to the extent
that the enterprise anticipates making a payment within one year
or the operating cycle. FIN 48 is effective for fiscal
years beginning after December 15, 2006 or fiscal year 2008
for the Company. The Company is currently evaluating the impact
that FIN 48 may have on our statements of operations and
statement of financial position.
|
|
| Note 23. |
Subsequent Event |
On July 31, 2006 the Company prepaid an additional
$50 million of term debt reducing the total outstanding
debt balance to $948 million. As a result of this payment,
the next scheduled principal payment on the amended facility is
December 31, 2008.
104
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the
participation of the Company’s management, including the
Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of
June 30, 2006. Based on that evaluation, the CEO and CFO
concluded that the Company’s disclosure controls and
procedures were effective as of such date to ensure that
information required to be disclosed in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Section 404 Compliance Project
Beginning with the fiscal year ending June 30, 2007,
Section 404 of the Sarbanes-Oxley Act of 2002 will require
us to include management’s report on our internal control
over financial reporting in our Annual Report on
Form 10-K. The
internal control report must contain (1) a statement of
management’s responsibility for establishing and
maintaining adequate internal control over our financial
reporting, (2) a statement identifying the framework used
by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting,
(3) management’s assessment of the effectiveness of
our internal control over financial reporting as of the end of
our most recent fiscal year, including a statement as to whether
or not our internal control over financial reporting is
effective, and (4) a statement that our registered
independent public accounting firm has issued an attestation
report on management’s assessment of our internal control
over financial reporting.
In order to achieve compliance with Section 404 within the
prescribed period, management has commenced a Section 404
compliance project under which management has adopted a detailed
project work plan to assess the adequacy of our internal control
over financial reporting, remediate any control deficiencies
that may be identified, validate through testing that controls
are functioning as documented and implement a continuous
reporting and improvement process for internal control over
financial reporting. During fiscal 2006 there have been no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitation of the Effectiveness of Internal
Control
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the internal control system are met. Because of
the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected.
|
|
| Item 9B. |
Other Information |
None.
Part III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The Information required by this Item, other than the
information regarding our executive officers set forth below
required by Item 401 of
Regulation S-K, is
incorporated herein by reference from the Company’s
definitive proxy statement to be filed no later than
120 days after June 30, 2006. We refer to this proxy
statement as the 2006 Proxy Statement.
105
EXECUTIVE OFFICERS OF THE REGISTRANT
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
John W. Chidsey
|
|
|
44 |
|
|
Chief Executive Officer and Director |
|
Russell B. Klein
|
|
|
49 |
|
|
President, Global Marketing Strategy and Innovation |
|
Ben K. Wells
|
|
|
52 |
|
|
Chief Financial Officer and Treasurer |
|
James F. Hyatt
|
|
|
50 |
|
|
Chief Operations Officer |
|
Peter C. Smith
|
|
|
50 |
|
|
Chief Human Resources Officer |
|
Anne Chwat
|
|
|
47 |
|
|
General Counsel and Secretary |
|
Charles M. Fallon, Jr.
|
|
|
43 |
|
|
President, North America |
|
Amy Wagner
|
|
|
40 |
|
|
Senior Vice President, Investor Relations |
|
Christopher M. Anderson
|
|
|
39 |
|
|
Vice President and Controller |
John W. Chidsey has served as our Chief Executive Officer
and a member of our board since April 2006. 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 of 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
and Treasurer since April 2006. From May 2005 to April 2006,
Mr. Wells served as our Senior Vice President, 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.
James F. Hyatt has served as our Chief Operations Officer
since August 2005. Mr. Hyatt had previously served as
Executive Vice President, U.S. Franchise Operations from
July 2004 to August 2005 and Senior Vice President,
U.S. Franchise Operations from February 2004 to July 2004.
Mr. Hyatt joined us as Senior Vice President, Operations
Services and Programs in May 2002. From 1995 to May 2002,
Mr. Hyatt was a Burger King franchisee in Atlanta,
Georgia.
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 and
Secretary since September 2004. 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.
Amy Wagner has served as our Senior Vice President,
Investor Relations since April 2006. From February 1990 to April
2006, Ms. Wagner served in various corporate finance
positions at Ryder System, Inc.,
106
including as Vice President, Risk Management and Insurance
Operations from January 2003 to April 2006 and Group Director,
Investor Relations from June 2001 to January 2003.
Christopher M. Anderson has served as our Vice President
and Controller since February 2005. From May 2002 to February
2005, Mr. Anderson served as Director of Finance and
Controller for a division of Hewlett-Packard. From February 2000
through May 2002, he served as Director of Finance and
Controller for a division of Compaq Computer Corporation.
|
|
| Item 11. |
Executive Compensation |
Incorporated herein by reference from the Company’s 2006
Proxy Statement.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Incorporated herein by reference from the Company’s 2006
Proxy Statement.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
Incorporated herein by reference from the Company’s 2006
Proxy Statement.
|
|
| Item 14. |
Principal Accounting Fees and Services |
Incorporated herein by reference from the Company’s 2006
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 |
| |
|
|
| |
3 |
.1 |
|
Amended and Restated Certificate of Incorporation of Burger King
Holdings, Inc. |
| |
3 |
.2 |
|
Amended and Restated By-Laws of Burger King Holdings, Inc. |
| |
4 |
.1* |
|
Form of Common Stock Certificate |
| |
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 |
107
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
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 |
| |
10 |
.3* |
|
Form of Management Subscription and Shareholders’ Agreement
among Burger King Holdings, Inc., Burger King Corporation and
its officers |
| |
10 |
.4* |
|
Form of Board Member Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and its directors |
| |
10 |
.5* |
|
Amendment to the Management Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and John W. Chidsey |
| |
10 |
.6* |
|
Management Subscription and Shareholders’ Agreement among
Burger King Holdings, Inc., Burger King Corporation and Gregory
D. Brenneman |
| |
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 |
| |
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 |
| |
10 |
.9* |
|
Lease Agreement, dated as of May 10, 2005, between CM
Lejeune, Inc. and Burger King Corporation |
| |
10 |
.10* |
|
Burger King Holdings, Inc. Equity Incentive Plan |
| |
10 |
.11* |
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan |
| |
10 |
.12* |
|
Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan |
| |
10 |
.13* |
|
Form of Management Restricted Unit Agreement |
| |
10 |
.14* |
|
Form of Amendment to Management Restricted Unit Agreement |
| |
10 |
.15* |
|
Management Restricted Unit Agreement among John W. Chidsey,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of October 8, 2004 |
| |
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 |
| |
10 |
.17* |
|
Form of 2003 Management Stock Option Agreement |
| |
10 |
.18* |
|
Form of 2005 Management Stock Option Agreement |
| |
10 |
.19* |
|
Form of Board Member Stock Option Agreement |
| |
10 |
.20* |
|
Form of Special Management Stock Option Agreement among John W.
Chidsey, Burger King Holdings, Inc. and Burger King Corporation |
| |
10 |
.21* |
|
Management Stock Option Agreement among Gregory D. Brenneman,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of August 1, 2004 |
108
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
10 |
.22* |
|
Stock Option Agreement among Armando Codina, Burger King
Holdings, Inc. and Burger King Corporation, dated as of
February 14, 2006 |
| |
10 |
.23* |
|
Employment Agreement between John W. Chidsey and Burger King
Corporation, dated as of April 7, 2006 |
| |
10 |
.24* |
|
Employment Agreement between Russell B. Klein and Burger King
Corporation, dated as of April 20, 2006 |
| |
10 |
.25* |
|
Employment Agreement between Ben K. Wells, and Burger King
Corporation, dated as of April 7, 2006 |
| |
10 |
.26* |
|
Employment Agreement between James F. Hyatt and Burger King
Corporation, dated as of April 20, 2006 |
| |
10 |
.27* |
|
Employment Agreement between Peter C. Smith and Burger King
Corporation, dated as of April 20, 2006 |
| |
10 |
.28* |
|
Separation and Consulting Services Agreement between Gregory D.
Brenneman and Burger King Corporation, dated as of April 6,
2006 |
| |
10 |
.29* |
|
Separation Agreement between Bradley Blum and Burger King
Corporation, dated as of July 30, 2004 |
| |
10 |
.30* |
|
Restricted Stock Unit Award Agreement between Burger King
Holdings, Inc. and John W. Chidsey, dated as of May 2006 |
| |
10 |
.31* |
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Omnibus Incentive Plan |
| |
10 |
.32* |
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Equity Incentive Plan |
| |
10 |
.33* |
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. 2006 Omnibus Incentive Plan |
| |
10 |
.34* |
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. Equity Incentive Plan |
| |
10 |
.35** |
|
Form of Performance Awards Agreement under the Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan |
| |
14 |
|
|
Burger King Code of Business Ethics and Conduct |
| |
21 |
.1 |
|
List of Subsidiaries of the Registrant |
| |
31 |
.1 |
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| |
31 |
.2 |
|
Certification of Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| |
32 |
.1 |
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
| |
32 |
.2 |
|
Certification of the Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
| * |
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on
Form S-1 (File
No. 333-131897) |
|
|
| ** |
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on
Form 8-K dated
August 14, 2006 |
109
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.
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BURGER KING HOLDINGS, INC. |
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Title: |
Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report been signed by the following persons in the
capacities and on the dates indicated.
| |
|
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|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ John W. Chidsey
John
W. Chidsey |
|
Chief Executive Officer and Director (principal executive
officer) |
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August 31, 2006 |
| |
/s/ Ben K. Wells
Ben
K. Wells |
|
Chief Financial Officer and Treasurer (principal financial
officer) |
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August 31, 2006 |
| |
/s/ Christopher M. Anderson
Christopher
M. Anderson |
|
Vice President and Controller (principal accounting officer) |
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August 31, 2006 |
| |
/s/ Brian Thomas Swette
Brian
Thomas Swette |
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Non-Executive Chairman |
|
August 31, 2006 |
| |
/s/ Andrew B. Balson
Andrew
B. Balson |
|
Director |
|
August 31, 2006 |
| |
/s/ David Bonderman
David
Bonderman |
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Director |
|
August 31, 2006 |
| |
/s/ Richard W. Boyce
Richard
W. Boyce |
|
Director |
|
August 31, 2006 |
| |
/s/ David A. Brandon
David
A. Brandon |
|
Director |
|
August 31, 2006 |
| |
/s/ Armando Codina
Armando
Codina |
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Director |
|
August 31, 2006 |
| |
/s/ Peter Raemin Formanek
Peter
Raemin Formanek |
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Director |
|
August 31, 2006 |
| |
/s/ Manny Garcia
Manny
Garcia |
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Director |
|
August 31, 2006 |
110
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| Signature |
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Title |
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Date |
| |
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| |
/s/ Adrian Jones
Adrian
Jones |
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Director |
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August 31, 2006 |
| |
/s/ Sanjeev k. Mehra
Sanjeev
k. Mehra |
|
Director |
|
August 31, 2006 |
| |
/s/ Stephen G. Pagliuca
Stephen
G. Pagliuca |
|
Director |
|
August 31, 2006 |
| |
/s/ Kneeland C. Youngblood
Kneeland
C. Youngblood |
|
Director |
|
August 31, 2006 |
111
EXHIBITS
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
3 |
.1 |
|
Amended and Restated Certificate of Incorporation of Burger King
Holdings, Inc. |
| |
3 |
.2 |
|
Amended and Restated By-Laws of Burger King Holdings, Inc. |
| |
4 |
.1* |
|
Form of Common Stock Certificate |
| |
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 |
| |
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 |
| |
10 |
.3* |
|
Form of Management Subscription and Shareholders’ Agreement
among Burger King Holdings, Inc., Burger King Corporation and
its officers |
| |
10 |
.4* |
|
Form of Board Member Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and its directors |
| |
10 |
.5* |
|
Amendment to the Management Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and John W. Chidsey |
| |
10 |
.6* |
|
Management Subscription and Shareholders’ Agreement among
Burger King Holdings, Inc., Burger King Corporation and Gregory
D. Brenneman |
| |
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 |
| |
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 |
| |
10 |
.9* |
|
Lease Agreement, dated as of May 10, 2005, between CM
Lejeune, Inc. and Burger King Corporation |
| |
10 |
.10* |
|
Burger King Holdings, Inc. Equity Incentive Plan |
| |
10 |
.11* |
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan |
| |
10 |
.12* |
|
Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan |
| |
10 |
.13* |
|
Form of Management Restricted Unit Agreement |
| |
10 |
.14* |
|
Form of Amendment to Management Restricted Unit Agreement |
| |
10 |
.15* |
|
Management Restricted Unit Agreement among John W. Chidsey,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of October 8, 2004 |
| |
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 |
| |
10 |
.17* |
|
Form of 2003 Management Stock Option Agreement |
112
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
10 |
.18* |
|
Form of 2005 Management Stock Option Agreement |
| |
10 |
.19* |
|
Form of Board Member Stock Option Agreement |
| |
10 |
.20* |
|
Form of Special Management Stock Option Agreement among John W.
Chidsey, Burger King Holdings, Inc. and Burger King Corporation |
| |
10 |
.21* |
|
Management Stock Option Agreement among Gregory D. Brenneman,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of August 1, 2004 |
| |
10 |
.22* |
|
Stock Option Agreement among Armando Codina, Burger King
Holdings, Inc. and Burger King Corporation, dated as of
February 14, 2006 |
| |
10 |
.23* |
|
Employment Agreement between John W. Chidsey and Burger King
Corporation, dated as of April 7, 2006 |
| |
10 |
.24* |
|
Employment Agreement between Russell B. Klein and Burger King
Corporation, dated as of April 20, 2006 |
| |
10 |
.25* |
|
Employment Agreement between Ben K. Wells, and Burger King
Corporation, dated as of April 7, 2006 |
| |
10 |
.26* |
|
Employment Agreement between James F. Hyatt and Burger King
Corporation, dated as of April 20, 2006 |
| |
10 |
.27* |
|
Employment Agreement between Peter C. Smith and Burger King
Corporation, dated as of April 20, 2006 |
| |
10 |
.28* |
|
Separation and Consulting Services Agreement between Gregory D.
Brenneman and Burger King Corporation, dated as of April 6,
2006 |
| |
10 |
.29* |
|
Separation Agreement between Bradley Blum and Burger King
Corporation, dated as of July 30, 2004 |
| |
10 |
.30* |
|
Restricted Stock Unit Award Agreement between Burger King
Holdings, Inc. and John W. Chidsey, dated as of May 2006 |
| |
10 |
.31* |
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Omnibus Incentive Plan |
| |
10 |
.32* |
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Equity Incentive Plan |
| |
10 |
.33* |
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. 2006 Omnibus Incentive Plan |
| |
10 |
.34* |
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. Equity Incentive Plan |
| |
10 |
.35** |
|
Form of Performance Awards Agreement under the Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan |
| |
14 |
|
|
Burger King Code of Business Ethics and Conduct |
| |
21 |
.1 |
|
List of Subsidiaries of the Registrant |
| |
31 |
.1 |
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| |
31 |
.2 |
|
Certification of Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
| |
32 |
.1 |
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
| |
32 |
.2 |
|
Certification of the Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
| * |
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on
Form S-1 (File
No. 333-131897) |
|
|
| ** |
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on
Form 8-K dated
August 14, 2006 |
113