Burger King Holdings, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
June 30, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32875
BURGER KING HOLDINGS,
INC.
(Exact name of Registrant as
Specified in Its Charter)
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Delaware
(State or Other
Jurisdiction of
Incorporation or Organization)
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75-3095469
(I.R.S. Employer
Identification Number)
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5505 Blue Lagoon Drive, Miami,
Florida
(Address of Principal
Executive Offices)
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33126
(Zip Code)
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Registrants
telephone number, including area code
(305) 378-3000
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per
share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark 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 Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, 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 þ Non-accelerated
filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of December 29, 2006
was $666 million.
The number of shares outstanding of the Registrants Common
Stock as of August 31, 2007 was 135,142,912.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from
Registrants definitive proxy statement for the 2007 annual
meeting of stockholders, which proxy will be filed no later than
120 days after the close of the registrants fiscal
year ended June 30, 2007.
BURGER
KING HOLDINGS, INC.
2007
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
Burger
King®,
Whopper®,
Double
Whopper®,
Triple
Whopper®,
Have It Your
Way®,
Burger King Bun Halves and Crescent Logo,
BKtm
Value Menu,
BKtm
Breakfast Value Menu and
BKtm
Stacker are trademarks of Burger King Brands, Inc., a
wholly-owned subsidiary of Burger King Holdings, Inc. References
to fiscal 2007, fiscal 2006 and fiscal 2005 in this
Form 10-K
are to the fiscal years ended June 30, 2007, 2006 and 2005,
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 the industry research firm NPD Group, Inc.
(which prepares and disseminates Consumer Reported Eating Share
Trends, or CREST data) or compiled from market research reports,
analyst reports and other publicly available information. All
industry and market data that are not cited as being from a
specified source are from internal analyses based upon data
available from known sources or other proprietary research and
analysis.
2
Overview
Burger King Holdings, Inc. (we or the
Company) is a Delaware corporation formed on
July 23, 2002. Our restaurant system includes restaurants
owned by the Company and by franchisees. We are the worlds
second largest fast food hamburger restaurant, or FFHR, chain as
measured by the total number of restaurants and sales
system-wide. As of June 30, 2007, we owned or franchised a
total of 11,283 restaurants in 69 countries and
U.S. territories, of which 1,303 restaurants were
company-owned and 9,980 were owned by our franchisees. Of these
restaurants, 7,171 or 64% were located in the United States and
4,112 or 36% 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 FFHR category. We
believe that this restaurant ownership mix provides us with a
strategic advantage because the capital required to grow and
maintain the Burger King system is funded primarily by
franchisees, while still giving us a sizeable base of company
restaurants to demonstrate credibility with franchisees in
launching new initiatives. As a result of the high percentage of
franchise restaurants in our system, we have lower capital
requirements compared to our major competitors.
Our
History
Burger King Corporation, which we refer to as BKC, was founded
in 1954 when James McLamore and David Edgerton opened the first
Burger King restaurant in Miami, Florida. The Whopper
sandwich was introduced in 1957. BKC opened its first
international restaurant in the Bahamas in 1966. BKC also
established its brand identity with the introduction of the
bun halves logo in 1969 and the launch of the first
Have It Your Way campaign in 1974. BKC introduced
drive-thru service, designed to satisfy customers
on-the-go in 1975.
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to
Minneapolis-based The Pillsbury Company. 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. On December 13, 2002, Diageo
plc sold BKC to private equity funds controlled by TPG Capital,
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. In May 2006, we
issued and sold 25 million shares of common stock and our
Sponsors sold 3.75 million shares of common stock at a
price of $17.00 per share in our initial public offering. Upon
completion of the offering, our common stock became listed on
the NYSE under the symbol 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 annual rate
of 4.9% over the past 10 years, totaling approximately
$221 billion for the
12-month
period ended June 30, 2007. According to NPD Group, Inc.,
QSR sales are projected to increase at an annual rate of 4.0%
between 2007 and 2012.
Furthermore, 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
3
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.
According to NPD Group, Inc., the FFHR category is the largest
category in the QSR segment, generating sales of over
$59 billion in the United States for the
12-month
period ended June 30, 2007 representing 27% of total QSR
sales. The FFHR category grew 5% in terms of sales during the
same period and, according to NPD Group, Inc., is expected to
increase at an average rate of 3.5% per year over the next five
years. For the
12-month
period ended June 30, 2007, the top three FFHR chains
(McDonalds, Burger King and Wendys) accounted for
73% of the categorys total sales, with approximately 14%
attributable to Burger King.
Our
Competitive Strengths
We believe that we are well-positioned to capitalize on the
following competitive strengths to achieve future growth:
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Distinctive brand with global
platform. We believe that our Burger King
and Whopper brands are two of the most
widely-recognized consumer brands in the world. We have one of
the largest restaurant networks in the world, with 11,283
restaurants operating in 69 countries and U.S. territories,
of which 4,112 are located in our international markets. During
fiscal 2007 our franchisees opened restaurants in four new
international markets: Poland, Japan, Indonesia and Egypt. We
believe that the demand for new international franchise
restaurants is growing and that our global platform will allow
us to leverage our established infrastructure to significantly
increase our international restaurant count with limited
incremental investment or expense.
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Attractive business
model. Approximately 90% of our restaurants
are franchised, which is a higher percentage than that of our
major competitors in the FFHR category. We believe that our
franchise restaurants will generate a consistent, profitable
royalty stream to us, with minimal ongoing capital expenditures
or incremental expense by us. We also believe this will provide
us with significant cash flow to reinvest in growing our brand
and enhancing shareholder value. Although we believe that this
restaurant ownership mix is beneficial to us, it also presents a
number of drawbacks, such as our limited control over
franchisees and limited ability to facilitate changes in
restaurant ownership.
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Innovative marketing campaigns, creative advertising and
strategic sponsorships. We utilize our
successful promotions, advertising and sponsorships to drive
sales and generate restaurant traffic. In June and July of 2007,
our U.S. television advertisements ranked in the top
position for most liked new ads for all national
advertisers according to advertising industry researcher IAG.
Our successful
Xbox®
game collection sold more than 3.2 million copies, making
it the best-selling suite of video games of the 2006 holiday
season. We are also reaching out to a broad spectrum of
restaurant guests with mass appeal sports and entertainment
sponsorships, such as the National Football League (NFL) and
NASCAR, music and pop culture icon, Diddy, and family oriented
movie tie-ins such as
Spider-Mantm
3 and The
Simpsonstm
Movie. Our interactive promotional site, www.simpsonizeme.com,
became the fastest growing initiative online with over
10 million unique visitors and over 500 million hits
to date. As part of our efforts to increase topical relevance
for our brand, we have extended our successful relationship with
Microsoft through a mutual partnership on the third installment
of the popular videogame franchise, Halo
3tm.
Additionally, our brand has become the basis of present and
future revenue streams through licensed merchandise and grocery
snack products.
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Experienced management team. We have a
seasoned management team with significant experience. John
Chidsey, our Chief Executive Officer, has extensive experience
in managing franchised and branded businesses, including the
Avis
Rent-A-Car
and Budget
Rent-A-Car
systems, Jackson Hewitt Tax Services and PepsiCo. Russell Klein,
our President, Global Marketing, Strategy and Innovation, has
27 years of retail and consumer marketing experience,
including at 7-Eleven Inc. Ben Wells, our Chief Financial
Officer, has 26 years of finance experience, including at
Compaq Computer Corporation and British Petroleum. James Hyatt,
our Chief Operations Officer, has more than 30 years of
brand experience as both a franchisee and senior executive of
BKC. In addition, other members of our management team have
worked at Frito Lay, McDonalds, Pillsbury, Taco Bell and
Wendys.
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Global
Operations
We operate in three reporting business segments: (i) United
States and Canada; (ii) Europe, the Middle East and Africa
and Asia Pacific, or EMEA/APAC; and (iii) Latin America.
Additional financial information about geographic segments is
incorporated herein by reference to Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 and Segment
Reporting in Part II, Item 8 in Note 21 of this
Form 10-K.
United
States and Canada
Restaurant
Operations
Our restaurants are limited-service restaurants of distinctive
design and are generally located in high-traffic areas
throughout the United States and Canada. As of June 30,
2007, 897 company restaurants and 6,591 franchise
restaurants were operating in the United States and Canada. For
fiscal 2007, total system sales in the United States and Canada
were approximately $8.8 billion. We believe our restaurants
appeal to a broad spectrum of consumers, with multiple meal
segments appealing to different customer groups.
Operating Procedures and Hours of
Operation. All of our restaurants must adhere to
strict standardized operating procedures and requirements which
we believe are critical to the image and success of the
Burger King brand. Each restaurant is required to follow
the Manual of Operating Data, an extensive operations manual
containing mandatory restaurant operating standards,
specifications and procedures prescribed from time to time to
assure uniformity of operations and consistent high quality of
products at Burger King restaurants. Among the
requirements contained in the Manual of Operating Data are
standard design, equipment system, color scheme and signage,
uniform operating procedures and standards of quality for
products and services.
Commencing in May 2007, we required restaurants in the United
States to be open seven days per week from 7:00 a.m. to
midnight, subject to certain exceptions. As of June 30,
2007, 84% of Burger King restaurants were open until
midnight or later. In comparison, as of June 30, 2006, 57%
of Burger King restaurants were open until midnight or
later. We believe that reducing the gap between our operating
hours and those of our competitors will be a key component in
capturing a greater share of FFHR sales in the United States and
Canada.
Management. Substantially all of our executive
management, finance, marketing, legal and operations support
functions are conducted from our global 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 restaurants sales volume. Management of
a franchise restaurant is the responsibility of the franchisee,
who is trained in our techniques and is responsible for ensuring
that the day-to-day operations of the restaurant are in
compliance with the Manual of Operating Data.
Restaurant Menu. 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
guests, drive-thru facilities and adjacent parking areas. Some
restaurants are located in airports, shopping malls, toll road
rest areas and educational and sports facilities. In fiscal
2005, we developed new, smaller restaurant designs that reduce
the average building costs by approximately 25%. The seating
capacity for these smaller restaurant designs is between 40 and
80 guests. We believe this seating capacity is adequate since
approximately 62% of our U.S. company restaurant sales are
made at the drive-thru. We and our franchisees have opened 60
new restaurants in the United States and Canada in this format
through June 30, 2007.
5
New Restaurant Development. We employ a
sophisticated and disciplined market planning and site selection
process through which we identify trade areas and approve
restaurant sites throughout the United States and Canada that
will provide for quality expansion. We have established a
development committee to oversee all new restaurant development
within the United States and Canada. Our development
committees objective is to ensure that every proposed new
restaurant location is carefully reviewed and that each location
meets the stringent requirements established by the committee,
which include factors such as site accessibility and visibility,
traffic patterns, signage, parking, site size in relation to
building type and certain demographic factors. Our model for
evaluating sites accounts for potential changes to the site,
such as road reconfiguration and traffic pattern alterations.
Each franchisee wishing to develop a new restaurant is
responsible for selecting a new site location. However, 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.
We and our franchisees opened 89 restaurants and 53 restaurants
in the United States in fiscal 2007 and 2006, respectively. We
and our franchisees closed 125 and 225 restaurants in the United
States during the same periods. We believe that the number of
closures will continue to decline. We have instituted several
initiatives to accelerate restaurant development in the United
States, including reduced upfront franchise fees, process
simplifications and turnkey development assistance programs,
which reduce the time and uncertainty associated with opening
new restaurants.
Company
Restaurants
As of June 30, 2007, we owned and operated 897 restaurants
in the United States and Canada, representing 12% of total
U.S. and Canada system restaurants. Included in this number
are 31 restaurants that we operate but are owned by a joint
venture between us and an independent third party. Out of our
897 company restaurants, we own the properties for 341
restaurants and we lease the remaining 556 properties from
third-party landlords. Our company restaurants in the United
States and Canada generated $1 billion in revenues in
fiscal 2007, or 75% of our total U.S. and Canada revenues
and 48% of our total worldwide revenues. We also use our company
restaurants to test new products and initiatives before rolling
them out to the wider Burger King system.
The following table details the top ten locations of our company
restaurants in the United States and Canada as of June 30,
2007:
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% of Total U.S. and
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Company
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Canada Company
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Rank
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State/Province
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Restaurant Count
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Restaurants
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1
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Florida
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232
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26
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%
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2
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Indiana
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70
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8
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%
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3
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Ontario
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66
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7
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%
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4
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North Carolina
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58
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6
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%
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5
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Massachusetts
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44
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5
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%
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6
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Virginia
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44
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5
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%
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7
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Georgia
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43
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5
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%
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8
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Ohio
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38
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4
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%
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9
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South Carolina
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38
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4
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10
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Connecticut
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33
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4
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Franchise
Operations
General. We grant franchises to operate
restaurants using Burger King trademarks, trade dress and
other intellectual property, uniform operating procedures,
consistent quality of products and services and standard
procedures for inventory control and management.
Our growth and success have been built in significant part upon
our substantial franchise operations. We franchised our first
restaurant in 1961, and as of June 30, 2007, there were
6,591 franchise restaurants, owned by 815 franchise operators,
in the United States and Canada. Franchisees report gross sales
on a monthly basis and pay
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royalties based on reported sales. Franchise restaurants in the
United States and Canada generated revenues of $284 million
in fiscal 2007, or 62% of our total worldwide franchise
revenues. The five largest franchisees in the United States and
Canada in terms of restaurant count represented in the aggregate
approximately 16% of U.S. and Canadian Burger King
restaurants as of June 30, 2007.
The following table details the top ten locations of our
franchisees restaurants in the United States and Canada as
of June 30, 2007:
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% of Total U.S. and
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Franchise
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Canada Franchise
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Rank
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State/Province
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Restaurant Count
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Restaurants
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1
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California
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676
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10
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%
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2
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Texas
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407
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6
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%
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3
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Michigan
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340
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5
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%
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4
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New York
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319
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5
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%
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5
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Ohio
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316
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5
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%
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6
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Florida
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311
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5
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%
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7
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Illinois
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296
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4
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%
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8
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Pennsylvania
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238
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4
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%
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9
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Georgia
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209
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3
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%
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10
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North Carolina
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206
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3
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%
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The following is a list of the five largest franchisees in terms
of restaurant count in the United States and Canada as of
June 30, 2007:
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Restaurant
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Rank
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Name
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Count
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Location
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1
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Carrols Corporation
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326
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Northwest and Midwest
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2
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Heartland Food Corp.
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260
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Mid South and Northwest
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3
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Strategic Restaurants Corp.
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242
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Midwest and Southeast
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4
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Army & Air Force
Exchange Services
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124
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Across the United States
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5
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Quality Dining, Inc.
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123
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Midwest
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Franchise Agreement Terms. For each franchise
restaurant, we enter into a franchise agreement covering a
standard set of terms and conditions. The typical franchise
agreement in the United States and Canada has a
20-year term
(for both initial grants and renewals of franchises) and
contemplates a one-time franchise fee of $50,000, which must be
paid in full before the restaurant opens for business, or in the
case of renewal, before expiration of the current franchise
term. In recent years, however, we have offered franchisees
reduced upfront franchise fees to encourage
U.S. franchisees to open new restaurants.
Recurring fees consist of monthly royalty and advertising
payments. Franchisees in the United States and Canada are
generally required to pay us an advertising contribution equal
to a percentage of gross sales, typically 4%, on a monthly
basis. In addition, most existing franchise restaurants in the
United States and Canada pay a royalty of 3.5% and 4.5% 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. We can control
the growth of our franchisees because we have the right to veto
any restaurant acquisition
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or new restaurant opening. These transactions must meet our
minimum approval criteria to ensure that franchisees are
adequately capitalized and that they satisfy certain other
requirements.
Renewals of Franchise Agreements. 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. To encourage franchisees
to renew their expiring franchise agreements, we agreed, in many
cases, to extend the existing agreements to avoid the closure of
the restaurants by giving franchisees additional time to comply
with our renewal requirements. We also instituted a program in
the United States to allow franchisees 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. Although this
program is now closed, we believe that this program and our
other initiatives were instrumental in maintaining our base of
restaurants and led to an increase in the number of restaurants
with renewed franchise agreements.
Property
Operations
Our property operations consist of restaurants where we lease
the land and often the building to the franchisee. Our real
estate operations in the United States and Canada generated
$85 million of our revenues in fiscal 2007, or 4% of total
worldwide revenue.
For properties that we lease from third-party landlords and
sublease to franchisees, leases generally provide for fixed
rental payments and may provide for contingent rental payments
based on a restaurants annual gross sales. Franchisees who
lease land only or land and building from us do so on a
triple net basis. Under these triple net leases, the
franchisee is obligated to pay all costs and expenses, including
all real property taxes and assessments, repairs and maintenance
and insurance. As of June 30, 2007, we leased or subleased
to franchisees in the United States and Canada 913 properties,
of which we own 460 properties and lease either the land or the
land and building from third-party landlords on the remaining
453 properties.
Europe,
the Middle East and Africa/Asia Pacific
(EMEA/APAC)
Restaurant
Operations
EMEA. EMEA is the second largest geographic
area in the Burger King system behind the United States
as measured by number of restaurants. As of June 30, 2007,
EMEA had 2,248 restaurants in 29 countries and territories,
including 320 company restaurants located in the United
Kingdom (the U.K.), Germany, Spain and The
Netherlands. For fiscal 2007, total system sales in EMEA were
approximately $2.8 billion. The U.K. is the largest market
in EMEA with 552 restaurants as of June 30, 2007.
APAC. As of June 30, 2007, APAC had 644
restaurants in 13 countries and territories, including China,
Malaysia, Thailand, Australia, Philippines, Singapore, New
Zealand, South Korea, Indonesia, and Japan. For fiscal 2007
total system sales in APAC were approximately $742 million.
All of the restaurants in the region other than our nine
restaurants in China are franchised. Australia is the largest
market in APAC, with 309 restaurants as of June 30, 2007,
all of which are franchised and operated under Hungry
Jacks, a brand that we own in Australia and
New Zealand. Australia is the only market in which we
operate under a brand other than Burger King. We believe
there is significant potential for growth in APAC, particularly
in our existing markets of South Korea, Hong Kong, Singapore,
Malaysia, China and the Philippines and in new markets such as
Japan and Indonesia.
Our restaurants located in EMEA/APAC generally adhere to the
standardized operating procedures and requirements followed by
U.S. restaurants. However, regional and country-specific
market conditions often require some variation in our standards
and procedures. Some of the major differences between
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.
8
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. We
and our franchisees are also opening restaurants with the
smaller building designs in EMEA/APAC. We have opened 37 new
restaurants in this format in EMEA/APAC through June 30,
2007.
New Restaurant Development. Unlike the United
States and Canada, where all new development must be approved by
the development committee, our market planning and site
selection process in EMEA/APAC is managed by our regional teams,
who are knowledgeable about the local market. In several of our
markets, there is typically a single franchisee that owns and
operates all of the restaurants within a country. We have
identified particular opportunities for extending the reach of
the Burger King brand in many countries, including, Spain,
Germany, Austria, Switzerland and Italy in EMEA, and Singapore,
Malaysia, the Philippines, China, South Korea and Hong Kong in
APAC. We have also entered into development agreements with new
franchisees for Poland, Japan, Indonesia and Egypt. We are also
considering the possibility of entering into other EMEA/APAC
markets, including countries in Eastern Europe, the
Mediterranean and the Middle East, and we are in the process of
identifying prospective new franchisees for these markets.
Company
Restaurants
As of June 30, 2007, 320 (or 14%) of the restaurants in
EMEA were company restaurants. There are nine company
restaurants in APAC, all of which are located in China.
The following table details company restaurant locations in EMEA
as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
% of Total EMEA
|
|
Rank
|
|
|
Country
|
|
Restaurant Count
|
|
|
Company Restaurants
|
|
|
|
1
|
|
|
Germany
|
|
|
157
|
|
|
|
49
|
%
|
|
2
|
|
|
United Kingdom
|
|
|
96
|
|
|
|
30
|
%
|
|
3
|
|
|
Spain
|
|
|
43
|
|
|
|
13
|
%
|
|
4
|
|
|
Netherlands
|
|
|
24
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
320
|
|
|
|
100
|
%
|
Franchise
Operations
As of June 30, 2007, 2,563 or 89% of our restaurants in
EMEA/APAC were franchised. Some of our international markets,
including Hungary, Portugal, South Korea and the Philippines,
are operated by a single franchisee. Other markets, such as the
U.K., Germany, 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 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/APAC, including, most
recently, Japan and Egypt. 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.
9
The following is a list of the five largest franchisees in terms
of restaurant count in EMEA/APAC as of June 30, 2007:
|
|
|
|
|
|
|
|
|
Rank
|
|
Name
|
|
Restaurant Count
|
|
|
Location
|
|
1
|
|
Hungry Jacks Pty Ltd.
|
|
|
221
|
|
|
Australia
|
2
|
|
Tab Gida Sanayl Ve Ticaret AS
|
|
|
137
|
|
|
Turkey
|
3
|
|
Granada Hospitality Limited
(Compass Group)
|
|
|
97
|
|
|
United Kingdom
|
4
|
|
SRS
|
|
|
87
|
|
|
Korea
|
5
|
|
Olayan
|
|
|
87
|
|
|
Saudi/UAE
|
Property
Operations
Our property operations in EMEA primarily consist of franchise
restaurants located in the U.K., Germany and Spain, which we
lease or sublease to franchisees. We have no franchisee-operated
properties in APAC. Of the 94 properties in EMEA that we lease
or sublease to franchisees, we own four properties and lease the
land and building from third party landlords on the remaining 90
properties. Our EMEA property operations generated
$31 million of our revenues in fiscal 2007, or 27% of our
total worldwide property revenues.
Lease terms on properties that we lease or sublease to our EMEA
franchisees vary from country to country. These leases generally
provide for
25-year
terms, depending on the term of the related franchise agreement.
We lease most of our properties from third party landlords and
sublease them to franchisees. These leases generally provide for
fixed rental payments based on our underlying rent plus a small
markup. In general, franchisees are obligated to pay for all
costs and expenses associated with the restaurant property,
including property taxes, repairs and maintenance and insurance.
In the U.K., many of our leases for our restaurant properties
are subject to rent reviews every five years, which may result
in rent adjustments to reflect current market rents for the next
five years.
Latin
America
As of June 30, 2007, we had 903 restaurants in 25 countries
and territories in Latin America. For fiscal 2007, total system
sales in Latin America were approximately $861 million.
There were 77 company restaurants in Latin America,
all located in Mexico, and 826 franchise restaurants in the
segment as of June 30, 2007. We are the market leader in 16
of our 25 markets in Latin America, including Puerto Rico, in
terms of number of restaurants. Mexico is the largest market in
this segment, with a total of 349 restaurants as of
June 30, 2007, or 39% of the region. Our restaurants in
Mexico have consistently had the highest company restaurant
margins worldwide due to a favorable real estate and labor
environment. In fiscal 2007, we opened 45 new restaurants in
Mexico, of which eight were company restaurants and 37 were
franchise restaurants.
The following is a list of the five largest franchisees in terms
of restaurant count in Latin America as of June 30, 2007:
|
|
|
|
|
|
|
|
|
Rank
|
|
Name
|
|
Restaurant Count
|
|
|
Location
|
|
1
|
|
Caribbean Restaurants, Inc.
|
|
|
171
|
|
|
Puerto Rico
|
2
|
|
ALSEA and affiliates
|
|
|
156
|
|
|
Mexico and Argentina
|
3
|
|
Geboy de Tijuana, S.A. de
C.V.
|
|
|
47
|
|
|
Mexico
|
4
|
|
Salvador Safie, Fernando Safie and
Ricardo Safie
|
|
|
38
|
|
|
Guatemala
|
5
|
|
Operadora Exe S.A. de C.V.
|
|
|
38
|
|
|
Mexico
|
Advertising
and Promotion
We believe sales in the QSR segment can be significantly
affected by the frequency and quality of advertising and
promotional programs. We believe that two of our major
competitive advantages are our strong brand equity and market
position and our global franchise network which allow us to
drive sales through extensive advertising and promotional
programs.
10
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 provide these franchisees with assistance in order
to deliver a consistent global brand message.
In the United States and in those other countries where we have
company restaurants, we coordinate the development, budgeting
and expenditures for all marketing programs, as well as the
allocation of advertising and media contributions among
national, regional and local markets, subject in the United
States to minimum expenditure requirements for media costs and
certain restrictions as to new media channels. We are required,
however, under our U.S. franchise agreements to discuss the
types of media in our advertising campaigns and the percentage
of the advertising fund to be spent on media with the recognized
franchisee association, currently the National Franchisee
Association, Inc. In addition, U.S. franchisees may elect
to participate in certain local advertising campaigns at the
Designated Market Area (DMA) level by making contributions
beyond those required for participation in the national
advertising fund. Currently, 78% of DMAs in the United States
are participating in local advertising campaigns. This allows
local markets to execute customized advertising and promotions
to deliver market specific solutions. We believe that increasing
the level of local advertising makes us more competitive in the
FFHR category.
Our current global marketing strategy is based upon 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 consumer,
the SuperFan, our Have It Your Way brand promise, our
core menu items, such as flame broiled hamburgers, french fries
and soft drinks, the development of innovative products and the
consistent communication of our brand. We concentrate our
marketing on television advertising, which we believe is the
most effective way to reach our target customer, the SuperFan.
SuperFans are consumers who reported eating at a fast food
hamburger outlet nine or more times in the past month. We also
use radio and Internet advertising and other marketing tools on
a more limited basis.
Supply
and Distribution
We establish the standards and specifications for most of the
goods used in the development, improvement and operation of our
restaurants and for the direct and indirect sources of supply of
most of those items. These requirements help us assure the
quality and consistency of the food products sold at our
restaurants and protect and enhance the image of the Burger
King system and the Burger King brand.
In general, we approve the manufacturers of the food, packaging
and equipment products and other products used in Burger King
restaurants, as well as the distributors of these products
to Burger King restaurants. Franchisees are generally
required to purchase these products from approved suppliers. We
consider a range of criteria in evaluating existing and
potential suppliers and distributors, including product and
service consistency, delivery timeliness and financial
condition. Approved suppliers and distributors must maintain
standards and satisfy other criteria on a continuing basis and
are subject to continuing review. Approved suppliers may be
required to bear development, testing and other costs associated
with our evaluation and review.
Restaurant Services, Inc., or RSI, is a not-for-profit,
independent purchasing cooperative formed in 1992 to leverage
the purchasing power of the Burger King system. RSI is
the purchasing agent for the Burger King system in the
United States and negotiates the purchase terms for most
equipment, food, beverages (other than branded soft drinks) and
other products such as promotional toys and paper products used
in our restaurants. RSI is also authorized to purchase and
manage distribution services on behalf of the company
restaurants and franchisees who appoint RSI as their agent for
these purposes. As of June 30, 2007, RSI was appointed the
distribution manager for approximately 93% of the restaurants in
the United States. A subsidiary of RSI is also purchasing food
and paper products for our company and franchise restaurants in
Canada under a contract with us. As of June 30, 2007, four
distributors service approximately 85% of the U.S. system
restaurants and the loss of any one of these distributors would
likely adversely affect our business.
11
There is currently no designated purchasing agent that
represents franchisees in our international regions. However, we
are working closely with our franchisees to implement programs
that leverage our global purchasing power and to negotiate lower
product costs and savings for our restaurants outside of the
United States and Canada. We approve suppliers and use similar
standards and criteria to evaluate international suppliers that
we use for U.S. suppliers. Franchisees may propose
additional suppliers, subject to our approval and established
business criteria.
In fiscal 2000, we entered into long-term exclusive contracts
with The
Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply company
and franchise restaurants with their products, which obligate
Burger King restaurants in the United States to purchase
a specified number of gallons of soft drink syrup. These volume
commitments are not subject to any time limit. As of
June 30, 2007, we estimate that it will take approximately
15 years to complete the
Coca-Cola
and Dr Pepper purchase commitments. 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
Coca-Cola,
the unamortized portion of the cost of installation and the
entire cost of refurbishing and removing the equipment owned by
Coca-Cola
and installed in company restaurants in the three years prior to
the termination.
Research
and Development
Company restaurants play a key role in the development of new
products and initiatives because we can use them to test and
perfect new products, equipment and programs before introducing
them to franchisees, which we believe gives us credibility with
our franchisees in launching new initiatives. This strategy
allows us to keep research and development costs down and
simultaneously facilitates the ability to sell new products and
to launch initiatives both internally to franchisees and
externally to guests.
We operate 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 U.K. 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
believe new product development is critical to our long-term
success and is a significant factor behind our comparable sales
growth. Product innovation begins with an intensive research and
development process that analyzes each potential new menu item,
including market tests to gauge consumer taste preferences, and
includes an ongoing analysis of the economics of food cost,
margin and final price point.
We have developed two new broilers including 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 flexible batch broiler will
reduce operating costs (principally through reduced utility
costs), without sacrificing speed, quality or efficiency. We
have installed the flexible batch broiler in 95% of our company
restaurants in the United States and Canada. In addition,
U.S. franchisees are required to install the new broilers
in their restaurants by January 2010. We have filed a patent
application with respect to the flexible batch broiler
technology and design. We have licensed one of our equipment
vendors on an exclusive basis to manufacture and supply the
flexible batch broiler to the Burger King system
throughout the world.
Management
Information Systems
Franchisees typically use a point of sale, or POS, cash register
system to record all sales transactions at the restaurant. We
have not historically required franchisees to use a particular
brand or model of hardware or software components for their
restaurant system. However, we have established specifications
to reduce cost, improve service and allow better data analysis
and have approved three global POS vendors and one regional
vendor for each of our three segments to sell these systems to
our franchisees. Currently, franchisees report 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.
12
Quality
Assurance
We are focused on achieving a high level of guest satisfaction
through the close monitoring of restaurants for compliance with
our key operations platforms: Clean & Safe,
Hot & Fresh and Friendly & Fast. We have
uniform operating standards and specifications relating to the
quality, preparation and selection of menu items, maintenance
and cleanliness of the premises and employee conduct.
The Clean & Safe certification is administered by an
independent outside vendor whose purpose is to bring heightened
awareness of food safety, and includes immediate
follow-up
procedures to take any action needed to protect the safety of
our customers. We measure our Hot & Fresh and
Friendly & Fast operations platforms principally
through Guest
Tracsm,
a rating system based on survey data submitted by our customers.
We review the overall performance of our operations platforms
through an Operations Excellence Review, or OER, which focuses
on evaluating and improving restaurant operations and guest
satisfaction.
All Burger King restaurants are required to be operated
in accordance with quality assurance and health standards which
we establish, as well as standards set by federal, state and
local governmental laws and regulations. These standards include
food preparation rules regarding, among other things, minimum
cooking times and temperatures, sanitation and cleanliness.
We closely supervise the operation of all of our company
restaurants to help ensure that standards and policies are
followed and that product quality, guest service and cleanliness
of the restaurants are maintained. Detailed reports from
management information systems are tabulated and distributed to
management on a regular basis to help maintain compliance. In
addition, we conduct scheduled and unscheduled inspections of
company and franchise restaurants throughout the Burger King
system.
Intellectual
Property
As of June 30, 2007, we and our wholly-owned subsidiaries,
Burger King Corporation and Burger King Brands, Inc., owned
approximately 2,390 trademark and service mark registrations and
applications and approximately 390 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 McDonalds Corporation, or
McDonalds, and Wendys International, Inc., or
Wendys. To a lesser degree, we compete against national
food service businesses offering alternative menus, such as
Subway, Yum! Brands, Inc.s Taco Bell, Pizza Hut and
Kentucky Fried Chicken, casual restaurant chains, such as
Applebees, Chilis, Ruby Tuesdays and
fast casual restaurant chains, such as Panera Bread,
as well as convenience stores and grocery stores that offer menu
items comparable to that of Burger King restaurants. We
compete on the basis of price, service and location and by
offering quality food products.
Our largest U.S. competitor, McDonalds, has
significant international operations. Non-FFHR based chains,
such as KFC and Pizza Hut, have many outlets in international
markets that compete with Burger King and other FFHR
chains. In addition, Burger King restaurants compete
internationally against local FFHR chains, sandwich shops,
bakeries and single-store locations.
Government
Regulation
We are subject to various federal, state and local laws
affecting the operation of our business, as are our franchisees.
Each Burger King restaurant is subject to licensing and
regulation by a number of governmental authorities, which
include zoning, health, safety, sanitation, building and fire
agencies in the jurisdiction in which
13
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.
Company restaurant operations and our relationships with
franchisees are subject to federal and state antitrust laws.
Company restaurant operations are also subject to federal and
state laws governing such matters as consumer protection,
privacy, wages, working conditions, citizenship requirements and
overtime. Some states have set minimum wage requirements higher
than the federal level. A purported class action was recently
filed against us alleging violations of the Fair and Accurate
Credit Transactions Act or FACTA, which requires that retailers
truncate the credit and debit card numbers
and/or omit
the expiration dates on receipts provided to customers. Similar
complaints have been filed against many retailers.
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, the U.K. and Spain. For example, the New York
City Board of Health has adopted an amendment to the New York
City Health Code that requires New York City restaurants and
other food service establishments to phase out artificial trans
fat (which we currently use in our french fries and 23 other
products) by July 1, 2008. In addition, the City of
Philadelphia has passed a law that requires restaurants to phase
out artificial trans fat by September 1, 2008. Other
counties and municipalities have adopted a ban on trans fat in
restaurant foods, and more than 12 states are considering
adopting such laws. We have begun the rollout of a trans fat
free cooking oil to our company restaurants in the
United States. Two trans fat free oil blends have passed
our operational, supply and consumer criteria, allowing us to
begin the national rollout. We expect that all
U.S. restaurants will be using trans fat free cooking oil
by the end of 2008.
New York Citys Board of Health has also approved menu
labeling legislation that requires restaurant chains to provide
certain nutrition information on menus/menu boards such as:
(i) number of calories; (ii) fat content, including
saturated and trans fats; (iii) number of carbohydrates;
and (iv) milligrams of sodium. Other states and
municipalities have announced they are considering or proposing
menu labeling legislation, including California, Connecticut,
Hawaii, New Jersey, New York, and Chicago. Additional cities or
states may propose to adopt trans fat restrictions, menu
labeling or similar regulations.
In addition, public interest groups have focused attention on
the marketing of high-fat and high-sodium foods to children in a
stated effort to combat childhood obesity, and legislators in
the United States have proposed replacing the self-regulatory
Childrens Advertising Review Board with formal
governmental regulation under the Federal Trade Commission.
Internationally, our company and franchise restaurants are
subject to national and local laws and regulations, which are
generally similar to those affecting our U.S. restaurants,
including laws and regulations concerning franchises, labor,
health, privacy, sanitation and safety. For example, regulators
in the U.K. have adopted restrictions on television advertising
of foods high in fat, salt or sugar targeted at children. In
addition, the Spanish government and certain industry
organizations have focused on reducing advertisements that
promote large portion sizes. Our international restaurants are
also subject to tariffs and regulations on imported commodities
and equipment and laws regulating foreign investment.
14
Working
Capital
Information about the Companys working capital (changes in
current assets and liabilities) is included in
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II,
Item 7 and in the Consolidated Statements of Cash Flows in
Part II, Item 8.
Environmental
Matters
We are not aware of any federal, state or local environmental
laws or regulations that will materially affect our earnings or
competitive position or result in material capital expenditures.
However, we cannot predict the effect on our operations of
possible future environmental legislation or regulations. During
fiscal 2007, there were no material capital expenditures for
environmental control facilities and no such material
expenditures are anticipated.
Customers
Our business is not dependent upon a single customer or a small
group of customers, including franchisees. No franchisees or
customers accounted for more than 10% of total consolidated
revenues in fiscal 2007.
Government
Contracts
No material portion of our business is subject to renegotiation
of profits or termination of contracts or subcontracts at the
election of the U.S. government.
Seasonal
Operations
Our business is moderately seasonal. Restaurant sales are
typically higher in the spring and summer months (our fourth and
first fiscal quarters) when weather is warmer than in the fall
and winter months (our second and third fiscal quarters).
Restaurant sales during the winter are typically highest in
December, during the holiday shopping season. Our restaurant
sales and company restaurant margins are typically lowest during
our third fiscal quarter, which occurs during the winter months
and includes February, the shortest month of the year. Because
our business is moderately seasonal, results for any one quarter
are not necessarily indicative of the results that may be
achieved for any other quarter or for the full fiscal year.
Our
Employees
As of June 30, 2007, we had approximately
39,000 employees in our company restaurants, our field
management offices and our global headquarters. As franchisees
are independent business owners, they and their employees are
not included in our employee count. We consider our relationship
with our employees 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; Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7; and in Financial
Statements and Supplementary Data in Part II,
Item 8 of this
Form 10-K.
Available
Information
The Company makes available free of charge on or through the
Investor Relations section of its internet website at
www.bk.com, this annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
annual proxy statements, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), as soon as reasonably practicable after
electronically filing such material with the Securities and
Exchange Commission (SEC). This information is also
available at www.sec.gov and may also be obtained by
visiting the Public Reference Room of the SEC at
100 F Street, NE, Washington, DC 20549 or by calling
the SEC at
1-800-SEC-0330.
The references to our website
15
address and the SECs website address do not constitute
incorporation by reference of the information contained in these
websites and should not be considered part of this document.
Our Corporate Governance Guidelines, our Code of Business Ethics
and Conduct, our Code of Ethics for Executive Officers, our Code
of Conduct for Directors and our Code of Business Ethics and
Conduct for Vendors are also located within the Investor
Relations section of our website. These documents, as well as
our SEC filings and copies of financial and other information,
are available in print free of charge to any shareholder who
requests a copy from our Investor Relations Department. Requests
to Investor Relations may also be made by calling
(305) 378-7696,
or by sending the request to Investor Relations, Burger King
Holdings, Inc., 5505 Blue Lagoon Drive, Miami, FL 33126.
The Companys Chief Executive Officer, John W. Chidsey,
certified to the New York Stock Exchange (NYSE) on June 12,
2007, pursuant to Section 303A-12 of the NYSEs
listing standards, that he was not aware of any violation by the
Company of the NYSEs corporate governance listing
standards as of that date.
Special
Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect
managements expectations regarding future events and
economic performance are forward-looking in nature and,
accordingly, are subject to risks and uncertainties. These
forward-looking statements include statements regarding our
ability to achieve
and/or
exceed our key financial guidance for fiscal 2008; our intent to
focus on U.S. sales growth and profitability and expand our
international network; our beliefs and expectations regarding
system-wide average restaurant sales; our beliefs and
expectations regarding franchise restaurants, including their
growth potential and our expectations regarding franchisee
distress; our expectations regarding opportunities to enhance
restaurant profitability and margin improvement; our intention
to continue to employ innovative and creative marketing
strategies, including the launching of new and limited time
offer products; our expectations regarding present and future
revenue streams generated through licensed merchandise and
grocery snack products; our exploration of initiatives to reduce
the initial investment expense, time and uncertainty of new
builds; our estimates regarding our liquidity, capital
expenditures and sources of both, and our ability to fund future
operations and obligations; our expectations regarding
restaurant openings/closures and increasing net restaurant
count; our beliefs regarding sales performance in the U.K.; our
estimates regarding the fulfillment of certain volume purchase
commitments; our beliefs regarding the effects of the
realignment of our European and Asian businesses; our beliefs
regarding the Fair and Accurate Credit Transactions Act lawsuit;
our expectations regarding the impact of accounting
pronouncements; our intention to renew hedging contracts; and
our continued efforts to leverage our global purchasing power.
These forward-looking statements are only predictions based on
our current expectations and projections about future events.
Important factors could cause our actual results, level of
activity, performance or achievements to differ materially from
those expressed or implied by these forward-looking statements,
including, but not limited to, the risks and uncertainties
discussed below.
Our
success depends on our ability to compete with our major
competitors.
The restaurant industry is intensely competitive and we compete
in the United States and internationally with many
well-established food service companies on the basis of 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. McDonalds and Wendys are our principal
competitors. As our competitors expand their operations,
including through acquisitions or otherwise, we expect
competition to intensify. We also compete against regional
hamburger restaurant chains, such as Carls Jr., Jack in
the Box and Sonic. Some of our competitors have substantially
greater financial and other resources than we do, which may
allow them to react to changes in pricing, marketing and the
quick service restaurant segment in general better than we can.
To a lesser degree, we compete against national food service
businesses offering alternative menus, such as Subway and Yum!
Brands, Inc.s Taco Bell, Pizza Hut and Kentucky Fried
Chicken, casual restaurant chains, such as Applebees,
Chilis, Ruby Tuesdays and fast casual
restaurant chains, such as Panera Bread, as well as
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convenience stores and grocery stores that offer menu items
comparable to that of Burger King restaurants. In one of
our major European markets, the U.K., much of the growth in the
quick service restaurant segment is expected to come from
bakeries, sandwich shops and new entrants that are appealing to
changes in consumer preferences away from the FFHR category.
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, or a
competitor has more effective advertising and marketing programs
than we do, it could have a material adverse effect on our
financial condition and results of operations. We also compete
with other restaurant chains and other retail businesses for
quality site locations and hourly employees.
If we
fail to successfully implement our international growth
strategy, our ability to increase our revenues and operating
profits could be adversely affected and our overall business
could be adversely affected.
A significant component of our growth strategy involves
increasing our net restaurant count in our international
markets. We can increase our net restaurant count by opening new
international restaurants in both existing and new markets and
by minimizing the number of closures in our existing markets. We
and our franchisees face many challenges in opening new
international restaurants, including, among others:
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the selection and availability of suitable restaurant locations;
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the negotiation of acceptable lease terms;
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the availability of bank credit and the ability of franchisees
to obtain acceptable financing terms;
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securing required foreign governmental permits and approvals;
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securing acceptable suppliers;
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employing and training qualified personnel; and
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consumer preferences and local market conditions.
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For example, in fiscal 2007, site permitting issues delayed
restaurant openings in the Middle East and Germany which
impacted our net restaurant growth in EMEA/APAC and worldwide.
We also experienced a higher than anticipated number of
restaurant closures in fiscal 2007 due to the early closure of
distressed U.K. restaurants. If we and our franchisees are
unable to successfully manage these risks, many of which are
beyond our control, we may not be able to achieve our future net
growth targets and our business and financial results would be
adversely affected.
We expect that most of our international growth will be
accomplished through the opening of additional franchise
restaurants. However, our franchisees may be unwilling or unable
to increase their investment in our system by opening new
restaurants, particularly if their existing restaurants are not
generating positive financial results. Moreover, opening new
franchise restaurants depends, in part, upon the availability of
prospective franchisees with the experience and financial
resources to be effective operators of Burger King
restaurants. In the past, we have approved franchisees that
were unsuccessful in implementing their expansion plans,
particularly in new markets. There can be no assurance that we
will be able to identify franchisees who meet our criteria, or
if we identify such franchisees, that they will successfully
implement their expansion plans.
Our
international operations subject us to additional risks and
costs and may cause our profitability to decline.
As of June 30, 2007, our restaurants are operated, directly
by us or by franchisees, in 68 foreign countries and
U.S. territories (Guam and Puerto Rico, which are
considered part of our international business). During fiscal
2006 and 2007, our revenues from international operations were
approximately $809 million and $930 million, or 40%
and 42% of total revenues, respectively. Unfavorable conditions
can depress sales in a given market and may prompt promotional
or other actions that adversely affect our margins, constrain
our operating flexibility or result in
17
charges, restaurant closures or sales of company restaurants.
Whether we can manage this risk effectively depends mainly on
the following:
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our ability to manage fluctuations in commodity prices, interest
and foreign exchange rates and the effects of local governmental
initiatives to manage national economic conditions such as
consumer spending and inflation rates;
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our ability to manage changing labor conditions and difficulties
in staffing our international operations;
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the impact on our margins of labor costs given our
labor-intensive business model and the long-term trend toward
higher wages in both mature and developing markets;
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our ability to manage consumer preferences and respond to
changes in consumer preferences;
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the effects of legal and regulatory changes and the burdens and
costs of our compliance with a variety of foreign laws;
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the effects of any changes to U.S. laws and regulations
relating to foreign trade and investments;
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the effects of local governmental initiatives to manage national
economic conditions such as consumer spending or wage and
inflation rates;
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the effects of increases in the taxes we pay and other changes
in applicable tax laws;
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our ability to manage political and economic instability and
anti-American
sentiment;
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the risks of operating in markets such as Brazil and China, in
which there are significant uncertainties regarding the
interpretation, application and enforceability of laws and
regulations and the enforceability of contract rights and
intellectual property rights;
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whether we can develop effective initiatives in the U.K. and
other underperforming markets that may be experiencing
challenges such as low consumer confidence levels, slow economic
growth or a highly competitive operating environment;
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the nature and timing of decisions about underperforming markets
or assets, including decisions that result in significant
impairment charges that reduce our earnings; and
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our ability to identify and secure appropriate real estate sites
and to manage the costs and profitability of our growth in light
of competitive pressures and other operating conditions that may
limit pricing flexibility.
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These factors may increase in importance as we expect to open
new company and franchise restaurants in international markets
as part of our growth strategy.
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.
In addition, we are dependent on franchisees to open new
restaurants as part of our growth strategy. Franchisees may not
have access to the financial resources they need in order to
open new restaurants due to the unavailability of credit or
other factors beyond their control. Any significant inability to
obtain necessary financing on acceptable terms, or at all, could
slow our planned growth.
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
18
manner consistent with our standards and requirements, or may
not hire and train qualified managers and other restaurant
personnel. While we ultimately can take action to terminate
franchisees that do not comply with the standards contained in
our franchise agreements, 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. McDonalds
exercises control through its significantly higher percentage of
company restaurants and ownership of franchisee real estate.
Wendys also has a higher percentage of company restaurants
than we do. As a result of the greater number of company
restaurants, McDonalds and Wendys may have a greater
ability to implement operational initiatives and business
strategies, including their marketing and advertising programs.
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. The
cost of food and paper products typically represents
approximately 30% 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 and raw ingredients,
including beef, chicken, cheese and cooking oils. 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, and the highly competitive nature of
our industry may limit our ability to pass increased costs on to
our guests.
We purchase large quantities of beef in the United States, which
represents approximately 20% of our food costs. The market for
beef is particularly volatile and is subject to significant
price fluctuations due to seasonal shifts, climate conditions,
demand for corn (a key ingredient of cattle feed), industry
demand, international commodity markets and other factors.
Demand for corn for use in ethanol, the primary alternative fuel
in the United States, has significantly reduced the supply of
corn for cattle feed and has resulted in higher beef prices. If
the price of beef or other food products that we use in our
restaurants increases in the future and we choose not to pass,
or cannot pass, these increases on to our guests, our operating
margins would decrease.
Increases in energy costs for our company restaurants,
principally electricity for lighting restaurants and natural gas
for our broilers, could adversely affect our operating margins
and our financial results if we choose not to pass, or cannot
pass, these increased costs to our guests. In addition, our
distributors purchase gasoline needed to transport food and
other supplies to us. Any significant increases in energy costs
could result in the imposition of fuel surcharges by our
distributors that could adversely affect our operating margins
and financial results if we chose not to pass, or cannot pass,
these increased costs to our guests.
We
rely on distributors of food, beverages and other products that
are necessary for our and our franchisees operations. If
these distributors fail to provide the necessary products in a
timely fashion, our business would face supply shortages and our
results of operations might be adversely affected.
We and our franchisees are dependent on frequent deliveries of
perishable food products that meet our specifications. Four
distributors service approximately 85% of our U.S. system
restaurants and the loss of any one of these distributors would
likely adversely affect our business. Moreover, in many of our
international markets, including the U.K., we have a sole
distributor that delivers products to all of our restaurants.
Our distributors operate in a competitive and low-margin
business environment and, as a result, they often extend
favorable credit terms to our franchisees. If certain of our
franchisees experience financial distress and do not pay
distributors for products bought from them, those
distributors operations would likely be adversely affected
which could jeopardize their ability to continue to supply us
and our other franchisees with needed products. Finally,
unanticipated demand, problems in production or distribution,
disease or food-borne illnesses, inclement weather, terrorist
attacks or other conditions could result in shortages or
interruptions in the supply of perishable food products. As a
result of the financial distress of our franchisees or
otherwise, we may need to take steps to ensure the continued
supply of products to restaurants in the affected markets, which
could result in increased costs to distribute needed products. A
disruption in our supply and distribution network could have a
severe impact on our and our franchisees ability to
continue to offer menu items to our guests and could adversely
affect our and our franchisees business, results of
operations and financial condition.
19
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 food options, our business could suffer. In
addition, negative publicity about our products could materially
harm our business, results of operations and financial
condition. In recent years, numerous companies in the fast food
industry have introduced products positioned to capitalize on
the growing consumer preference for food products that are
and/or are
perceived to be healthful, nutritious, low in calories and low
in fat content. Our success will depend in part on our ability
to anticipate and respond to changing consumer preferences,
tastes and eating and purchasing habits.
Our 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 guests 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, periods
of prolonged elevated energy prices or due to severe weather
conditions, health epidemics or pandemics, terrorist attacks or
the prospect of such events (such as the potential spread of
avian flu). Any material decline 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.
Our
operating results depend on the effectiveness of our marketing
and advertising programs and franchisee support of these
programs.
Our revenues are heavily influenced by brand marketing and
advertising. Our marketing and advertising programs may not be
successful, which may lead us to fail to attract new guests and
retain existing guests. If our marketing and advertising
programs are unsuccessful, our results of operations could be
materially adversely affected. Moreover, because franchisees and
company restaurants contribute to our advertising fund based on
a percentage of their gross sales, our advertising fund
expenditures are dependent upon sales volumes at system-wide
restaurants. If system-wide sales decline, there will be a
reduced amount available for our marketing and advertising
programs.
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. 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.
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 U.K. 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 sales volumes, restaurant
profitability, and financial viability. However, our franchisees
are independent operators, and their decision to incur
indebtedness is generally outside of our control and could
result in financial distress in the future due to over-leverage.
In 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
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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 programs peak in
August 2003, over 2,540 restaurants were in the FFRP program.
From December 2002 through June 30, 2006, we wrote-off
approximately $106 million in the United States in
uncollectible accounts receivable (principally royalties,
advertising fund contributions and rents). As of
December 31, 2006, the FFRP program in the United States
and Canada was completed. However, there will always be a
percentage of franchisees in our system in financial distress
and we will continue to provide assistance to these franchisees
as needed. As of June 30, 2007, we have an aggregate
remaining potential commitment of up to $26 million to fund
certain loans to renovate franchise restaurants, make
renovations to certain restaurants that we lease or sublease to
franchisees, and to provide rent relief
and/or
contingent cash flow subsidies to certain franchisees.
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 as of June 30, 2007, including
$71 million in the U.K., expiring over an average period of
seven years.
To the extent that our franchisees experience financial
distress, due to over-leverage or otherwise, it could negatively
affect (1) our operating results as a result of delayed or
reduced payments of royalties, national advertising fund
contributions and rents for properties we lease to them or
claims under our lease guarantees, (2) our future revenue,
earnings and cash flow growth and (3) our financial
condition. In addition, lenders to our franchisees were
adversely affected by franchisees who defaulted on their
indebtedness and there can be no assurance that current or
prospective franchisees can obtain necessary financing on
favorable terms or at all in light of the history of financial
distress among franchisees and prevailing market conditions.
Our
U.K. business has and may continue to experience declining sales
and operating profits that may adversely affect the financial
health of our franchisees and us.
We face risks and uncertainties in the U.K. that may impact the
financial health of our franchisees and us. As of June 30,
2007, we operated 96 restaurants and our franchisees operated
456 restaurants in the U.K. During fiscal 2007, we closed
13 company restaurants in the U.K., 10 of which closed in
the fourth quarter. We are continuing to review our company
restaurant portfolio in the U.K. and may decide to close
additional company restaurants based on location, restaurant
profitability, brand presence and lease term.
Certain of our U.K. franchisees continue to face financial
difficulties affecting their ability to meet their obligations
to us, including the payment of royalties, advertising
contributions and rent payments. For the year ended
June 30, 2007, we deferred $3 million in royalty and
rent revenues owed to us by distressed franchisees in the U.K.
and recorded $2 million of bad debt expense in the U.K.
marketing fund. In addition, in connection with the sale of
company restaurants to certain U.K. franchisees, we have
guaranteed certain lease payments arising from leases assigned
to these franchisees as part of the sale. The aggregate
contingent obligation arising from these assigned lease
guarantees in the U.K. was $71 million as of June 30,
2007. If we are unable to strengthen the operating performance
of the U.K. restaurants, we could incur additional write-offs,
additional expenses under these assigned lease guarantees and a
decrease in our revenues and earnings which could negatively
impact our financial condition and our future revenue growth.
In addition, continuing or increasing losses from our company
restaurants in the U.K., along with other factors, could have a
negative effect on our ability to utilize foreign tax credits to
offset our U.S. income taxes and could cause us to
establish a valuation allowance at a future date against all or
a portion of our foreign tax credit carryforwards.
Since the second quarter of fiscal 2007, we have been taking
active measures and implementing marketing and operational
initiatives to improve the performance of the U.K. market and to
work with our distressed U.K. franchisees and their creditors to
attempt to strengthen the franchisees financial condition.
As part of our marketing
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initiatives to improve brand recognition and address changing
U.K. consumer preferences, during the year ended June 30,
2007, we made an incremental contribution of $7 million to
the marketing fund in the U.K. and may continue to incur
incremental advertising contributions in the future. To the
extent that these additional expenses are significant, they may
negatively impact our future expenses and, consequently, our
earnings. Furthermore, these marketing and operational
initiatives may not be effective, which would have a negative
impact on the financial condition of our U.K. business.
There
can be no assurance that the franchisees can or will renew their
franchise agreements with us.
Our franchise agreements typically have a
20-year
term, and our franchisees may not be willing or able to renew
their franchise agreements with us. For example, franchisees may
decide not to renew due to low sales volumes, high real estate
costs, or may be unable to renew due to the failure to secure
lease renewals. In order for a franchisee to renew its franchise
agreement with us, it typically must pay a $50,000 franchise
fee, remodel its restaurant to conform to our current standards
and, in many cases, renew its property lease with its landlord.
The average cost to remodel a stand-alone restaurant in the
United States 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 several 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. During fiscal 2005,
2006 and 2007, 89, 98 and 73 restaurants with expiring franchise
agreements closed in the U.S. or 20%, 24% and 17% of the
total number of expiring franchise agreements for such periods,
respectively. 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.
Incidents
of food-borne illnesses or food tampering could materially
damage our reputation and reduce our restaurant
sales.
Our business is susceptible to the risk of food-borne illnesses
(such as
e-coli,
bovine spongiform encephalopathy or mad cows
disease, hepatitis A, trichinosis or salmonella). We
cannot guarantee that our internal controls and training will be
fully effective in preventing all food-borne illnesses.
Furthermore, our reliance on third-party food suppliers and
distributors increases the risk that food-borne illness
incidents could be caused by third-party food suppliers and
distributors outside of our control
and/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
illnesses in one of our restaurants or in one of our
competitors restaurants could negatively affect our
restaurant sales, force the closure of some of our restaurants
and conceivably have a national or international impact if
highly publicized. This risk exists even if it were later
determined that the illness had been wrongly attributed to the
restaurant.
In addition, other illnesses, such as foot and mouth disease or
avian influenza, could adversely affect the supply of some of
our food products and significantly increase our costs. There is
currently an outbreak of foot and mouth disease in England,
which has prompted a European-wide ban on live animals, fresh
meat and milk products from the U.K. Although this disease is
extremely rare in humans, the negative publicity about beef and
beef products could adversely affect our sales.
Our industry has long been subject to the threat of food
tampering by suppliers, employees or guests, such as the
addition of foreign objects in the food that we sell. Reports,
whether or not true, of injuries caused by food tampering have
in the past severely injured the reputations of restaurant
chains in the quick service restaurant segment and could affect
us in the future as well. Instances of food tampering, even
those occurring solely at restaurants of our competitors could,
by resulting in negative publicity about the restaurant
industry, adversely affect our sales on a local, regional,
national or worldwide basis. A decrease in guest traffic as a
result of these health concerns or negative publicity could
materially harm our business, results of operations and
financial condition.
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Labor
shortages or increases in labor costs could slow our growth or
harm our business.
Our success depends in part upon our ability to continue to
attract, motivate and retain regional operational and restaurant
general managers with the qualifications to succeed in our
industry and the motivation to apply our core service
philosophy. If we are unable to continue to recruit and retain
sufficiently qualified managers or to motivate our employees to
sustain high service levels, our business and our growth could
be adversely affected. Competition for these employees could
require us to pay higher wages which could result in higher
labor costs. In addition, increases in the minimum wage or labor
regulations could increase our labor costs. For example, the
European markets have seen increased minimum wages due to a
higher level of regulation and the U.S. Congress has passed
a three-step increase to the national minimum wage (from $5.15
to $5.85, $5.85 to $6.55 and 6.55 to $7.25) with the first
increase effective July 24, 2007. In addition, many states
have adopted, and others are considering adopting, minimum wage
statutes that exceed the federal minimum wage. We may be unable
to increase our prices in order to pass these increased labor
costs on to our guests, in which case our and our
franchisees margins would be negatively affected.
The
loss of key management personnel or our inability to attract and
retain new qualified personnel could hurt our business and
inhibit our ability to operate and grow
successfully.
The success of our business to date has been, and our continuing
success will be, dependent to a large degree on the continued
services of our executive officers, including John Chidsey, our
Chief Executive Officer; Russell Klein, our President,
Global Marketing, Strategy and Innovation; Ben Wells, our Chief
Financial Officer; Jim Hyatt, our Chief Operations Officer; and
other key personnel who have extensive experience in the
franchising and food industries. If we lose the services of any
of these key personnel and fail to manage a smooth transition to
new personnel, our business could suffer.
The
realignment of our European and Asian businesses may result in
increased income tax expense to us if these businesses are less
profitable than expected.
Effective July 1, 2006, we realigned the activities
associated with managing our European and Asian businesses,
including the transfer of rights of existing franchise
agreements, the ability to grant future franchise agreements and
utilization of our intellectual property assets, in new European
and Asian holding companies. Previously, all cash flows relating
to intellectual property and franchise rights in those regions
returned to the United States and were subsequently transferred
back to those regions to fund their growing capital
requirements. We believe this realignment more closely aligns
the intellectual property with the respective regions, provides
funding in the proper region and lowers our effective tax rate.
However, if certain of our European and Asian businesses are
less profitable than expected, there could be an adverse impact
on our overall effective tax rate, which would result in
increased income tax expense to us. In connection with this
realignment and the transfer of certain intellectual property to
our new European and Asian holding companies, we received from a
third-party qualified appraiser valuations of the intellectual
property assets. If the IRS were to materially disagree with the
valuations or certain other assumptions made in connection with
this realignment, it could result in additional income tax
liability which could negatively affect our results of
operations.
Additional
tax liabilities could adversely impact our financial
results.
We are subject to income taxes in both the United States and
numerous foreign jurisdictions. Significant judgment is required
in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and
calculations where the ultimate tax determination is uncertain.
Tax authorities regularly audit us as part of their routine
practice. Although we believe our tax estimates are reasonable,
the final determination of tax audits and any related litigation
could be materially different from our historical income tax
provisions and accruals. The results of a tax audit or related
litigation could have a material effect on our income tax
provision, net income or cash flows in the period or periods for
which that determination is made.
23
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 international
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 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 by fluctuations in
exchange rates. In fiscal 2007, income from operations would
have decreased or increased $10 million if all foreign
currencies uniformly weakened or strengthened by 10% relative to
the U.S. dollar.
Fluctuations in interest rates may also affect our business. We
attempt to minimize this risk and lower our overall borrowing
costs through the utilization of derivative financial
instruments, primarily interest rate swaps. These swaps are
entered into with financial institutions and have reset dates
and critical terms that match those of our forecasted interest
payments. Accordingly, any change in market value associated
with interest rate swaps is offset by the opposite market impact
on the related debt. We do not attempt to hedge all of our debt
and, as a result, may incur higher interest costs for portions
of our debt which are not hedged.
Leasing
and ownership of a significant portfolio of real estate exposes
us and our franchisees to potential losses and liabilities and
we or our franchisees may not be able to renew leases, control
rent increases and control real estate expenses at existing
restaurant locations or obtain leases or purchase real estate
for new restaurants.
Many of our company restaurants are presently located on leased
premises. In addition, our franchisees generally lease their
restaurant locations. At the end of the term of the lease, we or
our franchisees might be forced to find a new location to lease
or close the restaurant. If we are able to negotiate a new lease
at the existing location or an extension of the existing lease,
the rent may increase significantly. With respect to the land
and buildings that are owned by us or our franchisees, the value
of these assets could decrease or costs could increase because
of changes in the investment climate for real estate,
demographic trends, increases in insurance and taxes and
liability for environmental conditions. Any of these events
could adversely affect our profitability or our
franchisees profitability. Some leases are subject to
renewal at fair market value, which could involve substantial
rent increases, or are subject to renewal with scheduled rent
increases, which could result in rents being above fair market
value. We compete with numerous other retailers and restaurants
for sites in the highly competitive market for retail real
estate and some landlords and developers may exclusively grant
locations to our competitors. As a result, we may not be able to
obtain new leases or renew existing ones on acceptable terms,
which could adversely affect our sales and brand-building
initiatives. In the U.K., we have approximately 44 leases for
properties that we sublease to franchisees in which the lease
term with our landlords is longer than the sublease. As a
result, we may be liable for lease obligations if such
franchisees do not renew their subleases or if we cannot find
substitute tenants.
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 conditions where restaurants are
located could decline in the future, thus resulting in
potentially reduced sales in these locations. If we or our
franchisees cannot obtain desirable locations at reasonable
prices, our ability to implement 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 36% of
the total assets on our balance sheet as of June 30, 2007,
and we believe that our brand is very important to our success
and our competitive position. We rely on a combination of
trademarks, copyrights, service marks, trade secrets and similar
intellectual property rights to protect our brand and branded
products. The success of our business depends on our continued
ability to use our
24
existing trademarks and service marks in order to increase brand
awareness and further develop our branded products in both
domestic and international markets. We have registered certain
trademarks and have other trademark registrations pending in the
United States and foreign jurisdictions. Not all of the
trademarks that we currently use have been registered in all of
the countries in which we do business, and they may never be
registered in all of these countries. We may not be able to
adequately protect our trademarks, and our use of these
trademarks may result in liability for trademark infringement,
trademark dilution or unfair competition. The steps we have
taken to protect our intellectual property in the United States
and in foreign countries may not be adequate. In addition, the
laws of some foreign countries do not protect intellectual
property rights to the same extent as the laws of the United
States.
We may, from time to time, be required to institute litigation
to enforce our trademarks or other intellectual property rights,
or to protect our trade secrets. Such litigation could result in
substantial costs and diversion of resources and could
negatively affect our sales, profitability and prospects
regardless of whether we are able to successfully enforce our
rights.
We may
experience significant fluctuations in our operating results due
to a variety of factors, many of which are outside of our
control.
We may experience significant fluctuations in our operating
results due to a variety of factors, many of which are outside
of our control. Our operating results for any one quarter are
not necessarily indicative of results to be expected for any
other quarter or for any year and sales, comparable sales, and
average restaurant sales for any future period may decrease. Our
results of operations may fluctuate significantly because of a
number of factors, including but not limited to, our ability to
retain existing guests, attract new guests at a steady rate and
maintain guest satisfaction; the announcement or introduction of
new or enhanced products by us or our competitors; significant
marketing promotions that increase traffic to our stores; the
amount and timing of operating costs and capital expenditures
relating to expansion of our business; operations and
infrastructure; governmental regulation; and the risk factors
discussed in this section. Moreover, we may not be able to
successfully implement the business strategy described in this
Form 10-K
and implementing our business strategy may not sustain or
improve our results of operations or increase our market share.
You should not place undue reliance on our financial guidance,
nor should you rely on quarter-to-quarter comparisons of our
operating results as indicators of likely future performance.
Our
indebtedness under our senior secured credit facility is
substantial and could limit our ability to grow our
business.
As of June 30, 2007, we had total indebtedness under our
senior secured credit facility of $869 million. Our
indebtedness could have important consequences to you.
For example, it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness if we do not
maintain specified financial ratios, thereby reducing the
availability of our cash flow for other purposes; 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.
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In addition, our senior secured credit facility permits us to
incur substantial additional indebtedness in the future. As of
June 30, 2007, we had $120 million available to us for
additional borrowing under our $150 million revolving
credit facility portion of our senior secured credit facility.
If we increase our indebtedness by borrowing under the revolving
credit facility or incur other new indebtedness, the risks
described above would increase.
25
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.
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Our senior secured credit facility requires us to maintain
specified financial ratios. Our ability to meet these financial
ratios and tests can be affected by events beyond our control,
and we may not meet those ratios. A breach of any of these
restrictive covenants or our inability to comply with the
required financial ratios would result in a default under our
senior secured credit facility or require us to dedicate a
substantial portion of our cash flow from operations to payments
on our indebtedness. If the banks accelerate amounts owing under
our senior secured credit facility because of a default and we
are unable to pay such amounts, the banks have the right to
foreclose on the stock of BKC and certain of its subsidiaries.
We
face risks of litigation and pressure tactics, such as strikes,
boycotts and negative publicity from restaurant customers,
franchisees, suppliers, employees and others, which could divert
our financial and management resources and which may negatively
impact our financial condition and results of
operations.
Class action lawsuits have been filed, and may continue to be
filed, against various quick service restaurants alleging, among
other things, that quick service restaurants have failed to
disclose the health risks associated with high-fat foods and
that quick service restaurant marketing practices have targeted
children and encouraged obesity. We have been sued in California
under Proposition 65 to force disclosure of warnings that
certain of our products, such as french fries, flame-broiled
hamburgers and grilled chicken, may expose customers to
potentially cancer-causing chemicals. We have also been sued by
the Center for Science in the Public Interest over our use of
trans fat oils in seven franchise restaurants located in
Washington, D.C. Adverse publicity about these allegations
may negatively affect us and our franchisees, regardless of
whether the allegations are true, by discouraging customers from
buying our products. In addition, we face the risk of lawsuits
and negative publicity resulting from illnesses and injuries,
including injuries to infants and children, allegedly caused by
our products, toys and other promotional items available in our
restaurants or our playground equipment.
In addition to decreasing our sales and profitability and
diverting our management resources, adverse publicity or a
substantial judgment against us could negatively impact our
business, results of operations, financial condition and brand
reputation, hindering our ability to attract and retain
franchisees and grow our business in the United States and
internationally.
In addition, activist groups, including animal rights activists
and groups acting on behalf of franchisees, the workers who work
for our suppliers and others, have in the past, and may in the
future, use pressure tactics to generate adverse publicity about
us by alleging, for example, inhumane treatment of animals by
our suppliers, poor working conditions or unfair purchasing
policies. These groups may be able to coordinate their actions
with other groups, threaten strikes or boycotts or enlist the
support of well-known persons or organizations in order to
increase the pressure on us to achieve their stated aims. In the
future, these actions or the threat of these actions may force
us to change our business practices or pricing policies, which
may have a material adverse effect on our business, results of
operations and financial condition.
26
Further, we may be subject to employee, franchisee, customer and
other claims in the future based on, among other things,
mismanagement of the system, unfair or unequal treatment,
discrimination, harassment, violations of privacy and consumer
credit laws, including, without limitation, the Fair and
Accurate Credit Transactions Act or FACTA, wrongful termination
and wage, rest break and meal break issues, including those
relating to overtime compensation. A purported class action
complaint was recently filed against us alleging violations of
FACTA, and we have been subject to these other types of claims
in the past. If one or more of these claims were to be
successful or if there is a significant increase in the number
of these claims, our business, results of operations and
financial condition could be harmed.
Our
products are subject to numerous and changing government
regulations, and failure to comply with such existing or future
government regulations could negatively affect our sales,
revenues and earnings.
Our products are subject to numerous and changing government
regulations, and failure to comply with such existing or future
government regulations could negatively affect our sales,
revenues and earnings. In many of our markets, including the
United States and Europe, we are subject to increasing
regulation regarding our products, which may significantly
increase our cost of doing business.
Many recent governmental bodies, particularly those in the
United States, the U.K. and Spain, have begun to legislate or
regulate high-fat and high-sodium foods as a way of combating
concerns about obesity and health. The New York City Board of
Health recently adopted an amendment to the New York City Health
Code that requires New York City restaurants and other food
service establishments to phase out artificial trans fat (which
we currently use in our french fries and 23 other products) by
July 1, 2008. In addition, the City of Philadelphia
recently passed a law that requires restaurants to phase out
artificial trans fat by September 1, 2008. A number of
other counties and municipalities have adopted a ban on trans
fat in restaurant foods, and more than 12 states are
considering adopting such laws. In addition, public interest
groups have also focused attention on the marketing of high-fat
and high-sodium foods to children in a stated effort to combat
childhood obesity and legislators in the United States have
proposed replacing the self-regulatory Childrens
Advertising Review Board with formal governmental regulation
under the Federal Trade Commission. Further, regulators in the
U.K. have adopted restrictions on television advertising of
foods high in fat, salt or sugar targeted at children. In
addition, the Spanish government and certain industry
organizations have focused on reducing advertisements that
promote large portion sizes. Additional cities or states may
propose or adopt similar regulations. The cost of complying with
these regulations could increase our expenses and the negative
publicity arising from such legislative initiatives could reduce
our future sales.
Our food products are also subject to significant complex, and
sometimes contradictory, health and safety regulatory risks
including:
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inconsistent standards imposed by state and federal authorities
regarding the nutritional content of our products, which can
adversely affect the cost of our food, consumer perceptions and
increase our exposure to litigation;
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the impact of nutritional, health and other scientific inquiries
and conclusions, which constantly evolve and often have
contradictory implications, but nonetheless drive consumer
perceptions, litigation and regulation in ways that are material
to our business;
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the risks and costs of our nutritional labeling and other
disclosure practices, particularly given differences in
practices within the restaurant industry with respect to testing
and disclosure, ordinary variations in food preparation among
our own restaurants, and reliance on the accuracy and
appropriateness of information obtained from third-party
suppliers;
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the impact and costs of menu labeling legislation, currently
adopted in New York City and under consideration in various
other jurisdictions, which generally requires restaurant chains
to provide certain nutrition information on menus/menu boards
such as: (i) number of calories; (ii) fat content,
including saturated and trans fats; (iii) number of
carbohydrates; and (iv) milligrams of sodium; and
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the impact of licensing and regulation by state and local
departments relating to health, food preparation, sanitation and
safety standards.
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Additional U.S. or foreign jurisdictions may propose to
adopt similar regulations. The cost of complying with these
regulations could increase our expenses. Additionally, menu
labeling legislation may cause some of our guests to avoid
certain of our products
and/or alter
the frequency of their visits.
If we fail to comply with existing or future laws and
regulations governing our products, we may be subject to
governmental or judicial fines or sanctions. In addition, our
and our franchisees capital expenditures could increase
due to remediation measures that may be required if we are found
to be noncompliant with any of these laws or regulations.
Increasing
regulatory complexity surrounding our operations will continue
to affect our operations and results of operations in material
ways.
Our legal and regulatory environment worldwide exposes us to
complex compliance regimes and similar risks that affect our
operations and results of operations in material ways. In many
of our markets, including the United States and Europe, we are
subject to increasing regulation regarding our operations, which
may significantly increase our cost of doing business. In
developing markets, we face the risks associated with new and
untested laws and judicial systems. Among the more important
regulatory risks regarding our operations we face are the
following:
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the impact of minimum wage, overtime, occupational health and
safety, employer mandated healthcare, immigration, privacy and
other local and foreign laws and regulations on our business;
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the impact of new no match regulations issued
by the Department of Homeland Security regarding how employers
must deal with a mismatch between the name and social security
number on record with the Social Security Administration and the
name and number provided to employers;
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disruptions in our operations or price volatility in a market
that can result from governmental actions, including price
controls, currency and repatriation controls, limitations on the
import or export of commodities we use or government-mandated
closure of our or our vendors operations;
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the risks of operating in foreign markets in which there are
significant uncertainties, including with respect to the
application of legal requirements and the enforceability of laws
and contractual obligations; and
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the risks associated with information security, and the use of
cashless payments, such as increased investment in technology,
the costs of compliance with privacy, consumer protection and
other laws, costs resulting from consumer fraud and the impact
on our margins as the use of cashless payments increases.
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We are also subject to a Federal Trade Commission rule and to
various state and foreign laws that govern the offer and sale of
franchises. These laws regulate various aspects of the franchise
relationship, including terminations and the refusal to renew
franchises. The failure to comply with these laws and
regulations in any jurisdiction or to obtain required government
approvals could result in a ban or temporary suspension on
future franchise sales, fines, other penalties or require us to
make offers of rescission or restitution, any of which could
adversely affect our business and operating results. We could
also face lawsuits by our franchisees based upon alleged
violations of these laws.
The Americans with Disabilities Act, or ADA, prohibits
discrimination on the basis of disability in public
accommodations and employment. We have, in the past, been
required to make certain modifications to our restaurants
pursuant to the ADA. Although our obligations under those
requirements are substantially complete, future mandated
modifications to our facilities to make different accommodations
for disabled persons could result in material unanticipated
expense to us and our franchisees.
If we fail to comply with existing or future laws and
regulations, we may be subject to governmental or judicial fines
or sanctions. In addition, our and our franchisees capital
expenditures could increase due to remediation measures that may
be required if we are found to be noncompliant with any of these
laws or regulations.
28
The
personal information that we collect may be vulnerable to
breach, theft or loss that could adversely affect our reputation
and operations.
Possession and use of employee and franchisee personal
information in the ordinary course of our business subjects us
to risks and costs that could harm our business. We collect, use
and retain personal information regarding our employees and
their families, including social security numbers, banking and
tax ID information, and health care information. We also collect
and maintain personal information of our franchisees. Some of
this personal information is held and managed by certain of our
vendors. Although we use security and business controls to limit
access and use of personal information, a third party may be
able to circumvent those security and business controls, which
could result in a breach of employee or franchisee privacy. In
addition, errors in the storage, use or transmission of personal
information could result in a breach of employee or franchisee
privacy. Possession and use of personal information in our
operations also subjects us to legislative and regulatory
burdens that could require notification of data breaches and
restrict our use of personal information. We cannot assure you
that a breach, loss or theft of personal information will not
occur. A major breach, theft or loss of personal information
regarding our employees and their families or our franchisees
that is held by us or our vendors could have a material adverse
effect on our reputation and results of operations and result in
further regulation and oversight by federal and state
authorities and increased costs of compliance.
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. 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
results can be adversely affected by disruptions or catastrophic
events.
Unforeseen events, including war, terrorism and other
international conflicts, public health issues, and natural
disasters such as earthquakes, hurricanes and other adverse
weather and climate conditions, whether occurring in the United
States or abroad, could disrupt our operations, disrupt the
operations of franchisees, suppliers or customers, have an
adverse impact on consumer spending and confidence levels or
result in political or economic instability. These events could
reduce demand for our products or make it difficult or
impossible to receive products from distributors.
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Our
current principal stockholders own the majority of our common
stock which allows them significant influence over us, and they
could delay, deter or prevent a change in control or other
business combination or otherwise cause us to take action with
which you disagree.
The private equity funds controlled by the Sponsors beneficially
own approximately 58% 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 will have
significant influence over our decision to enter into any
corporate transaction and may have the ability to prevent any
transaction that requires the approval of stockholders,
regardless of whether or not other stockholders believe that
such transaction is in their own best interests. Such
concentration of voting power could have the effect of delaying,
deterring or preventing a change of control or other business
combination that might otherwise be beneficial to our
stockholders.
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 stock
and 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 consist 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 committees 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
committees purpose and responsibilities; and
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for an annual performance evaluation of the nominating and
governance committee and compensation committee.
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While our executive and corporate governance committee and our
compensation committee have charters that comply with NYSE
requirements, we are not required to maintain those charters. As
a result of our use of the controlled company
exemptions, you 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 your influence over matters on
which our stockholders vote, and, in the case of issuances of
preferred stock, would likely result in your interest in us
being subject to the prior rights of holders of that preferred
stock.
The
sale of a substantial number of shares of our common stock may
cause the market price of shares of our common stock to
decline.
Future sales of a substantial number of shares of our common
stock, or the perception that such sales might occur, could
cause the market price of our common stock to decline. The
private equity funds controlled by the Sponsors have
approximately 80 million shares, all of which are subject
to registration rights.
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Provisions
in our certificate of incorporation could make it more difficult
for a third party to acquire us and could discourage a takeover
and adversely affect existing stockholders.
Our certificate of incorporation authorizes our board of
directors to issue up to 10,000,000 preferred shares and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions on
those shares, without any further vote or action by our
stockholders. The rights of the holders of our common stock will
be subject to, and may be adversely affected by, the rights of
the holders of any preferred shares that may be issued in the
future. The issuance of preferred shares could have the effect
of delaying, deterring or preventing a change in control and
could adversely affect the voting power or economic value of
your shares.
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Item 1B.
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Unresolved
Staff Comments
|
None.
Our global headquarters are located in Miami, Florida and
consist of approximately 213,000 square feet which we
lease. We extended the Miami lease for our global headquarters
in May 2007 through September of 2018 with an option to renew
for one five-year period. We lease properties for our EMEA
headquarters in Zug, Switzerland and our APAC headquarters in
Singapore. We also lease properties for our regional offices in
the U.K., Germany, Spain and China. We lease an office space of
8,523 square feet in Uxbridge, England under a lease that
expires in April 2009. 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. In Shanghai, China, we have entered into two leases
for office space. These leases both expire in February 2008. We
believe that our existing headquarters and other leased and
owned facilities are adequate to meet our current requirements.
The following table presents information regarding our
restaurant properties as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
|
|
|
|
|
|
|
|
|
|
Building/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land &
|
|
|
Total
|
|
|
|
|
|
|
Owned (1)
|
|
|
Land
|
|
|
Building
|
|
|
Leases
|
|
|
Total
|
|
|
United States and
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
341
|
|
|
|
191
|
|
|
|
365
|
|
|
|
556
|
|
|
|
897
|
|
Franchisee-operated properties
|
|
|
460
|
|
|
|
260
|
|
|
|
193
|
|
|
|
453
|
|
|
|
913
|
|
Non-operating restaurant locations
|
|
|
23
|
|
|
|
20
|
|
|
|
10
|
|
|
|
30
|
|
|
|
53
|
|
Offices
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
824
|
|
|
|
471
|
|
|
|
575
|
|
|
|
1,046
|
|
|
|
1,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
20
|
|
|
|
65
|
|
|
|
321
|
|
|
|
386
|
|
|
|
406
|
|
Franchisee-operated properties
|
|
|
4
|
|
|
|
1
|
|
|
|
89
|
|
|
|
90
|
|
|
|
94
|
|
Non-operating restaurant locations
|
|
|
1
|
|
|
|
|
|
|
|
27
|
|
|
|
27
|
|
|
|
28
|
|
Offices
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25
|
|
|
|
66
|
|
|
|
448
|
|
|
|
514
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Owned refers to properties where we own the land and the
building. |
Item 3. Legal
Proceedings
Council for Education and Research on Toxics v. McDonalds
Corporation, Burger King Corporation, et al., Case No. BC
280980 (Superior Court of California in Los Angeles County)
(filed September 5, 2002); People of the State of
California, ex rel Bill Lockyer, Attorney General of the State
of California v. Frito-Lay, Inc. et al., Case
No. BC338956 (Superior Court of California in Los Angeles
County) (filed August 26, 2005). Two lawsuits were
31
filed against us and others alleging that we 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. We have settled both
cases, and the terms of the settlement are not material to us.
Leeman v. Burger King Corporation et al., Case
No. 06AS02168 (Superior Court of California in Sacramento
County) (filed May 26, 2006). In this lawsuit, the
plaintiff alleged 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 large flamed-broiled burgers
such as the Triple Whopper. We have agreed to settle the
case on terms that are not material to us. The settlement is
subject to court approval.
Cowley v. Burger King Corporation, Case
No. 07-21772
(U.S. District Court for the Southern District of Florida).
On July 10, 2007, a purported class action lawsuit was
filed against us in the United States District Court for the
Southern District of Florida. The plaintiff filed an amended
complaint on August 3, 2007. The case alleges liability
under the Fair and Accurate Credit Transactions Act for failure
to truncate credit and debit card account numbers
and/or omit
the expiration date on customer receipts, and seeks monetary
damages, including statutory damages, punitive damages, costs
and attorneys fees, and a permanent injunction against the
alleged unlawful practice. Similar complaints have recently been
filed against many other retailers. The case is in the
preliminary stages. Therefore, we are unable to determine the
ultimate outcome of the litigation, and any ultimate effect on
our business, financial position or cash flows. However, we
believe we have strong defenses to this claim, and we intend to
vigorously defend against it, including the plaintiffs
efforts to certify a class action.
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 Stockholders
|
None.
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
for Our Common Stock
Our common stock trades on the New York Stock Exchange under the
symbol BKC. Trading of our common stock commenced on
May 18, 2006 following the completion of our initial public
offering. Prior to that date, no public market existed for our
common stock. As of August 31, 2007, there were
approximately 194 holders of record of our common stock. The
following table sets forth the high and low sales prices of our
common stock as reported on the New York Stock Exchange and
dividends declared per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Dollars per Share:
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
First Quarter
|
|
$
|
16.64
|
|
|
$
|
12.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
$
|
21.28
|
|
|
$
|
15.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
22.84
|
|
|
$
|
19.67
|
|
|
$
|
0.0625
|
|
|
|
|
|
|
|
|
|
|
$
|
3.42
|
*
|
Fourth Quarter
|
|
$
|
27.04
|
|
|
$
|
21.53
|
|
|
$
|
0.0625
|
|
|
$
|
19.45
|
|
|
$
|
15.48
|
|
|
|
|
|
|
|
|
* |
|
We paid an aggregate cash dividend of $367 million in February
2006 prior to our initial public offering. See Note 17 to
our audited consolidated financial statements in Part II,
Item 8 of this Form 10-K for further information on
this dividend. |
32
Issuer
Purchases of Equity Securities
The following table presents information related to the
repurchase of our common stock during the three months ended
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Maximum Dollar
|
|
|
|
Total Number
|
|
|
|
|
|
Purchased as Part of
|
|
|
Amount That May Yet be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased(1)
|
|
|
Paid per Share
|
|
|
Plans or Programs
|
|
|
the Plans or Programs
|
|
|
April 1-30, 2007
|
|
|
4,180
|
|
|
$
|
22.61
|
|
|
|
0
|
|
|
|
N/A
|
|
May 1-31, 2007
|
|
|
15,365
|
|
|
$
|
24.70
|
|
|
|
0
|
|
|
$
|
100,000,000
|
|
June 1-30, 2007
|
|
|
8,204
|
|
|
$
|
26.21
|
|
|
|
0
|
|
|
$
|
100,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,749
|
|
|
$
|
24.83
|
|
|
|
0
|
|
|
$
|
100,000,000
|
|
|
|
|
(1) |
|
All shares purchased were used to satisfy the Companys
obligation to withhold from restricted stock awards the amount
of withholding taxes due in respect of such awards. |
On May 31, 2007, our Board of Directors authorized a
$100 million share repurchase program pursuant to which we
would repurchase shares directly in the open market consistent
with our internal trading policy and also repurchase shares
under plans complying with
Rule 10b5-1
under the Exchange Act during periods when we may be prohibited
from making direct share repurchases under such policy.
Dividend
Policy
We paid a quarterly cash dividend of $0.0625 per share during
the third and fourth quarters of fiscal 2007. Although we do not
have a dividend policy, we elected to pay a cash dividend in
each of these quarters because we generated strong cash flow
during the past year.
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. At the same time, we paid the
compensatory make-whole payment of $33 million to holders
of our options and restricted stock unit awards, primarily
members of senior management. This compensatory make-whole
payment and related taxes was recorded as compensation expense
in the third quarter of fiscal 2006.
Our board has declared a cash dividend of $0.0625 for the first
quarter of fiscal 2008. The dividend is payable on
September 28, 2007 to shareholders of record on
September 14, 2007.
The terms of our credit facility limit our ability to pay cash
dividends in certain circumstances. In addition, because we are
a holding company, our ability to pay cash dividends on shares
of our common stock may be limited by restrictions on our
ability to obtain sufficient funds through dividends from our
subsidiaries, including the restrictions under our credit
facility. Subject to the foregoing, the payment of cash
dividends in the future, if any, will be at the discretion of
our board of directors and will depend upon such factors as
earnings levels, capital requirements, our overall financial
condition and any other factors deemed relevant by our board of
directors.
33
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table presents information regarding options
outstanding under our compensation plans as of June 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
(c)
|
|
|
|
(a)
|
|
|
Average Exercise
|
|
|
Number of
|
|
|
|
Number of
|
|
|
Price of
|
|
|
Securities Remaining Available for
|
|
|
|
Securities to be Issued Upon
|
|
|
Outstanding
|
|
|
Future Issuance Under Equity
|
|
|
|
Exercise of Outstanding
|
|
|
Options, Warrants
|
|
|
Compensation Plans (Excluding
|
|
Plan Category
|
|
Options, Warrants and Rights
|
|
|
and Rights
|
|
|
Securities Reflected in Column(a)
|
|
|
Equity Compensation Plans
Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc. 2006
Omnibus Incentive Plan
|
|
|
964,309
|
|
|
$
|
14.05
|
|
|
|
6,096,664
|
|
Burger King Holdings, Inc. Equity
Incentive Plan
|
|
|
5,577,809
|
|
|
$
|
9.22
|
|
|
|
1,960,867
|
|
Equity Compensation Plans Not
Approved by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
6,542,118
|
|
|
$
|
9.30
|
|
|
|
8,057,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the 6,542,118 total number of securities in column
(a) above are approximately 1.3 million restricted
stock units, performance-based restricted stock awards and
deferred stock awards. The weighted average exercise price in
column (b) is based only on stock options as restricted
stock units, performance-based restricted stock awards and
deferred stock awards have no exercise price.
34
Stock
Performance Graph
This graph compares the cumulative total return of the
Companys common stock to the cumulative total return of
the S&P 500 Stock Index and the S&P Restaurant Index
for the period from May 18, 2006 through June 29,
2007, the last trading day of the Companys fiscal year.
The graph assumes an investment in the Companys common
stock and the indices of $100 at May 18, 2006 and that all
dividends were reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/18/2006
|
|
|
|
6/30/2006
|
|
|
|
6/29/2007
|
|
BKC
|
|
|
$
|
100
|
|
|
|
$
|
90
|
|
|
|
$
|
151
|
|
S&P 500 Index
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
122
|
|
S&P Restaurant Index
|
|
|
|
100
|
|
|
|
|
100
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All amounts rounded to nearest dollar.
|
|
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, 2007 and 2006 and for the fiscal years ended
June 30, 2007, 2006 and 2005 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 for
the period July 1, 2002 to December 12, 2002 has 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
35
beginning of the period. The other operating data for the fiscal
years ended June 30, 2007, 2006 and 2005 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
Managements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Holdings, Inc.
|
|
|
For the Period
|
|
|
|
Burger King Holdings, Inc.
|
|
|
Twelve Months
|
|
|
For the Period
|
|
|
from July 1,
|
|
|
|
For the Fiscal Years Ended
|
|
|
Ended
|
|
|
from December 13,
|
|
|
2002 to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2002 to June 30,
|
|
|
December 12,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
2002
|
|
|
|
(In millions, except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,658
|
|
|
$
|
1,516
|
|
|
$
|
1,407
|
|
|
$
|
1,276
|
|
|
$
|
1,174
|
|
|
$
|
648
|
|
|
$
|
526
|
|
Franchise revenues
|
|
|
460
|
|
|
|
420
|
|
|
|
413
|
|
|
|
361
|
|
|
|
368
|
|
|
|
198
|
|
|
|
170
|
|
Property revenues
|
|
|
116
|
|
|
|
112
|
|
|
|
120
|
|
|
|
117
|
|
|
|
115
|
|
|
|
60
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,234
|
|
|
|
2,048
|
|
|
|
1,940
|
|
|
|
1,754
|
|
|
|
1,657
|
|
|
|
906
|
|
|
|
751
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
499
|
|
|
|
470
|
|
|
|
437
|
|
|
|
391
|
|
|
|
359
|
|
|
|
197
|
|
|
|
162
|
|
Payroll and employee benefits
|
|
|
492
|
|
|
|
446
|
|
|
|
415
|
|
|
|
382
|
|
|
|
349
|
|
|
|
192
|
|
|
|
157
|
|
Occupancy and other operating costs
|
|
|
418
|
|
|
|
380
|
|
|
|
343
|
|
|
|
314
|
|
|
|
314
|
|
|
|
168
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant expenses
|
|
|
1,409
|
|
|
|
1,296
|
|
|
|
1,195
|
|
|
|
1,087
|
|
|
|
1,022
|
|
|
|
557
|
|
|
|
465
|
|
Selling, general and administrative
expenses(1)
|
|
|
474
|
|
|
|
488
|
|
|
|
487
|
|
|
|
474
|
|
|
|
472
|
|
|
|
248
|
|
|
|
224
|
|
Property expenses
|
|
|
61
|
|
|
|
57
|
|
|
|
64
|
|
|
|
58
|
|
|
|
55
|
|
|
|
28
|
|
|
|
27
|
|
Fees paid to affiliates(2)
|
|
|
|
|
|
|
39
|
|
|
|
9
|
|
|
|
8
|
|
|
|
6
|
|
|
|
5
|
|
|
|
1
|
|
Impairment of goodwill(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875
|
|
|
|
|
|
|
|
875
|
|
Other operating (income) expenses,
net(3)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
34
|
|
|
|
54
|
|
|
|
32
|
|
|
|
(7
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,943
|
|
|
|
1,878
|
|
|
|
1,789
|
|
|
|
1,681
|
|
|
|
2,462
|
|
|
|
831
|
|
|
|
1,631
|
|
Income (loss) from operations
|
|
|
291
|
|
|
|
170
|
|
|
|
151
|
|
|
|
73
|
|
|
|
(805
|
)
|
|
|
75
|
|
|
|
(880
|
)
|
Interest expense, net
|
|
|
67
|
|
|
|
72
|
|
|
|
73
|
|
|
|
64
|
|
|
|
81
|
|
|
|
35
|
|
|
|
46
|
|
Loss on early extinguishment of debt
|
|
|
1
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
223
|
|
|
|
80
|
|
|
|
78
|
|
|
|
9
|
|
|
|
(886
|
)
|
|
|
40
|
|
|
|
(926
|
)
|
Income tax expense (benefit)
|
|
|
75
|
|
|
|
53
|
|
|
|
31
|
|
|
|
4
|
|
|
|
(18
|
)
|
|
|
16
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
148
|
|
|
$
|
27
|
|
|
$
|
47
|
|
|
$
|
5
|
|
|
$
|
(868
|
)
|
|
$
|
24
|
|
|
$
|
(892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
basic(4)
|
|
$
|
1.11
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
|
$
|
0.05
|
|
|
|
|
*
|
|
$
|
0.23
|
|
|
|
|
*
|
Earnings per share
diluted(4)
|
|
$
|
1.08
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
|
$
|
0.05
|
|
|
|
|
*
|
|
$
|
0.23
|
|
|
|
|
*
|
Weighted average shares
outstanding- basic
|
|
|
133.9
|
|
|
|
110.3
|
|
|
|
106.5
|
|
|
|
106.1
|
|
|
|
|
*
|
|
|
104.7
|
|
|
|
|
*
|
Weighted average shares
outstanding- diluted
|
|
|
136.8
|
|
|
|
114.7
|
|
|
|
106.9
|
|
|
|
106.1
|
|
|
|
|
*
|
|
|
104.7
|
|
|
|
|
*
|
Cash dividends per common share(5)
|
|
$
|
0.13
|
|
|
$
|
3.42
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings, Inc.
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
Burger King Holdings, Inc.
|
|
|
Combined Twelve
|
|
|
from December 13,
|
|
|
from July 1,
|
|
|
|
For the Fiscal Years Ended
|
|
|
Months Ended
|
|
|
2002 to
|
|
|
2002 to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 12,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
2002
|
|
|
|
(In millions)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
117
|
|
|
$
|
74
|
|
|
$
|
218
|
|
|
$
|
199
|
|
|
$
|
82
|
|
|
$
|
81
|
|
|
$
|
1
|
|
Net cash used for investing
activities
|
|
|
(84
|
)
|
|
|
(74
|
)
|
|
|
(5
|
)
|
|
|
(184
|
)
|
|
|
(587
|
)
|
|
|
(485
|
)
|
|
|
(102
|
)
|
Net cash (used for) provided by
financing activities
|
|
|
(127
|
)
|
|
|
(173
|
)
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
719
|
|
|
|
607
|
|
|
|
112
|
|
Capital expenditures
|
|
|
87
|
|
|
|
85
|
|
|
|
93
|
|
|
|
81
|
|
|
|
142
|
|
|
|
47
|
|
|
|
95
|
|
EBITDA(6)
|
|
$
|
380
|
|
|
$
|
258
|
|
|
$
|
225
|
|
|
$
|
136
|
|
|
$
|
(719
|
)
|
|
$
|
118
|
|
|
$
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc.
|
|
|
|
As of June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
170
|
|
|
$
|
259
|
|
|
$
|
432
|
|
|
$
|
221
|
|
|
$
|
203
|
|
Total assets
|
|
|
2,517
|
|
|
|
2,552
|
|
|
|
2,723
|
|
|
|
2,665
|
|
|
|
2,458
|
|
Total debt and capital lease
obligations
|
|
|
943
|
|
|
|
1,065
|
|
|
|
1,339
|
|
|
|
1,294
|
|
|
|
1,251
|
|
Total liabilities
|
|
|
1,801
|
|
|
|
1,985
|
|
|
|
2,246
|
|
|
|
2,241
|
|
|
|
2,026
|
|
Total stockholders equity
|
|
$
|
716
|
|
|
$
|
567
|
|
|
$
|
477
|
|
|
$
|
424
|
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc.
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth (7)(8)
|
|
|
3.4
|
%
|
|
|
1.9
|
%
|
|
|
5.6
|
%
|
Sales growth (7)
|
|
|
4.9
|
%
|
|
|
2.1
|
%
|
|
|
6.1
|
%
|
Average restaurant sales (in
thousands)
|
|
$
|
1,193
|
|
|
$
|
1,126
|
|
|
$
|
1,104
|
|
Number of company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
897
|
|
|
|
878
|
|
|
|
844
|
|
EMEA/APAC (9)
|
|
|
329
|
|
|
|
293
|
|
|
|
283
|
|
Latin America (10)
|
|
|
77
|
|
|
|
69
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurants
|
|
|
1,303
|
|
|
|
1,240
|
|
|
|
1,187
|
|
Number of franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
6,591
|
|
|
|
6,656
|
|
|
|
6,876
|
|
EMEA/APAC (9)
|
|
|
2,563
|
|
|
|
2,494
|
|
|
|
2,373
|
|
Latin America (10)
|
|
|
826
|
|
|
|
739
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise restaurants
|
|
|
9,980
|
|
|
|
9,889
|
|
|
|
9,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restaurants system-wide
|
|
|
11,283
|
|
|
|
11,129
|
|
|
|
11,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc.
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
336
|
|
|
$
|
295
|
|
|
$
|
255
|
|
EMEA/APAC (9)
|
|
|
54
|
|
|
|
62
|
|
|
|
36
|
|
Latin America (10)
|
|
|
35
|
|
|
|
29
|
|
|
|
25
|
|
Unallocated (11)
|
|
|
(134
|
)
|
|
|
(216
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
291
|
|
|
$
|
170
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,082
|
|
|
$
|
1,032
|
|
|
$
|
923
|
|
EMEA/APAC (9)
|
|
|
515
|
|
|
|
428
|
|
|
|
435
|
|
Latin America (10)
|
|
|
61
|
|
|
|
56
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant revenues
|
|
$
|
1,658
|
|
|
$
|
1,516
|
|
|
$
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
15.3
|
%
|
|
|
14.1
|
%
|
|
|
14.2
|
%
|
EMEA/APAC (9)
|
|
|
13.0
|
%
|
|
|
13.9
|
%
|
|
|
15.2
|
%
|
Latin America (10)
|
|
|
25.9
|
%
|
|
|
26.6
|
%
|
|
|
30.6
|
%
|
Total company restaurant margin
|
|
|
15.0
|
%
|
|
|
14.5
|
%
|
|
|
15.1
|
%
|
Franchise revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
284
|
|
|
$
|
267
|
|
|
$
|
269
|
|
EMEA/APAC (9)
|
|
|
135
|
|
|
|
119
|
|
|
|
114
|
|
Latin America (10)
|
|
|
41
|
|
|
|
34
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise revenues
|
|
$
|
460
|
|
|
$
|
420
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise sales (in millions) (12)
|
|
$
|
11,574
|
|
|
$
|
10,903
|
|
|
$
|
10,817
|
|
|
|
|
(1) |
|
Selling, general and administrative expenses for fiscal 2006
includes compensation expense and taxes related to the
compensatory make-whole payment made on February 21, 2006
to holders of options and restricted stock unit awards,
primarily members of senior management. |
|
(2) |
|
Fees paid to affiliates consists 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) |
|
Earnings per share is calculated using whole dollars and shares. |
|
(5) |
|
The cash dividend paid in fiscal 2006, represents a special
dividend paid prior to our initial public offering. See
Note 17 to our audited consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information on this dividend. |
|
(6) |
|
EBITDA is defined as earnings (net income) before interest,
taxes, depreciation and amortization, and is used by management
to measure operating performance of the business. Management
believes that EBITDA is a useful measure as it incorporates
certain operating drivers of our business such as sales growth,
operating costs, selling, general and administrative expenses
and other income and expense. 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. |
38
|
|
|
|
|
While EBITDA is not a recognized measure under generally
accepted accounting principles (GAAP), management
uses it to evaluate and forecast our business performance.
Further, management believes that EBITDA provides both
management and investors with a more complete understanding of
the underlying operating results and trends and an enhanced
overall understanding of the Companys financial
performance and prospects for the future. Management also
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
periods. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Factors Affecting Comparability of Results Purchase
Accounting. |
The non-GAAP measurement of EBITDA has certain material
limitations, including:
|
|
|
|
|
it does not include interest expense. Because we have borrowed
money for general corporate purposes, interest expense is a
necessary element of our costs and ability to generate profits
and cash flows. Therefore, any measure that excludes interest
expense has material limitations,
|
|
|
|
it does not include depreciation and amortization expenses.
Because we use capital assets, depreciation and amortization is
a necessary element of our costs and ability to generate
profits. Therefore any measure that excludes depreciation and
amortization expenses has material limitations, and
|
|
|
|
it does not include provision for taxes. Because the payment of
taxes is a necessary element of our operations, any measure that
excludes tax expense has material limitations.
|
EBITDA is not intended to be a measure of liquidity or cash
flows from operations or a measure comparable to net income as
it does not take into account certain requirements such as
capital expenditures and related depreciation, principal and
interest payments and tax payments.
The following table is a reconciliation of our net income to
EBITDA:
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Burger King
|
|
|
|
|
|
|
|
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|
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Holdings, Inc.
|
|
|
Predecessor
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Combined
|
|
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For the Period from
|
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For the Period
|
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|
|
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|
Burger King Holdings, Inc.
|
|
|
Twelve
|
|
|
December 13,
|
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|
from July 1,
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
Months
|
|
|
2002 to
|
|
|
2002 to
|
|
|
|
|
|
|
June 30,
|
|
|
Ended June 30,
|
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|
June 30,
|
|
|
December 12,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
148
|
|
|
$
|
27
|
|
|
$
|
47
|
|
|
$
|
5
|
|
|
$
|
(868
|
)
|
|
$
|
24
|
|
|
$
|
(892
|
)
|
|
|
|
|
Interest expense, net
|
|
|
67
|
|
|
|
72
|
|
|
|
73
|
|
|
|
64
|
|
|
|
81
|
|
|
|
35
|
|
|
|
46
|
|
|
|
|
|
Loss on early distinguishment of
debt
|
|
|
1
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
75
|
|
|
|
53
|
|
|
|
31
|
|
|
|
4
|
|
|
|
(18
|
)
|
|
|
16
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
291
|
|
|
|
170
|
|
|
|
151
|
|
|
|
73
|
|
|
|
(805
|
)
|
|
|
75
|
|
|
|
(880
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
89
|
|
|
|
88
|
|
|
|
74
|
|
|
|
63
|
|
|
|
86
|
|
|
|
43
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
380
|
|
|
$
|
258
|
|
|
$
|
225
|
|
|
$
|
136
|
|
|
$
|
(719
|
)
|
|
$
|
118
|
|
|
$
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This presentation of EBITDA may not be directly comparable to
similarly titled measures of other companies, since not all
companies use identical calculations. |
|
(7) |
|
Comparable sales growth and sales growth are analyzed on a
constant currency basis, which means they are calculated using
the same exchange rate over the periods under comparison, to
remove the effects of currency fluctuations from these trend
analyses. We believe these constant currency measures provide a
more meaningful analysis of our business by identifying the
underlying business trends, without distortion from the effect
of foreign currency movements. Sales growth includes sales at
company restaurants and franchise restaurants. Unless otherwise
stated, sales, sales growth, comparable sales growth and average
restaurant sales are presented |
39
|
|
|
|
|
on a system-wide basis. We do not record franchise restaurant
sales as revenues. However, our royalty revenues are calculated
based on a percentage of franchise restaurant sales. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Key Business
Measures. |
|
(8) |
|
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. |
|
(9) |
|
Refers to our operations in Europe, the Middle East, Africa,
Asia, Australia, New Zealand and Guam. |
|
|
|
(10) |
|
Refers to our operations in Mexico, Central and South America,
the Caribbean and Puerto Rico. |
|
(11) |
|
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing, and supply chain management. Unallocated for
fiscal 2006 includes: a $34 million of compensation expense
and taxes related to the compensatory make-whole payment made to
holders of options and restricted stock unit awards in February
2006; $9 million of quarterly management fees paid to the
Sponsors; a $30 million termination fee paid to the
Sponsors to terminate the management agreement; $10 million
of costs related to the realignment of our European and Asian
businesses; and $5 million of executive severance.
Unallocated for fiscal 2005 includes: $9 million of
quarterly management fees and $17 million of global
realignment costs. |
|
(12) |
|
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.
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
38
|
|
|
|
403
|
|
|
|
441
|
|
Closings
|
|
|
(24
|
)
|
|
|
(263
|
)
|
|
|
(287
|
)
|
Acquisitions, net of refranchisings
|
|
|
49
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2007
|
|
|
1,303
|
|
|
|
9,980
|
|
|
|
11,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
United
States & Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
10
|
|
|
|
82
|
|
|
|
92
|
|
Closings
|
|
|
(9
|
)
|
|
|
(129
|
)
|
|
|
(138
|
)
|
Acquisitions, net of refranchisings
|
|
|
18
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2007
|
|
|
897
|
|
|
|
6,591
|
|
|
|
7,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA/APAC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
20
|
|
|
|
231
|
|
|
|
251
|
|
Closings
|
|
|
(15
|
)
|
|
|
(131
|
)
|
|
|
(146
|
)
|
Acquisitions, net of refranchisings
|
|
|
31
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2007
|
|
|
329
|
|
|
|
2,563
|
|
|
|
2,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Latin
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
8
|
|
|
|
90
|
|
|
|
98
|
|
Closings
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Acquisitions, net of refranchisings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2007
|
|
|
77
|
|
|
|
826
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion together with
Part II, Item 6 Selected Financial Data
and our audited consolidated financial statements and the
related notes thereto included in Item 8 Financial
Statements and Supplementary Data. In addition to
historical consolidated financial information, this discussion
contains forward-looking statements that reflect our plans,
estimates and beliefs. Actual results could differ from these
expectations as a result of factors including those described
under Item 1A, Risk Factors, Special Note
Regarding Forward-Looking Statements and elsewhere in this
Form 10-K.
References to fiscal 2007, fiscal 2006 and fiscal 2005 in
this section are to the fiscal years ended June 30, 2007,
2006 and 2005, respectively. Unless otherwise stated, sales,
sales growth, comparable sales growth and average restaurant
sales are presented on a system-wide basis.
Overview
We operate in the fast food hamburger restaurant, or FFHR,
category of the quick service restaurant, or QSR, segment of the
restaurant industry. Our system of restaurants includes
restaurants owned by the Company and franchisees. We are the
second largest FFHR chain in the world as measured by the number
of restaurants and sales system-wide. As of June 30, 2007,
we owned or franchised a total of 11,283 restaurants in 69
countries and U.S. territories, of which 7,488 were located
in the United States and Canada. As of that date, 1,303
restaurants were company-owned and 9,980 were owned by our
franchisees. 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 reporting business segments: the
United States and Canada; Europe, the Middle East, Africa and
Asia Pacific, or EMEA/APAC; and Latin America. The United States
and Canada is our largest segment and comprised 65% of total
revenues and 69% of income from operations, excluding
unallocated corporate general and administrative expenses, in
fiscal 2007. EMEA/APAC comprised 30% of total revenues and 19%
of income from operations, excluding unallocated corporate
general and administrative expenses, and Latin America
42
comprised the remaining 5% of revenues and 12% of income from
operations, excluding unallocated corporate general and
administrative expenses, in fiscal 2007.
Our
Business
Revenues
We generate revenues 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.
|
Our sales are heavily influenced by brand advertising, menu
selection and initiatives to improve restaurant operations.
Company restaurant revenues are affected by comparable sales,
timing of company restaurant openings and closures, acquisitions
by us of franchise restaurants and sales of company restaurants
to franchisees, or refranchisings. In fiscal 2007,
franchise restaurants generated approximately 87% 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 2007, company
restaurant revenues and franchise revenues represented 74% and
21% of total revenues, respectively. The remaining 5% of total
revenues was derived from property income.
We have a higher percentage of franchise restaurants to company
restaurants than our major competitors in the FFHR category. We
believe that this restaurant ownership mix provides us with a
strategic advantage because the capital required to grow and
maintain 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. However, our franchisee-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.
Costs and
expenses
Company restaurants incur three types of operating expenses:
|
|
|
|
|
food, paper and other product costs, which represent the costs
of the products that we sell to customers 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.
|
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 restaurants system-wide.
Our selling, general and administrative expenses include the
costs of field management for company and franchise restaurants,
costs of our operational excellence programs (including program
staffing, training and Clean & Safe certifications),
corporate overhead, including corporate salaries and facilities,
advertising and bad debt expenses and amortization of intangible
assets. We believe that our current staffing and structure will
allow us to expand our business globally without increasing
general and administrative expenses significantly.
Property expenses include costs of depreciation and rent on
properties we lease and sublease to franchisees, respectively.
43
Fees paid to affiliates are primarily management fees paid to
our Sponsors under a management agreement that we entered into
in connection with our acquisition of BKC and terminated upon
completion of our initial public offering. 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 years total revenues. The management agreement
was terminated in the fourth quarter of fiscal 2006. We paid a
one time fee of $30 million to the Sponsors in May 2006 to
terminate the management agreement.
Items classified as other operating 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.
Advertising
funds
We promote our brand and products by advertising in all the
countries and territories in which we operate. In countries
where we have company restaurants, such as the United States,
Canada, the U.K. and Germany, we manage an advertising fund for
that country by collecting required advertising contributions
from company and franchise restaurants and purchasing
advertising and other marketing initiatives on behalf of all
Burger King restaurants in that country. These
advertising contributions are based on a percentage of sales at
company and franchise restaurants. We do not record advertising
contributions collected from franchisees as revenues, or
expenditures of these contributions as expenses. Amounts which
are contributed to the advertising funds by company restaurants
are recorded as selling expenses. In countries where we manage
an advertising fund, we plan the marketing calendar in advance
based on expected contributions into the fund for that year. To
the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are recorded
as accrued advertising liability on our consolidated balance
sheets. 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
expenses. We made additional contributions of $9 million,
$1 million and $15 million in fiscal 2007, fiscal 2006
and fiscal 2005, respectively.
Fiscal
2007 Highlights and Fiscal 2008 Outlook
Our strategic plan (the Global 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
Global Go Forward Plan and strong executive team leadership, our
accomplishments for fiscal 2007 include:
|
|
|
|
|
14 consecutive quarters of positive worldwide comparable sales
growth, our best comparable sales growth in more than a decade,
including comparable sales growth of 3.4% for fiscal 2007;
|
|
|
|
13 consecutive quarters of positive comparable sales growth in
the United States and Canada, including comparable sales growth
of 3.6% for fiscal 2007;
|
|
|
|
all-time high annual revenues of $2.23 billion for fiscal
2007;
|
|
|
|
all-time high worldwide sales of $13.2 billion for fiscal
2007;
|
|
|
|
all-time high average restaurant sales of $1.19 million for
fiscal 2007;
|
|
|
|
continued acceleration of worldwide restaurant growth with 441
new openings and net growth of 154 during fiscal 2007;
|
|
|
|
restaurant openings in four new international markets: Japan,
Indonesia, Poland and Egypt;
|
|
|
|
successful product promotions such as the Texas Double
Whopper and Western Whopper sandwiches, BK
Stacker, the Angus Cheesy Bacon sandwich, and BK
Chicken Fries;
|
|
|
|
strong movie and promotional tie-ins, such as
Spider-Mantm
3, SpongeBob
SquarePantstm,
Fantastic
4tm,
NASCAR, NFL and the
X-Box®
gaming collection;
|
44
|
|
|
|
|
introduction of the BK Breakfast Value Menu, the first
such offering in the FFHR category, and continued improvement in
extending hours of operations;
|
|
|
|
all time high guest satisfaction scores, as well as record speed
of service and cleanliness scores;
|
|
|
|
reduction in debt of $125 million since July 1, 2006
to $872 million as of June 30, 2007; and
|
|
|
|
payment of two quarterly cash dividends as a public company of
$0.0625 per share each.
|
Our focus continues to be on the following:
|
|
|
|
|
driving further sales growth and profitability;
|
|
|
|
expanding our large international platform;
|
|
|
|
accelerating our new restaurant development; and
|
|
|
|
employing innovative marketing strategies and expanding product
offerings.
|
Our fiscal 2008 growth targets are: average
annual revenue growth of 6% to 7%; average annual EBITDA growth
of 10% to 12%; and net income growth of 12% to 15%.
We intend to achieve our growth targets and strengthen our
competitive position through the continued implementation of the
following key elements of our business strategy:
|
|
|
|
|
Drive further sales growth and
profitability: We remain focused on achieving our
comparable sales, average restaurant sales and profitability
potential. An essential component of our success is to grow
average restaurant sales through an enhanced guest experience.
Our key guest satisfaction and operations metrics were at
all-time highs in June 2007 and we intend to focus our efforts
on further improving these metrics. In addition, we intend to
implement initiatives to reduce the gap between our hours of
operation and those of our competitors, which we believe will
increase comparable sales and average restaurant sales in
U.S. restaurants. We also believe that significant
opportunities exist to enhance restaurant profitability by
better utilizing our fixed cost base, and continuing to explore
ways to reduce variable costs. Specifically, we expect to
achieve savings from the recent installation of the new flexible
batch broiler in substantially all of our company restaurants in
the U.S. and Canada and as we roll out our new labor
scheduling system to our U.S. company restaurants during
fiscal 2008. These savings should help to offset potential labor
and commodity cost increases.
|
|
|
|
Expand our large international platform: We
intend to leverage our substantial international infrastructure
to expand our franchise network and restaurant base.
Internationally we are much smaller than our largest competitor,
and, therefore, we believe we have significant growth
opportunities. We have developed a detailed global development
plan to accelerate worldwide growth over the next five years. We
expect to focus our expansion plans on (1) under-penetrated
markets where we already have an established presence, such as
Germany, Spain and Mexico; (2) markets in which we have a
small presence, but which we believe offer significant
opportunities for development, such as Brazil, China and Italy;
and (3) financially attractive new markets such as Japan
and Indonesia, where our new franchisees have recently opened
restaurants, and countries in the Middle East, Eastern Europe
and the Mediterranean region. We believe that our successful
entry into Brazil where in two years we have recruited seven new
franchisees and opened 34 restaurants in 14 cities
validates the opportunities that exist for us in rapidly
developing international markets.
|
|
|
|
Accelerate our new restaurant development: The
expansion of our restaurant network and an increase in the
number of new restaurants are key ingredients in our growth
plan. We expect that most of our new restaurant growth will come
from franchisees. Consequently, we believe that providing our
franchisees with a development process that is streamlined,
financially flexible and capital-efficient will accelerate the
pace of restaurant development. As part of this strategy, we
developed new, smaller restaurant designs that reduce the level
of capital investment required, while also addressing a change
in consumer preference from dine-in to drive-thru (62% of
U.S. company restaurant sales are currently made in the
drive-thru). These smaller restaurant models reduce average
building costs by approximately 25% and are anticipated to
reduce utility and other operating expenses. We are also
actively pursuing co-branding and site sharing programs to
reduce
|
45
|
|
|
|
|
initial investment expense and have begun testing a turn-key
development assistance program that reduces the time and
uncertainty associated with new builds.
|
|
|
|
|
|
Employ innovative marketing strategies and expand product
offerings: We intend to continue to employ innovative and
creative marketing strategies to increase our restaurant traffic
and comparable sales. We intend to launch new products to fill
gaps in our breakfast, dessert and snack menu, offer more
choices to our guests and enhance the price/value proposition of
our products with offerings such as the BK Value Menu and
the BK Breakfast Value Menu (the first national breakfast
value menu in the FFHR category). In addition, we intend to
roll-out several new and limited time offer products in fiscal
2008.
|
Key
Business Measures
We track our results of operations and manage our business by
using three key business measures: sales growth; comparable
sales growth; and average restaurant sales. Unless otherwise
stated, sales growth, comparable sales growth and average
restaurant sales are presented on a system-wide basis. Sales
growth and comparable sales growth are analyzed on a constant
currency basis, which means they are calculated using the same
exchange rate over the periods under comparison to remove the
effects of currency fluctuations from these trend analyses. We
believe these constant currency measures provide a more
meaningful analysis of our business by identifying the
underlying business trend, without distortion from the effect of
foreign currency movements.
Comparable
Sales Growth
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period in the prior year for
restaurants that have been open for 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 Years Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In constant currencies)
|
|
|
Comparable Sales
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
3.6
|
%
|
|
|
2.5
|
%
|
|
|
6.6
|
%
|
EMEA/APAC
|
|
|
3.0
|
%
|
|
|
0.0
|
%
|
|
|
2.8
|
%
|
Latin America
|
|
|
3.5
|
%
|
|
|
2.5
|
%
|
|
|
5.5
|
%
|
Total Worldwide
|
|
|
3.4
|
%
|
|
|
1.9
|
%
|
|
|
5.6
|
%
|
Our comparable sales growth in fiscal 2007 was driven by our
strategic initiatives related to operational excellence,
advertising, and our continued focus on our BK Value Menu
and the promotion of premium products. These results are driven
mostly by our franchise restaurants as approximately 90% of our
system-wide restaurants are franchised.
In the United States and Canada, our comparable sales growth
performance increased for fiscal 2007 as compared to fiscal
2006, as a result of our provocative advertising, menu
enhancements, such as the introduction of new products like the
BK Stacker, as well as limited time offers, such as the
Angus Cheesy Bacon sandwich, Texas Double Whopper
sandwich, and Western Whopper sandwich. Other
comparable sales growth drivers included the BK Value
Menu, late-night hours and successful movie tie-ins and
innovative promotions such as
Spider-Mantm
3, SpongeBob
SquarePantstm,
Fantastic
4tm
and the
Xbox®
game collection.
Comparable sales growth in EMEA/APAC reflects positive sales
performance in all major countries in the segment for fiscal
2007. Strong comparable sales in the U.K. were driven by the
introduction of fresh, high quality premium products, such as
the Aberdeen Angus Burger and 3 Pepper Angus Burger and the
Spider-Mantm
3 movie tie-in which featured the
Spider-Mantm
Dark Whopper sandwich limited time offer. In addition, a
strategic investment of $7 million was made to the
marketing fund to improve brand recognition and introduce new
products through commercials, such as the Manthem
and the Have It Your Way brand promise.
46
Latin America demonstrated strong results in comparable sales
for fiscal 2007 compared to fiscal 2006 as this segment
continues to grow. These strong results were fueled by the
introduction of new products, limited time offers, innovative
promotions and marketing campaigns, such as the Have It Your
Way brand promise.
Our comparable sales growth in fiscal 2006 was driven by new
products and marketing and operational initiatives. Comparable
sales in the United States and Canada did not increase at the
same rate in fiscal 2006 due to the high growth rate in fiscal
2005 to which fiscal 2006 performance is compared. EMEA
performance during fiscal 2006 was negatively impacted by weak
performance in the U.K., as a result of changes in consumer
preferences away from the FFHR category.
Comparable sales growth increased significantly in fiscal 2005,
as a result of strategic initiatives introduced in the second
half of fiscal 2004. In the United States and Canada, our
comparable sales growth performance improved significantly in
fiscal 2005, as we made 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. EMEA comparable sales for fiscal
2005 reflected a slow down in economic conditions, competition
in Germany and weak performance in the U.K., as a result of
changes in consumer preferences away from the FFHR category.
Average
Restaurant Sales
Average restaurant sales, or ARS, is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. ARS is influenced mostly
by comparable sales performance and restaurant openings and
closures and also includes the impact of movement in foreign
currency exchange rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Worldwide Average Restaurant Sales
|
|
$
|
1,193
|
|
|
$
|
1,126
|
|
|
$
|
1,104
|
|
Our ARS improvement during fiscal 2007 was primarily due to:
improved comparable sales; the opening of new restaurants with
higher than average sales volumes; and, to a lesser extent, the
closure of under-performing restaurants. Our comparable sales
were 3.4% for the year ended June 30, 2007, driven
primarily by our strategic initiatives related to operational
excellence, advertising, menu enhancements, such as our BK
Value Menu and BK Stacker, movie tie-ins such as
Spider-Mantm
3 and SpongeBob
SquarePantstm,
and promotional campaigns, such as our innovative
Xbox®
game collection. We and our franchisees opened 441 new
restaurants and closed 287 restaurants during fiscal 2007. As of
June 30, 2007, the last 50 free-standing restaurants opened
in the United States and that have operated for at least
12 months generated ARS of $1.49 million, which is
approximately 26% higher than the current U.S. system
average. We believe that continued improvements to the ARS of
existing restaurants and strong sales at new restaurants,
combined with the closure of under-performing restaurants, will
result in financially stronger operators throughout our
restaurant system.
Average restaurant sales improved in fiscal 2006 primarily from
improved comparable sales, the opening of new restaurants with
higher than average sales volumes and closure of
under-performing restaurants. Our comparable sales increased by
1.9% in fiscal 2006 driven primarily by our strategic
initiatives related to operational excellence, advertising and
our menu. We and our franchisees opened 349 new restaurants and
closed 324 restaurants during fiscal 2006.
Sales
Growth
Sales growth refers to the change in sales at all company-owned
and franchise restaurants from one period to another. Sales
growth is an important indicator of the overall direction and
trends of sales and income from
47
operations on a system-wide basis. Sales growth is influenced by
restaurant openings and comparable sales as well as the
effectiveness of our advertising and marketing initiatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In constant currencies)
|
|
|
Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
3.0
|
%
|
|
|
0.2
|
%
|
|
|
4.9
|
%
|
EMEA/APAC
|
|
|
7.9
|
%
|
|
|
5.0
|
%
|
|
|
7.9
|
%
|
Latin America
|
|
|
13.3
|
%
|
|
|
13.0
|
%
|
|
|
14.5
|
%
|
Total Worldwide
|
|
|
4.9
|
%
|
|
|
2.1
|
%
|
|
|
6.1
|
%
|
Sales growth continued on a positive trend during fiscal 2007,
as comparable sales and the number of restaurants continued to
increase on a system-wide basis. We expect restaurant closures
to continue to decline and restaurant openings to accelerate in
most regions, with the exception of the U.K. where we continue
to work on improving the financial health of certain company and
franchise restaurants.
Our sales growth in the United States and Canada during fiscal
2007 reflects positive comparable sales growth and an increase
in the amount of revenues earned by new restaurants, offset by a
net reduction in restaurant count. We had 7,488 restaurants in
the United States and Canada as of June 30, 2007, compared
to 7,534 restaurants as of June 30, 2006.
EMEA/APAC demonstrated strong sales growth during fiscal 2007
reflecting openings of new restaurants and positive comparable
sales in all the major markets, including the U.K., Germany,
Spain, Australia and New Zealand and smaller markets in the
Mediterranean and the Middle East. Sales performance improved in
the U.K. during the second half of fiscal 2007 as a result of
our strategic investments in that country.
Latin Americas sales growth was driven by new restaurant
openings and strong comparable sales in fiscal 2007.
The increases in sales growth in fiscal 2006 primarily reflected
improved comparable sales in the United States and Canada and
Latin America and sales at 349 new restaurants which opened
during the year, partially offset by the closure of 324
restaurants during the same period, most of which were
under-performing restaurants in the United States.
Sales growth increased slightly in the United States and Canada
during fiscal 2006, primarily due to an increase in comparable
sales of 2.5%, driven by the implementation of our strategic
initiatives related to advertising, our menu and our operational
excellence programs, offset by a net closure of 186 restaurants.
EMEA/APAC demonstrated strong sales growth during fiscal 2006
from positive comparable sales in several markets, including
Germany, Spain, the Netherlands and smaller markets in the
Mediterranean and the Middle East, partially offset by the U.K.,
where changes in consumer preferences away from the FFHR
category adversely affected sales. In addition, we opened 131
restaurants (net of closures) during fiscal 2006.
Latin Americas sales growth was driven by 80 net new
restaurant openings and strong comparable sales in fiscal 2006.
Factors
affecting comparability of results
Purchase
Accounting
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 requires 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 fiscal 2003. 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
48
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 2004, fiscal 2005 and fiscal 2006, we recorded a
net benefit from favorable and unfavorable lease amortization of
$52 million, $29 million and $24 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 between us and our predecessor (BKC and its
subsidiaries for all periods prior to our December 13, 2002
acquisition of BKC), 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).
Termination
of Global Headquarters Lease
In May 2007, BKC terminated the lease for its proposed new
global headquarters facility, which was to be constructed in
Coral Gables, Florida (the Coral Gables Lease). We
determined that remaining at our current headquarters location
would avoid the cost and disruption of moving to a new facility
and that the current headquarters facility would continue to
meet our needs for a global headquarters more effectively and
cost efficiently. The Coral Gables Lease provided for the lease
of approximately 225,000 square feet for a term of
15 years at an estimated initial annual rent of
approximately $6 million per year, subject to escalations.
By terminating the Coral Gables Lease, we will save
approximately $24 million in future rent payments between
October 2008 and September 2018 and approximately
$23 million of tenant improvements and moving costs, which
were expected to be paid over an
18-month
period. Total costs associated with the termination of the Coral
Gables Lease were $7 million, including a termination fee
of $5 million paid by BKC to the landlord, which includes a
reimbursement of the landlords expenses. See
Note 15 to the Consolidated Financial Statements in
Part II, Item 8 of this
Form 10-K.
These costs are reflected in other operating (income)
expense, net in our consolidated statements of income for fiscal
2007.
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 the closure of 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 the
fiscal years in which they were deferred 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 potential
commitment of $26 million as of June 30, 2007, to fund
certain loans to renovate franchise restaurants, to make
49
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.
Franchise system distress had the following impact on our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue not recognized (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
Selling, general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense (recovery)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
Incremental advertising
contributions
|
|
|
|
|
|
|
1
|
|
|
|
15
|
|
Internal and external costs of
FFRP program administration
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on selling, general
and administrative
|
|
|
(2
|
)
|
|
|
|
|
|
|
28
|
|
Other operating expenses
(income), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves (recoveries) on acquired
debt, net
|
|
|
|
|
|
|
(2
|
)
|
|
|
4
|
|
Other, net
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on other operating
(income) expenses, net
|
|
|
1
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on income from
operations
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
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
Revenue, we recognize the previously unrecognized
revenue at the time such amounts are actually collected. As
brand advertising is a significant element of our success, we
contributed an incremental $15 million to the U.S. and
Canada advertising fund for fiscal 2005 to fund the shortfall in
franchisee contributions. We also incurred significant internal
and external costs to manage the FFRP program in fiscal 2005.
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 has improved
from $973,000 in fiscal 2003 to $1.17 million in fiscal
2007. 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% in fiscal 2004 to 100% during
fiscal 2005, fiscal 2006 and fiscal 2007, which reflects the
improvement of our franchise systems financial health. The
FFRP program in the United States and Canada was completed as of
December 31, 2006.
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.
We believe the investments we have made 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.
50
Our
global reorganization and realignment
After our acquisition of BKC, we retained consultants 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, resulting in 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
alignment of our European and Asian businesses, and the
resulting corporate restructuring, we incurred costs of
$4 million, $10 million and $17 million in fiscal
2007, fiscal 2006 and fiscal 2005, 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 Years Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Consulting fees
|
|
$
|
4
|
|
|
$
|
10
|
|
|
$
|
2
|
|
Severance-related costs of the
global reorganization
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4
|
|
|
$
|
10
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Results
of Operations
The following table presents, for the periods indicated, our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
Increase/
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(Decrease)
|
|
|
Amount
|
|
|
(Decrease)
|
|
|
|
(In millions, except percentages and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,658
|
|
|
$
|
1,516
|
|
|
|
9
|
%
|
|
$
|
1,407
|
|
|
|
8
|
%
|
Franchise revenues
|
|
|
460
|
|
|
|
420
|
|
|
|
10
|
%
|
|
|
413
|
|
|
|
2
|
%
|
Property revenues
|
|
|
116
|
|
|
|
112
|
|
|
|
4
|
%
|
|
|
120
|
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,234
|
|
|
|
2,048
|
|
|
|
9
|
%
|
|
|
1,940
|
|
|
|
6
|
%
|
Company restaurant expenses
|
|
|
1,409
|
|
|
|
1,296
|
|
|
|
9
|
%
|
|
|
1,195
|
|
|
|
8
|
%
|
Selling, general and
administrative expenses
|
|
|
474
|
|
|
|
488
|
|
|
|
(3
|
)%
|
|
|
487
|
|
|
|
|
*
|
Property expenses
|
|
|
61
|
|
|
|
57
|
|
|
|
7
|
%
|
|
|
64
|
|
|
|
(11
|
)%
|
Fees paid to affiliates
|
|
|
|
|
|
|
39
|
|
|
|
|
*
|
|
|
9
|
|
|
|
333
|
%
|
Other operating (income) expenses,
net
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(50
|
)%
|
|
|
34
|
|
|
|
(106
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,943
|
|
|
|
1,878
|
|
|
|
3
|
%
|
|
|
1,789
|
|
|
|
5
|
%
|
Income from operations
|
|
|
291
|
|
|
|
170
|
|
|
|
71
|
%
|
|
|
151
|
|
|
|
13
|
%
|
Interest expense, net
|
|
|
67
|
|
|
|
72
|
|
|
|
(7
|
)%
|
|
|
73
|
|
|
|
(1
|
)%
|
Loss on early extinguishment of
debt
|
|
|
1
|
|
|
|
18
|
|
|
|
(94
|
)%
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
223
|
|
|
|
80
|
|
|
|
179
|
%
|
|
|
78
|
|
|
|
3
|
%
|
Income tax expense
|
|
|
75
|
|
|
|
53
|
|
|
|
42
|
%
|
|
|
31
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148
|
|
|
$
|
27
|
|
|
|
448
|
%
|
|
$
|
47
|
|
|
|
(43
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended June 30, 2007 compared to fiscal year ended
June 30, 2006
Revenues
Company
Restaurant Revenues
Total company restaurant revenues increased by 9% to
$1.7 billion in fiscal 2007, primarily as a result of the
addition of 63 company restaurants (net of closures and
refranchisings) during fiscal 2007 and positive worldwide
company comparable sales in this segment of 2.1%. Approximately
$40 million, or 28%, of the increase in company restaurant
revenues was generated by the favorable impact from the movement
of foreign currency exchange rates primarily in EMEA.
In the United States and Canada, company restaurant revenues
increased by 5% to $1.1 billion in fiscal 2007, primarily
as a result of positive company comparable sales in this segment
of 2.1% and a net increase of 19 company restaurants during
fiscal 2007. Approximately $4 million, or 8%, of the
increase in company restaurant revenues was generated by the
favorable impact from the movement of foreign currency exchange
rates in Canada.
In EMEA/APAC, company restaurant revenues increased by 20% to
$515 million in fiscal 2007, primarily as a result of a net
increase of 36 company restaurants in this segment during
fiscal 2007. The net increase of 36 company restaurants
reflects 41 acquisitions in the U.K., and 20 openings offset by
15 closures and 10 refranchisings. Company comparable sales for
EMEA/APAC was a positive 2.2% overall in this segment reflecting
positive comparable sales in Germany, Spain, The Netherlands and
the U.K. The increase in revenues also reflects
$37 million, or 9%, due to the favorable impact in the
movement of foreign currency exchange rates.
52
In Latin America, company restaurant revenues increased by 9% to
$61 million in fiscal 2007, primarily as a result of the
addition of eight company restaurants to this segment during
fiscal 2007, and company comparable sales growth of 1.1%. The
increase in revenues was offset by an unfavorable
$1 million, or 1%, due to the impact in the movement of
foreign currency exchange rates.
Franchise
Revenues
Total franchise revenues increased by 10% to $460 million
in fiscal 2007, driven by positive worldwide franchise
comparable sales of 3.6% during that period and by
$7 million of favorable impact from the movement of foreign
currency exchange rates. The number of franchise restaurants
(net of closures and acquisitions of franchise restaurants by
us) increased by 91 during fiscal 2007.
In the United States and Canada, franchise revenues increased by
6% to $284 million in fiscal 2007, primarily as a result of
positive franchise comparable sales in this segment of 3.8% and
higher effective royalty rates partially offset by the
elimination of royalties from a net reduction of 65 franchise
restaurants during fiscal 2007.
In EMEA/APAC, franchise revenues increased by 13% to
$135 million in fiscal 2007, driven by an increase of 69
restaurants (net of closures and acquisitions of franchise
restaurants by us) during fiscal 2007; franchise comparable
sales in this segment of 3.1%; and the favorable impact from the
movement of foreign currency exchange rates of $7 million.
Latin America franchise revenues increased by 21% to
$41 million in fiscal 2007, as a result of positive
franchise comparable sales in this segment of 3.7% and the
addition of 87 franchise restaurants (net of closures) during
fiscal 2007.
Property
Revenues
Total property revenues increased by 4% to $116 million in
fiscal 2007, primarily as a result of higher contingent rent
payments driven by our franchise comparable sales growth and the
favorable impact of foreign currency exchange rates in Europe,
partially offset by 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 during the period. In fiscal
2006, property revenues decreased by 7% to $112 million, 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 during the period, partially
offset by higher contingent rent payments.
In the United States and Canada, property revenues increased to
$85 million in fiscal 2007 from $83 million in fiscal
2006. The revenues for both fiscal years in this segment were
driven by higher contingent rent payments from increased
franchise restaurant sales offset by the decrease in the number
of properties that we lease or sublease to franchisees due to
franchise restaurants that were closed or acquired by us.
Our EMEA/APAC property revenues increased by $2 million to
$31 million, primarily as a result of the favorable impact
of foreign currency exchange rates in Europe. In fiscal 2006,
property revenues in this segment decreased by $8 million
to $29 million primarily as a result of the closure of
franchise restaurants in the U.K.
Operating
Costs and Expenses
Food,
Paper and Product Costs
Total food, paper and product costs increased by 6% to
$499 million in fiscal 2007, as a result of a 9% increase
in company restaurant revenues and the unfavorable impact of
foreign currency exchange rates primarily in EMEA. As a
percentage of company restaurant revenues, food, paper and
product costs decreased 0.9% to 30.1%, primarily from a decrease
in the cost of beef and tomatoes for most of the year and the
sale of higher margin products.
In the United States and Canada, food, paper and product costs
increased by 3% in fiscal 2007, as a result of a 5% increase in
company restaurant revenues in this segment offset by a benefit
from lower food costs. Food, paper and product costs as a
percentage of company restaurant revenues decreased 0.6% to
30.8%, primarily due to decreases in the cost of beef and
tomatoes for most of the year. The cost of beef increased in the
fourth quarter of fiscal 2007 placing downward pressures on
company restaurant margins in the U.S. and Canada.
53
In EMEA/APAC, food, paper and product costs increased by 15% in
fiscal 2007, primarily as a result of a 20% increase in company
restaurant revenues in this segment and from the unfavorable
impact of foreign currency exchange rates. Food, paper and
product costs as a percentage of company restaurant revenues
decreased 1.2% to 27.9% driven by price increases for our
products and promotions geared towards higher margin products.
In Latin America, food, paper and product costs increased by 10%
in fiscal 2007 as a result of a 9% increase in company
restaurant revenues in this segment. As a percentage of
revenues, food, paper and product costs remained relatively flat
at 36.6% for fiscal 2007 compared to 36.4% for fiscal 2006.
Payroll
and Employee Benefits
Payroll and employee benefits costs increased by 10% to
$492 million in fiscal 2007. This increase was primarily
due to the addition of 63 company restaurants (net of
closures) in fiscal 2007, increased wages and health insurance
benefit costs, and unfavorable impact of foreign currency
exchange rates. As a percentage of company restaurant revenues,
payroll and employee benefits costs remained relatively flat at
29.7% in fiscal 2007 compared to 29.4% in fiscal 2006 reflecting
the increase from the items above offset by labor efficiencies.
In the United States and Canada, payroll and employee benefits
increased by 5%, as a result of a net increase in the number of
company restaurants, additional labor hours required for late
night hours and the increase in company comparable sales, and
inflationary increases in salaries and wages and benefits.
Payroll and employee benefits remained relatively flat as a
percentage of company restaurant revenues reflecting positive
comparable sales and labor efficiencies as an offset to
inflationary increases.
In EMEA/APAC, payroll and employee benefits increased by 23% in
fiscal 2007, primarily as a result of 36 additional company
restaurants (net of closures and refranchisings) in fiscal 2007
and the unfavorable impact of foreign currency exchange rates.
Payroll and employee benefits as a percentage of company
restaurant revenues increased 0.5% to 30.3% primarily due to the
acquisition of franchise restaurants in the U.K. generating
lower sales.
In Latin America, payroll and employee benefits increased by 9%
in fiscal 2007, primarily as a result of the opening of eight
new company restaurants during fiscal 2007. Payroll and employee
benefits remained relatively flat as a percentage of company
restaurant revenues in fiscal 2007 compared to fiscal 2006.
Occupancy
and Other Operating Costs
Occupancy and other operating costs increased by 10% to
$418 million in fiscal 2007, compared to the prior year.
This increase was primarily attributable to escalating rent and
utility costs in EMEA, the addition of 63 company
restaurants (net of closures and refranchisings) in fiscal 2007
and the unfavorable impact of foreign currency exchange rates.
Occupancy and other operating costs remained relatively flat as
a percentage of worldwide company restaurant revenues in fiscal
2007 compared to fiscal 2006.
In the United States and Canada, occupancy and other operating
costs increased by 2% in fiscal 2007, compared to fiscal 2006,
driven by 19 additional company restaurants (net of closures and
refranchisings) in fiscal 2007, and an increase in utility costs
to operate during late night hours. These costs decreased as a
percentage of company restaurant revenues by 0.8% to 23.5% as a
result of a reduction in casualty and hurricane-related losses.
In EMEA/APAC, occupancy and other operating costs increased by
28% in fiscal 2007, compared to the same period in the prior
year, primarily due to the addition of 36 company
restaurants (net of closures and refranchisings) in fiscal 2007,
and unfavorable impact of foreign currency exchange rates. As a
percentage of company restaurant revenues, occupancy and other
operating costs increased to 28.8%, compared to 27.2% in fiscal
2006. The increase in these costs as a percentage of revenues
reflects increases in utilities and rents in all major markets.
In Latin America, occupancy and other operating costs increased
by 16%, primarily as a result of an increase of eight company
restaurants in fiscal 2007. As a percentage of company
restaurant revenues, these costs increased by 0.6% to 25.9% in
fiscal 2007 compared to the prior year, primarily as a result of
an increase in utilities, property taxes, repairs and
maintenance and the cost of information technology including POS
systems.
54
Selling,
General and Administrative Expenses
Selling expenses increased by $11 million for the twelve
months ended June 30, 2007, compared to the same period in
the prior year. This increase includes $9 million of
additional sales promotions and advertising expenses generated
by higher company restaurant revenues, and $7 million
related to incremental contributions made by the Company to the
marketing fund in the U.K. and Germany, offset by a
$5 million recovery of bad debt. The incremental
contribution to the marketing fund in the U.K. was used to
improve brand recognition in that market and to introduce new
premium products with commercials such as, the
Manthem and the Have It Your Way brand
promise, and promotions for the £1.99 Whopper
sandwich and Aberdeen Angus burger. The overall increase in
selling expenses for fiscal 2007 of $11 million also
includes the unfavorable impact of approximately $3 million
from the movement in foreign currency exchange rates.
General and administrative expenses decreased by
$25 million to $391 million for fiscal 2007, compared
to the same period in the prior year. This decrease was
primarily driven by a non-recurring compensation expense and
taxes related to the compensatory make-whole payment of
$34 million in the prior year, and by a reduction in
severance and relocation of $3 million, offset by
$4 million in professional fees including $1 million
of expenses related to the secondary offering by private equity
funds controlled by the Sponsors, $5 million of stock-based
compensation, an increase in corporate salary and fringe
benefits of $3 million, and an increase in travel and
meetings of $4 million. The overall decrease of
$25 million also includes the unfavorable impact of
approximately $8 million from the movement in foreign
currency exchange rates.
Property
Expenses
Property expenses increased by $4 million to
$61 million in fiscal 2007, as a result of lower
amortization of unfavorable leases in the United States and
Canada and the unfavorable impact of foreign currency exchange
rates in Europe. 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 the
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 37% of
property revenues in the United States and Canada in fiscal 2007
compared to 35% in fiscal 2006. 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
During fiscal 2007, we incurred no fees to affiliates. Fees paid
to affiliates were $39 million during fiscal 2006,
consisting of $30 million paid to our Sponsors to terminate
the management agreement and $9 million from regular
recurring monthly management fees.
Other
Operating (Income) Expense, Net
Other operating income, net for fiscal 2007 was $1 million,
compared to $2 million for the same period in the prior
year. The $1 million of other operating income, net for
fiscal 2007 includes a net gain of $5 million from the
disposal of assets, a gain of $7 million from forward
currency contracts used to hedge intercompany loans denominated
in foreign currencies offset by $7 million in costs
associated with the termination of the lease for a new
headquarters which we had proposed to build in Coral Gables,
Florida, $2 million in litigation reserves, and
$3 million in franchise workout costs. The $2 million
of other operating income, net for the twelve months ended
June 30, 2006 included a gain of $3 million from the
disposal of assets including the termination of unfavorable
leases in the U.S., Canada, and the U.K., a $2 million gain
from the recovery of an investment in franchisee debt, and a
$1 million recovery from an investment in New Zealand that
has since been dissolved. These gains were offset by
$4 million of closed restaurant expenses in the U.K. and
the U.S.
55
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Income from
Operations:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
336
|
|
|
$
|
295
|
|
EMEA/APAC
|
|
|
54
|
|
|
|
62
|
|
Latin America
|
|
|
35
|
|
|
|
29
|
|
Unallocated
|
|
|
(134
|
)
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
291
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
Income from operations increased by $121 million to
$291 million in fiscal 2007 compared to the prior year,
primarily as a result of a reduction in fees paid to affiliates
and decreased selling, general and administrative expenses from
the non-recurrence of management fees of $39 million paid
to our Sponsors, as well as the compensation expense and taxes
of $34 million recorded in fiscal 2006 related to the
compensatory make-whole payment. Improvement in restaurant sales
driven by strong comparable sales increased franchise revenues
and company restaurant revenues and margins. See Note 21
to our audited consolidated financial statements contained in
this report for income from operations by segment. The
favorable impact that the movement in foreign currency exchange
rates had on revenues was offset by the unfavorable impact on
operating costs and expenses, resulting in a $1 million
favorable overall impact on income from operations.
In the United States and Canada, income from operations
increased by $41 million to $336 million during fiscal
2007 compared to the prior year, primarily as a result of an
increase in company restaurant margins of $20 million and
an increase in franchise revenues of $17 million, driven by
lower company restaurant expenses and positive comparable sales
for both company and franchise restaurants.
Income from operations in EMEA/APAC decreased by $8 million
to $54 million in fiscal 2007 compared to the prior year,
driven primarily by an increase of $34 million in selling,
general and administrative expenses, offset by an increase in
company restaurant margins of $5 million, an increase in
franchise revenues of $16 million and an increase in other
operating income of $5 million generated by a gain on the
sale of a joint venture in New Zealand in fiscal 2007. The
increase in selling, general and administrative expenses of
$34 million reflects increases in the following:
advertising expenses of $11 million; salaries and fringe
benefits of $6 million; relocation, severance and training
expenses of $5 million; professional fees of
$4 million; travel and meeting expenses of $3 million;
and bad debt expense of $2 million.
Income from operations in Latin America increased by
$6 million to $35 million in fiscal 2007 compared to
the prior year, due to an increase in franchise revenues from
comparable sales of 3.7% and a net increase of 87 franchise
restaurants during fiscal 2007.
Interest
Expense, Net
Interest expense, net decreased by $5 million during the
twelve months ended June 30, 2007, compared to the same
period in the prior year reflecting a decrease in interest
expense of $8 million offset by a decrease in interest
income of $3 million. The decrease in interest expense is
primarily due to a reduction in the amount of borrowings
outstanding, which reduced interest expense by $12 million.
An increase in rates paid on borrowings increased interest
expense by $10 million during the period, offset by the
benefit from interest rate swaps of $6 million. The
decrease in interest income of $3 million is due to a
reduction in the amount of interest earning cash equivalents
combined with a reduction in yields.
Loss
on Early Extinguishment of Debt
Loss on early extinguishment of debt was $1 million in
fiscal 2007 compared to $18 million in fiscal 2006. The
decrease of $17 million was due to the write off of
deferred financing costs recognized in conjunction with the
56
refinancing of our secured debt in July 2005, the incremental
$350 million borrowing made in February 2006, and the
$350 million prepayment of term debt from the proceeds of
our initial public offering.
Income
Tax Expense
Income tax expense was $75 million in fiscal 2007. Compared
to the prior fiscal year, our effective tax rate decreased
approximately 33 percentage points to 33.6%, primarily as a
result of tax benefits realized from an operational realignment
of our European and Asian businesses, and from the reduction in
tax accruals due to the resolution of certain tax audit matters.
See Note 14 to our consolidated financial statements for
further information regarding our effective tax rate. See
Item 1A Risk Factors in Part I of this
report for a discussion regarding our ability to utilize foreign
tax credits.
Net
income
Net income increased by $121 million to $148 million
in fiscal 2007 compared to the prior year, primarily as a result
of a reduction in fees paid to affiliates and decreased selling,
general and administrative expenses from the non-recurrence of
management fees of $39 million paid to our Sponsors, as
well as the compensation expense and taxes of $34 million
recorded in fiscal 2006 related to the compensatory make-whole
payment. Improvement in restaurant sales driven by strong
comparable sales increased franchise revenues and company
restaurant revenues and improved our margins. The increase in
net income was also attributed to the net decrease in interest
expense of $5 million, decrease in early extinguishment of
debt of $17 million, offset by an increase in income tax
expense of $22 million.
Fiscal
year ended June 30, 2006 compared to fiscal year ended
June 30, 2005
Revenues
Company
Restaurant Revenues
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 worldwide
company comparable sales in the United States and Canada.
Partially offsetting these factors were negative company
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 company 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 company
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 company comparable sales in the U.K. and Germany, where
77% of our EMEA/APAC company restaurants were located as of
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 income from operations
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 company comparable sales.
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 company
comparable sales. In fiscal 2005,
57
company restaurant revenues increased 8% to $49 million,
primarily as a result of new restaurant openings and positive
company comparable sales.
Franchise
Revenues
Franchise revenues increased 2% to $420 million in fiscal
2006. Franchise comparable sales increased 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
franchise 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 franchise 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 franchise 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 franchise comparable sales.
Property
Revenues
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 U.K. 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.
58
Operating
Costs and Expenses
Food,
Paper and Product Costs
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 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
Payroll and employee benefit costs increased 7% to
$446 million in fiscal 2006. Payroll and employee benefit
costs decreased 0.1% to 29.4% of company restaurant revenues in
fiscal 2006 compared to 29.5% in fiscal 2005. Payroll and
employee benefit 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 benefit 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
benefit costs decreased 0.4% to 29.5% of company restaurant
revenues in fiscal 2005 as higher costs of wages and health
insurance benefit 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 benefit
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 benefit
costs increased 0.3% to 30.2% of company restaurant revenues. In
fiscal 2005, payroll and employee benefit 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 benefit 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 benefit costs decreased 5% to
$127 million in fiscal 2006, primarily as a result of
favorable foreign currency exchange rates. Payroll and employee
benefit costs decreased 1.1% to 29.7% of company restaurant
revenues in EMEA/APAC. In fiscal 2005, payroll and employee
benefit costs increased 3% to $134 million, primarily as a
result of new company restaurants in Germany and increased wages
and benefit
59
costs. Payroll and employee benefit 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
benefit costs increased 17% to $7 million in fiscal 2006,
primarily as a result of nine new company restaurant openings
since June 30, 2005. Payroll and employee benefit costs
increased 0.9% to 12.5% of company restaurant revenues in Latin
America. In fiscal 2005, payroll and employee benefit costs
increased 12% to $6 million, primarily as a result of new
company restaurants. Payroll and employee benefit 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
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
U.K., 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 U.K. 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.
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.
60
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.
General and administrative expenses included $29 million
and $33 million of costs associated with the FFRP
programs 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
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. 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
Fees paid to affiliates increased to $39 million in fiscal
2006, compared to $9 million in fiscal 2005 as a result of
the $30 million management agreement termination fee paid
to the Sponsors.
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:
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 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
61
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.
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Income from
Operations:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
295
|
|
|
$
|
255
|
|
EMEA/APAC
|
|
|
62
|
|
|
|
36
|
|
Latin America
|
|
|
29
|
|
|
|
25
|
|
Unallocated
|
|
|
(216
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
Total Income from Operations
|
|
$
|
170
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
Income from operations 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 21 to our audited consolidated
financial statements contained in this report for segment
information disclosed in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS No 131). In fiscal 2005, our
income from operations 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, income from operations
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, income
from operations 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.
Income from operations 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 U.K., due to decreased sales, increased beef
prices and occupancy costs, including rents and utilities. In
fiscal 2005, income from operations 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
U.K., and (v) $2 million of litigation settlement
costs in Asia.
Income from operations in Latin America increased by
$4 million to $29 million in fiscal 2006, primarily as
a result of increased revenues. In fiscal 2005, income from
operations decreased by $1 million to $25 million,
primarily as a result of higher company restaurant expenses.
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
62
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
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
refinancings. 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 in fiscal 2006.
Income
Tax Expense
Income tax expense increased $22 million to
$53 million in fiscal 2006. Compared to fiscal 2005, this
is a 26% increase in our effective tax rate to 66%, which is
primarily attributable to accruals for tax uncertainties of
$15 million and changes in the estimate of tax provisions
of $7 million.
Net
Income
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.
63
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, 2007. 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,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Company restaurant revenues
|
|
$
|
433
|
|
|
$
|
403
|
|
|
$
|
417
|
|
|
$
|
405
|
|
|
$
|
394
|
|
|
$
|
368
|
|
|
$
|
379
|
|
|
$
|
375
|
|
Franchise revenues
|
|
|
126
|
|
|
|
109
|
|
|
|
112
|
|
|
|
113
|
|
|
|
111
|
|
|
|
100
|
|
|
|
104
|
|
|
|
105
|
|
Property revenues
|
|
|
31
|
|
|
|
27
|
|
|
|
30
|
|
|
|
28
|
|
|
|
28
|
|
|
|
27
|
|
|
|
29
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
590
|
|
|
|
539
|
|
|
|
559
|
|
|
|
546
|
|
|
|
533
|
|
|
|
495
|
|
|
|
512
|
|
|
|
508
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
132
|
|
|
|
120
|
|
|
|
125
|
|
|
|
122
|
|
|
|
119
|
|
|
|
114
|
|
|
|
119
|
|
|
|
118
|
|
Payroll and employee benefits
|
|
|
129
|
|
|
|
121
|
|
|
|
123
|
|
|
|
119
|
|
|
|
116
|
|
|
|
111
|
|
|
|
109
|
|
|
|
110
|
|
Occupancy and other operating costs
|
|
|
108
|
|
|
|
105
|
|
|
|
103
|
|
|
|
102
|
|
|
|
100
|
|
|
|
96
|
|
|
|
93
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant expenses
|
|
|
369
|
|
|
|
346
|
|
|
|
351
|
|
|
|
343
|
|
|
|
335
|
|
|
|
321
|
|
|
|
321
|
|
|
|
319
|
|
Selling, general and administrative
expenses
|
|
|
128
|
|
|
|
115
|
|
|
|
119
|
|
|
|
112
|
|
|
|
135
|
|
|
|
146
|
|
|
|
109
|
|
|
|
98
|
|
Property expenses
|
|
|
16
|
|
|
|
14
|
|
|
|
15
|
|
|
|
16
|
|
|
|
15
|
|
|
|
14
|
|
|
|
14
|
|
|
|
14
|
|
Fees paid to affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Other operating expenses (income),
net
|
|
|
5
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
518
|
|
|
|
477
|
|
|
|
484
|
|
|
|
464
|
|
|
|
519
|
|
|
|
481
|
|
|
|
442
|
|
|
|
436
|
|
Income from operations
|
|
|
72
|
|
|
|
62
|
|
|
|
75
|
|
|
|
82
|
|
|
|
14
|
|
|
|
14
|
|
|
|
70
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
16
|
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
|
|
19
|
|
|
|
19
|
|
|
|
17
|
|
|
|
17
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
56
|
|
|
|
45
|
|
|
|
58
|
|
|
|
64
|
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
|
53
|
|
|
|
42
|
|
Income tax expense
|
|
|
20
|
|
|
|
11
|
|
|
|
20
|
|
|
|
24
|
|
|
|
1
|
|
|
|
6
|
|
|
|
26
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
36
|
|
|
$
|
34
|
|
|
$
|
38
|
|
|
$
|
40
|
|
|
$
|
(10
|
)
|
|
$
|
(12
|
)
|
|
$
|
27
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.30
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
Segment Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
87
|
|
|
$
|
78
|
|
|
$
|
84
|
|
|
$
|
87
|
|
|
$
|
76
|
|
|
$
|
67
|
|
|
$
|
74
|
|
|
$
|
78
|
|
EMEA/APAC
|
|
|
11
|
|
|
|
10
|
|
|
|
13
|
|
|
|
20
|
|
|
|
11
|
|
|
|
9
|
|
|
|
21
|
|
|
|
21
|
|
Latin America
|
|
|
9
|
|
|
|
8
|
|
|
|
10
|
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
|
|
8
|
|
|
|
7
|
|
Unallocated
|
|
|
(35
|
)
|
|
|
(34
|
)
|
|
|
(32
|
)
|
|
|
(33
|
)
|
|
|
(80
|
)
|
|
|
(69
|
)
|
|
|
(33
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
|
$
|
72
|
|
|
$
|
62
|
|
|
$
|
75
|
|
|
$
|
82
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
70
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
281
|
|
|
$
|
260
|
|
|
$
|
270
|
|
|
$
|
271
|
|
|
$
|
271
|
|
|
$
|
254
|
|
|
$
|
254
|
|
|
$
|
253
|
|
EMEA/APAC
|
|
|
136
|
|
|
|
129
|
|
|
|
131
|
|
|
|
119
|
|
|
|
109
|
|
|
|
100
|
|
|
|
110
|
|
|
|
109
|
|
Latin America
|
|
|
16
|
|
|
|
14
|
|
|
|
16
|
|
|
|
15
|
|
|
|
14
|
|
|
|
14
|
|
|
|
15
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company Restaurant Revenues
|
|
$
|
433
|
|
|
$
|
403
|
|
|
$
|
417
|
|
|
$
|
405
|
|
|
$
|
394
|
|
|
$
|
368
|
|
|
$
|
379
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant
Margin:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
15.8
|
%
|
|
|
15.6
|
%
|
|
|
15.3
|
%
|
|
|
14.8
|
%
|
|
|
15.5
|
%
|
|
|
12.6
|
%
|
|
|
14.1
|
%
|
|
|
14.2
|
%
|
EMEA/APAC
|
|
|
11.6
|
%
|
|
|
9.7
|
%
|
|
|
15.7
|
%
|
|
|
15.2
|
%
|
|
|
12.6
|
%
|
|
|
11.5
|
%
|
|
|
15.9
|
%
|
|
|
15.3
|
%
|
Latin America
|
|
|
25.9
|
%
|
|
|
23.6
|
%
|
|
|
28.8
|
%
|
|
|
25.3
|
%
|
|
|
25.5
|
%
|
|
|
27.3
|
%
|
|
|
28.8
|
%
|
|
|
24.4
|
%
|
Company Restaurant Margin
|
|
|
14.8
|
%
|
|
|
14.0
|
%
|
|
|
15.9
|
%
|
|
|
15.3
|
%
|
|
|
15.0
|
%
|
|
|
12.9
|
%
|
|
|
15.2
|
%
|
|
|
14.9
|
%
|
Franchise Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
78
|
|
|
$
|
66
|
|
|
$
|
70
|
|
|
$
|
70
|
|
|
$
|
70
|
|
|
$
|
65
|
|
|
$
|
66
|
|
|
$
|
67
|
|
EMEA/APAC
|
|
|
37
|
|
|
|
33
|
|
|
|
32
|
|
|
|
33
|
|
|
|
32
|
|
|
|
27
|
|
|
|
29
|
|
|
|
30
|
|
Latin America
|
|
|
11
|
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
9
|
|
|
|
8
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Franchise Revenues(2)
|
|
$
|
126
|
|
|
$
|
109
|
|
|
$
|
112
|
|
|
$
|
113
|
|
|
$
|
111
|
|
|
$
|
100
|
|
|
$
|
104
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
2,008
|
|
|
$
|
1,830
|
|
|
$
|
1,914
|
|
|
$
|
1,947
|
|
|
$
|
1,914
|
|
|
$
|
1,795
|
|
|
$
|
1,850
|
|
|
$
|
1,923
|
|
EMEA/APAC
|
|
|
817
|
|
|
|
728
|
|
|
|
757
|
|
|
|
773
|
|
|
|
695
|
|
|
|
632
|
|
|
|
680
|
|
|
|
708
|
|
Latin America
|
|
|
208
|
|
|
|
193
|
|
|
|
205
|
|
|
|
194
|
|
|
|
187
|
|
|
|
172
|
|
|
|
179
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Franchise Sales
|
|
$
|
3,033
|
|
|
$
|
2,751
|
|
|
$
|
2,876
|
|
|
$
|
2,914
|
|
|
$
|
2,796
|
|
|
$
|
2,599
|
|
|
$
|
2,709
|
|
|
$
|
2,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Calculated using dollars expressed in hundreds of thousands. |
|
(2) |
|
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. |
64
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 closures 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 49 franchise
restaurants (net of refranchisings) in fiscal 2007, which
resulted in increased revenues and operating expenses in fiscal
2007 compared to fiscal 2006.
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 2007 and fiscal 2006
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
Selling, general and
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Global reorganization and
realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
Compensatory make-whole payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Executive severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on
SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
36
|
|
|
|
1
|
|
|
|
1
|
|
Fees paid to
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Management termination fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees paid to
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Other operating (income)
expenses (OIE), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination of global headquarters
lease
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on OIE,
net
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
Total effect on income from
operations
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
36
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on $350 million
loan repaid at IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on income before
income taxes
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
40
|
|
|
$
|
5
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents bad debt expense (recoveries), incremental
advertising contributions and the internal and external costs of
FFRP program administration. |
|
(b) |
|
Represents (recoveries) reserves on acquired debt, net and other
items included within operating (income) expenses, net. |
65
Comparable sales growth for each of the quarters in the fiscal
years ended June 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
(In constant currencies)
|
|
|
Comparable Sales
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
4.8
|
%
|
|
|
2.6
|
%
|
|
|
4.4
|
%
|
|
|
2.6
|
%
|
|
|
2.0
|
%
|
|
|
4.9
|
%
|
|
|
2.3
|
%
|
|
|
1.1
|
%
|
EMEA/APAC
|
|
|
4.1
|
%
|
|
|
5.3
|
%
|
|
|
1.7
|
%
|
|
|
1.1
|
%
|
|
|
0.2
|
%
|
|
|
(0.4
|
)%
|
|
|
1.3
|
%
|
|
|
(0.7
|
)%
|
Latin America
|
|
|
1.5
|
%
|
|
|
2.7
|
%
|
|
|
4.1
|
%
|
|
|
6.1
|
%
|
|
|
5.0
|
%
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
|
|
1.5
|
%
|
Total Worldwide
|
|
|
4.4
|
%
|
|
|
3.2
|
%
|
|
|
3.7
|
%
|
|
|
2.4
|
%
|
|
|
1.7
|
%
|
|
|
3.3
|
%
|
|
|
2.0
|
%
|
|
|
0.7
|
%
|
Liquidity
and Capital Resources
Overview
Cash provided by operations was $117 million in fiscal
2007, compared to cash provided by operations of
$74 million in fiscal 2006.
During fiscal 2007, we retired $125 million in debt. Our
leverage ratio, as defined by our credit agreement, was 2.1x as
of June 30, 2007, compared to 2.6x as of June 30,
2006. By lowering our leverage ratio, the interest rate on our
Term Loan A of our senior secured credit facility decreased by
50 basis points. During the first quarter of fiscal 2008,
we retired an additional $25 million in debt.
During fiscal 2007, we declared and paid two quarterly dividends
of $0.0625 per share, resulting in $17 million of cash
payments to shareholders of record. During the first quarter of
fiscal 2008, we declared a quarterly dividend of $0.0625 that is
payable on September 28, 2007 to shareholders of record on
September 14, 2007.
We had cash and cash equivalents of $170 million as of
June 30, 2007. In addition, as of June 30, 2007, we
had a borrowing capacity of $120 million under our
$150 million revolving credit facility (net of
$30 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, dividends and share repurchases, if
any, 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
equity securities.
Comparative
Cash Flows
Operating
Activities
Cash provided by operating activities was $117 million and
$74 million in fiscal 2007 and 2006, respectively. The
$117 million provided in fiscal 2007 includes net income of
$148 million, offset by a usage of cash from a change in
working capital of $112 million, including tax payments of
$151 million, which were primarily comprised of payments of
$82 million made in connection with the operational
realignment of our European and Asian businesses and
$37 million of quarterly estimated U.S. federal and state
tax payments. The $74 million provided in fiscal 2006
includes an interest payment to affiliates of $103 million
on PIK notes and a usage of cash from a change in working
capital of $29 million.
Investing
Activities
Cash used for investing activities was $84 million in
fiscal 2007, compared to $74 million in fiscal 2006. The
$10 million increase in the amount of cash used in fiscal
2007, compared to the prior fiscal year, was due primarily to an
increase in cash used of $13 million for acquisitions of
franchise restaurants, investments in third party debt, and
payments for property and equipment offset by an increase in
proceeds of $4 million from asset disposals and restaurant
closures.
66
Capital expenditures include costs to open new company
restaurants, to remodel and maintain restaurant properties to
our standards and to develop our corporate infrastructure,
particularly in information technology. The following table
presents capital expenditures by type of expenditure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
New restaurants
|
|
$
|
23
|
|
|
$
|
25
|
|
|
$
|
26
|
|
Real estate purchases
|
|
|
|
|
|
|
6
|
|
|
|
5
|
|
Maintenance capital
|
|
|
47
|
|
|
|
40
|
|
|
|
44
|
|
Other, including corporate
|
|
|
17
|
|
|
|
14
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87
|
|
|
$
|
85
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance capital typically ranges from $10,000 to $15,000 per
restaurant per year, and 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. Maintenance capital
also includes investments in improvements to properties we lease
and sublease to franchisees, including contributions we make
toward 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 $120 to
$150 million in fiscal 2008 to develop new restaurants and
remodel and rebuild existing restaurants and for maintenance
capital, acquisitions, new equipment initiatives, IT initiatives
and other corporate expenditures.
Financing
Activities
Financing activities used cash of $127 million in fiscal
2007 and $173 million in fiscal 2006. Uses of cash in
financing activities in fiscal 2007 primarily consisted of
repayments of debt and capital leases of $131 million, two
quarterly cash dividend payments totaling $17 million and
the purchase of treasury stock of $2 million, offset by
$14 million in tax benefits from stock-based compensation,
$8 million from proceeds of stock-option exercises and
$1 million of proceeds from a foreign credit facility. Uses
of cash in financing activities in fiscal 2006 included the
repayment of $2.3 billion in long-term debt and capital
leases, payment of a $367 million cash dividend and payment
of financing costs of $19 million, offset by
$2.1 billion of proceeds received from the refinancing of
our credit facility.
Contractual
Obligations and Commitments
The following table presents information relating to our
contractual obligations as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
140
|
|
|
$
|
14
|
|
|
$
|
27
|
|
|
$
|
25
|
|
|
$
|
74
|
|
Operating lease obligations
|
|
|
1,423
|
|
|
|
160
|
|
|
|
284
|
|
|
|
242
|
|
|
|
737
|
|
Long-term debt, including current
portion and interest(1)
|
|
|
1,137
|
|
|
|
60
|
|
|
|
191
|
|
|
|
886
|
|
|
|
|
|
Purchase commitments(2)
|
|
|
97
|
|
|
|
58
|
|
|
|
28
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,797
|
|
|
$
|
292
|
|
|
$
|
530
|
|
|
$
|
1,164
|
|
|
$
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
67
|
|
|
(2) |
|
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 and service agreements. |
As of June 30, 2007, we leased 1,087 properties to
franchisees and other third parties. As of June 30, 2007,
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 16 to our audited
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for further information about our leasing arrangements.
As of June 30, 2007, the projected benefit obligation of
our U.S. and international defined benefit pension plans
exceeded pension assets by $47 million and the projected
benefit obligation of our U.S. medical plan exceeded plan assets
by $22 million. We use the Moodys long-term corporate
bond yield indices for Aa bonds (Moodys 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 $4 million
into our pension plans and estimated benefit payments of
$6 million out of these plans during fiscal 2007. 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.
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
Franchisee
Restructuring Program
In connection with the FFRP program, which was completed as of
December 31, 2006, we have made potential commitments to
fund loans to certain franchisees for the purpose of: remodeling
restaurants; remodeling certain properties we lease or sublease
to franchisees; providing temporary rent reductions to certain
franchisees; and funding shortfalls in certain franchisee cash
flow beyond specified levels (to annual and aggregate maximums).
As of June 30, 2007, our remaining commitments under the
FFRP program totaled $26 million, which we may incur. These
arrangements expire over the next 17 years.
Guarantees
We guarantee certain lease payments of franchisees arising from
leases assigned in connection with sales of company restaurants
to franchisees, by remaining secondarily liable 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 as of
June 30, 2007, expiring over an average period of seven
years.
Other commitments arising out of normal business operations were
$14 million and $10 million as of June 30, 2007
and 2006, respectively. These commitments consist primarily of
guarantees covering foreign franchisees obligations to
suppliers and acquisition-related guarantees.
Letters
of Credit
As of June 30, 2007, we had $30 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. As of June 30, 2007, none of these
irrevocable standby letters of credit had been drawn upon. As of
June 30, 2007, we had posted bonds totaling
$2 million, which related to certain utility deposits.
68
Vendor
Relationships
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, 2007, we estimate that it will take approximately
15 years to complete the
Coca-Cola
and Dr Pepper 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. As of
June 30, 2007 and 2006, the deferred amounts totaled
$21 million and $23 million, respectively. These
deferred amounts are amortized as a reduction to food, paper and
product costs in the accompanying consolidated statements of
operations.
Other
We have insurance programs with deductibles ranging between
$500,000 to $1 million to cover claims such as
workers compensation, general liability, automotive
liability, executive risk and property. We are self-insured for
healthcare claims for eligible participating employees. We
determine our liability for claims based on actuarial analysis.
As of June 30, 2007, we had a balance of $37 million
in accrued liabilities to cover such claims.
We have claims for certain years that are insured by a third
party carrier, which was insolvent as of June 30, 2007.
During the first quarter of fiscal 2007, we entered into a
novation agreement whereby the insolvent carrier was replaced by
another third party carrier which has taken over the
administration of pending and potential claims for these years.
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 2007, fiscal 2006 or fiscal 2005. 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.
We consider our critical accounting policies and estimates to be
as follows based on the high degree of judgment or complexity in
their application:
Business
combinations and intangible assets
The December 2002 acquisition of our predecessor required the
application of the purchase method of accounting in accordance
with SFAS No. 141. 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.
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.
69
Long-lived
assets
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
U.K. 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 U.K. and Germany) are made
up of geographic regions within those countries (three in the
U.K. and four in Germany). These operating market definitions
are based upon the following primary factors:
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|
|
management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants
and area managers receive incentives on this basis; and
|
|
|
|
management does not evaluate individual restaurants to build,
acquire or close independent of any 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 the 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 intangible asset we have is
our brand asset with a carrying book value of $906 million
as of June 30, 2007. 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. 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.
70
Reserves
for uncollectible accounts and revenue recognition
We collect royalties, advertising fund contributions and, in the
case of approximately 11% of our franchise restaurants, rents,
from franchisees. 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 decline, or the financial health of
franchisees otherwise deteriorate, we may be required to
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 carry-forwards. When considered necessary, we record a
valuation allowance to reduce deferred tax assets to the balance
that is more likely than not to be realized. We must make
estimates and judgments on future taxable income, considering
feasible tax planning strategies and taking into account
existing facts and circumstances, to determine the proper
valuation allowance. When we determine that deferred tax assets
could be realized in greater or lesser amounts than recorded,
the asset balance and income statement reflect the change in the
period such determination is made. Due to changes in facts and
circumstances and the estimates and judgments that are involved
in determining the proper valuation allowance, differences
between actual future events and prior estimates and judgments
could result in adjustments to this valuation allowance.
We use an estimate of the annual effective tax rate at each
interim period based on the facts and circumstances available at
this time, while the actual effective tax rate is calculated at
fiscal year-end.
Insurance
reserves
We carry insurance to cover claims such as workers
compensation, general liability, automotive liability, executive
risk and property, and we are self-insured for healthcare claims
for eligible participating employees. Through the use of
insurance program deductibles (ranging from $0.5 million to
$1 million) and self insurance, we retain a significant
portion of the expected losses under these programs. Insurance
reserves have been recorded based on our estimates of the
anticipated ultimate costs to settle all claims, both reported
and incurred-but-not-reported (IBNR).
Our accounting policies regarding these insurance programs
include judgments and independent actuarial assumptions about
economic conditions, the frequency or severity of claims and
claim development patterns and claim reserve, management and
settlement practices. Since there are many estimates and
assumptions involved in recording insurance reserves,
differences between actual future events and prior estimates and
assumptions could result in adjustments to these reserves.
Stock-based
compensation
Stock based compensation expense for non-qualified stock options
(NQOs) is estimated on the grant date using a
Black-Scholes option pricing model. Our specific weighted-
average assumptions for the risk-free interest rate, expected
term, expected volatility and expected dividend yield are
documented in Note 4 to our audited consolidated financial
statements included in Part II, Item 8 of this
Form 10-K.
Additionally, under SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS 123R), we are required to estimate
pre-vesting forfeitures for purposes of determining compensation
expense to be recognized. Future expense amounts for any
quarterly or annual period could be affected by changes in our
assumptions or changes in market conditions.
In connection with the adoption of SFAS No. 123R, we
have determined the expected term using the simplified method
for plain vanilla options as discussed in
Section D, Certain Assumptions Used in Valuation
Methods, of SEC Staff Accounting Bulletin No. 107.
Based on the results of applying the simplified method, we have
determined that 6.25 years is an appropriate expected term
for awards with four-year ratable vesting and 6.50 years
for awards with five-year ratable vesting.
71
We became a public company under SFAS No. 123R on
February 16, 2006 when we filed our Registration Statement
on
Form S-1
with the SEC (see Note 3 to our audited consolidated
financial statements included in Part II, Item 8 of
this Form 10-K). Prior to this date, we applied the minimum
value method, as permitted under SFAS 123
Accounting for Stock-Based Compensation
(SFAS No. 123), to calculate the grant
date fair value of our NQOs using the Black-Scholes option
pricing model for pro forma stock based compensation disclosure.
Under the minimum value method, zero volatility was assumed in
the price of our common stock. Subsequent to February 16,
2006, in accordance with SFAS No. 123R, we have used a
volatility assumption in the option pricing model to calculate
the grant date fair value of NQOs granted since that date.
However, as a newly public company, we have limited historical
data on the price of our publicly traded common stock and other
financial instruments. Therefore, as permitted under
SFAS No. 123R, we have elected to base our estimate of
the expected volatility of our common stock on the historical
volatility of a group of our peers whose share prices are
publicly available. Based on this peer group, the weighted
average volatility used in the determination of the fair value
of our NQOs for fiscal 2007 was 33%.
New
Accounting Pronouncements Issued But Not Yet
Adopted
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
enterprises 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 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. FIN 48 is effective for fiscal years
beginning after December 15, 2006, which for us was
July 1, 2007. We are currently evaluating the impact that
FIN 48 may have on our statements of operations and
statement of financial position. Thus far, our evaluation does
not reflect any material adjustments.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (FASB No. 157) which
defines fair value, establishes a framework for measuring fair
value in GAAP, and enhances disclosures about fair value
measurements. FASB No. 157 applies when other accounting
pronouncements require fair value measurements; it does not
require new fair value measurements. FASB No. 157 is
effective for fiscal years beginning after November 15,
2007, which for us will be our 2009 fiscal year. We are
currently evaluating the impact that FASB No. 157 may have
on our statements of operations and financial position.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities
(FASB No. 159), which allows entities to
voluntarily choose, at specified election dates, to measure
certain financial assets and financial liabilities (as well as
certain nonfinancial instruments that are similar to financial
instruments) at fair value (the fair value option).
The election is made on an
instrument-by-instrument
basis and is irrevocable. If the fair value option is elected
for an instrument, FASB No. 159 specifies that all
subsequent changes in fair value for that instrument must be
reported in earnings. FASB No. 159 is effective as of the
beginning of an entitys first fiscal year that begins
after November 15, 2007, which for us will be our fiscal
year beginning July 1, 2008. We do not expect the impact
that FASB No. 159 may have on our statements of
operations and financial position to be material.
|
|
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 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.
72
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
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 2007, income from operations would have decreased or
increased $10 million if all foreign currencies uniformly
weakened or strengthened 10% relative to the U.S. dollar.
We use foreign exchange forward contracts as economic hedges to
offset the future impact of gains and losses resulting from
changes in the expected amount of functional currency cash flows
to be received or paid upon settlement of intercompany loans
denominated in foreign currencies. Changes in the fair value of
the forward contracts attributable to changes in the current
spot rates between the U.S. Dollar and the foreign
currencies are offset by the remeasurement of the interecompany
loans, resulting in an insignificant impact to the
Companys net income. The portion of the fair value of the
forward contracts attributable to the spot-forward difference
(the difference between the spot exchange rate and the forward
exchange rate) is recognized in earnings as a gain or loss on
foreign exchange (See Note 12 to the Consolidated Financial
Statements). The contracts outstanding as of June 30, 2007
mature at various dates through September 2007 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 interest rate swaps. These swaps are entered into
with financial institutions and have reset dates and key terms
that match those of the underlying debt. Accordingly, any change
in market value associated with interest rate swaps is offset by
the opposite market impact on the related debt.
As of June 30, 2007, we had interest rate swaps with a
notional value of $440 million that qualify as cash flow
hedges under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as
amended. The interest rate swaps help us manage exposure to
changes in forecasted LIBOR-based interest payments made on
variable rate debt. A 1% change in interest rates on our
existing debt of $872 million would result in an increase
or decrease in interest expense of approximately $4 million
in a given year, as we have hedged $440 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 for fiscal
2007. The hypothetical change in food, paper and product costs
could be positively or negatively affected by changes in prices
or product sales mix.
73
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
74
Managements
Report on Internal Control Over Financial
Reporting
Management is responsible for the preparation, integrity and
fair presentation of the consolidated financial statements,
related notes and other information included in this annual
report. The financial statements were prepared in accordance
with accounting principles generally accepted in the United
States of America and include certain amounts based on
managements estimates and assumptions. Other financial
information presented is consistent with the financial
statements.
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal
control over financial reporting as of June 30, 2007.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. The Companys system of internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Management performed an assessment of the effectiveness of the
Companys internal control over financial reporting as of
June 30, 2007 based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment and those criteria, management
determined that the Companys internal control over
financial reporting was effective as of June 30, 2007.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
June 30, 2007 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in its report which
is included herein.
75
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Burger King Holdings, Inc. and subsidiaries (the Company) as of
June 30, 2007 and 2006, and the related consolidated
statements of income, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended June 30, 2007. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Burger King Holdings, Inc. and subsidiaries as of
June 30, 2007 and 2006, and the results of their operations
and their cash flows for each of the years in the three-year
period ended June 30, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in notes 2 and 3 to the consolidated financial
statements, effective July 1, 2006, the Company adopted
Statement of Financial Accounting Standard No. 123R
(revised 2004), Share-Based Payment.
As discussed in notes 2 and 18 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standard No. 158, Employers
Accounting for Defined Benefit Pension and Other
Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R), as of June 30, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
June 30, 2007, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated September 7, 2007, expressed
an unqualified opinion on managements assessment of, and
the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Miami, Florida
September 7, 2007
Certified Public Accountants
76
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Burger King Holdings, Inc. and
subsidiaries (the Company) maintained effective internal control
over financial reporting as of June 30, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of June 30, 2007, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of June 30, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of June 30,
2007 and 2006, and the related consolidated statements of
income, stockholders equity and comprehensive income, and
cash flows for each of the years in the three-year period ended
June 30, 2007, and our report dated September 7, 2007
expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Miami, Florida
September 7, 2007
Certified Public Accountants
77
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
170
|
|
|
$
|
259
|
|
Trade and notes receivable, net
|
|
|
125
|
|
|
|
109
|
|
Prepaids and other current assets,
net
|
|
|
66
|
|
|
|
40
|
|
Deferred income taxes, net
|
|
|
43
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
404
|
|
|
|
453
|
|
Property and equipment, net
|
|
|
879
|
|
|
|
886
|
|
Intangible assets, net
|
|
|
986
|
|
|
|
975
|
|
Goodwill
|
|
|
23
|
|
|
|
20
|
|
Net investment in property leased
to franchisees
|
|
|
142
|
|
|
|
148
|
|
Other assets, net
|
|
|
83
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,517
|
|
|
$
|
2,552
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$
|
106
|
|
|
$
|
100
|
|
Accrued advertising
|
|
|
64
|
|
|
|
49
|
|
Other accrued liabilities
|
|
|
259
|
|
|
|
338
|
|
Current portion of long term debt
and capital leases
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
434
|
|
|
|
492
|
|
Term debt, net of current portion
|
|
|
871
|
|
|
|
997
|
|
Capital leases, net of current
portion
|
|
|
67
|
|
|
|
63
|
|
Other deferrals and liabilities
|
|
|
334
|
|
|
|
349
|
|
Deferred income taxes, net
|
|
|
95
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,801
|
|
|
|
1,985
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 20)
|
|
|
|
|
|
|
|
|
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; 135,217,470 and
133,058,640 shares issued and outstanding at June 30,
2007 and June 30, 2006, respectively
|
|
|
1
|
|
|
|
1
|
|
Restricted stock units
|
|
|
3
|
|
|
|
5
|
|
Additional paid-in capital
|
|
|
574
|
|
|
|
545
|
|
Retained earnings
|
|
|
134
|
|
|
|
3
|
|
Accumulated other comprehensive
income
|
|
|
8
|
|
|
|
15
|
|
Treasury stock, at cost; 673,430
and 590,841 shares at June 30, 2007 and June 30,
2006, respectively
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
716
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,517
|
|
|
$
|
2,552
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
78
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except
|
|
|
|
per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,658
|
|
|
$
|
1,516
|
|
|
$
|
1,407
|
|
Franchise revenues
|
|
|
460
|
|
|
|
420
|
|
|
|
413
|
|
Property revenues
|
|
|
116
|
|
|
|
112
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,234
|
|
|
|
2,048
|
|
|
|
1,940
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
499
|
|
|
|
470
|
|
|
|
437
|
|
Payroll and employee benefits
|
|
|
492
|
|
|
|
446
|
|
|
|
415
|
|
Occupancy and other operating costs
|
|
|
418
|
|
|
|
380
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant expenses
|
|
|
1,409
|
|
|
|
1,296
|
|
|
|
1,195
|
|
Selling, general and
administrative expenses
|
|
|
474
|
|
|
|
488
|
|
|
|
487
|
|
Property expenses
|
|
|
61
|
|
|
|
57
|
|
|
|
64
|
|
Fees paid to affiliates
|
|
|
|
|
|
|
39
|
|
|
|
9
|
|
Other operating (income) expenses,
net
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,943
|
|
|
|
1,878
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
291
|
|
|
|
170
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
73
|
|
|
|
81
|
|
|
|
82
|
|
Interest income
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
|
67
|
|
|
|
72
|
|
|
|
73
|
|
Loss on early extinguishment of
debt
|
|
|
1
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
223
|
|
|
|
80
|
|
|
|
78
|
|
Income tax expense
|
|
|
75
|
|
|
|
53
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148
|
|
|
$
|
27
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.11
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
1.08
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
133.9
|
|
|
|
110.3
|
|
|
|
106.5
|
|
Diluted
|
|
|
136.8
|
|
|
|
114.7
|
|
|
|
106.9
|
|
See accompanying notes to consolidated financial statements.
79
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
Common
|
|
|
Restricted
|
|
|
Additional
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock Shares
|
|
|
Amount
|
|
|
Units
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In millions, except per share information)
|
|
|
Balances at June 30, 2004
|
|
|
107
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
403
|
|
|
$
|
29
|
|
|
$
|
(9
|
)
|
|
$
|
|
|
|
$
|
424
|
|
Issuance of common stock including
option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Issuance of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Foreign currency 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
|
|
Issuance of common stock including
option exercises, net
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Issuance of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Dividend paid on common shares
($3.42 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(267
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
(367
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Net change in fair value of
derivatives, 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
|
|
Issuance of common stock including
option exercises, net
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Issuance of shares upon settlement
of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid on common shares
($0.13 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of
derivatives, net of tax of $3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
Amounts reclassified to earnings
during the period, net of tax of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
Adjustment to intially apply
SFAS No 158, net of tax of ($4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007
|
|
|
135
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
574
|
|
|
$
|
134
|
|
|
$
|
8
|
|
|
$
|
(4
|
)
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
80
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148
|
|
|
$
|
27
|
|
|
$
|
47
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
89
|
|
|
|
88
|
|
|
|
74
|
|
Gain on hedging activities
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Interest expense payable in kind
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Gain on remeasurement of foreign
denominated transactions
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
Gain on asset disposals
|
|
|
(11
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Provision for doubtful accounts,
net of recoveries
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
Impairment of debt investments and
investments in unconsolidated companies and joint ventures
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Pension curtailment gain
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
1
|
|
|
|
18
|
|
|
|
|
|
Stock-based compensation
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
Deferred income taxes
|
|
|
10
|
|
|
|
68
|
|
|
|
9
|
|
Changes in current assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivable
|
|
|
(13
|
)
|
|
|
7
|
|
|
|
(2
|
)
|
Prepaids and other current assets
|
|
|
(17
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Accounts and drafts payable
|
|
|
5
|
|
|
|
8
|
|
|
|
(21
|
)
|
Accrued advertising
|
|
|
14
|
|
|
|
(10
|
)
|
|
|
7
|
|
Other accrued liabilities
|
|
|
(101
|
)
|
|
|
(30
|
)
|
|
|
48
|
|
Payment of interest on PIK notes
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
Other long-term assets and
liabilities, net
|
|
|
18
|
|
|
|
13
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
117
|
|
|
|
74
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale
securities
|
|
|
(350
|
)
|
|
|
|
|
|
|
(768
|
)
|
Proceeds from available for sale
securities
|
|
|
350
|
|
|
|
|
|
|
|
890
|
|
Payments for property and equipment
|
|
|
(87
|
)
|
|
|
(85
|
)
|
|
|
(93
|
)
|
Proceeds from asset disposals and
restaurant closures
|
|
|
22
|
|
|
|
18
|
|
|
|
18
|
|
Payments for acquired franchisee
operations
|
|
|
(17
|
)
|
|
|
(8
|
)
|
|
|
(28
|
)
|
Investment in franchisee debt
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(27
|
)
|
Repayments of franchisee debt
|
|
|
4
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(84
|
)
|
|
|
(74
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term debt and credit
facility
|
|
|
1
|
|
|
|
2,143
|
|
|
|
|
|
Repayments of term debt, credit
facility and capital leases
|
|
|
(131
|
)
|
|
|
(2,329
|
)
|
|
|
(3
|
)
|
Payments for financing costs
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
Proceeds from sale of common stock,
net
|
|
|
8
|
|
|
|
399
|
|
|
|
3
|
|
Dividends paid on common stock
|
|
|
(17
|
)
|
|
|
(367
|
)
|
|
|
|
|
Excess tax benefits from
stock-based compensation
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing
activities
|
|
|
(127
|
)
|
|
|
(173
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
5
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(89
|
)
|
|
|
(173
|
)
|
|
|
211
|
|
Cash and cash equivalents at
beginning of period
|
|
|
259
|
|
|
|
432
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
170
|
|
|
$
|
259
|
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid(1)
|
|
$
|
61
|
|
|
$
|
180
|
|
|
$
|
26
|
|
Income taxes paid(2)
|
|
$
|
151
|
|
|
$
|
16
|
|
|
$
|
14
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of franchisee operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16
|
|
Acquisition of property with
capital lease obligations
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
|
|
|
|
|
(1) |
|
Amount for the year ended June 30, 2007 is net of
$13 million received upon termination of interest rate
swaps. Amount for the year ended June 30, 2006 included
$103 million of interest paid on PIK notes. |
|
(2) |
|
Amount for the year ended June 30, 2007 includes
$82 million in income taxes incurred, resulting from the
realignment of the Companys European and Asian businesses,
and $37 million of quarterly estimated U.S. federal and
state tax payments. |
See accompanying notes to consolidated financial statements.
81
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
Note 1.
|
Description
of Business and Organization
|
Description
of Business
Burger King Holdings, Inc. (BKH or the
Company) is a Delaware corporation formed on
July 23, 2002. 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.
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.
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.
Organization
On December 13, 2002, 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). BKAC was established as an
acquisition vehicle by private equity funds controlled by TPG
Capital, the Goldman Sachs Capital Funds and Bain Capital
Partners (collectively, the Sponsors) for the
purpose of acquiring BKC. BKAC was merged into BKC upon
completion of the transaction (the Transaction). The
merger was accounted for as a combination of entities under
common control.
Initial
and Secondary Public Offerings
In May 2006, the Company completed its initial public offering
of 25 million shares of common stock, $0.01 par value,
at a per share price of $17, with net proceeds after transaction
costs to the Company of approximately $392 million (the
IPO). In connection with the IPO, the Sponsors sold
an additional 3.75 million shares at $17 per share to
settle the underwriters over-allotment option. Prior to
the IPO, the Sponsors owned 104.7 million shares, or
approximately 97%, of the Companys outstanding common
stock. After the completion of the IPO, the equity funds
controlled by the Sponsors owned approximately 76% of the
Companys outstanding common stock.
In February 2007, the Company completed a secondary offering of
22 million shares of its common stock, including a partial
exercise of the over-allotment option in March 2007 reducing the
percentage ownership of the private equity funds controlled by
the Sponsors (the secondary offering). As of
June 30, 2007, the percentage ownership of the private
equity funds controlled by the Sponsors was approximately 58%.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. The Company has consolidated, in accordance with
the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 46R,
Consolidation of Variable Interest Entities
an interpretation of ARB No. 51, one joint
venture that
82
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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 Companys results of
operations and financial position.
Concentrations
of Risk
The Companys operations include Company-owned and
franchise restaurants located in 69 countries and territories.
Of the 11,283 restaurants in operation as of June 30, 2007,
1,303 are Company-owned and operated and 9,980 are
franchisee-owned and 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. As of
June 30, 2007, four distributors serviced approximately 85%
of the Company-owned and franchised restaurants in the United
States.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that could affect
the amounts reported in the Companys 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 to the balance sheets are
recorded in accumulated other comprehensive income (loss) within
stockholders equity.
Foreign
Currency Transaction Gain or Losses
Foreign currency transaction gains or losses resulting from the
re-measurement of foreign-denominated assets and liabilities of
the Company or its subsidiaries are reflected in earnings in the
period when the exchange rates change.
Cash
and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments with original maturities of three months or less.
Auction
Rate Securities Available for Sale
Auction rate securities represent long-term variable rate bonds
tied to short-term interest rates that are reset through a
dutch auction process, which occurs every seven to
35 days, and are classified as available for sale
securities. Auction rate securities are considered highly liquid
by market participants because of the auction process. However,
because the auction rate securities have long-term maturity
dates and there is no guarantee the holder will be able to
liquidate its holding, they do not meet the definition of cash
equivalents in the Statement of Financial Accounting Standards
(SFAS) No. 95, Statement of Cash
Flows and, accordingly, are recorded as investments.
There were no auction rate securities outstanding as of
June 30, 2007 and 2006.
Allowance
for Doubtful Accounts
The Company evaluates the collectibility of its trade accounts
receivable from franchisees based on a combination of factors,
including the length of time the receivables are past due and
the probability of collection
83
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
from litigation or default proceedings, where applicable. The
Company records a specific allowance for doubtful accounts in an
amount required to adjust the carrying values of such balances
to the amount that the Company estimates to be net realizable
value. The Company writes off a specific account when
(a) the Company enters into an agreement with a franchisee
that releases the franchisee from outstanding obligations,
(b) franchise agreements are terminated and the projected
costs of collections exceed the benefits expected to be received
from pursuing the balance owed through legal action, or
(c) franchisees do not have the financial wherewithal or
unprotected assets from which collection is reasonably assured.
Notes receivable represent loans made to franchisees arising
from re-franchisings of Company-owned restaurants, sales of
property, and in certain cases when past due trade receivables
from franchisees are restructured into an interest-bearing note.
Trade receivables which are restructured to interest-bearing
notes are generally already fully reserved, and as a result, are
transferred to notes receivable at a net carrying value of zero.
Notes receivable with a carrying value greater than zero are
written down to net realizable value when it is probable or
likely that the Company is unable to collect all amounts 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
Inventories, totaling $15 million and $14 million as
of June 30, 2007 and 2006, 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.
Leases
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 of the
asset 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.
84
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 consolidated statement of
income.
Intangible
Assets Not Subject to Amortization
Intangible assets not subject to amortization represent the
recorded amount of the intellectual property associated with the
acquisition of the Burger King brand and goodwill.
Goodwill is the excess of the cost of an acquired entity over
the fair value of net assets, resulting from the Companys
acquisitions of franchise restaurants. For purposes of testing
intangible assets not subject to amortization for impairment,
the Company has determined that its reporting units are the
following geographic segments by which it manages its business
(see Note 21): United States and Canada, Europe, the Middle
East and Africa and Asia Pacific (EMEA/APAC) and Latin America.
The Company tests intangible assets not subject to amortization
annually by comparing the fair value of each reporting unit,
using discounted cash flows, to the carrying value to determine
if there is an indication that a potential impairment may exist.
Long-Lived
Assets
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
U.K. 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 U.K. and Germany) are
comprised of geographic regions within those countries (three in
the U.K. and four in Germany). These operating market
definitions are based upon the following primary factors:
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management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants,
and area managers receive incentives on this basis; and
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the Company does not evaluate individual restaurants to build,
acquire or close independent of an analysis of other restaurants
in these operating markets.
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In countries in which the Company has a smaller number of
restaurants (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 its fair value of the asset.
85
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses,
gains, and losses that are included in comprehensive income
(loss), but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders equity,
net of tax. The Companys other comprehensive income (loss)
is comprised of unrealized gains and losses on foreign currency
translation adjustments, unrealized gains and losses on hedging
activity, net of tax, and minimum pension liability adjustments,
net of tax.
Derivative
Financial Instruments
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended
(SFAS No. 133), establishes accounting and
reporting standards for derivative instruments and for hedging
activities by requiring that all derivatives be recognized in
the balance sheet and measured at fair value. Gains or losses
resulting from changes in the fair value of derivatives are
recognized in earnings or recorded in other comprehensive income
(loss) and recognized in the statement of income when the hedged
item affects earnings, depending on the purpose of the
derivatives and whether they qualify for, and the Company has
applied hedge accounting treatment.
When applying hedge accounting, the Companys policy is to
designate, at a derivatives inception, the specific
assets, liabilities or future commitments being hedged, and to
assess the hedges effectiveness at inception and on an
ongoing basis. The Company may elect not to designate the
derivative as a hedging instrument where the same financial
impact is achieved in the financial statements. The Company does
not enter into or hold derivatives for trading or speculative
purposes.
Disclosures
About Fair Value of Financial Instruments
Cash and cash equivalents, trade accounts and notes
receivable and accounts and drafts payable: 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 as of June 30, 2007 and 2006
was $872 million and $998 million, respectively, which
approximated fair value as the debt at both of these dates
carried a floating interest rate and reflected the
Companys credit ratings.
Revenue
Recognition
Revenues include retail sales at Company-owned restaurants and
franchise and property revenues. Franchise revenues include
royalties, and initial and renewal franchise fees. Property
revenues include rental income from operating lease rentals and
earned income on direct financing leases on property leased or
subleased to franchisees. Retail sales are recognized at the
point of sale and are based on a percentage of sales by
franchisees. Royalties are recognized when collectibility is
reasonably assured. Initial franchise fees are recognized as
revenue when the related restaurant begins operations. A
franchisee may pay a renewal franchise fee and renew its
franchise for an additional term. Renewal franchise fees are
recognized as revenue upon receipt of the non-refundable fee and
execution of a new franchise agreement. 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. Rental income on operating lease rentals
and earned income on direct financing leases are recognized when
collectibility is reasonably assured.
Advertising
and Promotional Costs
The Company expenses the production costs of advertising when
the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period
incurred.
86
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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 Companys franchise
agreements, contributions received from franchisees must be
spent on advertising, marketing and related activities, and
result in no gross profit recognized by the Company. Amounts
which are contributed to the advertising funds by Company-owned
restaurants are recorded as selling, general and administrative
expenses in the accompanying consolidated statements of income.
Advertising expense, net of franchisee contributions, totaled
$88 million for the year ended June 30, 2007,
$74 million for the year ended June 30, 2006, and
$87 million for the year ended June 30, 2005 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 a deferred liability, 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 Companys results of operations or
financial position.
Income
Taxes
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. A
deferred tax asset is recognized when it is considered more
likely than not to be realized. The effects of changes in tax
rates on deferred tax assets and liabilities are recognized in
income in the year in which the law is enacted. A valuation
allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred
tax assets will not be recognized.
Income tax benefits credited to stockholders equity relate
to tax benefits associated with amounts that are deductible for
income tax purposes but do not affect earnings. These benefits
are principally generated from employee exercises of
nonqualified stock options and settlement of restricted stock
unit awards.
Earnings
per Share
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. The computation of diluted earnings per share is
consistent with that of basic earnings per share, while giving
effect to all dilutive potential common shares that were
outstanding during the period.
Stock-based
Compensation
In the first quarter of fiscal 2007, the Company adopted
SFAS No. 123 (Revised 2004) Share-Based
Payment (SFAS No. 123R), which
replaced SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123),
superseded Accounting Standards Board (APB) 25,
Accounting for Stock Issued to Employees,
(APB No. 25) and related interpretations and
amended SFAS No. 95, Statement of Cash
Flows. Prior to the adoption of SFAS No. 123R,
all share-based payments were accounted for under the
recognition and measurement principles of APB 25 and its related
interpretations. Accordingly, no expense was reflected in the
consolidated statements of income for stock options, as all
stock options granted had an exercise price equal to the market
value of the Companys common stock on the date of grant.
Stock-based awards granted by the Company typically contain only
a service condition for vesting. For awards that cliff vest,
stock-based compensation cost is recognized ratably over the
requisite service period. For awards
87
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
with a graded vesting schedule, where the award vests in
increments during the requisite service period, the Company has
elected to record stock-based compensation cost over the
requisite service period for the entire award, in accordance
with the SFAS 123R.
Pension
and Postretirement Benefits
In the fourth quarter of fiscal year 2007, the Company adopted
the recognition and disclosure provisions of
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans
an amendment of FASB Statements No. 87,
88, 106 and 132(R) (SFAS No. 158).
SFAS No. 158 amends SFAS No. 87,
Employers Accounting for Pensions
(SFAS No. 87), SFAS No. 88,
Employers Accounting for Settlements and
Curtailments of Defined Benefit Plans and for Termination
Benefits (SFAS No. 88),
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions
(SFAS No. 106) and
SFAS No. 132(R), Employers Disclosures
about Pensions and Other Postretirement Benefits
(SFAS No. 132(R)).
SFAS No. 158 required the Company to recognize the
funded status of its pension and postretirement plans in the
June 30, 2007 consolidated balance sheet, with a
corresponding adjustment to accumulated other comprehensive
income, net of tax. Gains or losses and prior service costs or
credits that arise in future years will be recognized as a
component of other comprehensive income to the extent they have
not been recognized as a component of net periodic benefit cost
pursuant to SFAS No. 87 or SFAS No. 106.
The incremental effects of adopting the provisions of
SFAS No. 158 on the Companys consolidated
balance sheet as of June 30, 2007 are presented below
(amounts in millions of U.S. dollars). The adoption of
SFAS No. 158 had no impact on the consolidated
statement of income.
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Before
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After
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Application of
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Application of
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SFAS No. 158
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Adjustments
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SFAS No. 158
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Other assets, net
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$
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80
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$
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3
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$
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83
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Total assets
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$
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2,514
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$
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3
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$
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2,517
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Other deferrals and liabilities
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$
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341
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$
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(7
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)
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$
|
334
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Deferred income taxes, net
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$
|
91
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$
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4
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$
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95
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Total liabilities
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$
|
1,804
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$
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(3
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)
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$
|
1,801
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Accumulated other comprehensive
income
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$
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2
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$
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6
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$
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8
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Total stockholders equity
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$
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710
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$
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6
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$
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716
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SFAS No. 158 also requires measurement of the funded
status of pension and postretirement plans as of the date of the
Companys fiscal year end effective for the fiscal year
ending June 30, 2009. The Companys plans currently
have measurement dates that do not coincide with its fiscal year
end and thus the Company will be required to change their
measurement dates in fiscal 2009.
Adoption
of SEC Staff Accounting Bulletin No. 108
In September 2006, the Securities and Exchange Commission (the
SEC) issued Staff Accounting
Bulletin No. 108 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB No. 108). SAB No. 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement for the
purpose of a materiality assessment. SAB No. 108
requires that registrants quantify a current year misstatement
using a dual approach that considers both the impact
of prior year misstatements that remain on the balance sheet
(Iron Curtain Approach) and those that were recorded
in the current year income statement (Rollover
Approach). Historically, the Company had quantified
misstatements and assessed materiality based on the Rollover
Approach. The Company was required to adopt
SAB No. 108 in the fourth quarter of fiscal 2007.
88
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The transition provisions of SAB 108 permit uncorrected
prior year misstatements that were not material to any prior
periods under the historical Rollover Approach but that would
have been material under the dual approach of SAB 108 to be
corrected in the carrying amounts of assets and liabilities at
the beginning of the Companys fiscal year 2007 with an
offsetting adjustment to retained earnings for the cumulative
effect of misstatements. The adoption of SAB No. 108
did not require any adjustment to the Companys retained
earnings.
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Note 3.
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Stock-based
Compensation
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Prior to February 16, 2006, the date the Company filed a
Form S-1
registration statement with the SEC (for its initial public
offering which occurred on May 18, 2006), the Company
accounted for stock-based compensation in accordance with the
intrinsic-value method of APB No. 25. Under the intrinsic
value method of APB No. 25, stock options were granted at
fair value, with no compensation cost being recognized in the
financial statements over the vesting period. In addition, the
Company issued restricted stock units under APB No. 25 and
recognized compensation cost over the vesting period of the
awards. Under the pro forma disclosure required by
SFAS No. 123, compensation expense for stock options
was measured by the Company using the minimum value method,
which assumed no volatility in the Black-Scholes model used to
calculate the options fair value.
As a result of filing the
Form S-1
registration statement, the Company transitioned from a
non-public entity to a public entity under
SFAS No. 123R. Since the Company applied
SFAS No. 123 pro forma disclosure for stock options
using the minimum value method prior to becoming a public
entity, SFAS No. 123R required that the Company adopt
SFAS 123R using a combination of the prospective and
modified prospective transition methods. Under the prospective
method, the Company was required to apply the prospective
transition method for those stock options granted prior to the
Form S-1
filing date that were measured at minimum value. The
unrecognized compensation cost relating to these stock options
is required to be recognized in the financial statements,
subsequent to the adoption of SFAS No. 123R, using the
same method of recognition and measurement originally applied to
these options. As there was no compensation cost recognized by
the Company in the financial statements for these stock options
under APB No. 25, no compensation cost has been or will be
recognized for these stock options after the Companys
adoption of SFAS No. 123R on July 1, 2006, unless
such options are modified. For stock options granted subsequent
to the S-1
filing date, but prior to the SFAS No. 123R adoption
date of July 1, 2006, the Company is required to apply the
modified prospective transition method, in which compensation
expense is recognized for any unvested portion of the awards
granted between the
S-1 filing
date and the adoption date of SFAS 123R over the remaining
vesting period of the awards commencing on July 1, 2006.
On July 1, 2006, the Company adopted
SFAS No. 123R, which requires share-based compensation
cost to be recognized based on the grant date estimated fair
value of each award, net of estimated forfeitures, over the
employees requisite service period. Due to the
Companys use of the minimum value discussed above and also
because the value used to measure stock compensation expense for
nonvested shares is the same for APB No. 25 and
SFAS No. 123R, the adoption of SFAS No. 123R
did not have a material impact on the Companys operating
income, pretax income or net income.
Non-qualified stock option awards (NQSOs)
granted by the Company expire 10 years from the grant date
and generally vest ratably over a four to five-year service
period commencing on the grant date. Nonvested shares granted by
the Company include restricted stock units
(RSUs), performance-based restricted stock
(PBRS) and deferred stock issued to non-employee
members of the Companys Board of Directors. RSUs
generally vest ratably over a two to five year service period
commencing on the grant date. For those RSUs granted prior
to the Companys IPO, settlement of these awards will occur
on December 31, 2007, or soon as practicable thereafter, or
upon termination of the holders employment, if earlier. In
August 2006, the Company granted PBRS awards covering
approximately 706,000 shares to eligible employees. The
amount granted to each employee was based on the Company
achieving 100% of a performance target (profit before taxes) for
fiscal year 2007. As a result of the Company exceeding the
performance target for fiscal year 2007, an incremental
55,000 shares under the PBRS awards granted in August 2006
were earned by the eligible employees. In accordance with
SFAS 123R, stock based compensation expense was recorded on
these incremental performance shares PBRS awards for fiscal year
2007 as
89
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
if such awards had been granted and outstanding as of the
original grant date. The PBRS awards have a three or four year
vesting period, which includes the one-year performance period.
The Company recorded $5 million of pre-tax stock-based
compensation expense in fiscal 2007. Additionally, cash flows
from operating activities decreased $14 million in 2007 and
cash flows from financing activities increased $14 million
in 2007, as a result of the adoption of SFAS No. 123R.
Equity
Incentive Plan and 2006 Omnibus Incentive Plan
The Companys Equity Incentive Plan and 2006 Omnibus
Incentive Plan (collectively, the Plans) permit the
grant of stock-based compensation awards including NQSOs,
RSUs and PBRS awards to eligible employees for up to
20.8 million shares of the Companys common stock.
Awards are granted with an exercise price or market value equal
to the closing price of the Companys common stock on the
date of grant. The number of shares available to be granted
under the Plans totaled approximately eight million, as of
June 30, 2007. The Company satisfies share-based exercises
and vesting through the issuance of authorized but previously
unissued shares of the Companys stock. Nonvested shares
are generally net-settled with new Company shares withheld, and
not issued, to meet the employees minimum statutory
withholding tax requirements.
The Company also maintains Deferred Stock Award arrangements for
non-employee members of the Board of Directors. Pursuant to
these arrangements, non-employee directors receive an annual
grant of deferred stock and may also elect to receive their
quarterly retainer and Committee fees in deferred stock in lieu
of cash. In November 2006, the Company granted
59,193 shares of deferred stock as an annual grant to
non-employee directors. The deferred stock vests in quarterly
installments over a one-year period on the first day of each
calendar quarter following the grant date. The deferred stock
will settle and common shares will be issued at the time the
non-employee director no longer serves on the Board of Directors.
Stock based compensation expense for NQSOs is estimated on
the grant date using a Black-Scholes option pricing model. The
Companys specific weighted- average assumptions for the
risk-free interest rate, expected term, expected volatility and
expected dividend yield are discussed below. Additionally, under
SFAS No. 123R, the Company is required to estimate
pre-vesting forfeitures for purposes of determining compensation
expense to be recognized. Future expense amounts for any
quarterly or annual period could be affected by changes in the
Companys assumptions or changes in market conditions.
In connection with the adoption of SFAS No. 123R, the
Company has determined the expected term using the simplified
method for plain vanilla options as discussed in
Section D, Certain Assumptions Used in Valuation Methods,
of SEC Staff Accounting Bulletin No. 107. Based on the
results of applying the simplified method, the Company has
determined that 6.25 years is an appropriate expected term
for awards with four-year graded vesting and 6.50 years for
awards with five-year grading vesting.
As previously discussed, the Company became a public company
under SFAS No. 123R on February 16, 2006 when it
filed its
Form S-1.
Prior to this date, the Company applied the minimum value
method, as permitted under SFAS No. 123, to calculate
the grant date fair value of its NQSOs using the
Black-Scholes option pricing model for pro forma stock based
compensation disclosure. Under the minimum value method, zero
volatility was assumed in the price of the Companys common
stock. Subsequent to February 16, 2006, in accordance with
SFAS No. 123R, the Company has used a volatility
assumption in the option pricing model to calculate the grant
date fair value of NQSOs granted since that date. However,
as a newly public company, the Company has limited historical
data on the price of its publicly traded common stock and other
financial instruments. Therefore, as permitted under
SFAS No. 123R, the Company has elected to base its
estimate of the expected volatility of its common stock on the
historical volatility of a group of its peers whose share prices
are publicly available. Based on this peer group, the
Companys weighted average volatility used in the
determination of the fair value of NQSOs for 2007 was 33%.
90
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
A summary of the status and activity of NQSOs as of and
during the years ended June 30, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(000s)
|
|
|
|
|
|
Outstanding at June 30, 2004
|
|
|
6,818
|
|
|
$
|
4.78
|
|
Granted
|
|
|
5,143
|
|
|
|
4.28
|
|
Exercised
|
|
|
(22
|
)
|
|
|
3.80
|
|
Forfeited
|
|
|
(2,930
|
)
|
|
|
4.62
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005
|
|
|
9,009
|
|
|
|
4.55
|
|
Granted
|
|
|
2,247
|
|
|
|
13.69
|
|
Exercised
|
|
|
(1,248
|
)
|
|
|
4.78
|
|
Forfeited
|
|
|
(2,600
|
)
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
7,408
|
|
|
$
|
7.75
|
|
|
|
|
|
|
|
|
|
|
The fair value of each NQSO granted under the Plans during the
year ended June 30, 2007 was estimated on the date of grant
using the Black-Scholes option pricing model based on the
following weighted average assumptions:
|
|
|
|
|
Risk-free interest rate(1)
|
|
|
5.01
|
%
|
Expected term (in years)(2)
|
|
|
6.44
|
|
Expected volatility
|
|
|
33.01
|
%
|
Expected dividend yield(3)
|
|
|
0.54
|
%
|
|
|
|
(1) |
|
From 4.49% to 5.34% |
|
(2) |
|
From 6.25 years to 6.50 years |
|
(3) |
|
From 0.00% to 1.20% |
A summary of NQSO activity under the Plans as of and for the
year ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Total
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Total
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Contractual Term
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Option Value
|
|
|
Value
|
|
|
(Yrs)
|
|
|
|
(In 000s)
|
|
|
|
|
|
|
|
|
(In 000s)
|
|
|
|
|
|
Options outstanding as of
July 1, 2006
|
|
|
7,408
|
|
|
$
|
7.75
|
|
|
|
|
|
|
$
|
64,397
|
|
|
|
|
|
Granted
|
|
|
264
|
|
|
$
|
16.07
|
|
|
$
|
6.71
|
|
|
|
|
|
|
|
|
|
Pre-vest forfeited
|
|
|
(496
|
)
|
|
$
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,922
|
)
|
|
$
|
4.54
|
|
|
|
|
|
|
$
|
30,510
|
|
|
|
|
|
Post-vest forfeited
|
|
|
(3
|
)
|
|
$
|
6.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of
June 30, 2007
|
|
|
5,251
|
|
|
$
|
9.28
|
|
|
|
|
|
|
$
|
89,593
|
|
|
|
7.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of
June 30, 2007
|
|
|
1,680
|
|
|
$
|
6.65
|
|
|
|
|
|
|
$
|
33,082
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2007, proceeds from stock
options exercised was $9 million and actual tax benefits
realized for tax deductions from stock options exercised was
$14 million.
91
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
A summary of nonvested share activity under the Plans, which
includes RSUs, Deferred Stock Awards, and PBRS awards, as
of and for the year ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Total
|
|
|
Grant
|
|
|
Total
|
|
|
Contractual
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
Intrinsic
|
|
|
Term
|
|
|
Vesting
|
|
|
|
Nonvested Shares
|
|
|
Value
|
|
|
Value
|
|
|
(Yrs)
|
|
|
Life (Yrs)
|
|
|
|
(In 000s)
|
|
|
|
|
|
(In 000s)
|
|
|
|
|
|
|
|
|
Nonvested shares outstanding as of
July 1, 2006
|
|
|
958
|
|
|
$
|
4.17
|
|
|
$
|
15,082
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
768
|
|
|
$
|
14.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested & exercised
|
|
|
(320
|
)
|
|
$
|
2.91
|
|
|
$
|
6,508
|
|
|
|
|
|
|
|
|
|
Pre-vest forfeited
|
|
|
(53
|
)
|
|
$
|
10.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares outstanding as of
June 30, 2007
|
|
|
1,353
|
|
|
$
|
10.02
|
|
|
$
|
35,625
|
|
|
|
8.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares unvested as of
June 30, 2007
|
|
|
938
|
|
|
$
|
13.92
|
|
|
$
|
24,710
|
|
|
|
9.25
|
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, there was $15 million of total
unrecognized compensation cost related to stock options and
nonvested shares granted under the Plans. That cost is expected
to be recognized in the Companys financial statements over
a weighted-average period of two years.
For the year ended June 30, 2007, the value of shares
withheld by the Company to meet employees minimum
statutory withholding tax requirements was $2 million.
|
|
Note 4.
|
Acquisitions,
Closures and Dispositions
|
Acquisitions
All acquisitions of franchised restaurant operations are
accounted for using the purchase method of accounting under
SFAS No. 141 Business Combinations.
These acquisitions are summarized as follows (in millions,
except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of restaurants acquired
|
|
|
64
|
|
|
|
50
|
|
|
|
101
|
|
Prepaids and other current assets
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
1
|
|
Property and equipment, net
|
|
|
10
|
|
|
|
5
|
|
|
|
34
|
|
Goodwill and other intangible
assets
|
|
|
12
|
|
|
|
7
|
|
|
|
12
|
|
Assumed liabilities
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
17
|
|
|
$
|
8
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closures
and Dispositions
Gains and losses on closures and dispositions represent sales of
Company-owned properties and other costs related to restaurant
closures and sales of Company-owned restaurants to franchisees,
referred to as refranchisings. Gains and losses
recognized in the current period may reflect closures and
refranchisings that occurred in previous periods.
92
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of restaurant closures
|
|
|
24
|
|
|
|
14
|
|
|
|
23
|
|
Number of refranchisings
|
|
|
15
|
|
|
|
6
|
|
|
|
11
|
|
Net (gain) loss on acquisitions,
closures and dispositions
|
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
|
$
|
13
|
|
Included in the net gain on restaurant closures, refranchisings
and dispositions of assets for the year ended June 30, 2007
is a $5 million gain from the sale of an investment in a
non-consolidated joint venture, which is recorded in other
income and expense in the accompanying consolidated statement of
income.
|
|
Note 5.
|
Franchise
Revenues
|
Franchise revenues consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Franchise royalties
|
|
$
|
438
|
|
|
$
|
401
|
|
|
$
|
396
|
|
Initial franchise fees
|
|
|
12
|
|
|
|
10
|
|
|
|
9
|
|
Other
|
|
|
10
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
460
|
|
|
$
|
420
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 45, the Company deferred
the recognition of revenues totaling $3 million, zero and
$1 million during the years ended June 30, 2007, 2006
and 2005, respectively. In addition, the Company had recoveries
of previously deferred revenues totaling $2 million,
$1 million and $4 million during the years ended
June 30, 2007, 2006 and 2005, respectively. The Company
also wrote-off $11 million of deferred revenues in the year
ended June 30, 2005.
|
|
Note 6.
|
Trade and
Notes Receivable, Net
|
Trade and notes receivable, net, consist of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Trade accounts receivable
|
|
$
|
149
|
|
|
$
|
134
|
|
Notes receivable, current portion
|
|
|
5
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
141
|
|
Allowance for doubtful accounts
and reserve for notes receivable, current portion
|
|
|
(29
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
125
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
The change in allowances for doubtful accounts for each of the
years in the three year period ended June 30, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
32
|
|
|
$
|
29
|
|
|
$
|
79
|
|
(Recoveries) provision for
doubtful accounts, net
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
Write-offs and transfers to notes
receivable
|
|
|
1
|
|
|
|
5
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
29
|
|
|
$
|
32
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 7.
|
Property
and Equipment, Net
|
Property and equipment, net, along with their estimated useful
lives, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
|
|
|
|
$
|
372
|
|
|
$
|
379
|
|
Buildings and improvements
|
|
|
(up to 40 years
|
)
|
|
|
575
|
|
|
|
517
|
|
Machinery and equipment
|
|
|
(up to 18 years
|
)
|
|
|
259
|
|
|
|
228
|
|
Furniture, fixtures, and other
|
|
|
(up to 10 years
|
)
|
|
|
107
|
|
|
|
85
|
|
Construction in progress
|
|
|
|
|
|
|
28
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,341
|
|
|
|
1,243
|
|
Accumulated depreciation and
amortization
|
|
|
|
|
|
|
(462
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
879
|
|
|
$
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense on property and equipment totaled
$111 million, $109 million and $100 million for
the years ended June 30, 2007, 2006 and 2005, respectively.
Buildings and improvements include assets under capital leases
of $73 million and $68 million as of June 30,
2007 and 2006, respectively. Machinery and equipment include
assets under capital leases of $4 million and
$2 million as of June 30, 2007 and 2006, respectively.
Accumulated depreciation related to these assets totaled
$29 million and $23 million as of June 30, 2007
and 2006, respectively.
|
|
Note 8.
|
Intangible
Assets, Net and Goodwill
|
The Burger King brand with a carrying value of
$906 million and $896 million as of June 30, 2007
and 2006, respectively, and goodwill with a carrying value of
$23 million and $20 million as of June 30, 2007
and 2006, respectively, represent the Companys
indefinite-lived intangible assets. The increase in goodwill of
$3 million is attributable to acquisitions during 2007. The
increase in the net carrying amount of the brand is attributable
to a $13 million impact from foreign currency translation
on the value of the brand recorded in the Companys
EMEA/APAC reporting segment, offset by a $3 million
reduction in pre-acquisition deferred tax valuation allowances
which was recorded as part of the Transaction described in
Note 1 and applied against the brand in accordance with
SFAS No. 109. (See Note 14).
The table below presents intangible assets subject to
amortization, along with their useful lives (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Franchise agreements
|
|
|
26 years
|
|
|
$
|
74
|
|
|
$
|
68
|
|
Favorable lease contracts
|
|
|
up to 20 years
|
|
|
|
27
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
100
|
|
Accumulated amortization
|
|
|
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
|
|
|
|
$
|
80
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of franchise agreements totaled
$3 million for each of the years ended June 30, 2007,
2006 and 2005. The amortization of favorable lease contracts
totaled $2 million, $4 million and $3 million for
the years ended June 30, 2007, 2006 and 2005, respectively.
The $6 million increase in the value of franchise
agreements in 2007 is attributable to the recorded value of
reacquired franchise rights, in accordance with Emerging Issues
Task Force (EITF)
No. 04-1,
Accounting for Preexisting Relationships between the
Parties to a Business Combination
(EITF 04-1),
in connection with the acquisition of franchise restaurants in
2007.
94
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
As of June 30, 2007, estimated future amortization expense
of intangible assets subject to amortization for each of the
years ended June 30th is $4 million in each of 2008, 2009,
2010, 2011 and 2012; and $60 million thereafter.
|
|
Note 9.
|
Earnings
Per Share
|
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148,123,057
|
|
|
$
|
27,401,649
|
|
|
$
|
47,513,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares basic
|
|
|
133,912,509
|
|
|
|
110,327,949
|
|
|
|
106,499,866
|
|
Effect of dilutive securities
|
|
|
2,841,264
|
|
|
|
4,362,636
|
|
|
|
410,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares diluted
|
|
|
136,753,773
|
|
|
|
114,690,585
|
|
|
|
106,910,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.11
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
Diluted earnings per share
|
|
$
|
1.08
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
The Company does not include unexercised NQSOs with exercise
prices equal to or greater than the average market price in its
computation of diluted earnings per share as those options would
be anti-dilutive. For the years ended June 30, 2007, 2006
and 2005 there were 1.4 million, 1.2 million and
9.0 million anti-dilutive stock options outstanding,
respectively.
|
|
Note 10.
|
Other
Accrued Liabilities and Other Deferrals and
Liabilities
|
Included in other accrued liabilities as of June 30, 2007
and 2006, were accrued payroll and employee-related benefit
costs totaling $99 million and $101 million,
respectively, and income taxes payable of $17 million and
$96 million, respectively.
Included in other deferrals and liabilities as of June 30,
2007 and 2006 were accrued pension liabilities of
$45 million and $49 million, respectively, casualty
insurance reserves of $26 million and $22 million,
respectively, retiree health benefits of $21 million and
$23 million, respectively, and net book value of
unfavorable leases of $209 million and $234 million,
respectively.
Long-term debt is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Term Loan A
|
|
$
|
162
|
|
|
$
|
185
|
|
Term Loan B-1
|
|
|
707
|
|
|
|
809
|
|
Other
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
872
|
|
|
|
998
|
|
Less: current maturities of debt
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
871
|
|
|
$
|
997
|
|
|
|
|
|
|
|
|
|
|
95
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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 BKCs existing term loan, payment-in-kind
(PIK) notes issued in connection with the
Transaction, and $16 million in financing costs associated
with the new facility. In the first quarter of 2006, the Company
repaid the $47 million outstanding balance on the revolving
debt 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 consolidated statement of income for the year
ended June 30, 2006.
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 refinancing,
the Company received net proceeds of $347 million which, in
addition to cash on hand, was used to make a $367 million
dividend payment to the holders of the Companys common
stock and a one-time compensatory make-whole payment of
$33 million to holders of options and restricted stock
units of the Company (see Note 17). The Company recorded
deferred financing costs of $3 million in connection with
the amended facility and recorded a $1 million write-off of
deferred financing costs relating to the Term Loan B, which is
recorded as a loss on early extinguishment of debt in the
consolidated statement of income for the year ended
June 30, 2006.
In May 2006, the Company utilized a portion of the
$392 million in net proceeds received from the IPO to
prepay $350 million of principal on the Term Loan A and
Term Loan B-1 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
accompanying consolidated statement of income for the year ended
June 30, 2006.
As of June 30, 2007, the balance of deferred financing
costs related to the Term Loan A and Term Loan B-1 was
$9 million and is being amortized as a component of
interest expense using the effective interest method.
The interest rate under Term Loan A and the revolving credit
facility is, at the Companys option, either (a) the
greater of the federal funds effective rate plus 0.50% or the
prime rate (ABR), plus a rate not to exceed 0.75%,
which varies according to the Companys leverage ratio or
(b) LIBOR plus a rate not to exceed 1.75%, which varies
according to Companys leverage ratio. The interest rate
for Term Loan B-1 is, at Companys option, either
(a) ABR, plus a rate of 0.50% or (b) LIBOR plus 1.50%,
in each case so long as the Companys leverage ratio
remains at or below certain levels (but in any event not to
exceed 0.75% in the case of ABR loans and 1.75% in the case of
LIBOR loans). The weighted average interest rates related to the
Companys term debt was 6.91% and 5.89% as of June 30,
2007 and June 30, 2006, respectively.
The amended credit facility contains certain customary financial
and other covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees and mergers and acquisitions. These covenants also
place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between the Company and its
subsidiaries and certain transactions with affiliates.
The financial covenants limit the maximum amount of capital
expenditures to an amount ranging from $180 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
Companys leverage ratio is less than a predetermined
amount. There are other events and transactions, such as certain
asset sales, sale and leaseback transactions resulting in
aggregate net proceeds over $2.5 million in any fiscal
year, proceeds from casualty events and incurrence of debt that
will trigger additional mandatory prepayment.
96
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The amended facility also allows the Company to make dividend
payments, subject to certain covenant restrictions. As of
June 30, 2007, the Company was in compliance with the
financial covenants of the amended credit facility.
Provided that the Company is in compliance with certain
financial covenants, the amended facility allows the Company to
request one or more tranches of incremental term loans up to a
maximum amount of $150 million, although no lender is
obligated to provide any incremental term loans unless it so
agrees.
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 certain exceptions.
Furthermore, BKC has pledged as collateral a 65% equity interest
in certain foreign subsidiaries.
During the year ended June 30, 2007, the Company prepaid
$125 million of term debt of which $23 million related
to the Term Loan A and $102 million related to Term Loan
B-1. As of June 30, 2007, the next scheduled principal
payment on term debt is the June 30, 2009 principal payment
of $12 million on Term Loan A. During July 2007, the
Company prepaid an additional $25 million of term debt (see
Note 23). 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 maturities of long-term debt, including the Term
Loan A, Term Loan B-1 and other debt as of June 30, 2007,
are as follows (in millions):
|
|
|
|
|
2008
|
|
$
|
1
|
|
2009
|
|
|
12
|
|
2010
|
|
|
63
|
|
2011
|
|
|
88
|
|
2012
|
|
|
707
|
|
Thereafter
|
|
|
1
|
|
|
|
|
|
|
|
|
$
|
872
|
|
|
|
|
|
|
As of June 30, 2007, there were no borrowings outstanding
under the revolving credit facility; however, there were
$30 million of irrevocable standby letters of credit
outstanding, which reduced the amount available under the
revolving credit facility to $120 million as of
June 30, 2007. BKC incurs a commitment fee on the unused
revolving credit facility at the rate of 0.50% multiplied by the
unused portion.
The Company also has lines of credits with foreign banks, which
can also be used to provide guarantees, in the amounts of
$5 million as of June 30, 2007 and 2006, respectively.
The Company had issued $2 million of guarantees against
these lines of credit as of June 30, 2007 and 2006,
respectively.
|
|
Note 12.
|
Derivative
Instruments
|
Interest
Rate Swaps
As of June 30, 2006, the Company had interest rate swap
contracts with a notional value of $750 million that were
designated as cash flow hedges under SFAS No. 133.
These swaps were used to convert the floating interest rate
component of a portion of the Companys LIBOR-based term
debt to fixed rates (hedged forecasted transaction). In
September 2006, the Company settled the swaps which had a fair
value of $12 million. Upon settlement of the swaps, the
balance in accumulated other comprehensive income represented
the after-tax unrealized gain from the change in fair value of
the swaps through the termination date. This balance is
recognized into earnings as a reduction of interest expense over
the remaining term of debt underlying the original hedge. For
97
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
the year ended June 30, 2007, $6 million was
recognized into earnings as a reduction to interest expense in
the accompanying consolidated statements of income. An
additional $2 million is expected to be recognized into
earnings during the year ending June 30, 2008 as a
reduction to interest expense.
In September 2006, the Company entered into interest rate swap
contracts with a notional value of $440 million and
designated them as cash flow hedges under
SFAS No. 133. These swaps mature through September
2011 and are being used to hedge forecasted LIBOR-based interest
payments on variable rate debt (hedged forecasted transaction).
The fair value of these swaps as of June 30, 2007 was
$5 million and is recorded in other assets in the
accompanying consolidated balance sheet, with an offsetting
unrealized gain recorded in accumulated other comprehensive
income in the balance sheet. The unrealized gain in accumulated
other comprehensive income related to these hedges is expected
to be recorded in the Companys consolidated statement of
income in the future and will offset interest expense on certain
variable rate debt. The actual amounts that will be recorded to
the Companys consolidated statement of income could vary
from this estimated amount as a result of changes interest rates
in the future.
Excluding amounts recognized into earnings from swaps that have
been settled as discussed above, the Company recognized $1
million into earnings as a reduction of interest expense in the
accompanying consolidated statements of income for each of the
years ended June 30, 2007 and 2006 related to swaps. There
was no ineffectiveness recorded in earnings during the years
ended June 30, 2007 and 2006 related to these swaps. The
Company had no swaps outstanding during the year ended
June 30, 2005.
Foreign
Currency Forward Contracts
The Company utilizes foreign currency forward contracts as
economic hedges to offset the impact from transaction gains and
losses recorded by the Company from changes in the expected
amount of functional currency cash flows upon settlement of
intercompany loans denominated in foreign currencies. The fair
value of these forward contracts is reflected in current
liabilities in the accompanying consolidated balance sheets.
Changes in fair value of these forward contracts are recorded in
earnings in other operating (income) expense, net. For the years
ended June 30, 2007, 2006 and 2005, the Company recorded
$16 million, $5 million and zero, respectively, of
losses from the change in fair value of these forward contracts,
which were offset by transaction gains of $23 million and
$6 million during the same periods, respectively, from
changes in the expected amount of functional currency cash flows
upon settlement of intercompany loans denominated in foreign
currencies.
|
|
Note 13.
|
Interest
Expense
|
Interest expense consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Term loans and PIK Notes
|
|
$
|
63
|
|
|
$
|
72
|
|
|
$
|
74
|
|
Capital lease obligations
|
|
|
10
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73
|
|
|
$
|
81
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 11, the Company has $9 million of
unamortized deferred financing costs. 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.
98
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Income (loss) before income taxes, classified by source of
income, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
|
|
$
|
217
|
|
|
$
|
79
|
|
|
$
|
93
|
|
Foreign
|
|
|
6
|
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
223
|
|
|
$
|
80
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
52
|
|
|
$
|
(16
|
)
|
|
$
|
18
|
|
State, net of federal income tax
benefit
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
2
|
|
Foreign
|
|
|
8
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
(15
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8
|
|
|
|
50
|
|
|
|
13
|
|
State, net of federal income tax
benefit
|
|
|
|
|
|
|
5
|
|
|
|
(3
|
)
|
Foreign
|
|
|
2
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
68
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75
|
|
|
$
|
53
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The U.S. Federal tax statutory rate reconciles to the
effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal
income tax benefit
|
|
|
2.1
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Benefit and taxes related to
foreign operations
|
|
|
(3.5
|
)
|
|
|
11.1
|
|
|
|
(12.2
|
)
|
Foreign exchange differential on
tax benefits
|
|
|
(1.5
|
)
|
|
|
(1.9
|
)
|
|
|
4.8
|
|
Change in valuation allowance
|
|
|
3.1
|
|
|
|
0.9
|
|
|
|
10.1
|
|
Change in accrual for tax
uncertainties
|
|
|
(2.0
|
)
|
|
|
18.4
|
|
|
|
4.4
|
|
Other
|
|
|
0.4
|
|
|
|
|
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
33.6
|
%
|
|
|
66.3
|
%
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate was 33.6% for the year
ended June 30, 2007, primarily as a result of tax benefits
realized from an operational realignment of the Companys
European and Asian businesses and from the reduction in tax
accruals due to the resolution of certain tax audit matters.
During the year ended June 30, 2006, the Company recorded
accruals for tax uncertainties of $15 million and changes
in the estimate of tax provision of $7 million, which
resulted in a higher effective tax rate for the year.
99
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The income tax expense includes an increase in valuation
allowance related to deferred tax assets in foreign
jurisdictions of $5 million, $1 million and
$12 million for the years ended June 30, 2007, 2006
and 2005, respectively. For the year ended June 30, 2005,
the valuation allowance decreased by $4 million for 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 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax expense from continuing
operations
|
|
$
|
75
|
|
|
$
|
53
|
|
|
$
|
31
|
|
Interest rate swaps in accumulated
other comprehensive income (loss)
|
|
|
(6
|
)
|
|
|
10
|
|
|
|
|
|
Pension liability in accumulated
other comprehensive income (loss)
|
|
|
4
|
|
|
|
2
|
|
|
|
(2
|
)
|
Adjustments to deferred income
taxes related to brand
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
Adjustments to the valuation
allowance related to brand (See Note 8)
|
|
|
(3
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70
|
|
|
$
|
47
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred income tax expense
(benefit) attributable to income from continuing operations are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Deferred income tax expense
(exclusive of the effects of components listed below)
|
|
$
|
7
|
|
|
$
|
67
|
|
|
$
|
2
|
|
Change in valuation allowance, net
of amounts allocated as adjustments to purchase accounting
|
|
|
5
|
|
|
|
1
|
|
|
|
8
|
|
Change in effective state income
tax rate
|
|
|
(2
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10
|
|
|
$
|
68
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities at the date of the
Transaction were recorded based on managements best
estimate of the ultimate tax basis that will be accepted by the
tax authorities. At the date of a change in managements
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
Companys intangible assets. During the years ended
June 30, 2007 and June 30, 2006, the Company recorded
reductions in the valuation allowance of $3 million and
$12 million, respectively, which were applied to reduce
intangible assets. Based on the provisions of
SFAS No. 109, approximately $67 million of
valuation allowance, if realized, will be applied to reduce
intangible assets.
100
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Trade and notes receivable,
principally due to allowance for doubtful accounts
|
|
$
|
21
|
|
|
$
|
28
|
|
Accrued employee benefits
|
|
|
30
|
|
|
|
31
|
|
Unfavorable leases
|
|
|
92
|
|
|
|
101
|
|
Liabilities not currently
deductible for tax
|
|
|
52
|
|
|
|
45
|
|
Tax loss and credit carryforwards
|
|
|
78
|
|
|
|
38
|
|
Property and equipment,
principally due to differences in depreciation
|
|
|
72
|
|
|
|
61
|
|
Other
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
311
|
|
Valuation allowance
|
|
|
(98
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
222
|
|
Less deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
221
|
|
|
|
212
|
|
Leases
|
|
|
48
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
19
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2007, the valuation allowance
increased by $9 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
foreign net operating loss carryforwards and other deferred tax
assets will not be realized.
Changes in valuation allowance for the years ended June 30,
2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
89
|
|
|
$
|
78
|
|
|
$
|
65
|
|
Change in estimates recorded to
deferred income tax expense
|
|
|
5
|
|
|
|
1
|
|
|
|
8
|
|
Change in estimates in valuation
allowance recorded to intangible assets
|
|
|
(3
|
)
|
|
|
(12
|
)
|
|
|
|
|
Change due to increase in deferred
tax assets that are fully reserved
|
|
|
|
|
|
|
20
|
|
|
|
5
|
|
Changes from foreign currency
exchange rates
|
|
|
7
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
98
|
|
|
$
|
89
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no federal loss carryforwards in the United
States and has state loss carryforwards of $44 million,
expiring between 2008 and 2026. In addition, the Company has
foreign loss carryforwards of $159 million expiring between
2009 and 2022, and foreign loss carryforwards of
$158 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 $37 million of
undistributed earnings, which are considered to be permanently
reinvested in the operations of such subsidiaries outside the
U.S. Determination of the deferred income tax liability on
these unremitted earnings is not practicable. Such liability, if
any, depends on circumstances existing if, and when remittance
occurs.
101
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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
Companys 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.
|
|
Note 15.
|
Related
Party Transactions
|
In connection with the Companys acquisition of BKC, the
Company entered into a management agreement with the Sponsors
for monitoring the Companys 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, the
Company was charged a quarterly fee not to exceed 0.5% of the
prior quarters total revenues. The Company incurred
management fees and reimbursable out-of-pocket expenses under
the management agreement totaling $9 million per year, for
fiscal years ended June 30, 2006 and 2005. 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 IPO. These fees and reimbursable out-of-pocket
expenses were recorded within fees paid to affiliates in the
accompanying consolidated statements of income.
In connection with the July 2005 refinancing described in
Note 11 above, the Company repaid the PIK notes payable to
the private equity funds controlled by the Sponsors and issued
in connection with the Transaction described in Note 1
above. Interest of $2 million accrued prior to the
repayment was reflected in the Companys statement of
income during the year ended June 30, 2006. The Company
recorded $23 million of interest expenses during the year
ended June 30, 2005 on outstanding balances of PIK notes.
In February 2006, the Company paid $33 million to holders
of vested and unvested stock options and RSUs 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 (see Note 17).
A former member of the Board of Directors of the Company, who
resigned from the Board effective April 1, 2007, has a
direct financial interest in a company which is the landlord
under a lease for a new corporate headquarters facility that the
Company had proposed to build in Coral Gables, Florida. In May
2007, the Company terminated the lease and incurred costs of
$7 million, including a termination fee of $5 million
paid by the Company to the landlord, which includes a
reimbursement of the landlords expenses.
An affiliate of one of the Sponsors participated as one of the
joint book-running managers of our IPO in May 2006. This
affiliate was paid $5 million pursuant to a customary
underwriting agreement among the Company and the several
underwriters.
During the year ended June 30, 2007, the Company paid a
total of $1 million in registration expenses relating to
the secondary offering (see Note 1). This amount included
registration and filing fees, printing fees, external accounting
fees, all reasonable fees and disbursements of one law firm
selected by the Sponsors and all expenses related to the road
show for the secondary offering.
102
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
As of June 30, 2007, the Company leased or subleased 1,087
restaurant properties to franchisees and non-restaurant
properties to third parties under capital and operating leases.
The building and leasehold improvements of the income leases
with franchisees are usually accounted for as direct financing
leases and recorded as a net investment in property leased to
franchisees, while the land is recorded as operating leases.
Most leases to franchisees provide for fixed payments with
contingent rent when sales exceed certain levels. Lease terms
generally range from 10 to 20 years. The franchisees bear
the cost of maintenance, insurance and property taxes.
Property and equipment, net leased to franchisees and other
third parties under operating leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
197
|
|
|
$
|
196
|
|
Buildings and improvements
|
|
|
85
|
|
|
|
78
|
|
Restaurant equipment
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285
|
|
|
|
276
|
|
Accumulated depreciation
|
|
|
(29
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256
|
|
|
$
|
253
|
|
|
|
|
|
|
|
|
|
|
Net investment in property leased to franchisees and other third
parties under direct financing leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Future minimum rents to be received
|
|
$
|
330
|
|
|
$
|
353
|
|
Estimated unguaranteed residual
value
|
|
|
4
|
|
|
|
4
|
|
Unearned income
|
|
|
(183
|
)
|
|
|
(200
|
)
|
Allowance on direct financing
leases
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
155
|
|
Current portion included within
trade receivables
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in property leased
to franchisees
|
|
$
|
142
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company is the lessee on land, building,
equipment, office space and warehouse leases, including 236
restaurant buildings under capital leases. Initial lease terms
are generally 10 to 20 years. Most leases provide for fixed
monthly payments. Many of these leases provide for future rent
escalations and renewal options. Certain leases require
contingent rent, determined as a percentage of sales, generally
when annual sales exceed specific levels. Most leases also
obligate the Company to pay the cost of maintenance, insurance
and property taxes.
103
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
As of June 30, 2007, future minimum lease receipts and
commitments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
Lease Commitments
|
|
|
|
Financing
|
|
|
Operating
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
2008
|
|
$
|
30
|
|
|
$
|
71
|
|
|
$
|
14
|
|
|
$
|
160
|
|
2009
|
|
|
30
|
|
|
|
62
|
|
|
|
14
|
|
|
|
148
|
|
2010
|
|
|
30
|
|
|
|
59
|
|
|
|
13
|
|
|
|
136
|
|
2011
|
|
|
28
|
|
|
|
54
|
|
|
|
13
|
|
|
|
126
|
|
2012
|
|
|
26
|
|
|
|
48
|
|
|
|
12
|
|
|
|
116
|
|
Thereafter
|
|
|
186
|
|
|
|
323
|
|
|
|
74
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
330
|
|
|
$
|
617
|
|
|
$
|
140
|
|
|
$
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total minimum obligations under capital
leases are $140 million and $134 million as of
June 30, 2007 and June 30, 2006 respectively. Of these
amounts, $69 million and $67 million represents
interest as of June 30, 2007 and June 30, 2006. The
remaining balance of $71 million and $67 million is
reflected as capital lease obligations recorded in the
Companys consolidated balance sheet, of which
$4 million is classified as current portion of long-term
debt and capital leases as of June 30, 2007 and
June 30, 2006.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
76
|
|
|
$
|
74
|
|
|
$
|
78
|
|
Contingent
|
|
|
16
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental income
|
|
|
92
|
|
|
|
88
|
|
|
|
91
|
|
Earned income on direct financing
leases
|
|
|
24
|
|
|
|
24
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property revenues
|
|
$
|
116
|
|
|
$
|
112
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense associated with the lease commitments is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Rental expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
155
|
|
|
$
|
151
|
|
|
$
|
145
|
|
Contingent
|
|
|
7
|
|
|
|
6
|
|
|
|
6
|
|
Amortization of favorable and
unfavorable lease contracts, net
|
|
|
(25
|
)
|
|
|
(24
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expense
|
|
$
|
137
|
|
|
$
|
133
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 income. Amortization of favorable
lease contracts totaled $2 million, $4 million and
$3 million for the years ended June 30, 2007, 2006 and
2005, respectively. Amortization of unfavorable lease contracts
totaled $25 million, $28 million and $32 million
for the years ended June 30, 2007, 2006 and 2005,
respectively.
104
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Unfavorable leases, net of accumulated amortization totaled
$209 million and $234 million as of June 30, 2007
and June 30, 2006, respectively. Unfavorable leases, net of
amortization are classified within other deferrals and
liabilities in the accompanying consolidated balance sheets.
As of June 30, 2007, estimated future amortization expense
of unfavorable lease contracts subject to amortization for each
of the years ended June 30th is $24 million in 2008,
$22 million in 2009, $21 million in 2010,
$19 million in 2011, $18 million in 2012 and
$105 million thereafter.
|
|
Note 17.
|
Stockholders
Equity
|
Capital
Stock
Upon completion of the Transaction described in Note 1
above, on December 13, 2002, the Company was initially
capitalized as a limited liability company with
$398 million in cash. On June 27, 2003, the Company
was converted to a corporation and issued an aggregate
104,692,735 shares of common stock to the private equity
funds controlled by the Sponsors.
In connection with the IPO as described in Note 1, the
Board of Directors of the Company (1) authorized an
increase in the number of shares of the Companys common
stock, par value $0.01 per share, to 300 million shares,
(2) authorized a 26.34608 to 1 stock split on common stock
and (3) authorized 10 million shares of a new class of
preferred stock, with a par value of $0.01 per share. As of
June 30, 2007, no shares of preferred stock were issued or
outstanding. All shares in the accompanying consolidated
financial statements have been adjusted to reflect the stock
split on a retroactive basis.
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 Companys common stock on
February 9, 2006, including members of senior management
(special dividend). The payment of the dividend was
financed primarily from proceeds of the amended facility (see
Note 11) and was recorded as a cash dividend of
$100 million ($0.93 per share) charged to the
Companys 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 for the
year ended June 30, 2006.
During the year ended June 30, 2007, the Company declared
two quarterly cash dividends of $0.0625 per share on its common
stock. Total dividends paid by the Company during the year ended
June 30, 2007 was $17 million.
Compensatory
Make-Whole Payment
In February 2006, the Company paid $33 million to holders
of vested and unvested stock options and RSUs 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
income for the year ended June 30, 2006.
|
|
Note 18.
|
Pension
and Post Retirement Medical Benefits
|
The following disclosures reflect the Companys fourth
quarter of fiscal year 2007 adoption of the recognition and
disclosure provisions of SFAS 158 as discussed in
Note 2.
Pension
Benefits
The Company sponsors noncontributory defined benefit pension
plans for its salaried employees in the United States (the
U.S. Pension Plans) and certain employees in
the United Kingdom and Germany (the International
105
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Pension Plans). Effective December 31, 2005, all
benefits accrued under the U.S. Pension Plans were frozen
at the benefit level attained as of that date. As a result, the
Company recognized a curtailment gain of $6 million, as a
component of net periodic benefit cost for the year ended
June 30, 2006. In conjunction with the curtailment gain,
the Company made a one-time distribution totaling
$6 million on behalf of those U.S. Pension Plan
participants who were affected by the curtailment. The
distribution was paid by the Company in cash or contributed to
the Burger King Savings Plan or Executive Retirement Plan
account of the participant.
Postretirement
Medical Benefits
The Companys postretirement medical plan (the
U.S. Medical Plan) provides medical, dental and
life insurance benefits to U.S. salaried retirees and their
eligible dependents. The amount of retirement health care
coverage an employee will receive depends upon the length of
credited service with the Company, multiplied by an annual
factor to determine the value of the post-retirement health care
coverage.
The U.S Medical Plan also provides prescription drug coverage to
retirees as a primary provider in lieu of Medicare Part D.
Recent legislation enacted will result in the federal government
paying a special direct subsidy to employers (the
Part D subsidy) as an incentive to encourage
employers to continue providing prescription drug coverage to
Medicare-eligible employees. Under the subsidy, an employer may
receive an annual amount equal to 28 percent of the
allowable retiree drug costs between $250 and $5,000. The annual
effect of the Part D subsidy is reflected in the
Companys estimated future cash flows for the
U.S. Medical Plan.
401(k)
Benefits
The Company sponsors the Burger King Savings Plan (the
Savings Plan), a defined contribution plan under the
provisions of section 401(k) of the Internal Revenue Code.
The Savings Plan is voluntary and is provided to all employees
who meet the eligibility requirements.
A participant can elect to contribute up to 50% of their
compensation subject to IRS limits and the Company matches 100%
of the first 6% of employee compensation.
Effective July 1, 2007, the Company added the Burger King
Holdings, Inc. Stock Fund (the BK Stock Fund) to the
Savings Plan as an investment option. Participants in the
Savings Plan may direct no more than 10% of their investment
elections to the BK Stock Fund and no more than 10% of their
total account balance.
Non-Qualified
Deferred Compensation Plan
The Company also maintains an Executive Retirement Plan
(ERP) for all officers and senior management.
Officers and senior management may elect to defer up to 50% of
base pay once 401(k) limits are reached and up to 100% of
incentive pay on a before-tax basis under the ERP. BKC provides
a dollar-for-dollar match up to the first 6% of base pay.
Additionally, the Company may make a discretionary contribution
ranging from 0% to 6% based on the Companys performance.
The balance in the ERP as of June 30, 2007 and 2006 was
$22 million and $15 million, respectively. Effective
July 1, 2007, the Company established a Rabbi Trust to
maintain the liability of the ERP, eliminated the fixed return
on participant accounts and established 10 investment funds for
ERP participants to invest in.
Amounts recorded in the consolidated statements of income
representing the Companys matching contributions to the
Savings Plan and the ERP for fiscal years 2007, 2006 and 2005
totaled $4 million for each year, respectively.
106
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Obligations
and Funded Status
The following table sets forth the change in benefit
obligations, fair value of plan assets and amounts recognized in
the balance sheets for the U.S. Pension Plans,
International Pension Plans and U.S. Medical Plan
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change in benefit
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
142
|
|
|
$
|
165
|
|
|
$
|
20
|
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
22
|
|
Service cost
|
|
|
|
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Interest cost
|
|
|
9
|
|
|
|
9
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Actuarial (gains) losses
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Curtailment gain
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
146
|
|
|
|
142
|
|
|
|
20
|
|
|
|
20
|
|
|
|
22
|
|
|
|
22
|
|
Change in plan
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
|
95
|
|
|
|
82
|
|
|
|
15
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
9
|
|
|
|
7
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
3
|
|
|
|
10
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
|
101
|
|
|
|
95
|
|
|
|
18
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(45
|
)
|
|
$
|
(47
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
$
|
(22
|
)
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
consolidated balance sheet as of June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Noncurrent liabilities
|
|
|
(44
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension liability, end of
fiscal year
|
|
$
|
(45
|
)
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(22
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
consolidated balance sheet as of June 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
|
|
|
$
|
(47
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in
accumulated other comprehensive income
(AOCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial gain
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI due to initial adoption of
SFAS 158 (before tax)
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net gain for the U.S. Pension and Medical
Plans and the International Pension Plans that will be amortized
from accumulated other comprehensive gain into net periodic
pension costs in fiscal year 2008 is not significant.
107
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Additional
year-end information for the U.S. Pension Plans and
International 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 U.S. Pension Plans and International Pension Plans with
accumulated benefit obligations in excess of plan assets (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Projected benefit obligation
|
|
$
|
145
|
|
|
$
|
142
|
|
|
$
|
5
|
|
|
$
|
20
|
|
Accumulated benefit obligation
|
|
$
|
145
|
|
|
$
|
142
|
|
|
$
|
5
|
|
|
$
|
13
|
|
Fair value of plan assets
|
|
$
|
101
|
|
|
$
|
95
|
|
|
$
|
|
|
|
$
|
15
|
|
As of June 30, 2007 the projected benefit obligation of the
Germany pension plan exceeds plan assets by $5 million, as
there are no assets in this plan.
Components
of Net Periodic Benefit Cost
A summary of the components of net periodic benefit cost for the
U.S. Pension Plans and International Pension Plans and
U.S. Medical Plan is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
International Pension Plans
|
|
|
U.S Medical Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
8
|
|
|
|
9
|
|
|
|
9
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Expected return on plan assets
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
The weighted-average assumptions used in computing the benefit
obligations of the U.S. Pension Plans and U.S. Medical
Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
U.S. Medical Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate as of year-end
|
|
|
6.07
|
%
|
|
|
6.09
|
%
|
|
|
5.86
|
%
|
|
|
6.07
|
%
|
|
|
6.09
|
%
|
|
|
5.86
|
%
|
Range of compensation rate increase
|
|
|
N/A
|
*
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
* |
|
The Company curtailed the U.S Pension Plan during the year ended
June 30, 2006. |
The Company uses the Moodys 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.
108
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 and the
U.S. Medical Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plan(s)
|
|
|
U.S. Medical Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
6.09
|
%
|
|
|
5.86
|
%
|
|
|
6.00
|
%
|
|
|
6.09
|
%
|
|
|
5.86
|
%
|
|
|
6.00
|
%
|
Range of compensation rate increase
|
|
|
N/A
|
*
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected long-term rate of return
on plan assets
|
|
|
8.25
|
%
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
* |
|
The Company curtailed the U.S Pension Plan during the year ended
June 30, 2006. |
The expected long-term rate of return on plan assets is
determined by expected future returns on the asset categories in
target investment allocation. These expected returns are based
on historical returns for each assets category adjusted
for an assessment of current market conditions.
The assumed healthcare cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Healthcare cost trend rate assumed
for next year
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
|
|
9.00
|
%
|
Rate to which the cost trend rate
is assumed to decline (the ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the
ultimate trend rate
|
|
|
2016
|
|
|
|
2016
|
|
|
|
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 a minimal effect on
service and interest cost and the postretirement obligation.
Plan
Assets
The fair value of plan assets for U.S. Pension Plans as of
March 31, 2007 and 2006 was $101 million and
$95 million, respectively. The fair value of plan assets
for the International Pension Plans was $18 million and
$15 million at April 30, 2007 and 2006, respectively.
The following table sets forth the asset allocation for
U.S. and International Pension Plans assets at the
measurement date:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Equity securities
|
|
|
71
|
%
|
|
|
70
|
%
|
Debt securities
|
|
|
29
|
%
|
|
|
28
|
%
|
Other
|
|
|
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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 portfolio
of equity securities includes primarily large-capitalization
U.S. companies with a mix of small-capitalization
U.S. and international companies.
Estimated
Future Cash Flows
Total contributions to the U.S. Pension Plans and
International Pension Plans were $4 million,
$2 million and $17 million for the years ended
June 30, 2007, 2006 and 2005, respectively.
109
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The U.S. and International Pension Plans and
U.S. Medical Plans expected contributions to be paid
in the next fiscal year, the projected benefit payments for each
of the next five fiscal years and the total aggregate amount for
the subsequent five fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
Medical Plan*
|
|
|
Estimated Net Contributions During
Fiscal 2008:
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
1
|
|
Estimated Future Year Benefit
Payments During Years Ended June 30,:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
1
|
|
2009
|
|
|
5
|
|
|
|
|
|
|
|
1
|
|
2010
|
|
|
5
|
|
|
|
|
|
|
|
1
|
|
2011
|
|
|
5
|
|
|
|
|
|
|
|
1
|
|
2012
|
|
|
6
|
|
|
|
|
|
|
|
2
|
|
2013 - 2017
|
|
|
37
|
|
|
|
2
|
|
|
|
9
|
|
The Company uses a measurement date of
March 31st for
the U.S. Pension Plans, U.S. Medical Plan and the
Germany pension plan; a measurement date of
April 30th is
used for the United Kingdom pension plan.
|
|
Note 19.
|
Other
Operating Expenses (Income), Net
|
Other operating expenses (income), net, consist of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Gains) losses on asset
acquisitions, closures and dispositions
|
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
|
$
|
13
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
4
|
|
(Recovery) impairment of
investments in franchisee debt
|
|
|
|
|
|
|
(2
|
)
|
|
|
4
|
|
Litigation settlements and reserves
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Other, net
|
|
|
2
|
|
|
|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses (income),
net
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $2 million of other, net within other operating income,
net for the year ended June 30, 2007 included a realized
gain of $7 million from forward currency contracts used to
hedge intercompany loans denominated in foreign currencies
offset by $7 million in cost associated with the lease
termination of the Companys proposed new headquarters, and
$3 million in franchise workout costs.
The $3 million of other, net within other operating income,
net for the year ended June 30, 2006 included a recovery of
$1 million from investments in a joint venture in New
Zealand that has since been dissolved, offset by $4 million
of closed restaurant expenses incurred in the U.K. and the U.S.
The $11 million of other, net within other operating
expense, net for the year ended June 30, 2005 included
$5 million in settlement losses incurred with the
acquisition of franchise restaurants, and $5 million in
costs associated with the franchisee financial restructuring
program (FFRP) program.
110
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 20.
|
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, 2007, the Company has funded
$4 million in Capex Loans and has made $3 million of
improvements to restaurant properties that the Company leases to
franchisees in connection with these commitments. As of
June 30, 2007, the Company has potential commitments
remaining to provide future Capex Loans of $7 million and
to make up to $9 million of improvements to properties that
the Company leases to franchisees. These notes extend over a
period of up to five years.
The Company provided $2 million, $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, 2007, 2006 and 2005, respectively. As of
June 30, 2007, the Company has potential commitments
remaining to provide future rent relief of up to $7 million
extending over a period of up to 17 years.
Contingent cash flow subsidies represent potential 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 subsidies were provided through June 30, 2007. The
maximum contingent cash flow subsidy commitment for future
periods as of June 30, 2007 is $3 million. Upon
funding, in most instances, the subsidies will be added to the
franchisees existing note balance.
Guarantees
The Company guarantees certain lease payments of franchisees
arising from leases assigned in connection with sales of Company
restaurants to franchisees, by remaining secondarily liable for
base and contingent rents under the assigned leases of varying
terms. The maximum contingent rent amount is not determinable as
the amount is based on future revenues. In the event of default
by the franchisees, the Company has typically retained the right
to acquire possession of the related restaurants, subject to
landlord consent. The aggregate contingent obligation arising
from these assigned lease guarantees was $112 million as of
June 30, 2007, expiring over an average period of seven
years.
Other commitments arising out of normal business operations were
$14 million and $10 million as of June 30, 2007
and 2006, respectively, of which $8 million and
$6 million, respectively were guaranteed under bank
guarantee arrangements.
Letters
of Credit
As of June 30, 2007, there were $30 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, all of which were issued under
the Companys $150 million revolving credit facility
(See Note 11). As of June 30, 2007, no amounts had
been drawn on of these irrevocable standby letters of credit.
As of June 30, 2007, the Company had posted bonds totaling
$2 million, which related to certain utility deposits.
111
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Vendor
Relationships
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, 2007, the Company estimates that it will take
approximately 15 years to complete the
Coca-Cola
and Dr Pepper/ Seven Up, Inc. purchase commitments. In the event
of early termination of these arrangements, the Company may be
required to make termination payments that could be material to
the Companys results of operations and financial position.
Additionally, in connection with these contracts, the Company
has received upfront fees, which are being amortized over the
term of the contracts. As of June 30, 2007 and 2006, the
deferred amounts totaled $21 million and $23 million,
respectively. These deferred amounts are amortized as a
reduction to food, paper and product costs in the accompanying
consolidated statements of income.
As of June 30, 2007, the Company had $12 million in
aggregate contractual obligations for the year ended
June 30, 2008 with a vendor providing information
technology services under six separate arrangements. These
contracts extend up to four years with a termination fee ranging
from less than $1 million to $3 million during those
years. The Company also has a separate arrangement with an
aggregate contractual obligation of $4 million over
3 years with no early termination fee.
The Company also enters into commitments to purchase
advertising. As of June 30, 2007, commitments to purchase
advertising totaled $80 million.
Litigation
On July 10, 2007, a purported class action lawsuit was
filed against the Company in the United States District Court
for the Southern District of Florida. The plaintiff filed an
amended complaint on August 3, 2007. The case alleges
liability under the Fair and Accurate Credit Transactions Act
for failure to truncate credit and debit card account numbers
and/or omit
the expiration date on customer receipts, and seeks monetary
damages, including statutory damages, punitive damages, costs
and attorneys fees, and a permanent injunction against the
alleged unlawful practice. Similar complaints have recently been
filed against many other retailers. The case is in the
preliminary stages. Therefore, the Company is unable to
determine the ultimate outcome of the litigation, and any
ultimate effect on the Companys business, financial
position or cash flows. However, the Company believes it has
strong defenses to this claim, and intends to vigorously defend
against it, including the plaintiffs efforts to certify a
class action.
From time to time, the Company is involved in other legal
proceedings arising in the ordinary course of business relating
to matters including, but not limited to, disputes with
franchisees, suppliers, employees and customers, as well as
disputes over the Companys intellectual property. In the
opinion of management, disposition of the matters will not
materially affect the Companys financial condition or
results of operations.
Other
The Company carries insurance to cover claims such as
workers compensation, general liability, automotive
liability, executive risk and property, and is self-insured for
healthcare claims for eligible participating employees. Through
the use of insurance program deductibles (ranging from
$.5 million to $1 million) and self insurance, the
Company retains a significant portion of the expected losses
under these programs. Insurance reserves have been recorded
based on the Companys estimate of the anticipated ultimate
costs to settle all claims, both reported and
incurred-but-not-reported (IBNR), and such reserves include
judgments and independent actuarial assumptions about economic
conditions, the frequency or severity of claims and claim
development patterns, and claim reserve, management and
settlement practices. As of June 30, 2007, the Company had
recorded insurance reserves which totaled $37 million.
112
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 21.
|
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, income from operations,
depreciation and amortization, total assets, long-lived assets
and capital expenditures information by geographic segment (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,451
|
|
|
$
|
1,382
|
|
|
$
|
1,275
|
|
EMEA/APAC
|
|
|
681
|
|
|
|
576
|
|
|
|
586
|
|
Latin America
|
|
|
102
|
|
|
|
90
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,234
|
|
|
$
|
2,048
|
|
|
$
|
1,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Companys total
revenues. Revenues in the United States totaled
$1,304 million, $1,239 million and $1,146 million
for the years ended June 30, 2007, 2006 and 2005,
respectively. Revenues in Germany totaled $308 million,
$269 million and $262 million for the years ended
June 30, 2007, 2006 and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
336
|
|
|
$
|
295
|
|
|
$
|
255
|
|
EMEA/APAC
|
|
|
54
|
|
|
|
62
|
|
|
|
36
|
|
Latin America
|
|
|
35
|
|
|
|
29
|
|
|
|
25
|
|
Unallocated
|
|
|
(134
|
)
|
|
|
(216
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
|
291
|
|
|
|
170
|
|
|
|
151
|
|
Interest expense, net
|
|
|
67
|
|
|
|
72
|
|
|
|
73
|
|
Loss on early distinguishment of
debt
|
|
|
1
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
223
|
|
|
|
80
|
|
|
|
78
|
|
Income tax expense
|
|
|
75
|
|
|
|
53
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148
|
|
|
$
|
27
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Depreciation and
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
61
|
|
|
$
|
60
|
|
|
$
|
52
|
|
EMEA/APAC
|
|
|
13
|
|
|
|
9
|
|
|
|
4
|
|
Latin America
|
|
|
4
|
|
|
|
3
|
|
|
|
2
|
|
Unallocated
|
|
|
11
|
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
89
|
|
|
$
|
88
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,843
|
|
|
$
|
1,978
|
|
EMEA/APAC
|
|
|
587
|
|
|
|
498
|
|
Latin America
|
|
|
58
|
|
|
|
45
|
|
Unallocated
|
|
|
29
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,517
|
|
|
$
|
2,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
827
|
|
|
$
|
854
|
|
EMEA/APAC
|
|
|
125
|
|
|
|
114
|
|
Latin America
|
|
|
40
|
|
|
|
35
|
|
Unallocated
|
|
|
29
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
1,021
|
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets include property and equipment, net, and net
investment in property leased to franchisees. Only the United
States represented 10% or more of the Companys total
long-lived assets as of June 30, 2007 and 2006. Long-lived
assets in the United States, including the unallocated portion,
totaled $786 million and $813 million as of
June 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
41
|
|
|
$
|
43
|
|
|
$
|
40
|
|
EMEA/APAC
|
|
|
25
|
|
|
|
17
|
|
|
|
27
|
|
Latin America
|
|
|
8
|
|
|
|
10
|
|
|
|
8
|
|
Unallocated
|
|
|
13
|
|
|
|
15
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
87
|
|
|
$
|
85
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The goodwill reflected in the Companys consolidated
balance sheets of $23 million and $20 million as of
June 30, 2007 and 2006, respectively, was primarily
attributable to the Companys United States and Canada
geographic segment.
114
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 22.
|
Quarterly
Financial Data (Unaudited)
|
Summarized unaudited quarterly financial data (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
September 30, 2006
|
|
|
December 31, 2006
|
|
|
March 31, 2007
|
|
|
June 30, 2007
|
|
|
Revenue
|
|
$
|
546
|
|
|
$
|
559
|
|
|
$
|
539
|
|
|
$
|
590
|
|
Operating income
|
|
$
|
82
|
|
|
$
|
75
|
|
|
$
|
62
|
|
|
$
|
72
|
|
Net income
|
|
$
|
40
|
|
|
$
|
38
|
|
|
$
|
34
|
|
|
$
|
36
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
Diluted earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
22
|
|
|
$
|
27
|
|
|
$
|
(12
|
)
|
|
$
|
(10
|
)
|
Basic earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
Diluted earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.24
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.08
|
)
|
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 2007 and 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
Selling, general and
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
Global reorganization and
realignment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
Compensatory make-whole payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Executive severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on
SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
36
|
|
|
|
1
|
|
|
|
1
|
|
Fees paid to
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Management termination fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees paid to
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Other operating (income)
expenses (OIE), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination of global headquarters
lease
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on OIE,
net
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
Total effect on income from
operations
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
36
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on $350 million
loan repaid at IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on income before
income taxes
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
40
|
|
|
$
|
5
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
(a) |
|
Represents bad debt expense (recoveries), incremental
advertising contributions and the internal and external costs of
FFRP program administration. |
|
(b) |
|
Represents (recoveries) reserves on acquired debt, net and other
items included within operating (income) expenses, net |
|
|
Note 23.
|
Subsequent
Events
|
On July 31, 2007, the Company prepaid an additional
$25 million of term debt reducing the total outstanding
debt balance to $847 million. As a result of this payment,
the next scheduled principal payment on the amended facility is
the June 30, 2009 principal payment of $7 million on
the Term Loan A.
On August 28, 2007, the Company declared a quarterly
dividend of $0.0625 per share payable on September 28, 2007
to shareholders of record on September 14, 2007.
116
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of
June 30, 2007. Based on that evaluation, the CEO and CFO
concluded that the Companys disclosure controls and
procedures were effective as of such date to ensure that
information required to be disclosed in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.
Internal
Control Over Financial Reporting
The Companys management, including the CEO and CFO,
confirm that there were no changes in the Companys
internal control over financial reporting during the fiscal
quarter ended June 30, 2007 that has materially affected,
or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Managements Report on Internal Control Over Financial
Reporting and the report of Independent Registered Public
Accounting Firm on internal control over financial reporting are
set forth in Part II, Item 8 of this
Form 10-K.
|
|
Item 9B.
|
Other
Information
|
On March 19, 2007, the Company paid a one-time cash bonus
in the amount of $300,000 to Russell B. Klein, the
Companys President, Global Marketing, Strategy and
Innovation, in recognition of his extraordinary performance.
On May 30, 2007, the Compensation Committee of the Board of
Directors approved a $50,000 increase to the base salary of Ben
K. Wells, the Companys Chief Financial Officer, effective
as of July 1, 2007, so as to bring his base salary into the
desired competitive range. A copy of the letter agreement dated
July 12, 2007 amending Mr. Wells employment
agreement is attached as Exhibit 10.41 to this
Form 10-K.
117
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item, other than the
information regarding our executive officers set forth below
required by Item 401 of
Regulation S-K,
is incorporated herein by reference from the Companys
definitive proxy statement to be filed no later than
120 days after June 30, 2007. We refer to this proxy
statement as the 2007 Proxy Statement.
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John W. Chidsey
|
|
|
45
|
|
|
Chief Executive Officer and
Director
|
Russell B. Klein
|
|
|
50
|
|
|
President, Global Marketing,
Strategy and Innovation
|
Ben K. Wells
|
|
|
53
|
|
|
Chief Financial Officer
|
James F. Hyatt
|
|
|
51
|
|
|
Chief Operations Officer
|
Peter C. Smith
|
|
|
51
|
|
|
Chief Human Resources Officer
|
Anne Chwat
|
|
|
48
|
|
|
General Counsel and Secretary
|
Charles M. Fallon, Jr.
|
|
|
44
|
|
|
President, North America
|
Amy E. Wagner
|
|
|
42
|
|
|
Senior Vice President, Investor
Relations and Global Communications
|
Christopher M. Anderson
|
|
|
40
|
|
|
Senior 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, North America. Mr. Chidsey joined us as
Executive Vice President, Chief Administrative and Financial
Officer in March 2004 and held that position until June 2004.
From January 1996 to March 2003, Mr. Chidsey served in
numerous positions at Cendant Corporation, most recently as
Chief Executive Officer of the Vehicle Services Division and the
Financial Services Division.
Russell B. Klein has served as our President, Global
Marketing, Strategy and Innovation since June 2006. Previously,
he served as Chief Marketing Officer from June 2003 to June
2006. From August 2002 to May 2003, Mr. Klein served as
Chief Marketing Officer at 7-Eleven Inc. From January 1999 to
July 2002, Mr. Klein served as a Principal at Whisper
Capital.
Ben K. Wells has served as our Chief Financial Officer
since April 2006. From May 2005 to April 2006, Mr. Wells
served as our Senior Vice President, 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.
118
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 E. Wagner has served as our Senior Vice President,
Investor Relations and Global Communications since June 2007.
Previously she served as Senior Vice President, Investor
Relations from April 2006 to June 2007. From February 1990 to
April 2006, Ms. Wagner served in various corporate finance
positions at Ryder System, Inc., 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 Senior Vice
President and Controller since July 1, 2007. From February
2005 through June 2007, he served as our Vice President and
Controller. From May 2002 to February 2005, Mr. Anderson
served as Director of Finance and Controller for
Hewlett-Packard. From February 2000 through May 2002, he served
as Director of Finance and Controller for Compaq Computer
Corporation.
|
|
Item 11.
|
Executive
Compensation
|
Incorporated herein by reference from the Companys 2007
Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Incorporated herein by reference from the Companys 2007
Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Incorporated herein by reference from the Companys 2007
Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Incorporated herein by reference from the Companys 2007
Proxy Statement.
|
|
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
|
119
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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
|
|
10
|
.18**
|
|
Form of 2005 Management Stock
Option Agreement
|
120
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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 Award
Agreement under the Burger King Holdings, Inc. 2006 Omnibus
Incentive Plan
|
|
10
|
.36***
|
|
Form of Retainer Stock Award
Agreement for Directors under the Burger King Holdings, Inc.
2006 Omnibus Incentive Plan
|
|
10
|
.37***
|
|
Form of Annual Deferred Stock
Award Agreement for Directors under the Burger King Holdings,
Inc. 2006 Omnibus Incentive Plan
|
|
10
|
.38****
|
|
Employment Agreement between Anne
Chwat and Burger King Corporation dated as of April 20, 2006
|
|
10
|
.39*****
|
|
Agreement of Termination and
Cancellation of Lease
|
|
10
|
.40******
|
|
Burger King Savings Plan,
including all amendments thereto
|
|
10
|
.41
|
|
Letter Agreement between Ben K.
Wells and Burger King Corporation dated July 12, 2007
amending the Employment Agreement between Ben K. Wells and
Burger King Corporation dated as of April 7, 2006
|
|
14
|
.1*
|
|
Burger King Code of Business
Ethics and Conduct (Filed as Exhibit 14 to the Annual
Report on
Form 10-K
dated August 31, 2006)
|
|
14
|
.2
|
|
Code of Ethics for Executive
Officers
|
|
14
|
.3
|
|
Code of Conduct for Directors
|
|
21
|
.1
|
|
List of Subsidiaries of the
Registrant
|
121
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
23
|
.1
|
|
Consent of KPMG LLP
|
|
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. Annual Report on
Form 10-K
dated August 31, 2006 |
|
** |
|
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 |
|
**** |
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on
Form 10-Q
dated February 2, 2007 |
|
***** |
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on
Form 8-K
dated May 9, 2007 |
|
****** |
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on
Form S-8
(File
No. 333-144592) |
|
|
|
Management contract or compensatory plan or arrangement |
122
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BURGER KING HOLDINGS, INC.
|
|
|
|
By:
|
/s/ John
W. Chidsey
Name: John
W. Chidsey
Title: Chief Executive Officer and Director
|
Date: September 7, 2007
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
W. Chidsey
John
W. Chidsey
|
|
Chief Executive Officer and
Director (principal executive officer)
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Ben
K. Wells
Ben
K. Wells
|
|
Chief Financial Officer
(principal financial officer)
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Christopher
M. Anderson
Christopher
M. Anderson
|
|
Senior Vice President and
Controller (principal accounting officer)
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Brian
Thomas Swette
Brian
Thomas Swette
|
|
Non-Executive Chairman
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Andrew
B. Balson
Andrew
B. Balson
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ David
Bonderman
David
Bonderman
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Richard
W. Boyce
Richard
W. Boyce
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ David
A. Brandon
David
A. Brandon
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Ronald
M. Dykes
Ronald
M. Dykes
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Peter
R. Formanek
Peter
R. Formanek
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Manuel
A. Garcia
Manuel
A. Garcia
|
|
Director
|
|
September 7, 2007
|
123
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Adrian
Jones
Adrian
Jones
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Sanjeev
K. Mehra
Sanjeev
K. Mehra
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Stephen
G. Pagliuca
Stephen
G. Pagliuca
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Kneeland
C. Youngblood
Kneeland
C. Youngblood
|
|
Director
|
|
September 7, 2007
|
124
|
|
|
|
|
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
|
125
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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
|
|
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 Award
Agreement under the Burger King Holdings, Inc. 2006 Omnibus
Incentive Plan
|
|
10
|
.36***
|
|
Form of Retainer Stock Award
Agreement for Directors under the Burger King Holdings, Inc.
2006 Omnibus Incentive Plan
|
|
10
|
.37***
|
|
Form of Annual Deferred Stock
Award Agreement for Directors under the Burger King Holdings,
Inc. 2006 Omnibus Incentive Plan
|
|
10
|
.38****
|
|
Employment Agreement between Anne
Chwat and Burger King Corporation dated as of April 20, 2006
|
|
10
|
.39*****
|
|
Agreement of Termination and
Cancellation of Lease
|
|
10
|
.40******
|
|
Burger King Savings Plan,
including all amendments thereto
|
|
10
|
.41
|
|
Letter Agreement, between Ben K.
Wells and Burger King Corporation dated July 12, 2007
amending the Employment Agreement between Ben K. Wells and
Burger King Corporation dated as of April 7, 2006
|
126
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
14
|
.1*
|
|
Burger King Code of Business
Ethics and Conduct (Filed as Exhibit 14 to the Annual
Report on
Form 10-K
dated August 31, 2006)
|
|
14
|
.2
|
|
Code of Ethics for Executive
Officers
|
|
14
|
.3
|
|
Code of Conduct for Directors
|
|
21
|
.1
|
|
List of Subsidiaries of the
Registrant
|
|
23
|
.1
|
|
Consent of KPMG LLP
|
|
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. Annual Report on
Form 10-K
dated August 31, 2006 |
|
** |
|
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 |
|
**** |
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on
Form 10-Q
dated February 2, 2007 |
|
***** |
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on
Form 8-K
dated May 9, 2007 |
|
****** |
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on
Form S-8
(File
No. 333-144592) |
|
|
|
Management contract or compensatory plan or arrangement |
127