Burger King Holdings Inc.
As filed with the Securities and Exchange Commission on
February 20, 2007
Registration
No. 333-140440
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Burger King Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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5812 |
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75-3095469 |
(State or Other Jurisdiction
of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
5505 Blue Lagoon Drive
Miami, Florida 33126
(305) 378-3000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrants Principal Executive
Offices)
ANNE CHWAT
General Counsel
Burger King Holdings, Inc.
5505 Blue Lagoon Drive
Miami, Florida 33126
(305) 378-3000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
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KARA L. MACCULLOUGH
Holland & Knight LLP
701 Brickell Avenue
Miami, FL 33131
(305) 374-8500 |
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WILLIAM F. GORIN
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
(212) 225-2000 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
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Subject to Completion, dated February 20, 2007
20,000,000 Shares
Burger King Holdings, Inc.
Common Stock
The selling stockholders named in this prospectus are offering
20,000,000 shares of our common stock. We will not receive
any proceeds from the sale of our common stock by the selling
stockholders.
Our common stock is listed on the New York Stock Exchange under
the symbol BKC. On February 7, 2007, the
closing price of our common stock, as reported by the NYSE
Consolidated Tape, was $20.56 per share.
Investing in our common stock involves risks. See
Risk Factors beginning on page 10.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Underwriting | |
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Proceeds to selling | |
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discounts and | |
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stockholders, before | |
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Price to public | |
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commissions | |
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expenses | |
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Per Share
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$ |
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$ |
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$ |
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Total
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$ |
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To the extent that the underwriters sell more than
20,000,000 shares of common stock, the underwriters have an
option to purchase up to an additional 3,000,000 shares of
common stock from the selling stockholders at the offering price
less the underwriting discount. We will not receive any of the
proceeds from a sale of the shares by the selling stockholders
if the underwriters exercise their option to purchase additional
shares of common stock.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2007.
JPMorgan
Morgan Stanley
Banc of America Securities LLC
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Loop Capital Markets, LLC |
Wachovia Securities
Prospectus
dated ,
2007
Table of contents
No one is authorized to provide you with information that
conflicts with information in the registration statement we have
filed with the Securities and Exchange Commission. The selling
stockholders are offering to sell, and seeking offers to buy,
shares of our common stock only where those offers and sales are
permitted. The information in this prospectus is accurate only
as of the date of this prospectus, regardless of when this
prospectus is delivered or any sale of our common stock occurs.
In this prospectus, 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,
research analyst reports and other publicly available
information. All industry and market data that are not cited as
being from a specified source are from internal analyses based
upon data available from noted sources or other proprietary
research and analysis.
Prospectus summary
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all the
information you should consider before investing in our common
stock. You should read this entire prospectus carefully,
including the risks of investing in our common stock discussed
under Risk Factors and the financial statements and
notes included elsewhere in this prospectus. Unless we
specifically state otherwise, the information in this prospectus
does not take into account the sale of up to
3,000,000 shares of common stock that the underwriters have
the option to purchase from the selling stockholders.
On December 13, 2002, we acquired Burger King
Corporation, which we refer to as BKC, through
private equity funds controlled by Texas Pacific Group, Bain
Capital Partners and the Goldman Sachs Funds, or the
sponsors. In this prospectus, 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.
The King of Burgers
When the first Burger
King®
restaurant opened its doors in 1954, our founders had a smart
idea: serve great-tasting food fast and allow guests to
customize their hamburgers their way. Much has changed in the
half century since our founders sold the first
Whopper®
sandwiches in a Miami
drive-up hamburger
stand in 1957, but these core principles have remained.
We believe that the Burger King and Whopper brands
are two of the worlds most widely-recognized consumer
brands. These brands, together with our signature flame-broiled
products and the Have It Your
Way®
brand promise, are among the strategic assets that we believe
set Burger King restaurants apart from other regional and
national fast food hamburger restaurant chains. Have It Your
Way is increasingly relevant as consumers increasingly
demand personalization and choice over mass production. In a
competitive industry, we believe we have differentiated
ourselves through our attention to individual guests
preferences by offering great tasting fresh food served fast and
in a friendly manner.
We are the worlds second largest fast food hamburger
restaurant chain, as measured by the number of restaurants and
system-wide sales. As of December 31, 2006, we owned or
franchised 11,184 restaurants in 66 countries and
U.S. territories, of which approximately 90% are
franchised. For the fiscal year ended June 30, 2006, our
total revenues were $2.05 billion and our net income was
$27 million. For the six months ended December 31,
2006 our total revenues were $1.11 billion and net income
was $78 million.
Where We Started
Our founders sold Burger King Corporation to The Pillsbury
Company in 1967, taking it from a small privately held
franchised chain to a subsidiary of a large food conglomerate.
The Pillsbury Company was purchased by Grand Metropolitan plc,
which, in turn, merged with Guinness plc to form Diageo
plc, a British spirits company. Then in December 2002, Burger
King Corporation was acquired by private equity funds controlled
by Texas Pacific Group, Bain Capital Partners and the Goldman
Sachs Funds. 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
1
in our initial public offering. Upon completion of the offering,
our common stock became listed on the New York Stock Exchange
under the symbol BKC.
Upon their acquisition of us, the sponsors focused on attracting
an experienced management team, including our current Chief
Executive Officer, John Chidsey, who joined the company in March
2004 and became our CEO in April 2006. Immediately, the
management team developed and launched the Go
Forward growth plan, a comprehensive plan guided by the
following four 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).
What Weve Accomplished by Going Forward Together
Guided by our Go Forward plan and strong executive team
leadership, we implemented a number of strategic initiatives
that stabilized and improved overall operational and financial
performance. We continue to build on these successes as
evidenced by the following recent accomplishments:
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twelve consecutive quarters of positive system-wide comparable
sales growth, our best comparable sales growth in more than a
decade, including comparable sales growth of 3.7% for the second
quarter of fiscal 2007; |
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eleven consecutive quarters of positive comparable sales growth
in the United States and Canada, including comparable sales
growth of 4.4% for the second quarter of fiscal 2007; |
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all-time high annual revenues of $2.05 billion in fiscal
2006; |
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all-time record high average restaurant sales of
$1.13 million for fiscal 2006, $1.16 million for the
trailing 12-month
period ended December 31, 2006 and as of December 31,
2006, $1.51 million, for the last 50 free-standing
restaurants that opened in the United States and have operated
at least twelve months (approximately 30% higher than the
U.S. average); |
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opening 301 new restaurants in EMEA/ APAC and Latin America,
since January 1, 2006, increasing the net restaurant count
by 175 to 3,682 as of December 31, 2006; |
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award-winning advertising and promotion programs focused on our
core consumers; |
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a robust pipeline of new products that generated system-wide
sales of more than $3 billion in the past three years; |
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completion of our Franchisee Financial Restructuring Program, or
FFRP program, which we created in February 2003 to assist U.S.
and Canadian franchisees in financial distress; |
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the introduction in April 2005 of new, smaller restaurant
designs that reduce the average building costs by approximately
25% and the opening of 65 restaurants in such format as of
December 31, 2006, with an additional 40 under construction; |
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all-time high guest satisfaction scores, as well as record speed
of service and cleanliness scores; |
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completion of our initial public offering in May 2006; |
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announcement on January 30, 2007 of our first quarterly
cash dividend as a public company of 6.25 cents per
share; and |
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a net reduction in total debt from $1.283 billion as of
June 30, 2005 to $872 million as of January 31,
2007. |
2
Why We Are The King
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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 11,184
restaurants operating in 66 countries and U.S. territories, of
which 4,000 are located in our international markets. 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 fast food hamburger
restaurant 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 marketing,
advertising and sponsorships to drive sales and generate
restaurant traffic. In 2006, our U.S. television
advertisements were ranked among the most liked or
most recalled new ads more often than those of any
national advertisers in the past 24 months ending
December 31, 2006, according to advertising industry
researcher IAG. In addition, our successful
Xbox®
gaming collection sold more than 3.2 million copies, making
it the best-selling video game 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, and family
oriented movie tie-ins. |
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Experienced management team: We have a seasoned
management team with significant experience in managing and
leading franchised and branded businesses. Our management team
has extensive experience with companies such as Avis Rent-A-Car,
Budget Rent-A-Car, Coca-Cola, Frito Lay, Jackson Hewitt Tax
Services, McDonalds, PepsiCo, Pillsbury, Taco Bell,
Seagram, Wendys and 7-Eleven. The core of our management
team has been working together since 2004. |
Our Way Going Forward
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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 system-wide average restaurant sales through
an enhanced guest experience. Our key guest satisfaction and
operations metrics were at all-time highs in December 2006 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 see margin improvement as we roll out
our new labor scheduling system and flexible batch broiler to |
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our U.S. company restaurants during fiscal 2007 and to our
franchise restaurants during the next three years. |
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Expand our large international platform: We intend to
leverage our substantial international infrastructure to expand
our franchise network and restaurant base. Internationally we
are much smaller than our largest competitor, and therefore we
believe we have significant growth opportunities. We have
developed a detailed global development plan to accelerate
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, Taiwan and Italy and
(3) financially attractive new markets such as Japan and
Indonesia, in which we have recently executed development
agreements with new franchisees, 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, opened 27 restaurants in
10 cities and put development agreements in place to add
more than 150 restaurants within the next five years, validates
the opportunities that exist for us in rapidly developing
international markets. |
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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 (61% 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 initial investment expense and have begun testing a
turn-key development assistance program that reduces the time
and uncertainty associated with new builds. Finally, we are
offering financial incentives and investigating innovative
financing programs for our franchisees. |
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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 reinforce the Have It Your Way brand promise. As part
of this promise, 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
BKTM
Value Menu and the
soon-to-be launched
BKTM
Breakfast Value Menu (the first such offering in the FFHR
category). In addition, we intend to roll-out more than 15 other
new and limited time offer products in the second half of fiscal
2007 and fiscal 2008. |
4
Ownership by sponsors
Our principal stockholders are the private equity funds
controlled by the sponsors. As of January 17, 2007, these
funds beneficially owned approximately 75.1% of our outstanding
common stock. Following completion of this offering, these funds
will beneficially own approximately 60.2% of our common stock,
or 58.0% if the underwriters option to purchase additional
shares is fully exercised.
Recent developments
On January 30, 2007, we announced a quarterly cash dividend
of 6.25 cents per share. The dividend payment will be made on
March 15, 2007 to holders of record of our common stock on
February 15, 2007.
On January 30, 2007, we made a prepayment of an additional
$25 million of term debt under our credit facility using
cash generated from operations.
Our headquarters
Our global headquarters are located at 5505 Blue Lagoon Drive,
Miami, Florida 33126. Our telephone number is
(305) 378-3000. Our website is accessible through
www.burgerking.com or www.bk.com. Information on,
or accessible through, this website is not a part of, and is not
incorporated into, this prospectus.
Burger
King®,
Whopper®,
Have It Your
Way®,
BK
Joe®,
Tendercrisp®,
Burger King Bun Halves and Crescent Logo,
BKTM
Value Menu,
BKTM
Breakfast Value Menu,
BKTM
Stacker, and
BK HoldemsTM
trademarks are protected under applicable intellectual property
laws and are the property of Burger King Brands, Inc., an
indirect wholly-owned subsidiary of Burger King Holdings, Inc.
Cheesy
TotsTM
is a trademark of H.J. Heinz Company and used under license by
Burger King Corporation. Other registered trademarks referred to
in this prospectus are the property of their respective
owners.
The offering
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Common stock offered by the selling stockholders |
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20,000,000 shares(1) |
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Common stock to be outstanding after this offering |
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134,448,716 shares(2) |
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Voting Rights |
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One vote per share. |
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Use of Proceeds |
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We will not receive any of the proceeds from the sale of our
common stock by the selling stockholders. |
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New York Stock Exchange Symbol |
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BKC |
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Risk Factors |
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See Risk Factors and the other information included
in this prospectus for a discussion of the factors you should
consider carefully before deciding to invest in shares of our
common stock. |
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(1) |
Excludes 3,000,000 shares that may be sold by the selling
stockholders upon exercise of the underwriters option to
purchase additional shares. |
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(2) |
Excludes 8,189,149 shares of our common stock issuable upon the
exercise of non-qualified stock options or the settlement of
restricted stock unit awards, performance-based restricted stock
awards and deferred stock unit awards outstanding as of
December 31, 2006, of which options to purchase 2,956,545
shares were exercisable as of December 31, 2006. In
addition, as of December 31, 2006, (i) 2,380,985
shares of our common stock remain to be awarded under the Burger
King Holdings, Inc. Equity Incentive Plan and
(ii) 6,062,594 shares of our common stock remain to be
awarded under the Burger King Holdings, Inc. 2006 Omnibus
Incentive Plan. As of January 17, 2007, we had not granted any
equity awards in the third quarter of fiscal 2007. Between
January 1, 2007 and February 7, 2007, 811,155 options
were exercised by former employees of the Company. As a result
of these exercises total common stock outstanding as of
February 7, 2007 was 135,258,871. |
5
Summary consolidated financial and other data
The following summary consolidated financial and other data
should be read in conjunction with, and are qualified by
reference to, the disclosures set forth under
Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as in the
consolidated financial statements and their notes. The summary
consolidated income statement data for the years ended
June 30, 2004, 2005 and 2006 have been derived from our
audited, consolidated financial statements included elsewhere in
this prospectus. The summary consolidated income statement data
for the six months ended December 31, 2005 and 2006 and the
balance sheet data as of December 31, 2006 have been
derived from our unaudited consolidated financial statements
included elsewhere in this prospectus, and include all
adjustments consisting of normal recurring adjustments necessary
for a fair presentation of the results of the interim periods.
The data shown below are not necessarily indicative of future
results.
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Six months | |
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Fiscal year ended | |
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ended | |
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June 30, | |
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December 31, | |
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2004 | |
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2005 | |
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2006 | |
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2005 | |
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2006 | |
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(In millions, except per share data) | |
Income Statement Data:
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Total revenues
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$ |
1,754 |
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$ |
1,940 |
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$ |
2,048 |
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$ |
1,020 |
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$ |
1,105 |
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Total company restaurant expenses
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1,087 |
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1,195 |
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1,296 |
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640 |
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694 |
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Selling, general and administrative
expenses(1)
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474 |
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487 |
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488 |
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207 |
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231 |
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Property expenses
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58 |
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64 |
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57 |
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28 |
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31 |
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Fees paid to affiliates(2)
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8 |
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9 |
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39 |
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6 |
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Other operating expenses (income),
net
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54 |
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34 |
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(2 |
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(3 |
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(8 |
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Total operating costs and expenses
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1,681 |
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1,789 |
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1,878 |
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878 |
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948 |
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Income from operations
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73 |
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151 |
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170 |
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142 |
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157 |
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Interest expense, net
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64 |
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73 |
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72 |
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34 |
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34 |
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Loss on early extinguishment of debt
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18 |
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13 |
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1 |
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Income before income taxes
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9 |
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78 |
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80 |
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95 |
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122 |
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Income tax expense
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4 |
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31 |
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53 |
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46 |
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44 |
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Net income
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$ |
5 |
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$ |
47 |
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$ |
27 |
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$ |
49 |
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$ |
78 |
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Earnings per share(3):
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Basic
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$ |
0.05 |
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$ |
0.44 |
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$ |
0.24 |
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$ |
0.45 |
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$ |
0.59 |
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Diluted
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$ |
0.05 |
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$ |
0.44 |
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$ |
0.24 |
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$ |
0.43 |
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$ |
0.57 |
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Weighted average shares outstanding:
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Basic
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106.1 |
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106.5 |
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110.3 |
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106.8 |
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133.3 |
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Diluted
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106.1 |
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106.9 |
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114.7 |
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112.9 |
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136.1 |
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6
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| |
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Six months | |
|
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Fiscal year ended | |
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ended | |
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|
June 30, | |
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December 31, | |
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| |
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| |
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2004 | |
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2005 | |
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2006 | |
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2005 | |
|
2006 | |
| |
Other Financial Data:
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|
|
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|
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|
|
|
Cash provided by (used for)
operating activities
|
|
$ |
199 |
|
|
$ |
218 |
|
|
$ |
74 |
|
|
$ |
2 |
|
|
$ |
(2 |
) |
Cash provided by (used for)
investing activities
|
|
|
(184 |
) |
|
|
(5 |
) |
|
|
(74 |
) |
|
|
(29 |
) |
|
|
(27 |
) |
Cash provided by (used for)
financing activities
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(173 |
) |
|
|
(198 |
) |
|
|
(97 |
) |
Capital expenditures
|
|
|
81 |
|
|
|
93 |
|
|
|
85 |
|
|
|
30 |
|
|
|
31 |
|
EBITDA(4)
|
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
258 |
|
|
$ |
184 |
|
|
$ |
200 |
|
|
|
|
|
|
|
| |
Balance Sheet Data: |
|
As of December 31, 2006 | |
| |
Cash and cash equivalents
|
|
$ |
135 |
|
Total assets
|
|
|
2,431 |
|
Total debt and capital lease
obligations
|
|
|
965 |
|
Total liabilities
|
|
|
1,793 |
|
Total stockholders equity
|
|
$ |
638 |
|
|
7
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|
|
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|
|
|
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|
|
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|
|
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|
| |
|
|
|
|
Six months ended | |
|
|
Fiscal year ended June 30, | |
|
December 31, | |
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|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
Other System-Wide Operating
Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(5)(6)
|
|
|
1.0% |
|
|
|
5.6% |
|
|
|
1.9% |
|
|
|
1.3% |
|
|
|
3.0% |
|
Average restaurant sales (in
millions)
|
|
$ |
1,014 |
|
|
$ |
1,104 |
|
|
$ |
1,126 |
|
|
$ |
549 |
|
|
$ |
597 |
|
System-wide sales growth(5)
|
|
|
1.2% |
|
|
|
6.1% |
|
|
|
2.1% |
|
|
|
1.8% |
|
|
|
4.0% |
|
Company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
759 |
|
|
|
844 |
|
|
|
878 |
|
|
|
876 |
|
|
|
888 |
|
|
EMEA/ APAC(7)
|
|
|
277 |
|
|
|
283 |
|
|
|
293 |
|
|
|
289 |
|
|
|
331 |
|
|
Latin America(8)
|
|
|
51 |
|
|
|
60 |
|
|
|
69 |
|
|
|
63 |
|
|
|
71 |
|
|
|
|
|
|
Total company restaurants
|
|
|
1,087 |
|
|
|
1,187 |
|
|
|
1,240 |
|
|
|
1,228 |
|
|
|
1,290 |
|
Franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
7,217 |
|
|
|
6,876 |
|
|
|
6,656 |
|
|
|
6,758 |
|
|
|
6,614 |
|
|
EMEA/ APAC(7)
|
|
|
2,308 |
|
|
|
2,373 |
|
|
|
2,494 |
|
|
|
2,449 |
|
|
|
2,492 |
|
|
Latin America(8)
|
|
|
615 |
|
|
|
668 |
|
|
|
739 |
|
|
|
706 |
|
|
|
788 |
|
|
|
|
|
|
Total franchise restaurants
|
|
|
10,140 |
|
|
|
9,917 |
|
|
|
9,889 |
|
|
|
9,913 |
|
|
|
9,894 |
|
|
|
|
|
|
|
Total restaurants
|
|
|
11,227 |
|
|
|
11,104 |
|
|
|
11,129 |
|
|
|
11,141 |
|
|
|
11,184 |
|
|
|
|
Segment Data:
|
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|
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|
|
|
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|
|
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|
|
|
|
|
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|
Operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
115 |
|
|
$ |
255 |
|
|
$ |
295 |
|
|
$ |
152 |
|
|
$ |
171 |
|
|
EMEA/ APAC(7)
|
|
|
95 |
|
|
|
36 |
|
|
|
62 |
|
|
|
42 |
|
|
|
33 |
|
|
Latin America(8)
|
|
|
26 |
|
|
|
25 |
|
|
|
29 |
|
|
|
15 |
|
|
|
18 |
|
|
Unallocated(9)
|
|
|
(163 |
) |
|
|
(165 |
) |
|
|
(216 |
) |
|
|
(67 |
) |
|
|
(65 |
) |
|
|
|
|
|
Total operating income
|
|
$ |
73 |
|
|
$ |
151 |
|
|
$ |
170 |
|
|
$ |
142 |
|
|
$ |
157 |
|
|
|
|
Company Restaurant Revenues (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
802 |
|
|
$ |
923 |
|
|
$ |
1,032 |
|
|
$ |
507 |
|
|
$ |
541 |
|
|
EMEA/ APAC(7)
|
|
|
429 |
|
|
|
435 |
|
|
|
428 |
|
|
|
219 |
|
|
|
250 |
|
|
Latin America(8)
|
|
|
45 |
|
|
|
49 |
|
|
|
56 |
|
|
|
28 |
|
|
|
31 |
|
|
|
|
|
|
Total company restaurant revenues
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
$ |
1,516 |
|
|
$ |
754 |
|
|
$ |
822 |
|
|
|
|
Company Restaurant Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
11.3% |
|
|
|
14.2% |
|
|
|
14.1% |
|
|
|
14.1% |
|
|
|
15.0% |
|
|
EMEA/ APAC(7)
|
|
|
18.9% |
|
|
|
15.2% |
|
|
|
13.9% |
|
|
|
15.6% |
|
|
|
15.5% |
|
|
Latin America(8)
|
|
|
37.8% |
|
|
|
30.6% |
|
|
|
26.6% |
|
|
|
26.7% |
|
|
|
26.9% |
|
|
|
Total company restaurant margin(10)
|
|
|
14.8% |
|
|
|
15.1% |
|
|
|
14.5% |
|
|
|
15.0% |
|
|
|
15.6% |
|
Franchise Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
234 |
|
|
$ |
269 |
|
|
$ |
267 |
|
|
$ |
133 |
|
|
$ |
140 |
|
|
EMEA/ APAC(7)
|
|
|
102 |
|
|
|
114 |
|
|
|
119 |
|
|
|
59 |
|
|
|
65 |
|
|
Latin America(8)
|
|
|
25 |
|
|
|
30 |
|
|
|
34 |
|
|
|
17 |
|
|
|
20 |
|
|
|
|
|
|
Total franchise revenues
|
|
$ |
361 |
|
|
$ |
413 |
|
|
$ |
420 |
|
|
$ |
209 |
|
|
$ |
225 |
|
|
|
|
Franchise sales (in millions)(11)
|
|
$ |
10,055 |
|
|
$ |
10,817 |
|
|
$ |
10,903 |
|
|
$ |
5,508 |
|
|
$ |
5,790 |
|
|
|
|
(1) |
Includes the compensatory make-whole payment made on
February 21, 2006 to holders of our options and restricted
stock unit awards, primarily members of senior management. See
Certain Relationships and Related Transactions
Compensatory Make-Whole Payment. |
8
|
|
(2) |
Fees paid to affiliates primarily consist of management fees we
paid to the sponsors under a management agreement. Fees paid to
affiliates in fiscal 2006 also included a $30 million fee
that we paid to terminate the management agreement with our
sponsors upon completion of our initial public offering, which
we refer to as the sponsor management termination fee. See
Certain Relationships and Related Transactions
Management Agreement. |
|
(3) |
Earnings per share is calculated using whole dollars and shares. |
|
(4) |
EBITDA is defined as earnings (net income) before interest,
taxes, depreciation and amortization, and is used by management
to measure operating performance of the business. Management
believes that EBITDA is a useful measure as it incorporates
certain operating drivers of our business such as sales growth,
operating costs, selling, general and administrative expenses
and other income and expense. 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. |
|
|
|
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 our financial performance and prospects
for the future. EBITDA is not intended to be a measure of
liquidity or cash flows from operations nor a measure comparable
to net income as it does not take into account certain
requirements such as capital expenditures and related
depreciation, principal and interest payments and tax payments. |
|
|
The following table is a reconciliation of our net income to
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Six months | |
|
|
|
|
ended | |
|
|
Fiscal year ended | |
|
December | |
|
|
June 30, | |
|
31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
Net income
|
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
27 |
|
|
$ |
49 |
|
|
$ |
78 |
|
Interest expense, net
|
|
|
64 |
|
|
|
73 |
|
|
|
72 |
|
|
|
34 |
|
|
|
34 |
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
13 |
|
|
|
1 |
|
Income tax expense
|
|
|
4 |
|
|
|
31 |
|
|
|
53 |
|
|
|
46 |
|
|
|
44 |
|
|
|
|
Income from operations
|
|
|
73 |
|
|
|
151 |
|
|
|
170 |
|
|
|
142 |
|
|
|
157 |
|
Depreciation and amortization
|
|
|
63 |
|
|
|
74 |
|
|
|
88 |
|
|
|
42 |
|
|
|
43 |
|
|
|
|
EBITDA
|
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
258 |
|
|
$ |
184 |
|
|
$ |
200 |
|
|
|
|
|
This presentation of EBITDA may not be directly comparable to
similarly titled measures of other companies, since not all
companies use identical calculations. |
|
|
(5) |
Comparable sales growth and system-wide 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. System-wide 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. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Key Business
Measures. |
|
(6) |
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period for restaurants that have
been open for thirteen months or longer. Comparable sales growth
includes sales at company restaurants and franchise restaurants.
We do not record franchise restaurant sales as revenues.
However, our royalty revenues are calculated based on a
percentage of franchise restaurant sales. |
|
(7) |
Refers to our operations in Europe, the Middle East, Africa,
Asia, Australia and Guam. |
|
(8) |
Refers to our operations in Mexico, Central and South America
and the Caribbean. |
|
(9) |
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing and supply chain management. |
|
|
(10) |
Calculated using dollars expressed in hundreds of thousands. |
|
(11) |
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. |
9
Risk factors
You should carefully consider the following risks and all of
the other information set forth in this prospectus before
deciding to invest in shares of our common stock. The following
risks comprise all the material risks of which we are aware;
however, these risks and uncertainties may not be the only ones
we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also adversely
affect our business or financial performance. If any of the
events or developments described below actually occurred, our
business, financial condition or results of operations would
likely suffer. In that case, the trading price of our common
stock would likely decline, and you would lose all or part of
your investment in our common stock.
Risks related to our business
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 Corporation, or McDonalds, and
Wendys International, Inc., or 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 convenience
stores and grocery stores that offer menu items comparable to
that of Burger King restaurants. In one of our major
European markets, the United Kingdom, much of the growth in the
quick service restaurant segment is expected to come from
bakeries, sandwich shops and new entrants that are 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, it could have
a material adverse effect on our financial condition and results
of operations. We also compete with other restaurant chains and
other retail businesses for quality site locations and hourly
employees.
Our operating results are closely tied to the success of
our franchisees. Over the last several years, many franchisees
in the United States, Canada and the United Kingdom have
experienced severe financial distress, and our franchisees may
experience financial distress in the future.
We receive revenues in the form of royalties and fees from our
franchisees. As a result, our operating results substantially
depend upon our franchisees restaurant profitability,
sales volumes and financial viability. However, our franchisees
are independent operators, and their
10
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 their indebtedness. Our largest franchisee, with over
300 restaurants, declared bankruptcy in December 2002 and a
number of our other large franchisees defaulted on their
indebtedness. This distress affected our results of operations
as the franchisees did not pay, or delayed, or reduced payments
of, royalties, national advertising fund contributions and rents
for properties we leased to them.
In response to this situation, we established the Franchisee
Financial Restructuring Program, or FFRP program, in February
2003 to address our franchisees financial problems in the
United States and Canada. At the FFRP 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 December 31, 2006, we have an aggregate
remaining commitment of up to $30 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
$106 million as of December 31, 2006, including
$62 million in the United Kingdom, expiring over an average
period of 6 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 leased 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.
For more information on the FFRP program and its financial
impact on us, see Managements Discussion and
Analysis of Financial Condition and Results of
OperationsFactors Affecting Comparability of
ResultsHistorical Franchisee Financial Distress.
Our UK 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 have continued to experience declining sales and operating
profits in the United Kingdom (UK) that may further
impact the financial health of our franchisees and us. As of
11
December 31, 2006, we operated 108 restaurants and our
franchisees operated 491 restaurants in the UK.
With declining sales and increasing rents, certain of our UK
franchisees face financial difficulties affecting their ability
to meet their obligations to us, including the payment of
royalties, advertising contributions and rent payments. For the
six months ended December 31, 2006, we deferred
$3 million in royalty and rent revenues owed to us by
distressed franchisees in the UK and recorded $2 million of
bad debt expense in the UK marketing fund. In addition, in
connection with the sale of company restaurants to certain UK
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 UK was $62 million as of
December 31, 2006. If we are unable to strengthen the
operating performance of the UK 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.
We are taking active measures and implementing marketing and
operational initiatives to improve the performance of the UK
market and to work with our distressed UK franchisees and their
creditors to attempt to strengthen the franchisees
financial condition. As part of our marketing initiatives to
improve brand recognition and address changing UK consumer
preferences, during the six months ended December 31, 2006,
we made an incremental contribution of $7 million to the
marketing fund in the UK 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 UK business.
If we fail to successfully implement our international
growth strategy, our ability to increase our revenues and
operating profits could be adversely affected and our overall
business could be adversely affected.
A significant component of our growth strategy involves opening
new international restaurants in both existing and new markets.
We and our franchisees face many challenges in opening new
international restaurants, including, among others:
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the selection and availability of suitable restaurant locations; |
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the negotiation of acceptable lease terms; |
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the ability of franchisees to obtain acceptable financing terms; |
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securing required foreign governmental permits and approvals; |
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securing acceptable suppliers; and |
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employing and training qualified personnel. |
We are planning to expand our international operations in
markets where we currently operate and in selected new markets.
Operations in international markets may be affected by consumer
preferences and local market conditions.
We expect that most of our international growth will be
accomplished through the opening of additional franchise
restaurants. However, our franchisees may be unwilling or unable
to increase their investment in our system by opening new
restaurants, particularly if their existing restaurants are not
generating positive financial results. Moreover, opening new
franchise restaurants depends, in part, upon the availability of
prospective franchisees who meet our criteria, including
extensive knowledge of the local market. In the past, we have
approved franchisees that were unsuccessful in implementing
their expansion plans, particularly
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in new markets. There can be no assurance that we will be able
to find franchisees who meet our criteria, or if we find such
franchisees, that they will successfully implement their
expansion plans.
Approximately 90% of our restaurants are franchised and
this restaurant ownership mix presents a number of disadvantages
and risks.
Approximately 90% of our restaurants are franchised and we do
not expect the percentage of franchise restaurants to change
significantly as we implement our growth strategy. Although we
believe that this restaurant ownership mix is beneficial to us
because the capital required to grow and maintain our system is
funded primarily by franchisees, it also presents a number of
drawbacks, such as our limited control over franchisees and
limited ability to facilitate changes in restaurant ownership.
Franchisees are independent operators and have a significant
amount of flexibility in running their operations, including the
ability to set prices of our products in their restaurants.
Their employees are not our employees. Although we can exercise
control over our franchisees and their restaurant operations to
a limited extent through our ability under the franchise
agreements to mandate signage, equipment and standardized
operating procedures and approve suppliers, distributors and
products, the quality of franchise restaurant operations may be
diminished by any number of factors beyond our control.
Consequently, franchisees may not successfully operate
restaurants in a manner consistent with our standards and
requirements, or may not hire and train qualified managers and
other restaurant personnel. 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.
A substantial number of franchise agreements in the United
States will expire in the next five years and there can be no
assurance that the franchisees can or will renew their franchise
agreements with us.
Our franchise agreements typically have a 20-year term. As of
December 31, 2006, franchise agreements covering
approximately 1,900 restaurants in the U.S., or approximately
30% of the total number of U.S. franchise restaurants, will
expire in the next five years, of which approximately 500 are
scheduled to expire in calendar 2007. These franchisees may not
be willing or able to renew their franchise agreements with us.
For example, franchisees may decide not to renew due to low
sales volumes, 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.
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Over the past three fiscal years and during the six-month period
ended December 31, 2006, we have experienced lower levels
of franchisees in the United States renewing their franchise
agreements for a standard additional 20-year term than we have
historically experienced. In many cases, however, we agreed to
extend the existing franchise agreements to avoid the closure of
restaurants by giving franchisees additional time to comply with
our renewal requirements. In addition, during fiscal 2000 and
2001, we offered an incentive program to franchisees in the
United States in which franchisees could renew their franchise
agreements prior to expiration and pay reduced royalties for a
limited period. Approximately 1,100 restaurants
participated in this incentive program. Many of these
participants had franchise agreements that would have otherwise
expired over the next several years. We believe that this
program had a significant impact on our renewal rates in fiscal
2004, 2005 and 2006 because franchisees that would otherwise
have renewed during those fiscal years had already signed new
franchise agreements for a standard additional 20-year term.
During fiscal 2004, 2005 and 2006, a total of 333, 435 and 409
franchise agreements, respectively, expired in the United
States, including, for each year, an estimated 150 that had
expired during previous years but were extended. We expect that
approximately 372 franchise agreements will expire in fiscal
2007, including approximately 56 franchise agreements that had
expired during previous years but were extended. Of the 333
agreements that expired in fiscal 2004, 53, or 16%, were renewed
and 103, or 31%, were extended for periods that ranged from nine
months to two years. Of the 435 agreements that expired in
fiscal 2005, 168, or 39%, were renewed and 130, or 30%, were
extended for periods that also ranged from nine months to two
years. Of the 409 agreements that expired in fiscal 2006, 191,
or 47%, were renewed and 113, or 28%, were extended for similar
periods. Of the approximately 187 agreements that have been
processed during the six-month period ended December 31,
2006, 101, or 54%, were renewed and 40, or 21%, were extended
for similar periods. Additionally, 87, 89 and
98 restaurants with expiring franchise agreements closed
during fiscal 2004, 2005 and 2006, respectively, or 26%, 20% and
24% of the total number of expiring franchise agreements for
such periods, respectively. The balance of the restaurants with
expiring franchise agreements had no agreement in place by the
end of the relevant fiscal period, in many cases because
franchisees had not completed the renewal documentation, but
continued to operate and pay royalty and advertising fund
contributions in compliance with the terms of their expired
franchise agreements.
If a substantial number of our franchisees cannot or decide not
to renew their franchise agreements with us, then our business,
results of operations and financial condition would suffer.
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
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before introducing any nationally-or locally-advertised price or
discount promotion to gauge the level of support for the
campaign. While we can mandate certain strategic initiatives
through enforcement of our franchise agreements, we need the
active support of our franchisees if the implementation of these
initiatives is to be successful. At the time of the December
2002 acquisition, relationships with our franchisees were
strained. Although we believe that our current relationships
with our franchisees are generally good, there can be no
assurance that our franchisees will continue to support our
marketing programs and strategic initiatives. The failure of our
franchisees to support our marketing programs and strategic
initiatives would adversely affect our ability to implement our
business strategy and could materially harm our business,
results of operations and financial condition.
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 and Treasurer; 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.
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. Furthermore, other illnesses, such
as foot and mouth disease or avian influenza, could adversely
affect the supply of some of our food products and significantly
increase our costs.
In addition, our industry has long been subject to the threat of
food tampering by suppliers, employees or 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 system-wide 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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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
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 (such as hurricanes), 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.
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 31% of our company restaurant revenues.
Fluctuations in weather, supply and demand and economic
conditions could adversely affect the cost, availability and
quality of some of our critical products, including beef. Our
inability to obtain requisite quantities of high-quality
ingredients would adversely affect our ability to provide the
menu items that are central to our business, 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 and our beef costs in the
United States represent 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, industry demand and other factors. 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.
The increase in fiscal 2006 in energy costs in the United States
has also adversely affected our business. Energy costs for our
company restaurants in the United States, principally
electricity for lighting restaurants and natural gas for our
broilers, increased by $4 million in fiscal 2006. We have
generally not been able to pass these increased costs on to our
guests and continued high energy costs could adversely affect
our and our franchisees business, results of operations
and financial condition.
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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. Three
distributors service approximately 77% of our U.S. system and
the loss of any one of these distributors would likely adversely
affect our business. Moreover, in many of our international
markets, including the United Kingdom, 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.
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 is also
considering an increase to the national minimum wage. In
addition, many states have adopted, and others are considering
adopting, minimum wage statutes that exceed the federal minimum
wage. We may be unable to increase our prices in order to pass
these increased labor costs on to our guests, in which case our
and our franchisees margins would be negatively affected.
Our international operations subject us to additional
risks and costs and may cause our profitability to
decline.
As of December 31, 2006, our restaurants are operated,
directly by us or by franchisees, in 65 foreign countries
and U.S. territories (Guam and Puerto Rico, which are considered
part of our international business). During fiscal 2005 and
2006, our revenues from international operations were
approximately $809 million and $794 million, or 40%
and 41% 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
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flexibility or result in 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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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 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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whether we can develop effective initiatives in the United
Kingdom 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. |
These factors may increase in importance as we expect to open
additional company and franchise restaurants in international
markets as part of our growth strategy.
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
expense which could negatively affect our results of operations.
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
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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 2006, operating income 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.
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 system-wide 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 prospectus 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.
We or our franchisees may not be able to renew leases or
control rent increases at existing restaurant locations or
obtain leases for new restaurants.
Many of our company restaurants are presently located on leased
premises. In addition, our franchisees generally lease their
restaurant locations. At the end of the term of the lease, we or
our franchisees might be forced to find a new location to lease
or close the restaurant. If we are able to negotiate a new lease
at the existing location or an extension of the existing lease,
the rent may increase significantly. Any of these events could
adversely affect our profitability or our franchisees
profitability. Some leases are subject to renewal at fair market
value, which could involve substantial rent increases, or are
subject to renewal with scheduled rent increases, which could
result in rents being above fair market value. We compete with
numerous other retailers and restaurants for sites in the highly
competitive market for retail real estate and some landlords and
developers may exclusively grant locations to our competitors.
As a result, we may not be able to obtain new leases or renew
existing ones on acceptable terms, which could adversely affect
our sales and brand-building initiatives. In the United Kingdom,
we have approximately 53 leases for properties that we sublease
to
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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 37% of
the total assets on our balance sheet as of December 31,
2006, and we believe that our brand is very important to our
success and our competitive position. We rely on a combination
of trademarks, copyrights, service marks, trade secrets and
similar intellectual property rights to protect our brand and
branded products. The success of our business depends on our
continued ability to use our existing trademarks and service
marks in order to increase brand awareness and further develop
our branded products in both domestic and international markets.
We have registered certain trademarks and have other trademark
registrations pending in the United States and foreign
jurisdictions. Not all of the trademarks that we currently use
have been registered in all of the countries in which we do
business, and they may never be registered in all of these
countries. We may not be able to adequately protect our
trademarks, and our use of these trademarks may result in
liability for trademark infringement, trademark dilution or
unfair competition. The steps we have taken to protect our
intellectual property in the United States and in foreign
countries may not be adequate. In addition, the laws of some
foreign countries do not protect intellectual property rights to
the same extent as the laws of the United States.
We may from time to time be required to institute litigation to
enforce our trademarks or other intellectual property rights, or
to protect our trade secrets. Such litigation could result in
substantial costs and diversion of resources and could
negatively affect our sales, profitability and prospects
regardless of whether we are able to successfully enforce our
rights.
Our indebtedness under our senior secured credit facility
is substantial and could limit our ability to grow our
business.
As of January 31, 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. |
In addition, our senior secured credit facility permits us to
incur substantial additional indebtedness in the future. As of
December 31, 2006, we had $116 million available to us
for
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additional borrowing under our $150 million revolving
credit facility portion of our senior secured credit facility
(net of $34 million in letters of credit issued under the
revolving credit facility). If we increase our indebtedness by
borrowing under the revolving credit facility or incur other new
indebtedness, the risks described above would increase.
Our senior secured credit facility has restrictive terms
and our failure to comply with any of these terms could put us
in default, which would have an adverse effect on our business
and prospects.
Our senior secured credit facility contains a number of
significant covenants. These covenants limit our ability and the
ability of our subsidiaries to, among other things:
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incur additional indebtedness; |
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make capital expenditures and other investments above a certain
level; |
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merge, consolidate or dispose of our assets or the capital stock
or assets of any subsidiary; |
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pay dividends, make distributions or redeem capital stock in
certain circumstances; |
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enter into transactions with our affiliates; |
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grant liens on our assets or the assets of our subsidiaries; |
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enter into the sale and subsequent lease-back of real property;
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make or repay intercompany loans. |
Our senior secured credit facility requires us to maintain
specified financial ratios. Our ability to meet these financial
ratios and tests can be affected by events beyond our control,
and we may not meet those ratios. A breach of any of these
restrictive covenants or our inability to comply with the
required financial ratios would result in a default under our
senior secured credit facility or require us to dedicate a
substantial portion of our cash flow from operations to payments
on our indebtedness. If the banks accelerate amounts owing under
our senior secured credit facility because of a default and we
are unable to pay such amounts, the banks have the right to
foreclose on the stock of BKC and certain of its subsidiaries.
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. 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.
21
In addition, activist groups, including animal rights activists
and groups acting on behalf of franchisees, the workers who work
for our suppliers and others, have in the past, and may in the
future, use pressure tactics to generate adverse publicity about
us by alleging, for example, inhumane treatment of animals by
our suppliers, poor working conditions or unfair purchasing
policies. These groups may be able to coordinate their actions
with other groups, threaten strikes or boycotts or enlist the
support of well-known persons or organizations in order to
increase the pressure on us to achieve their stated aims. In the
future, these actions or the threat of these actions may force
us to change our business practices or pricing policies, which
may have a material adverse effect on our business, results of
operations and financial condition.
Further, we may be subject to employee, franchisee and other
claims in the future based on, among other things, mismanagement
of the system, unfair or unequal treatment, discrimination,
harassment, violations of privacy laws, wrongful termination and
wage, rest break and meal break issues, including those relating
to overtime compensation. We have been subject to these types of
claims in the past, and if one or more of these claims were to
be successful or if there is a significant increase in the
number of these claims, our business, results of operations and
financial condition could be harmed.
Our 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 United Kingdom 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
Health Department 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 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. More
than 12 states are considering laws banning trans fat in
restaurant food. The Attorney General of the State of California
is currently suing us and our major competitors under
Proposition 65 to force the disclosure of warnings that
carbohydrate-rich foods cooked at high temperatures, such as
french fries, contain the potentially cancer-causing chemical
acrylamide. In addition, public interest groups have also
focused attention on the marketing of these 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 while legislators in the
United Kingdom have adopted a ban on childrens advertising
by fast food restaurants. 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.
22
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. |
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 and other
local and foreign laws and regulations on our business; |
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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; |
23
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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. |
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.
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.
24
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.
Risks related to investing in our stock
The price of our common stock may be volatile and you may
not be able to sell your shares at or above the offering
price.
We completed our initial public offering in May 2006. An active
and liquid public market for our common stock may not continue
to develop or be sustained. Since our initial public offering,
the price of our common stock, as reported by the New York Stock
Exchange, has ranged from a low of $12.41 on August 1, 2006
to a high of $21.79 on January 10, 2007. Some specific
factors that may have a significant effect on the market price
of our common stock include:
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variations in our or our competitors actual or anticipated
operating results; |
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|
our or our competitors growth rates; |
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our or our competitors introduction of new locations, menu
items, concepts, or pricing policies; |
|
|
recruitment or departure of key personnel; |
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|
changes in the estimates of our operating performance or changes
in recommendations by any securities analysts that follow our
stock; |
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changes in the conditions in the restaurant industry, the
financial markets or the economy as a whole; |
|
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substantial sales of our common stock; |
|
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announcements of investigations or regulatory scrutiny of our
operations or lawsuits filed against us; and |
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changes in accounting principles. |
In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. Due to
the potential volatility of our stock price, we may therefore be
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
managements attention and resources from our business.
Our current principal stockholders will continue to own
the majority of our voting stock after this offering, which will
allow them to control substantially all matters requiring
stockholder approval.
Upon the completion of this offering, the private equity funds
controlled by the sponsors will together beneficially own
approximately 60.2% of our outstanding common stock (or 58.0% if
the underwriters exercise their option to purchase additional
shares). In addition, we expect that six of our thirteen
directors following this offering will continue to be
representatives of the private equity funds controlled by the
sponsors. Following this offering, each sponsor will retain 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. See
Description of Capital StockShareholders
Agreement. 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
25
or preventing a change of control or other business combination
that might otherwise be beneficial to our stockholders.
We will continue to be a controlled company
within the meaning of the New York Stock Exchange rules, and, as
a result, will continue to rely on exemptions from certain
corporate governance requirements that provide protection to
stockholders of other companies.
After the completion of this offering, the private equity funds
controlled by the sponsors will collectively own more than 50%
of the total voting power of our common shares and we will
continue to be a controlled company under the New
York Stock Exchange, or NYSE, corporate governance standards. As
a controlled company, we have utilized and intend to continue
utilizing 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. |
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.
Future sales of our common stock, or the perception that
such sales might occur, may cause the market price of shares of
our common stock to decline.
Sales of a substantial number of shares of our common stock, or
the perception that such sales might occur, following this
offering, could cause the market price of our common stock to
decline. The shares of our common stock outstanding prior to
this offering will be eligible for sale in the public market at
various times in the future. We, all of our executive officers,
directors and each of the sponsors have agreed, subject to
certain exceptions, not to sell any shares of our common stock
for a period of 90 days after the date of this prospectus
without the prior written consent of J.P. Morgan Securities Inc.
However once this lock-up has expired these shares will be
eligible to be sold in the public market, subject to the
securities laws. Upon termination of the lock-up, the private
equity funds controlled by the sponsors will have approximately
81 million shares, or 78 million shares if the
underwriters option to purchase
26
additional shares is fully exercised, all of which will be
subject to registration rights. For more information, see
Underwriting and Description of Capital
StockShareholders Agreement.
Provisions in our certificate of incorporation could make
it more difficult for a third party to acquire us and could
discourage a takeover and adversely affect existing
stockholders.
Our certificate of incorporation authorizes our board of
directors to issue up to 10,000,000 preferred shares and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions on
those shares, without any further vote or action by our
stockholders. The rights of the holders of our common shares
will be subject to, and may be adversely affected by, the rights
of the holders of any preferred shares that may be issued in the
future. The issuance of preferred shares could have the effect
of delaying, deterring or preventing a change in control and
could adversely affect the voting power or economic value of
your shares. See Description of Capital Stock
Preferred Stock.
Our operating results may fluctuate in future periods
which could cause the market price of our common stock to be
volatile or to decline.
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 system-wide sales, comparable sales, and
average restaurant sales for any future period may decrease. Our
operating results may fall below our expectations or the
expectations of investors or industry analysts in one or more
future periods. Any such shortfall could result in a significant
decline in the price of our common stock.
Special note regarding forward-looking statements
Certain statements made in this report that reflect
managements expectations regarding future events and
economic performance are forward-looking in nature and,
accordingly, are subject to risks and uncertainties. These
forward looking statements include statements regarding our
intent to focus on 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 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 UK; 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 estimates
regarding the rent and costs associated with our new global
headquarters lease; our intention to renew hedging contracts;
our continued efforts to leverage our global purchasing power;
and our expectations regarding the appointment of additional
independent directors. 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.
27
These factors include those risk factors set forth in filings
with the Securities and Exchange Commission, including our
annual and quarterly reports, and the following:
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Our ability to compete domestically and internationally in an
intensely competitive industry; |
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Our continued relationship with, and the success of, our
franchisees; |
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Risks relating to franchisee financial distress, including the
financial difficulties currently experienced by certain
franchisees in the United Kingdom which could result in, among
other things, delayed or reduced payments to us of royalties and
rents and increased exposure to third parties; |
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Our ability to successfully implement our international growth
strategy; |
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The effectiveness of our marketing and advertising programs and
franchisee support of these programs; |
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Our ability to retain or replace executive officers and key
members of management with qualified personnel; |
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Changes in consumer perceptions of dietary health and food
safety and negative publicity relating to our products; |
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Changes in consumer preferences and consumer discretionary
spending; |
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Risks related to the renewal of franchise agreements by our
franchisees; |
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Increases in our operating costs, including cost of food and
paper products, energy costs and labor costs; |
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Risks relating to the loss of any of our major distributors,
including our sole distributor in the UK and interruptions in
the supply of necessary products to us; |
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Risks related to our international operations; |
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Our inability to realize our expected tax benefits from the
realignment of our European and Asian businesses; |
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Fluctuations in international currency exchange and interest
rates; |
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Our continued ability, and the ability of our franchisees, to
obtain suitable locations and financing for new restaurant
development; |
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Changes in demographic patterns of current restaurant locations; |
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Our ability to adequately protect our intellectual property; |
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Adverse legal judgments, settlements or pressure tactics; and |
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Adverse legislation or regulation. |
These risks are not exhaustive and may not include factors which
could adversely impact our business and financial performance.
Moreover, we operate in a very competitive and rapidly
28
changing environment. New risk factors emerge from time to time
and it is not possible for our management to predict all risk
factors, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements
as predictions of future events. We do not undertake any
responsibility to update any of these forward-looking statements
to conform our prior statements to actual results or revised
expectations.
Use of proceeds
We will not receive any proceeds from the sale of our common
stock by the selling stockholders.
29
Market price of our common stock
Our common stock has been listed on the New York Stock Exchange
under the symbol BKC since May 18, 2006. Prior
to that time, there was no public market for our common stock.
The following table sets forth for the periods indicated the
high and low sales prices of our common stock on the New York
Stock Exchange.
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2006 |
|
High | |
|
Low | |
|
|
| |
|
| |
| |
Fourth Quarter (commencing
May 18, 2006)
|
|
$ |
19.45 |
|
|
$ |
15.48 |
|
|
|
|
|
|
|
|
|
|
|
| |
2007 |
|
High | |
|
Low | |
|
|
| |
|
| |
| |
First Quarter
|
|
$ |
16.64 |
|
|
$ |
12.41 |
|
Second Quarter
|
|
$ |
21.28 |
|
|
$ |
15.46 |
|
Third Quarter (through
February 7, 2007)
|
|
$ |
21.79 |
|
|
$ |
19.67 |
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|
A recent reported closing price for our common stock is set
forth on the cover page of this prospectus. The Bank of New York
is the transfer agent and registrar for our common stock. On
January 17, 2007, we had 164 holders of record of our
common stock.
Dividend policy
On January 30, 2007, we announced a quarterly cash dividend
of 6.25 cents per share, payable on March 15, 2007 to
holders of record of our common stock on February 15, 2007.
Although we do not have a dividend policy, we have elected to
pay a cash dividend because we have generated strong cash flow
over the past year, and we expect our cash flow to continue to
strengthen.
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 was recorded as compensation expense in the third
quarter of fiscal 2006. We did not declare or pay any cash
dividends on our common stock during the fiscal year ended
June 30, 2005.
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.
30
Capitalization
The following table sets forth our capitalization as of
December 31, 2006. This table should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.
|
|
|
|
|
| |
|
|
December 31, 2006 | |
|
|
(Unaudited) | |
| |
|
|
(in millions, except | |
|
|
share amounts) | |
Cash and cash equivalents
|
|
$ |
135 |
|
|
|
|
|
Short-term debt and capital leases
|
|
$ |
5 |
|
Long-term debt
|
|
|
896 |
|
Long-term capital leases
|
|
|
64 |
|
Stockholders equity:
|
|
|
|
|
Common stock, $0.01 par value per
share, 300,000,000 shares authorized, 133,805,018 shares issued
and outstanding(1)
|
|
|
1 |
|
Restricted stock units
|
|
|
5 |
|
Additional paid-in capital
|
|
|
554 |
|
Retained earnings
|
|
|
81 |
|
Accumulated other comprehensive
income
|
|
|
|
|
Treasury stock, at cost
|
|
|
(3 |
) |
|
|
|
|
Total stockholders equity
|
|
$ |
638 |
|
|
|
|
|
Total capitalization
|
|
$ |
1,603 |
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|
(1) Excludes 8,189,149 shares of our common stock issuable
upon the exercise of non-qualified stock options or the
settlement of restricted stock unit awards, performance-based
restricted stock awards and deferred stock unit awards
outstanding as of December 31, 2006, of which options to
purchase 2,956,545 shares were exercisable as of
December 31, 2006. In addition, as of December 31,
2006, (i) 2,380,985 shares of our common stock remain to be
awarded under the Burger King Holdings, Inc. Equity Incentive
Plan and (ii) 6,062,594 shares of our common stock remain
to be awarded under the Burger King Holdings, Inc. 2006 Omnibus
Incentive Plan. As of January 17, 2007, we had not granted any
equity awards in the third quarter of fiscal 2007.
31
Selected consolidated financial and other data
On December 13, 2002, we acquired BKC through private
equity funds controlled by the sponsors. In this prospectus,
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 for our
predecessor as of June 30, 2002, for the fiscal year ended
June 30, 2002 and for the period July 1, 2002 to
December 12, 2002 have been derived from the audited
consolidated financial statements and notes thereto of our
predecessor, which are not included herein.
The selected historical financial data as of June 30, 2004,
2005 and 2006 and for the period December 13, 2002 to
June 30, 2003, and for the fiscal years ended June 30,
2004, 2005 and 2006 have been derived from our audited financial
statements and the notes thereto included herein. The combined
financial data for the combined fiscal year ended June 30,
2003 have been derived from the audited consolidated financial
statements and notes thereto of our predecessor and us, but have
not been audited on a combined basis, do not comply with
generally accepted accounting principles and are not intended to
represent what our operating results would have been if the
acquisition of BKC had occurred at the beginning of the period.
The selected consolidated balance sheet data as of June 30,
2003 have been derived from our audited consolidated balance
sheet and the notes thereto, which are not included herein. The
selected historical financial data as of December 31, 2005
and 2006 and for the six months ended December 31, 2005 and
2006 have been derived from our unaudited consolidated financial
statements and the notes thereto included herein. The other
operating data for the fiscal year ended June 30, 2002, and
for the period July 1, 2002 to December 12, 2002 have
been derived from the internal records of our predecessor. The
other operating data for the period December 13, 2002 to
June 30, 2003, for the fiscal years ended June 30,
2004, 2005 and 2006 and for the six months ended
December 31, 2005 and 2006 have been derived from our
internal records.
The selected consolidated financial and other operating data
presented below contain all normal recurring adjustments that,
in the opinion of management, are necessary to present fairly
our financial position and results of operations as of and for
the periods presented. The selected historical consolidated
financial and other operating data included below and elsewhere
in this prospectus 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 and our
audited and unaudited consolidated financial statements and
related notes and other financial information appearing
elsewhere in this prospectus.
32
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| |
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|
|
Burger King Holdings, | |
|
|
|
|
Predecessor | |
|
Inc. | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
Burger King Holdings, Inc. | |
|
|
|
|
For the | |
|
For the | |
|
|
|
| |
|
|
For the | |
|
Period | |
|
Period | |
|
Combined | |
|
|
|
|
|
|
Fiscal | |
|
from | |
|
from | |
|
Twelve | |
|
|
|
For the Six | |
|
|
Year | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
For the Fiscal Year Ended | |
|
Months Ended | |
|
|
Ended | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
December 31, | |
|
|
June 30, | |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
(In millions, except per share data) | |
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$ |
1,130 |
|
|
$ |
526 |
|
|
$ |
648 |
|
|
$ |
1,174 |
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
$ |
1,516 |
|
|
$ |
754 |
|
|
$ |
822 |
|
|
Franchise revenues
|
|
|
392 |
|
|
|
170 |
|
|
|
198 |
|
|
|
368 |
|
|
|
361 |
|
|
|
413 |
|
|
|
420 |
|
|
|
209 |
|
|
|
225 |
|
|
Property revenues
|
|
|
124 |
|
|
|
55 |
|
|
|
60 |
|
|
|
115 |
|
|
|
117 |
|
|
|
120 |
|
|
|
112 |
|
|
|
57 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,646 |
|
|
|
751 |
|
|
|
906 |
|
|
|
1,657 |
|
|
|
1,754 |
|
|
|
1,940 |
|
|
|
2,048 |
|
|
|
1,020 |
|
|
|
1,105 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
354 |
|
|
|
162 |
|
|
|
197 |
|
|
|
359 |
|
|
|
391 |
|
|
|
437 |
|
|
|
470 |
|
|
|
237 |
|
|
|
247 |
|
|
Payroll and employee benefits
|
|
|
335 |
|
|
|
157 |
|
|
|
192 |
|
|
|
349 |
|
|
|
382 |
|
|
|
415 |
|
|
|
446 |
|
|
|
219 |
|
|
|
242 |
|
|
Occupancy and other operating costs
|
|
|
298 |
|
|
|
146 |
|
|
|
168 |
|
|
|
314 |
|
|
|
314 |
|
|
|
343 |
|
|
|
380 |
|
|
|
184 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant expenses
|
|
|
987 |
|
|
|
465 |
|
|
|
557 |
|
|
|
1,022 |
|
|
|
1,087 |
|
|
|
1,195 |
|
|
|
1,296 |
|
|
|
640 |
|
|
|
694 |
|
Selling, general and administrative
expenses(1)
|
|
|
422 |
|
|
|
224 |
|
|
|
248 |
|
|
|
472 |
|
|
|
474 |
|
|
|
487 |
|
|
|
488 |
|
|
|
207 |
|
|
|
231 |
|
Property expenses
|
|
|
58 |
|
|
|
27 |
|
|
|
28 |
|
|
|
55 |
|
|
|
58 |
|
|
|
64 |
|
|
|
57 |
|
|
|
28 |
|
|
|
31 |
|
Fees paid to affiliates(2)
|
|
|
7 |
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
|
|
8 |
|
|
|
9 |
|
|
|
39 |
|
|
|
6 |
|
|
|
|
|
Impairment of goodwill(3)
|
|
|
5 |
|
|
|
875 |
|
|
|
|
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses (income),
net(3)
|
|
|
45 |
|
|
|
39 |
|
|
|
(7 |
) |
|
|
32 |
|
|
|
54 |
|
|
|
34 |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,524 |
|
|
|
1,631 |
|
|
|
831 |
|
|
|
2,462 |
|
|
|
1,681 |
|
|
|
1,789 |
|
|
|
1,878 |
|
|
|
878 |
|
|
|
948 |
|
Income (loss) from operations
|
|
|
122 |
|
|
|
(880 |
) |
|
|
75 |
|
|
|
(805 |
) |
|
|
73 |
|
|
|
151 |
|
|
|
170 |
|
|
|
142 |
|
|
|
157 |
|
Interest expense, net
|
|
|
105 |
|
|
|
46 |
|
|
|
35 |
|
|
|
81 |
|
|
|
64 |
|
|
|
73 |
|
|
|
72 |
|
|
|
34 |
|
|
|
34 |
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
13 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
17 |
|
|
|
(926 |
) |
|
|
40 |
|
|
|
(886 |
) |
|
|
9 |
|
|
|
78 |
|
|
|
80 |
|
|
|
95 |
|
|
|
122 |
|
Income tax expense (benefit)
|
|
|
54 |
|
|
|
(34 |
) |
|
|
16 |
|
|
|
(18 |
) |
|
|
4 |
|
|
|
31 |
|
|
|
53 |
|
|
|
46 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(37 |
) |
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
27 |
|
|
$ |
49 |
|
|
$ |
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
* |
|
|
|
* |
|
|
$ |
0.23 |
|
|
|
* |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
$ |
0.24 |
|
|
$ |
0.45 |
|
|
$ |
0.59 |
|
|
Diluted
|
|
|
* |
|
|
|
* |
|
|
$ |
0.23 |
|
|
|
* |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
$ |
0.24 |
|
|
$ |
0.43 |
|
|
$ |
0.57 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
* |
|
|
|
* |
|
|
|
104.7 |
|
|
|
* |
|
|
|
106.1 |
|
|
|
106.5 |
|
|
|
110.3 |
|
|
|
106.8 |
|
|
|
133.3 |
|
|
Diluted
|
|
|
* |
|
|
|
* |
|
|
|
104.7 |
|
|
|
* |
|
|
|
106.1 |
|
|
|
106.9 |
|
|
|
114.7 |
|
|
|
112.9 |
|
|
|
136.1 |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for)
operating activities
|
|
$ |
212 |
|
|
$ |
1 |
|
|
$ |
81 |
|
|
$ |
82 |
|
|
$ |
199 |
|
|
$ |
218 |
|
|
$ |
74 |
|
|
$ |
2 |
|
|
$ |
(2 |
) |
Cash used for investing activities
|
|
|
(349 |
) |
|
|
(102 |
) |
|
|
(485 |
) |
|
|
(587 |
) |
|
|
(184 |
) |
|
|
(5 |
) |
|
|
(74 |
) |
|
|
(29 |
) |
|
|
(27 |
) |
Cash provided by (used for)
financing activities
|
|
|
155 |
|
|
|
112 |
|
|
|
607 |
|
|
|
719 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(173 |
) |
|
|
(198 |
) |
|
|
(97 |
) |
Capital expenditures
|
|
|
325 |
|
|
|
95 |
|
|
|
47 |
|
|
|
142 |
|
|
|
81 |
|
|
|
93 |
|
|
|
85 |
|
|
|
30 |
|
|
|
31 |
|
EBITDA(5)
|
|
$ |
283 |
|
|
$ |
(837 |
) |
|
$ |
118 |
|
|
$ |
(719 |
) |
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
258 |
|
|
$ |
184 |
|
|
$ |
200 |
|
Cash dividends declared per common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
* Not meaningful
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
|
|
|
As of | |
|
|
Predecessor | |
|
As of June 30, | |
|
December 31, | |
|
|
As of June 30, | |
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In millions) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
54 |
|
|
$ |
203 |
|
|
$ |
221 |
|
|
$ |
432 |
|
|
$ |
259 |
|
|
$ |
207 |
|
|
$ |
135 |
|
Total assets
|
|
|
3,329 |
|
|
|
2,458 |
|
|
|
2,665 |
|
|
|
2,723 |
|
|
|
2,552 |
|
|
|
2,476 |
|
|
|
2,431 |
|
Total debt and capital lease
obligations
|
|
|
1,323 |
|
|
|
1,251 |
|
|
|
1,294 |
|
|
|
1,339 |
|
|
|
1,065 |
|
|
|
1,066 |
|
|
|
965 |
|
Total liabilities
|
|
|
2,186 |
|
|
|
2,026 |
|
|
|
2,241 |
|
|
|
2,246 |
|
|
|
1,985 |
|
|
|
1946 |
|
|
|
1,793 |
|
Total stockholders equity
|
|
$ |
1,143 |
|
|
$ |
432 |
|
|
$ |
424 |
|
|
$ |
477 |
|
|
$ |
567 |
|
|
$ |
530 |
|
|
$ |
638 |
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
|
For the Fiscal Year | |
|
For the Six Months | |
|
|
Ended June 30, | |
|
Ended December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
Other System-Wide Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(6)(7)
|
|
|
1.0% |
|
|
|
5.6% |
|
|
|
1.9% |
|
|
|
1.3% |
|
|
|
3.0% |
|
Average restaurant sales (in
millions)
|
|
$ |
1,014 |
|
|
$ |
1,104 |
|
|
$ |
1,126 |
|
|
$ |
549 |
|
|
$ |
597 |
|
System-wide sales growth(6)
|
|
|
1.2% |
|
|
|
6.1% |
|
|
|
2.1% |
|
|
|
1.8% |
|
|
|
4.0% |
|
Number of company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
759 |
|
|
|
844 |
|
|
|
878 |
|
|
|
876 |
|
|
|
888 |
|
|
EMEA/ APAC(8)
|
|
|
277 |
|
|
|
283 |
|
|
|
293 |
|
|
|
289 |
|
|
|
331 |
|
|
Latin America(9)
|
|
|
51 |
|
|
|
60 |
|
|
|
69 |
|
|
|
63 |
|
|
|
71 |
|
|
|
|
|
|
Total company restaurants
|
|
|
1,087 |
|
|
|
1,187 |
|
|
|
1,240 |
|
|
|
1,228 |
|
|
|
1,290 |
|
Number of franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
7,217 |
|
|
|
6,876 |
|
|
|
6,656 |
|
|
|
6,758 |
|
|
|
6,614 |
|
|
EMEA/ APAC(8)
|
|
|
2,308 |
|
|
|
2,373 |
|
|
|
2,494 |
|
|
|
2,449 |
|
|
|
2,492 |
|
|
Latin America(9)
|
|
|
615 |
|
|
|
668 |
|
|
|
739 |
|
|
|
706 |
|
|
|
788 |
|
|
|
|
|
|
Total franchise restaurants
|
|
|
10,140 |
|
|
|
9,917 |
|
|
|
9,889 |
|
|
|
9,913 |
|
|
|
9,894 |
|
|
|
|
|
|
|
Total restaurants
|
|
|
11,227 |
|
|
|
11,104 |
|
|
|
11,129 |
|
|
|
11,141 |
|
|
|
11,184 |
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
115 |
|
|
$ |
255 |
|
|
$ |
295 |
|
|
$ |
152 |
|
|
$ |
171 |
|
|
EMEA/ APAC(8)
|
|
|
95 |
|
|
|
36 |
|
|
|
62 |
|
|
|
42 |
|
|
|
33 |
|
|
Latin America(9)
|
|
|
26 |
|
|
|
25 |
|
|
|
29 |
|
|
|
15 |
|
|
|
18 |
|
|
Unallocated(10)
|
|
|
(163 |
) |
|
|
(165 |
) |
|
|
(216 |
) |
|
|
(67 |
) |
|
|
(65 |
) |
|
|
|
|
|
Total operating income
|
|
$ |
73 |
|
|
$ |
151 |
|
|
$ |
170 |
|
|
$ |
142 |
|
|
$ |
157 |
|
|
|
|
Company Restaurant Revenues (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
802 |
|
|
$ |
923 |
|
|
$ |
1,032 |
|
|
$ |
507 |
|
|
$ |
541 |
|
|
EMEA/ APAC(8)
|
|
|
429 |
|
|
|
435 |
|
|
|
428 |
|
|
|
219 |
|
|
|
250 |
|
|
Latin America(9)
|
|
|
45 |
|
|
|
49 |
|
|
|
56 |
|
|
|
28 |
|
|
|
31 |
|
|
|
|
|
|
Total company restaurant revenues
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
$ |
1,516 |
|
|
$ |
754 |
|
|
$ |
822 |
|
|
|
|
Company Restaurant Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
11.3% |
|
|
|
14.2% |
|
|
|
14.1% |
|
|
|
14.1% |
|
|
|
15.0% |
|
|
EMEA/ APAC(8)
|
|
|
18.9% |
|
|
|
15.2% |
|
|
|
13.9% |
|
|
|
15.6% |
|
|
|
15.5% |
|
|
Latin America(9)
|
|
|
37.8% |
|
|
|
30.6% |
|
|
|
26.6% |
|
|
|
26.7% |
|
|
|
26.9% |
|
|
Total company restaurant margin(11)
|
|
|
14.8% |
|
|
|
15.1% |
|
|
|
14.5% |
|
|
|
15.0% |
|
|
|
15.6% |
|
Franchise Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
234 |
|
|
$ |
269 |
|
|
$ |
267 |
|
|
$ |
133 |
|
|
$ |
140 |
|
|
EMEA/ APAC(8)
|
|
|
102 |
|
|
|
114 |
|
|
|
119 |
|
|
|
59 |
|
|
|
65 |
|
|
Latin America(9)
|
|
|
25 |
|
|
|
30 |
|
|
|
34 |
|
|
|
17 |
|
|
|
20 |
|
|
|
|
|
|
Total franchise revenues
|
|
$ |
361 |
|
|
$ |
413 |
|
|
$ |
420 |
|
|
$ |
209 |
|
|
$ |
225 |
|
|
|
|
Franchise sales (in millions)(12)
|
|
$ |
10,055 |
|
|
$ |
10,817 |
|
|
$ |
10,903 |
|
|
$ |
5,508 |
|
|
$ |
5,790 |
|
|
|
|
(1) |
Selling, general and administrative expenses included
$72 million of intangible asset amortization in the fiscal
year ended June 30, 2002. Selling, general and
administrative expenses also included the compensatory
make-whole payment made on February 21, 2006 to holders of
our options and restricted stock unit awards, primarily members
of senior management. See Certain Relationships and
Related Transactions Compensatory Make-Whole Payment. |
|
(2) |
Fees paid to affiliates primarily consist of management fees we
paid to our 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 our 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 expenses (income), 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. |
35
|
|
(5) |
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. |
|
|
|
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. |
|
|
EBITDA is not intended to be a measure of liquidity or cash
flows from operations nor a measure comparable to net income as
it does not take into account certain requirements such as
capital expenditures and related depreciation, principal and
interest payments and tax payments. |
|
|
The following table is a reconciliation of our net income to
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Predecessor | |
|
Burger King Holdings, Inc. | |
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
| |
|
|
|
|
For the | |
|
For the | |
|
Combined | |
|
|
|
|
|
|
For the | |
|
period from | |
|
period from | |
|
twelve | |
|
|
|
For the six | |
|
|
fiscal year | |
|
July 1, | |
|
December 13, | |
|
months | |
|
For the fiscal year | |
|
months ended | |
|
|
ended | |
|
2002 to | |
|
2002 to | |
|
ended | |
|
ended June 30, | |
|
December 31, | |
|
|
June 30, | |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In millions) | |
Net (loss) income
|
|
$ |
(37 |
) |
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
27 |
|
|
$ |
49 |
|
|
$ |
78 |
|
Interest expense, net
|
|
|
105 |
|
|
|
46 |
|
|
|
35 |
|
|
|
81 |
|
|
|
64 |
|
|
|
73 |
|
|
|
72 |
|
|
|
34 |
|
|
|
34 |
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
13 |
|
|
|
1 |
|
Income tax expense (benefit)
|
|
|
54 |
|
|
|
(34 |
) |
|
|
16 |
|
|
|
(18 |
) |
|
|
4 |
|
|
|
31 |
|
|
|
53 |
|
|
|
46 |
|
|
|
44 |
|
|
|
|
Income (loss) from operations
|
|
|
122 |
|
|
|
(880 |
) |
|
|
75 |
|
|
|
(805 |
) |
|
|
73 |
|
|
|
151 |
|
|
|
170 |
|
|
|
142 |
|
|
|
157 |
|
Depreciation and amortization
|
|
|
161 |
|
|
|
43 |
|
|
|
43 |
|
|
|
86 |
|
|
|
63 |
|
|
|
74 |
|
|
|
88 |
|
|
|
42 |
|
|
|
43 |
|
|
|
|
EBITDA
|
|
$ |
283 |
|
|
$ |
(837 |
) |
|
$ |
118 |
|
|
$ |
(719 |
) |
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
258 |
|
|
$ |
184 |
|
|
$ |
200 |
|
|
|
|
|
This presentation of EBITDA may not be directly comparable to
similarly titled measures of other companies, since not all
companies use identical calculations. |
|
|
(6) |
Comparable sales growth and system-wide 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. System-wide 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. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsKey Business
Measures. |
|
(7) |
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period for restaurants that have
been open for thirteen months or longer. 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. |
|
(8) |
Refers to our operations in Europe, the Middle East, Africa,
Asia, Australia and Guam. |
|
(9) |
Refers to our operations in Mexico, Central and South America
and the Caribbean. |
|
|
(10) |
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing and supply chain management. |
|
|
(11) |
Calculated using dollars expressed in hundreds of thousands. |
|
(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. |
36
Burger King Holdings, Inc. and subsidiaries restaurant count
analysis
The following tables present information relating to the
analysis of our restaurants for the geographic areas and periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Company | |
|
Franchise | |
|
Total | |
| |
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance June 30, 2003
|
|
|
1,061 |
|
|
|
10,274 |
|
|
|
11,335 |
|
|
Openings
|
|
|
29 |
|
|
|
275 |
|
|
|
304 |
|
|
Closures
|
|
|
(20 |
) |
|
|
(392 |
) |
|
|
(412 |
) |
|
Acquisitions, net of refranchisings
|
|
|
17 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
1,087 |
|
|
|
10,140 |
|
|
|
11,227 |
|
|
|
|
|
Openings
|
|
|
63 |
|
|
|
251 |
|
|
|
314 |
|
|
Closures
|
|
|
(23 |
) |
|
|
(414 |
) |
|
|
(437 |
) |
|
Acquisitions, net of refranchisings
|
|
|
60 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
1,187 |
|
|
|
9,917 |
|
|
|
11,104 |
|
|
|
|
|
Openings
|
|
|
23 |
|
|
|
326 |
|
|
|
349 |
|
|
Closures
|
|
|
(14 |
) |
|
|
(310 |
) |
|
|
(324 |
) |
|
Acquisitions, net of refranchisings
|
|
|
44 |
|
|
|
(44 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
1,240 |
|
|
|
9,889 |
|
|
|
11,129 |
|
|
|
|
|
Openings
|
|
|
16 |
|
|
|
182 |
|
|
|
198 |
|
|
Closures
|
|
|
(8 |
) |
|
|
(135 |
) |
|
|
(143 |
) |
|
Acquisitions, net of refranchisings
|
|
|
42 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
Ending Balance December 31,
2006
|
|
|
1,290 |
|
|
|
9,894 |
|
|
|
11,184 |
|
|
|
|
|
|
|
|
|
USA and Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance June 30, 2003
|
|
|
735 |
|
|
|
7,529 |
|
|
|
8,264 |
|
|
Openings
|
|
|
3 |
|
|
|
43 |
|
|
|
46 |
|
|
Closures
|
|
|
(16 |
) |
|
|
(318 |
) |
|
|
(334 |
) |
|
Acquisitions, net of refranchisings
|
|
|
37 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
759 |
|
|
|
7,217 |
|
|
|
7,976 |
|
|
|
|
|
Openings
|
|
|
33 |
|
|
|
21 |
|
|
|
54 |
|
|
Closures
|
|
|
(9 |
) |
|
|
(301 |
) |
|
|
(310 |
) |
|
Acquisitions, net of refranchisings
|
|
|
61 |
|
|
|
(61 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
844 |
|
|
|
6,876 |
|
|
|
7,720 |
|
|
|
|
|
Openings
|
|
|
4 |
|
|
|
55 |
|
|
|
59 |
|
|
Closures
|
|
|
(10 |
) |
|
|
(235 |
) |
|
|
(245 |
) |
|
Acquisitions, net of refranchisings
|
|
|
40 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
878 |
|
|
|
6,656 |
|
|
|
7,534 |
|
|
|
|
|
Openings
|
|
|
5 |
|
|
|
36 |
|
|
|
41 |
|
|
Closures
|
|
|
(5 |
) |
|
|
(68 |
) |
|
|
(73 |
) |
|
Acquisitions, net of refranchisings
|
|
|
10 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
Ending Balance December 31,
2006
|
|
|
888 |
|
|
|
6,614 |
|
|
|
7,502 |
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Company | |
|
Franchise | |
|
Total | |
| |
|
|
|
|
|
EMEA/ APAC
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance June 30, 2003
|
|
|
280 |
|
|
|
2,179 |
|
|
|
2,459 |
|
|
Openings
|
|
|
21 |
|
|
|
177 |
|
|
|
198 |
|
|
Closures
|
|
|
(4 |
) |
|
|
(68 |
) |
|
|
(72 |
) |
|
Acquisitions, net of refranchisings
|
|
|
(20 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
277 |
|
|
|
2,308 |
|
|
|
2,585 |
|
|
|
|
|
Openings
|
|
|
21 |
|
|
|
165 |
|
|
|
186 |
|
|
Closures
|
|
|
(14 |
) |
|
|
(101 |
) |
|
|
(115 |
) |
|
Acquisitions, net of refranchisings
|
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
283 |
|
|
|
2,373 |
|
|
|
2,656 |
|
|
|
|
|
Openings
|
|
|
10 |
|
|
|
191 |
|
|
|
201 |
|
|
Closures
|
|
|
(4 |
) |
|
|
(66 |
) |
|
|
(70 |
) |
|
Acquisitions, net of refranchisings
|
|
|
4 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
293 |
|
|
|
2,494 |
|
|
|
2,787 |
|
|
|
|
|
Openings
|
|
|
9 |
|
|
|
94 |
|
|
|
103 |
|
|
Closures
|
|
|
(3 |
) |
|
|
(64 |
) |
|
|
(67 |
) |
|
Acquisitions, net of refranchisings
|
|
|
32 |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
Ending Balance December 31,
2006
|
|
|
331 |
|
|
|
2,492 |
|
|
|
2,823 |
|
|
|
|
|
|
|
|
|
Company |
|
|
|
Franchise |
|
|
|
Total |
|
|
|
|
|
|
Latin America
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance June 30, 2003
|
|
|
46 |
|
|
|
566 |
|
|
|
612 |
|
|
Openings
|
|
|
5 |
|
|
|
55 |
|
|
|
60 |
|
|
Closures
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
|
Acquisitions, net of refranchisings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
51 |
|
|
|
615 |
|
|
|
666 |
|
|
|
|
|
Openings
|
|
|
9 |
|
|
|
65 |
|
|
|
74 |
|
|
Closures
|
|
|
|
|
|
|
(12 |
) |
|
|
(12 |
) |
|
Acquisitions, net of refranchisings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
60 |
|
|
|
668 |
|
|
|
728 |
|
|
|
|
|
Openings
|
|
|
9 |
|
|
|
80 |
|
|
|
89 |
|
|
Closures
|
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
|
Acquisitions, net of refranchisings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2006
|
|
|
69 |
|
|
|
739 |
|
|
|
808 |
|
|
|
|
|
Openings
|
|
|
2 |
|
|
|
52 |
|
|
|
54 |
|
|
Closures
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
Acquisitions, net of refranchisings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance December 31,
2006
|
|
|
71 |
|
|
|
788 |
|
|
|
859 |
|
|
38
Managements discussion and analysis of
financial condition and results of operations
You should read the following discussion together with
Selected Consolidated Financial and Other Data and
our audited and unaudited consolidated financial statements and
the notes thereto included elsewhere in this prospectus. 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 Risk Factors, Special
Note Regarding Forward-Looking Statements and
elsewhere in this prospectus.
References to fiscal 2004, fiscal 2005, fiscal 2006 and
fiscal 2007 in this section are to the fiscal years ended
June 30, 2004, 2005, 2006 and the fiscal year ending
June 30, 2007, respectively.
Overview
We operate in the fast food hamburger restaurant, or FFHR,
category of the quick service restaurant, or QSR, segment of the
restaurant industry. We are the second largest FFHR chain in the
world as measured by the number of restaurants and system-wide
sales. As of December 31, 2006, we owned or franchised a
total of 11,184 restaurants in 66 countries and U.S.
territories, of which 7,502 were located in the United States
and Canada. At that date, 1,290 restaurants were company-owned
and 9,894 were owned by our franchisees. The FFHR category is
highly competitive with respect to price, service, location and
food quality. Our restaurants feature flame-broiled hamburgers,
chicken and other specialty sandwiches, french fries, soft
drinks and other reasonably-priced food items.
Our business operates in three reportable segments: 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 68% of total
revenues and 76% of operating income, excluding unallocated
corporate general and administrative expenses, in fiscal 2006.
EMEA/ APAC comprised 28% of total revenues and 16% of operating
income, excluding unallocated corporate general and
administrative expenses, and Latin America comprised the
remaining 4% of revenues and 8% of operating income, excluding
unallocated corporate general and administrative expenses, in
fiscal 2006.
Our business
Revenues
We generate revenue from three sources:
|
|
|
sales at our company restaurants; |
|
|
royalties and franchise fees paid to us by our franchisees; and |
|
|
property income from restaurants that we lease or sublease to
franchisees. |
We refer to system-wide sales as sales generated at our company
restaurants and franchise restaurants. System-wide 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 2006,
franchise restaurants generated approximately 88% of system-wide
sales. Royalties
39
paid by franchisees are based on a percentage of franchise
restaurant sales and are recorded as franchise revenues.
Franchise fees and franchise renewal fees are recorded as
revenues in the year received. In fiscal 2006, company
restaurant and franchise revenues represented 74% and 21% of
total revenues, respectively. The remaining 5% of total revenues
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. Moreover, due to the steps that we have taken
to improve the health of our franchise system in the United
States and Canada, we expect that this mix will produce more
stable earnings and cash flow in the future. However, our
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 food and beverages that we sell to consumers in company
restaurants; |
|
|
payroll and employee benefits costs, which represent the wages
paid to company restaurant managers and staff, as well as the
cost of their health insurance, other benefits and training; and |
|
|
occupancy and other operating costs, which represent all other
direct costs of operating our company restaurants, including the
cost of rent or real estate depreciation (for restaurant
properties owned by us), depreciation on equipment, repairs and
maintenance, insurance, restaurant supplies, and utilities. |
As average restaurant sales increase, we can leverage payroll
and employee benefits costs and occupancy and other costs,
resulting in a direct improvement in restaurant profitability.
As a result, we believe our continued focus on increasing
average restaurant sales will result in improved profitability
to our system-wide restaurants.
Our 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.
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
40
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.
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 United Kingdom and Germany, we manage an advertising
fund for that country by collecting required advertising
contributions from company and franchise restaurants and
purchasing advertising and other marketing initiatives on behalf
of all Burger King restaurants in that country. These
advertising contributions are based on a percentage of sales at
company and franchise restaurants. We do not record advertising
contributions collected from franchisees as revenues or
expenditures of these contributions as expenses. Amounts which
are contributed to the advertising funds by company restaurants
are recorded as selling 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 $41 million,
$15 million and $1 million in fiscal 2004, fiscal 2005
and fiscal 2006, respectively, and $7 million for the six
months ended December 31, 2006.
Key business measures
We track our results of operations and manage our business by
using three key business measures: comparable sales growth,
average restaurant sales and system-wide sales growth.
Comparable sales growth and system-wide sales growth are
analyzed on a constant currency basis, which means they are
calculated using 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 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.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the | |
|
For the six | |
|
|
fiscal year | |
|
months | |
|
|
ended | |
|
ended | |
|
|
June 30, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In constant currencies) | |
Comparable Sales
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
(0.5 |
)% |
|
|
6.6% |
|
|
|
2.5% |
|
|
|
1.6% |
|
|
|
3.5% |
|
EMEA/ APAC
|
|
|
5.4 |
% |
|
|
2.8% |
|
|
|
0.0% |
|
|
|
0.3% |
|
|
|
1.4% |
|
Latin America
|
|
|
4.0 |
% |
|
|
5.5% |
|
|
|
2.5% |
|
|
|
1.6% |
|
|
|
5.1% |
|
|
Total System-Wide
|
|
|
1.0 |
% |
|
|
5.6% |
|
|
|
1.9% |
|
|
|
1.3% |
|
|
|
3.0% |
|
|
Our early fiscal 2004 results were negatively affected by
competitive discounting in the United States and Canada,
before beginning to improve in the second half of fiscal 2004 as
a result of strategic initiatives including new premium
products, our new advertising campaigns targeting our core
consumers and our operational excellence programs. Strong
performance in Germany and Spain was partially offset by weaker
performance in the United Kingdom 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 continued to make improvements to our menu,
advertising and operations. The improved financial health of our
franchise system in fiscal 2005 and lower comparable sales in
fiscal 2004 also contributed to our exceptionally strong fiscal
2005 comparable sales performance. EMEA comparable sales for
fiscal 2005 were lower than fiscal 2004 resulting primarily from
a slow down in economic conditions, competition in Germany and
weak performance in the United Kingdom as a result of changes in
consumer preferences away from the FFHR category.
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 continued to be negatively impacted by consumer
preferences in the United Kingdom.
Our comparable sales growth for the six month periods ended
December 31, 2006 was driven by our strategic initiatives
related to operational excellence, advertising and our continued
focus on our BK Value Menu. 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 improved for the six months ended December 31,
2006 compared to the same period in the prior year driven by
improvements in our operations and our menu, such as the
introduction of the BK Stacker, the continued impact of
the BK Value Menu and innovative promotions such as the
Xbox®
game collection.
Comparable sales growth in EMEA/ APAC reflects positive sales
performance in most countries in that segment for the six months
ended December 31, 2006 except the United Kingdom,
where comparable sales continued to be weak in the first quarter
of fiscal 2007 but began to improve
42
during the second quarter of fiscal 2007 reflecting our efforts
to ignite the brand in that market.
Latin America demonstrated strong results in comparable sales
for the six months ended December 31, 2006 compared to the
same period in the prior year as this segment continues to grow.
These strong results were fueled primarily by the Central
America region with promotions such as the BK Stacker,
the Texas Double Whopper, and the 15th year
Whopper anniversary, South America with the
Whoppermania promotion, and the Caribbean
with a cross promotion with Coca Cola and the advertisement
of XL sandwiches.
Average restaurant sales
Average restaurant sales is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. Average restaurant sales
is influenced by comparable sales performance and restaurant
openings and closures. Average restaurant sales also includes
the impact of movement in foreign currency exchange rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the six | |
|
|
|
|
months | |
|
|
For the fiscal | |
|
ended | |
|
|
year ended June 30, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In thousands) | |
Average Restaurant Sales
|
|
$ |
1,014 |
|
|
$ |
1,104 |
|
|
$ |
1,126 |
|
|
$ |
549 |
|
|
$ |
597 |
|
|
Our improvement in average restaurant sales in fiscal 2004,
fiscal 2005, fiscal 2006 and the first six months of fiscal 2007
was primarily due to: improved comparable sales; the opening of
new restaurants with higher than average sales volumes; and the
closure of under-performing restaurants. Our comparable sales
increased by 1%, 5.6% and 1.9% year-over-year in fiscal 2004,
2005 and 2006, respectively, driven primarily by our strategic
initiatives related to operational excellence, advertising and
our menu. Additionally, we and our franchisees closed 1,638
restaurants between July 1, 2002 and June 30, 2006.
Approximately 73% of these closures were franchise restaurants
in the United States, which had average restaurant sales of
approximately $625,000 in the 12 months prior to closure.
For the six months ended December 31, 2006, ARS was
$597,000, compared to $549,000 for the six months ended
December 31, 2005. The trailing twelve-month average
restaurant sales reached a record high of $1.16 million for
the period ended December 31, 2006, as compared to
$1.12 million for the trailing twelve months
year-over-year, an increase of 4%. As of December 31, 2006
the last 50 free-standing restaurants that opened in the United
States and have operated for at least twelve months, generated
ARS of $1.51 million, which is approximately 30% higher
than the current U.S. system average.
Our ARS improvement during the first half of fiscal 2007 was
primarily due to improved comparable sales, the opening of new
restaurants with higher than average sales volumes and the
closure of under-performing restaurants. Our comparable sales
were 3.0% for the six months ended December 31, 2006,
driven primarily by our strategic initiatives related to
operational excellence, advertising, and our menu, such as our
BK Value Menu and BK Stackers, and promotional
campaigns, such as our innovative
Xbox®
game collection. We and our franchisees opened 375 new
restaurants between January 1, 2006 and December 31,
2006. The ARS of these new restaurants was higher than our
system-wide ARS. Additionally, we and our
43
franchisees closed 332 restaurants during the same period. Over
90% of these closures were franchise restaurants in the United
States and Canada which had ARS in the 12 months prior to
closure that was significantly lower than system-wide ARS. We
believe that continued improvements to ARS of existing
restaurants and strong sales at new restaurants combined with
the closures of under-performing restaurants will result in
financially stronger operators throughout our franchise base.
System-wide sales growth
System-wide sales refer to sales at all company and franchise
restaurants. System-wide sales and system-wide sales growth are
important indicators of:
|
|
|
the overall direction and trends of sales and operating income
on a system-wide basis; and |
|
|
the effectiveness of our advertising and marketing initiatives. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
For the six | |
|
|
For the fiscal year | |
|
months ended | |
|
|
ended June 30, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In constant currencies) | |
System-Wide Sales
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
(2.2 |
)% |
|
|
4.9 |
% |
|
|
0.2 |
% |
|
|
(0.6 |
)% |
|
|
2.6 |
% |
EMEA/ APAC
|
|
|
11.5 |
% |
|
|
7.9 |
% |
|
|
5.0 |
% |
|
|
6.5 |
% |
|
|
5.3 |
% |
Latin America
|
|
|
8.4 |
% |
|
|
14.5 |
% |
|
|
13.0 |
% |
|
|
12.9 |
% |
|
|
14.8 |
% |
|
Total
|
|
|
1.2 |
% |
|
|
6.1 |
% |
|
|
2.1 |
% |
|
|
1.8 |
% |
|
|
4.0 |
% |
|
The increases in system-wide sales growth in fiscal 2004 and
fiscal 2005 primarily reflected improved comparable sales in all
regions and sales at 618 new restaurants opened during that
two-year period, which were partially offset by the closure of
849 under-performing restaurants during the same two-year
period. This improving trend continued during fiscal 2006, when
comparable sales continued to increase on a system-wide basis
although at a slower rate due to the high growth rate in fiscal
2005. For the reasons discussed below, our system-wide sales
growth continued a growth trend during the six months ended
December 31, 2006, while 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 United Kingdom, where we continue to work with certain
franchisees to help them improve their financial health.
Following a pattern of declining sales in the first half of
fiscal 2004, sales in the United States and Canada increased
4.9% in fiscal 2005, primarily due to the implementation of our
strategic initiatives related to advertising, our menu and our
operational excellence programs. Our system-wide sales growth in
the United States and Canada increased slightly in fiscal 2006,
primarily as a result of positive comparable sales growth
partially offset by restaurant closures. We had 6,656 franchise
restaurants in the United States and Canada as of June 30,
2006, compared to 6,876 franchise restaurants as of
June 30, 2005. Our system-wide sales growth in the United
States and Canada increased during the six months ended
December 31, 2006, primarily as a result of positive
comparable sales and an increase in the amount of revenues
earned by new restaurants, partially offset by a net reduction
in restaurants. We had 7,502 restaurants in the United States
and Canada as of December 31, 2006, compared to 7,634
restaurants as of December 31, 2005.
44
EMEA/ APAC demonstrated strong system-wide sales growth during
the three-year period ended June 30, 2006, which reflected
growth in several markets, including Germany, Spain, The
Netherlands and smaller markets in the Mediterranean region and
the Middle East. Partially offsetting this growth was the United
Kingdom, where changes in consumer preferences away from the
FFHR category have adversely affected sales for us. EMEA/ APAC
demonstrated strong system-wide sales growth during the six
months ended December 31, 2006 reflecting openings of new
restaurants and positive comparable sales in several markets,
including Germany, Spain, and smaller markets in the
Mediterranean and the Middle East. Partially offsetting this
growth was the United Kingdom, where changes in consumer
preferences away from the FFHR category have adversely affected
our sales.
Latin Americas system-wide sales growth was driven by new
restaurant openings and strong comparable sales from fiscal 2004
through fiscal 2006 and for the first six months of fiscal 2007.
We opened 62 restaurants (net of closures) in Latin America
during fiscal 2005, 80 restaurants (net of closures) during
fiscal 2006 and 51 restaurants (net of closures) during the
first six months of fiscal 2007, increasing our total system
restaurant count in this segment to 859 as of December 31,
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 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
45
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).
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 fiscal
2004, and acquired a limited amount of franchisee debt, often as
part of broader agreements to acquire franchise restaurants or
real estate. We also contributed funds to cover shortfalls in
franchisee advertising contributions. See Other
Commercial Commitments and Off-Balance Sheet Arrangements
for further information about the support we committed to
provide in connection with the FFRP program, including an
aggregate remaining commitment of $30 million to fund
certain loans to renovate franchise restaurants, to make
renovations to certain restaurants that we lease or sublease to
franchisees, and to provide rent relief and/or contingent cash
flow subsidies to certain franchisees.
46
Franchise system distress had a significant impact on our
results of operations during fiscal 2004 and fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the fiscal year | |
|
|
ended June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
| |
|
|
(In millions) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue not recognized(1)
|
|
$ |
22 |
|
|
$ |
(3 |
) |
|
|
|
|
Selling, general and
administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense (recoveries)
|
|
|
11 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
Incremental advertising
contributions
|
|
|
41 |
|
|
|
15 |
|
|
|
1 |
|
|
|
Internal and external costs of FFRP
program administration
|
|
|
11 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
Total effect on selling, general
and administrative
|
|
|
63 |
|
|
|
28 |
|
|
|
|
|
Other operating expenses
(income), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves (recoveries) on
acquired debt, net
|
|
|
19 |
|
|
|
4 |
|
|
|
(2 |
) |
|
|
Other, net
|
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
Total effect on other operating
expenses (income), net
|
|
|
20 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total effect on income from
operations
|
|
$ |
105 |
|
|
$ |
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 in
fiscal 2004, although we retained the legal right pursuant to
the applicable franchise agreement to collect these amounts. In
accordance with SFAS No. 45 Accounting for
Franchise Revenue, we recognize revenue for the previously
unrecognized revenue at the time such amounts are actually
collected. In addition, provisions for bad debt expense were
significantly higher than historical levels during fiscal 2004,
as a result of a substantial increase in past due receivables.
As brand advertising is a significant element of our success, we
contributed an incremental $41 million, $15 million
and $1 million to the U.S. and Canada advertising fund for
each of fiscal 2004, 2005 and 2006, respectively, to fund the
shortfall in franchisee contributions. We also incurred
significant internal and external costs to manage the FFRP
program in fiscal 2004 and 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 $1.1 million in fiscal
2006. Our collection rates, which we define as collections
divided by billings on a one-month trailing basis, also improved
during this period. Collection rates in the United States and
Canada have improved from 91% during fiscal 2004 to 100% in
fiscal 2005 and fiscal 2006, which reflects the improvement of
our franchise systems financial health. During the first
six months of fiscal 2007, our collections have remained at
100%, consistent with fiscal 2006 and fiscal 2005. As of
December 31, 2006, the FFRP program was completed.
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
47
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 made historically in the FFRP
program will continue to provide a return to us in the form of a
reinvigorated franchise system in the United States and Canada.
Our global reorganization and realignment
After our acquisition of BKC, we retained consultants to assist
us in the review of the management and efficiency of our
business, focusing on our operations, marketing, supply chain
and corporate structure. In connection with these reviews, we
reorganized our corporate structure to allow us to operate as a
global brand, including through 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 ResourcesRealignment 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
$22 million, $17 million, $10 million and
$3 million in fiscal 2004, fiscal 2005, fiscal 2006 and the
first six months of fiscal 2007, 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 six | |
|
|
months | |
|
|
|
|
ended | |
|
|
For the fiscal year | |
|
December | |
|
|
ended June 30, | |
|
31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In millions) | |
|
|
Consulting fees
|
|
$ |
14 |
|
|
$ |
2 |
|
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
3 |
|
Severance-related costs of the
global reorganization
|
|
|
8 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
22 |
|
|
$ |
17 |
|
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
48
Results of operations
The following table presents, for the periods indicated, our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
For the six months ended | |
|
|
For the fiscal year ended June 30, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
Increase/ | |
|
|
|
Increase/ | |
|
|
|
|
|
Increase/ | |
|
|
Amount | |
|
Amount | |
|
(Decrease) | |
|
Amount | |
|
(Decrease) | |
|
Amount | |
|
Amount | |
|
(Decrease) | |
| |
|
|
(In millions, except percentages) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
|
10 |
% |
|
$ |
1,516 |
|
|
|
8 |
% |
|
$ |
754 |
|
|
$ |
822 |
|
|
|
9 |
% |
|
Franchise revenues
|
|
|
361 |
|
|
|
413 |
|
|
|
14 |
% |
|
|
420 |
|
|
|
2 |
% |
|
|
209 |
|
|
|
225 |
|
|
|
8 |
% |
|
Property revenues
|
|
|
117 |
|
|
|
120 |
|
|
|
3 |
% |
|
|
112 |
|
|
|
(7 |
)% |
|
|
57 |
|
|
|
58 |
|
|
|
2 |
% |
|
|
|
|
|
Total Revenues
|
|
|
1,754 |
|
|
|
1,940 |
|
|
|
11 |
% |
|
|
2,048 |
|
|
|
6 |
% |
|
|
1,020 |
|
|
|
1,105 |
|
|
|
8 |
% |
Company restaurant expenses
|
|
|
1,087 |
|
|
|
1,195 |
|
|
|
10 |
% |
|
|
1,296 |
|
|
|
8 |
% |
|
|
640 |
|
|
|
694 |
|
|
|
8 |
% |
Selling, general and administrative
expenses
|
|
|
474 |
|
|
|
487 |
|
|
|
3 |
% |
|
|
488 |
|
|
|
* |
|
|
|
207 |
|
|
|
231 |
|
|
|
12 |
% |
Property expenses
|
|
|
58 |
|
|
|
64 |
|
|
|
10 |
% |
|
|
57 |
|
|
|
(11 |
)% |
|
|
28 |
|
|
|
31 |
|
|
|
11 |
% |
Fees paid to affiliates
|
|
|
8 |
|
|
|
9 |
|
|
|
13 |
% |
|
|
39 |
|
|
|
333 |
% |
|
|
6 |
|
|
|
|
|
|
|
(100 |
)% |
Other operating expenses (income),
net
|
|
|
54 |
|
|
|
34 |
|
|
|
(37 |
)% |
|
|
(2 |
) |
|
|
(106 |
)% |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
(167 |
)% |
|
|
|
Total operating costs and expenses
|
|
|
1,681 |
|
|
|
1,789 |
|
|
|
6 |
% |
|
|
1,878 |
|
|
|
5 |
% |
|
|
878 |
|
|
|
948 |
|
|
|
8 |
% |
Income from operations
|
|
|
73 |
|
|
|
151 |
|
|
|
107 |
% |
|
|
170 |
|
|
|
13 |
% |
|
|
142 |
|
|
|
157 |
|
|
|
11 |
% |
Interest expense, net
|
|
|
64 |
|
|
|
73 |
|
|
|
14 |
% |
|
|
72 |
|
|
|
(1 |
)% |
|
|
34 |
|
|
|
34 |
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
18 |
|
|
|
* |
|
|
|
13 |
|
|
|
1 |
|
|
|
(92 |
)% |
|
|
|
Income before income taxes
|
|
|
9 |
|
|
|
78 |
|
|
|
* |
|
|
|
80 |
|
|
|
3 |
% |
|
|
95 |
|
|
|
122 |
|
|
|
28 |
% |
Income tax expense
|
|
|
4 |
|
|
|
31 |
|
|
|
* |
|
|
|
53 |
|
|
|
71 |
% |
|
|
46 |
|
|
|
44 |
|
|
|
(4 |
)% |
|
|
|
Net income
|
|
$ |
5 |
|
|
$ |
47 |
|
|
|
* |
|
|
$ |
27 |
|
|
|
(43 |
)% |
|
$ |
49 |
|
|
$ |
78 |
|
|
|
59 |
% |
|
* Not meaningful.
49
Six months ended December 31, 2006 compared to six
months ended December 31, 2005
Revenues
Company restaurant revenues
Company restaurant revenues increased by 9% to $822 million
during the six months ended December 31, 2006, primarily as
a result of 62 additional company restaurants (net of closures)
during the period January 1, 2006 through December 31,
2006 and positive comparable sales of 2.3%. Approximately
$19 million, or 28%, of the increase in company restaurant
revenues was generated by the favorable impact from the movement
of foreign currency exchange rates in Europe and Canada.
In the United States and Canada, company restaurant revenues
increased by 7% to $541 million during the six months ended
December 31, 2006, primarily as a result of positive
comparable sales of 2.8% and a net increase of 12 company
restaurants during the period January 1, 2006 through
December 31, 2006.
In EMEA/ APAC, company restaurant revenues increased by 14% to
$250 million during the six months ended December 31,
2006, primarily as a result of a net increase of 42 company
restaurants during the period January 1, 2006 through
December 31, 2006. Comparable sales was a positive 1.0%
overall in this segment reflecting positive comparable sales in
Germany, Spain, and The Netherlands, offset by negative
comparable sales in the United Kingdom. The increase in revenues
also reflects $16 million due to the favorable impact in
the movement of foreign currency exchange rates.
In Latin America, company restaurant revenues increased by 11%
to $31 million during the six months ended
December 31, 2006, primarily as a result of eight
additional restaurants (net of closures) during the period
January 1, 2006 through December 31, 2006, and
comparable sales of 1.9%.
Franchise revenues
Franchise revenues increased by 8% to $225 million during
the six months ended December 31, 2006, driven by positive
comparable sales of 3.1% during that period and by
$3 million of favorable impact in the movement of foreign
currency exchange rates. These increases were partially offset
by a net reduction of 19 franchise restaurants during the period
January 1, 2006 through December 31, 2006, primarily
in the United States and Canada.
In the United States and Canada, franchise revenues increased by
5% to $140 million during the six months ended
December 31, 2006, primarily as a result of positive
comparable sales of 3.5% partially offset by the elimination of
royalties from a net reduction of 144 franchise restaurants
during the period January 1, 2006 through December 31,
2006.
In EMEA/ APAC, franchise revenues increased by 10% to
$65 million during the six months ended December 31,
2006, driven by an increase of 43 restaurants (net of closures
and acquisitions of franchise restaurants by us) during the
period January 1, 2006 through December 31, 2006,
comparable sales of 1.5% and favorable impact from the movement
of foreign currency exchange rates.
Latin America franchise revenues increased by 18% to
$20 million during the six months ended December 31,
2006, as a result of positive comparable sales of 5.3% and the
addition of
50
82 franchise restaurants (net of closures) during the
period January 1, 2006 through December 31, 2006.
Operating costs and expenses
Food, paper and product costs
Food, paper and product costs increased by 4% to
$247 million during the six months ended December 31,
2006, as a result of a 9% increase in company restaurant
revenues and the unfavorable impact of foreign currency exchange
rates primarily attributable to Europe. As a percentage of
company restaurant revenues, food, paper and product costs
decreased 1.3% to 30.1%.
In the United States and Canada, food, paper and product costs
increased by 2% during the six months ended December 31,
2006, as a result of a 7% increase in company restaurant
revenues offset by a benefit from lower food costs. Food, paper
and product costs as a percentage of company restaurant revenues
decreased by 1.3% to 30.8%, primarily due to decreases in the
cost of beef and cheese and the sale of products which generated
higher margins.
In EMEA/ APAC food, paper and product costs increased by 8%
during the six months ended December 31, 2006, primarily as
a result of an increase in company restaurant revenues of 14%
and from the unfavorable impact of foreign currency exchange
rates. Food, paper and product costs as a percentage of company
restaurant revenues decreased by 1.6% to 27.7% driven by price
increases and promotions geared towards higher margin products.
There was no significant increase in food, paper and product
costs in Latin America during the six months ended
December 31, 2006.
Payroll and employee benefits
Payroll and employee benefits costs increased by 11% to
$242 million during the six months ended December 31,
2006. This increase was primarily due to the addition of 62
company restaurants (net of closures) during the period
January 1, 2006 through December 31, 2006, 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
increased 0.4% to 29.5% during the six months ended
December 31, 2006 compared to 29.1% during the same period
of fiscal 2006.
In the United States and Canada, payroll and employee benefits
increased by 8% and remained relatively flat as a percentage of
company restaurant revenues during the six months ended
December 31, 2006.
In EMEA/ APAC, payroll and employee benefits increased by 15%
during the six months ended December 31, 2006, primarily as
a result of the addition of 42 new company restaurants (net of
closures) during the period January 1, 2006 through
December 31, 2006 and the unfavorable impact of foreign
currency exchange rates. Payroll and employee benefits remained
relatively flat as a percentage of company restaurant revenues
during six months ended December 31, 2006 compared to the
same period in fiscal 2006.
In Latin America payroll and employee benefits increased by 13%
during the six months ended December 31, 2006, primarily as
a result of the opening of eight new company restaurants (net of
closures) during the period January 1, 2006 through
December 31, 2006. These costs as a percentage of revenues
increased by 0.2% to 11.8% as a result of inflationary increases
in wages and payroll tax credits taken during fiscal 2006.
51
Occupancy and other operating costs
Occupancy and other operating costs increased by 11% to
$205 million during the six months ended December 31,
2006, compared to the same period in the prior year. This
increase was primarily attributable to the addition of 62
restaurants (net of closures) during the period January 1, 2006
through December 31, 2006 and the unfavorable impact of
foreign currency exchange rates. Occupancy and other operating
costs were 24.8% of company restaurant revenues during the six
months ended December 31, 2006 compared to 24.5% during the
six months ended December 31, 2005.
In the United States and Canada, occupancy and other operating
costs increased by 6% during the six months ended
December 31, 2006, compared to the same period in the prior
year driven by twelve additional restaurants (net of closures)
during the period January 1, 2006 through December 31,
2006, and an increase in utility costs. These costs decreased as
a percentage of company restaurant revenues by 0.2% to 23.6% as
a result of a reduction in casualty and hurricane-related losses.
In EMEA/ APAC, occupancy and other operating costs increased by
21% during the six months ended December 31, 2006, compared
to the same period in the prior year primarily due to the
addition of 42 new company restaurants (net of closures) during
the period January 1, 2006 through December 31, 2006,
and unfavorable impact of foreign currency exchange rates. As a
percentage of company restaurant revenues, occupancy and other
operating costs increased to 27.6% compared to 26.0% during the
six months ended December 31, 2005. The increase in these
costs as a percentage of revenues reflects an acceleration of
depreciation and disposal of equipment on certain restaurant
closures.
In Latin America, occupancy and other operating costs increased
by 15% primarily as a result of an increase of eight company
restaurants during the period January 1, 2006 through
December 31, 2006. As a percentage of company restaurant
revenues, these costs increased to 24.9% during the six months
ended December 31, 2006 from 23.6% during the same period
in the prior year, primarily as a result of an increase in
utility costs and rent.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by
$24 million to $231 million for the six months ended
December 31, 2006. This increase was primarily driven by an
increase in sales promotions and advertising expense of
$12 million, $3 million of additional expenses
associated with the operational realignment of our European and
Asian businesses, an increase of $5 million in additional
corporate salaries and fringe benefits, and $2 million of
stock based compensation. The overall increase of
$24 million also includes the negative impact of
approximately $5 million from the movement in foreign
currency exchange rates. Contributions made to the marketing
fund by company restaurants are recorded as sales promotions and
advertising expense and are generally in proportion to company
restaurant revenues. Of the $12 million increase in sales
promotions and advertising expense, $5 million related to
higher company restaurant revenues and $7 million related
to an incremental contribution we made to the marketing fund in
the United Kingdom.
Other operating income, net
Other operating income, net for the six months ended
December 31, 2006 was $8 million as compared to
$3 million during the same period in the prior year. This
increase was primarily driven by a gain of $5 million
recorded during the six months ended December 31, 2006 from
52
the sale of our investment in a joint venture in New Zealand and
a gain on forward currency contracts of $3 million, offset
by an additional charge of $2 million associated with
franchise system distress in the United Kingdom.
Income from operations
Income from operations increased by $15 million to
$157 million during the six months ended December 31,
2006, primarily as a result of an improvement in restaurant
sales driven by strong comparable sales, which increased both
franchise revenues and company restaurant margins, the
discontinuation in fees paid to affiliates and a gain from the
sale of our investment in a joint venture. These increases were
offset by an increase in selling, general and administrative
expenses. See Note 14 to our unaudited condensed
consolidated financial statements for the period ended
December 31, 2006, for operating income 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 minimal overall impact
on income from operations.
In the United States and Canada, income from operations
increased by $19 million to $171 million during the
six months ended December 31, 2006, primarily as a result
of an increase in company restaurant margins of $10 million
and franchise revenues of $7 million, driven by an increase
in the number of company restaurants during the period
January 1, 2006 through December 31, 2006 and positive
comparable sales for both company and franchise restaurants.
Income from operations in EMEA/ APAC decreased by
$9 million to $33 million during the six months ended
December 31, 2006, driven primarily by an increase in
company restaurant margins of $5 million, an increase in
franchise revenues of $6 million and an increase in other
operating income (expense) of $4 million offset by an
increase of $21 million in selling, general and
administrative expenses.
There was no significant change in income from operations in
Latin America during the six months ended December 31, 2006
compared to the same period in the prior year.
Income tax expense
Income tax expense decreased by $2 million during the six
months ended December 31, 2006 compared to the same period
in the prior year. Our effective tax rate decreased by
12.3 percentage points to 36.1%, partially as a result of
tax benefits realized from an operational realignment of our
European and Asian businesses, which became effective
July 1, 2006. In addition, we received additional benefits
during the six months ended December 31, 2006, from the
closure of a state tax audit and from foreign currency
translation on foreign denominated deferred tax assets.
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 9 new restaurant
openings (net of closures), the acquisition of 44 franchise
restaurants (net of refranchisings), and positive comparable
sales in the United States and Canada. Partially offsetting
these factors were negative comparable sales in EMEA/ APAC. In
fiscal 2005, company
53
restaurant revenues increased 10% to $1,407 million, as a
result of strong comparable sales in the United States and
Canada and Latin America, where approximately 76% of our company
restaurants were located.
In the United States and Canada, company restaurant revenues
increased 12% to $1,032 million in fiscal 2006, primarily
as a result of positive comparable sales and the acquisition of
40 franchise restaurants (net of refranchisings), most of
which were located in the United States. In fiscal 2005
company restaurant revenues increased 15% to $923 million,
primarily as a result of strong comparable sales generated from
the implementation of strategic initiatives related to our menu,
advertising and operational excellence programs, as well as the
acquisition of 99 franchise restaurants.
In EMEA/ APAC, company restaurant revenues decreased 2% to
$428 million in fiscal 2006, primarily as a result of
negative comparable sales in the United Kingdom and Germany,
where 77% of our EMEA/ APAC company restaurants were located 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 operating income as it
was offset by the positive impact to company restaurant expenses
and selling, general and administrative expenses. In fiscal
2005, company restaurant revenues increased 1% to
$435 million, primarily as a result of new restaurant
openings and positive comparable sales.
In Latin America, company restaurant revenues increased 14% to
$56 million in fiscal 2006, as revenues generated by nine
new company restaurants, partially offset by negative comparable
sales. In fiscal 2005, company restaurant revenues increased 8%
to $49 million, primarily as a result of new restaurant
openings and positive comparable sales.
Franchise revenues
Franchise revenues increased 2% to $420 million in fiscal
2006. Comparable sales increased at franchise restaurants in the
United States and Canada and Latin America segments and
decreased in the EMEA/ APAC segment during fiscal 2006. In
addition, 326 new franchise restaurants were opened since
June 30, 2005, including 277 new international franchise
restaurants. Partially offsetting these factors was the
elimination of royalties from 360 franchise restaurants that
were closed or acquired by us, primarily in the United States
and Canada. In fiscal 2005, franchise revenues increased 14% to
$413 million, primarily as a result of improved sales at
franchise restaurants in all segments.
In the United States and Canada, franchise revenues decreased 1%
to $267 million in fiscal 2006, primarily as a result of
the elimination of royalties from 278 franchise restaurants that
were closed or acquired by us, partially offset by positive
comparable sales. In fiscal 2005, franchise revenues increased
15% to $269 million, primarily as a result of the
implementation of our menu, marketing and operational excellence
initiatives and the improved financial condition of our
franchise system. In addition to increased royalties from
improved franchise restaurant sales, we recognized
$3 million of franchise revenues not previously recognized
in United States and Canada in fiscal 2005, compared to
$17 million of franchise revenues not recognized in fiscal
2004. Partially offsetting these factors was the elimination of
royalties from franchise restaurants that were closed or
acquired by us in fiscal 2005.
Our EMEA/ APAC franchisees opened 121 new franchise restaurants
(net of closures and acquisitions) since June 30, 2005
resulting in a 4% increase in franchise revenues to
54
$119 million in fiscal 2006. In fiscal 2005, our
franchisees opened 65 new franchise restaurants (net of closures
and acquisitions) in EMEA/APAC which, along with positive
comparable sales, resulted in a 13% increase in franchise
revenues to $114 million.
Latin America franchise revenues increased 13% to
$34 million during fiscal 2006 as a result of 71 new
franchise restaurants (net of closures) since June 30, 2005
and positive comparable sales. In fiscal 2005, franchise
revenues increased 17% to $30 million, as a result of 53
new franchise restaurants (net of closures) and positive
comparable sales.
Property revenues
Property revenues decreased by 7% to $112 million in fiscal
2006, as a result of a decrease in the number of properties that
we lease or sublease to franchisees due to franchise restaurants
that were closed or acquired by us, partially offset by higher
contingent rent payments. In fiscal 2005, property revenues
increased 3% to $120 million.
In the United States and Canada, property revenues were
$83 million in fiscal 2006 and fiscal 2005, primarily as a
result of higher contingent rent payments from increased
franchise restaurant sales, offset by the effect of franchise
restaurants leased to franchisees that were closed or acquired
by us. In fiscal 2005, property revenues increased 1% to
$83 million primarily because fiscal 2004 property revenues
in the United States and Canada excluded $5 million of
property revenues not recognized, partially offset by
$3 million of revenues recognized in connection with
finalizing our purchase accounting allocations.
Our EMEA/ APAC property revenues decreased $8 million to
$29 million, primarily as a result of the closure of
franchise restaurants in the United Kingdom and the
reclassification of property income on certain properties that
were leased or subleased to non-restaurant businesses after
restaurant closures. The property income on these properties is
treated as a reduction in related property expenses rather than
revenue. In fiscal 2005, property revenues increased 5% to
$37 million.
Operating costs and expenses
Company restaurant expenses
Food, paper and product costs increased 8% to $470 million
in fiscal 2006, primarily as a result of an 8% increase in
company restaurant revenues. As a percentage of company
restaurant revenues, food, paper and 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.
55
In EMEA/ APAC, food, paper and product costs increased 2% to
$125 million in fiscal 2006, primarily as a result of
increased beef prices in Europe, partially offset by a 2%
decrease in company restaurant revenues and favorable foreign
currency exchange rates. Food, paper and product costs increased
1.2% to 29.2% of company restaurant revenues, primarily as a
result of the increased beef prices in Europe. In fiscal 2005,
food, paper and product costs increased 2% to $122 million
in EMEA/ APAC, primarily as a result of a 1% increase in company
restaurant revenues.
In Latin America, food, paper and product costs increased 11% in
fiscal 2006, primarily as a result of a 14% increase in company
restaurant revenues. In fiscal 2005, food, paper and product
costs increased 7% to $18 million, primarily as a result of
an 8% increase in company restaurant revenues.
Payroll and employee benefits costs increased 7% to
$446 million in fiscal 2006. Payroll and employee benefits
costs decreased 0.1% to 29.4% of company restaurant revenues in
fiscal 2006 compared to 29.5% in fiscal 2005. Payroll and
employee benefits costs have continued to increase as a result
of increases in wages and other costs of labor, particularly
health insurance, as well as an increase in the number of
company restaurants. Partially offsetting these increased costs
was a reduction in the labor required to operate our
restaurants, due to our operational excellence programs and
operational efficiency programs implemented in Europe.
In fiscal 2005, payroll and employee benefits costs increased 9%
to $415 million, as a result of increased wages, health
insurance and training expenses, as well as the acquisition of
franchise restaurants in fiscal 2005. Payroll and employee
benefits costs decreased 0.4% to 29.5% of company restaurant
revenues in fiscal 2005 as higher costs of wages and health
insurance benefits were more than offset by increasing
restaurant sales and efficiency gains from our operational
excellence programs to reduce the labor required to operate our
restaurants.
In the United States and Canada, payroll and employee benefits
costs increased 13% to $312 million in fiscal 2006,
primarily as a result of the acquisition of 40 franchise
restaurants (net of refranchisings) and increased wages and
health insurance benefit costs. Payroll and employee benefits
costs increased 0.3% to 30.2% of company restaurant revenues. In
fiscal 2005, payroll and employee benefits costs increased 12%
to $276 million, primarily as a result of the acquisition
of franchise restaurants and increased wages and health
insurance benefit costs. Payroll and employee benefits costs
were 29.9% of company restaurant revenues, compared to 30.8% in
fiscal 2004, primarily as a result of leveraging payroll costs
from increased sales and efficiency gains resulting from our
operational improvement initiatives.
In EMEA/ APAC, payroll and employee benefits costs decreased 5%
to $127 million in fiscal 2006, primarily as a result of
favorable foreign currency exchange rates. Payroll and employee
benefits costs decreased 1.1% to 29.7% of company restaurant
revenues in EMEA/ APAC. In fiscal 2005, payroll and employee
benefits costs increased 3% to $134 million, primarily as a
result of new company restaurants in Germany and increased wages
and benefits costs. Payroll and employee benefits costs were
30.8% of company restaurant revenues in EMEA/ APAC, compared to
30.3% in fiscal 2004.
In Latin America, where labor costs are lower than in the United
States and Canada and EMEA/ APAC segments, payroll and employee
benefits costs increased 17% to $7 million in fiscal 2006,
primarily as a result of nine new company restaurant openings
since June 30, 2005. Payroll and employee benefits costs
increased 0.9% to 12.5% of company restaurant revenues in Latin
America. In fiscal 2005, payroll and employee benefits costs
increased 12% to $6 million,
56
primarily as a result of new company restaurants. Payroll and
employee benefits costs were 11.4% of company restaurant
revenues in Latin America in fiscal 2005, compared to 11.0% in
fiscal 2004.
Occupancy and other operating costs increased 11% to
$380 million in fiscal 2006. Occupancy and other operating
costs were 25.1% of company restaurant revenues in fiscal 2006
compared to 24.4% in fiscal 2005. These increases are primarily
attributable to the acquisition of franchise restaurants and
increased utility costs.
Occupancy and other operating costs increased 9% to
$343 million in fiscal 2005, primarily as a result of the
acquisition of franchise restaurants and increases in costs such
as rents and utilities. Occupancy and other operating costs were
24.4% of company restaurant revenues in fiscal 2005 compared to
24.6% in fiscal 2004, primarily because of sales growth.
In the United States and Canada, occupancy and other operating
costs increased to 24.1% of company restaurant revenues in
fiscal 2006 compared to 23.6% in fiscal 2005, primarily as a
result of increased utility and restaurant supply costs. In
fiscal 2005, occupancy and other operating costs were 23.6% of
company restaurant revenues compared to 26.1% in fiscal 2004,
primarily as a result of leveraging base rents from increased
sales.
In EMEA/APAC, occupancy and other operating costs increased to
27.3% of company restaurant revenues in fiscal 2006 compared to
26.1% in fiscal 2005, as a result of decreased restaurant sales,
increased utilities in the segment and increased rents in the
United Kingdom, partially offset by the closure of certain
restaurants with higher than average restaurant rents. In fiscal
2005, occupancy and other operating costs were 26.1% of company
restaurant revenues compared to 22.9% in fiscal 2004, primarily
as a result of increased rents and utilities in the United
Kingdom and adjustments we recorded in fiscal 2004 when we
finalized our purchase accounting allocations.
In Latin America, occupancy and other operating costs increased
to 25% of company restaurant revenues in fiscal 2006 from 21.6%
in fiscal 2005, primarily as a result of a decrease in
comparable sales and increased utility costs. In fiscal 2005,
occupancy and other operating costs were 21.6% of company
restaurant revenues compared to 13.7% in fiscal 2004, primarily
as a result of increased utility costs and adjustments we
recorded in fiscal 2004 when we finalized our purchase
accounting allocations.
Worldwide selling, general and administrative
expenses
Selling, general and administrative expenses increased by
$1 million to $488 million during fiscal 2006. General
and administrative expenses increased $17 million to
$416 million, while selling expenses decreased
$16 million to $72 million.
Our fiscal 2006 general and administrative expenses included
$34 million of compensation expense and taxes related to
the compensatory make-whole payment, $10 million in
expenses associated with the realignment of our European and
Asian businesses and $5 million of executive severance
expense. Additionally, our acquisition of 44 franchise
restaurants (net of refranchisings) resulted in increased
general and administrative expenses related to the management of
our company restaurants. Partially offsetting these increased
expenses was a $19 million reduction in general and
administrative expenses related to franchise system distress and
our global reorganization costs in fiscal 2006.
The $16 million decrease in selling expenses in fiscal 2006
is primarily attributable to a $14 million decrease in
incremental advertising expense compared to fiscal 2005
resulting from
57
franchisee non-payment of advertising contributions. Partially
offsetting this reduction were incremental advertising expenses
for company restaurants opened or acquired in fiscal 2006.
In fiscal 2005, selling, general and administrative expenses
increased $13 million to $487 million. General and
administrative costs increased 10% to $399 million, while
selling expenses decreased 21% to $88 million.
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 expenses 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 and 35% in fiscal 2004. Our
property expenses in EMEA/ APAC approximate our property
revenues because most of the EMEA/APAC property operations
consist of properties that are subleased to franchisees on a
pass-through basis.
Fees paid to affiliates
Fees paid to affiliates increased to $39 million in fiscal
2006, compared to $9 million and $8 million in fiscal
2005 and fiscal 2004, respectively, as a result of the
$30 million management agreement termination fee paid to
the sponsors.
58
Worldwide other operating (income) expenses, net
Other operating income, net, comprised primarily of gains on
property disposals and other miscellaneous items, was
$2 million in fiscal 2006 compared to other operating
expenses, net, of $34 million and $54 million in
fiscal 2005 and fiscal 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the fiscal year | |
|
|
ended June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
| |
|
|
(In millions) | |
Losses (gains) on closures, asset
disposals, and refranchisings, net
|
|
$ |
15 |
|
|
$ |
13 |
|
|
$ |
(3 |
) |
Impairment of long-lived assets
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Impairment (recovery) of
investments in franchisee debt
|
|
|
19 |
|
|
|
4 |
|
|
|
(2 |
) |
Impairment of investments in
unconsolidated investments
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Litigation settlements and reserves
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
Other, net
|
|
|
12 |
|
|
|
11 |
|
|
|
3 |
|
|
|
|
Total other operating (income)
expenses, net
|
|
$ |
54 |
|
|
$ |
34 |
|
|
$ |
(2 |
) |
|
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 and $2 million
each of losses from transactions denominated in foreign
currencies, property valuation reserves, and re-branding costs
related to our operations in Asia.
Operating income
Operating income increased by $19 million to
$170 million in fiscal 2006, primarily as a result of
improved restaurant sales and the improved financial health of
our franchise system, partially offset by the effect of the
compensatory make-whole payment and the management agreement
termination fee. See Note 20 to our audited consolidated
financial statements contained in this report for segment
information disclosed in accordance with Statement of Financial
Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information
(SFAS No. 131). In fiscal 2005, our operating
income increased by $78 million to $151 million,
primarily as a result of increased revenues and the improved
financial health of our franchise system.
59
In the United States and Canada, operating income increased by
$40 million to $295 million in fiscal 2006, primarily
as a result of increased sales and reductions in the negative
effect of franchise system distress, which decreased by
$33 million. The decrease in the negative effect of
franchise system distress was comprised primarily of a
$14 million reduction in incremental advertising
contributions and a $12 million reduction in costs of FFRP
administration, both of which resulted from the improved
financial health of our franchise system. In fiscal 2005,
operating income increased by $140 million to
$255 million, primarily as a result of increased revenues
and a reduction in the negative effect of franchise system
distress, which decreased by $72 million. This decrease was
comprised primarily of a $25 million increase in franchise
and property revenue recognition, a $26 million reduction
in incremental advertising contributions and a $15 million
reduction in reserves on acquired debt, all of which resulted
from the improved financial health of our franchise system.
Operating income in EMEA/ APAC increased by $26 million to
$62 million in fiscal 2006, as a result of a
$6 million reduction in losses on property disposals, a
$16 million decrease in selling, general and administrative
expenses, primarily attributable to the effects of our global
reorganization and a $5 million increase in franchise
revenues, partially offset by a $7 million decrease in
margins from company restaurants driven primarily by results in
the United Kingdom, due to decreased sales, increased beef
prices and occupancy costs, including rents and utilities. In
fiscal 2005, operating income decreased by $59 million to
$36 million, as a result of a number of factors, including:
(i) a $16 million decrease in margins from company
restaurants, as a result of higher operating costs, (ii) a
$12 million increase in selling, general and administrative
expenses to support growth, (iii) a $6 million
increase in expenses related to our global reorganization,
(iv) $9 million of lease termination and exit costs,
including $8 million in the United Kingdom, and
(v) $2 million of litigation settlement costs in Asia.
Operating income in Latin America increased by $4 million
to $29 million in fiscal 2006, primarily as a result of
increased revenues. In fiscal 2005, operating income decreased
by $1 million to $25 million, primarily as a result of
higher company restaurant expenses.
Our unallocated corporate expenses increased $51 million to
$216 million in fiscal 2006, primarily as a result of
(i) the $34 million of compensation expense recorded
in connection with the compensatory make-whole payment and
related taxes, (ii) the management termination fee of
$30 million paid to the sponsors, and
(iii) $5 million of executive severance, partially
offset by a $7 million decrease in global reorganization
costs. In fiscal 2005, our unallocated corporate expenses
increased 1% to $165 million.
Interest expense, net
Interest expense, net decreased 1% to $72 million in fiscal
2006. Interest expense decreased 1% to $81 million in
fiscal 2006, as a result of our debt repayments and lower
interest rates attributable to our July 2005 and February 2006
financings. Interest income was approximately $9 million in
fiscal 2006 and fiscal 2005, as increased interest rates offset
a reduction in cash invested. In fiscal 2005, interest expense,
net increased 14% to $73 million due to higher interest
rates related to term debt and debt payable on our
payment-in-kind, or PIK
notes to Diageo plc and the private equity funds controlled by
the sponsors incurred in connection with our acquisition of BKC.
Interest income was $9 million in fiscal 2005, an increase
of $5 million from fiscal 2004, primarily as a result of an
increase in cash and cash equivalents due to improved cash
provided by operating activities and increased interest rates on
investments.
60
Loss on early extinguishment of debt
In connection with the refinancing of our secured debt in July
2005, the incremental $350 million borrowing in February
2006, and the prepayment of $350 million in term debt from
the proceeds of our initial public offering, $18 million of
deferred financing fees were recorded as a loss on early
extinguishment of debt.
Income tax expense
Income tax expense increased $22 million to
$53 million in fiscal 2006, primarily due to a 26% increase
in our effective tax rate to 66%. The higher effective tax rate
is primarily attributable to accruals for tax uncertainties of
$15 million and changes in the estimate of tax provisions
of $7 million which resulted in a higher effective tax rate
for fiscal 2006.
In fiscal 2005, income tax expense increased $27 million to
$31 million, primarily due to the $69 million increase
in income before income taxes in fiscal 2005. Our effective tax
rate declined by 4.7% to 39.7% which partially offset the effect
of the increase in income before income taxes. The majority of
the change in our effective tax rate is attributable to
adjustments to our valuation allowances related to deferred tax
assets in foreign countries and certain state income taxes in
fiscal 2005. See Note 13 to our audited consolidated
financial statements for further information regarding our
effective tax rate and valuation allowances.
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.
Fiscal year ended June 30, 2005 compared to fiscal year
ended June 30, 2004
Revenues
Company restaurant revenues
Company restaurant revenues increased 10% to $1,407 million
in fiscal 2005 as a result of strong comparable sales in the
United States and Canada and Latin America, where approximately
76% of our company restaurants are located.
In the United States and Canada, company restaurant revenues
increased 15% to $923 million, primarily as a result of
strong comparable sales generated from the implementation of
strategic initiatives related to our menu, advertising and
operational excellence programs, as well as the acquisition of
99 franchise restaurants.
61
In EMEA/APAC and Latin America, company restaurant revenues
increased 1% and 8%, respectively, to $435 million and
$49 million, respectively, primarily as a result of new
restaurant openings and positive comparable sales.
Franchise revenues
Franchise revenues increased 14% to $413 million in fiscal
2005 as a result of improved sales at franchise restaurants in
all segments.
Franchise revenues increased 15% to $269 million in the
United States and Canada in fiscal 2005, 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 the United States and Canada, 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.
In EMEA/APAC, our franchisees opened 165 new franchise
restaurants in fiscal 2005, contributing to a 3% net increase in
the number of EMEA/APAC franchise restaurants from fiscal 2004.
This increase in franchise restaurants and positive comparable
sales in EMEA/APAC resulted in a 13% increase in franchise
revenues to $114 million. In Latin America, franchise
revenues increased 17% to $30 million, primarily as a
result of 65 new franchise restaurants and positive comparable
sales.
Property revenues
Property revenues increased 3% to $120 million in fiscal
2005. On a segment basis, property revenues increased 1% and 5%,
respectively, in the United States and Canada and EMEA/APAC to
$83 million and $37 million, respectively. Our 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.
Operating costs and expenses
Company restaurant expenses
Food, paper and product costs increased 12% to $437 million
in fiscal 2005, primarily as a result of a 10% increase in
company restaurant revenues. Food, paper and product costs
increased 0.5% to 31.1% of company restaurant revenues in fiscal
2005, primarily as a result of increases in the price of beef in
the United States.
On a segment basis, food, paper and product costs increased 16%
to $297 million in the United States and Canada, primarily
as a result of a 15% increase in company restaurant revenues.
Food, paper and product costs increased 0.3% to 32.1% of company
restaurant revenues in the United States and Canada, primarily
as a result of increases in the price of beef. Food, paper and
product costs increased 2% to $122 million in EMEA/APAC and
7% to $18 million in Latin America, primarily as a result
of increased company restaurant revenues in EMEA/APAC and Latin
America of 1% and 8%, respectively.
Payroll and employee benefits costs increased 9% to
$415 million in fiscal 2005 as a result of increased wages,
health insurance and training expenses, as well as the
acquisition of franchise
62
restaurants in fiscal 2005. Payroll and employee benefits costs
decreased 0.4% to 29.5% of company restaurant revenues in fiscal
2005 as higher costs of wages and health insurance benefits were
more than offset by increasing restaurant sales and efficiency
gains from our operational excellence programs to reduce the
labor required to operate our restaurants.
On a segment basis, payroll and employee benefits costs
increased 12% to $276 million in the United States and
Canada in fiscal 2005, primarily as a result of the acquisition
of franchise restaurants and increased wages and health
insurance benefit costs. Payroll and employee benefits costs
were 29.9% of company restaurant revenues in the United States
and Canada in fiscal 2005, compared to 30.8% in fiscal 2004,
primarily as a result of leveraging payroll costs from increased
sales and efficiency gains resulting from our operational
improvement initiatives.
In EMEA/ APAC, payroll and employee benefits costs increased 3%
to $134 million in fiscal 2005, primarily as a result of
new company restaurants in Germany and increased wages and
benefits costs. Payroll and employee benefits costs were 30.8%
of company restaurant revenues in EMEA/ APAC in fiscal 2005,
compared to 30.3% in fiscal 2004.
In Latin America, payroll and employee benefits costs increased
12% to $6 million, primarily as a result of new company
restaurants. Payroll and employee benefits costs were 11.4% of
company restaurant revenues in Latin America in fiscal 2005,
compared to 11.0% in fiscal 2004.
The net reduction to occupancy and other operating costs
resulting from the amortization of unfavorable and favorable
leases was $20 million in fiscal 2005, compared to
$37 million in fiscal 2004. Excluding this net reduction
and depreciation adjustments of $14 million recorded in
fiscal 2004 when we finalized our purchase accounting
allocations, occupancy and other operating costs increased 8% to
$363 million in fiscal 2005. This increase resulted
primarily from the acquisition of franchise restaurants and
increases in certain other operating costs, such as rents and
utilities. Excluding this net reduction and the other
adjustments, occupancy and other operating costs decreased as a
percentage of company restaurant revenues to 25.8% in fiscal
2005 from 26.4% in fiscal 2004.
On a segment basis, occupancy and other operating costs,
excluding the favorable and unfavorable lease amortization and
the fiscal 2004 depreciation adjustments discussed above, were
24.5% of company restaurant revenues in the United States and
Canada in fiscal 2005 compared to 26.5% in fiscal 2004,
primarily as a result of leveraging base rents from increased
sales.
In EMEA/ APAC, occupancy and other operating costs, excluding
the favorable and unfavorable lease amortization and the fiscal
2004 depreciation adjustments discussed above, were 28.6% of
company restaurant revenues in fiscal 2005 compared to 26.9% in
fiscal 2004, primarily as a result of increased rents and
utilities in the United Kingdom.
Occupancy and other operating costs, excluding the favorable and
unfavorable lease amortization and fiscal 2004 depreciation
adjustments discussed above, were 23.4% of company restaurant
revenues in Latin America in fiscal 2005 compared to 20.1% in
fiscal 2004, primarily as a result of increased utility costs.
Worldwide selling, general and administrative
expenses
Selling, general and administrative expenses increased 3% to
$487 million in fiscal 2005. General and administrative
costs increased 10% to $399 million in fiscal 2005, while
our selling expenses decreased 21% to $88 million in fiscal
2005.
63
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. Management fee expense paid to the sponsors totaled
$9 million and $8 million in fiscal 2005 and fiscal
2004, respectively.
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
The net reduction to property expenses resulting from the
amortization of unfavorable and favorable leases was
$9 million in fiscal 2005, compared to $14 million in
fiscal 2004. Excluding the amortization of unfavorable and
favorable leases and other adjustments recorded when we
finalized our purchase accounting allocations in fiscal 2004,
property expenses increased 6% to $73 million in fiscal
2005. Excluding the amortization of unfavorable and favorable
leases and the other adjustments discussed above, property
expenses decreased to 60.8% of property revenues in fiscal 2005
from 61.4% in fiscal 2004. Also excluding the amortization of
unfavorable and favorable leases and the other adjustments
discussed above, property expenses were 42.5% of property
revenues in the United States and Canada in fiscal 2005 compared
to 45.2% in fiscal 2004. This improvement is primarily
attributable to the non-recognition of $5 million in
property revenues in fiscal 2004.
Worldwide other operating expenses
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the | |
|
|
fiscal year | |
|
|
ended | |
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
| |
|
|
(In millions) | |
Losses on closures, asset disposals
and refranchisings, net
|
|
$ |
15 |
|
|
$ |
13 |
|
Impairment of long-lived assets
|
|
|
|
|
|
|
4 |
|
Impairment of investments in
franchisee debt
|
|
|
19 |
|
|
|
4 |
|
Impairment of investments in
unconsolidated investments
|
|
|
4 |
|
|
|
|
|
Litigation settlements and reserves
|
|
|
4 |
|
|
|
2 |
|
Other, net
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
Total other operating expenses
|
|
$ |
54 |
|
|
$ |
34 |
|
|
64
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.
All of the fiscal 2005 and $12 million of the fiscal 2004
impairment of investments in franchisee debt related to 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. 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 $5 million of costs associated with the
FFRP program in fiscal 2005 in the United States and Canada. In
fiscal 2004, other, net included $3 million of losses from
unconsolidated investments in EMEA/APAC and $2 million each
of losses from transactions denominated in foreign currencies,
property valuation reserves, and re-branding costs related to
our operations in Asia.
Operating income
In fiscal 2005, our operating income increased by
$78 million to $151 million, primarily as a result of
increased revenues and the improved financial health of our
franchise system.
Operating income in the United States and Canada increased by
$140 million to $255 million in fiscal 2005, primarily
as a result of increased revenues and a reduction in the
negative effect of franchise system distress, which decreased by
$72 million in fiscal 2005 in the United States and Canada.
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.
EMEA/ APAC operating income decreased by $59 million to
$36 million in fiscal 2005, as a result of a number of
factors, including: (i) a $16 million decrease in
margins from company restaurants, as a result of higher
operating costs, (ii) a $12 million increase in
selling, general and administrative expenses to support growth,
(iii) a $6 million increase in expenses related to our
global reorganization, (iv) $9 million of lease
termination and exit costs, including $8 million in the
United Kingdom, and (v) $2 million of litigation
settlement costs in Asia.
Operating income in Latin America decreased by $1 million
to $25 million in fiscal 2005, primarily as a result of
higher company restaurant expenses. Our unallocated corporate
expenses increased 1% to $165 million in fiscal 2005.
Interest expense, net
Interest expense, net increased 14% to $73 million in
fiscal 2005 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,
65
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.
Income tax expense
Income tax expense increased $27 million to
$31 million in fiscal 2005 primarily due to the
$69 million increase in income before income taxes in
fiscal 2005. Our effective tax rate declined by 4.7% for fiscal
2005 to 39.7%, partially offsetting the effect of the increase
in income before income taxes. The majority of the change in our
effective tax rate is attributable to adjustments to our
valuation allowances related to deferred tax assets in foreign
countries and certain state income taxes in fiscal 2005. See
Note 12 to our audited consolidated financial statements
for further information regarding our effective tax rate and
valuation allowances.
Net income
In fiscal 2005, our net income increased by $42 million to
$47 million. This improvement resulted primarily from
increased revenues as described above, 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.
66
Quarterly financial data
The following table presents unaudited consolidated income
statement data for each of the ten fiscal quarters in the period
ended December 31, 2006. The operating results for any
quarter are not necessarily indicative of the results for any
future period. These quarterly results were prepared in
accordance with generally accepted accounting principles and
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the quarters ended | |
|
|
| |
|
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
2006 | |
| |
|
|
(In millions) | |
|
|
Company restaurant revenues
|
|
$ |
350 |
|
|
$ |
354 |
|
|
$ |
339 |
|
|
$ |
364 |
|
|
$ |
375 |
|
|
$ |
379 |
|
|
$ |
368 |
|
|
$ |
394 |
|
|
$ |
405 |
|
|
$ |
417 |
|
Franchise revenues
|
|
|
102 |
|
|
|
104 |
|
|
|
100 |
|
|
|
107 |
|
|
|
105 |
|
|
|
104 |
|
|
|
100 |
|
|
|
111 |
|
|
|
113 |
|
|
|
112 |
|
Property revenues
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
32 |
|
|
|
28 |
|
|
|
29 |
|
|
|
27 |
|
|
|
28 |
|
|
|
28 |
|
|
|
30 |
|
|
|
|
|
Total revenues
|
|
|
481 |
|
|
|
488 |
|
|
|
468 |
|
|
|
503 |
|
|
|
508 |
|
|
|
512 |
|
|
|
495 |
|
|
|
533 |
|
|
|
546 |
|
|
|
559 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
108 |
|
|
|
110 |
|
|
|
104 |
|
|
|
115 |
|
|
|
118 |
|
|
|
119 |
|
|
|
114 |
|
|
|
119 |
|
|
|
122 |
|
|
|
125 |
|
|
Payroll and employee benefits
|
|
|
103 |
|
|
|
101 |
|
|
|
104 |
|
|
|
107 |
|
|
|
110 |
|
|
|
109 |
|
|
|
111 |
|
|
|
116 |
|
|
|
119 |
|
|
|
123 |
|
|
Occupancy and other operating costs
|
|
|
87 |
|
|
|
81 |
|
|
|
88 |
|
|
|
87 |
|
|
|
91 |
|
|
|
93 |
|
|
|
96 |
|
|
|
100 |
|
|
|
102 |
|
|
|
103 |
|
|
|
|
|
Total company restaurant expenses
|
|
|
298 |
|
|
|
292 |
|
|
|
296 |
|
|
|
309 |
|
|
|
319 |
|
|
|
321 |
|
|
|
321 |
|
|
|
335 |
|
|
|
343 |
|
|
|
351 |
|
Selling, general and administrative
expenses
|
|
|
109 |
|
|
|
123 |
|
|
|
124 |
|
|
|
131 |
|
|
|
101 |
|
|
|
106 |
|
|
|
146 |
|
|
|
135 |
|
|
|
112 |
|
|
|
119 |
|
Property expenses
|
|
|
14 |
|
|
|
15 |
|
|
|
14 |
|
|
|
21 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
15 |
|
|
|
16 |
|
|
|
15 |
|
Fees paid to affiliates
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
Other operating expenses (income),
net
|
|
|
1 |
|
|
|
2 |
|
|
|
15 |
|
|
|
16 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
3 |
|
|
|
(7 |
) |
|
|
(1 |
) |
|
|
|
|
Total operating costs and expenses
|
|
|
425 |
|
|
|
434 |
|
|
|
451 |
|
|
|
479 |
|
|
|
436 |
|
|
|
442 |
|
|
|
481 |
|
|
|
519 |
|
|
|
464 |
|
|
|
484 |
|
Income from operations
|
|
|
56 |
|
|
|
54 |
|
|
|
17 |
|
|
|
24 |
|
|
|
72 |
|
|
|
70 |
|
|
|
14 |
|
|
|
14 |
|
|
|
82 |
|
|
|
75 |
|
|
|
|
Interest expense, net
|
|
|
16 |
|
|
|
18 |
|
|
|
19 |
|
|
|
20 |
|
|
|
17 |
|
|
|
17 |
|
|
|
19 |
|
|
|
19 |
|
|
|
17 |
|
|
|
17 |
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
1 |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
40 |
|
|
|
36 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
42 |
|
|
|
53 |
|
|
|
(6 |
) |
|
|
(9 |
) |
|
|
64 |
|
|
|
58 |
|
Income tax expense
|
|
|
19 |
|
|
|
13 |
|
|
|
(3 |
) |
|
|
2 |
|
|
|
20 |
|
|
|
26 |
|
|
|
6 |
|
|
|
1 |
|
|
|
24 |
|
|
|
20 |
|
|
|
|
Net (loss) income
|
|
$ |
21 |
|
|
$ |
23 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
22 |
|
|
$ |
27 |
|
|
$ |
(12 |
) |
|
$ |
(10 |
) |
|
$ |
40 |
|
|
$ |
38 |
|
|
|
|
|
Earnings per common share
Diluted
|
|
$ |
0.20 |
|
|
$ |
0.21 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.20 |
|
|
$ |
0.24 |
|
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.30 |
|
|
$ |
0.28 |
|
Segment Data Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
72 |
|
|
$ |
65 |
|
|
$ |
55 |
|
|
$ |
63 |
|
|
$ |
78 |
|
|
$ |
74 |
|
|
$ |
67 |
|
|
$ |
76 |
|
|
$ |
87 |
|
|
$ |
84 |
|
EMEA/ APAC
|
|
|
17 |
|
|
|
19 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
21 |
|
|
|
21 |
|
|
|
9 |
|
|
|
11 |
|
|
|
20 |
|
|
|
13 |
|
Latin America
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
|
|
7 |
|
|
|
8 |
|
|
|
10 |
|
Unallocated
|
|
|
(39 |
) |
|
|
(37 |
) |
|
|
(43 |
) |
|
|
(46 |
) |
|
|
(34 |
) |
|
|
(33 |
) |
|
|
(69 |
) |
|
|
(80 |
) |
|
|
(33 |
) |
|
|
(32 |
) |
|
|
|
|
Total Operating Income
|
|
$ |
56 |
|
|
$ |
54 |
|
|
$ |
17 |
|
|
$ |
24 |
|
|
$ |
72 |
|
|
$ |
70 |
|
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
82 |
|
|
$ |
75 |
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the quarters ended | |
|
|
| |
|
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
2006 | |
| |
|
|
(In millions) | |
|
|
Company Restaurant
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
229 |
|
|
$ |
229 |
|
|
$ |
220 |
|
|
$ |
245 |
|
|
$ |
253 |
|
|
$ |
254 |
|
|
$ |
254 |
|
|
$ |
271 |
|
|
$ |
271 |
|
|
$ |
270 |
|
EMEA/ APAC
|
|
|
109 |
|
|
|
113 |
|
|
|
107 |
|
|
|
106 |
|
|
|
109 |
|
|
|
110 |
|
|
|
100 |
|
|
|
109 |
|
|
|
119 |
|
|
|
131 |
|
Latin America
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
|
|
15 |
|
|
|
16 |
|
|
|
|
|
Total Company Restaurant Revenues
|
|
$ |
350 |
|
|
$ |
354 |
|
|
$ |
339 |
|
|
$ |
364 |
|
|
$ |
375 |
|
|
$ |
379 |
|
|
$ |
368 |
|
|
$ |
394 |
|
|
$ |
405 |
|
|
$ |
417 |
|
|
|
|
Company Restaurant
Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
13.2% |
|
|
|
16.5% |
|
|
|
11.9% |
|
|
|
15.6% |
|
|
|
14.2% |
|
|
|
14.1% |
|
|
|
12.6% |
|
|
|
15.5% |
|
|
|
14.8% |
|
|
|
15.3% |
|
EMEA/ APAC
|
|
|
16.3% |
|
|
|
17.5% |
|
|
|
13.0% |
|
|
|
13.0% |
|
|
|
15.3% |
|
|
|
15.9% |
|
|
|
11.5% |
|
|
|
12.6% |
|
|
|
15.2% |
|
|
|
15.7% |
|
Latin America
|
|
|
30.9% |
|
|
|
30.6% |
|
|
|
30.1% |
|
|
|
27.7% |
|
|
|
24.4% |
|
|
|
28.8% |
|
|
|
27.3% |
|
|
|
25.5% |
|
|
|
25.3% |
|
|
|
28.8% |
|
Company Restaurant Margin(1)
|
|
|
14.7% |
|
|
|
17.3% |
|
|
|
12.9% |
|
|
|
15.2% |
|
|
|
14.9% |
|
|
|
15.2% |
|
|
|
12.9% |
|
|
|
15.0% |
|
|
|
15.3% |
|
|
|
15.9% |
|
Franchise Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
67 |
|
|
$ |
67 |
|
|
$ |
66 |
|
|
$ |
70 |
|
|
$ |
67 |
|
|
$ |
66 |
|
|
$ |
65 |
|
|
$ |
70 |
|
|
$ |
70 |
|
|
$ |
70 |
|
EMEA/ APAC
|
|
|
28 |
|
|
|
29 |
|
|
|
27 |
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
27 |
|
|
|
32 |
|
|
|
33 |
|
|
|
32 |
|
Latin America
|
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
|
|
8 |
|
|
|
8 |
|
|
|
9 |
|
|
|
8 |
|
|
|
9 |
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
Total Franchise Revenues
|
|
$ |
102 |
|
|
$ |
104 |
|
|
$ |
100 |
|
|
$ |
107 |
|
|
$ |
105 |
|
|
$ |
104 |
|
|
$ |
100 |
|
|
$ |
111 |
|
|
$ |
113 |
|
|
$ |
112 |
|
|
|
|
Franchise Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
1,961 |
|
|
$ |
1,877 |
|
|
$ |
1,761 |
|
|
$ |
1,956 |
|
|
$ |
1,923 |
|
|
$ |
1,850 |
|
|
$ |
1,795 |
|
|
$ |
1,914 |
|
|
$ |
1,947 |
|
|
$ |
1,914 |
|
EMEA/ APAC
|
|
|
662 |
|
|
|
667 |
|
|
|
640 |
|
|
|
671 |
|
|
|
708 |
|
|
|
680 |
|
|
|
632 |
|
|
|
695 |
|
|
|
773 |
|
|
|
757 |
|
Latin America
|
|
|
147 |
|
|
|
159 |
|
|
|
153 |
|
|
|
163 |
|
|
|
168 |
|
|
|
179 |
|
|
|
172 |
|
|
|
187 |
|
|
|
194 |
|
|
|
205 |
|
|
|
|
|
Total Franchise Sales(2)
|
|
$ |
2,770 |
|
|
$ |
2,703 |
|
|
$ |
2,554 |
|
|
$ |
2,790 |
|
|
$ |
2,799 |
|
|
$ |
2,709 |
|
|
$ |
2,599 |
|
|
$ |
2,796 |
|
|
$ |
2,914 |
|
|
$ |
2,876 |
|
|
|
|
(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. |
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 44 franchise
restaurants in fiscal 2006, which resulted in increased revenues
and operating expenses in fiscal 2006 compared to fiscal 2005.
68
Our quarterly results also fluctuate due to the timing of
expenses and charges associated with franchisee distress, our
global reorganization, gains and losses on asset and business
disposals, impairment charges, and settlement losses recorded in
connection with acquisitions of franchise restaurants. Unusual
charges incurred during each quarter for fiscal 2005 and fiscal
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the quarters ended | |
|
|
| |
|
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
| |
|
|
(In millions) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(a)
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Selling, general and
administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(b)
|
|
|
8 |
|
|
|
9 |
|
|
|
9 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Global reorganization and
realignment
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
|
|
7 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
7 |
|
|
Compensatory make-whole payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
Executive severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Total effect on
SG&A
|
|
|
11 |
|
|
|
12 |
|
|
|
13 |
|
|
|
9 |
|
|
|
1 |
|
|
|
1 |
|
|
|
36 |
|
|
|
11 |
|
Fees paid to
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
Management agreement termination fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
Total fees paid to
affiliates
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
31 |
|
Other operating (income)
expenses, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(c)
|
|
|
1 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
Loss on asset disposals and asset
impairment
|
|
|
|
|
|
|
(4 |
) |
|
|
13 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on other (income)
expense, net
|
|
|
1 |
|
|
|
(4 |
) |
|
|
20 |
|
|
|
9 |
|
|
|
|
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
Total effect on income from
operations
|
|
|
16 |
|
|
|
10 |
|
|
|
34 |
|
|
|
17 |
|
|
|
4 |
|
|
|
5 |
|
|
|
36 |
|
|
|
43 |
|
|
|
|
Interest on $350 million
loan paid-off at IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
Total effect on income before
income taxes
|
|
$ |
16 |
|
|
$ |
10 |
|
|
$ |
34 |
|
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
5 |
|
|
$ |
40 |
|
|
$ |
50 |
|
|
|
|
(a) |
Represents revenues not recognized and (recoveries) of
revenues previously not recognized. |
|
(b) |
Represents bad debt expense (recoveries), incremental
advertising contributions and the internal and external costs of
FFRP program administration. |
|
|
(c) |
Represents (recoveries) reserves on acquired debt, net and
other items included within operating (income) expenses, net. |
69
Comparable sales growth for each of the quarters in the fiscal
years ended June 30, 2005 and 2006 and the six months ended
December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the quarters ended | |
|
|
| |
|
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sept 30, | |
|
Dec 31, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
2006 | |
| |
|
|
(In constant currencies) | |
|
|
Comparable Sales
Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
7.7% |
|
|
|
9.1% |
|
|
|
8.8% |
|
|
|
1.2% |
|
|
|
1.1 |
% |
|
|
2.3% |
|
|
|
4.9 |
% |
|
|
2.0% |
|
|
|
2.6% |
|
|
|
4.4% |
|
|
EMEA/ APAC
|
|
|
4.1% |
|
|
|
1.7% |
|
|
|
2.8% |
|
|
|
2.5% |
|
|
|
(0.7 |
)% |
|
|
1.3% |
|
|
|
(0.4 |
)% |
|
|
0.2% |
|
|
|
1.1% |
|
|
|
1.7% |
|
|
Latin America
|
|
|
6.4% |
|
|
|
8.2% |
|
|
|
5.6% |
|
|
|
2.2% |
|
|
|
1.5 |
% |
|
|
1.6% |
|
|
|
1.5 |
% |
|
|
5.0% |
|
|
|
6.1% |
|
|
|
4.1% |
|
|
|
Total System-Wide
|
|
|
6.8% |
|
|
|
7.2% |
|
|
|
7.1% |
|
|
|
1.6% |
|
|
|
0.7 |
% |
|
|
2.0% |
|
|
|
3.3 |
% |
|
|
1.7% |
|
|
|
2.4% |
|
|
|
3.7% |
|
|
Liquidity and capital resources
Overview
During the six months ended December 31, 2006 cash used in
operations was $2 million and was primarily impacted by
$114 million tax payment in September 2006 primarily due to
the realignment of our European and Asian businesses.
Our cash flow from operations was $74 million in fiscal
2006 and was adversely affected by our payment of the
compensatory make-whole payment of $33 million, the
management agreement termination fee of $30 million and the
interest payment of $103 million related to the PIK Notes.
See Certain Relationships and Related Transactions
for a description of these payments.
We had cash and cash equivalents of $135 million and
$259 million as of December 31, 2006 and June 30,
2006, respectively. In addition, as of December 31, 2006,
we had a borrowing capacity of $116 million under our
$150 million revolving credit facility (net of
$34 million in letters of credit issued under the revolving
credit facility).
In addition to our cash from operations, we have used liquidity
under our senior secured credit facility to meet our cash
requirements. Our senior secured credit facility, which we
amended and restated on February 15, 2006, consisted of a
$150 million revolving credit facility, a $250 million
term loan A and a $1.096 billion term loan B-1.
In connection with the February 2006 amendment, we borrowed
$350 million under term loan B-1 and used the
proceeds, along with $55 million of cash on hand, to pay
the February 2006 dividend, the compensatory make-whole payment
and financing costs and expenses. In May 2006, we utilized a
portion of the $392 million in net proceeds we received
from our initial public offering to prepay $350 million of
term debt. In the six months ended December 31, 2006, we
made an aggregate of $100 million in prepayments, reducing
our total outstanding debt balance under the senior secured
credit facility to $894 million as of December 31,
2006. On January 30, 2007, we made a prepayment of an
additional $25 million on the term debt under our senior
secured credit facility using cash generated from operations.
On January 30, 2007, we announced a quarterly cash dividend
of 6.25 cents per share, payable on March 15, 2007 to
holders of record of our common stock on February 15, 2007.
70
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, debt service payments, and
dividends, if any, in the short-term and for the foreseeable
future. If additional funds are needed for strategic initiatives
or other corporate purposes, we believe we could incur
additional debt or raise funds through the issuance of our
securities.
Comparative cash flows
Operating Activities. Cash used in operating activities
was $2 million during the six months ended
December 31, 2006 compared to cash generated by operating
activities of $2 million during the six months ended
December 31, 2005. The $2 million used during the six
months ended December 31, 2006 includes a usage of cash
from a change in working capital of $126 million, including
tax payments of $114 million which were due primarily as a
result of the operational realignment of our European and Asian
businesses. The $2 million generated during the six months
ended December 31, 2005 includes a payment of interest on
PIK notes of $103 million and a usage of cash from a change
in working capital of $50 million.
Investing Activities. Cash used in investing activities
was $27 million during the six months ended
December 31, 2006 compared to $29 million during the
six months ended December 31, 2005. The $2 million
decrease in the amount of cash used during the six months ended
December 31, 2006 compared to the same period of the prior
fiscal year, was due primarily to an increase in proceeds of
$5 million from asset disposals and restaurant closures,
offset by an increase in cash usage of $3 million due to
fixed asset additions, acquisitions of franchise operations and
investments in third party debt.
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 six | |
|
For the six | |
|
|
For the fiscal year | |
|
months ended | |
|
months ended | |
|
|
ended June 30, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2006 | |
| |
|
|
(In millions) | |
New restaurants
|
|
$ |
25 |
|
|
$ |
6 |
|
|
$ |
8 |
|
Maintenance capital
|
|
|
46 |
|
|
|
18 |
|
|
|
18 |
|
Other, including corporate
|
|
|
14 |
|
|
|
6 |
|
|
|
5 |
|
|
|
|
|
Total
|
|
$ |
85 |
|
|
$ |
30 |
|
|
$ |
31 |
|
|
Maintenance capital includes renovations to company restaurants,
including restaurants acquired from franchisees, investments in
new equipment and normal annual capital investments for each
company restaurant to maintain its appearance in accordance with
our standards, which typically range from $10,000 to
$15,000 per restaurant per year. Maintenance capital also
includes investments in improvements to properties we lease and
sublease to franchisees, including contributions we make towards
improvements completed by franchisees. Other capital
expenditures include investments in information technology
systems, as well as investments in technologies for deployment
in restaurants, such as
point-of-sale software.
71
We expect capital expenditures of approximately $80 million
to $100 million in fiscal 2007 for maintenance capital,
acquisitions, new restaurants and other corporate expenditures,
of which $31 million had been spent for the six months
ended December 31, 2006.
Financing Activities. Financing activities used cash of
$97 million during the six months ended December 31,
2006 and $198 million during the six months ended
December 31, 2005. Uses of cash in financing activities
during the six months ended December 31, 2006, primarily
included repayments of debt and capital leases of
$103 million and the purchase of treasury stock of
$1 million, offset by $4 million in tax benefits from
stock-based compensation, $2 million from proceeds of
stock-option exercises and $1 million from a foreign credit
facility. Uses of cash in financing activities during the six
months ended December 31, 2005, included the repayment of
$1.2 billion in term debt, revolver loans, PIK notes and
capital leases and related financing costs of $16 million,
offset by $1 billion of proceeds received from the
refinancing of our credit facility.
Realignment of our European and Asian businesses
During fiscal 2005, we realigned our business to operate as a
global brand by moving to common systems and platforms,
standardizing our marketing efforts, and introducing a uniform
product offering supplemented by offerings targeting local
consumer preferences. We also reorganized our international
management structure by instituting a regional structure for the
United States and Canada, EMEA/APAC and Latin America.
To further this initiative, we regionalized the activities
associated with managing our European and Asian businesses,
including the transfer of rights of existing franchise
agreements, the ability to grant future franchise agreements and
utilization of our intellectual property assets in new European
and Asian holding companies. Each of these new holding companies
is responsible in its region for (a) management,
development and expansion of the Burger King trade names
and trademarks, (b) management of existing and future
franchises and licenses for both franchise and company-owned
restaurants, and (c) collection and redeployment of funds.
Previously, all cash flows relating to intellectual property and
franchise rights in those regions returned to the United States
and then were subsequently transferred back to those regions to
fund their growing capital requirements. We believe this
realignment more closely aligns the intellectual property to the
respective regions, provides funding in the proper regions and
will lower our effective tax rate going forward.
The new holding companies acquired the intellectual property
rights from BKC, a U.S. company, in a transaction that
generated a taxable gain for BKC in the United States of
$328 million, resulting in a $126 million tax
liability in the fourth quarter of 2006 recorded in other
accrued liabilities in our consolidated balance sheet. This tax
liability was partially offset by $44 million through the
utilization of net operating loss carryforwards and other
foreign tax credits, resulting in a cash tax obligation of
$82 million, which we paid in the first quarter of fiscal
2007.
In accordance with the guidance provided by Accounting Research
Bulletin (ARB) 51, Consolidated Financial
Statements, the resulting tax amount of $126 million
was recorded as a prepaid tax asset and offset by the reversal
of a $105 million deferred tax liability, which we had
previously recorded associated with the transferred asset
resulting in a net prepaid asset of $21 million.
We incurred consulting, legal, information technology, finance
and relocation costs of approximately $10 million and
$3 million during fiscal 2006 and the first six months of
fiscal
72
2007, respectively, to implement this realignment. The
relocation costs were incurred in connection with the relocation
of certain key officers, finance, accounting and legal staff of
the EMEA/APAC businesses to locations within Europe and Asia.
Contractual obligations and commitments
The following table presents information relating to our
contractual obligations as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Payment due by period | |
|
|
| |
|
|
|
|
Less than | |
|
|
|
More than | |
Contractual obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
|
(In millions | |
Capital lease obligations
|
|
$ |
134 |
|
|
$ |
13 |
|
|
$ |
25 |
|
|
$ |
22 |
|
|
$ |
74 |
|
Operating lease obligations(1)
|
|
|
1,391 |
|
|
|
153 |
|
|
|
275 |
|
|
|
231 |
|
|
|
732 |
|
Long-term debt, including current
portion and interest(2)
|
|
|
1,354 |
|
|
|
64 |
|
|
|
164 |
|
|
|
273 |
|
|
|
853 |
|
Purchase commitments(3)
|
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,935 |
|
|
$ |
286 |
|
|
$ |
464 |
|
|
$ |
526 |
|
|
$ |
1,659 |
|
|
|
|
(1) |
Operating lease obligations include lease payments for company
restaurants and franchise restaurants that sublease the property
from us. Rental income from these franchisees was
$88 million and $91 million for fiscal 2006 and fiscal
2005, respectively. |
|
(2) |
We have estimated our interest payments based on
(i) projected LIBOR rates, (ii) the portion of our
debt we converted to fixed rates through interest rate swaps and
(iii) the amortization schedule of the debt. |
|
(3) |
Includes commitments to purchase advertising and other marketing
services from third parties in advance on behalf of the
Burger King system and obligations related to information
technology service agreements. |
As of December 31, 2006, there were no significant
differences in our outstanding contractual obligations except
for the reduction of $100 million accelerated principal
payment on our term debt under our senior secured credit
facility during the six months ended December 31, 2006. In
addition, on January 30, 2007, we made a prepayment of an
additional $25 million of term debt under our senior
secured credit facility.
As of June 30, 2006, we leased 1,090 properties to
franchisees and other third parties. As of June 30, 2006,
we also leased land, buildings, office space and warehousing
under operating leases, and leased or subleased land and
buildings that we own or lease, respectively, to franchisees
under operating leases. In addition to the minimum obligations
included in the table above, contingent rentals may be payable
under certain leases on the basis of a percentage of sales in
excess of stipulated amounts.
As of June 30, 2006, the projected benefit obligation of
our defined benefit pension plans exceeded pension assets by
$52 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 $2 million
into our pension plans and estimated benefit payments of
$4 million out of these plans during fiscal 2006. Estimates
of reasonably likely future pension contributions are dependent
on pension asset performance, future interest rates, future tax
law changes, and future changes in regulatory funding
requirements. 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
73
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.
We commit to purchase advertising and other marketing services
from third parties in advance on behalf of the Burger King
system in the United States and Canada. These commitments
are typically made in September of each year for the upcoming
twelve-month period. If our franchisees fail to pay required
advertising contributions we could be contractually committed to
fund any shortfall to the degree we are unable to cancel or
reschedule the timing of such committed amounts. We have similar
arrangements in other international markets where we operate
company restaurants. As of September 30, 2006, the time of
the year when our advertising commitments are typically highest
and as of December 31, 2006, our advertising commitments
totaled $112 million and $87 million, respectively.
Other commercial commitments and off-balance sheet
arrangements
Franchisee restructuring program
In connection with the FFRP program we have made commitments to
fund loans to certain franchisees for the purpose of remodeling
restaurants; remodel certain properties we lease or sublease to
franchisees; provide temporary rent reductions to certain
franchisees; and fund shortfalls in certain franchisee cash flow
beyond specified levels (to annual and aggregate maximums). As
of December 31, 2006, our remaining commitments under the
FFRP program totaled up to $30 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.
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 payable 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 $106 million as of
December 31, 2006, expiring over an average period of five
years.
Other commitments, arising out of normal business operations,
were $12 million as of December 31, 2006. These
commitments consist primarily of guarantees covering foreign
franchisees obligations, obligations to suppliers, and
acquisition-related guarantees.
Letters of credit
As of December 31, 2006, we had $34 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 December 31, 2006,
none of these irrevocable standby letters of credit had been
drawn upon.
74
As of December 31, 2006, we had posted bonds totaling
$2 million, which related to certain utility deposits.
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 December 31, 2006, we estimate that it will take
approximately 16 years to complete the Coca-Cola and Dr
Pepper purchase commitments. 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 operation 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
December 31, 2006, the deferred amounts totaled
$21 million. These deferred amounts are amortized as a
reduction to food, paper and product costs in the accompanying
consolidated statements of operations.
New global headquarters
In May 2005, we entered into an agreement to lease a building in
Coral Gables, Florida, to serve as our new global headquarters
beginning in fiscal 2009. The estimated annual rent for the
15 year initial term, which is expected to be approximately
$8 million per year, will be finalized upon the completion
of the buildings construction. Fixed annual rent will
escalate by 6% every other year commencing after the second year
and operating costs will escalate based upon the inflation rate.
We also expect to spend approximately $18 million in tenant
improvements, furniture and fixtures, information technology and
moving costs. Of this amount, approximately $17 million
will be capitalized and amortized over the shorter of the
assets useful life or lease. One of our directors has an
ownership interest in this building. See Certain
Relationships and Related Transactions New Global
Headquarters.
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 December 31, 2006, we had a balance of $37 million in
accrued liabilities to cover such claims.
We had claims for certain years which were insured by a third
party carrier, which was insolvent at June 30, 2006. 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 will take 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 2004, fiscal 2005, fiscal 2006 or the six
months ended December 31, 2006. Severe increases in
inflation, however, could affect global and U.S. economies and
could have an adverse impact on our business, financial
condition and results of operations.
75
Critical accounting policies and estimates
This discussion and analysis of financial condition and results
of operations is based on our consolidated financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these
financial statements requires our management to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, as well as related
disclosures of contingent assets and liabilities. We evaluate
our estimates on an ongoing basis and we base our estimates on
historical experience and various other assumptions we deem
reasonable to the situation. These estimates and assumptions
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Changes in our estimates could materially impact our
results of operations and financial condition in any particular
period.
Based on the high degree of judgment or complexity in their
application, we consider our critical accounting policies and
estimates to be:
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, Business Combinations
(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. Due to the high degree of judgment and complexity
involved with the valuation process, we hired a third party
valuation firm to assist with the determination of the fair
value of the net assets acquired.
In the event that actual results vary from any of the estimates
or assumptions used in any valuation or allocation process under
SFAS No. 141, we may be required to record an
impairment charge or an increase in depreciation or amortization
in future periods, or both. See Note 1 and Note 7 to
our audited consolidated financial statements included elsewhere
in this prospectus for further information about purchase
accounting allocations, related adjustments and intangible
assets recorded in connection with our acquisition of BKC and
acquisition of franchise restaurants.
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 United Kingdom and Germany. The operating market asset
groupings within the United States and Canada are predominantly
based on major metropolitan areas within the United States and
Canada. Similarly, operating markets within the other foreign
countries with larger asset concentrations (the United Kingdom
and Germany) are
76
made up of geographic regions within those countries (three in
the United Kingdom and four in Germany). These operating market
definitions are based upon the following primary factors:
|
|
|
management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants
and area managers receive incentives on this basis; and |
|
|
we do not evaluate individual restaurants to build, acquire or
close independent of 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 $901 million
as of December 31, 2006. We test our indefinite-lived
intangible assets for impairment on an annual basis or more
often if an event occurs or circumstances change that indicates
impairment might exist. 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.
77
Reserves for uncollectible accounts and revenue
recognition
We collect from franchisees royalties, advertising fund
contributions and, in the case of approximately 11% of our
franchise restaurants, rents. We recognize revenue that is
estimated to be reasonably assured of collection, and also
record reserves for estimated uncollectible revenues and
advertising contributions, based on monthly reviews of
franchisee accounts, average sales trends, and overall economic
conditions. In the event that franchise restaurant sales
declined, or the financial health of franchisees otherwise
deteriorated, we 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
that time, while the actual effective tax rate is calculated at
fiscal year-end.
Insurance programs
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.
We review all insurance reserves at least quarterly, and review
our estimation methodology and assumptions at least annually. If
we determine that the liability exceeds the recorded obligation,
the cost of these programs will increase in the future, as
insurance reserves are increased to revised expectations,
resulting in an increase in insurance program expenses.
We had claims for certain years which were insured by a third
party carrier, which was insolvent at June 30, 2006. 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 will take over the administration of
pending and potential claims for these years.
Stock-based compensation
Prior to February 16, 2006, the date we filed a
Form S-1
registration statement with the Securities and Exchange
Commission (for our initial public offering which occurred on
May 17, 2006), we accounted for stock-based
compensation in accordance with the intrinsic-
78
value method of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (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, we issued restricted stock
units under APB No. 25 and recognized compensation cost
over the vesting period of the awards. For pro forma disclosure
required by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123),
compensation expense for stock options was measured using the
minimum value method, which assumed no volatility in the
Black-Scholes model used to calculate the options fair
value.
Subsequent to February 16, 2006, we transitioned from a
nonpublic entity to a public entity under Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). Since we
applied SFAS No. 123 pro forma disclosure for stock
options using the minimum value method prior to becoming a
public entity, SFAS No. 123R requires that we adopt
SFAS No. 123R, using a combination of the prospective
and modified prospective transition methods. We must apply the
prospective transition method for those awards granted prior to
the Form S-1
filing date that were measured at minimum value. The
unrecognized compensation cost relating to these awards 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
those awards. As there was no compensation cost recognized by us
in the financial statements for these awards under APB
No. 25, no compensation cost has been or will be recognized
for these awards after our adoption of SFAS No. 123R
on July 1, 2006, unless such awards are modified. For those
awards granted subsequent to the
Form S-1 filing
date, but prior to the adoption date of July 1, 2006, we
are required to apply the modified prospective transition
method, in which compensation expense is recognized for any
unvested portion of the awards granted between the
Form S-1 filing
date and the adoption date of SFAS 123R over the remaining
vesting period of the awards beginning on the adoption date of
July 1, 2006.
On July 1, 2006, we adopted SFAS 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.
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 or our 2008 fiscal year.
We are currently evaluating the impact that FIN 48 may have
on our statements of operations and statement of financial
position.
79
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 statements of financial position.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)
(FASB No. 158). FASB No. 158 requires
an employer to recognize the overfunded or underfunded status of
a postretirement benefit plan as an asset or liability in its
statement of financial position and to recognize changes in that
funded status in comprehensive income in the year in which the
changes occur. Employers must also measure the funded status of
a postretirement benefit plan as of the date of its year end
statement of financial position. The provision to recognize the
overfunded or underfunded status of a postretirement benefit
plan in the statement of financial position is effective as of
the end of the fiscal year ending after December 15, 2006,
which for us will be our fiscal year ending June 30, 2007.
The provision to measure the funded status of a postretirement
benefit plan as of the date of an employers year end
statement of financial position is effective for fiscal years
ending after December 15, 2008, which for us will be our
fiscal year ending June 30, 2009. Since we measure our plan
assets and obligations on an annual basis, we will not be able
to determine the impact the adoption of SFAS No. 158
will have on our consolidated financial statements until the end
of fiscal 2007 when such valuation is completed. However, based
on valuations performed in fiscal 2006, had we been required to
adopt the provisions of SFAS No. 158 as of
June 30, 2006, our defined benefit plans and postretirement
benefit plan would have been underfunded by $52 million and
$22 million, respectively. As of June 30, 2006, we
recorded a liability of $54 million and $24 million,
respectively, for the defined benefit plans and the
postretirement benefit plan. In order to recognize (a) the
difference between the liability and funded status of the plans,
(b) unrecognized net actuarial gains and losses and
(c) other unrecognized items, we would have been required
to increase our stockholders equity by $2 million, on
an after-tax basis, as a component of accumulated other
comprehensive income.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108), which
requires registrants to consider the effect of all carry over
and reversing effects of prior-year misstatements when
quantifying errors in current-year financial statements.
SAB 108 requires that the registrant quantify the current
year misstatement using both the iron curtain approach and the
rollover approach to determine whether current-year financial
statements need to be adjusted. SAB 108 allows registrants
to record the effects of adopting SAB 108 as a
cumulative-effect adjustment to retained earnings. This
adjustment must be reported as of the beginning of the first
fiscal year ending after November 15, 2006. We are
currently evaluating the impact, if any, SAB 108 will have
on our statements of operations and financial condition.
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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.
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 2006, operating income would have decreased or
increased $10 million if all foreign currencies uniformly
weakened or strengthened 10% relative to the U.S. dollar.
We use derivative instruments to reduce the foreign exchange
impact on earnings from changes in the value of
foreign-denominated inter-company assets and liabilities. As of
December 31, 2006, we had forward currency contracts
outstanding to sell Euros, British Pounds and Canadian dollars
totaling $357 million, $50 million and
$5 million, respectively, to hedge intercompany notes and
offset the foreign exchange risk associated with the
remeasurement of these notes. Changes in the fair value of these
forward contracts due to changes in the spot rate between the
U.S. dollar and the Euro, British Pound and Canadian dollar are
offset by the remeasurement of the intercompany notes resulting
in insignificant impact to the Companys net income. The
contracts outstanding as of December 31, 2006 mature at
various dates through March 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 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.
As of December 31, 2006, 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
$897 million would result in an increase or decrease in
interest expense of approximately $5 million in a given
year, as we have hedged $440 million of our debt.
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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 $8 million and
$9 million in fiscal 2005 and fiscal 2006, respectively.
The hypothetical change in food, paper and product costs could
be positively or negatively affected by changes in prices or
product sales mix.
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Business
Overview
We are the worlds second largest fast food hamburger
restaurant, or FFHR, chain as measured by the number of
restaurants and system-wide sales. As of December 31, 2006,
we owned or franchised a total of 11,184 restaurants in 66
countries and U.S. territories, of which 1,290 restaurants were
company-owned and 9,894 were owned by our franchisees. Of these
restaurants, 7,180 or 64% were located in the United States and
4,004 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 guests fast food at modest prices.
We believe that the Burger King and Whopper brands
are two of the worlds most widely-recognized consumer
brands. These brands, together with our signature flame-broiled
products and the Have It Your Way brand promise, are
among the strategic assets that we believe set Burger King
restaurants apart from other regional and national FFHR
chains. Have It Your Way is increasingly relevant as
consumers continue to demand personalization and choice over
mass production. In a competitive industry, we believe we have
differentiated ourselves through our attention to individual
guests preferences, by offering great tasting fresh food
served fast and in a friendly manner.
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 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 our system is funded primarily by franchisees, while
giving us a sizeable base of company restaurants to demonstrate
credibility with our franchisees in launching new initiatives.
As a result of the high percentage of franchise restaurants in
our system, we have lower capital requirements compared to our
major competitors. Moreover, due to the steps that we have taken
to improve the health of our franchise system in the United
States and Canada, we expect that this mix will produce more
stable earnings and cash flow in the future. Although we believe
that this restaurant ownership mix is beneficial to us, it also
presents a number of drawbacks, such as our limited control over
franchisees and limited ability to facilitate changes in
restaurant ownership.
Our history
Burger King Corporation, which we refer to as BKC, was founded
in 1954 when James McLamore and David Edgerton opened the
first Burger King restaurant in Miami, Florida. The
Whopper sandwich was introduced in 1957. BKC opened its
first international restaurant in the Bahamas in 1966. BKC
opened the first Burger King restaurant in Canada in
1969, in APAC in Australia in 1971 and in EMEA in Madrid, Spain
in 1975. BKC also established its brand identity with the
introduction of the bun halves logo in 1969 and the
launch of the first Have It Your Way campaign in 1974.
BKC introduced drive-thru service, designed to satisfy
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guests on-the-go in 1975. In 1985, BKC rounded out
its menu offerings by adding breakfast on a national basis.
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to
Minneapolis-based The Pillsbury Company. BKC became a subsidiary
of Grand Metropolitan plc in 1989 when it acquired Pillsbury.
Grand Metropolitan plc merged with Guinness plc to
form Diageo plc in 1997. These conglomerates were focused
more on their core operations than on BKC. On December 13,
2002, Diageo plc sold BKC to private equity funds controlled by
the sponsors, and for the first time since 1967 BKC became an
independent company, which has allowed us to focus exclusively
on our restaurant business. We are a holding company formed in
connection with the December 2002 acquisition in order to own
100% of BKC. 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
$216 billion for the
12-month period ended
November 30, 2006. According to NPD Group, Inc., QSR sales
are projected to increase at an annual rate of 4.0% between 2007
and 2012. We believe this attractive historical and projected
growth is the result of a number of favorable trends:
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an increasing percentage of meals being eaten out of the home; |
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growing disposable incomes; |
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favorable demographic trends in the Echo Boomer generation
(those born between the late 1970s and early 1990s), who are
typically inclined toward QSR dining; |
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new marketing vehicles such as the internet and video games,
which lend themselves to marketing QSR concepts; and |
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the continued expansion of QSR menu offerings into more varied
and premium products. |
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 guests from other restaurant industry segments during adverse
economic conditions, as they seek to preserve the away
from home dining experience on tighter budgets. However,
significant economic downturns or sharp increases in energy
prices may impact FFHR chains, including us.
According to NPD Group, Inc., the FFHR category is the largest
category in the QSR segment, generating sales of more than
$57 billion in the United States for the 12-month period
ended November 30, 2006, representing 27% of total QSR
sales. The FFHR category grew 4.4% 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 during the next
five years. For the 12-month period ended November 30,
2006, 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.
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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 11,184
restaurants operating in 66 countries and U.S. territories, of
which 4,000 are located in our international markets. 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
marketing, advertising and sponsorships to drive sales and
generate restaurant traffic. In 2006, our U.S. television
advertisements were ranked among the most liked or
most recalled new ads more often than those of any
national advertisers in the past 24 months ending
December 31, 2006, according to advertising industry
researcher IAG. In 2006, our brand icon, The King
appeared as guest more than a dozen times on The Tonight Show
with Jay Leno. In addition, our successful
Xbox®
gaming collection sold more than 3.2 million copies, making
it the best-selling video game 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, and family
oriented movie tie-ins such as King Kong,
Spider-Man®
and SpongeBob
SquarePantstm
and Happy Feet. |
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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 and Treasurer, 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 Coca-Cola, Frito
Lay, McDonalds, Pillsbury, Taco Bell and Wendys. |
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Our business strategy
We intend to achieve further growth and strengthen our
competitive position through the continued implementation of the
following key elements of our business strategy:
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Drive further sales growth and profitability. As
of December 31, 2006 we have achieved eleven consecutive
quarters of comparable sales growth and increased average
restaurant sales by 17% since fiscal 2003 in our core U.S.
business. We remain focused on achieving our comparable sales,
average restaurant sales and profitability potential. As of
December 31, 2006, the last 50 free-standing restaurants opened
in the United States that have operated at least twelve months
generated annual average restaurant sales of more than
$1.51 million, which is more than 30% higher than our U.S.
system average of $1.16 million. By focusing on improved
restaurant operations and enhancing the guest experience we
believe that we can drive sales growth at our existing
restaurants. |
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Improve restaurant operations. A key component of our
strategy to drive sales growth is to improve restaurant
operations. We have implemented initiatives focused on
continually improving our restaurants cleanliness and
safety, serving hot and fresh food, providing fast and friendly
service to our guests and utilizing systems to measure our
performance. We believe that these initiatives have
significantly improved the guest experience and resulted in
increased comparable sales and average restaurant sales growth.
As a result of these efforts, our key guest satisfaction and
operations metrics were at all-time highs in December 2006 and
we intend to focus our efforts on further improving these
metrics. |
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Extend hours of operation. For the convenience of our
restaurant guests and to more effectively compete with other
quick service restaurant chains, over the past two fiscal years
we implemented programs to encourage our U.S. franchisees to
keep extended hours, particularly at the drive-thru window. For
example, we provided franchisees who agreed to stay open for
extended hours with local late night advertising, free
merchandising materials and financial incentives. We also
engaged a vendor to conduct surveys twice a year to evaluate our
hours of operation compared to our main competitors. Most of our
U.S. company restaurants are open until midnight or later seven
days a week, and the late night time period is our fastest
growing day part. We believe that reducing the gap between our
operating hours and those of our competitors will be a key
component in improving customer traffic and driving future
growth in comparable sales and average restaurant sales. |
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Improve restaurant profitability. We 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. For
example, we have negotiated arrangements with strategic vendors
which we believe will deliver cost reductions and profit
improvement for our franchisees. In addition, we have developed
a labor scheduling system which we believe will reduce labor
costs by allocating labor more efficiently and increasing
proficiency. We have started to implement this system in our
U.S. company restaurants and expect to begin introducing it to
U.S. franchisees in fiscal 2007. We have also developed a real
time product system called the Kitchen Minder which, using
historical data trends, determines the amount of a certain
product a restaurant should have at a specific time of day. As
of December 31, 2006, the Kitchen Minder has been
implemented in all U.S. company restaurants and we intend to
begin franchisee roll-out during the next three years. We have
also developed a new flexible broiler that we |
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expect will reduce utility costs when introduced. We have
started to install the new broiler in our U.S. company
restaurants and expect that the U.S. company restaurant roll-out
will be completed by the end of fiscal 2007 and to our franchise
restaurants during the next three years. |
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Expand our large international platform. We intend
to leverage our substantial international infrastructure to
expand our franchise network and restaurant base.
Internationally we are much smaller than our largest competitor,
and therefore we believe we have significant growth
opportunities. We have developed a detailed global development
plan to accelerate 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, Taiwan and
Italy, and (3) financially attractive new markets such as
Japan and Indonesia, in which we have recently executed
development agreements with new franchisees, 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, opened 27
restaurants in 10 cities and put development agreements in
place to add more than 150 restaurants within the next five
years, validates the opportunities that exist for us in rapidly
developing international markets. |
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We believe that our established infrastructure is capable of
supporting substantial restaurant expansion in the years ahead
with a limited increase in general and administrative costs
because we believe we have already made the necessary
investments in personnel and systems to support our projected
growth. For example, we have increased the number of management,
development and operations personnel in EMEA and hired a new
management team for APAC. We have also made significant
investments in our global information technology infrastructure
that are scalable for future growth, such as deploying common
platforms for SAP software across all regions, implementing an
internet-based communication system for international
franchisees and developing an internet-based system for the
collection of key franchisee operational and financial metrics. |
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We have developed a global marketing calendar to create more
consistent advertising and brand positioning strategies across
our markets. We have also established a global product
development team to reduce complexity and increase consistency
in our worldwide menu. We are working closely with our
franchisees to leverage our global purchasing power and
negotiate lower product costs and savings for our restaurants
outside of the United States and Canada. We have developed and
implemented a global supply chain management program that
oversees and manages the strategic purchasing and distribution
activities for key products and services used by our company and
franchise restaurants outside of the United States and Canada.
Over the last year, our international restaurant system has
benefited by centrally negotiated equipment supply programs and
food, packaging and distribution arrangements that have improved
consistency and lowered costs. We believe that the
organizational realignment that we have implemented will
position us to execute our global growth strategy, while
remaining responsive to national differences in consumer
preferences and local requirements. |
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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, |
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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 (61% 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 initial investment expense and have
begun testing a turn-key development assistance program that
reduces the time and uncertainty associated with new builds. |
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Employ innovative marketing strategies and expand product
offerings. We believe that innovative marketing
strategies and expanded product offerings are integral
components to our growth strategy. |
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Promote innovative marketing strategies. We intend to
continue to employ innovative and creative marketing strategies
to increase our restaurant sales and traffic, generate interest
in our Burger King brand and reinforce the Have It
Your Way brand promise. Our marketing strategy is focused on
our core consumer, who we refer to as the SuperFan. SuperFans
are consumers who reported eating at a fast food hamburger
outlet nine or more times in the past month. We believe that our
innovative and award-winning advertising campaigns have helped
drive improvements in comparable sales and average restaurant
sales. In 2006, our U.S. television advertisements were
ranked among the most liked or most
recalled new ads more often than those of any national
advertisers in the past 24 months ending December 31,
2006, according to advertising industry researcher IAG. We plan
to concentrate our marketing on television advertising and mass
appeal sports and entertainment sponsorships, such as the
National Football League (NFL) and NASCAR, which we believe
is the most effective way to reach the SuperFan. |
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Expand Product Offerings. As part of the Have It Your
Way brand promise, we intend to launch new products to fill
gaps in our breakfast, dessert and snack menu, to offer more
choices to our guests and to enhance the price/value proposition
of our products with such offerings as the BK Value Menu
and the soon-to-be launched BK Breakfast Value Menu,
which will feature 10 items starting at one dollar. In addition,
we intend to launch more than 15 other new and limited time
offer products in the second half of fiscal 2007 and fiscal
2008, including Cheesy Tots as an all-day snack item and
a limited time only new BBQ sauce on our core Whopper,
BK Stacker and Tendercrisp sandwiches. This summer
we plan to extend our BK Joe brand into an iced coffee.
At the same time, we will continue building our dessert line-up
with a portable, drinkable Oreo sundae. In early fiscal year
2008, we plan to introduce a new portable and wrap line branded
as BK Holdems. We will continue to use a
variety of strategies to enhance the price/value proposition
offered to our guests with offerings such as the BK Value
Menu, the soon-to-be launched BK Breakfast Value Menu,
limited time offers and coupon mailings. |
Global Operations
We operate in three reportable business segments: United States
and Canada; Europe, the Middle East and Africa and Asia Pacific,
or EMEA/ APAC; and Latin America. See our unaudited consolidated
financial statements for the period ended December 31, 2006
and our audited
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consolidated financial statements included elsewhere in this
prospectus for financial information about our segments.
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 December 31,
2006, 888 company restaurants and 6,614 franchise restaurants
were operating in the United States and Canada. For fiscal 2006,
total system sales in the United States and Canada were
approximately $8.5 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. Our restaurants are
typically open seven days per week from 7:00 a.m. to
11:00 p.m. As of August 31, 2006, 58% of Burger
King restaurants were open later than 11:00 p.m., with
7% open 24 hours. Based on surveys as of August 31, 2006,
approximately 70-80% of the restaurants of our major competitors
are open later than 11:00 p.m., with approximately 41% of
McDonalds restaurants open 24 hours. 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,
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drive-thru facilities and adjacent parking areas. Some
restaurants are located in institutional locations, such as
airports, shopping malls, toll road rest areas and educational
and sports facilities. In fiscal 2005, we developed 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 61% of our U.S.
company restaurant sales are made at the drive-thru. We have
opened 26 new restaurants in this format to date, with an
additional 12 under construction.
New Restaurant Development and Renewals. We employ a
sophisticated and disciplined market planning and site selection
process through which we identify trade areas and approve
restaurant sites throughout the United States and Canada that
will provide for quality expansion. We have established a
development committee to oversee all new restaurant development
within the United States and Canada. The development
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.
Our franchisees closed 1,145 restaurants in the United States
between July 1, 2002 and June 30, 2006. Many of these
closures involved franchisees in bankruptcy and in the FFRP
program. The franchise restaurants that closed had average
restaurant sales of approximately $625,000 in the 12 months
prior to closure. We and our franchisees opened 146 new
restaurants in the United States between fiscal 2004 and
fiscal 2006, of which 81 were opened for at least 12 months
as of June 30, 2006. The average restaurant sales of these
new restaurants was approximately $1.3 million for the
12 months after opening. We and our franchisees opened 53
restaurants and 39 restaurants in the United States in fiscal
2006 and during the six months ended December 31, 2006,
respectively. We and our franchisees closed 225 and 66
restaurants in the United States during the same periods. We
believe that the number of closures will decline in the second
half of fiscal 2007 and beyond. We have instituted several
initiatives to accelerate restaurant development in the United
States, including financial incentives, process simplifications
and turnkey development assistance programs, which reduce the
time and uncertainty associated with opening new restaurants.
In recent years, we have experienced lower levels of franchisees
in the United States renewing their expiring franchise
agreements for a standard additional 20-year term than we have
historically experienced. In many cases, however, we agreed to
extend the existing agreements to avoid the closure of the
restaurants by giving franchisees additional time to comply with
our renewal requirements. To encourage franchisees to renew, we
instituted a program in the United States to allow them to pay
the $50,000 franchise fee in installments and to delay the
required restaurant remodel for up to two years, while providing
an incentive to accelerate the completion of the remodel by
offering reduced royalties for a limited period. Although this
program is now closed, we believe that this program was
instrumental in maintaining our base of restaurants. As a result
of this program and our other initiatives, we have seen an
increase in the number of restaurants with renewed franchise
agreements.
90
Company restaurants
As of December 31, 2006, we owned and operated 888
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 888 company restaurants, we own the properties for
337 restaurants and we lease the remaining 551 properties
from third-party landlords. Our company restaurants in the
United States and Canada generated $1 billion in revenues
in fiscal 2006, or 75% of our total U.S. and Canada revenues and
50% 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
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Company | |
|
% of Total U.S. and Canada | |
Rank |
|
State/Province |
|
restaurant count | |
|
company restaurants | |
| |
1
|
|
Florida
|
|
|
228 |
|
|
|
26 |
% |
2
|
|
Indiana
|
|
|
69 |
|
|
|
8 |
% |
3
|
|
Ontario
|
|
|
67 |
|
|
|
8 |
% |
4
|
|
North Carolina
|
|
|
58 |
|
|
|
7 |
% |
5
|
|
Georgia
|
|
|
49 |
|
|
|
6 |
% |
6
|
|
Virginia
|
|
|
44 |
|
|
|
5 |
% |
7
|
|
Massachusetts
|
|
|
43 |
|
|
|
5 |
% |
8
|
|
Ohio
|
|
|
38 |
|
|
|
4 |
% |
9
|
|
South Carolina
|
|
|
38 |
|
|
|
4 |
% |
10
|
|
Connecticut
|
|
|
33 |
|
|
|
4 |
% |
10
|
|
New York
|
|
|
33 |
|
|
|
4 |
% |
|
Franchise operations
General. We grant franchises to operate restaurants using
Burger King trademarks, trade dress and other
intellectual property, uniform operating procedures, consistent
quality of products and services and standard procedures for
inventory control and management.
Our growth and success have been built in significant part upon
our substantial franchise operations. We franchised our first
restaurant in 1961, and as of December 31, 2006 there were
6,614 franchise restaurants, owned by 827 franchise operators,
in the United States and Canada. Franchisees report gross
sales on a monthly basis and pay royalties based on reported
sales. Franchise restaurants in the United States and Canada
generated revenues of $267 million in fiscal 2006, or 64%
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
December 31, 2006.
91
The following table details the top ten locations of our
franchisees restaurants in the United States and
Canada as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Franchise | |
|
% of Total U.S. and Canada | |
Rank |
|
State |
|
restaurant count | |
|
franchise restaurants | |
| |
1
|
|
California
|
|
|
677 |
|
|
|
10 |
% |
2
|
|
Texas
|
|
|
393 |
|
|
|
6 |
% |
3
|
|
Michigan
|
|
|
342 |
|
|
|
5 |
% |
4
|
|
New York
|
|
|
326 |
|
|
|
5 |
% |
5
|
|
Ohio
|
|
|
315 |
|
|
|
5 |
% |
6
|
|
Florida
|
|
|
312 |
|
|
|
5 |
% |
7
|
|
Illinois
|
|
|
295 |
|
|
|
4 |
% |
8
|
|
Pennsylvania
|
|
|
239 |
|
|
|
4 |
% |
9
|
|
North Carolina
|
|
|
206 |
|
|
|
3 |
% |
10
|
|
Georgia
|
|
|
205 |
|
|
|
3 |
% |
|
The following is a list of the five largest franchisees in terms
of restaurant count in the United States and Canada as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
| |
Rank |
|
Name |
|
Restaurant count | |
|
Location | |
| |
1
|
|
Carrols Corporation
|
|
|
328 |
|
|
|
Northeast and Midwest |
|
2
|
|
Heartland Food Corp. |
|
|
248 |
|
|
|
Mid South and Northwest |
|
3
|
|
Strategic Restaurants
Corp. |
|
|
239 |
|
|
|
Midwest and Southeast |
|
4
|
|
Army Air Force Exchange Services
|
|
|
126 |
|
|
|
Across the United States |
|
5
|
|
Quality Dining, Inc. |
|
|
124 |
|
|
|
Midwest |
|
|
Franchise Agreement Terms. For each franchise restaurant,
we enter into a franchise agreement covering a standard set of
terms and conditions. The typical franchise agreement in the
United States and Canada has a 20-year term (for both initial
grants and renewals of franchises) and contemplates a one-time
franchise fee of $50,000, which must be paid in full before the
restaurant opens for business, or in the case of renewal, before
expiration of the current franchise term.
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% 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
92
the growth of our franchisees because we have the right to veto
any restaurant acquisition or new restaurant opening. These
transactions must meet our minimum approval criteria to ensure
that franchisees are adequately capitalized and that they
satisfy certain other requirements.
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
$83 million of our revenues in fiscal 2006, 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 December 31, 2006, we leased or
subleased to franchisees in the United States and Canada 920
properties, of which we own 462 properties and lease either the
land or the land and building from third-party landlords on the
remaining 458 properties.
Europe, the Middle East and Africa/ Asia Pacific
(EMEA/APAC) regions
Restaurant operations
These regions, and the markets within these regions, differ
substantially in many respects, including guest taste
preferences, consumer disposable income, occupancy costs, food
costs, operating margins and the level of competitive activity.
The following discussion is intended as a summary of our
EMEA/APAC business as a whole. However, some of the information
discussed below may not be applicable to individual countries
within our EMEA/APAC operations.
EMEA. EMEA is the second largest geographic area in the
Burger King system behind the United States as measured
by number of restaurants. As of December 31, 2006, EMEA had
2,198 restaurants in 26 countries and territories, including 325
company restaurants located in the United Kingdom, Germany,
Spain and The Netherlands. For fiscal 2006, total system sales
in EMEA were approximately $2.477 billion. The United
Kingdom is the largest market in EMEA with 599 restaurants as of
December 31, 2006. Between fiscal 2002 and fiscal 2006, the
number of restaurants in EMEA grew 33% from 1,633 to 2,168. In
the first six months of fiscal 2007, 30 restaurants were
opened in EMEA (net of closures).
We are focused on improving our sales performance in the United
Kingdom, where our business faces challenges due to franchisee
financial distress, changes in consumer preferences away from
the FFHR category, high labor and real estate costs and
increased competition from sandwich shops, bakeries and other
new entrants. There are a total of 491 franchise restaurants in
the United Kingdom.
APAC. As of December 31, 2006, APAC had 625
restaurants in 12 countries and territories, including China,
Malaysia, Thailand, Australia, Philippines, Taiwan, Singapore,
New Zealand, and South Korea. For fiscal 2006 total system sales
in APAC were approximately $666 million. All of the
restaurants in the region other than our six restaurants in
China are franchised. Australia is the largest market in APAC,
with 294 restaurants as of December 31, 2006, all of
93
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. Between fiscal 1999 and fiscal 2001, the
number of restaurants in APAC increased by 29% from 431 to 556.
Between fiscal 2002 and fiscal 2006, the number of restaurants
in APAC increased by 11% from 556 to 619. We believe there is
significant potential for growth in APAC, particularly in our
existing markets of Korea, Taiwan, 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.
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 the smaller ROC buildings in
EMEA/APAC. We have opened 32 new restaurants in this format to
date, with an additional 28 under construction.
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,
Taiwan, Malaysia, the Philippines, China, Korea and Hong Kong in
APAC. We have also entered into development agreements with new
franchisees for Japan and Indonesia. 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 December 31, 2006, 325 (or 15%) of the restaurants in
EMEA were company restaurants. There are six company restaurants
in APAC, all of which are located in China, and we are planning
to open two additional company restaurants in China by the end
of fiscal 2007.
94
The following table details company restaurant locations in EMEA
as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Company | |
|
% of total EMEA | |
|
|
restaurant | |
|
company | |
Rank |
|
Country |
|
count | |
|
restaurants | |
| |
1
|
|
Germany
|
|
|
152 |
|
|
|
47 |
|
2
|
|
United Kingdom
|
|
|
108 |
|
|
|
33 |
|
3
|
|
Spain
|
|
|
41 |
|
|
|
13 |
|
4
|
|
The Netherlands
|
|
|
24 |
|
|
|
7 |
|
|
|
|
|
|
Total |
|
|
325 |
|
|
|
100% |
|
|
Franchise operations
As of December 31, 2006, 2,492 or 88% of our restaurants in
EMEA/ APAC were franchised. Some of our international markets
are operated by a single franchisee. Other markets, such as the
United Kingdom, Germany, Spain and Australia, have multiple
franchisees. In general, we enter into a franchise agreement for
each restaurant. International franchise agreements generally
contemplate a one-time franchise fee of $50,000, with monthly
royalties and advertising contributions each of up to 5% of
gross sales.
We have granted master franchises in Australia and Turkey, where
the franchisees are allowed to sub-franchise restaurants within
their particular territory. Additionally, in New Zealand and
certain Middle East and Persian Gulf countries, we have entered
into arrangements with franchisees under which they have agreed
to nominate third parties to develop and operate restaurants
within their respective territories under franchise agreements
with us. As part of these arrangements, the franchisees have
agreed to provide certain support services to third party
franchisees on our behalf, and we have agreed to share the
franchise fees and royalties paid by such third party
franchisees. Our largest franchisee in the Middle East and
Persian Gulf is also allowed to grant development rights with
respect to each country within its territory. We have also
entered into exclusive development agreements with franchisees
in a number of countries throughout EMEA and APAC, including
most recently, Japan. These exclusive development agreements
generally grant the franchisee exclusive rights to develop
restaurants in a particular geographic area and contain growth
clauses requiring franchisees to open a minimum number of
restaurants within a specified period.
The following is a list of the five largest franchisees in terms
of restaurant count in EMEA/APAC as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
| |
Rank |
|
Name |
|
Restaurant count | |
|
Location | |
| |
1
|
|
Hungry Jacks Pty
Ltd. |
|
|
251 |
|
|
|
Australia |
|
2
|
|
Tab Gida Sanayl Ve Ticaret AS
|
|
|
148 |
|
|
|
Turkey |
|
3
|
|
Granada Hospitality Limited
(Compass Group)
|
|
|
104 |
|
|
|
United Kingdom |
|
4
|
|
SRS
|
|
|
87 |
|
|
|
Korea |
|
5
|
|
Olayan
|
|
|
85 |
|
|
|
Saudi/UAE |
|
|
Property operations
Our property operations in EMEA primarily consist of franchise
restaurants located in the United Kingdom, Germany and Spain,
which we lease or sublease to franchisees. We have no
95
franchisee-operated properties in APAC. Of the 95 properties in
EMEA that we lease or sublease to franchisees, we own 4
properties and lease the land and building from third party
landlords on the remaining 91 properties. Our EMEA property
operations generated $29 million of our revenues in fiscal
2006, or 1.4% of our total worldwide revenues.
Lease terms on properties that we lease or sublease to our EMEA
franchisees vary from country to country. These leases generally
provide for 20-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 United Kingdom, many of our
leases for our restaurant properties are subject to rent reviews
every five years, which may result in rent adjustments to
reflect current market rents for the next five years.
Latin America
As of December 31, 2006, we had 859 restaurants in 25
countries and territories in Latin America. For fiscal
2006, total system sales in Latin America were approximately
$761 million. There were 71 company restaurants in Latin
America, all located in Mexico, and 788 franchise restaurants in
the region as of December 31, 2006. Between fiscal 2002 and
fiscal 2006, the number of restaurants in Latin America grew by
52% from 532 to 808. In the first six months of fiscal 2007, 51
restaurants (net of closures) were opened in Latin America. We
are the market leader in 15 of our 25 markets in Latin America,
including Puerto Rico, in terms of number of restaurants.
The Mexican market is the largest in the region, with a total of
326 restaurants as of December 31, 2006, or 38% of the
region. Our restaurants in Mexico have consistently had the
highest company restaurant margins worldwide. In fiscal 2006, we
opened 49 new restaurants in Mexico, of which nine were company
restaurants and 40 were franchise restaurants. We are also
aggressively pursuing development in Brazil.
As of December 31, 2006, there were 27 restaurants in
Brazil, and we have entered into agreements with franchisees for
the development of more than 150 new restaurants during the next
five years. The restaurants in Brazil that have been open and
operating for at least twelve months have achieved average
restaurant sales of $1.7 million for the trailing
12-month period ended
December 31, 2006.
Puerto Rico is our largest market in the Caribbean, with 171
restaurants operated by a single franchisee. The average
restaurant sales of these restaurants was $1.56 million for
the trailing 12-months
ended December 31, 2006, with 36 restaurants above
$2 million in ARS.
The following is a list of the five largest franchisees in terms
of restaurant count in Latin America as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
| |
Rank |
|
Name |
|
Restaurant count | |
|
Location | |
| |
1
|
|
Caribbean Restaurants
|
|
|
171 |
|
|
|
Puerto Rico |
|
2
|
|
ALSEA
|
|
|
144 |
|
|
|
Various |
|
3
|
|
Geboy de Tijuana, S.A. de
C.V. |
|
|
44 |
|
|
|
Mexico |
|
4
|
|
Salvador Safie, Fernando Safie and
Ricardo Safie
|
|
|
37 |
|
|
|
Guatemala |
|
5
|
|
Operadora Exe S.A. de
C.V. |
|
|
36 |
|
|
|
Mexico |
|
|
96
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.
Franchisees must make monthly contributions, generally 4% to 5%
of gross sales, to our advertising funds, and we contribute on
the same basis for company restaurants. Advertising
contributions are used to pay for all expenses relating to
marketing, advertising and promotion, including market research,
production, advertising costs, public relations and sales
promotions. In international markets where there is no company
restaurant presence, franchisees typically manage their own
advertising expenditures, and these amounts are not included in
the advertising fund.
However, as part of our global marketing strategy, we intend to
provide these franchisees with assistance in order to deliver a
consistent global brand message.
In the United States and in those other countries where we have
company restaurants, we have full discretion as to the
development, budgeting and expenditures for all marketing
programs, as well as the allocation of advertising and media
contributions among national, regional and local markets,
subject in the United States to minimum expenditure requirements
for media costs and certain restrictions as to new media
channels. We are required, however, under our U.S. franchise
agreements to discuss the types of media in our advertising
campaigns and the percentage of the advertising fund to be spent
on media with the recognized franchisee association, currently
the National Franchisee Association, Inc.
Our current global marketing strategy is based upon customer
choice. We believe that quality, innovation and differentiation
drive profitable customer traffic and pricing power over the
long term. Our global strategy is focused on our core consumer,
the SuperFan, our Have It Your Way brand promise, our
core menu items, such as burgers, fries and soft drinks, the
development of innovative products and the consistent
communication of our brand. We concentrate our marketing on
television advertising, which we believe is the most effective
way to reach the SuperFan. We also use radio and Internet
advertising and other marketing tools on a more limited basis.
97
Property
The following table presents information regarding our
properties as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Leased | |
|
|
|
|
Land & | |
|
Total | |
|
|
|
|
Owned(1) | |
|
Land | |
|
Building | |
|
Leases | |
|
Total | |
| |
United States and
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
337 |
|
|
|
190 |
|
|
|
361 |
|
|
|
551 |
|
|
|
888 |
|
|
Franchisee-operated properties
|
|
|
462 |
|
|
|
261 |
|
|
|
197 |
|
|
|
458 |
|
|
|
920 |
|
|
Non-operating restaurant locations
|
|
|
29 |
|
|
|
23 |
|
|
|
10 |
|
|
|
33 |
|
|
|
62 |
|
|
Offices
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
Total
|
|
|
828 |
|
|
|
474 |
|
|
|
575 |
|
|
|
1,049 |
|
|
|
1,877 |
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
20 |
|
|
|
48 |
|
|
|
334 |
|
|
|
382 |
|
|
|
402 |
|
|
Franchisee-operated properties
|
|
|
4 |
|
|
|
2 |
|
|
|
89 |
|
|
|
91 |
|
|
|
95 |
|
|
Non-operating restaurant locations
|
|
|
1 |
|
|
|
|
|
|
|
28 |
|
|
|
28 |
|
|
|
29 |
|
|
Offices
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
Total
|
|
|
25 |
|
|
|
50 |
|
|
|
461 |
|
|
|
511 |
|
|
|
536 |
|
|
(1) Owned refers to properties where we own the land and
the building.
Our global headquarters is located in Miami, Florida and
consists of approximately 213,000 square feet which we
lease, as well as another 42,950 square foot building, which we
also lease. We have signed a 15-year lease to move our global
headquarters into a building to be constructed in Coral Gables,
Florida. We currently plan to occupy a space of approximately
224,638 square feet in the new building beginning in fiscal
2009. Our regional headquarters are located in Zug, Switzerland
for EMEA and Singapore for APAC. We also lease properties for
our regional offices in the United Kingdom, Germany and Spain.
We currently have a month-to-month lease on our property in
London. We lease an office space of 46,864 square feet in
Munich, Germany under a lease that expires in August 2015. In
Madrid, Spain, we lease an office space of 16,210 square feet
under a lease that expires in March 2009. We believe that our
existing headquarters and other leased and owned facilities are
adequate to meet our current requirements.
Our employees
As of December 31, 2006, we had approximately 38,000
employees in our company restaurants, 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.
None of our employees are represented by a labor union or
covered by a collective bargaining agreement, other than our
employees in Brazil, Germany and Mexico.
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
98
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 December 31, 2006, RSI was appointed
the distribution manager for approximately 91% of the
restaurants in the United States. A subsidiary of RSI is also
purchasing food and paper products for our company and franchise
restaurants in Canada under a contract with us. Three
distributors service 77% of the U.S. system and the loss of any
one of these distributors would likely adversely affect our
business.
There is currently no designated purchasing agent that
represents franchisees in our international regions. However, we
are working closely with our franchisees to implement programs
that leverage our global purchasing power and to negotiate lower
product costs and savings for our restaurants outside of the
United States and Canada. We approve suppliers and use similar
standards and criteria to evaluate international suppliers that
we use for U.S. suppliers. Franchisees may propose additional
suppliers, subject to our approval and established business
criteria.
In fiscal 2000, we entered into long-term exclusive contracts
with The Coca-Cola Company and with Dr Pepper/ Seven Up, Inc. to
supply company 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 December 31, 2006, we estimate that it will
take approximately 16 years to complete the
Coca-Cola and Dr Pepper
purchase commitments, respectively. If these agreements were
terminated, we would be obligated to pay significant termination
fees and certain other costs, including in the case of the
contract with 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
99
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 United Kingdom and China to
test new products. While research and development activities are
important to our business, these expenditures are not material.
Independent suppliers also conduct research and development
activities for the benefit of the Burger King system. We
believe new product development is critical to our long-term
success and is a significant factor behind our comparable sales
growth. Product innovation begins with an intensive research and
development process that analyzes each potential new menu item,
including market tests to gauge consumer taste preferences, and
includes an ongoing analysis of the economics of food cost,
margin and final price point.
We have developed a new flexible batch broiler that is
significantly smaller, less expensive and easier to maintain
than the current broiler used in our restaurants. We expect that
the new broiler will reduce operating costs (principally through
reduced utility costs), without sacrificing speed, quality or
efficiency. We currently are installing the new broiler in our
U.S. company restaurants and expect that the U.S. company
restaurant rollout will be complete by the end of fiscal 2007.
The new broiler will be available to U.S. franchisees by
July 1, 2008. We have filed a patent application with
respect to the broiler technology and design. We have licensed
one of our equipment vendors on an exclusive basis to
manufacture and supply the new broiler to the Burger King
system throughout the world.
Management information systems
Franchisees typically use a point of sale, 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 recently established
specifications to reduce cost, improve service and allow better
data analysis and have approved three global POS vendors and one
regional vendor for each of our three key regions to sell these
systems to our franchisees. Currently, franchisees report sales
manually, and we do not have the ability to verify sales data
electronically by accessing their POS cash register systems. The
new POS system will make it possible for franchisees to submit
their sales and transaction level details to us in
near-real-time in a common format, allowing us to maintain one
common database of sales information. We expect that it will be
three to five years before the majority of franchisees have the
new POS systems. We provide proprietary software to our U.S.
franchisees for labor and product management.
Quality assurance
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
100
Hot & Fresh and Friendly & Fast operations platforms
principally through Guest Trac, a rating system based on survey
data submitted by our customers.
We measure 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 December 31, 2006, we and our wholly-owned
subsidiary, Burger King Brands, Inc., own approximately 2,419
trademark and service mark registrations and applications and
approximately 375 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 and 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.
Our largest U.S. competitor, McDonalds, has significant
international operations. Non-FFHR based chains, such as KFC and
Pizza Hut, have many outlets in international markets that
compete with Burger King and other FFHR chains. In
addition, Burger King restaurants compete internationally
against local FFHR chains, sandwich shops, bakeries and
single-store locations.
Government regulation
We are subject to various federal, state and local laws
affecting the operation of our business, as are our franchisees.
Each Burger King restaurant is subject to licensing and
regulation by a number of governmental authorities, which
include zoning, health, safety, sanitation, building and fire
agencies in the jurisdiction in which the restaurant is located.
Difficulties in obtaining,
101
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 wages, working conditions,
citizenship requirements and overtime. Some states have set
minimum wage requirements higher than the federal level.
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 United Kingdom and Spain.
For example, the New York City Health Department 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 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. More than 12
states are considering laws banning trans fat in restaurant
food. 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. The Attorney
General of the State of California is currently suing us and our
major competitors under Proposition 65 to force the disclosure
of warnings that carbohydrate-rich foods cooked at high
temperatures, such as french fries, contain the potentially
cancer-causing chemical acrylamide. In addition, public interest
groups have also focused attention on the marketing of 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, sanitation and safety. For example, legislators in the
United Kingdom have adopted a ban on childrens advertising
by fast food
102
restaurants. 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.
Tax matters
As a matter of course, we are regularly audited by various tax
authorities. From time to time, these audits result in proposed
assessments where the ultimate resolution may result in owing
additional cash tax payments. We believe that our tax positions
comply with applicable law and that we have adequately provided
for these matters. We are in the process of being audited by the
U.S. Internal Revenue Service. The audit relates to both
executive compensation and income taxes for our 2003 and 2004
fiscal years. At this time, we do not know when this audit will
be completed or what its impact, if any, will be.
Legal proceedings
On September 5, 2002, a lawsuit was filed against
McDonalds and us in the Superior Court of California in
Los Angeles County (Case No. BC280980) (Council for
Education and Research on Toxics v. McDonalds Corporation,
Burger King Corporation, et al.) alleging that the defendants
violated Proposition 65 and the California Unfair Competition
Act by failing to warn about the presence of acrylamide, a
Proposition 65 regulated chemical, in french fries. The case was
stayed for three years pending the outcome of a proposed
regulatory action by Californias Office of Environmental
Health Hazard Assessment (OEHHA), the lead agency
with primary jurisdiction for implementing Proposition 65. The
court agreed to stay the case until the agency proposed updated
regulations for acrylamide in foods. In April 2005, the agency
proposed new regulations, including safe harbor warning language
and a format for warnings to be provided on signs at retail
grocery stores or restaurants. On March 30, 2006, OEHHA
withdrew its proposed regulations promising to issue a new
proposal in 60 days. No new proposals have been issued. As
a result, the court lifted the stay on March 31, 2006. The
court has set a trial date of November 6, 2007.
On August 26, 2005, the Attorney General for California
filed a lawsuit against us and eight others in the food
industry, in the Superior Court of California in Los Angeles
County (Case No. BC338956) (People of the State of
California, ex rel Bill Lockyer, Attorney General of the State
of California v. Frito-Lay, Inc., et al.), seeking an order
providing for an unspecified warning to be provided to consumers
regarding the presence of acrylamide in french fries and an
unspecified monetary payment. The Attorney Generals case,
the CERT case and a number of other cases filed against other
companies by three different private plaintiffs groups
alleging similar violations were deemed related in January 2006
and assigned to a single judge in the Complex Litigation
Division of the Los Angeles Superior Court. On March 31,
2006, the court lifted the stay in the related cases, allowing
the matters to proceed. Discovery and motions practice has
commenced in the related cases.
On July 24, 2006, we were served with a lawsuit against us
and CKE Restaurants in the Superior Court of California in
Sacramento County (Case No. 06AS02168) (Leeman v. Burger
King Corporation, et al.). The complaint alleges that we
violated Proposition 65 by failing to warn consumers about the
presence of chemicals known as polycyclic aromatic hydrocarbons
(commonly referred to as PAHs) found in flame-broiled meats,
including our large flame-
103
broiled burgers such as the Triple Whopper. The chemicals
at issue are listed in Proposition 65 as possible human
carcinogens or reproductive toxicants.
On September 7, 2006, Physicians Committee for Responsible
Medicine filed a lawsuit against us and others in our industry
in the Superior Court of California, Los Angeles County
(Case No. BC35927, Physicians Committee for
Responsible Medicine vs. McDonalds Corporation, Burger
King Corporation et al.), alleging a violation of Proposition 65
for not warning about the chemical compounds PhIP allegedly
found in grilled chicken sandwiches served at restaurants in
California. We believe this lawsuit has no merit, and we plan to
vigorously defend this action.
In the event that there is a finding of liability in these
cases, we would be exposed to a potential obligation for payment
of plaintiffs attorneys fees, penalties (in an
amount to be set by the court) and injunctive relief. It is not
possible to ascertain with any degree of confidence the amount
of our financial exposure, if any.
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 guests and disputes over our
intellectual property.
104
Management
Executive officers and directors
Set forth below is information concerning our executive officers
and directors. Our directors are generally elected for one-year
terms. We expect to appoint additional directors over time who
are not our employees or otherwise affiliated with management or
our sponsors.
|
|
|
|
|
|
|
|
|
|
|
| |
Name |
|
Age | |
|
Position |
|
|
| |
John W. Chidsey
|
|
|
44 |
|
|
Chief Executive Officer and Director
|
|
|
|
|
Russell B. Klein
|
|
|
49 |
|
|
President, Global Marketing
Strategy and Innovation
|
|
|
|
|
Ben K. Wells
|
|
|
53 |
|
|
Chief Financial Officer and
Treasurer
|
|
|
|
|
James F. Hyatt
|
|
|
50 |
|
|
Chief Operations Officer
|
|
|
|
|
Peter C. Smith
|
|
|
50 |
|
|
Chief Human Resources Officer
|
|
|
|
|
Anne Chwat
|
|
|
47 |
|
|
General Counsel and Corporate
Secretary
|
|
|
|
|
Charles M. Fallon, Jr.
|
|
|
44 |
|
|
President, North America
|
|
|
|
|
Amy E. Wagner
|
|
|
41 |
|
|
Senior Vice President, Investor
Relations
|
|
|
|
|
Christopher M. Anderson
|
|
|
39 |
|
|
Vice President, Finance and
Controller
|
|
|
|
|
Brian T. Swette
|
|
|
52 |
|
|
Non-Executive Chairman of the Board
|
|
|
|
|
Andrew B. Balson
|
|
|
40 |
|
|
Director
|
|
|
|
|
David Bonderman
|
|
|
64 |
|
|
Director
|
|
|
|
|
Richard W. Boyce
|
|
|
52 |
|
|
Director
|
|
|
|
|
David A. Brandon
|
|
|
54 |
|
|
Director
|
|
|
|
|
Armando Codina
|
|
|
60 |
|
|
Director
|
|
|
|
|
Peter R. Formanek
|
|
|
63 |
|
|
Director
|
|
|
|
|
Manuel A. Garcia
|
|
|
63 |
|
|
Director
|
|
|
|
|
Adrian Jones
|
|
|
42 |
|
|
Director
|
|
|
|
|
Sanjeev K. Mehra
|
|
|
49 |
|
|
Director
|
|
|
|
|
Stephen G. Pagliuca
|
|
|
51 |
|
|
Director
|
|
|
|
|
Kneeland C. Youngblood
|
|
|
51 |
|
|
Director
|
|
|
|
|
|
John W. Chidsey has served as our Chief Executive Officer
and a member of the Board since April 2006. From September 2005
until April 2006, he served as our President and Chief Financial
Officer and from June 2004 until September 2005, he was our
President of North America. Mr. Chidsey joined us as
Executive Vice President, Chief Administrative and Financial
Officer in March 2004 and held that position until June 2004.
From January 1996 to March 2003, Mr. Chidsey served in
numerous positions at Cendant Corporation, including Chief
Executive Officer of the Vehicle Services Division and the
Financial Services Division. Mr. Chidsey is a director of
Doctors Hospital, a part of Baptist Health South Florida, South
Floridas largest not-for-profit healthcare organization.
He is also a member of the Board of Trustees of Davidson College.
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.
105
Ben K. Wells has served as our Chief Financial Officer
and Treasurer since April 2006. From May 2005 to April 2006,
Mr. Wells served as our Senior Vice President, Treasurer.
From June 2002 to May 2005 he was a Principal and Managing
Director at BK Wells & Co., a corporate treasury advisory
firm in Houston, Texas. From June 1987 to June 2002, he was at
Compaq Computer Corporation, most recently as Vice President,
Corporate Treasurer. Before joining Compaq, Mr. Wells held
various finance and treasury responsibilities over a 10-year
period at British Petroleum.
James F. Hyatt has served as our Chief Operations Officer
since August 2005. Mr. Hyatt had previously served as
Executive Vice President, U.S. Franchise Operations from July
2004 to August 2005 and Senior Vice President, U.S. Franchise
Operations from February 2004 to July 2004. Mr. Hyatt
joined us as Senior Vice President, Operations Services and
Programs in May 2002. From 1995 to May 2002, Mr. Hyatt was
a Burger King franchisee in Atlanta, Georgia.
Peter C. Smith has served as our Chief Human Resources
Officer since December 2003. From September 1998 to November
2003, Mr. Smith served as Senior Vice President of Human
Resources at AutoNation.
Anne Chwat has served as our General Counsel and
Corporate Secretary since September 2004. From September 2000 to
September 2004, Ms. Chwat served in various positions at
BMG Music (now SonyBMG Music Entertainment) including as Senior
Vice President, General Counsel and Chief Ethics and Compliance
Officer.
Charles M. Fallon, Jr. has served as our President, North
America since June 2006. From November 2002 to June 2006,
Mr. Fallon served as Executive Vice President of Revenue
Generation for Cendant Car Rental Group, Inc. Mr. Fallon
served in various positions with Cendant Corporation, including
as 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 since April 2006. 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 Vice President,
Finance and Controller since February 2005. From May 2002 to
February 2005, Mr. Anderson served as Director of Finance
and Controller for a division of Hewlett-Packard. From February
2000 through May 2002, he served as a Director of Finance and
Controller for a division of Compaq Computer Corporation.
Brian T. Swette has served on our board since April 2003
and became Non-Executive Chairman of our board in April 2006.
Mr. Swette served as Chief Operating Officer of eBay in San
Jose, California from 1998 to 2002. Mr. Swette is a
director of Jamba Juice Company.
Andrew B. Balson has served on our board since December
2002. Mr. Balson is a Managing Director of Bain Capital
Partners, where he has worked since 1996. Mr. Balson is a
director of Dominos Pizza and UGS Corp.
David Bonderman has served on our board since December
2002. Mr. Bonderman is a Founding Partner of Texas Pacific
Group and has served in that role since 1992. Mr. Bonderman
is a director of the following public companies: CoStar Group,
Inc., RyanAir Holdings, plc and Gemalto N.V.
106
Richard W. Boyce has served on our board since December
2002. Mr. Boyce has been a Partner of Texas Pacific Group
based in San Francisco, California since January 1999.
Mr. Boyce is a director of ON Semiconductor and J. Crew
Group, Inc.
David A. Brandon has served on our board since September
2003. Mr. Brandon is Chairman and CEO of Dominos
Pizza in Ann Arbor, Michigan and has served in that role since
March 1999. From 1989 to 1998, Mr. Brandon served as
President and CEO of Valassis Communication, Inc. and he was
Chairman of Valassis from 1997 to 1998. Mr. Brandon is a
director of The TJX Companies, Dominos Pizza and Kaydon
Corporation.
Armando Codina has served on our board since November
2005. Mr. Codina is founder and Chairman of Codina Group,
Inc., a real estate development company, established in 1979. In
April, 2006, Codina Group, Inc. was acquired by Florida East
Coast Industries, Inc. and Mr. Codina became Chief
Executive Officer and President of both Flagler Development
Company and Codina Group, Inc. Mr. Codina is a director of
AMR Corporation, BellSouth Corporation, Florida East Coast
Industries, Inc., General Motors Corporation and Merrill
Lynch & Co., Inc.
Peter R. Formanek has served on our board since September
2003. Mr. Formanek has been a private investor in Memphis,
Tennessee since May 1994. Mr. Formanek is a co-founder of
AutoZone, Inc.
Manuel A. Garcia has served on our board since September
2003. Mr. Garcia has served as President and Chief
Executive Officer of Atlantic Coast Management, Inc., an
operator of various restaurants in the Orlando, Florida area,
since 1996. Mr. Garcia is Chairman of the Board of Culinary
Concepts, Inc.
Adrian Jones has served on our board since December 2002.
Mr. Jones has been with Goldman, Sachs & Co. in New
York, New York and London, UK since 1994, and has been a
Managing Director since November 2002. Mr. Jones is a
director of Autocam Corporation, Signature Hospital Holding, LLC
and HealthMarket Inc.
Sanjeev K. Mehra has served on our board since December
2002. Mr. Mehra has been with Goldman, Sachs & Co. in
New York, New York since 1986, and has been a Managing Director
since 1996. Mr. Mehra is a director of Aramark Holdings
Corporation, The Nalco Company, Madison River Telephone Company,
LLC and SunGard Data Systems, Inc.
Stephen G. Pagliuca has served on our board since
December 2002. Mr. Pagliuca has served as a Managing
Director of Bain Capital Partners since 1989. Mr. Pagliuca
is a director of Gartner Group, Inc., Instinet Group
Incorporated and ProSeibenSat Media AG.
Kneeland C. Youngblood has served on our board since
October 2004. Mr. Youngblood has served as Co-Founder and
Managing Partner of Pharos Capital Group, LLC in Dallas, Texas,
a private equity firm focused on technology companies, business
service companies and health care companies, since January 1998.
Mr. Youngblood is Chairman of the Board of the American
Beacon Funds and is a director of Starwood Hotels and Resorts
Worldwide, Inc. and Gap Inc.
Board structure and composition
As of December 31, 2006, our board of directors had twelve
non-management members and one management member.
Messrs. Balson, Bonderman, Boyce, Jones, Mehra and Pagliuca
were appointed to our board of directors by the sponsors
pursuant to a shareholders agreement under which each of
the sponsors currently has the right to appoint two members of
our
107
board of directors. For more information on this
shareholders agreement, see Description of Capital
Stock Shareholders Agreement.
We are deemed to be a controlled company under the
rules of the New York Stock Exchange, and we rely on, and intend
to continue to rely on, the controlled company
exception to the board of directors and committee composition
requirements under the rules of the New York Stock Exchange.
Pursuant to this exception, we are exempt from the rule that
requires our board of directors to be composed of a majority of
independent directors; our compensation committee be
composed solely of independent directors; and our
executive and corporate governance committee be composed solely
of independent directors as defined under the rules
of the New York Stock Exchange. The controlled
company exception does not modify the independence
requirements for the audit committee, and we intend to comply
with the requirements of the Sarbanes-Oxley Act and the New York
Stock Exchange rules, which require that our audit committee be
composed of at least three independent directors by May 17,
2007.
Director compensation
Prior to July 1, 2006, directors who were employees of the
company or the sponsors did not receive any fees for their
services as directors. The other directors received an annual
retainer of $50,000 for service on our board payable at their
option either 100% in cash or 100% in stock options. They also
received $1,000 for each board meeting attended. Effective
July 1, 2006, we amended our director compensation program
to offer the following director compensation. The Non-Executive
Chairman of our board receives an annual retainer of $80,000 and
the other non-management directors, including those directors
who are employed by the sponsors, receive an annual retainer of
$50,000. The annual retainers are payable at the directors
option either 100% in cash or 100% in shares of our common
stock. In addition, our Non-Executive Chairman will be granted
on an annual basis shares of our common stock having a fair
market value on the grant date of $120,000 and each other
non-management member of our board will receive a share award
with a grant date fair market value of $85,000. The
non-management chair of the audit committee receives an
additional $20,000 fee and each other non-management committee
chair receives an additional $10,000 fee, payable at his or her
option either 100% in cash or 100% in shares of our common
stock. All shares awarded to the non-management directors will
be settled upon termination of board service. No separate
committee meeting fees are paid and no compensation is paid to
management directors for board or committee service.
All directors are reimbursed for reasonable travel and lodging
expenses incurred by them in connection with attending board and
committee meetings.
Board committees
Our board of directors has established an audit committee, a
compensation committee and an executive and corporate governance
committee. The members of each committee are appointed by our
board of directors and serve one-year terms.
Audit committee
Our audit committee assists the board in its oversight of the
integrity of our financial statements, the qualifications,
independence and performance of our independent auditors, the
performance of our internal audit function and our compliance
with regulatory
108
requirements. This committee is responsible for the appointment,
compensation, retention and oversight of the work of our
independent auditors. Pursuant to its written charter, our audit
committee pre-approves all audit services and permitted
non-audit services to be performed by our independent auditors
before the firm is engaged to render such services or pursuant
to pre-approved policies and procedures established by the
committee.
The audit committee is composed of Messrs. Boyce, Garcia
and Formanek (chair). Messrs. Formanek and Garcia are
independent directors within the requirements of the
Sarbanes-Oxley Act and the New York Stock Exchange rules. We
expect to replace Mr. Boyce with a director who is
independent under the Sarbanes-Oxley Act and the New York Stock
Exchange rules, by May 17, 2007. Our board has determined
that Mr. Formanek possesses financial management
expertise under the New York Stock Exchange Rules and
qualifies as an audit committee financial expert as
defined under the Sarbanes-Oxley Act. KPMG LLP currently serves
as our independent registered public accounting firm.
Compensation committee
Our compensation committee oversees our compensation and
benefits policies, oversees and sets the compensation and
benefits arrangements of our Chief Executive Officer and certain
other executive officers, provides a general review of, and
makes recommendations to our board of directors and/or to the
Companys shareholders with respect to our equity-based
compensation plans; reviews and approves all of our equity-based
compensation plans that are not otherwise subject to the
approval of our shareholders; implements, administers, operates
and interprets all equity-based and similar compensation plans
to the extent provided under the terms of such plans, including
the power to amend such plans; and reviews and approves awards
of shares or options to officers and employees pursuant to our
equity-based plans. The compensation committee is composed of
Messrs. Boyce, Codina, Mehra and Pagliuca (chair).
Executive and corporate governance committee
Our executive and corporate governance committee acts for our
board of directors with respect to any matters delegated to it
by our board and also acts as our nominating and corporate
governance committee. Our board has delegated to this committee
the authority to identify and recommend potential candidates
qualified to become board members and recommend directors for
appointment to board committees. It also exercises general
oversight with respect to the governance and performance of our
board, as well as corporate governance matters applicable to us
and our employees and directors. This committee also has
authority to take actions on behalf of the company (except if
prohibited by applicable law or regulation) if the amounts
associated with such actions do not individually exceed
$25 million except the committee has the authority to
declare dividends from wholly-owned subsidiaries and make and
capitalize loans by and among us and our wholly-owned
subsidiaries in excess of $25 million. The executive and
corporate governance committee is composed of
Messrs. Boyce, Chidsey, Pagliuca and Mehra (chair).
Compensation committee interlocks and insider
participation
The following non-management directors serve on the compensation
committee: Stephen G. Pagliuca (Chairman), Richard W. Boyce,
Armando Codina and Sanjeev K. Mehra. No directors on the
compensation committee are or have been officers or employees of
us or any of our subsidiaries. None of our executive officers
serves, or in the past year has served, on the board
109
of directors or compensation committee of another entity, one or
more of whose executive officers served on our board of
directors or our compensation committee.
Mr. Codina is an executive officer, director and an
approximately 8.2% owner of the outstanding shares of a public
company whose wholly-owned subsidiary has agreed to lease us an
approximately 224,638 square foot building to be
developed in Coral Gables, Florida, which lease has now been
assigned to a partnership owned by such public company and
wholly-owned subsidiary of a pension fund for which
JP Morgan Chase Bank, N.A. acts as trustee. The building
will serve as our new global headquarters beginning in 2008. The
lease runs for 15 years from the date we occupy the
building or 60 days from when the landlord substantially
completes construction. The estimated annual rent for the
15-year initial lease
term, which is expected to be approximately $8 million per
year, will be finalized upon the completion of the
buildings construction. Fixed annual rent will escalate by
6% every other year commencing after the second year and
operating costs will escalate based upon the inflation rate. The
lease terms were negotiated on an arms length basis prior
to the time that Mr. Codina was asked to join the board of
directors, and we believe the terms reflect market terms.
Additional director disclosure
In 2000, a series of private equity funds formed by Texas
Pacific Group acquired a 26.4% equity interest in Gemplus
International SA (Gemplus). In April 2005, a former
Gemplus employee and shareholder filed a private criminal
complaint before a Paris court against current and former
directors and executives of Gemplus, including
Mr. Bonderman, and Gemplus auditors. In his
complaint, the plaintiff generally alleges fraud and disclosure
violations arising from Texas Pacific Groups acquisition
of its equity interest in Gemplus and other public disclosures
by Gemplus between 2000 and 2002. Mr. Bonderman believes
the allegations against him in the complaint to be without merit
and intends to vigorously defend the charges.
110
Executive compensation
The following table sets forth information regarding the
compensation paid to John W. Chidsey, our Chief
Executive Officer, Gregory D. Brenneman, our former Chairman of
the Board and Chief Executive Officer, and our four other most
highly compensated executive officers (measured by base salary
and annual bonus) during the fiscal years ended June 30,
2006 and June 30, 2005, collectively referred to as our
named executive officers in this prospectus.
Summary compensation table
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Long term compensation | |
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| |
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Annual | |
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|
|
Securities | |
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|
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|
compensation | |
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|
|
Other annual | |
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Restricted | |
|
underlying | |
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All other | |
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| |
|
Bonus | |
|
compensation | |
|
stock awards | |
|
options/ | |
|
compensation | |
Name and principal position |
|
Year | |
|
Salary ($) | |
|
($)(3) | |
|
($)(4) | |
|
($)(5) | |
|
SARs(#) | |
|
($)(6) | |
| |
John Chidsey
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|
|
2006 |
|
|
$ |
814,567 |
|
|
$ |
7,139,170 |
|
|
$ |
53,494 |
|
|
$ |
3,583,073 |
|
|
|
|
|
|
$ |
110,398 |
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Chief Executive
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|
|
2005 |
|
|
|
744,231 |
|
|
|
1,625,000 |
|
|
|
76,009 |
|
|
|
|
|
|
|
236,746 |
|
|
|
246,779 |
|
Officer(1)
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
Peter C. Smith
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|
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2006 |
|
|
|
408,769 |
|
|
|
1,914,875 |
|
|
|
30,710 |
|
|
|
|
|
|
|
13,542 |
|
|
|
52,474 |
|
Chief Human
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|
|
2005 |
|
|
|
400,000 |
|
|
|
294,240 |
|
|
|
25,937 |
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|
|
293,816 |
|
|
|
52,693 |
|
|
|
50,127 |
|
Resources Officer
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|
|
|
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|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
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Russell B. Klein
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|
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2006 |
|
|
|
436,538 |
|
|
|
1,555,589 |
|
|
|
35,315 |
|
|
|
|
|
|
|
151,939 |
|
|
|
95,200 |
|
President, Global
|
|
|
2005 |
|
|
|
400,000 |
|
|
|
309,164 |
|
|
|
75,107 |
|
|
|
307,859 |
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|
|
|
|
|
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77,603 |
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Marketing Strategy
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and Innovation
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James F. Hyatt
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2006 |
|
|
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408,769 |
|
|
|
1,478,995 |
|
|
|
37,123 |
|
|
|
|
|
|
|
|
|
|
|
72,894 |
|
Chief Operations
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|
|
2005 |
|
|
|
400,000 |
|
|
|
588,000 |
|
|
|
24,047 |
|
|
|
|
|
|
|
131,732 |
|
|
|
49,618 |
|
Officer
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|
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|
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Anne Chwat
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2006 |
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434,317 |
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|
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1,334,606 |
|
|
|
33,222 |
|
|
|
|
|
|
|
|
|
|
|
118,867 |
|
General Counsel and
|
|
|
2005 |
|
|
|
317,115 |
|
|
|
541,546 |
|
|
|
20,259 |
|
|
|
|
|
|
|
210,770 |
|
|
|
97,488 |
|
Corporate Secretary
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Gregory D. Brenneman
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2006 |
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|
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1,021,923 |
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|
|
12,421,349 |
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|
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186,441 |
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|
|
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|
|
|
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310,975 |
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Former Chief Executive
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|
|
2005 |
|
|
$ |
900,000 |
|
|
$ |
2,250,000 |
|
|
$ |
187,207 |
|
|
|
|
|
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|
3,025,743(2 |
) |
|
$ |
569,384 |
|
Officer(2)
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|
(1) |
Mr. Chidsey became Chief Executive Officer on April 7,
2006. |
|
(2) |
Mr. Brenneman served as Chairman of the Board from
February 17, 2005 until April 7, 2006 and Chief
Executive Officer from August 1, 2004 until April 7,
2006. He served as a consultant until June 30, 2006 and
received his base salary and bonus based on the entire 2006
fiscal year. Mr. Brenneman forfeited 1,815,509 of his
3,025,743 options upon his separation from employment on
April 7, 2006. |
|
(3) |
For fiscal 2006, bonuses include amounts paid under our
Restaurant Support Incentive Plan (RSIP), the
February 2006 compensatory make-whole payment which is described
below in Certain Relationships and Related
Transactions and other individual bonuses. For fiscal
2005, bonuses include amounts paid under the RSIP and other
individual bonuses. Bonuses are generally paid in the year
following the year in which they were earned. Fiscal year 2006
and 2005 bonus payments were made on August 31, 2006 and
September 1, 2005, respectively. The 2005 bonuses for
Messrs. Klein and Smith do not include their partial
deferrals into restricted stock units (see footnote
(5) below) which is reflected in table under the column
Restricted Stock Awards. |
|
(4) |
This column includes: (a) in fiscal 2006, the dollar value
of interest earned on compensation deferred under our Executive
Retirement Plan in excess of 120% of the long-term applicable
federal rate (Mr. Chidsey, $6,356; Mr. Smith, $3,820;
Mr. Klein, $4,613; Mr. Hyatt, $4,490; Ms. Chwat,
$2,465; Mr. Brenneman, $6,267); (b) in fiscal 2005,
the dollar value of interest earned on compensation deferred
under our Executive Retirement Plan and the Investment Deferred
Compensation Plan in excess of 120% of the long-term applicable
federal rate (Mr. Chidsey, $6,129; Mr. Klein, $5,007;
Mr. Hyatt, $1,434; Mr. Smith, $5,404;
Mr. Brenneman, $6,437; and Ms. Chwat $1,522);
(c) in fiscal 2006, amounts on account of personal use of
company-leased aircraft (calculated using the actual invoice
cost associated with such airplane use) (Mr. Chidsey,
$13,089 and Mr. Brenneman, $130,887); (d) in fiscal |
111
|
|
|
2005, amounts on account of
personal use of company-leased aircraft (calculated using the
actual invoice cost associated with such airplane use)
(Mr. Klein, $30,876 and Mr. Brenneman, $84,522);
(e) perquisite allowances in fiscal 2006 (Mr. Chidsey,
$30,987, Mr. Smith, $26,631; Mr. Klein, $30,403;
Mr. Hyatt, $25,784; Ms. Chwat, $30,506; and
Mr. Brenneman, $29,082); (f) car allowance amounts in
fiscal 2005 (Mr. Chidsey, $20,040, Mr. Smith, $20,040,
Mr. Klein, $20,040, Mr. Hyatt, $19,852,
Mr. Brenneman, $18,036 and Ms. Chwat, $14,953);
(g) in fiscal 2006, tax gross-up payments related to
relocation expenses and aircraft use (Mr. Chidsey, $2,763,
Mr. Hyatt, $6,634 and Mr. Brenneman, $5,532 and
$14,321); and (h) in fiscal 2005, tax gross-up payments
(Mr. Chidsey, $49,841; Mr. Klein, $17,083; Mr. Hyatt,
$2,761; Mr. Smith, $493; Ms. Chwat, $3,116 and
Mr. Brenneman, $77,290); Mr. Chidseys,
Ms. Chwats and Mr. Brennemans tax gross-up
payments for 2005 were primarily related to their relocation
expenses. Each of Messrs. Chidsey, Smith, Klein, Hyatt,
Brenneman and Ms. Chwat in fiscal 2006 and each of
Messrs. Chidsey, Hyatt, Smith and Ms. Chwat in fiscal
2005 received personal benefits having an aggregate value of
less than the minimum required for disclosure under the rules of
the SEC. Amounts on account of personal airplane use in fiscal
2005 are primarily related to company-mandated hurricane
evacuation as well as spousal travel in connection with business
functions.
|
|
(5) |
Mr. Chidsey was granted
210,769 restricted stock units on May 17, 2006. The
restricted stock units vest 20% per year over five
(5) years. The fair market value of a share of the
Companys common stock on the date of grant was $17 for a
total amount of $3,583,073. The value of Mr. Chidseys
restricted stock unit holdings as of June 30, 2006 was
$3,319,612 based on a fair market value of $15.75 per share. To
the extent dividends are paid on shares of the Companys
common stock while the restricted stock units remain
outstanding, Mr. Chidsey will receive an amount in cash for
each of his vested and unvested restricted stock units equal to
the amount per share of the dividend. Each of Messrs. Klein
and Smith elected to receive one-half of his 2005 fiscal year
bonus in the form of restricted stock units (which were granted
after the end of fiscal 2005 at the same time as the bonus
amounts were paid). Mr. Klein was granted restricted stock
units with respect to 30,035 shares of the Companys common
stock on September 1, 2005 and Mr. Smith was granted
restricted stock units with respect to 28,665 shares of the
Companys common stock on September 1, 2005. The
restricted stock units vest one-half on each anniversary of the
grant date. The fair market value of a share of common stock on
the date of grant was $10.25. The aggregate number of shares and
value with respect to unvested restricted stock unit holdings of
Messrs. Chidsey, Klein and Smith on June 30, 2006 were
210,769 shares ($3,319,612); 42,076 shares ($662,697); and
44,526 shares ($701,285), respectively. The fair market value of
a share of the Companys common stock for purposes of
determining these values was $15.75.
|
|
(6) |
This column includes:
(a) company match and profit sharing contributions to the
Companys Executive Retirement Plan in fiscal 2006
(Mr. Chidsey, $108,874; Mr. Smith, $50,006;
Mr. Klein, $52,154; Mr. Hyatt, $49, 246;
Ms. Chwat, $52,324; and Mr. Brenneman, $48,480); and
in fiscal 2005 (Mr. Chidsey, $89,654; Mr. Klein,
$48,000; Mr. Hyatt, $48,000; Mr. Smith, $48,000;
Ms. Chwat, $37,760 and Mr. Brenneman, $114,000);
(b) the value of executive life insurance benefits in
fiscal 2006 (Mr. Chidsey, $1,524; Mr. Smith, $2,468;
Mr. Klein, $2,257; Mr. Hyatt, $2,405; Ms. Chwat,
$1,880; and Mr. Brenneman, $1,329); and in fiscal 2005
(Mr. Chidsey, $1,438; Mr. Smith, $2,127;
Mr. Klein, $1,903; Mr. Hyatt, $1,618; Ms. Chwat,
$751 and Mr. Brenneman, $1,450); (c) subsidy for
health coverage in fiscal 2006 (Mr. Brenneman, $2,871); (d)
reimbursement of premiums for medical insurance coverage under a
prior employers health plan in lieu of participation in
the Companys plan in fiscal 2005 (Mr. Brenneman, $5,670);
(e) reimbursement of tuition fees in fiscal 2006
(Mr. Klein, $40,789) and fiscal 2005 (Mr. Klein,
$27,700 ; Ms. Chwat, $30,438 and Mr. Brenneman,
$28,750); (f) relocation related expenses incurred during
fiscal 2006 (Mr. Hyatt, $21,243; Ms. Chwat, $64,663;
Mr. Brenneman, $258,296) and during fiscal 2005 (Mr.
Chidsey $155,687; Ms. Chwat, $28,540 and
Mr. Brenneman, $419,514).
|
Stock option/ SAR grants in last fiscal year
The following table sets forth information concerning grants of
stock options made to our named executive officers during our
fiscal year ended June 30, 2006. No stock appreciation
rights were granted to our named executive officers during our
most recent fiscal year.
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Individual grant | |
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| |
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Percent of total | |
|
|
|
Potential realizable value | |
|
|
|
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| |
|
|
|
at assumed annual rates | |
|
|
Number of | |
|
|
|
|
|
of stock price | |
|
|
securities | |
|
Options/SARs | |
|
|
|
appreciation for option | |
|
|
underlying | |
|
granted to | |
|
|
|
term(2) | |
|
|
options/SARs | |
|
employees in | |
|
Exercise or base | |
|
Expiration | |
|
| |
Name |
|
granted (#)(1) | |
|
fiscal year | |
|
price ($/Share) | |
|
date | |
|
5%($) | |
|
10%($) | |
| |
Peter C. Smith
|
|
|
13,542 |
|
|
|
0.62% |
|
|
|
$10.25 |
|
|
|
8/21/2015 |
|
|
$ |
87,294 |
|
|
$ |
221,220 |
|
Russell B. Klein
|
|
|
20,208 |
|
|
|
0.93% |
|
|
|
$10.25 |
|
|
|
8/21/2015 |
|
|
$ |
130,264 |
|
|
$ |
330,115 |
|
|
|
|
131,731 |
|
|
|
6.05% |
|
|
|
$17.00 |
|
|
|
5/17/2016 |
|
|
$ |
1,408,364 |
|
|
$ |
3,569,070 |
|
|
|
|
(1) |
Options to purchase shares of our common stock were granted by
our board under the Burger King Holdings, Inc. Equity Incentive
Plan. Options vest 20% per year on each anniversary of the grant
date and expire ten years from the grant date. |
112
|
|
|
The exercise price of each of the
options granted was equal to the fair market value of a share of
the Companys common stock on the grant date.
|
|
(2) |
The potential realizable values
represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term.
The potential gains shown are net of the option exercise price,
but do not include deductions for taxes associated with the
exercise. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the
respective options were granted (using the fair market value of
our common stock on the date of grant) to their expiration date.
Actual gains, if any, will depend upon the future market prices
of our common stock, the option holders continued
employment through the option period and the date on which the
options are exercised. The 5% and 10% annual rates of
appreciation are mandated by the rules of the SEC and are not
intended to forecast future appreciation, if any, of our common
stock.
|
Aggregated option and SAR exercises in last fiscal year and
fiscal year end option values
The following table sets forth information concerning option
exercises by our named executive officers during our most recent
fiscal year ended June 30, 2006.
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|
|
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|
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| |
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Number of securities | |
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|
underlying unexercised | |
|
Value of unexercised in-the- | |
|
|
options/SARs at fiscal | |
|
money options/SARs at | |
|
|
Shares | |
|
|
|
year end (#) | |
|
fiscal year end ($)(1) | |
|
|
acquired on | |
|
Value | |
|
| |
|
| |
Name |
|
exercise (#) | |
|
realized($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| |
John W. Chidsey
|
|
|
0 |
|
|
$ |
0 |
|
|
|
482,954 |
|
|
|
842,809 |
|
|
$ |
4,603,898 |
|
|
$ |
8,320,448 |
|
Peter C. Smith
|
|
|
105,227 |
|
|
$ |
1,877,250 |
|
|
|
10 |
|
|
|
197,744 |
|
|
$ |
120 |
|
|
$ |
2,275,695 |
|
Russell B. Klein
|
|
|
118,373 |
|
|
$ |
2,111,774 |
|
|
|
5 |
|
|
|
329,507 |
|
|
$ |
60 |
|
|
$ |
2,233,082 |
|
James F. Hyatt
|
|
|
0 |
|
|
$ |
0 |
|
|
|
79,037 |
|
|
|
184,427 |
|
|
$ |
944,492 |
|
|
$ |
2,203,903 |
|
Anne Chwat
|
|
|
42,155 |
|
|
$ |
752,045 |
|
|
|
0 |
|
|
|
168,615 |
|
|
$ |
0 |
|
|
$ |
2,014,949 |
|
Gregory D. Brenneman(2)
|
|
|
0 |
|
|
$ |
0 |
|
|
|
1,210,234 |
|
|
|
0 |
|
|
$ |
13,464,579 |
|
|
$ |
0 |
|
|
|
|
(1) |
The value is based on the difference between the applicable
option exercise prices and the fair market value as of
June 30, 2006 ($15.75). |
|
(2) |
Mr. Brenneman served as Chief Executive Officer from
August 1, 2004 through April 7, 2006. He forfeited
1,815,509 of his options upon his separation of employment. |
Agreements with our named executive officers
Employment agreement with Mr. Chidsey
On April 7, 2006, we entered into an employment agreement
with Mr. John Chidsey, our Chief Executive Officer. The
term of the agreement ends on April 6, 2009. At the end of
the term, the agreement automatically extends for additional
three-year periods, unless either party gives notice of
non-renewal to the other at least six months prior to the
expiration of the relevant period. Mr. Chidsey receives an
annual base salary of $1,012,500 and is eligible to receive a
performance-based annual cash bonus with a target payment equal
to 100% of his annual base salary if we achieve the target
performance goals set by our compensation committee for a
particular fiscal year. If we exceed the targets set for a
particular fiscal year, Mr. Chidsey is able to earn a cash
bonus of up to 200% of his annual base salary and if we achieve
at least the threshold performance targets, he will be entitled
to a bonus equal to 50% of his annual base salary. In fiscal
2007 and for periods thereafter, performance-based cash bonus
awards for Mr. Chidsey will be determined in accordance
with the Omnibus Plan (as defined below). Mr. Chidsey may
elect to receive his annual bonus in a lump sum cash payment, or
at his election, in any form as our compensation committee makes
available to members of our senior management team.
Mr. Chidsey is also entitled to receive an annual perquisite
113
allowance of $50,000 and is entitled to private charter jet
usage for business travel (and up to $100,000 per year for
personal use).
On an annual basis, Mr. Chidsey is entitled to receive a
target annual performance-based restricted stock and stock
option grant with a grant date value equal to 400% of his base
salary. The actual value of the grants may be greater or less
than the target amount and will depend on our performance, as
determined by our compensation committee. In connection with his
promotion to Chief Executive Officer, we also granted
Mr. Chidsey an award of 210,769 restricted stock units on
May 17, 2006. The restricted stock units are priced at $17
per share and will vest in five equal installments on each
anniversary of the grant date.
If we terminate Mr. Chidseys employment without cause
or he terminates his employment with good reason or due to his
death or disability (as such terms are defined in the
agreement), he will be entitled to receive an amount equal to
two times his annual base salary and target annual bonus (or
three times, if his termination occurs after a change in
control). He will also be entitled to continued coverage under
our medical, dental and life insurance plans for him and his
eligible dependents and payment of his perquisite allowance,
each during the two-year period following termination (or
three-year period, if his termination occurs after a change in
control). If Mr. Chidseys employment is terminated
due to his death or disability or during the 24-month period
after a change in control of the company either without cause or
for good reason, all options and other equity awards held by
Mr. Chidsey will vest in full and he will have one year to
exercise such awards. Among other events, a resignation for any
reason within the 30-day period immediately following the
one-year anniversary of a change in control involving a
strategic buyer (as determined by our board) constitutes a
termination by us without cause under the employment agreement.
If any payments due to Mr. Chidsey in connection with a
change in control would be subject to an excise tax, we will
provide Mr. Chidsey with a related tax gross-up payment,
unless a reduction in Mr. Chidseys payments by up to
10% would avoid the excise tax.
Employment agreements with Messrs. Smith, Klein and
Hyatt and Ms. Chwat
We have entered into employment agreements with each of
Mr. Peter C. Smith, our Chief Human Resources Officer,
Mr. Russell B. Klein, our President, Global Marketing
Strategy and Innovation, Mr. James F. Hyatt, our Chief
Operations Officer and Ms. Anne Chwat, our General Counsel
and Corporate Secretary. The term of each of the agreements ends
on June 30, 2007. At the end of the term, each
executives employment will be automatically extended for
additional one-year periods, unless we have given a notice of
non-renewal to the executive at least ninety days prior to the
expiration of the relevant period. The agreements provide for an
annual base salary of $412,000 for Mr. Smith, $450,000 for
Mr. Klein, $412,000 for Mr. Hyatt and $437,750 for
Ms. Chwat, subject to annual increases as determined by our
board. The annual base salaries for fiscal 2007 are $424,360 for
Mr. Smith, $500,000 for Mr. Klein, $424,360 for
Mr. Hyatt and $450,883 for Ms. Chwat.
Messrs. Smith and Hyatt and Ms. Chwat are eligible to
receive a performance-based annual cash bonus with a target
payment equal to 70% of their annual base salary if we achieve
the target performance goals set by our compensation committee
for a particular fiscal year; provided that if we exceed the
targets set for a particular fiscal year, the executive is able
to earn a cash bonus of up to 140% of his or her annual base
salary. Mr. Klein is eligible to receive a
performance-based annual cash bonus with a target payment equal
to 80% of his annual base salary if we achieve the target
performance goals set by our compensation committee for a
particular fiscal year; provided that if we exceed the target
set for a particular fiscal year, Mr. Klein is eligible to
receive a cash bonus of
114
up to 160% of his annual base salary. For fiscal 2007 and for
periods thereafter, performance based cash bonus awards will be
determined in accordance with the Omnibus Plan. Each executive
may elect to receive up to 50% of his annual bonus in the form
of restricted stock units or in any other form that our
compensation committee makes available to members of our senior
management team. Each executive also is entitled to receive an
annual perquisite allowance of $35,000 and is eligible to
participate in our long-term equity programs.
If we terminate the executives employment without cause or
if the executive terminates his or her employment with good
reason (as defined in the relevant agreement), the executive
will be entitled to receive his or her then current base salary
and his or her perquisite allowance for one year, a pro-rata
bonus for the year of termination and continued coverage for one
year under our medical, dental and life insurance plans for him
or her and his or her eligible dependents. If the
executives employment is terminated at any time within
24 months after a change in control of the company either
without cause or for good reason, all options held by the
executive will become fully vested upon termination and he or
she will have 90 days to exercise such options.
Non-competition and confidentiality
Each of our named executive officers listed above has agreed not
to compete with us and not to solicit our employees or
franchisees during the term of his or her employment and for one
year after a termination of his or her employment. If the
executive breaches any of these covenants, we will cease paying
any severance due to him or her and he or she will be obligated
to repay any severance amounts paid to him or her. The
agreements also require each executive to maintain the
confidentiality of our information.
Separation and consulting services agreement with
Mr. Brenneman
Mr. Gregory D. Brenneman served as our chief executive
officer from August 1, 2004 until April 7, 2006 and
was also our chairman of the board. In connection with his
separation, we entered into a separation and consulting services
agreement with him. Under this agreement, Mr. Brenneman
continued to provide certain consulting services to us through
June 30, 2006 in exchange for continued payment of his base
salary at the time of separation until such date. He has also
received the following benefits in connection with his
separation: (a) an annual bonus payment of
$2.06 million for fiscal 2006 (which was paid to him at the
same time as bonuses were paid to our active employees);
(b) a relocation benefit in accordance with company policy;
and (c) accelerated vesting of 605,117 stock options that
would have vested on August 1, 2006, with all vested
options to be exercised on or before April 6, 2007. His
remaining unvested options to purchase 1,815,509 shares were
cancelled on April 7, 2006. Additionally,
Mr. Brenneman continues to receive payment of his base
salary at the time of separation of $1.03 million for three
years from the end of the consulting period (the unpaid amounts
of which will be paid in full on April 2, 2007 if
consistent with Section 409A of the Code) and continued
coverage under our medical and dental plans until April 30,
2007 (or, if earlier, until he receives such benefits from a
subsequent employer). Mr. Brenneman remains bound by the
shareholders agreement he entered into with us, and we
have agreed not to exercise our repurchase rights with respect
to any shares he owns or may acquire as a result of option
exercises. In addition, Mr. Brenneman remains subject to
one-year post-separation non-competition and non-solicitation
covenants as well as the other restrictive covenants contained
in the employment agreement that governed his employment with us.
115
Equity incentive plans
Burger King Holdings, Inc. Equity Incentive Plan
The following is a description of the material terms of the
Burger King Holdings, Inc. Equity Incentive Plan, which we refer
to as the Equity Incentive Plan. This summary is not
a complete description of all provisions of the Equity Incentive
Plan and is qualified in its entirety by reference to the Plan,
which is incorporated by reference into the registration
statement of which this prospectus is a part.
Purpose. The purpose of the Equity Incentive Plan is to
motivate Equity Incentive Plan participants to perform to the
best of their abilities and to align their interests with the
interests of our shareholders by giving participants an
ownership interest in our common stock.
Plan Administration. The Equity Incentive Plan is
administered by the compensation committee of our board
(referred to as the compensation committee). The
compensation committee has the authority, among other things, to
select eligible individuals to participate in the Equity
Incentive Plan, to determine the terms and conditions of awards
granted under the Equity Incentive Plan and to make all
determinations necessary for the administration of the Equity
Incentive Plan.
Authorized Shares. Subject to certain adjustments, the
maximum number of shares of common stock that may be delivered
pursuant to awards under the Equity Incentive Plan is
13,684,418. Shares of common stock to be issued under the Equity
Incentive Plan may be authorized but unissued shares of common
stock or shares held in treasury. Any shares of common stock
covered by an award that terminates, lapses or is otherwise
cancelled will again be available for issuance under the Equity
Incentive Plan.
Eligibility. Our officers, designated employees and
consultants as well as non-management members of our board are
eligible to participate in the Equity Incentive Plan.
Types of Awards. The compensation committee may grant the
following types of awards under the Equity Incentive Plan:
investment rights, stock options and restricted stock units. The
exercise price of an option may not be less than the fair market
value of a share of common stock on the date of grant and each
option will have a ten-year term, unless otherwise determined by
the compensation committee.
An investment right is a one-time opportunity granted to members
of our executive team, other senior executives and independent
board members to purchase shares of our common stock on or soon
after the grant of the right at a price per share equal to the
fair market value of our common stock on the date of grant of
the investment right. Investment rights were granted to certain
of our officers at the time we adopted the plan and, after that
date, to newly hired executive team employees and newly
appointed members of our board.
A restricted stock unit consists of a contractual right
denominated in shares of our common stock which represents the
right to receive a share of our common stock at a future date,
subject to certain vesting and other conditions.
Vesting; Settlement. The compensation committee has the
authority to determine the vesting schedule applicable to each
award. Unless otherwise set forth in an award agreement, options
granted to employees vest in equal installments on each of the
first five anniversaries of the grant date and options granted
to members of our board at the election of a director in lieu of
receiving a portion of his or her annual cash retainer vest 25%
on the last day of each quarter after the grant date. Restricted
stock units granted in respect of our 2005 fiscal year or
116
earlier at the election of an employee in lieu of receiving a
portion of his or her annual bonus vest in two equal
installments on each of the first two anniversaries of the grant
date. Vested restricted stock units will be settled upon the
earlier of a termination of employment or December 31, 2007.
Termination of Employment. Unless otherwise determined by
the compensation committee and provided in an applicable option
agreement, upon a termination of employment or service, all
unvested options will terminate. A participant will have ninety
days to exercise vested options upon a termination without cause
or upon his or her resignation and one year upon a termination
due to his or her death, disability or retirement (or, if
shorter, the remaining term of the option). If a
participants service is terminated for cause, all options,
whether or not vested, will terminate.
Unless otherwise determined by the compensation committee and
provided in an applicable restricted stock unit agreement,
restricted stock units granted at the election of an employee in
lieu of receiving a portion of his or her annual bonus will
become fully vested upon a termination without cause or due to
death, disability or retirement.
Change in Control. If there is a change of control (as
defined in the Equity Incentive Plan) and, within twenty-four
months following the change of control, a participants
employment is terminated without cause, all unvested options
will vest upon termination.
In the event of a change of control, the compensation committee
may (1) accelerate the vesting of unvested options and
restricted stock units, (2) direct that options and
restricted stock units be assumed by the acquiror in the change
of control transaction or converted into new awards with
substantially the same terms or (3) cancel awards in
exchange for a payment, which may be in cash or equity
securities.
Repurchase Rights. We do not have the ability to
repurchase any shares held by participants.
Transferability. Awards granted under the Equity
Incentive Plan may not be sold, pledged or otherwise
transferred, other than following the death of a participant by
will or the laws of descent. A participants beneficiary or
estate may exercise vested options (but not investment rights)
during the applicable exercise period following the death of the
participant, subject to the same conditions that would have
applied to exercise by the participant.
Adjustment. The compensation committee has the authority
to adjust the number of shares covered by outstanding awards,
the applicable exercise or purchase price of an existing award
and the number of shares of common stock issuable under the
Equity Incentive Plan as a result of any change in the number of
shares resulting from a reorganization, merger, consolidation,
stock split, reverse stock split or other similar transaction.
Amendment and Termination. The compensation committee may
amend or terminate the Equity Incentive Plan or any award
agreement entered into under the Equity Incentive Plan, except
that no amendment shall increase the number of shares available
for grant under the Equity Incentive Plan without the approval
of our stockholders and no amendment may adversely affect the
rights of a participant without a participants consent.
Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan
Our board of directors and stockholders have approved and
adopted the Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan (the Omnibus Plan). The Omnibus Plan replaced
our annual bonus plan described below. The following summary
describes the material terms of the
117
Omnibus Plan. This summary is not a complete description of all
provisions of the Omnibus Plan and is qualified in its entirety
by reference to the Omnibus Plan, which is incorporated by
reference into the registration statement of which this
prospectus is a part.
Authorized Shares. Subject to adjustment, up to 7,113,442
shares of our common stock will be available for awards to be
granted under the Omnibus Plan. As of December 31, 2006
awards covering 1,050,848 shares of our common stock have been
granted under the Omnibus Plan. No participant in the Omnibus
Plan may receive stock options and stock appreciation rights in
any fiscal year that relate to more than 1,053,843 shares of our
common stock. Shares of common stock to be issued under the
Omnibus Plan may be made available from authorized but unissued
common stock or common stock that we acquire.
If any shares of our common stock covered by an award (other
than a substitute award as defined below) terminate or are
forfeited, then the shares of our common stock covered by such
award will again be available for issuance under the Omnibus
Plan. Shares of our common stock underlying substitute awards
shall not reduce the number of shares of our common stock
available for delivery under the Omnibus Plan. A
substitute award is any award granted in assumption
of, or in substitution for, an outstanding award previously
granted by a company acquired by us or with which we combine.
Administration. The compensation committee will
administer the Omnibus Plan and will have authority to select
individuals to whom awards are granted, determine the types of
awards and number of shares covered, and determine the terms and
conditions of awards, including the applicable vesting schedule
and whether the award will be settled in cash, shares or a
combination of the two. The compensation committee may delegate
to one or more of our officers the authority to grant awards to
participants who are not our directors or executive officers.
Types of Awards. The Omnibus Plan provides for grants of
incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, restricted stock units,
deferred shares, performance awards, including cash bonus
awards, and other stock-based awards.
|
|
|
Stock options: The exercise price of an option (other
than a substitute award) may not be less than the fair market
value of a share of our common stock on the date of grant and
each option will have a term to be determined by the
compensation committee (not to exceed ten years). Stock options
will be exercisable at such time or times as determined by the
compensation committee. |
|
|
Stock appreciation rights. A stock appreciation right
(SAR) may be granted free-standing or in tandem with
another award under the plan. Upon exercise of a SAR, the holder
of that SAR is entitled to receive the excess of the fair market
value of the shares for which the right is exercised over the
exercise price of the SAR. The exercise price of a SAR (other
than a substitute award) will not be less than the fair market
value of a share of our common stock on the date of grant. |
|
|
Restricted stock/restricted stock units: Shares of
restricted stock are shares of common stock subject to
restrictions on transfer and a substantial risk of forfeiture. A
restricted stock unit consists of a contractual right
denominated in shares of our common stock which represents the
right to receive the value of a share of common stock at a
future date, subject to certain vesting and other restrictions.
Awards of restricted stock and restricted stock units will be
subject to restrictions and such other terms and conditions as
the compensation committee |
118
|
|
|
may determine, which restrictions and such other terms and
conditions may lapse separately or in combination at such time
or times, in such installments or otherwise, as the compensation
committee may deem appropriate. |
|
|
Deferred shares. An award of deferred shares entitles the
participant to receive shares of our common stock upon the
expiration of a specified deferral period. In addition, deferred
shares may be subject to restrictions on transferability,
forfeiture and other restrictions as determined by the
compensation committee. |
|
|
Other awards: The compensation committee is authorized to
grant other stock-based awards, either alone or in addition to
other awards granted under the Omnibus Plan. Other awards may be
settled in shares, cash, awards granted under the plan or any
other form of property as the compensation committee determines. |
Eligibility. Our employees, directors, consultants and
other advisors or service providers to the company will be
eligible to participate in the Omnibus Plan.
Adjustments. The compensation committee has the authority
to adjust the terms of any outstanding awards and the number of
shares of common stock issuable under the Omnibus Plan for any
change in shares of our common stock resulting from a stock
split, reverse stock split, stock dividend, spin-off,
combination or reclassification of the common stock, or any
other event that the compensation committee determines affects
our capitalization if it determines that an adjustment is
appropriate in order to prevent enlargement or dilution of the
benefits or potential benefits intended to be made available
under the plan.
Performance Awards. The Omnibus Plan will provide that
grants of performance awards, including cash-denominated awards,
and (when determined by the compensation committee) options,
deferred shares, restricted stock or other stock-based awards,
will be made based upon, and subject to achieving,
performance objectives. Performance objectives with
respect to those awards that are intended to qualify as
performance-based compensation for purposes of
Section 162(m) of the Internal Revenue Code are limited to
specified levels of or increases in our or one of our
subsidiaries return on equity, diluted earnings per share,
total earnings, earnings growth, return on capital, return on
assets, return on equity, earnings before interest and taxes,
EBITDA, EBITDA minus capital expenditures, sales or sales
growth, customer growth, traffic, revenue or revenue growth,
gross margin return on investment, increase in the fair market
value of common stock, share price (including but not limited
to, growth measures and total stockholder return), operating
profit, net earnings, cash flow (including, but not limited to,
operating cash flow and free cash flow), cash flow return on
investment (which equals net cash flow divided by total
capital), inventory turns, financial return ratios, total return
to stockholders, market share, earnings measures/ratios,
economic value added (EVA), balance sheet measurements such as
receivable turnover, internal rate of return, increase in net
present value, or expense targets, customer satisfaction surveys
and productivity.
Performance criteria may be measured on an absolute
(e.g., plan or budget) or relative basis. Relative
performance may be measured against a group of peer companies, a
financial market index or other acceptable objective and
quantifiable indices. Except in the case of an award intended to
qualify as performance-based compensation under
Section 162(m) of the Internal Revenue Code, if the
compensation committee determines that a change in our business,
operations, corporate structure or capital structure, or the
manner in which we conduct our business, or other events or
circumstances render the performance objectives unsuitable, the
compensation committee may modify the performance objectives or
the related minimum
119
acceptable level of achievement, in whole or in part, as the
compensation committee deems appropriate and equitable. The
maximum number of shares of our common stock subject to a
performance award in any fiscal year is 1,053,843 shares and the
maximum amount that can be earned in respect of a performance
award denominated in cash or value other than shares on an
annualized basis is $10 million.
Termination of Service. The compensation committee will
determine the effect of a termination of employment or service
on awards granted under the plan.
Change in Control. Upon the occurrence of a change in
control (as defined in the Omnibus Plan), the compensation
committee will determine whether outstanding options will become
fully exercisable and whether outstanding awards (other than
options) will become fully vested or payable. The compensation
committee will determine the treatment of outstanding awards in
connection with any transaction or transactions resulting in a
change in control.
Duration of the Omnibus Plan. The Omnibus Plan was
effective on May 1, 2006. No award may be granted under the
plan after April 19, 2016. However, unless otherwise
expressly provided in the Omnibus Plan or in an applicable award
agreement, any award granted prior to this date may extend
beyond such date, and the authority of the compensation
committee to administer the plan and to amend, suspend or
terminate any such award, or to waive any conditions or rights
under any such award, and the authority of our board to amend
the plan, will extend beyond such date.
Amendment, Modification and Termination. Except as
otherwise provided in an award agreement, our board may from
time to time suspend, discontinue, revise or amend the Omnibus
Plan and the compensation committee may amend the terms of any
award in any respect, provided that no such action will
adversely impair or affect the rights of a holder of an
outstanding award under the plan without the holders
consent, and no such action will be taken without shareholder
approval, if required by the rules of the stock exchange on
which our shares are traded.
Annual bonus program
Burger King Corporation Fiscal Year 2007 Restaurant
Support Incentive Program
On August 8, 2006, our compensation committee approved,
under the Omnibus Plan, the Fiscal Year 2007 Restaurant Support
Incentive Program or 2007 RSIP, which provides for
performance-based cash bonus awards for fiscal 2007 for certain
executives, including our named executive officers. The
incentive payout for participants under the 2007 RSIP will be
determined by reference to a Company Performance Factor and an
Individual Performance Factor, and is expressed as a percentage
of the executives annual base salary. The Company
Performance Factor is an overall business performance
factor which measures our performance against an EBITDA target
set for the fiscal year. EBITDA is measured on a worldwide basis
and on the basis of the scope of the executives role
within the company. Each business performance factor has a
minimum threshold performance level at which a 50%
payout is earned; a target performance level at
which a 100% payout is earned; and a maximum
performance level at which up to a 200% payout can be earned.
The Company Performance Factor is then multiplied by an
executives Individual Performance Factor,
which is based on the executives individual performance
target and actual performance of the executive for fiscal 2007.
The maximum incentive payout under the 2007 RSIP is 250% of base
salary for Mr. Chidsey, 200% of base salary for
Mr. Klein and 175% of base salary for each of
Mr. Hyatt, Mr. Smith and Ms. Chwat.
120
An executive must be employed by us on the last day of the
fiscal year to be entitled to incentive compensation under the
2007 RSIP. If an executives employment is terminated prior
to such date as a result of death or involuntary termination of
employment without cause or with good reason (if applicable),
all or a pro-rata amount of the bonus may be paid. Bonus amounts
to executives on approved leave of absence will be determined by
the compensation committee in its sole discretion.
Executive benefit programs
We sponsor various benefit programs exclusively for certain
executives, including the named executive officers who are
currently employed by us, as described below.
Our Executive Retirement Program permits certain executives to
voluntarily defer portions of their base salary and annual bonus
until retirement or termination of employment. Amounts deferred,
up to a maximum of 6% of base salary, are matched by us on a
dollar-for-dollar basis. Depending on the level at which we
achieve specified financial performance results, an
officers account under the plan may also be credited with
up to an additional 6% of his or her base salary. All amounts
deferred by the executive or credited to his or her account by
us earn interest at a rate that reflects a reasonable long-term
return for a balanced portfolio, as of December 31, 2006,
an annual rate of 8.5%. All contributions by us vest on a graded
basis over a three-year period.
Our Executive Life Insurance Program provides company-paid life
insurance coverage to certain executives and allows such
executives to purchase additional life insurance coverage at
their own cost. Company-paid coverage is limited to the lesser
of 2.75 times base salary or $1.3 million.
Our Executive Health Plan covers all currently employed named
executive officers and certain other executives. It serves as a
fully insured supplement to the medical plan provided to all our
employees. Out-of-pocket costs and expenses for deductibles,
coinsurance, dental care, orthodontia, vision care, prescription
drugs, and preventative care are reimbursed to those executives
up to an annual maximum of $100,000.
In addition, each executive officer is provided with an annual
perquisite allowance to be used, at his or her election, in
connection with financial planning services, automobile
allowance and additional life and other insurance benefits. As
of December 31, 2006, the allowance amount for
Mr. Chidsey is $50,000 and for Messrs. Klein, Hyatt
and Smith and Ms. Chwat is $35,000. Mr. Chidsey is
also entitled to personal use of company aircraft on the terms
set forth in his employment agreement with us, as described
above.
Other employee compensation and benefit programs
We also have additional annual bonus plans which cover most of
our employees, a 401(k) plan with an employer match feature, a
severance program and a comprehensive health and welfare benefit
program.
November 2006 director equity grants
On November 29, 2006, we granted an aggregate of 59,193
deferred shares under the Omnibus Plan to the members of our
board, with a fair market value of $17.82 per share. The
deferred shares vest quarterly on the first day of each calendar
quarter and will be settled upon termination of board service.
121
May 2006 and August 2006 executive equity grants
On May 17, 2006, we granted an aggregate of 869,423 stock
options under the Equity Incentive Plan and the Omnibus Plan,
including 131,731 to Mr. Klein, with an exercise price of
$17 per share. In addition, as described above under
Agreements with Our Named Executive Officers
Employment Agreement with Mr. Chidsey, we made a
grant of 210,769 restricted stock units to Mr. Chidsey in
connection with his entering into a new employment agreement
with us, which grant was also made on May 17, 2006 at a
price of $17 per share.
On August 21, 2006, we made a grant of performance shares
under the Omnibus Plan to certain executives, including
Messrs. Chidsey, Klein, Smith and Hyatt and Ms. Chwat,
who received grants of performance shares in the amount of
142,348; 39,145; 24,192; 21,992; and 23,367 shares of our common
stock, respectively, subject to adjustment as described below.
Subject to the satisfaction of the vesting conditions described
below, the number of shares of our common stock to be issued to
each grantee in settlement of the performance shares
(Earned Performance Shares) will be based on a
Company Performance Factor which measures our
performance against a profit before taxes target for fiscal
2007. The minimum number of Earned Performance Shares for any
executive will be 50% of the performance shares granted and the
maximum number will be 150% of the number of performance shares
granted, depending on attainment of the Company Performance
Factor. If our compensation committee certifies attainment of
the Company Performance Factor at the end of fiscal 2007, then
100% of the Earned Performance Shares will vest on
August 21, 2009 for Mr. Klein; and 50% of the Earned
Performance Shares will vest on August 21, 2009 for
Messrs. Chidsey, Hyatt, Smith and Ms. Chwat, with the
remainder of their Earned Performance Shares vesting on
August 21, 2010. If an executives employment is
terminated at any time within 24 months after a change in
control of the company either without cause or for good reason,
all performance shares will become fully vested upon termination.
February 2006 employee option grant
On February 14, 2006, we granted options to purchase 53
shares of our common stock to each of approximately 5,000 of our
employees worldwide who were not previously eligible to receive
option grants, such as restaurant managers and support staff, at
an exercise price of $21.64 per share. These options generally
vest on February 14, 2011, so long as the employee remains
employed by us, and expire on February 14, 2016.
122
Compensatory make-whole payment
On February 21, 2006 in connection with the payment of a
cash dividend to holders of record of our common stock on
February 9, 2006, we also made a payment to holders of our
options and restricted stock unit awards, primarily members of
senior management, which we refer to as the compensatory
make-whole payment. Our board of directors decided to pay the
compensatory make-whole payment because our board recognized
that the payment of the February 2006 dividend and the
additional $350 million in debt incurred to finance the
payment of the dividend would decrease the value of the equity
interests of holders of our options and restricted stock unit
awards as these holders were not otherwise entitled to receive
the dividend. Our board also recognized that the holders of our
options and restricted stock unit awards had significantly
contributed to the improvement in our business performance and
equity value over the prior two years. Accordingly, our board
decided to pay the same amount of the February 2006 dividend, on
a per share basis, to the holders of our options and restricted
stock unit awards to compensate them for this decline in the
value of their equity interests. The chart under the caption
Certain Relationships and Related Transactions
Payment of the February 2006 Dividend, Compensatory Make-Whole
Payment and the Sponsor Management Termination Fee sets
forth the amount of the compensatory make-whole payment received
by each of our executive officers, including our named executive
officers.
123
Principal and selling stockholders
The following table sets forth certain information as of
January 17, 2007, regarding the beneficial ownership of our
common stock by:
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each selling stockholder |
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each of our directors and named executive officers, including
Gregory D. Brenneman, our prior Chief Executive Officer,
individually; |
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all directors and executive officers as a group; and |
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each person who is known to us to be the beneficial owner of
more than 5% of our common stock. |
As of January 17, 2007, our outstanding equity securities
consisted of 134,448,716 shares of common stock, of which
32,304,065 shares are held by the Goldman Sachs Funds, which are
affiliates of Goldman, Sachs & Co., one of the
representatives of the underwriters. The Goldman Sachs Funds are
selling 6,400,000 shares of our common stock in this
offering (or 7,360,000 shares if the underwriters elect to
purchase 3,000,000 additional shares in full). The Goldman Sachs
Funds are affiliates of a broker-dealer and purchased the shares
to be sold in this offering in the ordinary course of its
business and at the time of such purchase had no agreements or
understandings, directly or indirectly, with any person to
distribute such shares. The selling stockholders affiliated with
Goldman Sachs in this offering may be deemed to be underwriters.
The number of shares beneficially owned by each stockholder is
determined under rules promulgated by the SEC and generally
includes voting or investment power over the shares. The
information does not necessarily indicate beneficial ownership
for any other purpose. Under the SEC rules, the number of shares
of common stock deemed outstanding includes shares issuable upon
conversion of other securities, as well as the exercise of
options or the settlement of restricted stock units held by the
respective person or group that may be exercised or settled on
or within 60 days of January 17, 2007. For purposes of
calculating each persons or groups percentage
ownership, shares of common stock issuable pursuant to stock
options and restricted stock units exercisable or settleable on
or within 60 days of January 17, 2007 are included as
outstanding and beneficially owned for that person or group but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or group.
124
The address for each listed stockholder, unless otherwise
indicated, is: c/o Burger King Holdings, Inc., 5505 Blue Lagoon
Drive, Miami, Florida 33126. To our knowledge, except as
indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
shares of common stock beneficially owned by them.
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Shares beneficially | |
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Shares beneficially | |
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owned after this | |
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owned before this | |
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offering without | |
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offering | |
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Shares | |
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exercise of option | |
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offered | |
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Name and address of beneficial owner |
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Number | |
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Percent | |
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hereby(b) | |
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Number | |
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Percent | |
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Named Executive Officers and
Directors:
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John W. Chidsey(a)
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924,010 |
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* |
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924,010 |
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* |
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Russell B. Klein(a)
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301,206 |
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* |
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301,206 |
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* |
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James F. Hyatt(a)
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118,557 |
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* |
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118,557 |
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* |
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Peter C. Smith(a)
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325,174 |
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* |
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325,174 |
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* |
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Anne Chwat(a)
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167,102 |
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* |
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167,102 |
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* |
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Andrew B. Balson(a)(c)
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1,192 |
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* |
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1,192 |
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* |
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David Bonderman(a)(d)
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36,340,577 |
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27.03% |
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7,200,000 |
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29,140,577 |
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21.67% |
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Richard W. Boyce(a)
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1,192 |
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* |
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1,192 |
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David M. Brandon(a)
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11,192 |
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* |
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11,192 |
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* |
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Armando Codina(a)
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52,673 |
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* |
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52,673 |
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* |
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Peter R. Formanek(a)
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271,029 |
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* |
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271,029 |
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Manuel A. Garcia(a)
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96,817 |
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* |
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96,817 |
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Adrian Jones(a)(e)
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32,304,065 |
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24.03% |
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6,400,000 |
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25,904,065 |
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19.27% |
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Sanjeev K. Mehra(a)(e)
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32,304,065 |
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24.03% |
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6,400,000 |
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25,904,065 |
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19.27% |
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Stephen G. Pagliuca(a)(c)
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1,192 |
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* |
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1,192 |
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Brian T. Swette(a)
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102,308 |
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* |
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102,308 |
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* |
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Kneeland C. Youngblood(a)
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116,799 |
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* |
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116,799 |
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* |
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Gregory D. Brenneman(a)
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1,199,383 |
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* |
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1,199,383 |
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* |
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All Executive Officers and
Directors as a group (21 persons)(a)(c)(d)(e)
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71,224,968 |
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52.48% |
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13,600,000 |
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57,624,968 |
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42.46% |
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5% Stockholders:
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Investment funds affiliated with
Bain Capital Investors, LLC(f) c/o
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Bain Capital Partners, LLC
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32,301,677 |
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24.03% |
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6,400,000 |
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25,901,677 |
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19.27% |
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111 Huntington Avenue Boston,
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MA 02199
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The Goldman Sachs Group, Inc.(g)
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32,304,065 |
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24.03% |
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6,400,000 |
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25,904,065 |
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19.27% |
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85 Broad Street
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New York, NY 10004
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TPG BK Holdco LLC(h)
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36,339,385 |
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27.03% |
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7,200,000 |
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29,139,385 |
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21.67% |
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c/o Texas Pacific Group 301
Commerce Street Suite 3300 Fort Worth, Texas 76102
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* Less than one percent (1%).
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(a) |
Includes beneficial ownership of shares of common stock for
which the following persons hold options exercisable on or
within 60 days of January 17, 2007: Mr. Chidsey,
693,650 shares; Mr. Codina, 5,269 shares;
Mr. Hyatt, 118,557 shares; Mr. Formanek, 75,587
shares; Mr. Smith, 60,605 shares and Ms. Chwat,
42,152 shares; all directors and executive officers as a
group, 1,043,242 shares; and Mr. Brenneman,
685,634 shares. Also includes beneficial ownership of
shares of common stock underlying restricted stock units held by
the following persons that have vested or will |
125
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vest on or within 60 days of
January 17, 2007: Mr. Chidsey, 105,385 shares; Mr.
Klein, 39,098 shares; Mr. Smith, 56,592 shares;
and all directors and executive officers as a group,
211,536 shares. Also includes beneficial ownership of
shares of common stock underlying deferred stock units held by
the following persons that have vested or will vest on or within
60 days of January 17, 2007: each of Messrs. Balson,
Bonderman, Boyce, Brandon, Codina, Formanek, Garcia, Pagliuca
and Youngblood, 1,192 shares; Messrs. Jones and Menra,
2,384 shares; and Mr. Sweete, 1,683 shares; and all directors
and officers as a group, 14,795 shares. Mr. Brenneman
resigned effective April 6, 2006. Consequently information
for Mr. Brenneman is based on records made available to the
company.
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(b) |
Assumes no exercise of the underwriters option to purchase
additional shares from the selling stockholders. |
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(c) |
Mr. Balson and Mr. Pagliuca are Managing Directors and
Members of Bain Capital Investors, LLC. Messrs. Balson and
Pagliuca may be deemed to share voting and dispositive power
with respect to all the shares of common stock held by each of
the Bain Capital investment funds referred to in note
(f) below. Each of Messrs. Balson and Pagliuca
disclaims beneficial ownership of securities held by these
investment funds except to the extent of his pecuniary interest
therein. |
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(d) |
Includes 36,339,385 shares held by TPG BK Holdco LLC, whose
managing member is TPG Partners III, LP, whose general partner
is TPG GenPar III, LP, whose general partner is TPG Advisors
III, Inc., of which 7,200,000 shares of common stock will
be sold by TPG BK Holdco LLC in this offering
8,280,000 shares if the underwriters exercise their option
to purchase additional shares in full). Mr. Bonderman and
James G. Coulter are officers, directors and sole shareholders
of TPG Advisors III, Inc. Mr. Coulter is not affiliated
with us. Each of Messrs. Bonderman and Coulter disclaims
beneficial ownership of such securities. |
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(e) |
Mr. Jones and Mr. Mehra are managing directors of
Goldman, Sachs & Co. Messrs. Jones and Mehra and The
Goldman Sachs Group, Inc. each disclaims beneficial ownership of
the common shares owned directly or indirectly by the Goldman
Sachs Funds and Goldman Sachs & Co., except to the extent of
his or its pecuniary interest therein, if any. Goldman Sachs
& Co. disclaims beneficial ownership of the common shares
owned directly or indirectly by the Goldman Sachs Funds, except
to the extent of its pecuniary interest therein, if any. Each of
Messrs. Jones and Mehra has an understanding with The
Goldman Sachs Group, Inc. pursuant to which he holds the
deferred stock units he receives as a director for the benefit
of The Goldman Sachs Group, Inc. |
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(f) |
The shares included in the table consist of: (i) 25,015,575
shares of common stock owned by Bain Capital Integral Investors,
LLC, whose administrative member is Bain Capital Investors, LLC
(BCI); (ii) 7,149,635 shares of common stock owned
by Bain Capital VII Coinvestment Fund, LLC, whose sole member is
Bain Capital VII Coinvestment Fund, L.P., whose general partner
is Bain Capital Partners VII, L.P., whose general partner is BCI
and (iii) 136,467 shares of common stock owned by BCIP TCV,
LLC, whose administrative member is BCI. Assuming no exercise of
the underwriters option to purchase additional shares:
(i) 4,956,389 shares of common stock will be sold by Bain
Capital Integral Investors, LLC; (ii) 1,416,572 shares of
common stock will be sold by Bain Capital VII Coinvestment Fund,
LLC; and (iii) 27,039 shares of common stock will be sold
by BCIP TCV, LLC. If the underwriters exercise their option to
purchase additional shares in full: (i) 5,699,847 shares of
common stock will be sold by Bain Capital Integral Investors,
LLC; (ii) 1,629,058 shares of common stock will be sold by
Bain Capital VII Coinvestment Fund, LLC; and (iii) 31,095
shares of common stock will be sold by BCIP TCV, LLC. Certain
partners and other employees of Bain Capital entities may make a
contribution of shares of common stock prior to this offering to
one or more charities, including the Combined Jewish
Philanthropies of Greater Boston, Inc., Conard Davis Family
Foundation, Edgerley Family Foundation, Fidelity Investments
Charitable Gift Fund, JSJN Childrens Charitable Trust, The
Boston Foundation, The Corporation of the President of The
Church of Jesus Christ of Latter-day Saints and Tyler Charitable
Foundation. In such case, a recipient charity, if it chooses to
participate in this offering, will be the selling stockholder
with respect to the donated shares. |
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(g) |
The Goldman Sachs Group, Inc., and certain affiliates,
including, Goldman, Sachs & Co., may be deemed to directly
or indirectly own the shares of common stock which are owned
directly or indirectly by investment partnerships, which we
refer to as the Goldman Sachs Funds, of which affiliates of The
Goldman Sachs Group, Inc. and Goldman Sachs & Co. are the
general partner, managing limited partner or the managing
partner. Goldman, Sachs & Co. is the investment manager for
certain of the Goldman Sachs Funds. Goldman, Sachs & Co. is
a direct and indirect, wholly owned subsidiary of The Goldman
Sachs Group, Inc. The Goldman Sachs Group, Inc., Goldman, Sachs
& Co. and the Goldman Sachs Funds share voting and
investment power with certain of their respective affiliates.
Shares beneficially owned by the Goldman Sachs Funds consist of:
(i) 16,877,144 shares of common stock owned by GS Capital
Partners 2000, L.P.; (ii) 6,132,511 shares of common stock
owned by GS Capital Partners 2000 Offshore, L.P.;
(iii) 705,426 shares of common stock owned by GS Capital
Partners 2000 GmbH & Co. Beteiligungs KG;
(iv) 5,359,077 shares of common stock owned by GS |
126
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Capital Partners 2000 Employee
Fund, L.P.; (v) 248,271 shares of common stock owned by
Bridge Street Special Opportunities Fund 2000, L.P.;
(vi) 496,542 shares of common stock owned by Stone Street
Fund 2000, L.P.; (vii) 827,570 shares of common stock owned
by Goldman Sachs Direct Investment Fund 2000, L.P.;
(viii) 959,602 shares of common stock owned by GS Private
Equity Partners 2000, L.P.; (ix) 329,853 shares of common stock
owned by GS Private Equity Partners 2000 Offshore Holdings,
L.P.; and (x) 365,685 shares of common stock owned by GS
Private Equity Partners 2000- Direct Investment Fund, L.P.
Assuming no exercise of the underwriters option to
purchase additional shares; (i) 3,343,904 shares of common
stock will be sold by GS Capital Partners 2000, L.P.;
(ii) 1,215,047 shares of common stock will be sold by GS
Capital Partners 2000 Offshore, L.P.; (iii) 139,768 shares
of common stock will be sold by GS Capital Partners 2000 GmbH
& Co. Beteiligungs KG; (iv) 1,061,805 shares of common
stock will be sold by GS Capital Partners 2000 Employee Fund,
L.P.; (v) 49,190 shares of common stock will be sold by
Bridge Street Special Opportunities Fund 2000, L.P.;
(vi) 98,381 shares of common stock will be sold by Stone
Street Fund 2000, L.P.; (vii) 163,968 shares of common
stock will be sold by Goldman Sachs Direct Investment
Fund 2000, L.P.; (viii) 190,128 shares of common stock
will be sold by GS Private Equity Partners 2000, L.P.;
(ix) 65,355 shares of common stock will be sold by GS
Private Equity Partners 2000 Offshore Holdings, L.P.; and
(x) 72,454 shares of common stock will be sold by GS
Private Equity Partners 2000 Direct Investment Fund, L.P.
If the underwriters exercise their option to purchase additional
shares in full: (i) 3,845,490 shares of common stock will
be sold by GS Capital Partners 2000, L.P.; (ii) 1,397,304
shares of common stock will be sold by GS Capital Partners 2000
Offshore, L.P.; (iii) 160,733 shares of common stock will
be sold by GS Capital Partners 2000 GmbH & Co. Beteiligungs
KG; (iv) 1,221,076 shares of common stock will be sold by
GS Capital Partners 2000 Employee Fund, L.P.; (v) 56,569
shares of common stock will be sold by Bridge Street Special
Opportunities Fund 2000, L.P.; (vi) 113,138 shares of
common stock will be sold by Stone Street Fund 2000, L.P.;
(vii) 188,563 shares of common stock will be sold by
Goldman Sachs Direct Investment Fund 2000, L.P.;
(viii) 218,647 shares of common stock will be sold by GS
Private Equity Partners 2000, L.P.; (ix) 75,158 shares of
common stock will be sold by GS Private Equity Partners 2000
Offshore Holdings, L.P.; and (x) 83,322 shares of common
stock will be sold by GS Private Equity Partners 2000-Direct
Investment Fund, L.P.
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(h) |
The shares included in the table
are owned by TPG BK Holdco LLC. TPG Advisors III, Inc., a
Delaware corporation, is the general partner of TPG GenPar III,
L.P., a Delaware limited partnership, which in turn is the sole
general partner of TPG Partners III, L.P., a Delaware limited
partnership which in turn is the managing member of TPG BK
Holdco, LLC, which directly holds the securities of the Company.
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127
Certain relationships and related transactions
Management subscription and shareholders agreement
We entered into a management subscription and shareholders
agreement with certain of our directors and executive officers.
All of the provisions of the management subscription and
shareholders agreement terminated upon completion of our
initial public offering in May 2006, except for certain transfer
restrictions and restrictions on the ability of parties to the
agreement to sell shares and restrictions in accordance with
certain applicable securities laws.
Management agreement
In connection with our acquisition of BKC, we entered into a
management agreement dated December 13, 2002 with the
sponsors and entities affiliated with the sponsors, pursuant to
which we agreed to pay the sponsors a quarterly management fee
not to exceed 0.5% of the prior quarters total revenues.
During fiscal 2004, 2005, and 2006, we paid approximately
$8 million, $9 million, and $9 million,
respectively, in quarterly management fees, which were paid as
compensation to the sponsors for monitoring our business through
board of director participation, executive team recruitment,
interim senior management services that were provided from
time-to-time and other services consistent with arrangements
with private equity funds. We also reimbursed the sponsors for
certain out-of-pocket expenses incurred by their employees. See
Expense Reimbursement to the Sponsors. The
management agreement includes customary indemnification
provisions pursuant to which we indemnify each of the sponsors
and those members of our board of directors who hold senior
positions at the sponsors or their affiliates from and against
all liabilities and expenses incurred in connection with our
acquisition of BKC, the management agreement or transactions
related to their investment in us, except for such liability or
expense arising on account of an indemnified persons gross
negligence or willful misconduct.
In connection with our initial public offering, we paid a
one-time sponsor management termination fee of $30 million,
which was split equally among the three sponsors, to terminate
all provisions of the management agreement, except for the
indemnification provisions which survive. The sponsor management
termination fee resulted from negotiations with the sponsors to
terminate the management agreement which obligated us to pay the
quarterly management fee. Our board of directors concluded that
it was in the best interests of the company to terminate these
arrangements with the sponsors and the resulting payments upon
becoming a publicly-traded company.
Payment of the February 2006 dividend, compensatory
make-whole payment and the sponsor management termination fee
The table below sets forth the amounts received by the private
equity funds controlled by the sponsors, members of our board of
directors and our executive officers in connection with the
February 2006 dividend and the compensatory make-whole payment.
Messrs. Balson, Bonderman, Boyce, Jones, Mehra and
Pagliuca, who are each members of our board of directors
nominated by the sponsors, did not receive any payments in
connection with the February 2006 dividend and the compensatory
make-whole payment. In addition to the
128
amounts described below, the $30 million sponsor management
termination fee was split equally among the three sponsors.
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Compensatory | |
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February 2006 | |
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make-whole | |
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dividend amount ($) | |
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payment amount ($) | |
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Total amount ($) | |
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Private Equity Funds Controlled by
the Sponsors
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|
|
|
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GS Capital Partners 2000,
L.P.
|
|
$ |
59,941,116 |
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|
$ |
|
|
|
$ |
59,941,116 |
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TPG BK Holdco, LLC
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|
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129,063,506 |
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|
|
|
|
|
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129,063,506 |
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GS Capital Partners 2000 Employee
Fund, L.P.
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|
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19,033,377 |
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|
|
|
|
|
|
19,033,377 |
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Stone Street Fund 2000,
L.P.
|
|
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1,763,524 |
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|
|
|
|
|
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1,763,524 |
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Bridge Street Special Opportunities
Fund 2000, L.P.
|
|
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881,762 |
|
|
|
|
|
|
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881,762 |
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Goldman Sachs Direct Investment
Fund 2000, L.P.
|
|
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2,939,207 |
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|
|
|
|
|
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2,939,207 |
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GS Private Equity Partners 2000,
L.P.
|
|
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3,408,134 |
|
|
|
|
|
|
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3,408,134 |
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GS Private Equity Partners
2000-Direct Investment Fund, L.P.
|
|
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1,298,771 |
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|
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1,298,771 |
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Bain Capital Integral Investors, LLC
|
|
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88,845,694 |
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|
|
|
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88,845,694 |
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BCIP TCV, LLC
|
|
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484,674 |
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|
|
|
|
|
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484,674 |
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Bain Capital VII Coinvestment Fund,
LLC
|
|
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25,392,748 |
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25,392,748 |
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GS Capital Partners 2000 Offshore,
L.P.
|
|
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21,780,316 |
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21,780,316 |
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GS Private Equity Partners 2000
Offshore Holdings, L.P.
|
|
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1,171,509 |
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|
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1,171,509 |
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GS Capital Partners 2000
GmbH & Co. Beteiligungs KG
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2,505,402 |
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2,505,402 |
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Board of Directors:
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Armando Codina
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158,245 |
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158,245 |
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Peter R. Formanek
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586,427 |
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258,840 |
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845,267 |
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Manuel Garcia
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293,213 |
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293,213 |
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Brian T. Swette
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293,213 |
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293,213 |
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Kneeland C. Youngblood
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395,883 |
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395,883 |
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Executive Officers:
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John W. Chidsey
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410,499 |
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4,900,813 |
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5,311,312 |
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Russell B. Klein
|
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639,927 |
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862,589 |
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1,502,516 |
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Ben K. Wells
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180,439 |
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180,439 |
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James F. Hyatt
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|
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902,195 |
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902,195 |
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Peter C. Smith
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351,856 |
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1,280,395 |
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1,632,251 |
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Anne Chwat
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249,276 |
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721,756 |
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971,032 |
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Chris Anderson
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107,542 |
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107,542 |
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Amy E. Wagner
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Gregory D. Brenneman(1)
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$ |
1,759,280 |
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$ |
10,361,349 |
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$ |
12,120,629 |
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(1) Mr. Brenneman served as our Chairman of the Board
and Chief Executive Officer until April 7, 2006.
129
Payment-in-Kind Notes
In order to finance, in part, our acquisition of BKC, we issued
$212.5 million in payment-in-kind, or PIK, notes to the
private equity funds controlled by the sponsors on
December 13, 2002. These private equity funds subsequently
transferred an aggregate of $0.9 million in PIK notes to
four of our directors, Messrs. Formanek, Garcia, Swette and
Youngblood. The PIK notes accreted interest at a rate of 9% per
annum. As of June 30, 2004 and 2005, the amounts
outstanding under the PIK Notes were $242 million and
$264 million, respectively. Our interest expense on the PIK
Notes totaled $11 million for the period December 13,
2002 to June 30, 2003, $21 million for the year ended
June 30, 2004 and $23 million for the year ended
June 30, 2005.
On July 13, 2005, we repaid the PIK notes in full,
including accreted interest, as part of the refinancing of our
indebtedness. We do not expect to borrow any other amounts in
the future from the sponsors or from the private equity funds
controlled by the sponsors.
Expense reimbursement to the sponsors
Prior to being a public company, we reimbursed the sponsors for
certain travel-related expenses of their employees in connection
with meetings of our board of directors and other meetings
related to the management and monitoring of our business by the
sponsors. During fiscal 2004, 2005, and 2006, we have paid
approximately $266,000, $496,000 and $214,000, respectively, in
total expense reimbursements to the sponsors. Once we became a
public company, we reimbursed traveling expenses for those
directors appointed by our sponsors on the same terms as our
other non-management directors.
Under the shareholders agreement with our sponsors, we
agreed to pay all registration expenses relating to the filing
of this registration statement on
Form S-1 other
than underwriter commissions and discounts. The reimbursable
amount includes registration and filing fees, printing fees, all
reasonable fees and disbursements of one law firm selected by
the sponsors and all expenses related to any
road-show for an underwritten offering. Pursuant to
our obligations under the shareholders agreement, in July
2006 we paid approximately $90,000 in legal fees in connection
with our initial public offering on behalf of the sponsors.
In addition, we paid on behalf of the sponsors approximately
$500,000 in legal fees and expenses to Cleary Gottlieb Steen
& Hamilton LLP that were incurred by the sponsors in
connection with their management of us and arrangements between
us and the sponsors. Cleary Gottlieb Steen & Hamilton LLP
provided legal advice to the underwriters of our initial public
offering and is providing legal advice to the underwriters in
connection with this offering.
Initial public offering commissions and related fees
Goldman, Sachs & Co. participated as one of the joint
book-running managers of our initial public offering. We paid
Goldman, Sachs & Co. approximately $5 million in
commissions and related fees pursuant to a customary
underwriting agreement among the company and the several
underwriters.
New global headquarters
Mr. Codina, a current Director of the Company, is an
executive officer, director and an approximately 8.2% owner of
the outstanding shares of a public company whose wholly-
130
owned subsidiary has agreed to lease us an approximately 224,638
square foot building to be developed in Coral Gables, Florida,
which lease has now been assigned to a partnership owned by such
public company and wholly-owned subsidiary of a pension fund for
which JPMorgan Chase Bank, N.A. acts as trustee. The building
will serve as our new global headquarters beginning in 2008. The
lease runs for 15 years from the date we occupy the
building or 60 days from when the landlord substantially
completes construction. The estimated annual rent for the
15-year initial lease term, which is expected to be
approximately $8 million per year, will be finalized upon
the completion of the buildings construction. Fixed annual
rent will escalate 6% every other year commencing after the
second year and operating costs will escalate based upon the
inflation rate. The lease terms were negotiated on an arms
length basis prior to the time that Mr. Codina was asked to
join the Board of Directors, and we believe the terms reflect
market terms.
Restaurant lease
The late Mrs. Clarita Garcia was the landlord under a lease
with BKC for a Burger King restaurant located in Orlando,
Florida. Manuel A. Garcia, one of our current directors, is the
son of the late Mrs. Garcia and serves as executor of his
mothers estate. BKC became the lessee in March 1996, prior
to Mr. Garcia being named a director. The lease expires in
February 2018. During fiscal 2004, fiscal 2005, fiscal 2006, and
the six months ended December 31, 2006, BKC paid
approximately $111,000, $123,000, $130,000, and $65,000,
respectively, (including taxes) in rent payments to
Mrs. Garcia or her estate.
Relocation expense
In connection with his relocation from Texas to the Miami area,
in accordance with our relocation policy, a relocation firm
hired by us advanced our former Chief Executive Officer, Mr.
Brenneman, $1.4 million for three months on an
interest-free basis in July 2004 in connection with the
sale of his home. This advance was repaid in September 2004
when Mr. Brennemans Texas home was sold. In connection
with his relocation from New Jersey to the Miami area, a
relocation firm hired by us purchased the home of our Chief
Executive Officer, Mr. Chidsey, in March 2005 for
$2.4 million in accordance with our relocation policy.
131
Description of capital stock
General matters
The following description of our common stock and preferred
stock and the relevant provisions of our certificate of
incorporation and bylaws are summaries thereof and are qualified
by reference to our certificate of incorporation and bylaws,
copies of which have been filed with the Securities and Exchange
Commission as exhibits to our Form 10-K, and applicable law.
As of December 31, 2006, our authorized capital stock
consists of 300,000,000 shares of common stock, $0.01 par value,
and 10,000,000 shares of preferred stock, $0.01 par value.
Common stock
As of January 17, 2007, there were 134,448,716 shares
of common stock issued and outstanding.
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders and do not
have cumulative voting rights. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of
common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by our board of
directors out of funds legally available therefor. See
Dividend Policy. In the event of liquidation,
dissolution or winding up of our company, the holders of common
stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and non-assessable, and
the shares of common stock to be issued upon completion of this
offering will be fully paid and non-assessable. As of
January 17, 2007, there were approximately 164 holders of
record of our common stock.
Preferred stock
As of January 17, 2007, there were no shares of our
preferred stock outstanding.
Our board of directors has the authority to issue preferred
stock in one or more classes or series and to fix the
designations, powers, preferences and rights, and the
qualifications, limitations or restrictions thereof including
dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or
series, without further vote or action by the stockholders. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company
without further action by the shareholders and may adversely
affect the voting and other rights of the holders of common
stock. At present, we have no plans to issue any of the
preferred stock.
Voting
The affirmative vote of a majority of the shares of our capital
stock present, in person or by written proxy, at a meeting of
stockholders and entitled to vote on the subject matter will be
the act of the stockholders.
132
Our certificate of incorporation may be amended in any manner
provided by the Delaware General Corporation Law. Our board of
directors has the power to adopt, amend or repeal our bylaws.
Action by written consent
Our certificate of incorporation and bylaws provide that
stockholder action can be taken by written consent of the
stockholders only if the private equity funds controlled by the
sponsors collectively own 50% or more of the outstanding shares
of common stock.
Ability to call special meetings
Our bylaws provide that special meetings of our stockholders can
only be called pursuant to a resolution adopted by a majority of
our board of directors or by the chairman of our board of
directors. Special meetings may also be called by the holders of
at least 25% of the outstanding shares of our common stock if
the private equity funds controlled by the sponsors own 50% or
more of the outstanding common stock. Thereafter, stockholders
will not be permitted to call a special meeting or to require
our board to call a special meeting.
Shareholder proposals
Our bylaws establish an advance notice procedure for shareholder
proposals to be brought before an annual meeting of
stockholders, including proposed nominations of persons for
election to the board of directors.
Stockholders at our annual meeting may only consider proposals
or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of our board of
directors or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the
meeting and who has given to our secretary timely written
notice, in proper form, of the stockholders intention to
bring that business before the meeting. Although neither our
certificate of incorporation nor our bylaws gives the board of
directors the power to approve or disapprove stockholder
nominations of candidates or proposals about other business to
be conducted at a special or annual meeting, our bylaws may have
the effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed or may
discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of us.
Limitation of liability and indemnification matters
Our certificate of incorporation provides that a director of our
company will not be liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director,
except in certain cases where liability is mandated by the
Delaware General Corporation Law. Our certificate of
incorporation also provides for indemnification, to the fullest
extent permitted by law, by our company of any person made or
threatened to be made a party to, or who is involved in, any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or
officer of our company, or at the request of our CEO or his
designee, serves or served as a director or officer of any other
enterprise, against all expenses, liabilities and losses
actually incurred or suffered by such person in connection with
the action, suit or proceeding. Our certificate of incorporation
also provides that, to the extent authorized from time to time
133
by our board of directors, we may provide indemnification to any
one or more employees and other agents of our company to the
extent and effect determined by our board of directors to be
appropriate and authorized by the Delaware General Corporation
Law. Our certificate of incorporation also permits us to
purchase and maintain insurance for the foregoing and we expect
to maintain such insurance.
Corporate opportunities
Our certificate of incorporation provides that the sponsors have
no obligation to offer us an opportunity to participate in
business opportunities presented to the sponsors or their
respective affiliates even if the opportunity is one that we
might reasonably have pursued, and that neither the sponsors nor
their respective affiliates will be liable to us or our
stockholders for breach of any duty by reason of any such
activities unless, in the case of any person who is a director
or officer of our company, such business opportunity is
expressly offered to such director or officer in writing solely
in his or her capacity as an officer or director of our company.
Stockholders will be deemed to have notice of and consented to
this provision of our certificate of incorporation.
Shareholders agreement
In connection with our acquisition of BKC, we entered into a
shareholders agreement dated June 27, 2003 with BKC
and the sponsors. The shareholders agreement provided,
among other things, that each of the sponsors would be entitled
to appoint three members of our board of directors. Six of our
current directors, Messrs. Balson, Bonderman, Boyce, Jones,
Mehra and Pagliuca, were appointed pursuant to the
shareholders agreement. We have entered into an amended
and restated shareholders agreement with the sponsors that
provides for (i) the right of each sponsor to appoint two
members to our board of directors, (ii) certain provisions
relating to drag-along and tag-along rights and transfer
restrictions and (iii) registration rights provisions. A
sponsors right to appoint directors will be reduced to one
director if that sponsors stock ownership drops to 10% or
less of our outstanding common stock, and will be eliminated if
that sponsors stock ownership drops to 2% or less of our
outstanding common stock. The right to appoint directors to any
board committee (with the exception of our audit committee)
terminates if the sponsors no longer collectively beneficially
own 30% or more of our outstanding common stock. The provisions
relating to drag-along and tag-along rights and transfer
restrictions obligate or allow a sponsor to participate in the
sale of shares by the other sponsors or limit the transfer of
shares held by the sponsors to third parties. The registration
rights provisions grant shelf registration rights, demand
registration rights and piggyback registration rights to those
shareholders and transferees. Specifically, we have granted each
of the sponsors the right to two demand registrations which can
be exercised after the 180th day following our initial public
offering and prior to the first anniversary of such date and an
unlimited number of demand registrations after the first
anniversary of our IPO if there is not a currently effective
shelf registration statement at the time of such demand. We also
agreed that immediately following the first anniversary of the
IPO, we would file with the SEC and use our best efforts to have
declared effective as promptly as practicable a shelf
registration statement relating to the offer and sale of all
registrable securities held by the sponsors. In addition, we
granted the sponsors the right to request that their shares be
included, subject to certain cut-back provisions, in most
registration statements that we file, other than a registration
statement on
Form S-4 or
Form S-8 or a
registration statement relating to an employee stock or benefit
plan. Under the shareholders agreement, we agreed to pay
all
134
registration expenses relating to our obligations under the
shareholders agreement, including registration and filing
fees, printing fees, all applicable rating agency fees, all
reasonable fees and disbursements of one law firm selected by
the sponsors, fees and expenses of any special experts retained
by us, and all expenses related to any road-show for
an underwritten offering. Pursuant to the shareholders
agreement, the sponsors requested that we prepare and file a
registration statement on
Form S-1 with
respect to this offering.
The shareholders agreement includes customary
indemnification provisions in favor of all shareholders or
transferees that are party to the shareholders agreement,
the related parties and the controlling persons (within the
meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) of such shareholders
against liabilities under the Securities Act incurred in
connection with the registration of any of our debt or equity
securities. We agreed to reimburse these persons for any legal
or other expenses incurred in connection with investigating or
defending any such liability, action or proceeding, except that
we will not be required to indemnify any of these persons or
reimburse related legal or other expenses if such loss or
expense arises out of or is based on any untrue statement or
omission made in reliance upon and in conformity with written
information provided by these persons.
As of January 17, 2007, the private equity funds controlled
by the sponsors collectively held 100,945,127 shares as to
which these registration rights apply. After giving effect to
the sale of shares by the selling stockholders in this offering,
the private equity funds controlled by sponsors will own
80,945,127 shares of our common stock (or 77,945,127
assuming that the underwriters exercise in full their option to
purchase additional shares) of our common stock to which these
registration rights apply.
Anti-takeover effects of Delaware law and our certificate of
incorporation
Certain provisions of Delaware law and our certificate of
incorporation, summarized below, may discourage, delay, defer or
prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including those attempts
that might result in a premium over the market price for shares
held by our stockholders.
Pursuant to Section 203(b)(1) of the Delaware corporate
law, our certificate of incorporation provides that the
provisions of Section 203 shall not apply to us. However,
the sponsors, as our controlling stockholders, have the power to
amend our certificate of incorporation at any time. In general,
Section 203 prohibits a publicly-held Delaware corporation
from engaging in a business combination with an
interested stockholder for a period of three years
after the time such stockholder became an interested stockholder
unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder
is approved in a prescribed manner. A business
combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the
interested stockholder. An interested stockholder is
a person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of the
corporations voting stock. If applicable, these provisions
may have the effect of delaying, deferring or preventing a
change in control without further action by the stockholders.
135
Listing
Our common stock is listed on the New York Stock Exchange under
the symbol BKC.
Transfer agent and registrar
The transfer agent and registrar for our common stock is The
Bank of New York.
136
Description of our credit facility
On July 13, 2005, we and BKC entered into a
$1.15 billion senior secured credit facility with 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, and various other lenders. The credit
facility consisted of a $150 million revolving credit
facility, a $250 million term loan, which we refer to as
term loan A, and a $746 million term loan, which we refer
to as term loan B. We used $1 billion in proceeds from the
term loans A and B, $47 million in proceeds from the
revolving credit facility, and cash on hand to pay in full
BKCs existing senior secured credit facility and our
payment-in-kind notes outstanding that we incurred in connection
with our acquisition of BKC and to pay $16 million in
financing costs.
On February 15, 2006, we amended and restated the senior
secured credit facility. We borrowed $350 million under our
senior secured credit facility, all the proceeds of which were
used to pay, along with $55 million of cash on hand, the
February 2006 dividend, the compensatory make-whole payment and
financing costs and expenses. The amendments replaced the
$746 million then outstanding under term loan B with a new
term loan B, which we refer to as term loan B-1, in an amount of
$1.096 billion.
In May 2006, we utilized a portion of the $392 million in
net proceeds we received from our initial public offering to
prepay $350 million of term debt, resulting in a debt
balance of $994 million outstanding under the term loan A
and B-1 facilities. In July 2006, we prepaid an additional
$50 million of term debt, reducing the term loan A and B-1
balance to $944 million. In the quarter ended
December 31, 2006, we made an additional $50 million
prepayment, reducing the outstanding debt balance under our
senior secured credit facility to $894 million. In January
2007, we made an additional $25 million prepayment,
reducing the total outstanding debt balance under the term loan
A and term loan B-1 to $869 million. As a result of these
prepayments, our next scheduled principal payment on the senior
secured credit facility is in June 2009. The level of required
principal repayments increases over time thereafter. The
maturity date for term loan A is June 2011 and the maturity date
for term loan B-1 is June 2012.
The interest rate under the senior secured credit facility for
term loan A and the revolving credit facility is, at our option,
either (a) the greater of the federal funds effective rate
plus 0.50% and the prime rate, which we refer to as ABR, plus a
rate not to exceed 0.75%, which varies according to our leverage
ratio or (b) LIBOR plus a rate not to exceed 1.75%, which
varies according to our leverage ratio. The interest rate for
term loan B-1 is, at our option, either (a) ABR, plus a
rate of 0.50% or (b) LIBOR plus 1.50%, in each case so long
as our leverage ratio remains at or below certain levels (but in
any event not to exceed 0.75%, in the case of ABR loans, and
1.75% in the case of LIBOR loans). As of December 31, 2006,
amounts outstanding under the term loan A and the term B-1 both
accrued interest at a per annum rate of 6.875%.
Our senior secured credit facility contains certain customary
financial and other covenants. These covenants impose
restrictions on additional indebtedness, liens, investments,
advances, guarantees, mergers and acquisitions. These covenants
also place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between us and our
subsidiaries and certain transactions with affiliates.
Additionally, our senior secured credit facility contains
customary events of default, including payment defaults,
breaches of representations and warranties, covenant defaults,
cross-defaults to other material indebtedness, events of
bankruptcy and
137
insolvency, judgment defaults, failure of any guaranty or
security document to be in full force and effect and a change of
control of our business.
The financial covenants include a requirement to maintain a
certain interest expense coverage ratio and leverage ratio,
which are calculated excluding the effect of the payments of the
February 2006 dividend, the compensatory make-whole payment and
the sponsor management termination fee, and limit the maximum
amount of capital expenditures to $180 million in 2006 and
either $200 million or $250 million in each fiscal
year thereafter depending on our rent-adjusted leverage ratio
(as defined in our senior secured credit facility). To the
extent that we do not use the entire basket available for
capital expenditures in any fiscal year, 50% of the unused
amount is allowed to be carried forward into the next fiscal
year less amounts carried forward to the prior fiscal year,
subject to certain limitations. Following the end of each fiscal
year, we are required to prepay the term debt in an amount equal
to 50% of excess cash flow (as defined in our senior secured
credit facility) for such fiscal year. This prepayment
requirement is not applicable if our leverage ratio is less than
a predetermined amount. There are other events and transactions,
such as certain asset sales, sale and leaseback transactions
resulting in aggregate net proceeds over $2.5 million in
any fiscal year, proceeds from casualty events and incurrence of
debt that will trigger additional mandatory prepayment.
Our senior secured credit facility permits us to pay cash
dividends on our common stock, in an aggregate amount, taken
together with the amount of certain investments permitted under
our senior secured credit facility, following the completion of
this offering, equal to the greater of (i) 50% of excess
cash flow of BKC for the period from July 1, 2005 through
the end of the most-recently ended fiscal year of BKC and
(ii) the sum of (A) $50 million, (B) 50% of
consolidated net income for the period from December 31,
2005 to the end of the most-recently ended fiscal quarter (or
where consolidated net income is a deficit, minus 100% of the
deficit) and (C) the aggregate amount of proceeds received
by us from the issuance of certain equity interests. In
addition, after July 1, 2007, we will be permitted to pay
cash dividends on our common stock, in an aggregate amount,
taken together with the amount of certain investments permitted
under our senior secured credit facility, equal to 50% of excess
cash flow of BKC for the period from July 1, 2005 through
the end of the most recently ended fiscal year of BKC.
While BKC is the only borrower under our senior secured credit
facility, we and certain of our subsidiaries have jointly and
severally unconditionally guaranteed the payment of the amounts
due under our senior secured credit facility. We and certain of
our subsidiaries, including BKC, have pledged as collateral a
100% equity interest in our and BKCs domestic subsidiaries
with some exceptions. Furthermore, BKC has pledged as collateral
a 65% equity interest in certain of its foreign subsidiaries.
As of December 31, 2006, we had $116 million available
for borrowing under our $150 million revolving credit
facility (net of $34 million in letters of credit issued
under the revolving credit facility). The maturity date for all
amounts due under the revolving credit facility is June 2011.
See Note 7 to our unaudited consolidated financial
statements for the period ended December 31, 2006, and
Note 10 to our audited consolidated financial statements
included elsewhere in this prospectus for further information
about our senior secured credit facility.
138
Material United States federal tax consequences
for non-United States holders of common stock
The following is a general discussion of the material U.S.
federal income and estate tax consequences of the ownership and
disposition of common stock by a beneficial owner that is a
non-U.S. holder and that does not own, and is not
deemed to own, more than 5% of the Companys common stock.
A non-U.S. holder is a person or entity that, for
U.S. federal income tax purposes, is a:
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non-resident alien individual, other than certain former
citizens and residents of the United States subject to tax
as expatriates, |
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foreign corporation, |
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foreign partnership, or |
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foreign estate or trust. |
A non-U.S. holder does not include an individual who
is present in the United States for 183 days or more in the
taxable year of disposition and is not otherwise a resident of
the United States for U.S. federal income tax purposes. Such an
individual is urged to consult his or her own tax advisor
regarding the U.S. federal income tax consequences of the sale,
exchange or other disposition of common stock.
This discussion is based on the Internal Revenue Code of 1986,
as amended (the Code), and administrative
pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, changes to any of which
subsequent to the date of this prospectus may affect the tax
consequences described herein. This discussion does not address
all aspects of U.S. federal income and estate taxation that may
be relevant to non-U.S. holders in light of their particular
circumstances and does not address any tax consequences arising
under the laws of any state, local or foreign jurisdiction.
Prospective holders are urged to consult their tax advisors with
respect to the particular tax consequences to them of owning and
disposing of common stock, including the consequences under the
laws of any state, local or foreign jurisdiction.
Dividends
Dividends paid by the Company to a non-U.S. holder of common
stock generally will be subject to withholding tax at a 30% rate
or a reduced rate specified by an applicable income tax treaty.
In order to obtain a reduced rate of withholding, a non-U.S.
holder will be required to provide an Internal Revenue Service
Form W-8BEN
certifying its entitlement to benefits under a treaty.
The withholding tax does not apply to dividends paid to a
non-U.S. holder who provides a
Form W-8ECI,
certifying that the dividends are effectively connected with the
non-U.S. holders conduct of a trade or business within the
United States. Instead, the effectively connected dividends will
be subject to regular U.S. income tax as if the non-U.S. holder
were a U.S. resident. A non-U.S. corporation receiving
effectively connected dividends may also be subject to an
additional branch profits tax imposed at a rate of
30% (or a lower treaty rate).
139
Gain on disposition of common stock
A non-U.S. holder generally will not be subject to U.S. federal
income tax on gain realized on a sale or other disposition of
common stock unless:
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the gain is effectively connected with a trade or business of
the non-U.S. holder in the United States, subject to an
applicable treaty providing otherwise, or |
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the Company is or has been a U.S. real property holding
corporation, as defined below, at any time within the five-year
period preceding the disposition or the non-U.S. holders
holding period, whichever period is shorter, and its common
stock has ceased to be traded on an established securities
market prior to the beginning of the calendar year in which the
sale or disposition occurs. |
The Company believes that it is not, and does not anticipate
becoming, a U.S. real property holding corporation.
Information reporting requirements and backup withholding
Information returns will be filed with the Internal Revenue
Service in connection with payments of dividends and the
proceeds from a sale or other disposition of common stock. You
may have to comply with certification procedures to establish
that you are not a U.S. person in order to avoid information
reporting and backup withholding tax requirements. The
certification procedures required to claim a reduced rate of
withholding under a treaty will satisfy the certification
requirements necessary to avoid the backup withholding tax as
well. The amount of any backup withholding from a payment to you
will be allowed as a credit against your U.S. federal income tax
liability and may entitle you to a refund, provided that the
required information is furnished to the Internal Revenue
Service.
Federal estate tax
An individual non-U.S. holder who is treated as the owner of, or
has made certain lifetime transfers of, an interest in the
common stock will be required to include the value of the stock
in his gross estate for U.S. federal estate tax purposes, and
may be subject to U.S. federal estate tax, unless an applicable
estate tax treaty provides otherwise.
140
Underwriting
The selling stockholders are offering the shares of common stock
described in this prospectus through a number of underwriters.
J.P.Morgan Securities Inc., Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated are acting as joint book-running
managers of the offering and as representatives of the
underwriters. We and the selling stockholders have entered into
an underwriting agreement with the underwriters. Subject to the
terms and conditions of the underwriting agreement, the selling
stockholders have agreed to sell to the underwriters, and each
underwriter has severally agreed to purchase, the number of
shares of common stock listed next to its name in the following
table:
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J.P.Morgan Securities
Inc.
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Goldman, Sachs &
Co.
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Morgan Stanley & Co.
Incorporated
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Banc of America Securities LLC
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Citigroup Global Markets
Inc.
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Loop Capital Markets, LLC
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Wachovia Capital Markets, LLC
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Total
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The underwriters are committed to purchase all the common shares
offered by the selling stockholders if they purchase any shares.
The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting
underwriters may also be increased or the offering may be
terminated.
The underwriters propose to offer the common shares directly to
the public at the public offering price set forth on the cover
page of this prospectus and to certain dealers at that price
less a concession not in excess of
$ per
share. Any such dealers may resell shares to certain other
brokers or dealers at a discount of up to
$ per
share from the initial public offering price. After the initial
public offering of the shares, the offering price and other
selling terms may be changed by the underwriters.
The underwriters have an option to buy up to 3,000,000
additional shares of common stock from the selling stockholders
to cover sales of shares by the underwriters which exceed the
number of shares specified in the table above. The underwriters
have 30 days from the date of this prospectus to exercise
this over-allotment option. If any shares are purchased with
this over-allotment option, the underwriters will purchase
shares in approximately the same proportion as shown in the
table above. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on
the same terms as those on which the shares are being offered.
We will not receive any of the proceeds from a sale of shares by
the selling stockholders.
The underwriting fee is equal to the public offering price per
share of common stock less the amount paid by the underwriters
to the selling stockholders per share of common stock. The
following table shows the per share and total underwriting
discounts and commissions to be
141
paid by the selling stockholders to the underwriters assuming
both no exercise and full exercise of the underwriters
option to purchase additional shares.
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Without over- | |
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Paid by the selling stockholders |
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Per Share
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$ |
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$ |
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Total
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$ |
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$ |
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We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal
and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately
$ million.
A prospectus in electronic format may be made available on the
web sites maintained by one or more underwriters, or selling
group members, if any, participating in the offering. The
underwriters may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders.
Internet distributions will be allocated by the representatives
to underwriters and selling group members that may make Internet
distributions on the same basis as other allocations.
We have agreed that, subject to certain exceptions, we will not
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act
relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, or publicly disclose the intention to make
any offer, sale, pledge, disposition or filing, without the
prior written consent of J.P. Morgan Securities Inc. for a
period of 90 days after the date of this prospectus.
Notwithstanding the foregoing, if (1) during the last
17 days of the 90-day restricted period, we issue an
earnings release or material news or a material event relating
to our company occurs; or (2) prior to the expiration of
the 90-day restricted period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the 90-day period, the restrictions described above shall
continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
All of our directors and executive officers and certain other
equity holders, including the selling stockholders, have entered
into lock-up agreements with the underwriters prior to the
commencement of this offering pursuant to which each of these
persons or entities, with certain exceptions, for a period of 90
days after the date of this prospectus, have agreed that they
will not, without the prior written consent of J.P. Morgan
Securities Inc., (1) offer, pledge, announce the intention
to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock (including, without limitation,
common stock which may be deemed to be beneficially owned by
such persons in accordance with the rules and regulations of the
SEC and securities which may be issued upon exercise of a stock
option or warrant) or (2) enter into any swap or other
agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the common stock, whether
any such transaction described in clause (1) or
(2) above is to be settled by delivery of common stock or
such other securities, in cash or otherwise, subject to
142
certain exceptions, including sales made in this offering and,
with respect to certain directors and executive officers,
transfers made 30 days or later after completion of this
offering pursuant to a plan that complies with Rule 10b5-1
under the Exchange Act and was entered into prior to the pricing
of this offering. Notwithstanding the foregoing, if
(1) during the last 17 days of the 90-day restricted
period, we issue an earnings release or material news or a
material event relating to our company occurs; or (2) prior
to the expiration of the 90-day restricted period, we announce
that we will release earnings results during the 16-day period
beginning on the last day of the 90-day period, the restrictions
described above shall continue to apply until the expiration of
the 18-day period beginning on the issuance of the earnings
release or the occurrence of the material news or material event.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
Our common stock is listed on the New York Stock Exchange under
the symbol BKC.
In connection with this offering, the underwriters may engage in
stabilizing transactions, which involves making bids for,
purchasing and selling shares of common stock in the open market
for the purpose of preventing or retarding a decline in the
market price of the common stock while this offering is in
progress. These stabilizing transactions may include making
short sales of the common stock, which involves the sale by the
underwriters of a greater number of shares of common stock than
they are required to purchase in this offering, and purchasing
shares of common stock on the open market to cover positions
created by short sales. Short sales may be covered
shorts, which are short positions in an amount not greater than
the underwriters over allotment option referred to above,
or may be naked shorts, which are short positions in
excess of that amount. The underwriters may close out any
covered short position either by exercising their over allotment
option, in whole or in part, or by purchasing shares in the open
market. In making this determination, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market compared to the price at which the
underwriters may purchase shares through the over allotment
option. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
that could adversely affect investors who purchase in this
offering. To the extent that the underwriters create a naked
short position, they will purchase shares in the open market to
cover the position.
The underwriters have advised us that, pursuant to
Regulation M of the Securities Act of 1933, they may also
engage in other activities that stabilize, maintain or otherwise
affect the price of the common stock, including the imposition
of penalty bids. This means that if the representatives of the
underwriters purchase common stock in the open market in
stabilizing transactions or to cover short sales, the
representatives can require the underwriters that sold those
shares as part of this offering to repay the underwriting
discount received by them.
These activities, as well as other purchases by the underwriters
for their own account, may have the effect of raising or
maintaining the market price of the common stock or preventing
or retarding a decline in the market price of the common stock,
and, as a result, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If
the underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these
transactions on the New York Stock Exchange, in the
over-the-counter market or otherwise.
143
Each underwriter has represented that (i) it has only
communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of any common stock in circumstances in
which Section 21(1) of the FSMA does not apply to us and
(ii) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter has
represented and agreed that with effect from and including the
date on which the European Union Prospectus Directive (the
EU Prospectus Directive) is implemented in that
Relevant Member State (the Relevant Implementation
Date) it has not made and will not make an offer of common
stock to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the EU Prospectus
Directive, except that it may, with effect from and including
the Relevant Implementation Date, make an offer of shares to the
public in that Relevant Member State at any time:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities; |
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to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as shown
in its last annual or consolidated accounts; or |
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in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Member State by any measure
implementing the EU Prospectus Directive in that Member State
and the expression EU Prospectus Directive means Directive
2003/71/ EC and includes any relevant implementing measure in
each Relevant Member State.
The shares may not be offered or sold by means of any document
other than to persons whose ordinary business is to buy or sell
shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32) of Hong
Kong, and no advertisement, invitation or document relating to
the shares may be issued, whether in Hong Kong or elsewhere,
which is directed at, or the contents of which are likely to be
accessed or read by, the public in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571) of Hong Kong
and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with
144
the offer or sale, or invitation for subscription or purchase,
of the shares may not be circulated or distributed, nor may the
shares be offered or sold, or be made the subject of an
invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore other than (i) to an
institutional investor under Section 274 of the Securities
and Futures Act, Chapter 289 of Singapore (the
SFA), (ii) to a relevant person, or any person
pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA or
(iii) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
Because, prior to this offering, the Goldman Sachs Funds,
affiliates of Goldman, Sachs & Co., own in excess
of 10% of the issued and outstanding shares of our common stock,
under Rule 2720 of the NASD, Inc.s Conduct Rules
(Rule 2720), Goldman Sachs & Co.
may be deemed to be our affiliate. Accordingly, this
offering is being made in compliance with Rule 2720.
Pursuant to Rule 2720, the appointment of a qualified
independent underwriter is not necessary in connection with this
offering, as a bona fide independent market (as defined in
Rule 2720) exists in the shares.
Certain of the underwriters and their affiliates have provided
in the past to us, our affiliates and the sponsors and may
provide from time to time in the future certain commercial
banking, financial advisory, investment banking and other
services for us, such affiliates and the sponsors in the
ordinary course of their business, for which they have received
and may continue to receive customary fees and commissions. For
example, J.P. Morgan Chase Bank N.A., an affiliate of
J.P. Morgan Securities Inc., is the administrative agent
for our senior secured credit facility and Citicorp North
America Inc., an affiliate of Citigroup Global Markets Inc., is
syndication agent for our senior secured credit facility.
Affiliates of each of the underwriters, except Loop Capital
Markets, LLC, are lenders under our senior credit facility. In
addition, from time to time, certain of the underwriters and
their affiliates may effect transactions for their own account
or the account of customers, and hold on behalf of themselves or
their customers, long or short positions in our debt or equity
securities or loans, and may do so in the future.
145
Legal matters
The validity of the shares of common stock offered hereby will
be passed upon for us by Holland & Knight LLP, Miami,
Florida, and certain legal matters will be passed upon for the
underwriters by Cleary Gottlieb Steen & Hamilton LLP,
New York, New York. Cleary Gottlieb Steen & Hamilton
LLP has in the past provided legal services to us and the
sponsors, including in connection with the acquisition of BKC in
December 2002, and may in the future continue to provide legal
services to us and the sponsors. In addition, Cleary Gottlieb
Steen & Hamilton LLP currently provides legal
services to the sponsors.
Experts
The consolidated financial statements of Burger King Holdings,
Inc. and subsidiaries as of June 30, 2006 and 2005, and for
each of the years in the three-year period ended June 30,
2006, have been included herein in reliance upon the report of
KPMG LLP, independent registered public accounting firm,
appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
Where you can find more information
We have filed with the Securities and Exchange Commission or
SEC, in Washington, D.C., a registration statement on
Form S-1 under the
Securities Act with respect to the common stock offered hereby.
For further information with respect to us and our common stock,
reference is made to the registration statement and the exhibits
and any schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance,
if such contract or document is filed as an exhibit, reference
is made to the copy of such contract or other document filed as
an exhibit to the registration statement, each statement being
qualified in all respects by such reference. A copy of the
registration statement, including the exhibits and schedules
thereto, may be read and copied at the SECs Public
Reference Room at 100 F Street, N.E., Room 1580,
Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In
addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can
electronically access the registration statement, including the
exhibits and any schedules thereto. The registration statement,
including the exhibits and schedules thereto, are also available
for reading and copying at the offices of the New York Stock
Exchange at 20 Broad Street, New York, New York 10005.
We are subject to the full informational requirements of the
Securities Exchange Act of 1934, as amended. These periodic
reports and other information are available for inspection and
copying at the public reference room and website of the SEC
referred to above. We also maintain an Internet site at
http://www.bk.com. Our website and the information contained
therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement
of which it forms a part. You may access our annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to
146
those reports filed or furnished pursuant to Section 13
(a) or 15 (d) of the Exchange Act with the SEC free of
charge at our website as soon as reasonably practicable after
such information is electronically filed with, or furnished to,
the SEC.
You may obtain a copy of any of our filings, at no cost, by
writing or telephoning us at:
Burger King Holdings, Inc.
5505 Blue Lagoon Drive
Miami, Florida 33126
(305) 378-3000
Attn: Corporate Secretary
147
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
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Unaudited Financial
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Audited Financial
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F-1
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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|
June 30, 2006 | |
| |
|
|
(in millions, except share data) | |
|
|
(unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
135 |
|
|
$ |
259 |
|
|
Trade and notes receivable, net
|
|
|
117 |
|
|
|
109 |
|
|
Prepaids and other current assets,
net
|
|
|
51 |
|
|
|
40 |
|
|
Deferred income taxes, net
|
|
|
38 |
|
|
|
45 |
|
|
|
|
|
|
Total current assets
|
|
|
341 |
|
|
|
453 |
|
Property and equipment, net
|
|
|
866 |
|
|
|
886 |
|
Intangible assets, net
|
|
|
980 |
|
|
|
975 |
|
Goodwill
|
|
|
22 |
|
|
|
20 |
|
Net investment in property leased
to franchisees
|
|
|
146 |
|
|
|
148 |
|
Other assets, net
|
|
|
76 |
|
|
|
70 |
|
|
|
|
|
|
Total assets
|
|
$ |
2,431 |
|
|
$ |
2,552 |
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$ |
73 |
|
|
$ |
100 |
|
|
Accrued advertising
|
|
|
54 |
|
|
|
49 |
|
|
Other accrued liabilities
|
|
|
253 |
|
|
|
338 |
|
|
Current portion of debt and capital
leases
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
Total current liabilities
|
|
|
385 |
|
|
|
492 |
|
Long term debt
|
|
|
896 |
|
|
|
997 |
|
Capital leases, net of current
portion
|
|
|
64 |
|
|
|
63 |
|
Other deferrals and liabilities
|
|
|
342 |
|
|
|
349 |
|
Deferred income taxes, net
|
|
|
106 |
|
|
|
84 |
|
|
|
|
|
|
Total liabilities
|
|
|
1,793 |
|
|
|
1,985 |
|
Commitments and Contingencies
(Note 13)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 10,000,000 shares authorized; no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
300,000,000 shares authorized; 133,805,018 and
133,058,640 shares issued and outstanding at
December 31, 2006 and June 30, 2006, respectively
|
|
|
1 |
|
|
|
1 |
|
|
Restricted stock units
|
|
|
5 |
|
|
|
5 |
|
|
Additional paid-in capital
|
|
|
554 |
|
|
|
545 |
|
|
Retained earnings
|
|
|
81 |
|
|
|
3 |
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
15 |
|
|
Treasury stock, at cost; 643,698
and 590,841 shares, at December 31, 2006 and
June 30, 2006, respectively
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
|
Total stockholders equity
|
|
|
638 |
|
|
|
567 |
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$ |
2,431 |
|
|
$ |
2,552 |
|
|
See accompanying notes to condensed consolidated financial
statements.
F-2
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three Months | |
|
Six Months | |
|
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
|
|
(in millions, except per | |
|
|
share data) | |
|
|
(unaudited) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$ |
417 |
|
|
$ |
379 |
|
|
$ |
822 |
|
|
$ |
754 |
|
|
Franchise revenues
|
|
|
112 |
|
|
|
104 |
|
|
|
225 |
|
|
|
209 |
|
|
Property revenues
|
|
|
30 |
|
|
|
29 |
|
|
|
58 |
|
|
|
57 |
|
|
|
|
|
|
Total revenues
|
|
|
559 |
|
|
|
512 |
|
|
|
1,105 |
|
|
|
1,020 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
125 |
|
|
|
119 |
|
|
|
247 |
|
|
|
237 |
|
|
Payroll and employee benefits
|
|
|
123 |
|
|
|
109 |
|
|
|
242 |
|
|
|
219 |
|
|
Occupancy and other operating costs
|
|
|
103 |
|
|
|
93 |
|
|
|
205 |
|
|
|
184 |
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
351 |
|
|
|
321 |
|
|
|
694 |
|
|
|
640 |
|
Selling, general and administrative
expenses
|
|
|
119 |
|
|
|
106 |
|
|
|
231 |
|
|
|
207 |
|
Property expenses
|
|
|
15 |
|
|
|
14 |
|
|
|
31 |
|
|
|
28 |
|
Fees paid to affiliates
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
6 |
|
Other operating income, net
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
(3 |
) |
|
|
|
|
Total operating costs and expenses
|
|
|
484 |
|
|
|
442 |
|
|
|
948 |
|
|
|
878 |
|
|
|
|
Income from operations
|
|
|
75 |
|
|
|
70 |
|
|
|
157 |
|
|
|
142 |
|
|
|
|
|
Interest expense
|
|
|
19 |
|
|
|
18 |
|
|
|
38 |
|
|
|
37 |
|
|
Interest income
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
|
|
|
Total interest expense, net
|
|
|
17 |
|
|
|
17 |
|
|
|
34 |
|
|
|
34 |
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
13 |
|
|
|
|
Income before income taxes
|
|
|
58 |
|
|
|
53 |
|
|
|
122 |
|
|
|
95 |
|
|
Income tax expense
|
|
|
20 |
|
|
|
26 |
|
|
|
44 |
|
|
|
46 |
|
|
|
|
Net income
|
|
$ |
38 |
|
|
$ |
27 |
|
|
$ |
78 |
|
|
$ |
49 |
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
|
$ |
0.59 |
|
|
$ |
0.45 |
|
|
Diluted
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
|
$ |
0.57 |
|
|
$ |
0.43 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
133.5 |
|
|
|
106.9 |
|
|
|
133.3 |
|
|
|
106.8 |
|
|
Diluted
|
|
|
136.5 |
|
|
|
112.9 |
|
|
|
136.1 |
|
|
|
112.9 |
|
|
See accompanying notes to condensed consolidated financial
statements.
F-3
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Six months ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
|
|
(unaudited) | |
|
|
(in millions) | |
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
78 |
|
|
$ |
49 |
|
|
Adjustments to reconcile net income
to net cash used for operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
43 |
|
|
|
42 |
|
|
|
Gain on hedging activities
|
|
|
(2 |
) |
|
|
|
|
|
|
Gain on remeasurement of foreign
denominated transactions
|
|
|
(13 |
) |
|
|
|
|
|
|
Gain on asset disposals
|
|
|
(7 |
) |
|
|
(1 |
) |
|
|
Pension curtailment gain
|
|
|
|
|
|
|
(6 |
) |
|
|
Loss on early extinguishment of debt
|
|
|
1 |
|
|
|
13 |
|
|
|
Stock-based compensation
|
|
|
2 |
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
8 |
|
|
|
31 |
|
|
Changes in current assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivables
|
|
|
(7 |
) |
|
|
1 |
|
|
|
Prepaids and other current assets
|
|
|
(10 |
) |
|
|
(12 |
) |
|
|
Accounts and drafts payable
|
|
|
(28 |
) |
|
|
(20 |
) |
|
|
Accrued advertising
|
|
|
5 |
|
|
|
8 |
|
|
|
Other accrued liabilities
|
|
|
(86 |
) |
|
|
(27 |
) |
|
Payment of interest on PIK notes
|
|
|
|
|
|
|
(103 |
) |
|
Other long-term assets and
liabilities
|
|
|
14 |
|
|
|
27 |
|
|
|
|
|
|
Net cash (used for) provided
by operating activities
|
|
$ |
(2 |
) |
|
$ |
2 |
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale
securities
|
|
|
(308 |
) |
|
|
|
|
|
Proceeds from sale of
available-for-sale securities
|
|
|
308 |
|
|
|
|
|
|
Payments for property and equipment
|
|
|
(31 |
) |
|
|
(30 |
) |
|
Proceeds from asset disposals and
restaurant closures
|
|
|
15 |
|
|
|
10 |
|
|
Payments for acquired franchisee
operations
|
|
|
(8 |
) |
|
|
(7 |
) |
|
Investment in franchisee debt
|
|
|
(4 |
) |
|
|
(3 |
) |
|
Collections on franchisee debt
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
Net cash used for investing
activities
|
|
$ |
(27 |
) |
|
$ |
(29 |
) |
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from term debt and credit
facility
|
|
|
1 |
|
|
|
1,047 |
|
|
Repayments of term debt, credit
facility and capital leases
|
|
|
(103 |
) |
|
|
(1,229 |
) |
|
Payments for financing costs
|
|
|
|
|
|
|
(16 |
) |
|
Proceeds from sale of common stock
|
|
|
2 |
|
|
|
|
|
|
Excess tax benefits from
stock-based compensation
|
|
|
4 |
|
|
|
|
|
|
Treasury stock purchases
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Net cash used for financing
activities
|
|
$ |
(97 |
) |
|
$ |
(198 |
) |
|
|
|
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
2 |
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(124 |
) |
|
|
(225 |
) |
Cash and cash equivalents at
beginning of period
|
|
|
259 |
|
|
|
432 |
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$ |
135 |
|
|
$ |
207 |
|
|
|
|
Supplemental cash flow
disclosures:
|
|
|
|
|
|
|
|
|
|
Interest paid(1)
|
|
$ |
27 |
|
|
$ |
139 |
|
|
Income taxes paid(2)
|
|
$ |
114 |
|
|
$ |
7 |
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of property with
capital lease obligations
|
|
$ |
5 |
|
|
$ |
10 |
|
|
(1) Amount for the six month period ended December 31,
2006 is net of $12 million received upon settlement of
interest rate swaps. Amount for the six month period ended
December 31, 2005 includes $103 million of interest
paid on PIK notes held by affiliates which was included in term
debt at June 30, 2005.
(2) Amount for the six month period ended December 31,
2006 includes payment of $82 million in income taxes
incurred, primarily resulting from the realignment of the
European and Asian businesses.
See accompanying notes to condensed consolidated financial
statements.
F-4
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Basis of Presentation
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.
As of December 31, 2006, the Company was approximately 75%
owned by private equity funds controlled by Texas Pacific Group,
the Goldman Sachs Funds and Bain Capital Partners (collectively,
the Sponsors).
The Company generates revenues from three sources:
(i) sales at restaurants owned by the Company;
(ii) royalties and franchise fees paid by franchisees; and
(iii) property income from the franchise restaurants that
the Company leases or subleases to franchisees. The Company
receives monthly royalties and advertising contributions from
franchisees based on a percentage of restaurant sales.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements contained in the Companys Annual Report on
Form 10-K for the
fiscal year ended June 30, 2006. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included.
The results for the three and six months ended December 31,
2006 do not necessarily indicate the results that may be
expected for the full year.
The condensed consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All
material intercompany balances and transactions have been
eliminated in consolidation. Investments in affiliates where the
Company owns between 20% and 50% are accounted for under the
equity method, except as discussed below.
In December 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46R,
Consolidation of Variable Interest Entities an
interpretation of ARB No. 51
(FIN 46R). FIN 46R establishes
guidance to identify variable interest entities
(VIEs). FIN 46R requires VIEs to be
consolidated by the primary beneficiary who is exposed to the
majority of the VIEs expected losses, expected residual
returns, or both. FIN 46R excludes from its scope operating
businesses unless certain conditions exist.
A majority of franchise entities meet the definition of an
operating business and, therefore, are exempt from the scope of
FIN 46R. Additionally, there are a number of franchise
entities which do not meet the definition of a business, as a
result of leasing arrangements and other forms of subordinated
financial support provided by the Company, including certain
franchise entities that participated in the franchisee financial
restructuring program (see Note 13) and, therefore,
are considered VIEs. However, the Company is not exposed
to the majority of expected losses in any of these arrangements
and, therefore, is not the primary beneficiary required to
consolidate any of these franchisee entities.
F-5
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The Company has consolidated one joint venture created in fiscal
2005 that operates restaurants where the Company is a 49%
partner, but is deemed to be the primary beneficiary, as the
joint venture agreement provides protection to the joint venture
partner from absorbing expected losses. The results of
operations of this joint venture are not material to the
Companys results of operations or financial position.
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 affect the
amounts reported in the Companys condensed consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods to
conform to the current periods presentation. The
reclassifications had no effect on previously reported net
income or stockholders equity.
Inventories
Inventories, totaling $17 million and $14 million as
of December 31, 2006 and June 30, 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 condensed
consolidated balance sheets.
Note 2. Stock-based Compensation
Prior to February 16, 2006, the date the Company filed its
Form S-1
registration statement with the Securities and Exchange
Commission (the initial public offering was effective on
May 17, 2006), the Company accounted for stock-based
compensation in accordance with the intrinsic-value method of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25).
Under the intrinsic value method of APB No. 25, stock
options were granted by the Company 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 (RSUs) under APB
No. 25 and recognized compensation cost over the vesting
period of the awards. For pro forma disclosure required by
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123), compensation expense
for stock options was measured using the minimum value method,
which assumed no volatility of the Companys common stock
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
nonpublic entity to a public entity as defined by Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment(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
requires that the Company adopt SFAS No. 123R,
F-6
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
using a combination of the prospective and modified prospective
transition methods. The Company applied the prospective
transition method for those awards granted prior to the
Form S-1 filing
date that were measured at minimum value. The unrecognized
compensation cost relating to these awards is recognized in the
financial statements subsequent to the adoption of
SFAS No. 123R, using the same method of recognition
and measurement originally applied to those awards. As there was
no compensation cost recognized by the Company in the financial
statements for these awards under APB No. 25, no
compensation cost has been or will be recognized for these
awards after the Companys adoption of
SFAS No. 123R on July 1, 2006, unless such awards
are modified after that date. For those awards granted
subsequent to the
Form S-1 filing
date, but prior to the adoption date of July 1, 2006, the
Company applied the modified prospective transition method,
under which compensation expense is recognized for any unvested
portion of the awards granted between the
Form S-1 filing
date and the adoption date of SFAS 123R over the remaining
vesting period of the awards beginning on the adoption date of
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.
Non-qualified stock option awards (NQSO) granted by
the Company expire ten years from the grant date and generally
vest ratably over a five-year service period commencing on the
grant date. RSUs granted by the Company generally vest
ratably over a two to five year service period commencing on the
grant date. For those vested and unvested RSUs granted
prior to the Companys initial public offering, settlement
of these awards (i.e., the issuance of shares of the
Companys common stock to the recipients) will occur on
December 31, 2007 or upon termination of the holders
employment, if earlier. For the six months ended
December 31, 2006, the Company granted performance-based
restricted stock (PBRS) awards of
706,422 shares to eligible employees as long-term incentive
compensation. The actual number of shares earned by the employee
depends on specific performance criteria of the Company during
the one-year performance period ended June 30, 2007 and
will be adjusted at the end of the performance period. The PBRS
awards have a three or four-year vesting period from the grant
date, depending on the employee, which includes the one-year
performance period.
The Company recorded $1 million and $2 million of
pre-tax stock-based compensation expense for the three and six
months ended December 31, 2006, respectively.
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 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 8.4 million as of December 31, 2006.
F-7
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The Company also maintains Deferred Stock Award arrangements
under the 2006 Omnibus Incentive Plan for non-employee members
of the Board of Directors. Pursuant to these arrangements,
non-employee directors receive an annual grant of deferred
shares of the Companys common stock and may elect to
receive their quarterly retainer and Committee fees in deferred
shares in lieu of cash. In November 2006, the Company granted
59,193 deferred shares as an annual grant to non-employee
directors. The deferred shares vest in quarterly installments
over a one-year period on the first day of each calendar quarter
following the grant date. The deferred shares will settle and
common shares will be issued at the time the non-employee
director no longer provides services to the Board.
The fair value of each stock option granted under the Plans
during the quarter ended December 31, 2006 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
|
|
|
4.59% |
|
Expected term (in years)
|
|
|
6.25 |
|
Expected volatility
|
|
|
33.01% |
|
Expected dividend yield
|
|
|
0.00% |
|
|
A summary of NQSO activity under the Plans as of
December 31, 2006 and changes during the three and six
months ended December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Number | |
|
Weighted Average | |
|
Weighted Average | |
|
|
of Options | |
|
Exercise Price | |
|
Remaining | |
|
|
(in 000s) | |
|
Per Share($) | |
|
Contractual life | |
| |
Outstanding at June 30, 2006
|
|
|
7,408 |
|
|
$ |
7.75 |
|
|
|
7.06 |
|
|
Granted
|
|
|
81 |
|
|
|
14.05 |
|
|
|
|
|
|
Exercised
|
|
|
(5 |
) |
|
|
3.80 |
|
|
|
|
|
|
Forfeited
|
|
|
(255 |
) |
|
|
6.42 |
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
7,229 |
|
|
|
7.87 |
|
|
|
6.65 |
|
|
Granted
|
|
|
150 |
|
|
|
15.96 |
|
|
|
|
|
|
Exercised
|
|
|
(623 |
) |
|
|
3.86 |
|
|
|
|
|
|
Forfeited
|
|
|
(89 |
) |
|
|
9.11 |
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
6,667 |
|
|
|
8.41 |
|
|
|
6.86 |
|
|
|
|
Exercisable at December 31,
2006
|
|
|
2,516 |
|
|
$ |
5.07 |
|
|
|
4.67 |
|
|
The aggregate intrinsic value as of December 31, 2006 for
outstanding and exercisable NQSO awards was $85 million and
$40 million, respectively. The intrinsic value of a stock
option is the amount by which the market value of the underlying
stock exceeds the exercise price of the option. For the six
months ended December 31, 2006, the total intrinsic value
of stock options exercised was $9 million and proceeds from
stock options exercised was $2 million. For the six months
ended December 31, 2006, actual tax benefits realized for
tax deductions from stock options exercised was $4 million.
F-8
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
A summary of RSU activity under the Plans as of
December 31, 2006 and changes during the three and six
months ended December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
| |
|
|
Number | |
|
Weighted average | |
|
|
of RSUs | |
|
grant date fair | |
|
|
(in 000s) | |
|
value ($) | |
| |
Outstanding at June 30, 2006
|
|
|
957 |
|
|
$ |
12.11 |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
151 |
|
|
|
5.54 |
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
806 |
|
|
|
9.65 |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20 |
) |
|
|
6.83 |
|
|
Forfeited
|
|
|
(9 |
) |
|
|
10.25 |
|
|
|
|
Outstanding at December 31,
2006
|
|
|
777 |
|
|
|
9.85 |
|
|
|
|
Exercisable at December 31,
2006
|
|
|
441 |
|
|
$ |
5.93 |
|
|
As of December 31, 2006, there was $8 million of total
unrecognized compensation cost related to nonvested share-based
compensation arrangements (NQSOs and RSU awards) granted
under the Plans. That cost is expected to be recognized over a
weighted-average period of 4.3 years. The total fair value
of shares vested during six months ended December 31, 2006
was $14 million.
In August 2006, the Company granted PBRS awards under the 2006
Omnibus Incentive Plan, as long-term incentive compensation to
selected executives and other key employees. PBRS awards are
based on an individuals total annual long-term incentive
target award. The performance measure of PBRS awards is the
Companys profit before taxes for fiscal year 2007.
The fair value of the PBRS awards was the closing price of the
Companys common stock on the grant date and assumes that
the target performance will be achieved. The number of PBRS
awards earned by an employee may be adjusted up or down each
reporting period during the performance period, based on the
Companys probable performance over the performance period.
At the end of the one-year performance period, the value of the
PBRS awards will be adjusted to the actual awards earned based
on the performance of the Company. The PBRS awards have a 3 or
4-year vesting
requirement from the grant date, depending on the employee.
F-9
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
A summary of PBRS activity under the 2006 Omnibus Incentive Plan
as of December 31, 2006 and changes during the three and
six months ended December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
| |
|
|
Number | |
|
Weighted average | |
|
|
of PBRS | |
|
grant date fair | |
|
|
(in 000s) | |
|
value ($) | |
| |
Outstanding at June 30, 2006
|
|
|
|
|
|
$ |
|
|
|
Granted
|
|
|
706 |
|
|
|
14.05 |
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4 |
) |
|
|
14.05 |
|
|
|
|
Outstanding at September 30,
2006
|
|
|
702 |
|
|
|
14.05 |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16 |
) |
|
|
14.05 |
|
|
|
|
Outstanding at December 31,
2006
|
|
|
686 |
|
|
|
14.05 |
|
|
|
|
Exercisable at December 31,
2006
|
|
|
|
|
|
$ |
|
|
|
As of December 31, 2006, there was $9 million of total
unrecognized compensation cost related to PBRS awards granted
under the 2006 Omnibus Incentive Plan. That cost is expected to
be recognized over a weighted average period of 2.6 years.
No performance shares vested during the six months ended
December 31, 2006. Compensation expense recorded during the
six months ended December 31, 2006 for performance shares
was $1 million.
Note 3. Acquisitions, Closures and Dispositions
Acquisitions
All acquisitions of franchised restaurant operations are
accounted for using the purchase method of accounting under
Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141). These
acquisitions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Number of restaurant acquisitions
|
|
|
41 |
|
|
|
28 |
|
|
|
46 |
|
|
|
38 |
|
Prepaids and other current assets
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Property and equipment, net
|
|
|
5 |
|
|
|
1 |
|
|
|
5 |
|
|
|
2 |
|
Goodwill and other intangible assets
|
|
|
6 |
|
|
|
4 |
|
|
|
6 |
|
|
|
6 |
|
Assumed liabilities
|
|
|
(4 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
Total purchase price
|
|
$ |
8 |
|
|
$ |
4 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
F-10
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Asset and Business Dispositions
Gains and losses on asset closures and dispositions represent
sales of Company-owned properties related to restaurant closures
and sales of Company-owned restaurants to franchisees, or
refranchisings, and are recorded in other operating
income, net in the accompanying condensed consolidated
statements of income, (See Note 12). Gains and losses
recognized in the current period may reflect closures that
occurred in previous periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Number of restaurant closures
|
|
|
4 |
|
|
|
1 |
|
|
|
8 |
|
|
|
6 |
|
Number of refranchisings
|
|
|
3 |
|
|
|
|
|
|
|
4 |
|
|
|
2 |
|
Losses (gains) on asset
closures and dispositions
|
|
$ |
2 |
|
|
$ |
(1 |
) |
|
$ |
(4 |
) |
|
$ |
(1 |
) |
|
Included in the gains on asset closures and dispositions for the
six months ended December 31, 2006 is a $5 million
gain from the sale of an investment in a non-consolidated joint
venture.
Note 4. Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months ended | |
|
Six months ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
37,782,214 |
|
|
$ |
26,790,797 |
|
|
$ |
78,227,071 |
|
|
$ |
48,586,669 |
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
133,450,444 |
|
|
|
106,853,404 |
|
|
|
133,264,354 |
|
|
|
106,806,402 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
393,883 |
|
|
|
705,179 |
|
|
|
395,004 |
|
|
|
465,720 |
|
|
Performance-based restricted stock
|
|
|
129,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options
|
|
|
2,481,631 |
|
|
|
5,337,689 |
|
|
|
2,445,638 |
|
|
|
5,585,290 |
|
|
|
|
Denominator for diluted earnings
per share
|
|
|
136,455,343 |
|
|
|
112,896,272 |
|
|
|
136,104,996 |
|
|
|
112,857,412 |
|
|
|
|
Basic earnings per share
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
|
$ |
0.59 |
|
|
$ |
0.45 |
|
Diluted earnings per share
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
|
$ |
0.57 |
|
|
$ |
0.43 |
|
|
F-11
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The Company does not include unexercised NQSOs to purchase
shares of the Companys common stock with exercise prices
equal to or greater than the average market price (anti-dilutive
stock options) in its computation of diluted earnings per share
as those options would result in anti-dilution. There were
800,000 of anti-dilutive stock options outstanding during the
three months ended December 31, 2006 and none during the
three months ended December 31, 2005. There were
1.2 million and 1 million of anti-dilutive stock
options outstanding during the six months ended
December 31, 2006 and 2005, respectively.
Note 5. Comprehensive Income
Comprehensive income is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three | |
|
|
|
|
months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net income
|
|
$ |
38 |
|
|
$ |
27 |
|
|
$ |
78 |
|
|
$ |
49 |
|
Translation adjustment
|
|
|
(7 |
) |
|
|
1 |
|
|
|
(5 |
) |
|
|
3 |
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of
derivatives
|
|
|
|
|
|
|
3 |
|
|
|
(8 |
) |
|
|
5 |
|
|
Amounts reclassified to earnings
during the period
|
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
Total other comprehensive (loss)
income
|
|
|
(8 |
) |
|
|
(2 |
) |
|
|
(15 |
) |
|
|
2 |
|
|
|
|
Total comprehensive income
|
|
$ |
30 |
|
|
$ |
25 |
|
|
$ |
63 |
|
|
$ |
51 |
|
|
Note 6. Other Accrued Liabilities
Included in other accrued liabilities as of December 31,
2006 and June 30, 2006, were accrued payroll and
employee-related benefit costs totaling $84 million and
$101 million, respectively, and income taxes payable of
$12 million and $96 million, respectively.
Note 7. Long-Term Debt
As of December 31, 2006, and June 30, 2006, the
Company had $896 million and $997 million,
respectively, of long-term debt outstanding. During the six
months ended December 31, 2006, the Company prepaid
$100 million of term debt. As of December 31, 2006,
the next scheduled principal payment on the term debt is
March 31, 2009. See subsequent events in footnote 15
for pre-payment in January 2007.
F-12
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Note 8. Derivative Instruments
Interest rate swaps
In September 2005, the Company entered into interest rate swap
contracts with a notional value of $750 million that
qualify as cash flow hedges under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended
(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. In
September 2006, the Company terminated these hedges, which had a
remaining value of $12 million. In accordance with
SFAS No. 133, this remaining value is included in
accumulated other comprehensive income and is recognized into
earnings as a reduction to interest expense over the remaining
life of the term debt underlying the hedge. For the three months
ended December 31, 2006, $2 million was recognized
into earnings as a reduction to interest expense in the
accompanying condensed consolidated statement of income.
In September 2006, the Company entered into interest rate swap
contracts with a notional value of $440 million to hedge
forecasted LIBOR-based interest payments on its variable rate
debt. These swaps mature through September 2011 and qualify as
cash flow hedges under SFAS No. 133. The fair value of
these interest rate swaps was $1 million as of
December 31, 2006 and is recorded within other assets, net
in the accompanying condensed consolidated balance sheets.
Unrealized gains and losses related to these hedges are expected
to be reclassified into earnings in the future and will offset
interest expense on the forecasted interest payments. The actual
amounts that will be reclassified could vary from the estimated
amount as a result of changes in interest rates in the future.
For the three months ended December 31, 2006, approximately
$1 million was recognized into earnings as a reduction to
interest expense in the accompanying condensed consolidated
statement of income. No ineffectiveness was recognized during
the three and six months ended December 31, 2006 for
interest rate swaps designated as cash flow hedges.
Foreign currency forward contracts
In September 2006, the Company entered into three-month foreign
currency forward contracts which matured in December 2006, to
sell Euros with an aggregate contract amount of
$344 million, in order to offset the impact from foreign
currency fluctuations on certain foreign-denominated
intercompany loans. The Company recognized a $16 million
gain during the three months ended December 31, 2006 as a
result of the foreign currency translation of these foreign
denominated intercompany loans. This gain was offset by a
corresponding realized loss on the foreign currency forward
contracts of $15 million. The net gain of $1 million
is attributable to the difference between the spot rate and the
forward exchange rate and is recognized in earnings during the
three months ended December 31, 2006. For the six months
ended December 31, 2006, the Company has recognized a
$12 million gain as a result of the foreign currency
translation of these foreign denominated intercompany loans,
which has been offset by a corresponding realized loss on
foreign currency forward contracts of $9 million. The net
gain of $3 million is attributable to the difference
between the spot rate and the foreign exchange rate and is
recognized in earnings during the six months ended
F-13
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
December 31, 2006. In December 2006, the Company entered
into three-month foreign currency forward contracts, which
mature in March 2007, to sell Euros with an aggregate contract
amount of $347 million, in order to economically hedge the
impact from foreign currency fluctuations on these foreign
denominated intercompany loans for this period.
As of December 31, 2006, a liability in the amount of
$12 million related to the foreign currency forward
contracts that matured in December 2006, was recorded in other
current liabilities in the accompanying condensed consolidated
balance sheets.
Note 9. Income Taxes
The U.S. Federal tax statutory rate reconciles to the
effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
U.S. Federal income tax rate
|
|
|
35.0% |
|
|
|
35.0% |
|
|
|
35.0% |
|
|
|
35.0% |
|
State income taxes, net of federal
income tax benefit
|
|
|
2.6 |
|
|
|
1.0 |
|
|
|
2.6 |
|
|
|
2.3 |
|
Benefit and taxes related to
foreign operations
|
|
|
(1.1 |
) |
|
|
9.2 |
|
|
|
(3.0 |
) |
|
|
3.5 |
|
Foreign exchange differential on
tax benefits
|
|
|
(3.6 |
) |
|
|
(0.2 |
) |
|
|
(2.2 |
) |
|
|
(0.2 |
) |
Change in valuation allowance
|
|
|
2.7 |
|
|
|
(1.2 |
) |
|
|
2.7 |
|
|
|
4.1 |
|
Change in accrual for tax
uncertainties
|
|
|
(0.3 |
) |
|
|
5.7 |
|
|
|
1.3 |
|
|
|
3.8 |
|
Other
|
|
|
(0.8 |
) |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
|
|
Effective income tax rate
|
|
|
34.5% |
|
|
|
49.1% |
|
|
|
36.1% |
|
|
|
48.4% |
|
|
Note 10. 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. In May 2006, the Company
paid $30 million to the Sponsors to terminate the
management agreement upon the completion of its initial public
offering eliminating management fees subsequent to that date.
Prior to the termination of the management agreement, the
Company incurred management fees and reimbursable
out-of-pocket expenses
under the management agreement totaling $3 million and
$6 million for the three and six months ended
December 31, 2005, respectively. These fees and
reimbursable
out-of-pocket expenses
are recorded within fees paid to affiliates in the consolidated
statement of operations.
The outstanding balance of the
payment-in-kind
(PIK) notes to the private equity funds controlled
by the Sponsors included $103 million of PIK interest as of
June 30, 2005, and $2 million of accrued interest for
the three months ended fiscal year 2006, and was repaid in
F-14
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
July 2005. Interest expense on the PIK notes totaled
$2 million for the three and six months ended
December 31, 2005.
A member of the Board of Directors of the Company has a direct
financial interest in a company with which the Company has
entered into a lease agreement for the Companys new
corporate headquarters (see Note 13).
Note 11. Retirement Plan and Other Postretirement
Benefits
A summary of the components of net periodic benefit cost for the
Pension Plans (retirement benefits) and Postretirement Plans
(other benefits) is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement Benefits | |
|
|
| |
|
|
Three months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Service cost-benefits earned during
the period
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
3 |
|
Interest costs on projected benefit
obligations
|
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
Expected return on plan assets
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
Curtailment gain
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
Net periodic benefit cost
|
|
$ |
1 |
|
|
$ |
(5 |
) |
|
$ |
2 |
|
|
$ |
(2 |
) |
|
Other benefits costs were $1 million for both three month
periods ended December 31, 2006 and 2005. Other benefit
costs were $1 million for both six month periods ended
December 31, 2006 and 2005.
Note 12. Other Operating Income, Net
Other operating income, net, consists of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Losses (gains) on asset
closures and dispositions
|
|
$ |
2 |
|
|
$ |
(1 |
) |
|
$ |
(4 |
) |
|
$ |
(1 |
) |
(Recovery) impairment of
investments in franchisee debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Other, net
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
Other operating income, net
|
|
$ |
(1 |
) |
|
$ |
(2 |
) |
|
$ |
(8 |
) |
|
$ |
(3 |
) |
|
The $1 million of other operating income, net for the three
months ended December 31, 2006, includes a gain of
$1 million on forward currency contracts, a $1 million
gain on asset sales, offset by $2 million of expenses
associated with franchise system distress in the United Kingdom.
The $2 million of other operating income, net for the three
months ended
F-15
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
December 31, 2005, includes a gain on asset sales of
$1 million and a foreign currency transaction gain of
$1 million.
The $8 million of other operating income, net for the six
months ended December 31, 2006, includes a $5 million
gain from the sale of the Companys investment in a joint
venture in New Zealand, a gain on forward currency contracts of
$3 million, and $2 million of expenses associated with
franchise system distress in the United Kingdom. The
$3 million of other operating income, net for the six
months ended December 31, 2005, includes a recovery of
investments in franchisee debt of $2 million and a
$1 million gain on asset sales.
Note 13. Commitments and Contingencies
Franchisee Restructuring Program
During fiscal 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 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.
During the three and six months ended December 31, 2006,
the Company funded $2 million and $3 million in Capex
Loans, respectively, and made $1 million of improvements to
restaurant properties that the Company leases to franchisees in
connection with these commitments. As of December 31, 2006,
the Company has commitments remaining to provide future Capex
Loans of $8 million and to make up to $10 million of
improvements to properties that the Company leases to
franchisees extending over a period of up to five years.
During the three months ended December 31, 2006, temporary
reductions in rent (rent relief), for certain
franchisees that leased restaurant property from the Company
were not significant. For the six months ended December 31,
2006, the Company provided approximately $1 million in rent
relief. As of December 31, 2006, the Company had remaining
commitments to provide future rent relief of up to
$7 million extending over a period of up to 17 years.
Contingent cash flow subsidies represent commitments by the
Company to provide future cash grants to certain franchisees for
limited periods in the event of failure to achieve their debt
service coverage ratio. For the three and six months ended
December 31, 2006, contingent cash flow subsidies provided
to franchisees were not significant. The maximum contingent cash
flow subsidy commitment for future periods as of
December 31, 2006 is $5 million extending over a
period of up to five years. Upon funding, in most instances, the
subsidies will be added to the franchisees existing note
balance.
F-16
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
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 $106 million as of
December 31, 2006, expiring over an average period of six
years.
Other commitments arising out of normal business operations were
$12 million as of December 31, 2006, of which
$8 million were guaranteed under bank guarantee
arrangements.
Letters of Credit
As of December 31, 2006, the Company had $34 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 December 31, 2006,
none of these irrevocable standby letters of credit had been
drawn upon.
As of December 31, 2006, the Company had posted bonds
totaling $2 million, which related to certain utility
deposits.
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 December 31, 2006, the Company
estimates that it will take approximately 16 years to
complete the Coca-Cola and Dr Pepper/ Seven Up, Inc.
purchase commitments. In the event of early termination of these
arrangements, the Company may be required to make termination
payments that could be material to the Companys results of
operations and financial position. Additionally, in connection
with these contracts, the Company received upfront fees, which
are being amortized over the term of the contracts. As of
December 31, 2006 and June 30, 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
condensed consolidated statements of income.
The Company has $5 million in aggregate contractual
obligations for the year ending June 30, 2007 with a vendor
providing information technology services under three separate
arrangements. These contracts extend up to five years with
a termination fee ranging from $1 million to
$8 million during those years.
The Company also enters into commitments to purchase advertising
for periods up to twelve months. As of December 31,
2006, commitments to purchase advertising totaled
$87 million.
F-17
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
New Global Headquarters
In May 2005, the Company entered into an agreement to lease a
building in Coral Gables, Florida, to serve as the
Companys new global headquarters beginning in fiscal 2009.
The estimated annual rent for the 15 year initial term,
which is expected to be approximately $8 million per year,
will be finalized upon the completion of the buildings
construction. Fixed annual rent under the lease will escalate by
6% every other year commencing after the second year and
operating costs will escalate based upon the inflation rate. The
Company also expects to spend approximately $18 million in
tenant improvements, furniture and fixtures, information
technology and moving costs. Of this amount, approximately
$17 million will be capitalized and amortized over the
shorter of the assets useful life or the term of the lease.
Other
The Company has 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. The Company is
self-insured for healthcare claims for eligible participating
employees. The Company determines its liability for claims based
on actuarial analysis. As of December 31, 2006, the Company
had a balance of $37 million in accrued liabilities to
cover such claims.
The Company had claims for certain years which were insured by a
third party carrier, which was insolvent at June 30, 2006.
During the first quarter of fiscal 2007, the Company entered
into a novation agreement whereby the insolvent carrier was
replaced by another third party carrier which will take over the
administration of pending and potential claims for these years.
Note 14. Segment Reporting
The Company operates in the fast food hamburger restaurant
category of the quick service segment of the restaurant
industry. Revenues include retail sales at Company-owned
restaurants and franchise revenues. The business is managed in
three distinct geographic segments: United States and Canada;
Europe, the Middle East, Africa and Asia Pacific (EMEA/
APAC); and Latin America.
F-18
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The following tables present revenues and operating income by
geographic segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months | |
|
|
|
|
ended | |
|
Six months ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
362 |
|
|
$ |
341 |
|
|
$ |
724 |
|
|
$ |
682 |
|
EMEA/ APAC
|
|
|
171 |
|
|
|
147 |
|
|
|
330 |
|
|
|
293 |
|
Latin America
|
|
|
26 |
|
|
|
24 |
|
|
|
51 |
|
|
|
45 |
|
|
|
|
|
Total revenues
|
|
$ |
559 |
|
|
$ |
512 |
|
|
$ |
1,105 |
|
|
$ |
1,020 |
|
|
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
$323 million and $647 million for the three and
six months ended December 31, 2006, respectively.
Revenues in Germany totaled $79 million and
$152 million for the three and six months ended
December 31, 2006, respectively. Revenues in the United
States totaled $305 million and $611 million for the
three and six months ended December 31, 2005. Revenues
in Germany totaled $68 and $135 million for the three and
six months ended December 31, 2005.
The unallocated amount reflected in the Operating Income table
below includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing and supply chain management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months | |
|
Six months | |
|
|
ended | |
|
ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
84 |
|
|
$ |
74 |
|
|
$ |
171 |
|
|
$ |
152 |
|
EMEA/ APAC
|
|
|
13 |
|
|
|
21 |
|
|
|
33 |
|
|
|
42 |
|
Latin America
|
|
|
10 |
|
|
|
8 |
|
|
|
18 |
|
|
|
15 |
|
Unallocated
|
|
|
(32 |
) |
|
|
(33 |
) |
|
|
(65 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
75 |
|
|
$ |
70 |
|
|
$ |
157 |
|
|
$ |
142 |
|
|
|
Interest expense, net
|
|
|
17 |
|
|
|
17 |
|
|
|
34 |
|
|
|
34 |
|
|
|
Loss on early distinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
58 |
|
|
$ |
53 |
|
|
$ |
122 |
|
|
$ |
95 |
|
|
|
Income tax expense
|
|
|
20 |
|
|
|
26 |
|
|
|
44 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
38 |
|
|
$ |
27 |
|
|
$ |
78 |
|
|
$ |
49 |
|
|
F-19
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Note 15. Subsequent Event
On January 30, 2007, the Company announced a quarterly
dividend of 6.25 cents per share. The dividend will be paid on
March 15, 2007 to shareholders of record as of the close of
business on February 15, 2007.
On January 30, 2007, the Company prepaid an additional
$25 million of term debt, reducing the total outstanding
long-term debt balance to $871 million. As a result of this
payment, the next scheduled principal payment on the amended
facility is in June 2009.
F-20
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 as of June 30,
2006, and 2005, and the related consolidated statements of
operations, stockholders equity and comprehensive income
(loss), and cash flows for each of the years in the three-year
period ended June 30, 2006. These consolidated financial
statements are the responsibility of the 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, 2006 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year
period ended June 30, 2006, in conformity with
U.S. generally accepted accounting principles.
August 31, 2006
Miami, Florida
Certified Public Accountants
F-21
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
As of June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
|
|
(in millions, | |
|
|
except share | |
|
|
data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
259 |
|
|
$ |
432 |
|
|
Trade and notes receivable, net
|
|
|
109 |
|
|
|
110 |
|
|
Prepaids and other current assets,
net
|
|
|
40 |
|
|
|
35 |
|
|
Deferred income taxes, net
|
|
|
45 |
|
|
|
57 |
|
|
|
|
|
|
Total current assets
|
|
|
453 |
|
|
|
634 |
|
Property and equipment, net
|
|
|
886 |
|
|
|
899 |
|
Intangible assets, net
|
|
|
975 |
|
|
|
995 |
|
Goodwill
|
|
|
20 |
|
|
|
17 |
|
Net investment in property leased
to franchisees
|
|
|
148 |
|
|
|
149 |
|
Other assets, net
|
|
|
70 |
|
|
|
29 |
|
|
|
|
|
|
Total assets
|
|
$ |
2,552 |
|
|
$ |
2,723 |
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$ |
100 |
|
|
$ |
83 |
|
|
Accrued advertising
|
|
|
49 |
|
|
|
59 |
|
|
Other accrued liabilities
|
|
|
338 |
|
|
|
248 |
|
|
Current portion of long term debt
and capital leases
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
Total current liabilities
|
|
|
492 |
|
|
|
394 |
|
Term debt, net of current portion
|
|
|
997 |
|
|
|
1,282 |
|
Capital leases, net of current
portion
|
|
|
63 |
|
|
|
53 |
|
Other deferrals and liabilities
|
|
|
349 |
|
|
|
375 |
|
Deferred income taxes, net
|
|
|
84 |
|
|
|
142 |
|
|
|
|
|
|
Total liabilities
|
|
|
1,985 |
|
|
|
2,246 |
|
Commitments and Contingencies
(Note 19)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 10,000,000 shares authorized; no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
300,000,000 shares authorized; 133,058,640 and
106,734,893 shares issued and outstanding at June 30,
2006 and June 30, 2005, respectively
|
|
|
1 |
|
|
|
1 |
|
|
Restricted stock units
|
|
|
5 |
|
|
|
2 |
|
|
Additional paid-in capital
|
|
|
545 |
|
|
|
406 |
|
|
Retained earnings
|
|
|
3 |
|
|
|
76 |
|
|
Accumulated other comprehensive
income (loss)
|
|
|
15 |
|
|
|
(6 |
) |
|
Treasury stock, at cost;
590,841 shares, at June 30, 2006 and June 30,
2005, respectively
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
Total stockholders equity
|
|
|
567 |
|
|
|
477 |
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$ |
2,552 |
|
|
$ |
2,723 |
|
|
See accompanying notes to consolidated financial
statements.
F-22
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Fiscal Years Ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
|
(in millions, except | |
|
|
per share data) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$ |
1,516 |
|
|
$ |
1,407 |
|
|
$ |
1,276 |
|
|
Franchise revenues
|
|
|
420 |
|
|
|
413 |
|
|
|
361 |
|
|
Property revenues
|
|
|
112 |
|
|
|
120 |
|
|
|
117 |
|
|
|
|
|
|
Total revenues
|
|
|
2,048 |
|
|
|
1,940 |
|
|
|
1,754 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
470 |
|
|
|
437 |
|
|
|
391 |
|
|
Payroll and employee benefits
|
|
|
446 |
|
|
|
415 |
|
|
|
382 |
|
|
Occupancy and other operating costs
|
|
|
380 |
|
|
|
343 |
|
|
|
314 |
|
|
|
|
|
|
Total company restaurant expenses
|
|
|
1,296 |
|
|
|
1,195 |
|
|
|
1,087 |
|
Selling, general and administrative
expenses
|
|
|
488 |
|
|
|
487 |
|
|
|
474 |
|
Property expenses
|
|
|
57 |
|
|
|
64 |
|
|
|
58 |
|
Fees paid to affiliates
|
|
|
39 |
|
|
|
9 |
|
|
|
8 |
|
Other operating (income) expenses,
net
|
|
|
(2 |
) |
|
|
34 |
|
|
|
54 |
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,878 |
|
|
|
1,789 |
|
|
|
1,681 |
|
|
|
|
Income from operations
|
|
|
170 |
|
|
|
151 |
|
|
|
73 |
|
|
|
|
|
Interest expense
|
|
|
81 |
|
|
|
82 |
|
|
|
68 |
|
|
Interest income
|
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(4 |
) |
|
|
|
|
|
Total interest expense, net
|
|
|
72 |
|
|
|
73 |
|
|
|
64 |
|
|
Loss on early extinguishment of debt
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
80 |
|
|
|
78 |
|
|
|
9 |
|
|
Income tax expense
|
|
|
53 |
|
|
|
31 |
|
|
|
4 |
|
|
|
|
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
Diluted
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
110.3 |
|
|
|
106.5 |
|
|
|
106.1 |
|
|
Diluted
|
|
|
114.7 |
|
|
|
106.9 |
|
|
|
106.1 |
|
|
See accompanying notes to consolidated financial
statements.
F-23
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
and Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Issued | |
|
|
|
|
Issued | |
|
Common | |
|
Restricted | |
|
Additional | |
|
|
|
Accum. Other | |
|
|
|
|
Common | |
|
Stock | |
|
Stock | |
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Treasury | |
|
|
|
|
Stock Shares | |
|
Amount | |
|
Units | |
|
Capital | |
|
Earnings | |
|
Income (Loss) | |
|
Stock | |
|
Total | |
| |
|
|
(in millions) | |
Balances at June 30, 2003
|
|
|
107 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
397 |
|
|
$ |
24 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
432 |
|
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
Balances at June 30, 2004
|
|
|
107 |
|
|
|
1 |
|
|
|
|
|
|
|
403 |
|
|
|
29 |
|
|
|
(9 |
) |
|
|
|
|
|
|
424 |
|
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Issuance of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
Minimum pension liability
adjustment, net of tax of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
Balances at June 30, 2005
|
|
|
107 |
|
|
|
1 |
|
|
|
2 |
|
|
|
406 |
|
|
|
76 |
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
477 |
|
|
Sale of common stock
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
Issuance of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
Dividend paid on common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(267 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
(367 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
Unrealized gain on hedging
activity, net of tax of $(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
16 |
|
|
|
Minimum pension liability
adjustment, net of tax of $(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
Balances at June 30, 2006
|
|
|
133 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
545 |
|
|
$ |
3 |
|
|
$ |
15 |
|
|
$ |
(2 |
) |
|
$ |
567 |
|
|
See accompanying notes to consolidated financial
statements.
F-24
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
|
|
(in millions) | |
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
88 |
|
|
|
74 |
|
|
|
63 |
|
|
|
Interest expense payable in kind
|
|
|
|
|
|
|
45 |
|
|
|
41 |
|
|
|
(Gain) loss on asset disposals
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
12 |
|
|
|
(Recoveries) provision for bad debt
expense, net
|
|
|
(2 |
) |
|
|
1 |
|
|
|
11 |
|
|
|
Impairment of debt investments and
investments in unconsolidated companies and joint ventures
|
|
|
|
|
|
|
4 |
|
|
|
24 |
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
Pension curtailment gain
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit)
expense
|
|
|
68 |
|
|
|
9 |
|
|
|
(12 |
) |
|
Changes in current assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivables
|
|
|
7 |
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
Prepaids and other current assets
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(6 |
) |
|
|
Accounts and drafts payable
|
|
|
8 |
|
|
|
(21 |
) |
|
|
23 |
|
|
|
Accrued advertising
|
|
|
(10 |
) |
|
|
7 |
|
|
|
(3 |
) |
|
|
Other accrued liabilities
|
|
|
(30 |
) |
|
|
48 |
|
|
|
28 |
|
|
Payment of interest on PIK notes
|
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
Other long-term assets and
liabilities, net
|
|
|
13 |
|
|
|
8 |
|
|
|
21 |
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
74 |
|
|
|
218 |
|
|
|
199 |
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale
securities
|
|
|
|
|
|
|
(768 |
) |
|
|
(308 |
) |
|
Proceeds from available for sale
securities
|
|
|
|
|
|
|
890 |
|
|
|
186 |
|
|
Payments for property and equipment
|
|
|
(85 |
) |
|
|
(93 |
) |
|
|
(81 |
) |
|
Proceeds from asset disposals and
restaurant closures
|
|
|
18 |
|
|
|
18 |
|
|
|
26 |
|
|
Payments for acquired franchisee
operations
|
|
|
(8 |
) |
|
|
(28 |
) |
|
|
(6 |
) |
|
Investment in franchisee debt
|
|
|
(4 |
) |
|
|
(27 |
) |
|
|
(22 |
) |
|
Repayments of franchisee debt
|
|
|
5 |
|
|
|
3 |
|
|
|
3 |
|
|
Net proceeds for purchase of BKC
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Release from restricted cash/escrow
account
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(74 |
) |
|
|
(5 |
) |
|
|
(184 |
) |
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term debt and credit
facility
|
|
|
2,143 |
|
|
|
|
|
|
|
|
|
|
Repayments of term debt, credit
facility and capital leases
|
|
|
(2,329 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
Payments for financing costs
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock,
net
|
|
|
399 |
|
|
|
3 |
|
|
|
6 |
|
|
Dividends paid on common stock
|
|
|
(367 |
) |
|
|
|
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Net cash (used for) provided by
financing activities
|
|
|
(173 |
) |
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(173 |
) |
|
|
211 |
|
|
|
18 |
|
|
Cash and cash equivalents at
beginning of period
|
|
|
432 |
|
|
|
221 |
|
|
|
203 |
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$ |
259 |
|
|
$ |
432 |
|
|
$ |
221 |
|
|
|
|
Supplemental cash-flow
disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid(1)
|
|
$ |
180 |
|
|
$ |
26 |
|
|
$ |
21 |
|
|
Income taxes paid
|
|
$ |
16 |
|
|
$ |
14 |
|
|
$ |
13 |
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of franchisee operations
|
|
$ |
|
|
|
$ |
16 |
|
|
$ |
3 |
|
|
Acquisition of property with
capital lease obligations
|
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
(1) Amount for the year ended June 30, 2006 includes
$103 million of interest paid on PIK notes which was
included in term debt at June 30, 2005.
See accompanying notes to consolidated financial
statements.
F-25
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. BKH is approximately 75.9% owned by
private equity funds controlled by Texas Pacific Group, the
Goldman Sachs Capital Funds and Bain Capital Partners
(collectively, the Sponsors).
The Company generates revenues from three sources:
(i) sales at restaurants owned by the Company;
(ii) royalties and franchise fees paid by franchisees; and
(iii) property income from the franchise restaurants that
the Company leases or subleases to franchisees. The Company
receives monthly royalties and advertising contributions from
franchisees based on a percentage of restaurant sales.
Organization
On December 13, 2002 (the Transaction Date),
Gramet Holding Corporation (GHC), a wholly-owned
subsidiary of Diageo plc and the former parent of BKC, completed
its sale of 100% of the outstanding common stock of BKC to
Burger King Acquisition Corporation (BKAC) for
$1.51 billion, subject to adjustments (the
Transaction).
BKAC was established as an acquisition vehicle by the Sponsors
for the purpose of acquiring BKC. BKAC was capitalized with an
$822.5 million capital contribution from BKH. Of the
aggregate contribution, $610 million was paid in cash and
$212.5 million was due from the Company.
On the Transaction Date, BKAC paid GHC a total of
$1,404.3 million, calculated as $1,510 million less a
preliminary purchase price adjustment of $105.7 million.
The Company and GHC ultimately settled on a further reduction to
the purchase price of $5 million. Of the total amount, GHC
received $441.8 million in cash from BKAC,
$750 million in loan proceeds from BKACs lenders and
$212.5 million in the form of a
payment-in-kind note,
or PIK note, issued by BKH to GHC. Additionally, BKAC paid
$62.5 million in costs associated with the Transaction,
comprised of $28.8 million in deferred financing fees and
$33.7 in professional fees. Of the $33.7 in professional fees,
$22.4 million was paid to the Sponsors.
On the Transaction Date, BKH also issued PIK notes in the
aggregate amount of $212.5 million to the private equity
funds controlled by the Sponsors, and the proceeds were
contributed to BKAC. The terms of these PIK notes were identical
to the PIK note issued to GHC.
BKAC was merged into BKC upon completion of the Transaction. The
merger was accounted for as a combination of entities under
common control.
The Transaction was accounted for using the purchase method of
accounting, or purchase accounting, in accordance with Statement
of Financial Accounting Standard (SFAS)
No. 141, Business Combinations
(SFAS No. 141). At the time of the
Transaction, the Company made a preliminary allocation of the
purchase price to the assets acquired and liabilities assumed at
F-26
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
their estimated fair market value. After the transaction, the
Company hired a third party valuation firm to assist in
determining the fair market value of the assets. In December
2003, the Company completed its fair market value calculations
and finalized the purchase accounting adjustments to these
preliminary allocations. The sum of the fair value of assets
acquired and liabilities assumed exceeded the acquisition cost,
resulting in negative goodwill of $154 million. The
negative goodwill was allocated on a pro rata basis to reduce
the carrying value of long-lived assets in accordance with
SFAS No. 141.
In connection with the final allocation of the purchase price,
the Company adjusted the valuation of its long-lived assets,
primarily property and equipment, and recorded favorable and
unfavorable leases as intangible assets and other liabilities,
respectively. In connection with these adjustments to the
preliminary allocations, the Company recognized a net benefit of
$2 million as a change in accounting estimate in the fiscal
year ended June 30, 2004. This net benefit consisted of
$23 million in additional amortization related to the
adjustment to unfavorable leases and $1 million in other
adjustments, partially offset by $18 million in additional
depreciation expense related to the adjustment to property and
equipment and $4 million of additional amortization expense
related to the adjustment to favorable leases.
Initial Public Offering
In May 2006 the Company completed its initial public offering of
25,000,000 shares of common stock, $0.01 par value, at
a per share price of $17.00 with net proceeds after transaction
costs to the Company of approximately $392 million (the
initial public offering). The Sponsors sold an
additional 3,750,000 shares, to settle the
underwriters over-allotment option at $17.00 per
share. After the consummation of the initial public offering,
the equity funds controlled by the Sponsors owned approximately
75.9% of the Companys outstanding common stock. In
connection with the initial public offering, the Board of
Directors of the Company authorized an increase in the number of
shares of the Companys common stock to 300 million
shares, authorized a 26.34608 to one stock split, and authorized
10 million shares of a new class of preferred stock, with a
par value of $0.01 per share. As of June 30, 2006, no
shares of this new class of preferred stock were issued or
outstanding. All references to the number of shares in these
consolidated financial statements and accompanying notes have
been adjusted to reflect the stock split on a retroactive basis.
Note 2. Summary of Significant Accounting
Policies
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of
BKH and its majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. Investments in affiliates where the Company owns
between 20% and 50% are accounted for under the equity method,
except as discussed below.
In December 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46R,
Consolidation of Variable Interest Entities an
interpretation of ARB No. 51
(FIN 46R). FIN 46R establishes
guidance to identify variable interest entities
(VIEs). FIN 46R requires VIEs to be
consolidated by the primary beneficiary who is exposed to the
majority of
F-27
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
the VIEs expected losses, expected residual returns, or
both. FIN 46R excludes from its scope operating businesses
unless certain conditions exist.
A majority of franchise entities meet the definition of an
operating business and, therefore, are exempt from the scope of
FIN 46R. Additionally, there are a number of franchise
entities which do not meet the definition of a business as a
result of leasing arrangements and other forms of subordinated
financial support provided by the Company, including certain
franchise entities that participated in the franchise financial
restructuring program (see Note 19) and, therefore,
are considered variable interest entities. However, the Company
is not exposed to the majority of expected losses in any of
these arrangements and, therefore, is not the primary
beneficiary required to consolidate any of these franchisees.
The Company has consolidated one joint venture created in fiscal
2005 that operates restaurants where the Company is a 49%
partner, but is deemed to be the primary beneficiary, as the
joint venture agreement provides protection to the joint venture
partner from absorbing expected losses. The results of
operations of this joint venture are not material to the
Companys results of operations and financial position.
Concentrations of Risk
The Companys operations include Company-owned and
franchise restaurants located throughout the U.S., its
territories and 64 other countries. Of the 11,129 restaurants in
operation as of June 30, 2006, 1,240 are Company-owned and
operated and 9,889 are franchisee operated.
The Company has an operating agreement with a third party,
Restaurant Services, Inc., or RSI, which acts as the exclusive
purchasing agent for Company-owned and franchised Burger King
restaurants in the United States for the purchase of food,
packaging, and equipment. These restaurants place purchase
orders and receive the respective products from distributors
with whom, in most cases, RSI has service agreements. For the
year ended June 30, 2006, the five largest
U.S. distributors serviced approximately 88% of total
U.S. purchases by Company-owned and franchised restaurants.
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 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 are recorded in accumulated
other comprehensive income (loss) within stockholders
equity.
F-28
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Foreign Currency Transaction Gain or Losses
Foreign currency transaction gains or losses resulting from the
re-measurement of foreign-denominated assets and liabilities of
the Company or its subsidiaries are reflected in earnings in the
period when the exchange rates change.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments with original maturities of three months or less.
Investment in Auction Rate Notes
Auction rate notes represent long-term variable rate bonds tied
to short-term interest rates that are reset through a
dutch auction process, which occurs every seven to
thirty-five days, and are classified as available for sale
securities. Auction rate notes are considered highly liquid by
market participants because of the auction process. However,
because the auction rate notes have long-term maturity dates and
there is no guarantee the holder will be able to liquidate its
holding, they do not meet the definition of cash equivalents in
SFAS No. 95, Statement of Cash Flows and,
accordingly, are recorded as investments. There were no
investments in auction rate notes at June 30, 2006 and 2005.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its trade receivable
from franchisees based on a combination of factors, including
the length of time the receivables are past due and the
probability of any success from litigation or default
proceedings, where applicable. The Company records a specific
allowance for doubtful accounts in an amount required to adjust
the carrying values of such balances to the amount that the
Company estimates to be net realizable value. The Company writes
off a specific account when (a) the Company enters into an
agreement with a franchisee that releases the franchisee from
outstanding obligations, (b) franchise agreements are
terminated and the projected costs of collections exceed the
benefits expected to be received from pursuing the balance owed
through legal action, or (c) franchisees do not have the
financial wherewithal or unprotected assets from which
collection is reasonably assured.
Notes receivable represent loans made to franchisees arising
from re-franchisings of company owned restaurants, sale of
property, and in certain cases when past due trade receivables
from franchisees are generally restructured into an interest
bearing note. Trade receivables which are restructured to
interest bearing notes are generally already fully reserved, and
as a result, are transferred to notes receivables at a net
carrying value of zero. Notes receivable with a carrying value
greater than zero are impaired when it is probable or likely
that the Company is unable to collect all amounts in accordance
with the contractual terms of the loan agreement, in accordance
with SFAS No. 114, Accounting by Creditors
for Impairment of a Loan and SFAS No. 118,
Accounting by Creditors for Impairment of a
LoanIncome Recognition and Disclosures.
F-29
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Inventories
Inventories, totaling $14 million and $15 million at
June 30, 2006 and 2005, respectively, are stated at the
lower of cost
(first-in, first-out)
or net realizable value, and consist primarily of restaurant
food items and paper supplies. Inventories are included in
prepaids and other current assets in the accompanying
consolidated balance sheets.
Property and Equipment, net
Property and equipment, net, owned by the Company are recorded
at historical cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using
the straight-line method based on the estimated useful lives of
the assets. Leasehold improvements to properties where the
Company is the lessee are amortized over the lesser of the
remaining term of the lease or the life of the improvement.
Improvements and major repairs with a useful life greater than
one year are capitalized, while minor maintenance and repairs
are expensed when incurred.
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 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.
Favorable and unfavorable lease contracts were recorded as part
of the Transaction (see Note 1). The Company amortizes
these favorable and unfavorable lease contracts on a
straight-line basis over the remaining term of the leases. Upon
early termination of a lease, the favorable or unfavorable lease
contract balance associated with the lease contract is
recognized as a loss or gain in the statement of operations.
Goodwill and Intangible Assets
Goodwill and the intellectual property associated with the
Burger King brand are assessed for impairment by segment
annually or more frequently if events or circumstances indicate
that
F-30
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
either asset may be impaired in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142).
In accordance with the requirements of SFAS No. 142,
goodwill is recorded at the reporting unit level for purposes of
impairment testing. The reporting units are the Companys
operating segments. As of June 30, 2006, all of the
goodwill recorded is included in the United States and Canada
operating segment.
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
United Kingdom and Germany. The operating market asset groupings
within the United States and Canada are predominantly based on
major metropolitan areas within the United States and Canada.
Similarly, operating markets within the other foreign countries
with larger asset concentrations (the United Kingdom and
Germany) are comprised of geographic regions within those
countries (three in the United Kingdom and four in Germany).
These operating market definitions are based upon the following
primary factors:
|
|
|
management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants,
and area managers receive incentives on this basis; and |
|
|
the Company does not evaluate individual restaurants to build,
acquire or close independent of an analysis of other restaurants
in these operating markets. |
In countries in which the Company has a smaller number of
restaurants (The Netherlands, Spain, Mexico and China), most
operating functions and advertising are performed at the country
level, and shared by all restaurants in each country. As a
result, the Company has defined operating markets as the entire
country in the case of The Netherlands, Spain, Mexico and China.
If the carrying amount of an asset exceeds the estimated and
undiscounted future cash flows generated by the asset, an
impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses,
gains, and losses that are included in comprehensive income
(loss) but are excluded from net income as these amounts
F-31
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
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 gain on
hedging activity, net of tax, and minimum pension liability
adjustments, net of tax.
Derivative Financial Instruments
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, establishes accounting
and reporting standards for derivative instruments and for
hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value.
Gains or losses resulting from changes in the fair value of
derivatives are recognized in earnings or recorded in other
comprehensive income (loss) and recognized in the statement of
operations when the hedged item affects earnings, depending on
the purpose of the derivatives and whether they qualify for
hedge accounting treatment.
When applying hedge accounting, the 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 not designate the derivative as a
hedging instrument where the same financial impact is achieved
in the financial statements. The Company does not enter into or
hold derivatives for trading or speculative purposes.
Disclosures About Fair Value of Financial Instruments
Cash and cash equivalents, trade and notes receivable:
The carrying value equals fair value based on the short-term
nature of these accounts.
Debt, including current maturities: The carrying value of
term debt was $998 million at June 30, 2006 and
$1.28 billion at June 30, 2005 which approximated fair
value as the debt at both of these dates carry a floating
interest rate and reflect the Companys credit ratings at
each date.
Revenue Recognition
Revenues include retail sales at Company-owned restaurants and
franchise and property revenues. Franchise and property revenues
include royalties, initial and renewal franchise fees, and
property revenues, which include pass-through rental income from
operating lease rentals and earned income on direct financing
leases on property leased to franchisees. Retail sales are
recognized at the point of sale. Royalties are based on a
percentage of sales by franchisees. Royalties are recorded as
earned and when collectibility is reasonably assured. Initial
franchise fees are recognized as income when the related
restaurant begins operations. A franchisee may pay a renewal
franchise fee and renew its franchise for an additional term.
Renewal franchise fees are recognized as income upon receipt of
the non-refundable fee and execution of a new franchise
agreement. In accordance with SFAS No. 45,
Accounting for Franchise Fee Revenue, the cost recovery
accounting method is used to recognize revenues for franchisees
for whom collectibility is not reasonably assured.
Pass-through rental income on operating lease rentals and earned
income on direct financing leases are recognized as earned and
when collectibility is reasonably assured.
F-32
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Advertising and Promotional Costs
The Company expenses the production costs of advertising when
the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period
incurred, in accordance with Statement of Position
(SOP) No. 93-7, Reporting on Advertising
Costs.
Franchised restaurants and Company-owned restaurants contribute
to advertising funds managed by the Company in the United States
and certain international markets where Company-owned
restaurants operate. Under the 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. Advertising expense, net of franchisee contributions,
totaled $74 million for the year ended June 30, 2006,
$87 million for the year ended June 30, 2005, and
$100 million for the year ended June 30, 2004 and is
included in selling, general and administrative expenses.
To the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are accounted
for as deferred credits, in accordance with
SFAS No. 45, and are recorded in accrued advertising
in the accompanying consolidated balance sheets.
Franchisees in markets where no Company-owned restaurants
operate contribute to advertising funds not managed by the
Company. Such contributions and related fund expenditures are
not reflected in the 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. 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.
Earnings per Share
Basic earnings per share is computed by dividing net income
attributable to common stockholders by the weighted average
number of common shares outstanding for the period. The
computation of diluted earnings per share is consistent with
that of basic earnings per share, while giving effect to all
dilutive potential common shares that were outstanding during
the period.
F-33
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Stock-based Compensation
The Company accounts for stock-based compensation using the
intrinsic-value method in accordance with Accounting Principles
Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees (APB No. 25), and
related interpretations. Pro forma information regarding net
income and earnings per share is required by
SFAS No. 123, Accounting for Stock Based
Compensation (SFAS No. 123). In
estimating the fair value of its options under
SFAS No. 123, the Company uses the minimum value
method. In addition, the Company will adopt SFAS 123(R),
Share-Based Payment, (SFAS 123(R)) on
July 1, 2006. As such, the Company became a public company,
as the term is defined in SFAS 123(R), on February 16,
2006, the date the Company filed
its S-1
registration statement with the SEC in anticipation of its
initial public offering of common stock, which was completed in
May 2006. In accordance with SFAS 123(R), the Company is
required to apply the modified prospective transition method to
any share-based payments issued subsequent to the filing of the
registration statement; however no stock compensation cost will
begin to be recognized for such awards in the financial
statements until the Company adopts SFAS 123(R) on
July 1, 2006. As a result, the pro-forma information
regarding net income and earnings per share required by
SFAS 123 would also include an estimated volatility factor
for those share-based payment awards issued for the period
February 16, 2006 to June 30, 2006. However, the
amount of stock compensation for these awards was immaterial,
therefore, the following assumptions for the Black-Scholes model
are only those used to calculate compensation cost using the
minimum value method.
Compensation value for the fair value disclosure is estimated
for each option grant using a Black-Scholes option-pricing
model. The following weighted average assumptions were used for
option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Risk-free interest rate
|
|
|
4.78% |
|
|
|
3.88% |
|
|
|
3.98% |
|
Expected term (in years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
Expected dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
|
The following table illustrates the effect on net income and
earnings per share had the Company applied the minimum value
recognition provisions of SFAS No. 123, as amended by
F-34
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, to stock-based
employee compensation (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Net income, as reported
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
less: Stock-based compensation
expense under minimum value method, net of related tax effects
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
Net income, pro forma
|
|
$ |
25 |
|
|
$ |
46 |
|
|
$ |
4 |
|
|
|
|
Basic earnings per share, as
reported
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
Basic earnings per share, pro forma
|
|
$ |
0.23 |
|
|
$ |
0.43 |
|
|
$ |
0.04 |
|
Diluted earnings per share, as
reported
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
Diluted earnings per share, pro
forma
|
|
$ |
0.22 |
|
|
$ |
0.43 |
|
|
$ |
0.04 |
|
|
Reclassifications
Certain reclassifications have been made to the prior periods to
conform to the current periods presentation. The
reclassifications had no effect on previously reported net
income or stockholders equity.
Note 3. Acquisitions, Closures and Dispositions
Acquisitions
All acquisitions of franchised restaurant operations are
accounted for using the purchase method of accounting under
SFAS 141. These acquisitions are summarized as follows (in
millions, except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Number of restaurants acquired
|
|
|
50 |
|
|
|
101 |
|
|
|
38 |
|
Inventory
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Property and equipment, net
|
|
|
5 |
|
|
|
34 |
|
|
|
4 |
|
Goodwill and other intangible assets
|
|
|
7 |
|
|
|
12 |
|
|
|
5 |
|
Assumed liabilities
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Total purchase price
|
|
$ |
8 |
|
|
$ |
44 |
|
|
$ |
9 |
|
|
Closures and Dispositions
(Gains) losses on asset and business disposals are comprised
primarily of lease termination costs relating to restaurant
closures and refranchising of Company-owned restaurants, and are
recorded in other operating expenses (income), net in the
accompanying consolidated
F-35
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
statements of operations. The closures and refranchisings are
summarized as follows (in millions, except for number of
restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Number of restaurant closures
|
|
|
14 |
|
|
|
23 |
|
|
|
20 |
|
(Gains) losses on closures and
dispositions, net
|
|
$ |
(3 |
) |
|
$ |
6 |
|
|
$ |
12 |
|
|
Number of refranchisings
|
|
|
6 |
|
|
|
11 |
|
|
|
21 |
|
Loss on refranchisings
|
|
$ |
|
|
|
$ |
7 |
|
|
$ |
3 |
|
|
Note 4. Franchise Revenues
Franchise revenues are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Franchise royalties
|
|
$ |
401 |
|
|
$ |
396 |
|
|
$ |
346 |
|
Initial franchise fees
|
|
|
10 |
|
|
|
9 |
|
|
|
7 |
|
Other
|
|
|
9 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
Total
|
|
$ |
420 |
|
|
$ |
413 |
|
|
$ |
361 |
|
|
In accordance with SFAS No. 45, the Company deferred
the recognition of revenues totaling $1 million and
$22 million for the years ended June 30, 2005 and
2004, respectively. The Company had recoveries of
$4 million and write-offs of $11 million for the year
ended June 30, 2005. As of June 30, 2005 and 2004, the
Company had deferred revenue balances of $8 million and
$22 million, respectively. The Company did not defer
recognition of revenues for the fiscal year ended June 30,
2006.
Note 5. Trade and Notes Receivable, Net
Trade and notes receivable, net, are comprised of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Trade accounts receivable
|
|
$ |
134 |
|
|
$ |
133 |
|
Notes receivable, current portion
|
|
|
7 |
|
|
|
6 |
|
|
|
|
|
|
|
141 |
|
|
|
139 |
|
Allowance for doubtful accounts and
notes receivable, current portion
|
|
|
(32 |
) |
|
|
(29 |
) |
|
|
|
|
Total, net
|
|
$ |
109 |
|
|
$ |
110 |
|
|
F-36
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The Company recorded net recoveries of $2 million for the
year ended June 30, 2006, and bad debt expense, net of
recoveries, of $1 million for the year ended June 30,
2005, and $11 million for the year ended June 30,
2004. The change in allowances for doubtful accounts for each of
the three years ending June 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Beginning balance
|
|
$ |
29 |
|
|
$ |
79 |
|
|
$ |
106 |
|
Bad debt expense, net of recoveries
|
|
|
(2 |
) |
|
|
1 |
|
|
|
11 |
|
Write-offs and transfers to/from
notes receivable, net
|
|
|
5 |
|
|
|
(51 |
) |
|
|
(38 |
) |
|
|
|
Ending balance
|
|
$ |
32 |
|
|
$ |
29 |
|
|
$ |
79 |
|
|
Note 6. Property and Equipment, Net
Property and equipment, net, along with their estimated useful
lives, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Land
|
|
|
|
|
|
$ |
379 |
|
|
$ |
384 |
|
Buildings and improvements
|
|
|
(up to 40 years |
) |
|
|
517 |
|
|
|
470 |
|
Machinery and equipment
|
|
|
(up to 18 years |
) |
|
|
228 |
|
|
|
234 |
|
Furniture, fixtures, and other
|
|
|
(up to 10 years |
) |
|
|
85 |
|
|
|
37 |
|
Construction in progress
|
|
|
|
|
|
|
34 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,243 |
|
|
|
1,151 |
|
Accumulated depreciation and
amortization
|
|
|
|
|
|
|
(357 |
) |
|
|
(252 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$ |
886 |
|
|
$ |
899 |
|
|
Depreciation expense on property and equipment totaled
$109 million for the year ended June 30, 2006,
$100 million for the year ended June 30, 2005, and
$112 million for the year ended June 30, 2004.
Property and equipment, net, includes assets under capital
leases, net of depreciation, of $47 million and
$39 million at June 30, 2006 and 2005, respectively.
Note 7. Intangible Assets, Net and Goodwill
The Burger King brand of $896 million and
$909 million at June 30, 2006 and 2005, respectively
and goodwill of $20 million and $17 million at
June 30, 2006 and 2005, respectively, represent the
Companys indefinite-lived intangible assets. The increase
in goodwill of $3 million is attributable to acquisitions
during 2006. The decrease in the net carrying amount of the
brand is attributable to a $12 million reduction in
pre-acquisition deferred tax valuation allowances and
$6 million deferred tax liability associated with these
reductions, both of which were
F-37
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
recorded as part of the Transaction, and were applied against
the brand in accordance with SFAS No. 109. These
amounts were offset by the foreign currency translation effect
of $3 million on the value of the brand transferred to EMEA
operating segment as part of the realignment of the European and
Asian businesses (See Note 13).
The table below presents intangible assets subject to
amortization, along with their useful lives (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Franchise agreements
|
|
|
26 years |
|
|
$ |
68 |
|
|
$ |
65 |
|
Favorable lease contracts
|
|
|
Up to 20 years |
|
|
|
32 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
101 |
|
Accumulated amortization
|
|
|
|
|
|
|
(21 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
Net carrying amount
|
|
|
|
|
|
$ |
79 |
|
|
$ |
86 |
|
|
Amortization expense on franchise agreements totaled
$3 million for the years ended June 30, 2006, 2005 and
2004, respectively. The amortization of favorable lease
contracts totaled $4 million for the year ended
June 30, 2006, $3 million for the year ended
June 30, 2005, and $5 million for the year ended
June 30, 2004.
As of June 30, 2006, estimated future amortization expense
of intangible assets subject to amortization for each of the
years ended June 30 is $5 million in 2007;
$4 million in each of 2008, 2009, 2010, and 2011; and
$58 million thereafter.
F-38
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 8. Earnings Per Share
Basic and diluted earnings per share were calculated as follows
(in millions, except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
110,327,949 |
|
|
|
106,499,866 |
|
|
|
106,061,888 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
707,836 |
|
|
|
410,261 |
|
|
|
|
|
|
Employee stock options
|
|
|
3,654,800 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share
|
|
|
114,690,585 |
|
|
|
106,910,127 |
|
|
|
106,061,888 |
|
|
|
|
Basic earnings per share
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
Diluted earnings per share
|
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
0.05 |
|
|
Unexercised employee stock options to
purchase 1.2 million, 9.0 million and
6.8 million shares of the Companys common stock for
the years ended June 30, 2006, 2005 and 2004, respectively,
were not included in the computation of diluted earnings per
share as their exercise prices were equal to or greater than the
average market price of the Companys common stock during
those respective periods, which would have resulted in dilution.
Note 9. Other Accrued Liabilities
Included in other accrued liabilities as of June 30, 2006
and 2005, were accrued payroll and employee-related benefit
costs totaling $101 million and $93 million,
respectively, and income taxes payable of $96 million and
$5 million, respectively.
F-39
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 10. Term Debt
Term debt is comprised of the following:
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
PIK notes
|
|
$ |
|
|
|
$ |
528 |
|
Term loan
|
|
|
|
|
|
|
750 |
|
Term loan A
|
|
|
185 |
|
|
|
|
|
Term loan B-1
|
|
|
809 |
|
|
|
|
|
Other
|
|
|
4 |
|
|
|
5 |
|
|
|
|
Total term debt
|
|
|
998 |
|
|
|
1,283 |
|
|
Less: current maturities of term
debt
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
Long term portion of term debt
|
|
$ |
997 |
|
|
$ |
1,282 |
|
|
In July 2005, the Company entered into a $1.15 billion
credit agreement, which consists of a $150 million
revolving credit facility, a $250 million term loan
(Term loan A), and a $750 million term
loan (Term loan B). The Company utilized
$1 billion in proceeds from Term loan A and Term
loan B, $47 million from the revolving credit
facility, and cash on hand to repay in full BKCs Term
loan, PIK Notes and $16 million in financing costs
associated with the new facility. The unamortized balance of
deferred financing costs, totaling $13 million, related to
the existing Term loan was recorded as a loss on early
extinguishment of debt in the accompanying condensed
consolidated statement of operations for the year ended
June 30, 2006. In the first quarter of 2006, the Company
repaid the $47 million outstanding balance on the revolving
debt facility.
In February 2006, the Company amended and restated its
$1.15 billion secured credit facility (amended
facility) to replace the existing $750 million Term
loan B with a new Term loan B-1 (Term
loan B-1) in an amount of $1.1 billion. As a
result of this transaction, the Company received net proceeds of
$347 million. The $347 million of net proceeds and
cash on hand was used to make a $367 million dividend
payment to the holders of the Companys common stock (see
Note 16) and to make a one-time compensatory make-whole
payment in the amount of $33 million to certain option and
restricted stock unit holders in the Companys common stock
(see Note 16). The Company recorded deferred financing
costs of $3 million in connection with the amended facility
in addition to a $1 million write-off of deferred financing
costs, which is recorded as a loss on early extinguishment of
debt in the consolidated statement of operations for the fiscal
year ended June 30, 2006.
In May 2006, the Company utilized a portion of the
$392 million in net proceeds received from the initial
public offering to prepay $350 million of Term loans. As a
result of this prepayment, the Company recorded a
$4 million write-off of deferred financing fees as a loss
on the early extinguishment of debt in the consolidated
statement of operations for the fiscal year ended June 30,
2006.
F-40
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
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 5.89%
and 5.40% at June 30, 2006 and June 30, 2005,
respectively.
The amended credit facility contains certain customary financial
and other covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees, mergers and acquisitions. These covenants also place
restrictions on asset sales, sale and leaseback transactions,
dividends, payments between the Company and its subsidiaries and
certain transactions with affiliates.
The financial covenants limit the maximum amount of capital
expenditures to an amount ranging from $180 million to
$250 million per fiscal year over the term of the amended
facility, subject to certain financial ratios. Following the end
of each fiscal year, the Company is required to prepay the term
debt in an amount equal to 50% of excess cash flow (as defined
in the senior secured credit facility) for such fiscal year.
This prepayment requirement is not applicable if the
Companys leverage ratio is less than a predetermined
amount. There are other events and transactions, such as certain
asset sales, sale and leaseback transactions resulting in
aggregate net proceeds over $2.5 million in any fiscal
year, proceeds from casualty events and incurrence of debt that
will trigger additional mandatory prepayment.
The amended facility also allows the Company to make dividend
payments, subject to certain covenant restrictions.
BKC is the borrower under the amended facility and the Company
and certain subsidiaries have jointly and severally
unconditionally guaranteed the payment of the amounts under the
amended facility. The Company, BKC and certain subsidiaries have
pledged, as collateral, a 100% equity interest in the domestic
subsidiaries of the Company and BKC with some exceptions.
Furthermore, BKC has pledged as collateral a 65% equity interest
in certain foreign subsidiaries.
As a result of the May 2006 prepayment of $350 million and
July 2006 prepayment of $50 million (see Note 23), the
next scheduled principal payment on the amended facility is
December 31, 2008. The level of required principal
repayments increases over time thereafter. The maturity dates of
Term loan A, Term loan B-1, and amounts drawn under
the revolving credit facility are June 2011, June 2012, and June
2011, respectively. The aggregate debt
F-41
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
maturities, including the Term loan A, Term loan B-1
and other debt as of June 30, 2006, are as follows (in
millions):
|
|
|
|
|
2007
|
|
$ |
1 |
|
2008
|
|
|
1 |
|
2009
|
|
|
35 |
|
2010
|
|
|
63 |
|
2011
|
|
|
88 |
|
Thereafter
|
|
|
810 |
|
|
|
|
|
|
|
$ |
998 |
|
|
At June 30, 2006, there were no borrowings outstanding
under the revolving credit facility. At June 30, 2006,
there were $41 million of irrevocable standby letters of
credit outstanding, which are described further in Note 19.
Accordingly, the availability of the revolving credit facility
was $109 million as of June 30, 2006. BKC incurs a
commitment fee on the unused revolving credit facility at the
rate of 0.50%.
The Company also has lines of credits with foreign banks, which
can also be used to provide guarantees, in the amounts of
$5 million and $4 million at June 30, 2006 and
2005, respectively. The Company had issued $2 million of
guarantees against these lines of credit at both June 30,
2006 and 2005, respectively.
Note 11. Derivative Instruments
Interest rate swaps
During the year ended June 30, 2006, the Company entered
into interest rate swap contracts with a notional value of
$750 million that qualify as cash flow hedges under
SFAS No. 133, as amended. These interest rate swaps
are used to convert the floating interest-rate component of
certain debt obligations to fixed rates.
The fair value of the interest rate swaps was $26 million
as of June 30, 2006 and is recorded within other assets,
net in the accompanying consolidated balance sheet. At
June 30, 2006, a $16 million, net of tax, unrealized
gain on hedging activity is included in accumulated other
comprehensive income (loss) included in the consolidated
statement of stockholders equity and other comprehensive
income (loss), resulting from the increase in fair value of the
interest rate swaps. Unrealized gains and losses in other
comprehensive income related to these hedges are expected to be
recorded to the Companys statement of operations in the
future and will offset interest expense on certain variable rate
debt. The actual amounts that will be recorded to the
Companys consolidated statement of operations could vary
from this estimated amount as a result of changes in interest
rates in the future. No ineffectiveness was recognized in fiscal
2006 for those interest rate swaps designated as cash flow
hedges.
Forward Contracts
The Company enters into foreign currency forward contracts with
the objective of reducing its exposure to foreign currency
fluctuations associated with foreign-denominated assets. As part
of the realignment of the European and Asian businesses, the
Company recorded Euro-
F-42
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
denominated intercompany receivables with a principal amount
equivalent to $340 million as consideration for
intellectual property and other assets transferred to certain
foreign subsidiaries. Concurrently, the Company entered into
foreign currency forward contracts that mature in October 2006
to sell Euros and buy approximately $346 million
U.S. Dollars in order to reduce the Companys cash
flow and income statement exposure to changes in the U.S. and
Euro exchange rates associated with the principal and interest
amounts of such receivables. The notional amount of the
contracts associated with the principal portion of the
intercompany receivables totaling $342 million is recorded
at fair value on the consolidated balance sheet with the
corresponding amount recorded in other income (expense). The
change in fair value of these contracts through June 30,
2006 resulted in a $5 million loss, and is included in
other income (expense), net in the consolidated statement of
operations, which is offset by a corresponding gain recorded
upon the remeasurement of the principal portion of intercompany
receivables for the same period.
The Company also entered into and designated the notional amount
of the contracts associated with the interest portion of the
receivables totaling $4 million as cash flow hedges. As the
notional amount, maturity date and currency of these contracts
match those of the underlying receivable, these foreign currency
forward contracts are considered to be effective cash flow
hedges according to the criteria specified in
SFAS No. 133. Accordingly, the gains and losses for
these foreign currency forward contracts are reported in
accumulated other comprehensive income and will be reclassified
into earnings when the impact of the hedged transaction (i.e.,
receipt of the interest payment) occurs. For those foreign
currency exchange forward contracts that the Company has
designated as cash flow hedges, the Company measures
ineffectiveness by comparing the cumulative change in the
foreign currency forward contract with the cumulative change in
the hedged item. The Company excludes the difference between the
spot rate and the forward rate of the contracts entered into
from the assessment of hedge ineffectiveness for its cash flow
hedges. No ineffectiveness was recognized in fiscal 2006 for
those foreign currency forward contracts designated as cash flow
hedges.
Note 12. Interest expense
Interest expense is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Term loans and PIK Notes
|
|
$ |
72 |
|
|
$ |
74 |
|
|
$ |
61 |
|
Capital lease obligations
|
|
|
9 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
Total
|
|
$ |
81 |
|
|
$ |
82 |
|
|
$ |
68 |
|
|
As discussed in Note 10, the Company incurred
$19 million in deferred financing fees in conjunction with
the July 2005 refinancing and the February 2006 amended
facility, of which $5 million have been written off as a
loss on the early extinguishment of debt resulting from
pre-payments and refinancings. These fees are classified in
other assets, net and are amortized over the term of the debt
into interest expense on term debt using the effective interest
method.
F-43
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 13. Income Taxes
Income (loss) before income taxes, classified by source of
income, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Domestic
|
|
$ |
79 |
|
|
$ |
93 |
|
|
$ |
(25 |
) |
Foreign
|
|
|
1 |
|
|
|
(15 |
) |
|
|
34 |
|
|
|
|
|
Income before income taxes
|
|
$ |
80 |
|
|
$ |
78 |
|
|
$ |
9 |
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(16 |
) |
|
$ |
18 |
|
|
$ |
10 |
|
|
|
State, net of federal income tax
benefit
|
|
|
(1 |
) |
|
|
2 |
|
|
|
5 |
|
|
Foreign
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
(15 |
) |
|
|
22 |
|
|
|
16 |
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
50 |
|
|
|
13 |
|
|
|
(22 |
) |
|
|
State, net of federal income tax
benefit
|
|
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
Foreign
|
|
|
13 |
|
|
|
(1 |
) |
|
|
10 |
|
|
|
|
|
|
|
68 |
|
|
|
9 |
|
|
|
(12 |
) |
|
|
|
Total
|
|
$ |
53 |
|
|
$ |
31 |
|
|
$ |
4 |
|
|
The U.S. Federal tax statutory rate reconciles to the
effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
U.S. Federal income tax rate
|
|
|
35.0% |
|
|
|
35.0% |
|
|
|
35.0% |
|
State income taxes, net of federal
income tax benefit
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
25.2 |
|
Benefit and taxes related to
foreign operations
|
|
|
11.1 |
|
|
|
(12.2 |
) |
|
|
(28.8 |
) |
Foreign exchange differential on
tax benefits
|
|
|
(1.9 |
) |
|
|
4.8 |
|
|
|
(87.2 |
) |
Change in valuation allowance
|
|
|
0.9 |
|
|
|
10.1 |
|
|
|
80.4 |
|
Change in accrual for tax
uncertainties
|
|
|
18.4 |
|
|
|
4.4 |
|
|
|
33.7 |
|
Other
|
|
|
|
|
|
|
(5.2 |
) |
|
|
(13.9 |
) |
|
|
|
|
Effective income tax rate
|
|
|
66.3% |
|
|
|
39.7% |
|
|
|
44.4% |
|
|
F-44
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
During the year ended June 30, 2006, the Company recorded
accruals for tax uncertainties of $15 million and changes
in the estimate of tax provisions of $7 million, which
resulted in a higher effective tax rate for the year.
The income tax expense includes an increase in valuation
allowance related to deferred tax assets in foreign countries of
$1 million, $12 million, and $7 million for the
years ending June 30, 2006, 2005 and 2004, respectively.
For the year ended June 30, 2005, the valuation allowance
decreased by $4 million in certain states. This reduction
was a result of determining that it was more likely than not
that certain state loss carryforwards and other deferred tax
assets would be realized. The valuation allowance increased by
$1 million for certain state loss carryforwards as their
realization was not considered more likely than not for the year
ended June 30, 2004.
The following table provides the amount of income tax expense
(benefit) allocated to continuing operations and amounts
separately allocated to other items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Income tax expense from continuing
operations
|
|
$ |
53 |
|
|
$ |
31 |
|
|
$ |
4 |
|
Interest rate swaps in accumulated
other comprehensive income (loss)
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Minimum pension liability in
accumulated other comprehensive income (loss)
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
Adjustments to deferred income
taxes related to brand
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
Adjustments to the valuation
allowance related to brand (See note 7)
|
|
|
(12 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
$ |
47 |
|
|
$ |
29 |
|
|
$ |
2 |
|
|
The significant components of deferred income tax expense
(benefit) attributable to income from continuing operations are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Deferred income tax expense
(benefit) (exclusive of the effects of components listed below)
|
|
$ |
67 |
|
|
$ |
2 |
|
|
$ |
(20 |
) |
Change in valuation allowance, net
of amounts allocated as adjustments to purchase accounting
|
|
|
1 |
|
|
|
8 |
|
|
|
8 |
|
Change in effective state income
tax rate
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Total
|
|
$ |
68 |
|
|
$ |
9 |
|
|
$ |
(12 |
) |
|
Deferred tax assets and liabilities at the date of transaction
were recorded based on 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
F-45
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
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 year ended June 30, 2004, the Company recognized the
effect of benefits arising from these items by recording a
deferred tax asset of $41 million, which resulted in a
related decrease in the value of the Burger King
brand recorded in connection with the Transaction. During
the year ended June 30, 2006, the Company recorded
reductions in the valuation allowance of $12 million which
were applied to reduce intangible assets. Based on the
provisions of SFAS No. 109, approximately
$64 million of valuation allowance, if realized, will be
applied to reduce intangible assets.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Trade and notes receivable,
principally due to allowance for doubtful accounts
|
|
$ |
28 |
|
|
$ |
36 |
|
|
Accrued employee benefits
|
|
|
31 |
|
|
|
29 |
|
|
Unfavorable leases
|
|
|
101 |
|
|
|
106 |
|
|
Liabilities not currently
deductible for tax
|
|
|
45 |
|
|
|
70 |
|
|
Tax loss and credit carryforwards
|
|
|
38 |
|
|
|
79 |
|
|
Property and equipment, principally
due to differences in depreciation
|
|
|
61 |
|
|
|
49 |
|
|
Other
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
311 |
|
|
|
370 |
|
Valuation allowance
|
|
|
(89 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
222 |
|
|
|
292 |
|
Less deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
212 |
|
|
|
328 |
|
|
Leases
|
|
|
49 |
|
|
|
49 |
|
|
|
|
|
|
|
261 |
|
|
|
377 |
|
|
|
|
|
Net deferred tax liability
|
|
$ |
39 |
|
|
$ |
85 |
|
|
For the year ended June 30, 2006, the valuation allowance
increased by $11 million. After considering the level of
historical taxable income, projections for future taxable income
over the periods in which the deferred tax assets are
deductible, and the reversal of deferred tax liabilities,
management believes it is more likely than not that the benefits
of certain state and foreign net operating loss carryforwards
and other deferred tax assets will not be realized.
F-46
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Changes in valuation allowance for the years ended June 30,
2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Beginning balance
|
|
$ |
78 |
|
|
$ |
65 |
|
|
$ |
22 |
|
|
Purchase accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
Change in estimates recorded to
deferred income tax expense
|
|
|
1 |
|
|
|
8 |
|
|
|
8 |
|
|
Change in estimates in valuation
allowance recorded to intangible assets
|
|
|
(12 |
) |
|
|
|
|
|
|
(2 |
) |
|
Change due to increase in deferred
tax assets that are fully reserved
|
|
|
20 |
|
|
|
5 |
|
|
|
|
|
|
Changes from foreign currency
exchange rates
|
|
|
2 |
|
|
|
|
|
|
|
6 |
|
|
|
|
Ending balance
|
|
$ |
89 |
|
|
$ |
78 |
|
|
$ |
65 |
|
|
The Company has no federal loss carryforwards in the United
States and has state loss carryforwards of $37 million,
expiring between 2007 and 2025. In addition, the Company has
foreign loss carryforwards of $83 million expiring between
2007 and 2019, and foreign loss carryforwards of
$131 million that do not expire.
Deferred taxes have not been provided on basis difference
related to investments in foreign subsidiaries. These
differences consist primarily of $19 million of
undistributed earnings, which are considered to be permanently
reinvested in the operations of such subsidiaries.
As a matter of course, the Company is regularly audited by
various tax authorities. From time to time, these audits result
in proposed assessments where the ultimate resolution may result
in the Company owing additional taxes. The Company believes that
its tax positions comply with applicable tax law and that it has
adequately provided for these matters.
During 2006, the Company regionalized the activities associated
with managing its European and Asian businesses, including the
transfer of rights of existing franchise agreements, the ability
to grant future franchise agreements and utilization of the
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 resulting
in a $126 million tax liability. This liability is recorded
in other accrued liabilities in the consolidated balance sheet
and is offset by $40 million through the utilization of net
operating loss carryforwards and other foreign tax credits,
resulting in a cash tax payment obligation of $86 million,
which the Company expects to make in the first quarter of fiscal
2007. In accordance with the guidance provided by ARB 51,
Consolidated Financial Statements, the resulting tax
amount of $126 million was recorded as a prepaid tax asset
and offset by the reversal of a $105 million deferred tax
liability, which the Company had previously recorded associated
with the transferred asset resulting in a net prepaid asset of
$21 million, which is included in other assets, net on the
accompanying consolidated balance sheet.
F-47
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 14. 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 the fiscal years ended June 30, 2006 and 2005, and
$8 million for the fiscal year ended June 30, 2004.
These fees and reimbursable
out-of-pocket expenses
are recorded within fees paid to affiliates in the consolidated
statement of operations. At June 30, 2005, amounts payable
to the Sponsors for management fees and reimbursable
out-of-pocket expenses
totaled $2 million, which are included within other accrued
liabilities in the consolidated balance sheets. In May 2006, the
Company paid a termination fee totaling $30 million to the
Sponsors to terminate the management agreement upon the
completion of the initial public offering. As a result, the
Company recognized an expense of $30 million in the period
and included in fees paid to affiliates.
As of June 30, 2005, the Company had PIK Notes outstanding
to the private equity funds controlled by the Sponsors of
$528 million. The outstanding balance of the PIK Notes,
which included $103 million of
payment-in-kind
interest as of June 30, 2005, and $2 million of
accrued interest for the fiscal year 2006, was repaid in July
2005. Interest expense on the PIK Notes totaled $2 million
and $23 million for the years ended June 30, 2006 and
2005, respectively.
A member of the Board of Directors of the Company has a direct
financial interest in a company with which the Company has
entered into a lease agreement for the Companys new
corporate headquarters (see Note 19).
An affiliate of one of the Sponsors participated as one of the
joint book-running managers of our initial public offering. This
affiliate was paid $5 million pursuant to a customary
underwriting agreement among the Company and the several
underwriters.
Note 15. Leases
At June 30, 2006, the Company leased 1,090 restaurant
properties to franchisees and other non-restaurant third parties
under capital and operating leases. The building portions of the
capital leases with franchisees are accounted for as direct
financing leases and recorded as a net investment in property
leased to franchisees, while the land and restaurant equipment
components are recorded as operating leases and are included in
the table below.
F-48
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Property and equipment, net leased to franchisees and other
third parties under operating leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Land
|
|
$ |
196 |
|
|
$ |
201 |
|
Buildings and improvements
|
|
|
78 |
|
|
|
67 |
|
Restaurant equipment
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
276 |
|
|
|
270 |
|
Accumulated depreciation
|
|
|
(23 |
) |
|
|
(18 |
) |
|
|
|
Property and equipment, net leased
to franchisees and other third parties under operating leases
|
|
$ |
253 |
|
|
$ |
252 |
|
|
Net investment in property leased to franchisees and other third
parties under direct financing leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Future minimum rents to be received
|
|
$ |
353 |
|
|
$ |
373 |
|
Estimated unguaranteed residual
value
|
|
|
4 |
|
|
|
4 |
|
Unearned income
|
|
|
(200 |
) |
|
|
(218 |
) |
Allowance on direct financing leases
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
155 |
|
|
|
157 |
|
Current portion included within
trade receivables
|
|
|
(7 |
) |
|
|
(8 |
) |
|
|
|
Net investment in property leased
to franchisees
|
|
$ |
148 |
|
|
$ |
149 |
|
|
In addition, the Company leases land, buildings, office space,
and warehousing, including 194 restaurant buildings under
capital leases.
F-49
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
At June 30, 2006, future minimum lease receipts and
commitments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Lease Receipts | |
|
Lease Commitments | |
|
|
| |
|
| |
|
|
Direct | |
|
|
|
|
|
|
Financing | |
|
Operating | |
|
Capital | |
|
Operating | |
|
|
Leases | |
|
Leases | |
|
Leases | |
|
Leases | |
| |
2007
|
|
$ |
30 |
|
|
$ |
73 |
|
|
$ |
13 |
|
|
$ |
153 |
|
2008
|
|
|
30 |
|
|
|
68 |
|
|
|
13 |
|
|
|
145 |
|
2009
|
|
|
30 |
|
|
|
62 |
|
|
|
12 |
|
|
|
130 |
|
2010
|
|
|
30 |
|
|
|
58 |
|
|
|
11 |
|
|
|
121 |
|
2011
|
|
|
28 |
|
|
|
54 |
|
|
|
11 |
|
|
|
110 |
|
Thereafter
|
|
|
205 |
|
|
|
352 |
|
|
|
74 |
|
|
|
732 |
|
|
|
|
|
Total
|
|
$ |
353 |
|
|
$ |
667 |
|
|
$ |
134 |
|
|
$ |
1,391 |
|
|
The total minimum obligations of capital leases are
$134 million at June 30, 2006. Of this amount,
$67 million represents interest. The remaining balance of
$67 million is reflected as capital lease obligations
recorded in the Companys consolidated balance sheet, of
which $4 million is classified as current portion of
long-term debt and capital leases.
Property revenues, which are classified within franchise and
property revenues, are comprised primarily of rental income from
operating leases and earned income on direct financing leases
with franchisees as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$ |
74 |
|
|
$ |
78 |
|
|
$ |
78 |
|
|
Contingent
|
|
|
14 |
|
|
|
13 |
|
|
|
10 |
|
|
|
|
|
|
Total rental income
|
|
|
88 |
|
|
|
91 |
|
|
|
88 |
|
Earned income on direct financing
leases
|
|
|
24 |
|
|
|
29 |
|
|
|
29 |
|
|
|
|
|
Total property revenues
|
|
$ |
112 |
|
|
$ |
120 |
|
|
$ |
117 |
|
|
F-50
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Rent expense associated with the lease commitments is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Rental expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$ |
151 |
|
|
$ |
145 |
|
|
$ |
137 |
|
|
Contingent
|
|
|
6 |
|
|
|
6 |
|
|
|
5 |
|
Amortization of favorable and
unfavorable lease contracts, net
|
|
|
(24 |
) |
|
|
(29 |
) |
|
|
(52 |
) |
|
|
|
|
Total rental expense
|
|
$ |
133 |
|
|
$ |
122 |
|
|
$ |
90 |
|
|
Favorable and unfavorable lease contracts are amortized over a
period of up to 20 years and are included in occupancy and
other operating costs and property expenses, respectively, in
the consolidated statements of operations. Amortization of
unfavorable lease contracts totaled $28 million for the
year ended June 30, 2006, $32 million for the year
ended June 30, 2005, and $57 million for the year
ended June 30, 2004. Amortization of favorable lease
contracts totaled $4 million for the year ended
June 30, 2006, $3 million for the year ended
June 30, 2005, and $5 million for the year ended
June 30, 2004.
Unfavorable leases, net of accumulated amortization totaled
$234 million and $261 million at June 30, 2006
and June 30, 2005, respectively. Unfavorable leases, net of
amortization are classified within other deferrals and
liabilities in the consolidated balance sheets.
As of June 30, 2006, estimated future amortization expense
of unfavorable lease contracts subject to amortization for each
of the years ended June 30 is $26 million in 2007,
$24 million in 2008, $22 million in 2009,
$21 million in 2010, $19 million in 2011, and
$122 million thereafter.
Note 16. Stockholders equity
Capital Stock
The Company was initially capitalized on December 13, 2002
with $398 million in cash, as a limited liability company.
On June 27, 2003, the Company was converted to a
corporation and issued an aggregate 104,692,735 common shares to
the private equity funds controlled by the Sponsors.
As described in Note 1, in connection with the initial
public offering, the Board of Directors of the Company
authorized an increase in the number of shares of the
Companys $0.01 par value common stock to
300 million shares, authorized a 26.34608 to one stock
split on common stock and authorized 10 million shares of a
new class of preferred stock, with a par value of $0.01 per
share. As of June 30, 2006, no shares of this new class of
preferred stock were issued or outstanding.
Dividends Paid and Return of Capital
On February 21, 2006, the Company paid a dividend of
$367 million, or $3.42 per issued and outstanding
share, to holders of record of the Companys common stock
on February 9, 2006,
F-51
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
including members of senior management. The payment of the
dividend was financed primarily from proceeds of the amended
facility (see Note 10) and was recorded as a cash dividend
of $100 million ($0.93 per share) charged to the
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 (loss)
for the year ended June 30, 2006.
Stock-Based Compensation
Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan
Prior to the Companys initial public offering, the Company
adopted the Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan (the 2006 Omnibus Incentive Plan). The 2006
Omnibus Incentive Plan provides for the possible issuance of up
to 7,113,442 shares of BKH common stock through grants of
stock options, stock appreciation rights
(SARs), restricted stock and restricted stock
units, deferred stock and performance-based awards to certain
officers, employees and non-management members of the Board of
Directors.
Burger King Holdings, Inc. Equity Incentive Plan
In July 2003, the Company implemented the Burger King Holdings,
Inc. Equity Incentive Plan (the Equity Incentive
Plan). The Equity Incentive Plan provides for the possible
issuance of up to 13,684,418 shares of BKH common stock
through the sale of common stock to certain officers of the
Company and independent members of the Board of Directors;
grants of stock options to certain officers, employees, and
independent board members of the Company; and grants of
restricted stock units to certain officers of the Company.
Options generally vest over five years and have a
10-year life from the
date of grant. In conjunction with the initial public offering,
the Company granted a one-time grant of 447,886 options to
purchase shares of BKH common stock to certain executive
officers.
F-52
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The following table summarizes the status and activity of
options granted during fiscal 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted | |
|
|
average | |
|
|
Number of | |
|
exercise | |
|
|
Options | |
|
price | |
| |
Outstanding at June 30, 2003
|
|
|
|
|
|
$ |
|
|
|
Granted
|
|
|
8,787,366 |
|
|
|
4.86 |
|
|
Forfeited
|
|
|
(1,969,211 |
) |
|
|
5.16 |
|
|
|
|
Outstanding at June 30, 2004
|
|
|
6,818,155 |
|
|
|
4.78 |
|
|
Granted
|
|
|
5,142,728 |
|
|
|
4.28 |
|
|
Exercised
|
|
|
(21,446 |
) |
|
|
3.80 |
|
|
Forfeited
|
|
|
(2,930,316 |
) |
|
|
4.62 |
|
|
|
|
Outstanding at June 30, 2005
|
|
|
9,009,121 |
|
|
|
4.55 |
|
|
Granted
|
|
|
2,247,383 |
|
|
|
13.69 |
|
|
Exercised
|
|
|
(1,247,776 |
) |
|
|
4.78 |
|
|
Forfeited
|
|
|
(2,600,489 |
) |
|
|
4.50 |
|
|
|
|
Outstanding at June 30, 2006
|
|
|
7,408,239 |
|
|
$ |
7.75 |
|
|
The following table summarizes information about stock options
outstanding at June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted | |
|
|
|
|
average | |
|
Weighted | |
|
|
remaining | |
|
average | |
Exercise |
|
Number of | |
|
contractual | |
|
exercise | |
price |
|
Options | |
|
life | |
|
price | |
| |
$ 3.80
|
|
|
4,686,502 |
|
|
|
6.29 |
|
|
$ |
3.80 |
|
7.59
|
|
|
263,250 |
|
|
|
0.77 |
|
|
|
7.59 |
|
10.25
|
|
|
830,709 |
|
|
|
9.16 |
|
|
|
10.25 |
|
11.39
|
|
|
384,522 |
|
|
|
7.74 |
|
|
|
11.39 |
|
17.00
|
|
|
447,886 |
|
|
|
9.88 |
|
|
|
17.00 |
|
18.91
|
|
|
29,007 |
|
|
|
9.92 |
|
|
|
18.91 |
|
$21.64
|
|
|
766,363 |
|
|
|
9.54 |
|
|
$ |
21.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,408,239 |
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
During the years ended June 30, 2006, 2005 and 2004, the
Company granted 508,379, 482,212 and 109,969 restricted stock
units (RSUs), respectively, at fair value to
certain officers of BKC and its subsidiaries. In addition,
during the years ended June 30, 2006 and 2005, 29,745 and
17,888 shares, respectively, of common stock were issued in
settlement of RSUs and 3,267 RSUs were
forfeited during the year ended June 30, 2006. There were
no shares of common stock issued in settlement of RSUs in
2004 and no RSUs forfeited in 2005 and 2004.
F-53
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
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
operations for the year ended June 30, 2006.
Note 17. Retirement Plan and Other Postretirement
Benefits
The Company has noncontributory defined benefit plans for its
salaried employees in the United States (the Plans)
and noncontributory defined benefit plans for certain employees
in the United Kingdom and Germany. In November 2005, the Company
announced that effective December 31, 2005 all benefits
accrued under the Plans would be frozen at the benefit level
attained on that date. As a result, the Company recognized a
one-time pension curtailment gain of $6 million, as a
component of selling, general and administrative expenses in the
accompanying consolidated statement of operations for the fiscal
year ended June 30, 2006, equal to the unamortized balances
as of December 31, 2005 from prior plan amendments and
allowable gains to be realized.
BKC has the Burger King Savings Plan (the Savings
Plan), a defined contribution plan that is provided to all
employees who meet the eligibility requirements. Eligible
employees may contribute up to 50% of pay on a pre-tax basis,
subject to IRS limitations.
Effective August 1, 2003, BKC implemented the Executive
Retirement Plan (ERP) for all officers and senior
management. Officers and senior management may elect to defer up
to 50% of base pay and up to 100% of incentive pay on a
before-tax basis under the ERP. BKC provides dollar-for-dollar
match on up to the first 6% of base pay. Additionally, the
Company may make a discretionary contribution ranging from 0% to
6% based on Companys performance.
In conjunction with the curtailment gain, the Company approved a
distribution totaling $6 million on behalf of those
participants who were affected by the curtailment of the Plans.
The distribution was recorded as a component of selling, general
and administrative expenses in the accompanying consolidated
statements of operations for the fiscal year ended June 30,
2006 and was paid by the Company to employees in cash or
contributed to the 401(k) plan in which the employee
participates.
Expenses incurred for the savings plan and ERP totaled
$6 million for the year ended June 30, 2006,
$5 million for the year ended June 30, 2005, and
$5 million for the year ended June 30, 2004.
BKC uses a measurement date of March 31 and April 30
for all of its US and Non-US Plans.
F-54
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 Pension Plans and Postretirement
Plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement | |
|
Other | |
|
|
Benefits | |
|
Benefits | |
|
|
| |
|
| |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Change in benefit
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$ |
181 |
|
|
$ |
167 |
|
|
$ |
22 |
|
|
$ |
21 |
|
|
Service cost
|
|
|
5 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
Interest cost
|
|
|
10 |
|
|
|
10 |
|
|
|
1 |
|
|
|
1 |
|
|
Actuarial (gain) loss
|
|
|
(9 |
) |
|
|
3 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
Curtailment (gain)
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
162 |
|
|
|
181 |
|
|
|
22 |
|
|
|
22 |
|
|
|
|
Change in fair value of plan
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
|
93 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
10 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
11 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of
year
|
|
|
110 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
|
(52 |
) |
|
|
(88 |
) |
|
|
(22 |
) |
|
|
(22 |
) |
|
Unrecognized net actuarial
(gain) loss
|
|
|
(2 |
) |
|
|
23 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
Net accrued benefit cost
|
|
|
(54 |
) |
|
|
(60 |
) |
|
|
(24 |
) |
|
|
(23 |
) |
|
|
|
Recognized in Statement of
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
|
(54 |
) |
|
|
(55 |
) |
|
|
(24 |
) |
|
|
(23 |
) |
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net accrued benefit cost
|
|
$ |
(54 |
) |
|
$ |
(60 |
) |
|
$ |
(24 |
) |
|
$ |
(23 |
) |
|
F-55
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Additional year-end information for Pension Plans with
accumulated benefit obligations in excess of plan assets
The following sets forth the projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets
for the Pension Plans with accumulated benefit obligations in
excess of plan assets (in millions):
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Projected benefit obligation
|
|
$ |
162 |
|
|
$ |
181 |
|
Accumulated benefit obligation
|
|
|
155 |
|
|
|
153 |
|
Fair value of plan assets
|
|
$ |
110 |
|
|
$ |
93 |
|
|
Components of Net Periodic Benefit Cost
A summary of the components of net periodic benefit cost for the
Pension Plans (retirement benefits) and Postretirement Plans
(other benefits) is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
Years ended | |
|
Years Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
| |
Service cost-benefits earned during
the period
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest costs on projected benefit
obligations
|
|
|
10 |
|
|
|
10 |
|
|
|
9 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Expected return on plan assets
|
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost and total
annual pension cost
|
|
$ |
1 |
|
|
$ |
10 |
|
|
$ |
9 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
Assumptions
The weighted-average assumptions used in computing the benefit
obligations of the U.S. Pension Plans (retirement benefits)
and Postretirement Plans (other benefits) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
Years ended June 30, | |
|
Years Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
| |
Discount rate as of year-end
|
|
|
6.09% |
|
|
|
5.86% |
|
|
|
6.00% |
|
|
|
6.09% |
|
|
|
5.86% |
|
|
|
6.00% |
|
Range of compensation rate increase
|
|
|
4.75% |
|
|
|
4.75% |
|
|
|
4.75% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
F-56
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
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.
The weighted-average assumptions used in computing the net
periodic benefit cost of the U.S. Pension Plans (retirement
benefits) and Postretirement Plans (other benefits) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
Years ended June 30, | |
|
Years Ended June 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
| |
Discount rate
|
|
|
5.86% |
|
|
|
6.00% |
|
|
|
6.25% |
|
|
|
5.86% |
|
|
|
6.00% |
|
|
|
6.25% |
|
Range of compensation rate increase
|
|
|
4.75% |
|
|
|
4.75% |
|
|
|
4.75% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
|
0.00% |
|
Expected long-term rate of return
on plan assets
|
|
|
8.75% |
|
|
|
8.75% |
|
|
|
8.75% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
|
0.00% |
|
|
The expected long-term rate of return on plan assets is
determined by expected future returns on the asset categories in
target investment allocation. These expected returns are based
on historical returns for each assets category adjusted
for an assessment of current market conditions.
The assumed healthcare cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Healthcare cost trend rate assumed
for next year
|
|
|
10.00% |
|
|
|
9.00% |
|
|
|
9.50% |
|
Rate to which the cost trend rate
is assumed to decline (the ultimate trend rate)
|
|
|
5.00% |
|
|
|
5.00% |
|
|
|
5.00% |
|
Year that the rate reaches the
ultimate trend rate
|
|
|
2016 |
|
|
|
2013 |
|
|
|
2013 |
|
|
Assumed healthcare cost trend rates do not have a significant
effect on the amounts reported for the postretirement healthcare
plans, since a one-percentage point change in the assumed
healthcare cost trend rate would have very minimal effects on
service and interest cost and the postretirement obligation.
Plan Assets
The fair value of plan assets for BKCs U.S. pension
benefit plans as of March 31, 2006 and 2005 was
$95 million and $82 million, respectively. The fair
value of plan assets for BKCs pension benefit plans
outside the U.S. was $15 million and $11 million
at April 30, 2006 and 2005, respectively.
F-57
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The following table sets forth the asset allocation for
BKCs U.S. pension plans assets:
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement | |
|
|
Benefits | |
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Equity securities
|
|
|
72% |
|
|
|
71% |
|
Debt securities
|
|
|
27% |
|
|
|
28% |
|
Short-term investments
|
|
|
1% |
|
|
|
1% |
|
|
|
|
|
|
|
100% |
|
|
|
100% |
|
|
The investment objective for the U.S. pension plans is to
secure the benefit obligations to participants while minimizing
costs to the Company. The goal is to optimize the long-term
return on plan assets at an average level of risk. The target
investment allocation is 65% equity and 35% fixed income
securities. The portfolio of equity securities includes
primarily large-capitalization U.S. companies with a mix of
some small-capitalization U.S. companies and international
entities.
Estimated Future Cash Flows
Total contributions to the Pension Plans were $2 million,
$17 million and $1 million for the years ended
June 30, 2006, 2005, and 2004, respectively.
The Pension and Postretirement Plans expected contributions to
be paid in the next fiscal year, the projected benefit payments
for each of the next five fiscal years, and the total aggregate
amount for the subsequent five fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Retirement Benefits | |
|
|
|
|
| |
|
Other | |
|
|
Qualified | |
|
Excess | |
|
Total | |
|
Benefits | |
| |
Estimated net employer
contributions during fiscal 2007
|
|
$ |
4.2 |
|
|
$ |
0.6 |
|
|
$ |
4.8 |
|
|
$ |
0.8 |
|
Estimated future fiscal year
benefit payments during fiscal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
4.1 |
|
|
$ |
0.6 |
|
|
$ |
4.7 |
|
|
$ |
0.8 |
|
|
2008
|
|
|
4.4 |
|
|
|
0.5 |
|
|
|
4.9 |
|
|
|
1.0 |
|
|
2009
|
|
|
4.5 |
|
|
|
0.5 |
|
|
|
5.0 |
|
|
|
1.1 |
|
|
2010
|
|
|
4.7 |
|
|
|
0.5 |
|
|
|
5.2 |
|
|
|
1.2 |
|
|
2011
|
|
|
4.9 |
|
|
|
0.5 |
|
|
|
5.4 |
|
|
|
1.3 |
|
|
2012 - 2016
|
|
$ |
32.6 |
|
|
$ |
3.1 |
|
|
$ |
35.7 |
|
|
$ |
8.8 |
|
|
F-58
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 18. Other Operating Expenses (Income), Net
Other operating expenses (income), net, consist of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
(Gains) losses on asset
acquisitions, closures and dispositions
|
|
$ |
(3 |
) |
|
$ |
13 |
|
|
$ |
15 |
|
Impairment of long-lived assets
|
|
|
|
|
|
|
4 |
|
|
|
|
|
(Recovery) impairment of
investments in franchisee debt
|
|
|
(2 |
) |
|
|
4 |
|
|
|
19 |
|
Impairment of investments in
unconsolidated companies
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Litigation settlements and reserves
|
|
|
|
|
|
|
2 |
|
|
|
4 |
|
Other, net
|
|
|
3 |
|
|
|
11 |
|
|
|
12 |
|
|
|
|
Other operating expenses (income),
net
|
|
$ |
(2 |
) |
|
$ |
34 |
|
|
$ |
54 |
|
|
(Gains) Losses on Asset Acquisitions, Closures and
Dispositions
Losses on asset acquisitions, closures and business dispositions
are primarily related to restaurant closures and refranchising
of Company-owned restaurants. See Note 3 for further
details.
Litigation Settlements and Reserves
The Company is a party to legal proceedings arising in the
ordinary course of business, some of which are covered by
insurance. In the opinion of management, disposition of these
matters will not materially affect the Companys financial
condition and statements of operations.
For the year ended June 30, 2004, the Company recognized a
charge of $3 million for settlement of a claim in Australia
by BKCs joint venture partner. Under the terms of a
settlement agreement, BKC paid $3 million to terminate
certain development rights granted to the joint venture in June
2002. BKCs joint venture partner also had the option to
buy BKCs interest in the joint venture for approximately
$6 million by giving notice to BKC on or before
June 30, 2006. The joint venture partner exercised its
option and purchased BKCs interest in the joint venture in
August 2006. In addition, BKC agreed to forgive the note
receivable from the joint venture plus accrued interest and
accordingly, the Company recognized an impairment loss of
$7 million for the year ended June 30, 2004.
(Recovery) Impairment of Investment in Franchisee Debt
The Company assesses impairment on franchise debt in accordance
with SFAS No. 114. For the year ended June 30,
2004, the Company assessed the collectibility of certain
acquired franchisee third-party debt, and recorded an impairment
charge of $12 million. As noted above, for the year ended
June 30, 2004, the Company agreed to forgive the note
receivable from the Australia joint venture partner plus accrued
interest and thus the Company recognized an impairment loss of
$7 million. There were no impairments for the year ended
June 30, 2006 and 2005.
F-59
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Other, net
Items included within Other, net in fiscal 2005 include
settlement losses in connection with the acquisition of
franchise restaurants of $5 million and $5 million of
costs associated with the FFRP program. Items in Other, net in
fiscal 2004 include losses from unconsolidated investments of
$3 million in EMEA/ APAC and $2 million each of losses
from transactions denominated in foreign currencies, property
valuation reserves and re-branding costs related to our
operations in Asia.
Note 19. Commitments and Contingencies
Franchisee Restructuring Program
During 2003, the Company initiated a program designed to provide
assistance to franchisees in the United States and Canada
experiencing financial difficulties. Under this program, the
Company worked with franchisees meeting certain operational
criteria, their lenders, and other creditors to attempt to
strengthen the franchisees financial condition. As part of
this program, the Company has agreed to provide financial
support to certain franchisees.
In order to assist certain franchisees in making capital
improvements to restaurants in need of remodeling, the Company
provided commitments to fund capital expenditure loans
(Capex Loans) and to make capital expenditures
related to restaurant properties that the Company leases to
franchisees. Capex Loans are typically unsecured, bear interest,
and have 10-year terms.
Through June 30, 2006, the Company has funded
$3 million in Capex Loans and has made $7 million of
improvements to restaurant properties that the Company leases to
franchisees in connection with these commitments. As of
June 30, 2006, the Company has commitments remaining to
provide future Capex Loans of $10 million and to make up to
$12 million of improvements to properties that the Company
leases to franchisees.
The Company provided $2 million and $3 million of
temporary reductions in rent (rent relief) for
certain franchisees that leased restaurant property from the
Company in the fiscal years ended June 30, 2006 and 2005,
respectively. There was no rent relief provided in the fiscal
year ended 2004. As of June 30, 2006, the Company has
commitments remaining to provide future rent relief of up to
$9 million.
Contingent cash flow subsidies represent commitments by the
Company to provide future cash grants to certain franchisees for
limited periods in the event of failure to achieve their debt
service coverage ratio. No contingent cash flow subsidy has been
provided through June 30, 2006. The maximum contingent cash
flow subsidy commitment for future periods as of June 30,
2006 is $5 million. Upon funding, in most instances, the
subsidies will be added to the 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
F-60
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
possession of the related restaurants, subject to landlord
consent. The aggregate contingent obligation arising from these
assigned lease guarantees was $112 million at June 30,
2006, expiring over an average period of five years.
Other commitments arising out of normal business operations were
$10 million and $12 million as of June 30, 2006
and 2005, respectively, of which $6 million and
$4 million, respectively were guaranteed under bank
guarantee arrangements.
Letters of Credit
At June 30, 2006, there were $42 million in
irrevocable standby letters of credit outstanding, which were
issued primarily to certain insurance carriers to guarantee
payment for various insurance programs such as health and
commercial liability insurance. Included in that amount was
$41 million of standby letters of credit issued under the
Companys $150 million revolving credit facility. As
of June 30, 2006, none of these irrevocable standby letters
of credit had been drawn upon.
As of June 30, 2006, the Company had posted bonds totaling
$2 million, which related to certain utility deposits.
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, 2006, the Company estimates
that it will take approximately 16 years and 17 years
to complete the Coca-Cola and Dr Pepper/ Seven Up, Inc.
purchase commitments, respectively. In the event of early
termination of these arrangements, the Company may be required
to make termination payments that could be material to the
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. At June 30, 2006 and 2005, the
deferred amounts totaled $23 million and $26 million,
respectively. These deferred amounts are amortized as a
reduction to food, paper and product costs in the accompanying
consolidated statements of operations.
As of June 30, 2006 the Company had $11 million in
aggregate contractual obligations for the year ended
June 30, 2007 with a vendor providing information
technology services under three separate arrangements. These
contracts extend up to five years with a termination fee ranging
from less than $1 million to $3 million during those
years.
The Company also enters into commitments to purchase advertising
for periods up to twelve months. At June 30, 2006,
commitments to purchase advertising totaled $45 million.
New Global Headquarters
In May 2005, the Company entered into an agreement to lease a
building in Coral Gables, Florida, to serve as the
Companys new global headquarters beginning in fiscal 2009.
Under this agreement, the estimated annual rent for the
15 year initial term is expected to be
F-61
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
approximately $7 million a year, which will be finalized
upon the completion of the buildings construction and will
escalate based on the annual inflation rate.
Other
The Company is self-insured for most domestic workers
compensation, general liability, and automotive liability losses
subject to per occurrence and aggregate annual liability
limitations. The Company is also self-insured for healthcare
claims for eligible participating employees subject to certain
deductibles and limitations. The Company determines its
liability for claims incurred but not reported based on an
actuarial analysis.
The Company has claims for certain years which are insured by a
third party carrier, which is currently insolvent. The Company
is currently reviewing its options to replace this carrier with
another insurance carrier. If the Company is unable to
successfully replace the carrier and the existing carrier goes
into receivership, then there is the possibility for the State,
in which the claim is reported, to take over the pending and
potential claims. This may result in an increase in premiums for
claims related to this period.
Note 20. Segment Reporting
The Company operates in the fast food hamburger restaurant
industry. Revenues include retail sales at Company-owned
restaurants and franchise revenues. The business is managed as
distinct geographic segments: United States and Canada, Europe,
Middle East and Africa and Asia Pacific (EMEA/
APAC), and Latin America.
Unallocated amounts reflected in certain tables below included
corporate support costs in areas such as facilities, finance,
human resources, information technology, legal, marketing, and
supply chain management.
The following tables present revenues, operating income,
depreciation and amortization, total assets, long-lived assets
and capital expenditures information by geographic segment (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
1,382 |
|
|
$ |
1,275 |
|
|
$ |
1,117 |
|
EMEA/ APAC
|
|
|
576 |
|
|
|
586 |
|
|
|
566 |
|
Latin America
|
|
|
90 |
|
|
|
79 |
|
|
|
71 |
|
|
|
|
|
Total revenues
|
|
$ |
2,048 |
|
|
$ |
1,940 |
|
|
$ |
1,754 |
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Companys total
revenues. Revenues in the United States totaled
$1,239 million for the year ended June 30, 2006,
$1,146 million for the year ended June 30, 2005 and
$997 million for the year ended June 30, 2004.
Revenues in Germany totaled $269 million for the year ended
June 30, 2006, $262 million for the year ended
June 30, 2005 and $236 million for the year ended
June 30, 2004.
F-62
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
295 |
|
|
$ |
255 |
|
|
$ |
115 |
|
EMEA/ APAC
|
|
|
62 |
|
|
|
36 |
|
|
|
95 |
|
Latin America
|
|
|
29 |
|
|
|
25 |
|
|
|
26 |
|
Unallocated
|
|
|
(216 |
) |
|
|
(165 |
) |
|
|
(163 |
) |
|
|
|
|
Total operating income
|
|
|
170 |
|
|
|
151 |
|
|
|
73 |
|
|
Interest expense, net
|
|
|
72 |
|
|
|
73 |
|
|
|
64 |
|
|
Loss on early distinguishment of
debt
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
80 |
|
|
|
78 |
|
|
|
9 |
|
|
Income tax expense
|
|
|
53 |
|
|
|
31 |
|
|
|
4 |
|
|
|
|
|
Net income
|
|
$ |
27 |
|
|
$ |
47 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Depreciation and
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
60 |
|
|
$ |
52 |
|
|
$ |
56 |
|
EMEA/ APAC
|
|
|
9 |
|
|
|
4 |
|
|
|
(13 |
) |
Latin America
|
|
|
3 |
|
|
|
2 |
|
|
|
(1 |
) |
Unallocated
|
|
|
16 |
|
|
|
16 |
|
|
|
21 |
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
88 |
|
|
$ |
74 |
|
|
$ |
63 |
|
|
Depreciation and amortization expense for the year ended
June 30, 2004 reflects the initial period of amortization
of unfavorable leases recorded as part of the Transaction.
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
1,978 |
|
|
$ |
2,433 |
|
EMEA/ APAC
|
|
|
498 |
|
|
|
220 |
|
Latin America
|
|
|
45 |
|
|
|
47 |
|
Unallocated
|
|
|
31 |
|
|
|
23 |
|
|
|
|
|
Total assets
|
|
$ |
2,552 |
|
|
$ |
2,723 |
|
|
F-63
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
| |
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
854 |
|
|
$ |
892 |
|
EMEA/ APAC
|
|
|
114 |
|
|
|
102 |
|
Latin America
|
|
|
35 |
|
|
|
31 |
|
Unallocated
|
|
|
31 |
|
|
|
23 |
|
|
|
|
|
Total long-lived assets
|
|
$ |
1,034 |
|
|
$ |
1,048 |
|
|
Long-lived assets include property and equipment, net, and net
investment in property leased to franchisees. Only the United
States represented 10% or more of the Companys total
long-lived assets as of June 30, 2006 and 2005. Long-lived
assets in the United States, including the unallocated portion,
totaled $813 million and $845 million at June 30,
2006 and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years ended | |
|
|
June 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
| |
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
43 |
|
|
$ |
40 |
|
|
$ |
36 |
|
EMEA/ APAC
|
|
|
17 |
|
|
|
27 |
|
|
|
28 |
|
Latin America
|
|
|
10 |
|
|
|
8 |
|
|
|
6 |
|
Unallocated
|
|
|
15 |
|
|
|
18 |
|
|
|
11 |
|
|
|
|
|
Total capital expenditures
|
|
$ |
85 |
|
|
$ |
93 |
|
|
$ |
81 |
|
|
Note 21. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data (in millions,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Quarters Ended | |
|
|
| |
|
|
September 30 | |
|
December 31, | |
|
March 31, | |
|
June 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
| |
Revenue
|
|
$ |
508 |
|
|
$ |
512 |
|
|
$ |
495 |
|
|
$ |
533 |
|
Operating income
|
|
|
72 |
|
|
|
70 |
|
|
|
14 |
|
|
|
14 |
|
Net income (loss)
|
|
|
22 |
|
|
|
27 |
|
|
|
(12 |
) |
|
|
(10 |
) |
Basic earnings (loss) per share
|
|
|
0.21 |
|
|
|
0.25 |
|
|
|
(0.11 |
) |
|
|
(0.08 |
) |
Diluted earnings (loss) per share
|
|
$ |
0.20 |
|
|
$ |
0.24 |
|
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
|
F-64
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Quarters Ended | |
|
|
| |
|
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
June 30, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
| |
Revenue
|
|
$ |
481 |
|
|
$ |
488 |
|
|
$ |
468 |
|
|
$ |
503 |
|
Operating income
|
|
|
56 |
|
|
|
54 |
|
|
|
17 |
|
|
|
24 |
|
Net income
|
|
|
21 |
|
|
|
23 |
|
|
|
1 |
|
|
|
2 |
|
Basic earnings per share
|
|
|
0.20 |
|
|
|
0.22 |
|
|
|
0.01 |
|
|
|
0.02 |
|
Diluted earnings per share
|
|
$ |
0.20 |
|
|
$ |
0.21 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
F-65
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Quarterly results were impacted by timing of expenses and
charges which affect comparability of results. The impact of
these items during each quarter for fiscal 2006 and 2005 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the Quarters Ended | |
|
|
| |
|
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
Jun 30, | |
|
Mar 31, | |
|
Dec 31, | |
|
Sep 30, | |
|
|
2006 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
| |
|
|
(in millions) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(a)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
1 |
|
Selling, general and
administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(b)
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
9 |
|
|
|
9 |
|
|
|
8 |
|
|
Global reorganization and
realignment
|
|
|
7 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
7 |
|
|
|
4 |
|
|
|
3 |
|
|
|
3 |
|
|
Compensatory make-whole payment
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive severance
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on
SG&A
|
|
|
11 |
|
|
|
36 |
|
|
|
1 |
|
|
|
1 |
|
|
|
9 |
|
|
|
13 |
|
|
|
12 |
|
|
|
11 |
|
Fees paid to
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
Management agreement termination fee
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees paid to
affiliates
|
|
|
31 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
Other operating (income)
expenses, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise system distress impact(c)
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
1 |
|
|
Loss on asset disposals and asset
impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
13 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Total effect on other (income)
expense, net
|
|
|
1 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
|
|
9 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
1 |
|
|
Total effect on income from
operations
|
|
|
43 |
|
|
|
36 |
|
|
|
5 |
|
|
|
4 |
|
|
|
17 |
|
|
|
34 |
|
|
|
10 |
|
|
|
16 |
|
|
|
|
Interest on $350 million
loan paid-off at IPO
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on income before
income taxes
|
|
$ |
50 |
|
|
$ |
40 |
|
|
$ |
5 |
|
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
34 |
|
|
$ |
10 |
|
|
$ |
16 |
|
|
|
|
|
(a) |
|
Represents revenues not recognized and (recoveries) of
revenues previously not recognized. |
|
(b) |
|
Represents bad debt expense (recoveries), incremental
advertising contributions and the internal and external costs of
FFRP program administration. |
|
(c) |
|
Represents (recoveries) reserves on acquired debt, net
and other items included within operating (income) expenses,
net. |
Note 22. New Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123
(revised 2004), SFAS No. 123(R), which is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123(R)
F-66
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25). SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative. Under SFAS No. 123(R) the effective date
for a nonpublic entity that becomes a public entity after
June 15, 2005 is the first interim or annual reporting
period beginning after becoming a public company. Further,
SFAS No. 123(R) states that an entity that makes a
filing with a regulatory agency in preparation for the sale of
any class of equity securities in a public market is considered
a public entity for purposes of SFAS No. 123(R). The
Company implemented SFAS No. 123(R) effective
July 1, 2006. As a result, after the filing date of a
registration statement in connection with the Companys
initial public offering of its common stock, the Company is
required to apply the modified prospective transition method to
any share-based payments issued subsequent to the filing of the
registration statement but prior to the effective date of the
Companys adoption of SFAS No. 123(R). Under the
modified prospective transition method, compensation expense is
recognized for any unvested portion of the awards granted
between filing date and adoption date of
SFAS No. 123(R) over the remaining vesting period of
the awards beginning on the adoption date for the Company,
July 1, 2006.
As permitted by SFAS No. 123, for periods prior to
July 1, 2006 the Company accounted for share-based payments
to employees using APB No. 25s intrinsic value method
and, as such, recognized no compensation expense for employee
stock options. As the Company currently applies
SFAS No. 123 pro forma disclosure using the minimum
value method of accounting, the Company is required to adopt
SFAS No. 123(R) using the prospective transition
method. Under the modified prospective transition method,
non-public entities that previously applied SFAS No.S 123
using the minimum value method continue to account for
non-vested awards outstanding at the date of adoption of
SFAS No. 123(R) in the same manner as they had been
accounted to prior to adoption. The Company currently accounts
for equity awards using the minimum value method under APB
No. 25, and will continue to apply APB No. 25 to
equity awards outstanding at the adoption date of
SFAS No. 123(R). The Company will not recognize
compensation expense for awards issued prior to the date of
adoption, unless those awards are modified after the Company
became a public company, as described above.
For any awards granted subsequent to the adoption of
SFAS No. 123(R), compensation expense will be
recognized generally over the vesting period of the award.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
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 is measured to
determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount
of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. An enterprise that presents a
classified statement of financial position
F-67
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
should classify a liability for unrecognized tax benefits as
current to the extent that the enterprise anticipates making a
payment within one year or the operating cycle. FIN 48 is
effective for fiscal years beginning after December 15,
2006 or fiscal year 2008 for the Company. The Company is
currently evaluating the impact that FIN 48 may have on our
statements of operations and statement of financial position.
Note 23. Subsequent Event
On July 31, 2006 the Company prepaid an additional
$50 million of term debt reducing the total outstanding
debt balance to $948 million. As a result of this payment,
the next scheduled principal payment on the amended facility is
December 31, 2008.
F-68
20,000,000 Shares
Burger King Holdings, Inc.
Common Stock
Prospectus
,
2007
JPMorgan
Morgan Stanley
Banc of America Securities LLC
|
|
|
Loop Capital Markets, LLC |
Wachovia Securities
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of the
common stock.
Part II
Information not required in prospectus
Item 13. Other
expenses of issuance and distribution.
The following table sets forth the expenses (other than
compensation to the underwriters) expected to be incurred in
connection with this offering. All such amounts (except the SEC
registration fee, the NASD filing fee and the New York Stock
Exchange listing fee) are estimated.
|
|
|
|
|
|
SEC registration fee
|
|
$ |
51,000 |
|
NASD filing fee
|
|
|
48,500 |
|
Printing and engraving expenses
|
|
|
200,000 |
|
Legal fees and expenses
|
|
|
250,000 |
|
Accounting fees and expenses
|
|
|
150,000 |
|
Blue Sky fees and expenses
|
|
|
15,000 |
* |
Transfer Agent and Registrar fees
|
|
|
10,000 |
* |
Miscellaneous
|
|
|
800,000 |
|
|
|
|
|
|
Total
|
|
$ |
1,524,500 |
|
|
|
|
|
Item 14. Indemnification
of directors and officers.
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and officers
as well as other employees and individuals against expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed
actions, suits or proceedings in which such person is made a
party by reason of such person being or having been a director,
officer, employee or agent to the Registrant. The Delaware
General Corporation Law provides that Section 145 is not
exclusive of other rights to which those seeking indemnification
may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise. The Registrants
Certificate of Incorporation provides for indemnification by the
Registrant of its directors, officers and employees to the
fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the
directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases, redemptions or other distributions,
or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrants Certificate
of Incorporation provides for such limitation of liability to
the fullest extent permitted by the Delaware General Corporation
Law.
The Registrant maintains standard policies of insurance under
which coverage is provided (a) to its directors and
officers against loss rising from claims made by reason of
breach of duty or
II-1
other wrongful act, while acting in their capacity as directors
and officers of the Registrant, and (b) to the Registrant
with respect to payments which may be made by the Registrant to
such officers and directors pursuant to any indemnification
provision contained in the Registrants Certificate of
Incorporation or otherwise as a matter of law.
The proposed form of underwriting agreement filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification of directors and certain officers of the
Registrant by the underwriters against certain liabilities.
Item 15. Recent
sales of unregistered securities.
Since August 2003, the Registrant has issued the following
securities which were not registered under the Securities Act of
1933, as amended:
Between August 2003 and January 17, 2007, the Registrant
issued an aggregate of 2,858,567 shares of its common stock to
directors, employees and former employees for an aggregate of
$11,865,919 in consideration of services rendered or in private
placements and (ii) an aggregate of 1,339,940 shares
of its common stock to employees and former employees pursuant
to the exercise of outstanding options for an aggregate of
$6,465,616 in consideration of services rendered.
The issuances listed above were deemed exempt from registration
under the Securities Act of 1933, as amended, pursuant to
Section 4(2) of the Securities Act or Rule 701
thereunder. In accordance with Rule 701, the shares were
issued pursuant to a written compensatory benefit plan and the
issuances did not, during any consecutive
12-month period, exceed
15% of the outstanding shares of the Registrants common
stock, calculated in accordance with the provisions of
Rule 701.
Item 16. Exhibits
and financial statement schedules.
(a) Exhibits.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
1 |
.1 |
|
Form of Underwriting Agreement
|
|
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
|
|
5 |
.1***** |
|
Legal Opinion of Holland &
Knight LLP
|
|
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
|
II-2
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.3** |
|
Form of Management Subscription and
Shareholders Agreement among Burger King Holdings, Inc.,
Burger King Corporation and its officers
|
|
10 |
.4** |
|
Form of Board Member Subscription
and Shareholders Agreement among Burger King Holdings,
Inc., Burger King Corporation and its directors
|
|
10 |
.5** |
|
Amendment to the Management
Subscription and Shareholders Agreement among Burger King
Holdings, Inc., Burger King Corporation and John W. Chidsey
|
|
10 |
.6** |
|
Management Subscription and
Shareholders Agreement among Burger King Holdings, Inc.,
Burger King Corporation and Gregory D. Brenneman
|
|
10 |
.7** |
|
Management Agreement, dated
December 13, 2002, among Burger King Corporation, Bain
Capital Partners, LLC, Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC, BCIP TCV, LLC, Goldman,
Sachs & Co., Goldman Sachs Capital Partners 2000, L.P.,
GS Capital Partners 2000 Offshore, L.P., GS Capital Partners
2000 GmbH & Co. Beteiligungs KG, GS Capital Partners
2000 Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., Stone Street Fund 2000, L.P., Goldman
Sachs Direct Investment Fund 2000, L.P., GS Private Equity
Partners 2000, L.P., GS Private Equity Partners 2000 Offshore
Holdings, L.P., GS Private Equity Partners 2000
Direct Investment Fund, L.P., TPG GenPar III, L.P. and TPG
BK Holdco LLC
|
|
10 |
.8** |
|
Letter Agreement Terminating the
Management Agreement, dated as of February 3, 2006, among
Burger King Corporation, Bain Capital Partners, LLC, Bain
Capital Integral Investors, LLC, Bain Capital VII Coinvestment
Fund, LLC, BCIP TCV, LLC, Goldman, Sachs & Co., Goldman
Sachs Capital Partners 2000, L.P., GS Capital Partners 2000
Offshore, L.P., GS Capital Partners 2000 GmbH & Co.
Beteiligungs KG, GS Capital Partners 2000 Employee Fund, L.P.,
Bridge Street Special Opportunities Fund 2000, L.P., GS
Private Equity Partners 2000, L.P., GS Private Equity Partners
2000 Offshore Holdings, L.P., GS Private Equity Partners
2000 Direct Investment Fund, L.P., TPG GenPar III,
L.P. and TPG BK Holdco LLC
|
|
10 |
.9** |
|
Lease Agreement, dated as of
May 10, 2005, between CM Lejeune, Inc. and Burger King
Corporation
|
|
10 |
.10** |
|
Burger King Holdings, Inc. Equity
Incentive Plan
|
|
10 |
.11** |
|
Burger King Holdings, Inc. 2006
Omnibus Incentive Plan
|
|
10 |
.12** |
|
Burger King Corporation Fiscal Year
2006 Executive Team Restaurant Support Incentive Plan
|
|
10 |
.13** |
|
Form of Management Restricted Unit
Agreement
|
|
10 |
.14** |
|
Form of Amendment to Management
Restricted Unit Agreement
|
|
10 |
.15** |
|
Management Restricted Unit
Agreement among John W. Chidsey, Burger King Holdings, Inc. and
Burger King Corporation, dated as of October 8, 2004
|
|
10 |
.16** |
|
Special Management Restricted Unit
Agreement among Peter C. Smith, Burger King Holdings, Inc. and
Burger King Corporation, dated as of December 1, 2003
|
|
10 |
.17** |
|
Form of 2003 Management Stock
Option Agreement
|
|
10 |
.18** |
|
Form of 2005 Management Stock
Option Agreement
|
|
10 |
.19** |
|
Form of Board Member Stock Option
Agreement
|
|
10 |
.20** |
|
Form of Special Management Stock
Option Agreement among John W. Chidsey, Burger King Holdings,
Inc. and Burger King Corporation
|
|
10 |
.21** |
|
Management Stock Option Agreement
among Gregory D. Brenneman, Burger King Holdings, Inc. and
Burger King Corporation, dated as of August 1, 2004
|
|
10 |
.22** |
|
Stock Option Agreement among
Armando Codina, Burger King Holdings, Inc. and Burger King
Corporation, dated as of February 14, 2006
|
II-3
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
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
|
|
14* |
|
|
Burger King Code of Business Ethics
and Conduct
|
|
21 |
.1***** |
|
List of Subsidiaries of the
Registrant
|
|
23 |
.1 |
|
Consent of Independent Registered
Public Accounting Firm
|
|
23 |
.2***** |
|
Consent of Holland & Knight LLP
(included as Exhibit 5.1)
|
|
24 |
.1***** |
|
Power of Attorney (included on
signature page)
|
|
|
|
|
* |
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, 2006. |
II-4
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
|
|
|
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of
the time it was declared effective. |
|
|
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. |
II-5
Signatures
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Amendment
No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 20th day of February, 2007.
|
|
|
BURGER KING HOLDINGS, INC. |
|
|
|
|
|
Name: John W. Chidsey |
|
Title: Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has 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)
|
|
|
February 20, 2007 |
|
|
/s/
BEN K. WELLS
Ben
K. Wells
|
|
Chief Financial Officer and
Treasurer (principal financial officer)
|
|
|
February 20, 2007 |
|
|
*
Brian
T. Swette
|
|
Non-Executive Chairman
|
|
|
February 20, 2007 |
|
|
/s/
CHRISTOPHER M. ANDERSON
Christopher
M. Anderson
|
|
Vice President, Finance and
Controller (principal accounting officer)
|
|
|
February 20, 2007 |
|
|
*
Andrew
B. Balson
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
David
Bonderman
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
Richard
W. Boyce
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
David
A. Brandon
|
|
Director
|
|
|
February 20, 2007 |
|
II-6
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date | |
|
|
|
|
| |
|
*
Armando
Codina
|
|
Director
|
|
|
February 20, 2007 |
|
|
Peter
R. Formanek
|
|
Director
|
|
|
February , 2007 |
|
|
*
Manny
Garcia
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
Adrian
Jones
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
Sanjeev
K. Mehra
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
Stephen
G. Pagliuca
|
|
Director
|
|
|
February 20, 2007 |
|
|
*
Kneeland
C. Youngblood
|
|
Director
|
|
|
February 20, 2007 |
|
|
*/s/
JOHN W. CHIDSEY
John
W. Chidsey
Attorney-in-fact
|
|
|
|
|
|
|
II-7
Exhibit index
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
1 |
.1 |
|
Form of Underwriting Agreement
|
|
23 |
.1 |
|
Consent of Independent Registered
Public Accountants
|